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1 AAI Working Paper #04-05 Abstract: PRICE-FIXING OVERCHARGES AAI Working Paper #04-05 Abstract: PRICE-FIXING OVERCHARGES: LEGAL AND ECONOMIC EVIDENCE Author: John M. Connor, Professor, Purdue University; Advisory Board of the AAI This paper is a survey identified hundreds of published social-science studies of private, hard- core cartels that contained 674 observations of long-run overcharges. The primary finding is that the median cartel overcharge for all types of cartels over all time periods is 25%: 18% for domestic cartels, 32% for international cartels, and 28% for all successful cartels. In addition, a survey of 24 final verdicts in decided U.S. horizontal collusion cases reveals an average median overcharge of 21% and an average mean overcharge of 30%. Outside the United States, 62 decisions of competition commissions cited median average overcharges of 29% and a mean of 49%. These findings suggest that U.S. and non-U.S. cartel penalties ought to be increased. Despite the evident increases in cartel detection rates and the size of monetary fines and penalties in the past decade, a good case can be made that current global anticartel regimes are under-deterring. Keywords: cartels, overcharges, international antitrust, penalties and fines. Date: November, 2004 Author Contact: John M. Connor, [email protected] AAI Working Papers are works in progress that will eventually be revised and published elsewhere. They do not necessarily represent the positions of the American Antitrust Institute. 1 Draft – Nov. 8, 2004 PRICE-FIXING OVERCHARGES: LEGAL AND ECONOMIC EVIDENCE John M. Connor* Staff Paper No. 04-16, Purdue University, Dept. AE * This working paper was prepared simultaneously with Connor and Lande (2004). The author is indebted to Professor Robert H. Lande, who wrote the first drafts of large sections of the Motivation and Conclusions of this paper; he also was responsible for preparing the material on overcharges from antitrust verdicts in U.S. courts. Jeff Zimmerman was of great assistance in proofreading the final draft and rechecking the tables summarizing the social-science overcharges. 2 Summary This survey identified hundreds of published social-science studies of private, hard-core cartels that contained 674 observations of long-run overcharges. The primary finding is that the median cartel overcharge for all types of cartels over all time periods is 25%: 18% for domestic cartels, 32% for international cartels, and 28% for all successful cartels. Thus, international cartels have historically been about 75% more effective in raising prices than domestic cartels. Cartel overcharges are skewed to the high side, pushing the mean overcharge for all types of cartels over all time periods to 49%. “Peak” cartel overcharges are typically double those of the long-run averages. These results are generally consistent with the few, more limited, previously published works that survey cartel overcharges.1 The results of the survey of 24 final verdicts in decided U.S. horizontal collusion cases, only three of which were international cartels, show an average median overcharge of 21% and an average mean overcharge of 30%. Outside the United States, 62 decisions of competition commissions cited median average overcharges of 29% and a mean of 49%. There are three significant policy implications. First, there is a view among some antitrust writers that there is little evidence that cartels raise prices significantly for a period long enough to justify the height of current U.S. cartel penalties. This survey’s results, which are based upon an extraordinarily large amount of data spanning a broad swath of history of all types of private cartels, sharply contradict these views. In fact, the data suggest that U.S. penalties ought to be increased. Mean overcharges are three times as high as the level presumed by the U.S. Sentencing Commission. Surprisingly, bid rigging was no more injurious than other forms of collusion, which suggests that the USSC should amend its Guidelines that currently treat bid rigging more harshly than other forms of collusion. Second, the principal antitrust authorities abroad also seem to base their typical or maximum fines on a 10% harm presumption. Average fines imposed since 1995 by Canada and the EU on identical cartels have been lower than U.S. government fines, yet overcharges generated by cartels discovered outside the United States are higher than North America- centered cartels. Consequently, anticartel laws and fine-setting practices abroad are in even greater need of strengthening. Third, cartels with multi-continental effects are the most harmful type. Despite the evident increases in cartel detection rates and the size of monetary fines and penalties in the past decade, a good case can be made that current global anticartel regimes are under-deterring. While the recent worldwide trend towards the intensification of cartel penalties has been desirable, global cartels are more difficult to detect, have less fear from entry of rivals, achieve higher levels of sales and profitability, and systematically receive weaker corporate sanctions 1 With rare exceptions, no estimate was ignored because of perceived defects in analytical quality. The authors’ professions, types of publications, year of publication, degree of peer review, and analytical estimation methods from which these estimates are derived vary greatly. However, extensive examinations of source reliability give no reason to regard any sub set of the sample as inherently unreliable. 3 than comparable domestic cartels. Global antitrust sanctions should be higher for global cartels than for other types. TABLE OF CONTENTS MOTIVATION ………………………………………………………………………………5 Issue 1: The U.S. Sentencing Guidelines Origin and Importance of the 10% Presumption Critiques of the 10% Guidelines Presumption Issue 2: Cartel Fines in Other Jurisdictions Issue 3: Cartel Deterrence OBJECTIVE………………………………………………………………………………...12 LITERATURE SURVEY ………………………………………………………………….12 Early Monographs on Cartels Books Academic Papers Post-World War II Cartel Studies Quantitative Estimates of Cartel Overcharges DATA SOURCES AND COLLECTION METHODS ….……………………………….26 Social Science Studies U.S. Antitrust Court Verdicts Decisions of Other Antitrust Authorities GENERAL DESCRIPTION OF THE SOCIAL SCIENCE DATA …………………….35 Markets Episodes Overcharges SOCIAL SCIENCE STUDIES: RESULTS ………………………………………………40 Numbers of Overcharge Observations Trends in Average Overcharges over Time Average Overcharges across Types Size Distribution of Overcharges Peak Overcharges Overcharges by Location of Cartel Overcharges and Market Size 4 SOCIAL SCIENCE STUDIES: RELIABILITY ……………………………………….. 56 Sources of the Estimates Sensitivity to Publication Dates Intra-Episodic Comparisons Sensitivity to Peer Review U.S.COURT VERDICTS………….………………………………………………………67 DECISIONS OF OTHER ANTITRUST AUTHORITIES……………………………...69 CONCLUSIONS ………………………………………………………………………......70 REFERENCES .……………………………………………………………………………74 LIST OF TABLES Table 1. Summary of Six Economic Surveys of Cartel Overcharges………………….25 Table 2. Number of Cartel Markets, by Type………………………………………….37 Table 3. Number of Cartel Episodes, by Type............................................................... 39 Table 4. Number of Average Overcharge Observations, by Type of Cartel.................. 40 Table 5. Number of Average Overcharge Observations by Year and Type................... 42 Table 5A. Number of Zero Average Overcharge Observations by Year and Type.......... 46 Table 6. Median Average Overcharges, by Year and Type…………………… ........... 48 Table 6A. Median of Average Overcharges of Successful Cartels, by Year and Type.... 49 Table 7. Mean Average Overcharges by Size Category................................................. 51 Table 8. Peak Cartel Overcharges, by Year and Type.................................................... 53 Table 9. Peak/Average Ratios of Cartel Overcharges, by Year and Type..................... 53 Table 10. Average Overcharges by Cartel Headquarters Location.................................. 55 Table 11. Social-Science Sources of Overcharge Estimates............................................ 57 Table 12. Average Overcharge Estimates by Publication Dates...................................... 59 Table 12A. Average Overcharge Estimates by Publication Dates, Successful Cartels...... 60 Table 13. Median Average Overcharges by Publication and Cartel Type....................... 61 Table 14. Median Rates of Estimates for Same Episodes by Different Methods.............64 Table 14A. Median Ratios of Estimates for Same Episodes (Simplified)...........................64 Table 15. Average Percentage Cartel Overcharges, by Legal Status and Type of Study.66 Table 16. Cartel Overcharges from Decisions of Other Antitrust Authorities..................69 APPENDIX TABLE I……………………………………………………………………..97 5 OTHER APPENDIX TABLES: Go to http://www.agecon.purdue.edu/directory/details.asp?username=jconnor MOTIVATION Since at least 1888, hundreds of economists, historians, commissioners, and jurists have labored mightily to assess the “effectiveness” of cartels. Various criteria have been applied to evaluate cartel performance, including longevity, stability, and efficiency, but by far the greatest attention has been lavished on market price effects.2 The increase in transaction prices by a sellers’ cartel is commonly called an overcharge by economists or damages by legal writers. It is the increase in the transfer of income or wealth from buyers to the members of the cartel that occurs as a result of a collusive
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