CALCULATING ANTITRUST FINES

1
CALCULATING ANTITRUST FINES DAMAGESTHEORETICAL
UNDERPINNINGS PRACTICAL APPROACHES

• Presentation to
• Commissioners Malaysia Competition Commission
• by
• Rughvir (Shyam) Khemani, PhD (LSE)
• Microeconomic Consulting and Research Associates
• (www.micradc.com) and
• Former Advisor, Competition Policy
• The World Bank Group, Washington D.C., USA
• Kuala Lampur, Malaysia, 8-9 June 2013

2
Effective Administration of Competition Law and
Policy

• The effective administration of competition law
  and policy requires balancing of
• Enforcement??Fostering Compliance
• Enforcement-gt Investigation, Prosecution,
  Adjudication, Judgment, Imposition of Fines
  Penalties
• Compliance-gt Research Policy Analysis, Market
  Studies, Publications Speeches, Meetings with
  Stakeholders, Advocacy
• Effective enforcement (including appropriate
  levels of fines and sanctions) -gtCompliance
• Compliance-gtLowers administrative enforcement
  costs, legal and economic uncertainty.

3
Definitions

• Finea sum imposed as punishment for an offense
• Penaltythe suffering in person, rights, or
  property that is annexed by law or judicial
  decision to the commission of a crime or public
  offense
• Sanctionsthe detriment, loss of reward, or
  coercive intervention annexed to a violation of a
  law as a means of enforcing the law
• Damagescompensation in money imposed by law for
  loss or injury
• Remediesthe legal means to recover a right or
  to prevent or obtain redress for a
  wrong/something that corrects or counteracts
•  

4
Powers to Impose Fines and Other Remedial Measures

• Section 35 MyCC can apply Interim Measures
• Section 61 MyCC can impose penalties
• Corporate body fine of gt5 million ringgit for
  initial offense gt10 million ringgit for 2nd
  subsequent offense(s)
• Non-corporate person(s) gt1 million ringgit
  and/or imprisonment of 5 years 2nd and
  subsequent offense(s) gt 2 million ringgit,
  and/or 5 years imprisonment
• Section 62Compounding of offences
• MyCC can impose fines on enterprises up to 10 of
  world-wide turnover
• Section 64 Rights of private action (by persons
  directly/indirectly affected)

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Characteristics of Illegal Price-fixing
1. Higher prices
2. Lower variance
3. Price increases gradually to prevent detection
4. Price falls after detection, with lag to
reduce estimate of damages
6
Example of Price-fixing Level and Variance
Source Abrantes-Metz, Froeb, Geweke and Taylor
7
Empirical Estimates of Cartel Pricing

• Regression meta-analysis concludes that increase
  in price due to cartel is between 20 and 30

Source Connor 2005
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Case Study European Cement

• BACKGROUND MiCRA retained by participant in
  collapsed cartel to appeal penalty based on
  agencys estimate of price effect of cartel
• ISSUE Can fall in price after cartel collapse
  serve as estimate of effect of cartel on prices?

9
European Cement

• Price falls by almost 50 with collapse of cartel
• Implies cartel raised prices by 30/ton

10
European Cement

• Cartel agreement was to maintain assigned market
  shares.
• Assigned shares based on capacity
• Induces massive excess capacity
• Prices collapse with collapse of conspiracy to
  unsustainably low levels
• Fall in price with collapse of conspiracy
  overstates price effect of conspiracy

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Compare to Margins in Other Countries
Cement Industry Variable Margins 1992 2001 Cement Industry Variable Margins 1992 2001 Cement Industry Variable Margins 1992 2001
Year European Variable Margin United States Variable Margin
1992 .584 .539
1993 .588 .535
1994 .598 .582
1995 .585 .582
1996 .596 .608
1997 .593 .610
1998 .629 .625
1999 .649 .626
2000 .666 .622
2001 .672 .622
Weighted Average .615 .601

• Implies prices 3.5 higher due to cartel
• Approximately 2.11/ton

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Assessing Damages

• Assessing size of consumer harm arising from
  anticompetitive conduct ?influences size of fine
  to be imposed
• Key issue in commercial disputes ?estimate
  compensation
• General approach compare actual outcomes(prices)
  with what would have been absent anticompetitive
  conduct (but for analysis)
• Econometric analysis controlling for main factors
  affecting prices viz., changes in costs, demand
  and customer mix.before and after study of
  market and firm pricing-output behavior.

13
Vitamin Case

• Vitamins
• 1999 Hoffmann-La Roche and other firms pled
  guilty to operating a world-wide cartel over
  previous decade for main vitamins (especially
  vitamins A E)
• Investigations prosecutions in EU and other
  jurisdictions
• Documents indicate price levels and changes
  pre-post cartel period, gradual, systematic price
  increases and rapid steep decreases post US
  investigation..
• Differentials facilitated estimates of
  over-charge
• US fine 500 million EC fine euros 462 million

14
GOOGLE On-line Mapping

• 2012 Frances Commercial Tribunal of Paris (CTP)
  found Google abused its dominant position ? fined
  euros 500,000.
• Relevant market online mapping allowing for the
  geolocalisation of sales points on company
  websites
• CTP held Google dominant (de facto monopoly) in
  France in search engine market.
• Allowed for dominance in connected online mapping
  market free
• Disadvantaged Bottin, a French company offering
  online mapping for annual subscription fee

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GOOGLE online mapping-continued

• Free service did not allow for covering of costs
  e.g. acquiring geographic/aerial rights necessary
  for mapping charged by 3rd parties
• Google pricing strategy exclusionary, drove all
  competitors (e.g. Maporama) out of the market
• Google strategy maximized its advertising revenue
  to detriment of competitors that needed to charge
  fees for online mapping service
• CTP rejected Google defense
• Predatory pricing conditions as per EC guidelines
  not proven
• Google was sacrificing short-term profits.and
  other arguments..

16
Polypropylene Carpet

• Polypropylene carpet? low grade floor covering
  used in low-income houses/offices
• Mid-1990s US DoJ investigated alleged price
  collusion firms prices which had previously
  increased declined rapidly
• Econometric analysis and actual prices
  pre-investigation gt post-investigation prices
• During alleged cartel period, cost declines of
  principal inputs not passed thru rapidly
  suggesting collusion but cost increases post
  investigation also not passed thru rapidly
• Parties argued this as evidence of competitive
  pressures-fear of losing market share.

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Polypropylene Carpet--continued

• In oligopolistic markets, prices tend to
  increase when costs increase but tend to be
  sticky downward when costs decline
• Case settled before adjudication, empirical
  analysis, evidentiary issues unresolved
• Some Complexities
• Econometric analysis data intensive, require
  well-specified models, inclusion of all relevant
  variables
• But for analysis needs to consider structural
  changes between pre-post anti-competitive
  periods
• Pass thru calculations final vs. intermediate
  purchasers, inter-connected markets.

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Pass-Through Rate

• Direct and indirect purchasers
• Illinois Brick in US vs. EU approach
• Theory Pass-through rate depends on
• Competition oligopoly monopoly
• Firm-specific vs. industry-wide cost increase
• Shape of demand curve
• Slope of marginal cost curve
• Conduct parameter

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Pass-Through Rate

• Under competition, pass-through rate depends on
  the supply elasticity and demand elasticity

20
Pass-Through Rate

• Under monopoly, pass-through rate depends on the
  convexity of the demand curve

?P 1/2?C
?P
?C
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Implementation Issues

• Optimal penalties
• Theory harm divided by probability of detection
• Financial penalties vs. jail time
• Level of fines cost recovery punitive
  deterrent
• Fines Too low? license fee to commit
  infractions?
• ? Proportionate, deterrent
• Factors to consider Magnitude of price
  differentials, profits earned, time duration of
  anticompetitive conduct, size of market affected,
  nature and type of customers (individual
  consumers vs. business firms, income group,
  etc.), nature of product (staple vs. other),
  importance in budget/cost..
• Amnesty-Leniency