Wednesday, 1 February 2017

What should we do about 'cartels'?

I've just got back from holidays and as I'm playing myself in, I find that last week the National Business Review ran with an op-ed piece, 'Editor's Insight: Greens kick dead horse of cartel criminalisation'.

It said that the Greens were using cartel criminalisation as part of "a promising anti-business platform"; that cartels may be a non-existent problem - "In recent years, only one significant domestic cartel has been prosecuted (in wood chemicals) while the two others were in international air cargo and freight forwarding" - and that in any event "cartels are not necessarily bad news for customers or competitive business, except in cases of price fixing or blatant rigging of the market...Cartels are commonplace in certain industries where, for operational reasons, companies work together for their own benefit as well their customers’ but otherwise remain competitive entities. Shipping, airlines and similar services are examples".

I don't care about the politics of the issues, but I think the rest of the argument is debatable.

Part of it is people talking past each other. The NBR piece calls the ordinary, sometimes necessary, and as the NBR says, often beneficial cooperation between otherwise rivals in an industry a 'cartel': most people wouldn't. The arrangements that two airlines make to get your baggage to the end point of your journey with them would not normally be termed a 'cartel', and indeed most dictionary definitions don't include that sort of thing, either. Google "definition of cartel", for example, and what comes up at the head of the results is "an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition", which is the usual anti-competitive meaning of 'cartel'.

Clearly, there's never been any intention of criminalising beneficial pro-consumer cooperation, what the NBR called "bona fide commercial behaviour". The  debate has always been about those "cases of price fixing or blatant rigging of the market" the NBR also mentioned. So what should we do about those?

Are they too few to bother about? It's hard to tell: by definition, cartels are unknown unknowns until they're rumbled. I'll come back to that in a minute.

But otherwise I'm for criminalisation of the genuine, blatant - what are sometimes called 'hard core' - examples of price-fixing and bid-rigging. Last time I wrote about this, I said I endorsed criminalisation somewhat reluctantly: there are already too many redneck yobbos running around trying to jail people for this, that and the other, and not enough people taking liberal or progressive lines focussed on prevention and rehabilitation. And I've since learned that we already have a distressingly high rate of incarceration by international standards, which ought to give New Zealand lawmakers considerable pause for thought before they write yet another 'crime' onto the lawbooks.

But I'm still inclined towards a hard line. For cases that fit the classic hard core model - anti-competitive intent that is manifestly not bona fide, secrecy, collusion, persistence, materiality - it's beyond absurd that the shop assistant who pockets $25 from the till will end up in the District Court, whereas the shadowy guys who meet on the fringes of industry fairs to steal $25 million from the public won't hear the knock of the cop at their door.

And it's pro-business, pro-market people in particular who should be most concerned about this. The typical cartel is a conspiracy to rort other businesses. One good example is the Amcor/Visy stitch-up of the Australasian markets for cardboard packaging. Businesses who wanted to put their stuff in boxes and send it out the door - even the biggest (Coca Cola, Fonterra, Goodman Fielder) who can normally look after themselves - were being ripped off.

People who believe that, for most purposes, well-functioning markets are the best way to deliver national productivity and consumer satisfaction, should be equally incensed. There's nothing more brutal to the proper working of markets than a cartel that substitutes their own chicanery for the free play of demand and supply. People get less, and pay more, than they would otherwise. How'd you feel, for example, if it was the health service that was on the receiving end of one of these hard core cartels?

The only thing, frankly, that might give me pause for thought is that criminalisation might, just, be counterproductive. The idea behind it was that it would discourage cartel formation in the first place, and arguably would also strengthen the 'ratting out' regimes that competition authorities typically run to encourage cartellists to dob in their former co-conspirators. But it also could strengthen the incentives to conceal a new or ongoing cartel. I'd wondered about this, and subsequently learned that there's some evidence suggesting that today's cartellists could indeed be running deeper and quieter than before.

In short, it's never easy, for obvious reasons, to know the prevalence of (true, anti-competitive) cartels. And it's possible that criminalisation, perversely, might have led cartellists to become more adept at hiding them. We won't know that for a while, and maybe not for a long while, though it might be a straw in the wind that the first alleged criminal cartel cases are beginning to pop up in Australia (latest news here). For the time being we simply don't know how big or how small an issue might be out there.

If criminalisation meant that cartels became much harder to find, I might reconsider. But for now I'm not inclined to cut cartels any slack. They're criminal conspiracies, on the same moral level as guys in balaclavas on their way to the bank with shotguns. They should get the same treatment.

4 comments:

  1. The NBR also suggests that we lack domestic cartels. This claim has been repeated by many seeking to argue that criminalisation isn't necessary.

    In my view it plainly hasn't been the case in the last 10 years, notwithstanding the significant Wood Chemicals penalties handed out circa 2005/6. I'll let readers decide, but a quick read of the Commission's media releases & enforcement register for warnings and prosecutions identifies domestic agreements (or attempted agreements) fairly described as cartel conduct in many industries:
    - Pathology Services (2008)
    - Elevator Maintenance (2008)
    - Electricity (2009)
    - Waste Oil Collection in 2009 AND 2015
    - Interchange services (I know that will get some peoples blood boiling...)
    - Online LED light sales (2010)
    - Online tyre sales (2010)
    - Air Ambulances (2011)
    - Online bullion trading (2012)
    - Taranaki Flooring (2013)
    - Auckland Timber (2013/2014)
    - Pharmacy services (2014)
    - Animal Tracing (2015)
    - Real Estate (2015)
    - Metal Roof Flashings (2015)

    Now the small fish amoung these have resulted in warnings, and often aren't well known as a result. But many of these have been significant, and significantly punished. The various real estate cases penalties together are larger than the international cartels bar Air Cargo.

    A final thought: looking over that list I can't help but notice how frequently health services and building related products/services feature.

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    1. Thanks for the response. It's a tough one, isn't it, judging the prevalence of something where (in the worst cases) the participants are making strenuous efforts to remain undetected. I can't really comment in any detail on the names in your list, as I was involved with a fair few of them in my days at the Commerce Commission. But your point that some sectors seem more prone than others is apt: you might, for example, be interested in this 2008 OECD report on the construction industry https://www.oecd.org/regreform/sectors/41765075.pdf

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  2. Thanks for the comments. My original article which prompted the NBR response is at http://www.nzherald.co.nz/politics/news/article.cfm?c_id=280&objectid=11787051

    Research from the Productivity Commission and others shows that there here is a problem of high prices in NZ relative to other countries. As a small economy, we need to ensure that there is vigorous and fair competition, especially in sectors such as building supplies. Our regulators have a crucial role to play. Strong measures against hard core cartels is an important part of the regulatory mix, and it is disappointing that recommendations for criminalisation of hard core cartels has been weakened as a political judgement by this government.

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    1. Thanks for your comments: it's good that competition, and potential impediments to it, are getting attention across the political spectrum. It's an important issue, and the voice of the consumer, who wants a good range of choice, struggles to get heard.
      And I'm pleased to see (now that I've caught up with your original article - as I said I'm just back from holidays) that you think a market studies power for the Commerce Commission is a good idea. I've been banging on about this forever, for example here http://economicsnz.blogspot.co.nz/2016/08/time-to-kill-off-absurdity.html
      and here
      http://economicsnz.blogspot.co.nz/2016/11/good-ideas-but-now-what.html

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