Stick it to them

Our Commerce Commission has just hosted the International Competition Network's annual cartel workshop, on the nowadays typical hybrid online-plus-in-person basis, and it has been a fascinating meeting.

If you're not a competition policy tragic, sticking it to cartels may not ring your bell. You wouldn't be alone. People don't always appreciate the harm they do, and indeed it's not so long ago that cartels were seen as potentially a good idea. In FDR's depression-ravaged America, for example, cartels were actively encouraged: they were thought to be useful as a way of holding up prices when deflation was a macroeconomic problem. Some folks still think that cartels can help businesses through tough times by parceling out the available jobs so that everyone has some sort of income stream to help keep them going.

But these days, competition agencies, rightly, see cartels as an unmitigated evil. Cartels raise prices, ripping everyone off for illicit private commercial gain. They reduce output: think OPEC, which rorts the oil price by agreeing to curb production. And at least one of the four activities that fall under the general heading of 'cartel' - price fixing, market allocation, bid rigging, collective output control - is nothing short of outright commercial fraud. Crooked collusive bidding on tenders is a crime - and a particularly nasty one when it stitches up the likes of medical supplies or essential infrastructure - and the conspirators ought to face the prospect of being banged up with the other fraudsters, as they will when our cartel criminalisation regime goes live next April.

So there are good reasons why competition agencies everywhere want to discover and punish any existing cartels, and hence or otherwise deter new ones from forming.

Trouble is, one of their best weapons may be losing its oomph.

'Leniency', as it's known in the trade, was a Cunning Plan. It destabilised cartels by encouraging cartel members to rat on their mates. The first - and, importantly, only the first - cartelist to dob in the others got 'immunity': the Commerce Commissions of this world wouldn't take any proceedings against them, but would prosecute the rest of the gang. There is other stuff - the initial dobber-in had to continue cooperating with the investigation, for example - but that's the guts. 

The importance of 'only the first' is right out of game theory. If a bit of mistrust starts to bubble up in a cartel - and let's face it, it tends to, as cartelists are always worried that someone will renege and sneak a commercial advantage by undercutting the high price they are supposed to quote - then the 'first in' element sets up a payoff matrix where the first in gets a positive payoff at the others' expense. And there have indeed been real world instances of cartelists racing to be first in the regulators' door. Overall, it's been good at unearthing cartels that mightn't have been found otherwise.

But there is a growing suspicion that cartelists may be opting to stay away from looking for leniency. It doesn't seem to apply to New Zealand - apparently the Commerce Commission has at least 17 leniency applications in, and at the conference we heard that Portugal's authority has eight, which the local folks think is a lot for an economy Portugal's size - but at least in some jurisdictions, notably the EU, the number of leniency applications has dropped off. 

Why? Probably three things most of all. 

One is that the EU has made it easier for private parties to swing in behind the competition regulator and sue for damages: the prospect of megabuck claims across multiple jurisdictions to recover the cartels' overcharging has made cartelists reconsider the leniency matrix of payoffs. Personally I'm all for facilitating people getting back their ill-lost costs, and multiple expensive court cases are exactly what the conspirators deserve (and should have thought of before they started), but realistically you've also got to wonder about the cost to competition enforcement of leniency becoming ineffective. 

The second thing is that it's good to get immunity from a competition authority's civil proceedings and the risk of a big fine, but it's not always as clean a process as it might be for applicants to get immunity from criminal proceedings, where employees risk going to jail (as they have in Australia since 2009, and as they will here from next year). People really worry about that - you would, too - and if the deal doesn't come as a guaranteed combo, people won't buy it.

The third thing is that it's plausible that at least some competition authorities rested on their oars and let leniency do all the cartel detection work. Understandable: leniency was the gift that kept on giving. But, again, it upset the payoff matrix. Now, cartelists started to reckon that if they didn't dob a cartel in, there was sod-all chance that the competition authorities would find it by themselves. The calculus shifted to staying shtum. 

How to turn the tables back in the competition authorities' favour?

You don't have to be a professional game theorist to get to the answer, which is to re-stack the payoff calculus.

One leg is to make the payoff from leniency and immunity more attractive. There's some swallowing of dead rats involved, but there you go. The main moving parts are ironclad civil plus criminal immunity, and probably some form of protection against private claims.

The other leg is to increase competition authorities' independent capability to find cartels. The Commerce Commission's Grant Chamberlain (below) chaired the plenary session on 'Widening the enforcement toolkit - how do we detect cartels going forward without relying on leniency?', and the big takeaway for me was that outreach programmes have a lot of cartel-detecting potential. Go out and about in the community on competition advocacy tours, and you'll find (as one panelist said) that if you talk to people, they tell you things. Funny, that.

Another very promising line of attack is Big Data. Everyone says Big Data will mean this, that or the other for society as a whole: not everyone has connected the dots and realised that in the right hands it could be a powerful anti-cartel tool. I was impressed by Spain's efforts. There is a nationwide Spanish e-platform used for public procurement tenders: their authority cloned it, and devised software to interrogate it for patterns suggestive of bid-rigging. Way to go. 

And one last tool is encouraging whistleblowers, which has had some good results. Me, I'd stack the strategic deck a bit more, and as well as protecting whistleblowers from retaliation, I'd give them a share of the takings from any eventual fines. 

Not that some need much extra motivation. One of the speakers told us of a French example, which involved bid-rigging contracts for upgrading school buildings. The cartelists had an IT guy set up the software to keep track of who got what. Later, almost incredibly, they made him redundant.

His wife dobbed them in.