Cartel screening in the digital era – Robert PORTER – January 2018 OECD Workshop
2 gostaram1,149 visualizações
This presentation by Robert Porter (Professor of Economics, Northwestern University, US) was made during a workshop on “Cartel screening in the digital era” held by the OECD in Paris on 30 January 2018. More papers and presentations on the topic can be found out at oe.cd/wcsde.
Mais conteúdo relacionado
Mais procurados (13)
Semelhante a Cartel screening in the digital era – Robert PORTER – January 2018 OECD Workshop (20)
Mais de OECD Directorate for Financial and Enterprise Affairs (20)
Último (20)
Cartel screening in the digital era – Robert PORTER – January 2018 OECD Workshop
- 1. Detection of Collusion Robert Porter Northwestern University OECD Workshop on Cartel Screens Paris 30 January 2018
- 2. 2 Introduction Pro-active cartel detection methods can complement reactive amnesty or leniency programs. The two approaches are not necessarily substitutes. Screens identify markets in which industry structure is conducive to collusion, behavior is suspicious, or where the complaints of customers or rivals warrant closer scrutiny. Screens can provide evidence to justify an investigation. In a procurement setting, the appropriate remedies may include re- design of the procurement process, as opposed to antitrust enforcement alone.
- 3. 3 Introduction My purpose today is to: • Review the factors that facilitate cartel formation. • Provide an overview of the cartel screening approaches. Structural vs. behavioral screens • Discuss some of the challenges in screen design and implementation. • Describe some recent developments in screening techniques. • Discuss how the wealth of data now available offers the prospect of more extensive investigations, but how it can also facilitate collusive practices.
- 4. 4 Cartel Formation and Governance Issues A collusive scheme must: 1. Enlist conspirators - problematic if potential participants are asymmetric 2. Come to an agreement - prices - market shares or market division - product features 3. Enforce agreement - detection and deterrence of cheating 4. Protect gains from entry or expansion by non-participants 5. Avoid detection 6. Respond to new circumstances
- 5. 5 Structural Screens A typical approach considers a set of industries or markets. Regress a measure of cartel incidence or of the degree of collusion on various industry characteristics that may facilitate collusion: – Number or concentration of sellers – Degree of product differentiation – Excess capacity – Entry barriers – Demand stability – Pricing transparency Caution: The extent to which these factors facilitate collusion depend on individual industry circumstances. Also, 3 or 4 digit SIC codes may be too aggregate.
- 6. 6 Structural Screens Dependent variable: 1. Measure of profits Problems of interpretation (Schmalensee, HIO 1987) E.g., Demsetz critique – under competition, high market shares and profits accrue to firms with better products or lower costs 2. Indicator of cartel existence, or number of discovered cartels Does not account for undetected cartels, absent strong assumptions about rates of cartel formation and dissolution (e.g., Hyytinen, Steen & Toivanen 2017 study of legal cartels in Finland) Results help to indicate of markets of potential concern, but offer a crude measure.
- 7. 7 Behavioral Screens Many collusive agreements encounter operational problems, associated with formation and governance issues. The manner in which a conspiracy deals with these problems can facilitate detection. However, there is no general detective prescription. Individual circumstances suggest the line of inquiry. Case studies are inevitable. Behavioral screens determine whether suspicious behavior is consistent with competition or collusion. In some cases, collusive behavior would be difficult to achieve without communication.
- 8. 8 Behavioral Screens It isn’t possible to study all markets of potential concern. Instead, behavioral screens are more likely to be useful when investigating a complaint by customers or rival firms, or arising from studies of individual markets (e.g., Nasdaq). If behavior is deemed suspicious by the screen, then a more detailed investigation may be warranted. Firms could be asked to rationalize the suspicious behavior, and offered leniency should they confess to collusion. In this sense, using screens can complement leniency programs.
- 9. 9 Behavioral Screens - Implementation I’ll describe a number of potential screens. They are designed to detect anomalous behavior and test whether it is consistent with competition. They are tailored to the circumstances of the individual market. I’ll also describe some potential challenges of implementation and interpretation.
- 10. 10 Structural Breaks: Price Patterns Many agreements are short lived. Price changes at time of cartel formation and demise can be useful markers. Formation: Often witness gradual increase, not associated with cost increases, as cartel experiments with the price that the market can bear. Demise: The ends of cartel agreements are rarely managed, resulting in sudden price collapses. Vitamin C: Bernheim 2002, 2008, Igami & Sugaya 2017 Variance screen: When a cartel is active, prices can be less responsive to costs, and less variable more generally. Frozen perch: Abrantes-Metz, Froeb, Geweke & Taylor 2006
- 11. 11 Structural Breaks: Price Patterns If firms interact repeatedly, can sustain agreement by threatening defections with future punishment. Requires rapid, sure and severe responses to suspected cheating. May nevertheless witness, or suspect, deviations. Punishment? Legal cartels can use fines. Corn syrup: compensate rivals for foregone market share at agreed-upon cartel price. If no recourse to fines, a ring can punish non-compliance by singling out the deviator from the ring, or by dissolving the ring. LA trash haulers used local price wars to target punishment. Temporary price wars may also be employed. Joint Executive Committee railway cartel (Porter 1983, Ellison 1994): price wars triggered by departures from allotted market shares
- 12. 12 Pricing to Avoid Detection A procurement auction bidding ring may submit phony, or complementary, bids, that by design are higher than the serious bid submitted by the ring, to create the appearance of competition. Example: Long Island highway contracts (Porter & Zona 1993) Ring met prior to the auction to assign low bid privileges. Other conspirators often submitted complementary bids. How does this behavior manifest itself? Exploit non-inclusiveness of cartel, plus presence of phony bids. Split data along two dimensions: (1) Cartel vs. non-cartel (those not present at meetings). (2) Low bid within group vs. higher bids.
- 13. 13 Pricing to Avoid Detection Test whether the low bidder for a given group is determined by the same process as the ranking of higher bids. Accept for non-cartel firms, do not accept for cartel. The order of the bids submitted by non-conspirators is related to cost measures (capacity, utilization rate). The low or serious conspirator bid likely to be submitted by the firm with the lowest cost. The ranking of higher cartel bids is unrelated to the cost measures. Bajari & Yi 2003 adapt method to identify cartel participants. Caution: A sophisticated cartel could pass this test, by inflating all bids (serious and phony) by the same amount, preserving the ranking of bids based on costs. Then have to compare cartel and non-cartel bid levels.
- 14. 14 Pricing to Avoid Detection Example: Japanese construction project auctions (Kawai & Nakabayashi 2015) Suspicious patterns of bids across re-auctioned projects; focus on rank reversals. Sealed bid auction where low bid wins, but only if it is below the secret reserve price (maximum bid). If not, re-auction item shortly thereafter. Examine auctions which went to a second round, where the difference between the lowest and second lowest bids is less than 1% of the reserve price. The low bidder in the first round is almost always the low bidder in the second round. Not true of the second and third bidders, when their bids are close.
- 15. 15 Pricing to Avoid Detection Figures plot the percentage difference between the second round bids of the lowest and second lowest bidders in the first round, Δ12, and the analogous difference for the second and third lowest bidders, Δ23. Patterns indicative of a ring designating one serious bidder.
- 16. 16 Partial Agreements If a cartel is not all inclusive, then the behavior of outsiders can serve as a standard of comparison. Example: Ohio school milk auctions (Porter & Zona 1999) Plant locations matter, as processed milk is costly to ship. The three Cincinnati dairies bid both near their plants and well beyond their local territories. Their more distant bids tended to be lower. Other dairies’ bids increase with distance from their closest plant to a given school district. The Cincinnati dairies’ bidding is consistent with territorial allocation of nearby school districts, where they were the lowest cost potential competitors, and more competitive bidding in distant districts. An “inverted price umbrella,” consistent with a local monopoly constrained only by distant rivals.
- 17. 17 Anomalous Price Patterns Other price patterns are also inconsistent with competition. Example: Japanese paving auctions (Ortner & Chassang 2017) Cities announce reserve price, maximum bid based on engineer’s estimate of upper bound on costs (not binding). Some also have adopted minimum bids, so as not to compromise quality; relatively low. Find that in some cities, winning bids are lower after a minimum bid is adopted, in comparison with control cities. Consistent with collusion, if a minimum bid limits the punishments associated with a price war following suspected cheating.
- 18. 18 Excess Entry in Average Bid Auctions Average bid auctions are frequently used to award procurement contracts. Low and high bids are discarded according to a pre-specified rule, and the winner’s bid is the closest to the average of the remaining bids. Incentive for a ring to submit many bids, to manipulate the average bid, and to increase the chance of being the winner. Example: Italian roadworks (Decarolis & Conley 2016) Many more bids submitted than in comparable first price auctions (50 vs. 7 on average). Devise test for presence and membership of ring, validated on sample where collusion was uncovered. Apply to sample where collusion suspected.
- 19. 19 Market Allocation Many cartels have internal political problems, arising from differences in costs, capital, customer bases, discount rates, etc. Examples: OPEC, US agricultural marketing agreements. Cartel problem is to allocate shares and divide the spoils. An imperfect solution is a territorial assignment: - by region, - by point in time (GE/Westinghouse electrical conspiracy in the 1950s used phases of the moon), - by incumbency (NY trash hauling), - by pure randomization (e.g., identical bids). Caution: geographic specialization, bid rotation, and low client turnover are not inconsistent with competition. But lack of competition can be symptomatic of collusion. Example: Offshore oil lease bidding (Aradillas-Lopez, Haile, Hendricks & Porter 2017)
- 20. 20 Market Share Patterns Another imperfect solution is to act to keep market shares stable. Market shares are unpredictable, and may need to compensate for excess shares after the fact. Quebec gas: staggered price changes to meet market share targets (Clark & Houde 2013, 2014). School milk auctions: strong vs. weak cartels (Pesendorfer 2000) Strong cartel distinguished by ability to make side payments. Allegations of side payments in Florida ring, not Texas. Market shares will be more stable in a weak cartel, to maintain internal discipline. Assign low bidding privileges based on relative market share. Market shares were more volatile in Florida (especially revenue shares). Akin to a variance screen test for market shares.
- 21. 21 Increasing Data Availability The wealth of data now available offers the prospect of more extensive investigations, but it can also facilitate collusion. In particular, more readily available pricing data speeds the detection of deviations from agreed upon prices, dampening the incentives to cheat, especially if rivals respond more quickly than customers to price cuts. Example: Price transparency rules Danish concrete: “Government Assisted Oligopoly Coordination,” Albaek, Mollgaard & Overgaard 1997 Example: Airline Tariff Publishing Company case (Borenstein 2004) Airlines could communicate with advance price announcements, without having to sell tickets at those prices.
- 22. 22 Price Comparison Websites It was thought that the internet would lower the costs of consumer search, spurring price and quality competition. Firms can dampen these effects by shrouding attributes of their products (Ellison & Ellison 2009, 2017). But there is evidence that, even absent shrouding, price comparison sites can lead to higher prices. Luco 2017 studies a Chilean program that mandated that gas stations post their prices on a government website. After the program began, prices increased 10 percent, and more in poor neighborhoods. In high income neighborhoods, where people were more likely to visit the website, prices increased less, or fell.
- 23. 23 Corruption of Bidding Processes In some auctions, corruption of the process is a concern. E.g., in a sealed bid procurement auction, a bidder could bribe the buyer’s agent to learn their rivals’ bids, to maximize their payment when they win. Andreyanov, Davidson & Korovkin 2017 study 4.3 million Russian procurement auctions. Their test uses the time when sealed bids are submitted. Preferred bidders wait until the end of the auction to decide whether to submit, and if so bids just enough to win. Their tests suggest that more than 10 percent of winning bids were in auctions with “bid leakage” (e.g., winning bid more likely to be late). Contract prices are higher than under an equal playing field: - direct effect: higher bid by preferred bidders - indirect effect: others bid more aggressively, but less likely to bid
- 24. 24 Corruption of Bidding Processes Auctions where bids have multiple dimensions (multiple items, or price and quality) are especially vulnerable (Burguet & Che 2004). If the auctioneer has discretion in choosing the winner, for example by favoring some bidders on the basis of perceived quality, then the process can also be corrupted. The auctioneer can inflate the quality of the preferred bidders, or give more weight to dimensions in which they are stronger. Bidders with insider status need not bid as aggressively on price to win the contract. There is a role for rules that limit the selling agent’s discretion, or otherwise create an open process. Lewis-Faupel, Neggers, Olken & Pande 2016: adoption of e- procurement in India and Indonesia resulted in entry of non-local bidders and quality improvement (e.g., contract more likely to completed on schedule), but not lower prices.
- 25. 25 Corruption of Bidding Processes If there are contract renegotiation possibilities, then a competitive bidding process may be compromised by corruption of the renegotiation process. E.g., bidders who have a relationship with the auctioneer (or the person responsible for renegotiation) may bid aggressively to win the contract, knowing that profits will be more than recouped in the renegotiation process. Also concern about corruption of contract implementation. Example: Land auctions in China (Cai, Henderson & Zhang 2013). Properties were sold with zoning restrictions on development. Two stage process: indicative bidding, followed by bid adjustments. Preferred bidders signaled presence by submitting indicative bids immediately after first round bidding opened. Others stayed out, knowing that only insiders would obtain relaxed zoning restrictions (e.g., permitted building height).
- 26. Summary: Potential Screens for Collusion 1. Structural breaks in prices - Level changes associated with birth or death - Variance screens Caution: ensure not associated with cost or demand changes 2. Suspicious losing bids (indicative of complementary bidding) 3. Indications of punishment of defections - Permanent or temporary collapse of agreement - Targeted punishment 4. Comparisons with firms outside the ring 5. Comparisons across markets Associated with differences in: - the extent of competition from outside the cartel - the strength or cohesiveness of the cartel 26
- 27. Summary: Potential Screens for Collusion 6. Market share patterns inconsistent with competition - Geographic specialization - Bid rotation - Low client turnover - Too stable Caution: not necessarily indicative of collusion 7. Suspicious bid timing - Low pre-emptive bids - Late winning sealed bids 8. Suspicious patterns in contract renegotiations 27