Transcript The Graphite Electrode CartelM. Hviid, A. Stephan (2009),

The Graphite
Electrode Cartel
M. Hviid, A. Stephan (2009), The graphite electrodes cartel: fines which deter? In: Cases in European Competition
Policy: the economic analysis. Cambridge University Press, Cambridge.
Presented by:
Anup Kalani
Kishor Balbudhe
Katarzyna Wilk
Felix Sarfo
Agenda
•
About Cartels
•
Theory of Optimal Deterrence
•
Case and Industry background
•
Guidelines on fines – description of the fining proccess
•
The C/G case
•
Conclusions
•
Cement Cartelization in the Indian Economy
•
The Indian vis-a-vis the European cement cartelization. Institutional
differences
2
What is Cartel?
•
Under Article 81 of Treaty of Rome, Cartel is defined as:
“All agreements between undertakings, decisions by associations of undertakings and
concerted parties which may affect trade between Member States and which have as their
object or effect the prevention, restriction or distortion of competition within common
market”
•
•
Amended as Article 101 and 102 of Treaty on the Functioning of the European
Union (TEFU) under Treaty of Lisbon
This can be achieved by following methods:
1.
2.
3.
4.
Fixing purchasing or selling price
Limiting or controlling production
Sharing market or sources of supply
Engage in collusive bidding or bid rigging
Source: European Union Law - http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:12008E101
3
About Cartels
•
The term Cartels was originated in Germany for alliance of enterprises in
1880s.
•
Different types of Cartels:
1.
2.
3.
4.
5.
•
Public Cartels
Private Cartels
International Cartel
Import Cartel
Export Cartel
Interesting Facts:
Public Cartels were allowed during Great Depression (1930s) in US
• Washing powder cartel between Unilever and P&G
• OPEC Oil Cartel???
•
4
Conditions conducive to Cartelization
1.
High concentration – few competitors
2.
High entry and exit barriers
3.
Homogeneity of products
4.
Excess capacity
5.
Similar production costs
6.
Inelastic demand
5
Harms of Cartelization
•
•
Cartels are harmful because of below reasons:
1.
Higher prices
2.
Lower quality products
3.
Lack of transparency
4.
Restricted output
Lysine price-fixing cartel
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To raise price of animal feed additive Lysine
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Price rise of 70% during first nine months of cartel formation
Source - http://www.justice.gov/atr/public/speeches/201477.htm
6
EU Statistics about Cartelization
Fines Imposed (Mn Euros) – 1990 - 2014
Source : http://ec.europa.eu/competition
Cartel cases decided by EU Commission –
1990 - 2014
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Detection of Cartels
1.
Whistle Blowers
2.
Investigation – Dawn raids, Inspection of premises/books etc.
3.
Conducting Sector inquiries
4.
Requesting information
5.
Leniency Program

Very popular Leniency/Amnesty program of US
https://www.youtube.com/watch?v=V945c9rvi1k
Source: http://europa.eu/legislation_summaries/competition/firms/l26092_en.htm
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Detection Problem
1.
Secretive and concealing nature of cartel members
2.
Need of extraordinary power vested with authorities
3.
Jurisdictional reach in case of international cartels
4.
Requirement of high standard of proof and procedure
To deter cartelization, the fine imposed on the undertaking should be
greater than the expected benefit of collusion.
9
Theory of Optimal Deterrence
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Relies on cost-benefit analysis by firms
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Balancing of expected gain against the expected punishment
•
Due to presence of only monetary losses, the calculation is simple
•
The theory is based on below fact:
“Firm will deter against cartelization when expected benefit is less than
expected fine”
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Theory of Optimal Deterrence
The key to deterrence of price fixing is to ensure that the expected loss from being
found guilty of a violation outweighs the expected benefit from collusion
•
B – Expected benefit out of cartelization
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F – Expected fine if found guilty
•
Pd – Probability of detection
•
Pc – Probability of being convicted
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Then the undertaking will be deterred from cartelization if:
𝐁 ≤ 𝐏𝐝 × 𝐏𝐜 × 𝐅
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The graphite electrodes industry
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Graphite electrodes
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Ceramic moulded columns of graphite
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Used for the production of steel in the electric arc furnaces, called “mini-mills”
•
Recycling process – Scrap metal to new steel
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Purpose – Steel production using recycled scrap metal
•
One-thirds of steel production in EU from the industry
•
€420 million industry in European Economic Area by 1998
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The graphite electrodes industry in EU
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18 major firms before cartelization
•
9 active firms after crisis – Consolidation
Signs of collusion
•
•
•
Firm
SGL
UCAR
High concentration of power (90% share with
2 firms)
VAW
High entry barriers
Carbide Graphite group
•
18 firms operating before cartel formation
•
Complicated and expensive production
Crisis before the cartel
•
Conradty
EU Market
share
X%
Y%
7%
Showa Denko K.K.
SEC
Nippon
3-4%
Tokai
Strong fall in demand during 1980s
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Case and the appeals
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Joint investigation between European Commission, USA, Canada
•
Direct participation of high-level executives
•
Market prices set in ‘top-guy’ meetings
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Side payments made to deter companies from cheating the cartel
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The Case – Timeline
July 2001
EC decision announced
– 8 of the 9 firms
charged penalties
June 1997
EC starts investigation
January 1998
SGL attempts
persuasive measures
for non-cooperation
June 2006
ECJ gives its decision
favouring EC on its
appeal against CFI
decision
April 2004
CFI decision on 7
firms’ appeal against
EC
15
The Commission’s guidelines on fines
 The commission imposed fines following The 1998 Guidelines on the
Method of Setting Fines Imposed Pursuant to Article 15(2) of Regulation
No.17 and Article 65(5) of the ECSC Treaty (98/C9/03).
 The purpose of the guideline was to ensure transparency and
impartiality in the face of the violators and European Court of Justice.
 However the Commission’s discretion in using the guideline to set the
fines should be coherent, non-discriminatory and consist.
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Method of calculating the fines
The method of calculating the fines consist of five (5) steps:
1.
Basic Amount
2.
Aggravating and Attenuating Factors
3.
10% Annual Turnover Cap
4.
Leniency
5.
Ability to pay and other factors
17
Method of calculating the fines
1. Basic Amount.
The Basic Amount consists of the following elements - the gravity of the
offence; deterrence uplift which is part of ; and the duration of the offence.
 The gravity of the offence (x)- The Commission deemed this
infringement as serious and deliberate as decision to fix the price was
taken by high profile managers of the undertakings.
 Deterrence Multiplier- The Commission set the fine at a level which
ensures that it has a sufficiently deterrent effect. Using the worldwide
turnover(table 1, next slide) based on the last year of infringement, the
Commission categorized undertakings into four categories applying
relative weights.
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Method of calculating the fines
1. Basic Amount.
Table 1:Market share in graphite electrodes (1998 turnover)
Source: EU case; Kobayashi (2001, Table 2)
Firm
EU
US
Worldwide
SGL
X%
23%
>10%
36%
>10%
UCAR
VAW
Y%
<5%
Conradty
?
C/G
7%
18%
5-10%
SDK
3-4%
18%
5-10%
SEC
<5%
Nippon
<5%
Tokai
Source: M. Hviid, A. Stephan, The graphite electrodes cartel: fines which deter?
1%
5-10%
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Method of calculating the fines
1. Basic Amount.
Summary of the initial categorization:
 Category 1: SGL and UCAR. Starting point €40 million
 Category 2:Tokai, SDK and C/G. Starting point €16 million
 Category 3: VAW, SEC and Nippon. Starting point €8 million
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Method of calculating the fines
1. Basic Amount.
Summary of the categorization:
 Category 1: SGL and UCAR. Starting point €40 million
 Category 2: SDK. Starting point €16 million
 Category 3: Tokai and C/G. Starting point €8 million
 Category 4: VAW, SEC and Nippon. Starting point €4 million
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Method of calculating the fines
1. Basic Amount.
 In determining the multiplier, the Commission used the means testing
method , which, was found to be inconsistent with optimal deterrence
argument.
 Duration: the basic amount is not increased for short term
infringements (less than one year); for medium-term infringements
(one to five years) it is increased by up to 50%, and an additional 10%
for each year thereafter.
 The Commission in this case used the calculation of fine increment to
the maximum as most of the undertakings have been part of the cartel
for at least five(5) years.
 The basic amount was increased by 55% for each of the undertaking
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Method of calculating the fines
2. Aggravating and attenuating factors.

The basic amount is increased/decreased where there are circumstanes
of certain kind.
 The guidelines do not provide an exhaustive list of this circumstances
but do provide examples.
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Method of calculating the fines
2. Aggravating and attenuating factors.
Aggravating circumstances
• The repeated infringement of
same type (10%)
• Refusal to cooperate or
obstruction (25%)
• Acting as a leader or instigator
(50%)
• Using retaliatory measures to
enforce infringement
• The need to increase penalty to
exceed improper gains
• Other
Attenuating circumstances
• A passive or follow-my-leader
role (40%)
• Non-implementation or
termination of infringement
when Commission intervenes
• Reasonable doubt
• Infringements commited as a
result of negligence or
unintentionally
• Other
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Method of calculating the fines
2. Aggravating and attenuating factors. Companies’ appeals.
 C/G argued the reduction was inadequate – rejected.

SEC and Nippon argued they took a passive role – rejected as they had
been represented by Tokai at some meetings and present at others.
 Nippon cliamed it had not reduced it’s sales – not substantiated.
 SEC argued it had quadrupled its output between 1992-97 – the CFI
accepted that fact although noticed it hadn’t alleviated the harm as SEC
had obtained only a small market share in the EEA.
 The disastrous economic situation argument – rejected.
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Method of calculating the fines
3. Ten per cent annual turnover cap.

From the 1998 guidelines – the final fine imposed by the Commission
may not in any case exceed 10 per cent of the worldwide turnover of the
undertkings on the year preceding the year in which the decision is
taken.
 SDK and SGL argued that the 10 per cent limit should apply after the
leniency discount – the CFI rejected as this would remove the incentive
to apply for leniency.
26
Method of calculating the fines
4. Leniency notice.
What for?
1.
Incentive to cooperate
2.
Cartel detection
3.
Avoiding costly appeals
27
Method of calculating the fines
4. Leniency notice.
 SDK – 70% reduction for being the first to provide substantial evidence
of the cartel
 UCAR – 40% reduction for contributing to establishing important
aspects of the case
 SGL – 30% reduction for handing over information that went beyond
that specified in the formal request
 C/G – only 20% reduction as initially it gave ambiguous information as
to its role
 VAW – 20% reduction for cooperation
 Tokai, SEC, Nippon – 10% reduction each for not contesting the actual
allegations
28
Method of calculating the fines
4. Leniency notice – commentary.
 The Commission has a substantial degree of freedom when it comes to
awarding leniency => lack of clear guidelines
 Should there be a discount simply for not contesting the facts? –
incentives (?)
 The leniency programme did not manage to avoid costly appeals
companies’ appeals focused on the size of the leniency discount
awarded.
-
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Method of calculating the fines
5. Ability to pay and other factors.
 The guidelines leave open the possibility to reduce the fine to take
account of a firm’s ability to pay in certain circumstances.
 The Commission turned down all out of three firms (SGL, UCAR, C/G)
that argued for a reduction due to certain circumstances (market
conditions, changes in company’s corporate structure).
 The Commission stated that to take account of an undertaking’s bad
financial situation would be equall to conferring competitive advantage
to companies least well adapted to the market conditions.
30
Method of calculating the fines
5. Ability to pay and other factors.
 SGL argued the company’s situation was weakened by the high fines
imposed by other competition authorities and civil damage payments
and further sanctions by the Commission might force the company into
bankruptcy.
 In this case the Commission rejected the argument although it granted
SGL two 33% discounts in two other cartel cases involving some of the
same firms.
Unknown motivation and methods of calculating the bankruptcy
discount - Are bankruptcy discounts applied transparently?
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The odd one out – C/G. The problem of overdeterrence.
 The Commission’s treatment of C/G stand out as harsh.
 C/G took a passive follow-my-leader approach and more than doubled
it’s sales during the period.
 According to the Commission, the company had access to early
information about price increases and used it.
 Was the investigation meticulous, the treatment fair and does it matter?
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Conclusions
 Fines and leniency discounts are not calculated in a manner that is
transparent
 The means-tested element of setting fines is also incompatible with an
economic model of deterrence based on expected benefits and gains
 The harsh treatment of C/G, despite it’s passive role, is a missed
opportunity to encourage firms to pursuit cartel-destabilising strategies
 Basing fines on EEA market shares, rather then worldwide shares, will
not be deterrence enhancing for as long as external enforcement is weak
 The guidelines make it difficult for the size of
with a good degree of precision
a fine to be forseeable
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Cement Cartelization in Indian Economy
•
In 2008, Competition Commission of India (CCI) sent notices to 42
cement companies including Cement Manufacturing Association for
alleged cartelization
•
With the surge in demand for cement, the price of cement also increased
•
This led CCI to investigate the cartelization in the industry under
Competition Act, 2002
•
Evidence is provided by Whistle-blowers to confirm the cartelization in
the industry
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The CCI fined all the involved companies a combined fine of €800 M
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Methodology Used
Concentration Index (C3/C5)
•
The C3 and C5 index for the industry remained more or less constant during three
years (2004-2006) in study
Price Surge
•
All the 5 regions experienced sudden price increase simultaneously during March
2006
Demand/Consumption
•
High demand/consumption variability affects cartelization in the long run.
35
Methodology Used
Expenses to Sales Ratio
•
In spite of sales picking up sharply and steadily, the cost of production has not
increased at same pace which could point towards cartelization
The
increase in demand is matched up by increased capacity and hence
no shortage is observed. But the increased prices and declining expense
to sales ratio point towards possible cartelization
36
The Indian Cement Cartel and the European Cement
Cartelization. Institutional differences.
Indian Institutions
European Institutions
•
Weak rights of victims of the illegal anticompetitive conduct – difficulties with filing
cases in courts by private parties
•
Encouragement of a class action type of
private antitrust enforcement
•
Leniency programs are not effective or
wrongly implemented
•
Leniency programs are greater in number
and generally encourage reporting cartellike activities
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The institutions in charge have relatively
less power
•
The institutional set is more empowered
•
Small involvement of economic expertise
•
The economic analysis plays important part
in the detection of a cartel
•
Lack of international perspective
•
There are bilateral economic arrangements
within the EEA
Source: http://www.circ.in/pdf/Case_Study_04.pdf
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Question 1
•
What should be minimum fine for deterrence if probability of detection
is 25% and probability of conviction is 80% when the price under
collusion is 10% higher ? (Note: Consider inelastic demand)

25% of Sales

30% of Sales

50% of Sales

60% of Sales
38
Question 2
•
A cartel is a collusive agreement among a number of firms that is
designed to

Expand output and lower prices but not to a predatory level

Expand output and lower prices to a predatory level

Restrict output and raise prices

Expand output and raise prices

Restrict output and lower prices to a predatory level
39
Question 3
•
What over-deterrence is?
 It means the authorities in charge take up too much cases which renders them
ineffective when it comes to infringement detection.
 It means that a treatment of a company is too harsh considering seriousness of its’
infringement and therefore it doesn’t incentivise companies to cooperate in the first
place.
 It means putting false accusations on companies that are innocent and not involved
in a cartel.
40
Question 4
•
Under which Act, cartelization is prohibited in EU?

Act 81 of Treaty of Rome
 Act 81 of Treaty of Lisbon
 Act 101 and 102 of Treaty of Rome
 Act 101 and 102 of Treaty of Lisbon
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Question 5
•
Cartels usually happen in:
 Monopolistic Industry
 Perfect Competition Industry
 Oligopolistic Industry
 None of the above
42