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Vitamin Cartel

In 2001, the European Commission imposed record fines of €855.2 millions to the members of the Vitamin Cartel. The cartel, formed through collusion between thirteen companies operated for a decade (between September of 1989 and February of 1999) mainly by fixing the prices of vitamins. There were also agreements on the following: the allocation of volumes of sales and market shares for specific vitamins, the division of contracts to supply vitamin premixed to customers in the U.S., and the participation in meetings to both monitor and enforce adherence to the previous agreements. This enabled the companies to set relatively high prices without losing market share. This hurt consumers as prices would have been lower if the environment was more competitive. Moreover, it hurt other companies that used vitamins in their production process, and their respective consumers.

Suspicions of anti-competitive behavior first emerged in 1997 and, two years later, the U.S. Department of Justice formalized the complaint following thorough investigation.  Later on, the EU decided to launch a similar investigation. International cartels generally develop because the right dynamics are in place. In this case, these included the fact that the vitamins market was very concentrated (with very few players) and had high entry barriers due to the required big initial investment, as well as the fact that vitamins are a commodity and therefore are harder to differentiate (which allows the companies to uniform their prices more easily).

The fines attributed to each company depended mainly on the infractions committed and its role within the cartel, and whether or not it had cooperated with the competition authority in its investigation. In the EC case, Aventis SA benefited from having been the first company to cooperate and, therefore, was granted complete immunity in its participation in the collusion regarding certain vitamins (but not all of them). The giants Hoffman-La Roche and BASF AG also cooperated and their fines were reduced by 50 percent. Yet, they still received the largest fines (€462 and €296.16 millions respectively) due to their crucial roles within the cartel (the former was the leader). Finally, five out of the thirteen companies had been involved at least five years prior to the investigation and, thus were immune.

Is this type of punishment enough to discourage cartels? Firstly, it is important to note that rational companies would only participate in a cartel if they were convinced that the benefits enjoyed would outweigh the future potential costs of being caught and fined for it. Since there are legal limits in terms of how much a company may be fined, cartels could more or less easily calculate this trade-off and, subsequently, decide whether to participate or not. In theory, this means that some cartels probably will see benefits from engaging in collusion even if they get caught eventually. Thus, it could be argued that penalties are not enough to prevent cartels from (re)emerging. In the case of the vitamin cartel, its price mark-ups of 20 percent allowed it to gain billions of dollars, which is more than what it paid in criminal fines. This sends the message that it is still beneficial to engage in collusion.  A suggestion would be, for instance, to compel the involved companies to split from their subsidiaries, as punishment for having destroyed most of their local competition. This type of structural relief could, eventually, result in more competition emerging in the vitamin market. 

 

References:

Barboza, D. (1999), “Tearing Down the Façade of ‘Vitamins Inc.” in The New York Times [online] 10th October, Available at: http://www.nytimes.com/1999/10/10/business/tearing-down-the-facade-of-vitamins-inc.html?pagewanted=all&src=pm [Accessed on 06.05.13]

Bendavid, N. (1999), “Vitamin Price-Fixing Draws Record $755 Million in Fines” in The Chicago Tribune [online] 21st May, Available at: http://articles.chicagotribune.com/1999-05-21/news/9905210013_1_roche-and-basf-price-fixing-and-bid-rigging-vitamin [Accessed on 07.05.13]

Department of Justice (1999), “F. Hoffmann-La Roche and BASF Agree to Pay Record Criminal Fines for Participation in International Vitamin Cartel” in U.S. Department of Justice [online] 20th May, Available: http://www.justice.gov/atr/public/press_releases/1999/2450.htm [Accessed on 06.05.13]

Labaton, S. (1999), “May16-22; Breaking Up a Vitamin Cartel” in The New York Times [online] 23rd May, Available at: http://www.nytimes.com/1999/05/23/weekinreview/may-16-22-breaking-up-a-vitamin-cartel.html [Accessed on 06.05.13]

 

JB

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Author: studentnovasbe

Master student in Nova Sbe

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