Nova workboard

a blog from young economists at Nova SBE

Fuel: make prices public or not?

In 2013 the German Competition authorities obliged oil companies and petrol station operators to report to the Market Transparency Unit any change in price of the fuel types Super E5, Super E10 and Diesel. The purpose of such as policy is to “enable consumers to gain information on current fuel prices at petrol stations”[i]. But we should ask: will the problem be solved this way? Is this the best solution?

Oil is one of the sectors for which collusion is more frequently claimed to exist. Even if, in most cases, collusion is not proved to exist, it appears to be a non-transparent sector. In this sense, it is not surprising that such a measure is found in here.

In basic economic models, we consider information is perfect. However, this assumption is far from being realistic. Searching for the most competitive prices is costly and, thus, gives room for the non-exhaustion of arbitrage opportunities.

In this sense, these costs are almost eliminated with such a measure: people just have the cost of searching on the internet (“the Market Transparency Unit for Fuels (…) receives the price data from the mineral oil companies and petrol station operators and passes these on to private consumer information service providers, which in turn inform the consumer”[ii]), that nevertheless is not null. Besides this, some associated costs (such as transport ones) are not removed. But, undoubtedly, consumers are now more capable of doing a “good” decision than before. I think this was the reason explaining this policy change, going along with the purpose of enabling “consumers to gain information on current fuel prices in Germany”[iii]. If we assume that this measure does not incentivize collusive behavior, consumers will unambiguously be better off.

However, the problem (and thus the origin of this post) lies on the fact that this last assumption does not fit reality. Indeed, price observability helps collusive behavior to be taken. The reasoning besides this is simpler than what it might seem: when prices are not observable, it becomes harder to detect deviations to a tacit agreement between firms, raising concerns of confounding deviations with shocks on demand. With observable prices, a firm deciding to deviate is detected very quickly, making punishment fast to impose. Firms have, therefore, larger incentives to continue colluding than before.

Given this concern, the effects of this policy shift may not be as bright as predicted. Although consumers are now better supplied of information concerning the fuel goods, this may not necessarily impose that they are better off, because even if choosing with a better information background than before, probably the prices amongst which they will choose are now higher. The policy can, indeed, have the opposite effect of the one it was intended to. The measure was not taken a lot of time ago, since “its normal operation [started] on 1 December 2013”[iv] (besides the fact that most information that is available is not in English, so it would be hard for me to collect it), so it is difficult to see accurately, at this point, the effects of the policy. When enough data is available, it would be worthwhile to compute a regression that would test for possible structural changes in prices with this measure, controlling for demand-side factors and international price fluctuations.

While not having a magic formula for, in a competitive framework, improving consumers’ welfare with such a scenario, I think competition authorities should think in alternative ways of improving consumers’ welfare, by imposing firms to behave competitively. A tougher control of firms’ practices and the creation of mechanisms that promote denunciations of these practices seem to be, although non-magic solutions, more suitable to this problem.

Samuel, 624


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EU takes another step further in fight against cartels

The European Commission gave today another step in the fight against cartel activity in Europe by allowing companies that are affected by such “agreements” to gain access to crucial documents in order to help sue so they “can obtain the evidence necessary to prove their claims”. After fining automotive suppliers by a combined €953.3M (one of the largest until today) for colluding and fixing the prices of ball bearings, reflecting such fine “the economic importance of the cartelized sector as well as the scope and duration of infringement”[i], the EC seems to be on fire in tightening screws on cartel activity.

The new rules’ purpose is at making changes into member states’ legal systems to facilitate the victims of cartel activity in bringing claims for compensation. Particularly, they aim at empowering all courts to disclose evidence and will allow all several years of pursuit for compensation starting from the date of the publication of the conclusions of the case.

While having imposed fines totaling €1.83 billion in 2013, victims faced several problems in obtaining compensation such as the difficulty of obtaining evidence or the prohibitive costs of court case. According to the Financial Times, only 25% of EU anti-trust rulings issued between 2006 and 2012 resulted in claims for compensation. Most of which were carried out by large companies in the UK and Germany, whose national systems are known to be more victim-friendly on antitrust.

The documents being disclosed, under the new legislation, can be self-incriminating, in light of the leniency policy, under which companies that deliver information about a cartel in which they participated might receive full or partial immunity from fines. Such statements are often offered by whistleblowing companies who expose cartel activity.

The biggest concern regarding this matter is, precisely, related with the leniency programme, which has been proven successful in its short-run effects in inducing firms to reveal information about criminal activities and possibly reducing the agency’s investigation and prosecution costs (having been verified a sharp rise in the number of cartels convicted after adopting the leniency program) and long-run effects of deterrence of collusive behavior. Secrecy is vital. Even if in most cases there is a “opportunistic” self-reporting because cartels are already under scrutiny, the breaking down of such cartels is dependent on the companies that come forward, something that may be discouraged once the secrecy of such assistance, either because it can still suffer from retaliation of cartel members or by reputation matters so early in the process. Even though the EC is aware of such matter (promising the creation of a “black list” with information that cannot be disclosed at all) it is importance to take notion of the caution needed to apply these rules and that it should be strict limits on the circumstances in which victims can have access to such documents in order to not damage de success of the programme. The creation of a “black list” to prevent disclosure of whistleblower evidence is an important protection and it reflects the importance attached to the role played by such evidence in cartel enforcement.  However, the effectiveness of such protection will of course depend on what is included on the black list.

Nevertheless, the commissioner for competition, Joaquín Almunia, considerer this agreement a step forward because it “will remove the barriers that currently prevent the victims of antitrust infringements in the EU from obtaining effective compensation. At the same time, it will ensure an adequate and balanced interaction between actions for damages and the effective public enforcement of competition law by the Commission and national competition authorities.”

The progress made on the legislation shows the will of the EU to push through these reforms and seriously fight cartelization.

Rita Azevedo 625

[i] Commission Vice President in charge of competition policy, Joaquín Almunia

Inadequate competition is driving Finnish retail food prices up

Finnish retail food prices are one of the highest in the European Union. According to a comparison between 15 EU-countries with similar income levels made in 2012, Finland was the fourth most expensive country after Denmark, Sweden and Austria. Part of this can be explained by variation in value added taxes in different countries, but it can’t explain everything.

The most likely reason for this is the level of competition inside the business in each country. For example Dutch food retail prices are 24 percent lower than the Finnish ones.  There are eight strong competitive food retailers in the Netherlands, but only two can be found from Finland. Thus, it is most likely that there is more competition in the Dutch market.

In May 2012, European Commission recommended Finland to reform its regulations in the retail trade, because the market was seen highly concentrated. At that time, the two biggest players, S-Group (45%) and Kesko (35%) were together holding over 80 percent of the market. In 2012, the Finnish Government reformed the Finnish competition law and started a support program targeting to increase healthy competition in the retail trade.

Since then not much has changed. S-Group and Kesko are still holding dominant positions and there are no relevant changes in their market shares. Both vertical and horizontal constraints still exist and they’re preventing free competition to happen. S-Group and Kesko have too strong positions towards both food distributors and customers.

For example, if a food distributor wants to expand its business by selling to other retailers, it is very likely to lose its contract with both of the biggest ones. That makes it almost impossible for a distributor to sell to anyone else. A study made in January 2012 reveals that both of the retailers had been using “doubtful ways” to take advantage of their strong position towards the food distributors.

Customers are somewhat locked to these retailers as well. There is a public monopoly for a government owned company called Alko for selling beverages containing more than 4.7 percent of alcohol. This means that locations of these liquor stores are extremely important for food retailers, because customers prefer buying food and drinks from the same place. At the moment almost all of the Alko stores are located inside or next to the stores of S-Group and Kesko and the third biggest player Lidl actually has only one store which has Alko in it. There are many politicians in the boards of S-Group, Kesko and Alko, which may have an effect on who is getting those licenses and who is not.

The other problem from a customer’s perspective is bonus cards provided by the two biggest retailers. There is an investigation going on whether they have elements that are binding customers too much.

To solve the problem of too high retail food prices in Finland, the level of competition has to be increased. This could be done by reducing the power of the two big retailers towards both food distributors and customers. For example, there could be higher sanctions for selective buying and bonus card schemes could be restrained. Also, reducing the influence of politicians in the boards of these companies would reduce their incentives to favor them in the political decisions. Breaking the alcohol selling monopoly and bring wines to the supermarkets would also make entering the market easier. To get the Finnish retail food prices lower, more big players in the market are needed. 

Petri Lehtonen

Attempts to demonopolize the market of 4G mobile communication

In general, cellular network is one of the fastest growing markets among communication services. To be precise, mobile network operators (MNO) notice attention not only of investors, but also of regulation agencies. In many countries (particularly in Russia) this market can be characterized by such feature as high extent of monopolization of mobile services. Therefore, the situation requires restrictions of competition policy and legislation.

Development of mobile network occurs gradually: in the beginning the first generation (1G) was created, then 2G and 3G followed. And now 4G (LTE) becomes a common practice all over the world. Clearly, every type of mobile communication requires sufficient amount of radio frequencies. In the majority of countries the process of distribution of radio frequencies among mobile network operators takes place through an auction, but in Russia this model does not work properly. Needless to say that frequency is one of the main resources of mobile operators.

According to data of the state commission on radio frequencies, in Russia only 3-4% of radio frequencies are assigned by private companies (in the rest of the world this portion implies 30-40%), 33% – by military agencies, and the rest is reserved for common use. In order to use frequencies, mobile operators must get an approval of the state commission on radio frequencies. If these specific frequencies are free, the commission must announce a competition.

Regarding 4G mobile communication, the process of distribution looked differently, in spite of the fact that development of the communication of new generation could occur on the basis of existent frequencies. At first, new frequencies were going to be distributed among new players of the market – “Osnova Telekom” and “RusTelekom”, but the big three of this field of business – precisely, Beeline, MTS and Megafon – have interfered. As a result, the state commission decided to give defined portion to “OsnovaTelekom” (25% of this company belongs to Ministry of Defense) and the rest, existing regional players, to competition.

Regional mobile network operators often cannot get access to the distribution of new frequencies – the results of competitions seem to be defined beforehand. In case of 4G, the big three even suggested not to allow the use of old frequencies in transition to new generation. It was a measure for protection of their interests. Nevertheless, this announcement triggered FAS (Federal Antimonopoly Service) to intervene; FAS stated that the situation, in which the state commission considers this suggestion of the big three, violates the Federal Law “On Competition”.

What will be done with the frequencies of Long Term Evolution (LTE)? The most possible outcome is that the protest of FAS will be overcome under the pressure of “OsnovaTelekom” and the big three – Megafon, MTS, Beeline, although certain minimum of radio frequencies may be conferred to regional operators all the same.

From the economic point of view it’s better to provide considerable amount of radio frequencies within the auction to major local players in the regions to raise the competition level in accordance with competition police. But it should be done carefully to avoid the situation when companies holding the frequencies can’t develop them and provide appropriate level of service. Another issue is that these local players should have no right to resell them to anyone, incl. big three, for several years, not giving them the opportunity to speculate.

From a personal perspective, competition is not a major objective to the economic authorities in relation to the telecom market in Russia as they also find social responsibility in 4G development and want to minimize risks sacrificing competition. As they estimate big three as the sufficient scheme for competition they provide radio frequencies either to them or to some state affiliated companies, which lobbied this frequencies distribution.  Though lobbying is relevant for the big three as well. So, the only party, which really suffers in this case, is market competition because these three companies are not enough for real competition.

 Tatiana Prokopenko


When the Whistle is Blown there is still a whole race to run

It was roughly a year ago, in the 6th of March of 2013, that the Portuguese newspapers released information about raids by the Competition Authority to more than 15 different banks. According to the information provided, the British Barclays denounced a cartel of which it was part in Portugal. Allegedly, banks have been colluding to keep the spreads high. With investigations going on it may still take more than a year for the Competition Authority to take a final decision regarding this case.

The first question someone could ask itself is why Barclays denounced itself. The British bank has been involved in different scandals in last years, like the manipulation of the LIBOR, and the new CEO promises a policy of transparency and ethics. Nonetheless, the importance of the existence of a leniency program in Portugal cannot be ignored. By denouncing this cartel Barclays is exempt from any fine for having blown the whistle.

The second, billion dollar question is whether we really have a cartel. Most people would be happy to scream “yes”, but more than from any knowledge this comes from an anti-banks feeling that has been on high levels since the beginning of the 2008 Crisis. Besides that, everyone would like to get higher interest on deposits and lower on loans, so it is easy to say that the current rates are not the product of competition.

What is the evidence? The banking system can finance itself at the EURIBOR rate an average interest rate for loans between banks. This means that this rate, in a way, guides both the rate charged on loans and the one paid on deposits. As we can see from the following graph:


The data in this graph was taken from Banco de Portugal, the EURIBOR rate is for 12 months maturity. In the graph I distinguished three different types of loans (for housing, for companies and for consumption). This graph does show us how the EURIBOR is an important reference, and indeed most rates have followed the movements of the EURIBOR, making the affirmation of a cartel questionable.

Nonetheless, the next graph may be more useful to assess this. The accusation is that the banks had a cartel on spreads. If true, this means that the banks agreed not to compete by reducing spreads to get more clients.


We can see a similar pattern in all spreads, with a general decrease between 2010 and October of 2011. After this period the spreads start increasing.

The difficulty in mantaining a cartel is the existence of an incentive to cheat on the promise of keeping the spread high, in order to steal clients from the rivals. This decrease in spreads that occurs until October of 2011 is not very congruent with the existence of a cartel. Indeed, looking at this anecdotal data, if existent, the cartel would be posterior to this date. But notice that the moment of increase in the spreads coincides also with the moment in which the EURIBOR starts going down because deposit rates go down faster than loan rates. This could be explained by search models in which banks, taking advantage of quasi-rationality of people (or search costs), do not decrease loan rates so steadily immediately, because they can still get clients who did not inform themselves completely of the different rates of each bank. This could also explain the sudden increase in the spreads, because loan rates did not react to the EURIBOR decrease as fast as the deposit rates.

On the other hand, the increase in spreads is already lasting for longer than search models would probably explain and are at the highest level of the last years. Actually, why would Barclays lie?

It looks like it is not that easy to see whether there is a cartel or not. Even with such a simple analysis we already find arguments for both sides and with a more detailed analysis certainly a lot more points would arise. In the end it is up to the Competition Authority to find enough evidence of the existence of a cartel or not, but even with a denunciation there is still a lot of work to be done: just like in a race, when the whistle is blown there is still a whole race to run.

João Ritto, #623, Masters in Economics

IN REPLY TO: “Cartel in financial products: What was the role of the EC Leniency Program?”

In his blog post Filipe Silvério is touching upon the most important function of the European Committee Leniency program: affecting the expected payoff scheme of colluding companies. The increase in the probability of getting caught is the main driver here, and I agree with Silvério that without the Leniency Program, regulators might not have known about existence of the discussed cartels. I assume the mentioned decrease in expected profits (as result of an higher detection probability) is based on the Leniency Model. Although the successes of this model, I also consider it to be important to look at the drawbacks and will complement Silvério’s blog post with two of them.

It is not always in companies their best interest to apply for leniency. An application for the program automatically gives a company the reputation of being involved in illegal activity. As Silvério starts his post: “Can I trust my bank?” This is a cost not taken into account in the Leniency model. On top of that, a company applying would have to come forward with every little thing that might be associated with antitrust activity. For example, when Barclays revealed the existence of a Euribor-cartel, but the EC would also find involvement with the Yen Libor-cartel, its leniency application could have been denied. (Wallace, 2010)

Another problem with the model referred to, is that it ignores the fact that the colluding firms have asymmetric information about the detection possibility. The detection possibility does not only depend on the effort of the regulator (which is ex ante known to all firms), but also on firm specific information available after the start of colluding. Self-reporting only occurs when the firm specific detection probability is high. According to Feess and Walzl (2004), the result of this is that having the possibility to self-report creates an option value that reduces the expected fine to be paid, and thus increases the payoff of colluding. This means that giving a self-reporting firm full immunity might not be without any costs.

To summarize, I agree with Silvério and acknowledge of the importance of the Leniency Program. Nonetheless, the underlining model faces some disadvantages. Indirect or non-monetary costs of self-reporting are not taking into account, and asymmetric information creates an option value that increases the pay-off scheme of colluding. These drawbacks should not be ignored when using or analyzing the model.

Stefanus Leeffers, 642

Link to Filipe Silvério’s blog post:

    Feess, E. and Walzl, M. (2004), An Analysis of Corporate Leniency Programs and Lessons to Learn for US and EU Policies, University of Maastricht.

    Wallace, K. (2010), To Cooperate Or Not: Obtaining Amnesty Under The DOJ’s Corporate Leniency Policy, American Bar Association.


The return of a whistleblower

After approximately 10 years of price agreements and other anticompetitive practices in the Dutch construction industry, Ad Bos, ex-director of one of the 344 companies involved blew the whistle in 2001. Although existing signs of these practices both the Dutch prosecution court and competition authority failed in investigating and terminating it. A whistleblower was needed to make the case relevant. This example shows the importance of whistleblowers, and how effective they can be. This article is a call for a financial incentive for whistleblowers in Europe and argues why we should not want to be without it.

The European Commission underestimates whistleblowers. This is underlined by the way she explains how Article 101 (probation of anticompetitive agreements) cases start: “1) a complaint, 2) opening of an own–initiative investigation, or 3) a leniency application from one of the participants to a cartel.” [1] But what about whistleblowers like Ad Bos? An incentive program for whistleblowers would be a great additional fourth point here. While the British, Hungarian and Slovak antitrust laws have already included a financial incentive, the EU is still trusting in the moral incentive of individuals to do the right thing.

This incentive program would basically include a cash payment given to first person that notifies the regulator of a horizontal or vertical cartel agreement and provides electronic or paper form proof. The whistleblower can than receive a payment of some small percentage of the penalties levied in the case, up to a certain maximum. Also, protection of identity by the regulator would be of great importance for the functioning of the program.

A big advantage of this additional program would be the reduction in time of cartels operating. On top of the leniency program’s incentive of being the first company there is also an internal race for being first employee. Companies that consider applying for the leniency program have to take into account these anonymous employees that might want to make some extra returns as whistleblower.

Recently, Lord Turner, chairman of the Financial Conduct Authority of the UK, made an interesting statement with respect to the importance of whistleblowing. According to him the regulator might never have known about the recent -affair if there would not have been a potential supervisor in every trading room. Whistleblowing is one of the few mechanisms to avoid an enormous police force that could spot every crime. The link with competition policy in this sense is easily made. [2]

Although this sounds like a great idea, there are two issues that have to be given some thought. First, even as an employee it is not easy to get your hands on actual proof nowadays. It is a great risk that the employee faces when considering the high unemployment rates in the EU and the chance of bearing damage to the employer while the cartel accusation might turn out to be untrue or not enough supported. Besides this, the question is whether the EC is able to protect identities and more importantly will EU citizens believe the EC is capable of doing that. [3]

On the other hand, the existing burden in form of proof and risk that has to be taken is a good mechanism to avoid potential fake whistleblowers. One has to be fairly certain about his case before contacting the regulator. In the end, whether someone is telling the truth has to be discussed and decided on in court. A way to fight fake whistleblowers is to raise punishments for those who commit fraud by creating evidence for example.

To conclude, given the concerns that policy makers have to cover before imposing this new program, the whistleblower incentive program can be an effective tool in fighting anti-competitive practices. It speeds up potential leniency applications, fills in a cap that is hard to fill in competition policy and on the other hand it gives employees a financial push in the moral right direction.

Stefanus Leeffers, 642




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Cartel in financial products: what was the role of the EC Leniency Program?

Can I trust in my bank? No doubt you have heard someone asking this question before (and maybe you  have already asked yourself about it). In the center of discussion of the recent financial crisis is undoubtedly the  wrong practices carried out by the banks. However, even with the supposed end of the financial crisis, the  reputation of the banks has been hit by several new scandals. For example, in the last December, the European  Commission (EC) imposed a record €1.7bn fine on six firms (while two other are waiting for the final decision)  for colluding to fix two key interest rate benchmarks. Let’s try to understand a little more.

The EC found evidence of cartels operating in relation to both European interbank offered rate (Euribor)  and the yen London interbank offered rate (Yen Libor). Essentially, the cartels were operating in the financial  derivatives market, which are products used to manage the risks of fluctuations in interest rates. The derivatives  are products traded worldwide which are valued from the level of a benchmark interest rate and are in relation  to different currencies such as the Japanese yen, euro or dollar. Basically, the derivatives should reflect the cost  of lending in a specific currency. The problem is that banks are supposed to compete with each other but they  colluded, manipulating these interest rates for their own interests.

At this time, it is quite possible that you are asking “how was the cartel discovered?”. Regarding the  Euribor, the cartel, which operated between 2005 and 2008, was discovered because Barclays (one of the  participants during 32 months) revealed its existence. The cartel which had been rigging yen Libor, in the period  between 2007 and 2010, was disclosed by the Swiss bank UBS which also participated in that illegal practice.

Now, the question is “why did they do that?”. As you know, cartels are illegal and therefore firms are very careful with possible traces which can lead  to investigations. Additionally, for economic reasons, it is very difficult to determine what should be the  competitive outcome of the market and there are several possible outcomes which are compatible with the  collusive agreement. For example, if firms did not collude, what should be the interest rate? The answer is not  straightforward and therefore the economic data can be unhelpful in those situations. The alternative is the use  of a mechanism which complicates the creation or the stabilization of a cartel. One example is the so-called  Leniency program. Just for the sake of curiosity, the first Leniency regime was introduced in 1978 by the US  authorities, but only after its 1993 reform it became popular.  Barclays and UBS revealed the existence of the cartel under the Commission’s 2006 Leniency Notice  “whereby companies that provide information about a cartel in which they participated might receive full or  partial immunity from fines”.

According to European law, fines for companies involved in illegal market sharing or manipulation can reach up to 10% of its total turnover. The amount of the penalty should be based not only on the amount of  earnings in products related to the cartel but also the geographic scope, the degree of gravity of the  infringement and its duration. In both cases, the penalties were frightening! In the Euribor Cartel, the Barclays received full immunity, avoiding a penalty around €690m. For the Yen  scandal, if the UBS did not have full immunity, they would have paid a fine of around €2.5bn. In relation to the Euribor cartel, four banks were fined: Deutsche Bank (€465.9m), Société Générale  (€444.9m) and RBS (€131m). Additionally, for cooperating with the EC investigation, those banks benefited from  a 10 percent reduction in their fines. In the case of the Yen Libor, RBS (€260m), Deutsche Bank (€259.5m),
JPMorgan (€79.9m), Citigroup (€70m) and the brooking firm RP Martin (€247,000) were also fined by the EC.  Furthermore, Citigroup, Deutsche Bank, RBS and RP also saw their fines being reduced for cooperating with the  investigation. However, this is not the end of the story. The British bank HSBSC and the French Crédit Agricole  refused amicable settlement with the EC and therefore they will continue under investigation as well as the British broker ICAP.

The answer to the last question requires another interrogation: “why now?”. This answer is not directly  given by the facts, so we should think a little bit. In this interesting case-study, the details should not be  forgotten: both Barclays and UBS have already been fined for other cases and by different authorities. In  particular, in 2012, the British Financial Services Authority fined Barclays by their attempt of manipulation of the  Libor (for example, with false reports). The bank has also accepted a settlement with US Department of Justice  and with the US Commodities Futures Trading Commission. In total, they had to pay a record penalty of €440m. The case of the UBS is even more impressive: they were fined a record €1.1bn by the US, British and Swiss  authorities.
As their misconducts were discovered, both banks were afraid of future investigations. They knew that  European authorities would take more attention to their practices and therefore the probability of the cartels  being discovered increased substantially.

Consequently, the expected profits of being in the cartel (or in those  cases, of hiding the extinct cartels) decreased and the reductions were so large that they become lower than the  expected profits of being the whistleblowers. Of course, the leniency program was determinant: banks need to  have an incentive to reveal the cartels (in this case, full immunity for the whistleblowers).

To conclude, the leniency program was very effective in the sense that the EC sanctioned the existence  of those cartels. However, in this case the EC did not stop the cartel: when the EC investigations were finished,  both cartels were already extinct. Naturally, we cannot forget the effects of previous investigations which also  contributed to decrease expected profits of hiding the cartel. Although they may have some limitations (this  would be subject to another post), leniency programs are undoubtedly an important tool in the fight against  cartels. This is why a growing number of countries have now Leniency programs.

Filipe Silvério, #617

Is the Leniency program enough?

Economics have provided some intuition on how to minimize risk for collusive behaviour among companies. This is crucial in a good functioning market, as cartel formation will have as a result the maintenance of high prices, low quality (so as to decrease costs), or other situations that will result on increasing profits, decreasing consumer surplus and overall decreasing welfare.

Furthermore, it is important to understand the difficulties associated with finding a cartel, as normally these situations are carried out on tacit agreements, and many times there are no proofs to speak of.

Policymaking has targeted this problem as one of great importance to avoid, and it is in this context that the leniency program emerged. Basically this program consists on giving incentives for firms in a collusive situation to go forward and admit it, as no fine whatsoever will be given to this firm. In contrast all the others would be heavily charged. By reducing the costs of “snitching”, firms will be more prone to do it and if so, the collusive behaviour will cease. Moreover, as it will make the likelihood of the cartel to be discovered higher, (as incentives are given for some of the firms to declare their behaviour), therefore the costs of the cartel, even if no one snitch, increase.

This program has been the number one cause of cartel discovery in numerous countries, but is it enough? In many private enterprises managers income is correlated with the well being of the company, furthermore management is a very reputation wise profession – if they have been managers of a very profitable company they will likely receive admirable offers, making them prone to do everything on their reach to increase profits. Although all off this, they do not internalize all the cost and risks of their actions, and may well be that they see a cartel as a nothing to loose chance, (if they believe that in few years they will work somewhere else for example, and the cartel will not be discovered until then).

We should also add in this analysis, that with this program, a cartel is probably only sustained if it has enough gains to overcome the high costs of being caught – so only the most profitable cartels will endure, and probably these are the cartels with most distorting effects.

In some countries, the CEO’s of a cartelized company, in the event of discovery of the collusive behaviour, will go to jail – cartel is criminalized. If the CEO’s believe that if they get caught in a cartel they will go to jail, the likelihood of ongoing in a cartel is smaller, as they will then internalize the costs and risks of the cartel. This allied with the leniency program would reduce even further the probability of cartel sustaining, and now not all the sustained cartels that resulted in higher profit would be sustainable, as this would further depend on how risk lover was the manager.

But there is a problem in this reasoning: for each crime a proportional penalty should be applied. There are people who defend that prison would be too much. But if I consider that in an illegal way the company is creating a DWL, that without the cartel would not exist, then the cartel is “stealing” part of the economy. It is also appropriating of some consumer surplus. If a guy that steals bread should go to prison, why can’t a manager that “steals” from all the consumers?

                                                                        Maria Martins


Cartels are made and can be sustainable if there are no incentives to deviate. The incentives to do not deviate are possible either by explicit agreements, where firms agree on specific written rules, or by implicit agreements, also known as tacit agreements. The first one is illegal. In this sense, what is the point on make an explicit agreement? Indeed, the rules are written and there is no possibility of misunderstanding the rules. However, if there is an incentive to deviate, what can impede a firm to do so? There are rules, but these are illegal, as well as the practice of collusion. In fact, in general, these agreements, decisions, and practices are invalid, which means they cannot be used to coerce any party to comply with what is stipulated therein. In collusive practices are usually involved fixing market conditions. Cartels usually involve parallel behavior by the companies, being this behavior behind the exchange of information between these companies. One of the cartel cases most observed is the simultaneous and identical increase in prices.

For instance, in Portugal, one of the most recent news concerning the subject was the searching of Portuguese banks for suspect act in cartel, where apparently there was a complaint of Barclays in this sense. It is suspected that the banks acted in cartel, by combining the values ​​of spreads and commissions. The competition authority states that the searches are related with the verification of evidence of exchanging sensitive commercial information on the domestic market, which underlies suspected infringements.

In Portugal, as almost a translation of Article 81 of the European Union Treaty, the article 4 of the new Competition Act (Law 18/2003) establishes the general principle of the prohibition of cartels between enterprises. The principle states that “are prohibited agreements between undertakings, decisions by associations of undertakings and concerted practices between undertakings, whatever form they, which have as their object or effect of preventing, distorting or restricting competition appreciably in whole or in part of the national market.

To conclude, it is unlikely to be found explicit agreements, nevertheless their existence will always be illegal under the existing rules. Moreover, although some cartels have had some long-term success, the majority of them are unable to affect in a substantial way the prices in the long-term[1].


[1] Besanko, David, David Dranove, and Mark Shanley. Economics of Strategy. New York: Wiley, 2000


Mafalda Gomes

The fight against cartels will be stronger in the Czech Republic

In present it is possible to punish only companies for cartel’ agreement, their managers are not threaten by sanction. If a new law in Czech Republic is approved by the parliament unchanged, the managers can be threaten by 3-year prison and prohibition of activity for an active presence in anticompetitive acting.

The new punishments would concern only so called horizontal cartels, thus, the agreements of pricing or dividing of market among direct competitors. According to ÚOHS (Czech authority for competition policy) the horizontal cartels are the most dangerous way of restriction of competition and they lead to the increase in prices for final consumers and to the deterioration of choice of good’s quality.

The abuse of dominant position, not allowed connection of companies and even anticompetitive agreements among suppliers and purchasers will be not threaten by prison.

The chief of ÚOHS thinks; that the new punishments for managers will not have a negative effect on a Czech business. The new punishments are focusing only on the hardest and intentional cases of disruption the competition.

So the Czech managers would not be threaten by the punishments for unintentional mistakes or not so huge offences against competitive rules. The punishment for anticompetitive acting is quite common in the European Union. Germany, France, Great Britain, Estonia, Romania or Slovakia have it in their law too.

In the USA there was also a tightening in the punishments for cartels three years ago. The managers, who are directly participate on a cartel’ agreement, can spend in the prison even ten years.

The uncovered cartels were punished mostly with fines in the Czech Republic until now. Last year ÚOHS fined for example bakery companies Delta, Odkolek and Penam, which arranged the prices of bakery products. The most important case until now; was the cartel of sixteen international industrial companies. This cartel was fined with the 942 million crowns (cca 36,2 million €). The ÚOHS uncovered this illegal agreement due to the cooperation with the ABB company, which participated in the cartel. It was under the leniency programme, ABB confessed the participating in cartel and presented evidences about illegal agreements. Because of this, ABB avoided to the fine.

In my opinion this process is really appropriate because the number of cases of companies connecting together is still high and it is necessary to investigate every connection in order not to harm the consumers by distorting how the market operates.

Petra Handlířová


Asphalt cartels in Norway

In January 2010 the Norwegian asphalt giant Veidekke approached the Norwegian Competition Authority(NCA) with information clearly stating that their company had been involved in price-agreements with another company. The other company involved was NCC, a swedish construction gigant which also has a big market share in the Norwegian asphalt market.

The reason for Veidekke having an incentive to disclose such information with the competition authority was of course the leniency law, which was introduced in Norway in 2004. This law states that a firm can avoid getting the punished for participating in illegal cooperation with other firms if it is the first to disclose information of this cooperation to the competition authority.

In effect this law builds on the classic Prisoner’s Dilemma. A firm knowing that the other part of an illegal cooperation can foreclose information of the activity to the competition authority and get away without any punishment has a strong incentive to be the first to come clean with the information. Furthermore the dynamics of the system incentivizes firms to never go into any cartel activity since the likeliness of keeping the activity secret is very low.

In the Norwegian asphalt case the area which was in question was a counties of Sør-Trøndelag and Nord-Trøndelag, which is approximately half of the size of Portugal. The companies had split the area between them in a way such that the each company got the areas that were geographically located close to it’s asphalt factory in the county. The agreement of course involved not bidding on each others areas, so that each company would get a higher price from the public contracter which was the local municipality of Trondheim and Statens Vegvesen.

When Veidekke approached the NCA they presented evidence of meetings at local Statoil stations, messages of contact between the district leaders of the two companies and some other information.

The NCA after a while judged that NCC would pay approximately € 22 million and that Veidekke would pay € 36 million for breaking the illegal price cooperation. However, because of the leniency law Veidekke ended up paying nothing for breaking the competition law.

The leniency law is very untypical for Norway. In the asphalt case the company that had the worst violations of the competition law was the one that got away without paying for its crime. Many have questioned the fairness of the leniency law, pointing out that it represents a more “American” solution to the problem than we would prefer in Europe.

Nevertheless one might ask oneself, would this kind of well-executed cartel activity be uncovered without the existence of a leniency law?

Written by Sondre Holm Sandnes


“Big fees for NCC and Veidekke”, NCA official page, retrieved 11.05.13 from

NCC and Veidekke can miss new contracts”,, retrieved 11.05.13 from

“Veidekke and NCC cheated the State for millions”,, retrieved 11.05.13 from

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. 



Barboza, D. (1999), “Tearing Down the Façade of ‘Vitamins Inc.” in The New York Times [online] 10th October, Available at: [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: [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: [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: [Accessed on 06.05.13]



Bid rigging in Czech Republic

The Czech authority for competition policy (ÚOHS) would like to focus more on penalizing tacit agreements among candidates of public contracts. A planned revision of a law for protection of competition is supposed to enable a more dynamic procedure against such agreements. These practises are often associated with corruption and they are also well organised. Tacit agreements among candidates of public contracts are also known as bid rigging.

Now I would like to explain more this concept. Bid rigging can have many forms. It can be for example an agreement which includes who will present „the best“ price offer in the competition. „The lowest“ price, in that case, can be about ten percent higher than the real value of execution of a contract. However, tacitly colluded candidates present their offers in this way, so that the others seem to be even more expensive (so called covered offers). The contract owner will choose the lowest one, still a quite high price. In the next public contract, candidates will change and somebody else will offer a seemingly lowest price and so on.

This type of offers is the most often way bid rigging is implemented. In practice the presention of covered offers can be the following: a candidate agrees with presenting of an offer, which is higher than the winner’s offer, determined in advance. Or the candidate presents the offer, about which he knows that it is too high to be accepted; the candidate can also present the offer, which includes special conditions, about which he knows that they are unacceptable for the contract owner. The covered offers are in these cases used in order to create the semblance of authentic competition. This way can be combined with the resignation of the winner of the competition, who, for example, states that he is not able to realize that contract due to lack of capacity or other reasons. Then the other firm will get the contract for the bid price, which is much more higher than the price estimated by the contract owner and also than the real price of the contract.

The antitrust authority wants to defend against these tacit agreements through a planned big revision of the law for protection of competition. The candidates convicted from this kind of agreements will face not only the fine but also, for example, the loss the access to public contracts for three years. The proposal also expects that the company that will state the tacit agreement to the antitrust authority in the moment, when nobody knows about it, can avoid to the fine.

I think that there is really necessary to do something with that, especially in the Czech Republic, because the Czech Republic belongs among the countries where the situation is really bad according the Transparency International. For example public contracts in Czech Republic swallow 650 millions crowns (cca 25 millions €) up. The bottom border of estimate the overpricing of public contracts, mostly in the sectors like construction, information technology, consultancy or legal services and of that what will „get lost“ on the way, illegally in private pockets, is between 10 % to 20 %. As we can see the larger intervention is really necessary and we can hope that the situation will get better with the revision.

Petra Handlířová



[1]     boji20110601.html


[3]  ve-zneuzivani-verejnych-zakazek

Rome-Milan: competition finally worked out!

The availability of the high-speed train followed by the entrance of new competitors both on the long distance train and on the Fiumicino-Linate route, significantly benefited consumers, both in terms of prices and of quality.

The Milan-Rome route – with more than 30.000 spots available daily between train and plan – is a crucial part of the Italian transport network as well as one of the most profitable in Europe.[1] Before the completion of the high-speed train line, the two means of transport constituted two different markets. Indeed, with a travel time of five hours, the train service, provided by the state-owned monopolist Trenitalia, was not convenient for round journeys during the same day. Therefore, time-less business clients preferred the plane. Targeting mainly this segment, airlines working on that line managed to make relevant profits. Such that, the route was considered the golden goose of the Italian – if not  European – air transport market.

In spite of the significant profits it was making on that route, Alitalia was not in a good shape. In order to tackle its financial distress, the Government set a complex and controversial operation – Operazione Fenice. This plan included the merger with the second Italian airline, Airone, basically the only other player on the Fiumicino-Linate route. Therefore, in order to conclude the operation, the Antitrust Authority (AGCM)[2] did what it had been asked to do: allowing a monopoly for a limited period of time.

In the meanwhile, the various parts of the high-speed railways were being completed and the travel time fell significantly, up to three hours at the end of 2009.  Just a couple of years later, the private company NTV entered the long-distance-high-speed-train market and immediately exerted a significant competitive pressure on the former monopolist. The outcome was a considerably cheaper as well as better service.

The features of the new train service reduced the gap with the plane. Thus, some competition between the two means arose as well.  Nevertheless according to the AGCM, the cross elasticity between the two services was not enough, especially during the more profitable periods of the day, early morning and late evening, that allows for a round trip in the same day.[3] Furthermore, having no access to Linate slots, Milan City Airport, the other airlines cannot actually compete with Alitalia. Therefore the overall competitive pressure was by far too weak. [4] Coherently, starting from October 2012, Alitalia has been forced by the AGCM to dismiss some of its slots in order to let another player, the English low-cost company Easyjet, enter the Fiumicino-Linate route.[5]

At the end of the day, this complex story has an happy ending: prices fell by more than one third during the last 5 years, while the quality and punctuality are now significantly better. [6] In other words: competition worked out! And now what’s next? What happened in a comparable setting, the route between Barcelona and Madrid bodes well: after the liberalization of the flight market, which was suffering the train competitive pressure, the number of flights tripled and the prices decreased further. [7]

Luigi Di Vincenzo