January 2016        

Price-fixing and cartels

Paul Doran

According to the Oxford English Dictionary, a cartel is an association of manufacturers or suppliers formed with the purpose of maintaining prices at a high level and restricting competition.
    The sheer number of cartels around the world is astonishing. We have all heard of the Libor rigging scandal in the last while, whereby some of the biggest banks deliberately set out to maintain fixed pricing, with Barclays in particular managing to outdo itself.
    The Libor rate is used as the benchmark for trillions of loans, mortgages and financial products traded around the world. Barclays trades in these products, so in attempting to fix the Libor rate they are rigging the market in its favour. As a result they made bigger profits and traded at an advantage over others. But during the credit crunch, banks became concerned about lending to one another, and the Libor rate rose significantly. The more likely a bank was to collapse, the higher the rate they were charged to borrow.
    Barclays senior management told their staff to lie, claiming they could borrow at lower interest rates than they were allowed to, in order to make the bank’s financial position appear stronger.
    In Ireland, as an island nation, we are especially dependent on ships and planes for the transporting of many basic necessities. Transport costs are then passed on to the consumer. We work hard to pay for these essentials, and any fluctuation in the prices of fuel has a detrimental effect on our total spending, especially for the thousands of people below or on the poverty line.
    In November 2010 eleven airlines were fined by the EU Commission for their participation in an alleged cartel in air freight, following investigations initiated by the EU Commission in February 2006. The Commission in its finding in 2010 said that eleven air cargo carriers fixed surcharges for fuel and security costs from December 1999 to February 2006.
    Air France received the biggest fine, of €182.9 million, while KLM came in second, at €127 million. In 2004 the two carriers merged to form Air France-KLM. Other airlines found guilty of price-fixing included Air Canada (€21 million), Martinair, British Airways, which now owns Aer Lingus (€104 million), Cargolux (€79.9 million), Cathay Pacific Airways (€57 million), Japan Airlines (€35.7 million), LAN Chile (€8 million), SAS (€32 million), and Singapore Airlines (€74 million).
    The airlines subsequently challenged the EU anti-monopoly enforcer’s decision. Lufthansa, which escaped a sanction because it blew the whistle on the cartel, also took legal action. Qantas, which had been fined €8.9 million, did not challenge the Commission’s decision.
    Are we really expected to believe this has stopped?
    Biofuels are another important product, all the more so after the climate change conference in Paris that concluded recently, with many promises of changes in how we treat our scarce resources. As recently as 7 December the following statement was issued: “The European Commission has opened a formal anti-trust investigation to scrutinise whether three ethanol producers have, in breach of EU anti-trust rules, manipulated ethanol benchmarks published by a price reporting agency.”
    The companies concerned are Abengoa SA of Spain, Alcogroup SA of Belgium, and Lantmännen of Sweden, together with their relevant subsidiaries. They produce, distribute and trade ethanol.
    Ethanol is an alcohol made from biomass (such as wheat, maize or sugar beet) that is mainly added to petrol and used as a biofuel for certain motor vehicles. The Commission has concerns that these companies may have colluded to manipulate ethanol benchmarks published by the price-reporting agency Platts, for example by agreeing between them to submit or support bids with a view to influencing benchmarks upwards and thus driving up prices.
    This could lead to a reduction in the use of biofuels as an alternative to fossil fuels, with negative consequences both for consumers and for the environment.
    The prices assessed and published by price-reporting agencies such as Platts serve as benchmarks for trade in the physical markets and in the financial derivative markets for a number of commodity products, both in Europe and around the world. In 2013 the EU Commission proposed a regulation to enhance the governance, integrity and reliability of benchmarks used in financial instruments and contracts. This regulation is at the final stage of adoption by the EU Council and EU Parliament.
    Electrolytic capacitors are something that are used every day by all of us but that most just don’t think about. They are used to store electrical energy, for example to smooth the output of power supplies and to activate camera flashes. Mobile phones, televisions and games consoles are just some of their everyday uses. They are used in virtually all electronic products, and they are expensive. The EU Commission has informed ten manufacturers that it suspects them of having participated in a cartel.
    Between 1997 and 2014 ten Asian manufacturers met in a range of multilateral meetings in Japan to discuss market trends, prices, and specific customer information. These meetings appear to have been supplemented with additional bilateral or trilateral discussions between the companies.
    Some of these additional discussions appear to have taken place in Europe with the European subsidiary of a Japanese company. If it is established, such behaviour would violate EU rules that prohibit anti-competitive business practices, such as collusion on prices (article 101 of the Treaty on the Functioning of the European Union).
    The investigation began in March 2014 with investigative measures by several competition authorities around the world.
    These are just a few of the cases where some of the world’s biggest companies have been caught trying to fix prices. When they are caught, the people responsible are rarely sent to prison, where they belong. Most of us when we see or hear of these cases rarely stop to think of the effect that cartels have on our daily lives.

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