mi cra calculating antitrust fines & damages theoretical underpinnings & practical...
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MiCRA CALCULATING ANTITRUST FINES & DAMAGES
THEORETICAL UNDERPINNINGS & PRACTICAL APPROACHES
Presentation to Commissioners Malaysia Competition Commission
byRughvir (Shyam) Khemani, PhD (LSE)
Microeconomic Consulting and Research Associates
(www.micradc.com) andFormer Advisor, Competition Policy
The World Bank Group, Washington D.C., USA
Kuala Lampur, Malaysia, 8-9 June 2013
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MiCRA
Effective Administration of Competition Law and Policy
The effective administration of competition law and policy requires balancing of
EnforcementFostering ComplianceEnforcement-> Investigation, Prosecution,
Adjudication, Judgment, Imposition of Fines & PenaltiesCompliance-> Research & Policy Analysis, Market
Studies, Publications & Speeches, Meetings with Stakeholders, Advocacy
Effective enforcement (including appropriate levels of fines and sanctions) ->Compliance
Compliance->Lowers administrative & enforcement costs, legal and economic uncertainty….
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MiCRA
Definitions
Fine—“a sum imposed as punishment for an offense”Penalty—“the suffering in person, rights, or property that is annexed by law or judicial decision to the commission of a crime or public offense”Sanctions—“the detriment, loss of reward, or coercive intervention annexed to a violation of a law as a means of enforcing the law”Damages—“compensation in money imposed by law for loss or injury”Remedies—“the legal means to recover a right or to prevent or obtain redress for a wrong/something that corrects or counteracts”
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MiCRA Powers to Impose Fines and Other
Remedial MeasuresSection 35 MyCC can apply Interim MeasuresSection 61 MyCC can impose penalties:
Corporate body fine of >5 million ringgit for initial offense; >10 million ringgit for 2nd & subsequent offense(s)
Non-corporate person(s) >1 million ringgit and/or imprisonment of 5 years; 2nd and subsequent offense(s) > 2 million ringgit, and/or 5 years imprisonmentSection 62:Compounding of offencesMyCC can impose fines on enterprises up to 10% of world-wide turnoverSection 64: Rights of private action (by persons directly/indirectly affected)
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MiCRA
Characteristics of Illegal Price-fixing
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1. Higher prices
2. Lower variance
3. Price increases gradually to prevent detection
4. Price falls after detection, with lag to reduce estimate of damages
MiCRA
Empirical Estimates of Cartel Pricing
Regression meta-analysis concludes that increase in price due to cartel is between 20% and 30%
7Source: Connor 2005
MiCRA
Case Study: European Cement
BACKGROUND: MiCRA retained by participant in collapsed cartel to appeal penalty based on agency’s estimate of price effect of cartel
ISSUE: Can fall in price after cartel collapse serve as estimate of effect of cartel on prices?
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MiCRA
European Cement
•Price falls by almost 50% with collapse of cartel•Implies cartel raised prices by € 30/ton
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Laspeyres Price Indices for Selected Cements, 2000-2003
0.000
0.200
0.400
0.600
0.800
1.000
1.200
2000 2001 2002 2003Year
Pri
ce I
nd
ex
Agreement Area
MiCRA
European Cement
Cartel agreement was to maintain assigned market shares.
Assigned shares based on capacity Induces massive excess capacityPrices collapse with collapse of conspiracy
to unsustainably low levelsFall in price with collapse of conspiracy
overstates price effect of conspiracy
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MiCRA
Compare to Margins in Other Countries
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Cement Industry Variable Margins 1992 – 2001
YearEuropean
Variable Margin
United States Variable Margin
1992 .584 .5391993 .588 .5351994 .598 .5821995 .585 .5821996 .596 .6081997 .593 .6101998 .629 .6251999 .649 .6262000 .666 .6222001 .672 .622
Weighted Average .615 .601
• Implies prices 3.5% higher due to cartel• Approximately € 2.11/ton
MiCRA
Assessing DamagesAssessing size of ‘consumer harm’ arising from
anticompetitive conduct influences size of fine to be imposed
Key issue in commercial disputes estimate compensation
General approach: compare actual outcomes(prices) with what would have been absent anticompetitive conduct (‘but for’ analysis)
Econometric analysis controlling for main factors affecting prices viz., changes in costs, demand and customer mix….’before and after’ study of market and firm pricing-output behavior….
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MiCRA
Vitamin Case
Vitamins 1999: Hoffmann-La Roche and other firms pled guilty to operating a world-wide cartel over previous decade for main vitamins (especially vitamins A & E)Investigations & prosecutions in EU and other jurisdictionsDocuments indicate price levels and changes pre-post cartel period, gradual, systematic price increases and rapid steep decreases post US investigation..Differentials facilitated estimates of ‘over-charge’ US fine $500 million; EC fine euros 462 million
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MiCRA GOOGLE On-line Mapping
2012 France’s Commercial Tribunal of Paris (CTP) found Google abused its dominant position fined euros 500,000.
Relevant market: “online mapping allowing for the geolocalisation of sales points on company websites”
CTP held Google dominant (de facto monopoly) in France in search engine market.
Allowed for dominance in connected online mapping market free
Disadvantaged Bottin, a French company offering online mapping for annual subscription fee
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MiCRA GOOGLE online mapping-continued
Free’ service did not allow for covering of costs e.g. acquiring geographic/aerial rights necessary for mapping charged by 3rd parties
Google pricing strategy exclusionary, drove all competitors (e.g. Maporama) out of the market
Google strategy maximized its advertising revenue to detriment of competitors that needed to charge fees for online mapping service
CTP rejected Google defense:Predatory pricing conditions as per EC guidelines
not provenGoogle was sacrificing short-term profits….and
other arguments…..15
MiCRA
Polypropylene CarpetPolypropylene carpet low grade floor
covering used in low-income houses/officesMid-1990s US DoJ investigated alleged price
collusion: firms’ prices which had previously increased declined rapidly
Econometric analysis and actual prices pre-investigation > post-investigation prices
During alleged cartel period, cost declines of principal inputs not passed thru’ rapidly suggesting collusion; but cost increases post investigation also not passed thru rapidly
Parties argued this as evidence of competitive pressures-fear of losing market share…. 16
MiCRA
Polypropylene Carpet--continuedIn ‘oligopolistic’ markets, prices tend to increase
when costs increase but tend to be ‘sticky’ downward when costs decline
Case settled before adjudication, empirical analysis, evidentiary issues unresolved
Some Complexities:Econometric analysis data intensive, require well-
specified models, inclusion of all relevant variables‘But for’ analysis needs to consider ‘structural
changes’ between pre-post anti-competitive periods
‘Pass thru’ calculations: final vs. intermediate purchasers, inter-connected markets….
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MiCRA
Pass-Through Rate
Direct and indirect purchasersIllinois Brick in US vs. EU approach
Theory: Pass-through rate depends onCompetition – oligopoly – monopolyFirm-specific vs. industry-wide cost increase
Shape of demand curveSlope of marginal cost curveConduct parameter
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MiCRA
Pass-Through Rate
Under competition, pass-through rate depends on the supply elasticity and demand elasticity
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Price
PT = 1
Quantity
Infinitely elastic supply curve
∆P = ∆C
Price
∆P < ∆C
PT < 1
Quantity
Upward-sloping supply curve
MiCRA
∆P = 1/2∆C∆P
Pass-Through Rate
Under monopoly, pass-through rate depends on the convexity of the demand curve
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Price
∆C
Linear demand curve
PT = 1/2
QuantityMR
Constant elasticity demand curve
PT = 2
Quantity
Price
∆P = 2∆C
∆C
MiCRA
Implementation IssuesOptimal penalties
Theory: harm divided by probability of detection Financial penalties vs. jail time
Level of fines: cost recovery + punitive + deterrent Fines: Too low license fee to commit infractions?
Proportionate, deterrentFactors to consider: Magnitude of price
differentials, profits earned, time duration of anticompetitive conduct, size of market affected, nature and type of customers (individual consumers vs. business firms, income group, etc.), nature of product (staple vs. other), importance in budget/cost…..
Amnesty-Leniency
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