Economics of Cartel and the Types of Indirect Evidences Slovenian Experience:

In short Vast majority of Slovenian cartel cases (over 95 %) are not based on leniency applications Majority of evidence is gathered during inspections In prosecuting cases we rely on indirect evidence Had some successes using solely indirect evidence Majority of these cases were of naïve nature Whole body of evidence, direct and indirect, is treated holistically In recent time some cases were partly annulled because Agency relied too heavily on „holistic“ nature of the evidence and did not, where no direct evidence or communication evidence existed, perform sufficient economic analysis of parallel pricing behavior in certain periods of infirngment

Cartels are different Cartels (price fixing, bid rigging, market sharing) are usually different from other kinds of violations of competition rules (abuse of dominant position, vertical restraints). In latter cases participants and their acts are usually well known. There is usually a complainant who can provide some information, evidence and economic data. And it is the role of NCA to prove that the consequences of those acts, because they prevent, restrict or distort competition on the relevant market, are anti-competitive. Cartels, on the other hand, are clandestine and NCA has to find out who did what, and sometimes infer why they did it. Usually the cartel parties have all the evidence and are, at least at first stages of investigations, not willing to divulge it. The anti- competitive nature of the act is assumed and is difficult to refute (101(3)).

Behavior of firms Firms act in their self-interest. In general behavior of firms can be grouped in three distinct categories: unilateral non-cooperative best response mutual accommodation cartels

Unilateral non-cooperative best response Firms assume how other firms will act and act accordingly. They reach equilibrium when no one player has an incentive to change his strategy given the non-cooperative strategies of other players. Behavior consistent with Nash non-cooperative equilibrium one shot game shows firm acted in self interest

Mutual accommodation There is “coordination” in a sense that firms reach their mutual best interest and know that it would not be feasible if other firm did not act accordingly. There is no communication between firms. Thus there is no agreement and no violation of article 101 TFEU. Firms accommodate, adjust their behavior based on experience learned through market interactions. For instance one firm could maintain lower prices, but it decides that it is in its interest to raise prices accordingly, as have done some of its competitors. There can be many reasons for this kind of behavior.

Cartels In cartels firms communicate their intentions and thus reach agreement on how they will coordinate their actions

Why form a cartel? In theory perfect competition models show that undertakings are price takers and enter and produce until last unit of production earns zero profits. Thus cartel is formed to increase profits above competitive level. Cartel can be modeled on behavior of monopolist. Monopolist is price setter and can choose any price/quantity pair on demand curve.

To be, or not to be Cartel members, because price is higher than marginal cost, have an incentive to cheat. The main point of successful cartel is to monitor cartel members and prevent and punish cheating.

Successful cartel Successful cartels have to solve three problems: Cartel cannot be formed without some sort of communication. Cartel has to establish mechanisms to detect compliance. Cartel has to punish deflectors. In solving these problems direct and indirect evidence will be produced. Some of it can be concealed from the authorities. Some indirect evidence will always be present, but will be open to ambiguous interpretation.

Without direct evidence and based solely on circumstantial evidence it is difficult to distinguish when certain behavior is result of illicit coordination. Careful analysis of all facts is required. Starting point should be searching for behavior that is not consistent with non-cooperative best response.

Indirect evidence In view of the Commission the notion of indirect or circumstantial evidence comprises of evidence which is appropriate to corroborate the proof of the existence of a cartel by way of: deduction, common sense, economic analysis or logical inference from other facts which are demonstrated.

Two types of indirect evidence: Communication evidence Economic evidence

Communication evidence It is the most important kind of circumstantial evidence. It shows that there was some sort of contact between firms (records of telephone, conversations, joint meetings, and travel to same destination …) Without it successful litigation of competition cases, based solely on economic indirect, is very difficult.

Economic evidence Usually refers to economic theory and models that show that: market structure was susceptible to cartelization (structural evidence) certain practices can help reach or sustain an agreement (facilitating practices) and firm’s conduct shows that an agreement was probably reached (behavioral evidence).

Structural evidence Structural evidence does not prove an existence of agreement it only shows that existence of an agreement is theoretically more plausible: In economic literature several theoretical structural factors are identified as facilitating cartel behavior: a smaller number of firms in the market facilitates collusion and enables to detect cheating large, powerful buyers make collusion harder to sustain higher entry barriers high degree of vertical integration standardized or homogenous products (cost asymmetries and quality differences restrict collusion) demand growth facilitates collusion persistent demand instability in a market hinders collusion excess capacity and stocks help sustain collusion Absence of these factors cannot be used to show that cartel does not exist.

Facilitating practices Usually facilitating practices are complement to other evidence and they can show what arrangement parties set up to facilitate formation of cartel agreement, its monitoring and punishment. Theory shows that frequency of interaction and market transparency favors collusion. OECD lists as facilitating practices: information exchanges, price signaling, freight equalization, price protection and MFN policies, and restrictive product standards Facilitating practices can sometimes, depending of the circumstances of the case, on their own represent violation of competition law (establishing a facilitating practice, where firms in oligopoly can monitor and police their prices, could be sign of illicit agreement and not of simple mutual accommodation).

Conduct evidence Conduct evidence is the most important type of economic evidence. Analysis of conduct can show if firm acted in manner that was contrary to its unilateral self-interest. Positive outcome supports an inference of possible agreement. Conduct evidence includes: parallel pricing Industry performance (abnormally high profits, stable market shares, history of competition law violation).

Using conduct evidence as proof of infringement The only Commission’s case which relied exclusively on indirect evidence in form of economic studies, Woodpulp, was annulled by the court. Commission thus notes that parallelism of behavior, for instance in price increases, is only an indication and does not in itself constitute evidence of collusion. There have to be uncovered other elements of proof or indications from which the existence of collusion may be inferred.

In US these additional elements that have to be proved are named as “plus factors” (usually communication evidence, actions against self interest, past illegal behavior, certain facilitating practices …) Defendants could refute that they acted illegally by showing their conduct was either consistent with independent choice or accomplished procompetitive or competitively neutral objectives. Similarly in EU where Commission and courts take holistic approach to whole body of evidence

Holistic approach The whole combination of direct and indirect evidence is, in accordance with the Aalborg Portland case, treated holistically, that is “in most cases, the existence of an anticompetitive agreement must be inferred from a number of coincidences and indicia, which taken together, may in the absence of other plausible explanation, constitute evidence of an infringement of the competition rules”. When the Commission establishes that the undertaking in question has participated in an anticompetitive measure, it is for that undertaking to provide, a different explanation for its conduct.

SLOVENIAN CASES Indirect evidence only: Parallel pricing Cash withdrawal fees Electricity prices Retail of staple and non-staple goods Cases where indirect evidence formed majority of evidence: Medicine for human use – parallel pricing Other notable cases: Ski lift operators – parallel pricing

Cash withdrawal fees: Parallel pricing Several major banks had, on the same day, announced and set the same level of fee they charge for cash withdrawal from ATM machines. Fee was charged by bank to its customers when withdrawing cash from ATM belonging to another bank. Also, when customer made withdrawal from ATM belonging to another bank, that customers bank had to pay fee to the bank owning the ATM. Evidence showed that the group of banks also set the same level of fee for this transaction. Some other banks also raised their fees but for different amounts and at different date. The case involved concerted practice. No direct proof was found. The amount of coincidences and also absence of economic and technical reasons for the actions, was enough to conclude that they colluded and that no other alternative explanation exists for their action.

Electricity prices Similar to the first case. All distributors of electric energy (five) had announced on the same day increase of price of electricity for domestic consumption. Price increases were similar. Although some distributors had in newspapers in preceding days announced that they will sometime in the future raise prices for unspecified amount, Agency concluded that distributors were not acting on this information and could not have intelligently adjusted to competitors actions in one day. Conclusion was based on the fact that competitors could not, in such a short period, have foreseen all the consequences that their action would entail.

Retail of staple and non-staple goods Agency conducted market investigation in to the way retailers of goods dealt with their suppliers. There was sufficient evidence that three major retailers, who had 70 % market share, formed a cartel and were exchanging sensitive information about future retail prices and were acting in parallel manner. Suppliers, probably because of fears of retaliation, were not willing to produce meaningful evidence. Agency tried to get direct evidence, and had performed dawn raids on all three retailer. Forensic copies of relevant data were made, but Agency could not use it because Information Commissioner forbade its use. He claimed it contained personal data and that Agency did not follow proper procedure. Agency could not use direct evidence and had to rely on available, mostly circumstantial, evidence. The indirect evidence showed that supplier who wished to raise his prices, first, had to propose to one of the three retailers the date when he would raise prices, and get his approval. Then he would visit the other two retailers where he would follow the same procedure. The result of sample analysis was that prices were raised for products where all three retailers approved the raise. Also, the raise would in majority of cases happen on the same day. In some cases price increases were followed by one day or in short timeframe. Decision was not issued because Agency accepted proposed commitments.

Medicine for human use Pharmacies were conducting public procurement procedures for medicine for human use. (regular demand, facilitating structure) Maximum price of medicine was administratively set. (transparency) Over the period of several years all four wholesaler of medicine always submitted their offers at the maximum price. Some orders were, because they offered the same price, as proposed by the distributors, split between them. Some public procurement procedures were designed in this manner. During this period their market share was constant. Agency showed that their behavior was not in their self interest. Agency designated public procurement procedure as evidence of communication, also some s were found indirectly implicating two of the wholesalers.

Ski lift operators Cartel spanned over ten years. Direct evidence of collusion at setting prices for first two years and last year of collusion Between these periods prices moved in similar, parallel fashion. No direct evidence of collusion was found. Agency inferred based on the direct evidence that showed collusion in some period and the indirect evidence of similar parallel price increases that infringement spanned over whole 10 year period. Court was not satisfied with this „holistic“ approach and based on the companies arguments demanded that Agency should for these intermediate periods perform economic analysis which would exclude the possibility that price increases were result of external factors (energy price increases, different investment levels…)