Price Effects of International Cartels in Markets for Primary Products John M. Connor, Purdue University West Lafayette, Indiana, USA CUTS Symposium on Trade in Primary Products and Competition Policy, World Trade Organization, Geneva, Switzerland, September 22, 2011

MOTIVATION An old debate about trade and FDI policies: Did they change the terms of trade between the rich and poor nations, 18 th -20 th centuries? New debate about whether private market power of MNCs has transferred incomes from and hindered economic development of LDCs. Are primary product cartels different? Have private cartels exploited LDCs to a greater extent than their “home” nations? Have weak antitrust authorities contributed?

OBJECTIVE To analyze the extent of price changes induced by privately organized international cartels in markets for primary products To examine price effects of primary vs. secondary cartels across industries, geography, and time Link the economic harm generated by these cartels to the monetary penalties historically imposed on them by competition authorities Calculate the degree of deterrence of cartel violations presently achieved

DEFINITIONS Cartel = voluntary associations of large MNCs that explicitly collude on market prices or output to increase joint profits Cartel = illegal, secret joint-venture/merger Explicit collusion = “conspiracy” = direct communication and overt agreement Private = not protected by sovereignty/treaty International = Members from 2+ nations Primary = raw materials & minimal processing

METHOD OF ANALYSIS Cartel Overcharge CO = Pm – Pc during collusion. Expressed as a percentage price change: CO = ((Pm – Pc)/Pc) ∙ 100%. Primary vs. Secondary industries comparisons Time periods reflect changes in antitrust regimes and empirical economic analysis Optimal deterrence is a legal-econ concept: point where E(benefits)=E(penalties) => Penalties* = E(Benefits)/prob(detection)

DATA SOURCES Price-Fixing Overcharges (PFO) data set: basic information on more than two thousand published, quantitative estimates of the price changes (if any) caused by private cartels that began to operate as early as 1700 Private International Cartels (PIC) data: a more richly detailed legal-economic compilation on about 600 contemporary international cartels punished by antitrust authorities worldwide during 21 years: January 1990 to December 2010

Primary Product Cartels

INDUSTRY DISTRIBUTION: PFO Number of Known International Cartel Episodes, by Industry, Industry Year Episode Ended Total Primary: Agriculture & Forestry05005 Mining Food & Tobacco Textiles20002 Wood, lumber00000 Chemical Fertilizers Primary Metals Other Industries: Other Manufacturing Construction00013 Transport & Communication Distribution00011 Other Services All Industries Source: John M. Connor. Price-Fixing Overcharges data spreadsheet dated May 4, 2011.

Contemporary Primary Product Cartels

Number of Contemporary Primary Product Cartels, by Industry

INDUSTRY DISTRIBUTION: PIC Number of International Cartels Detected, by Industry, IndustryYear Episode Ended Total Primary: Agriculture & Forestry2810 Mining1910 Food & Tobacco93645 Textiles145 Wood, lumber033 Chemical Fertilizers81220 Primary Metals066 Other Industries: Other Manufacturing Construction Transport & Communication Distribution Other Services95766 All Industries Source: John M. Connor. Private International Cartels data spreadsheet dated June 21, 2011.

Numbers of Cartels Operating in Low Income Regions,

GEOGRAPHIC DISTRIBUTION Number of Known International Cartel Episodes, by Principal Geographic Region of Operation, RegionYear Episode Ended Total North America EU (Multiple Member States) Single Nations of W. Europe Global (2+ Continents) Asia & Oceania Other Less Developed Regions a World (All Regions) Percent of World Asia, and LDCs1%0%1%9%5% Global, Asia, and LDCs65%79%58%27%47% Source: John M. Connor. Price-Fixing Overcharges data spreadsheet dated May 4, a)Includes episode entirely within Africa, Latin America, or Eastern Europe.

Sales of Primary Product Cartels Operating in Low Income Regions

MEDIAN CARTEL PRICE EFFECTS

PRICE EFFECTS: DISCUSSION Cartel overcharges are declining. Before 1946, cartel overcharges of primary products cartels were lower (about 40%) on average than for secondary products (55%). But since 1945 cartel overcharges of primary products cartels are higher (38%) on average than for secondary products (25%). Explanations of these empirical regularities require further research.

ANTI-CARTEL ENFORCEMENT SPREADS Four historical phases: : antitrust wins in US courts : heyday of global cartels outside USA : methods weak, penalties low : cartels outlawed everywhere, procedures strengthened, penalties rise Today at least 50 antitrust authorities have investigated international cartels, including 30 in the LDCs (Brazil, So. Africa, Korea are very active)

ANTI-CARTEL ENFORCEMENT STRONGER Cartel detections are up to 50+ per annum, four times faster than 20 years ago. Penalties are rising everywhere; disgorgement of cartel profits is now normal in US and EU, but not elsewhere The spread and increasing power of antitrust authorities is one cause of declining international cartel overcharges Yet, penalties are sub-optimal for deterrence

CONCLUDING COMMENTS Primary products cartels are shrinking in number and importance. But where they occur, the price effects are more injurious, partly because they are strongly associated with global cartels. Higher penalties are needed to deter. The Primary/Secondary products distinction for cartels is analytically useful and deserves further empirical research.