September 20, 2013

The cartels are out to get you

When I was young, American opinion was strongly anti-cartel, both abroad (OPEC) and at home. Slowly, though, economists lost interest in the subject, arguing that globalization made it increasingly difficult for firms to collude. I mean, to meet up, executives from different countries would have to take steamships across oceans. And then they'd have to hash out details using sign language and grunts. So the feasibility of international cartels was just crazy talk.

But, it turns out, retired Purdue economist John Connor is making a bundle for himself battling Skynet testifying as an expert witness in lawsuits against individual cartels. Economists used to be obsessed with anti-trust, but now there is so little academic interest in the evils of cartels that Connor has largely cornered the market. Unfortunately, he keeps his huge database of episodes of international collusion proprietary to maintain his monopoly, so economists in general can go on blithely paying little attention to the subject.

From the Chronicle of Higher Education, via Marginal Revolution, a highly informative article about a topic that has dropped off the radar in recent decades:
An Economist Corners the Market on Global Cartels 
By Paul Voosen 
Shaded under a blue umbrella at a Cape Cod beach club, a beer in hand and his banana-yellow Porsche convertible parked nearby, John M. Connor, an emeritus economics professor at Purdue University, had a confession to make: The cartels have been very good for him. 
It started nearly two decades ago, with an FBI raid in Illinois that uncovered a global conspiracy to raise prices on animal-feed supplements. At the time, Mr. Connor had spent his days probing, say, the efficiency of the U.S. butter market. (It's good, by the way.) Yet somehow this international cartel had sat in his academic and geographic backyard, and he had had no idea it was even possible. 
"How did I not know about that?" he said as he read front-page coverage of the scandal at Archer-Daniels-Midland, the U.S. company that colluded with several Asian firms. ...

"The Informant!" with Matt Damon and directed by Steven Soderbergh is an odd, interesting 2009 movie about this ADM lysine cartel. Here's my review of the film that recounts Connor's history of the ADM case in his book "Global Price Fixing: Our Customers Are the Enemy." (It's standard practice in the film critic business to read academic works on the economics of lysine price-fixing before writing movie reviews.)
That fascination reshaped Mr. Connor's career and led to a second act as the "King of Cartels," a status recognized this month by a lifetime-achievement award from the American Antitrust Institute, a bipartisan center where he serves as a senior fellow. Mr. Connor's work, including his book Global Price Fixing, is influential. His private database, where he has recorded nearly 900 international price-fixing scandals, has no known parallel. He has become a courtroom fixture, consulting for cases against putative cartels. (That explains the car.) And he's a government gadfly, arguing that the country hasn't done nearly enough to protect its consumers. 
For cartels, he says, the evidence is clear. Crime does still pay. 
Often business-on-business offenses, international cartels rarely rise to public notice, but they are a pervasive, costly phenomenon. Since the 1990s, they have accrued more than $80-billion in U.S. government fines. 
More cases go undetected; generous estimates suggest only a third come to light. 
These cartels thrive, then fail, in the hidden abysses of the market, but not before they've garnished profits from the budgets of everyday shoppers out to buy meat, computer monitors, or cars. 
"It's the dark side of globalization," Mr. Connor said. Communication costs are low; cultural differences are eroding. The M.B.A. is ascendant. "They all speak the same language. Use the same spreadsheets." 
... Either the number of global cartels is rising, or more are now being fished out.
"I used to add 30 or 40 a year just a few years ago," he said. "Now it's 90, 100 a year"—and that's only counting international cartels. 
... How do [cartels] work in the real world? That's what Mr. Connor has explored, assisted by reams of internal documents. Much of that knowledge is locked behind legal deals—he'll tell you he worked on the LCD-monitor cartel for Dell and on the vitamins "supercartel," and that's about it—but it's been a boon for his research, as well. 
"I get to see what executives are saying to each other," he said. E-mails, planning documents. "All their dirty laundry." 
Before Mr. Connor, cartel scholars would scrounge up a few cases and generalize from there, said Robert H. Lande, a law professor at the University of Baltimore. 
"John has taken the opposite approach. And the reason nobody else did it is it's such a pain," Mr. Lande said. "Boring doesn't even begin to describe it," he added. 

"The Informant!" was a challenge to even Soderbergh's skills as an entertainer (e.g., Ocean's Eleven) to keep the audience interested.
Armed with these data, Mr. Connor is comfortable espousing some truths about global cartels. They require a limited number of market players, homogenous products, few individual conspirators, and the opportunity for face-to-face meetings every three months or so, possibly to deal with currency changes. 
They rarely last longer than a decade, often torn apart by internal instability, as one firm tries to cheat the others. (The Justice Department banks on that suspicion, granting leniency to the first company to defect from a cartel.) The government also punishes price-fixing against itself more severely than such offenses against the private sector, he has found, and its sanctions result in a net benefit to national accounts. 
... What he can show, however, in a study published last year in the Cardozo Law Review with Mr. Lande, is that given existing U.S. sanctions, including prison time, cartels remain a rational business strategy. Sanctions are one-fifth of where they should be, they found. 
"My numbers tend to show that the fines that have been imposed historically have been too low to deter cartels," Mr. Connor said. "And the fact that more and more cartels are popping up every year would seem to reinforce the point."


Anonymous said...

Interesting that the cartels fail mainly due to members trying to cheat each other. No honor among thieves I suppose. I imagine a cartel composed of individuals with the same ethnicity, language and values would last longer than the "multicultural" coalition cited in the article.

Anonymous said...

Sport Science Happy Gilmore

Anonymous said...

The potash (fertilizer) cartel broke up just this month due to squabbling b/w the Russians and Belarussians.

Anonymous said...

When I was an engineer in a wafer fab in the mid-80s, we suspected a cartel was in control of pricing for silicon-carbide susceptors used in silicon epitaxy and chemical vapor deposition. A really niche market but basically every silicon wafer had to touch one at some point in its manufacture. Low profile and high profit.

Anonymous said...

India, Kenya, Indonesia, Malawi, Rwanda and Sri Lanka, which account for more than 80 percent of the world's tea output, agreed in Colombo to form the International Tea Producers Forum, an organisation they said was aimed at stabilising prices, promoting the beverage and ensuring sustainable production.

David said...

The hick philosophy is that you don't criticize job creators. In Tennessee, Mississippi, and Alabama, this man would be considered a communist.

jody said...


Steve Sailer said...

But Connor seems to have created a job or two at the Porsche factory and in the Martha's Vineyard summer home construction industry, so two can play this game.

Anonymous said...

re potash - which as I understand was a plain view cartel like OPEC - I believe Belarus has not taken the Russian action lying down - they invited Russian potash execs to a meeting - and arrested the only one who turned up as he got off the plane.

Better to investigate cartels in the US than in either of those places.

Unanimous said...

Goldman Sachs and JP Morgan as a commodity cartel?

Cail Corishev said...

It's always seemed to me that businesses are able to run virtual cartels without doing anything as obvious as meeting to discuss it.

In a small town near me, there are two gas stations. They sit at opposite ends of town, out of sight of each other. Yet every day, the south-end station's price on gas is exactly a penny less than the north-end station's.

Is that because the south-end station's manager drives by the other station on his way to work in the morning, makes a note of their price, and sets his own a penny lower to compete? Or do they both set their price according to some daily price that comes down from corporate headquarters, meaning that the collusion is happening up at that level? I don't know, but such price matching doesn't happen on accident. If there are a dozen different people selling sweet corn by the roadside in different parts of town in the summer, some may be charging twice as much as others. Gas stations would be the same way if they were really setting their own prices based on what they paid the last time they got a shipment, what they need to profit to pay overheads, and so on.

For that matter, isn't price matching, where a business says, "If you find a better price elsewhere, we'll match it," an open form of collusion? At first glance, it would only serve to lower prices; but that's not really true, because it also allows me to keep my prices higher to begin with. I can set my prices a little higher and have that policy, rather than trying to undercut the opposition. But if all my competitors do that, we all end up with higher prices, basically winking at each other through our advertising by saying that we won't go lower.

Maybe that's why interest in cartels waned: people realized that even if you do your best to ban them, it's not hard for corporations -- especially when there are only a few and their prices are very visible to everyone -- to find ways to cooperate toward higher prices without any actionable collusion.

David said...

When labor does it, it's the destruction of Western Civilization. When management does it, it's economic progress. Labor produces nothing; even management, as a form of labor, produces zip. The fountainhead of wealth is stockholders.

So boo hiss for unions and hooray for cartels!

What we really need is pure free enterprise for labor (e.g., end the minimum wage) and an all-powerful government run by stockholders.

I've just saved you from having to read people like Thomas Friedman again, or listen to half the people on cable. Think of all the time I've saved you.

Anonymous said...

Is someone able to get past the pay wall for the full article?

Philip Neal said...

There would seem to be something paradoxical about a monopoly on cartel busting. But as 'Screaming Lord Sutch', the perennial joke candidate at British by-elections, used to ask, 'Why is there only one Monopolies and Mergers Commission?'

Anonymous said...

What I don't understand is why the trust busters didn't seem to distinguish between the cartels that were primarily exporters vs cartels that were primarily domestic markets. (Cartels that are in another country your government can't do anything about.)

If the cartel is primarily an exporter, then to my way of thinking the cartel ought to be encouraged, if anything. If it is extracting the maximum profit from whatever good the cartel controls by extracting that wealth from foreign countries, it is making your country richer.

fnn said...

The hick philosophy is that you don't criticize job creators. In Tennessee, Mississippi, and Alabama, this man would be considered a communist.

But apparently not in Louisiana.Find out who Huey Long was.

Anonymous said...

Bush dropped the anti-trust suit against Microsoft. So, we complain here about Big Biz wanting guest workers. W helped the big Biz being more powerful like Microsoft.

David said...

It isn't 1928. Huey Long couldn't be elected hall monitor today. Read Joe Bageant.

Anonymous said...

There are a lot of IO economists who work full-time on litigation and academic economists who serve as expert witness in price-fixing and antitrust trials. Connor is more unique for doing well on the plaintiff side. There is a lot more money in serving as an expert witness for the defense, as these companies have deep pockets and desperate to resolve these issues.

Also, the commenter above who said you can't go after cartels in other countries is incorrect. Obviously you can't do anything about OPEC, but most of the conspirators in the LCD panel cartel were Asian companies.