District Heating Cartel Case Study Flashcards
How do we calculate the damages a cartel has caused?
note:
p (the but-for price) is the price that would have occurred had the cartel not existed
p is difficult to obtain because it is hypothetical
This method only captures some of the damages (represented by the red line on the graph
The purple rectangle shows us the damages to buyers affected by the cartel
The red triangle shows us the damage to the consumers who were priced out of the market
The extent to which this calculation is imperfect will depend upon the PEd (i.e. the lost consumer welfare will be larger the more elastic the curve is)
What are the five methods to calculate the but-for price?
- Before/after method
- Yardstick method
- Cost-based method
- Econometric method
- Oligopoly model
What is the Before/After method of calculating but-for price?
Use prices in same market before or after the cartel period
Con:
- doesn’t control for other factors
- How do we know the prices are actually competitive? (they may have been affected by the cartel and we have no evidence to prove this)
- The prices after a cartel are under the control of firms involved in the cartel (if firms know the after price will be used to calculate the damages, they may set a higher price to mitigate damage calculations)
What is the yardstick method of calculating but-for price?
Using prices in a different comparable (geographic) market
Con:
- doesn’t control for other factors (i.e. the supply and demand conditions before the cartel were very different than compared to the cartel)
- How do we know the prices are actually competitive?
What is the cost-based method of calculating but-for price?
Using accounting data to calculate average cost + normal return
Con:
- its starting point is perfect comp, but cartels should arise in imperfect markets with a few symmetric firms
What is the econometric method of calculating but-for price?
Using time-series regression to estimate the overcharge
Pros:
- Much more sophisticated than the simple methods
- You can control for other factors such as demand or supply conditions
Cons:
- When does the cartel start or end? (our estimate may be late, leading to a smaller estimate of the overcharge, B2)
- We also see the issue of after prices being inflated in order to reduce the estimate of damages
What is the oligopoly model method of calculating the but-for price?
We develop a theoretical model of competition in the market and use real world data to parameterise the model to quantify the effects
Con:
- you must be able to create a theoretical model of competition in the market
- This is always going to need some degree of simplification, so you might lose out on some important factors
What is district heating?
In certain parts of Europe, hot water is supplied to homes through pre-insulated pipes from district heating stations to homes
Discontinuous was the standard way of production
- putting inflexible pipes of a certain length together and then sealing the pipe
- quite expensive (so new method was devised)
Continuous pipe production (new method)
- Lower cost because it was quicker and used less materials
What were the CR4 and HHI in the market?
Municipality means local government
When did the European Commission start its investigation?
June 1995
There was a tipoff from a competitor ‘Powerpipe’ (Swedish Company)
The cartel still continued 9 months after investigation began
When did the Commission end their investigation and what was the verdict?
October 1998
The Infringement occurred between 1990 and 1996 (although it may have started in 1988)
There were 10 cartel members in total, with four core Danish firms
The cartel was active in Denmark initially, then expanded to Italy/Germany, then to the EU
Behaviour included: price fixing, market sharing, delayed innovation and predation
What was the original fine from the CFI in March 2001?
After the cartels had appealed to the CFI
How much did firms have to pay 4 Danish Municipalities for damages in 2004/05?
Which method was used to fine these 3 firms? And how did the firms defend themselves?
For the cost-based method, the defendant calculated EBITDA and related that to invested capital (operational assets, financial assets and equity)
The requirement to normal capital was then varied between 0-15%, and depending on this number, corresponding overcharges were calculated
What could have been found from the methods not used?
Note:
- The German prices in the Yardstick method were from 1990-91 when the Germans weren’t involved in the cartel
- Oligopoly not used because the defendants argued the firms in the Cournot model are irrational (but they are, they are profit maximisers), Cournot is also simplified with homogeneous products (but not required)
