Graphite Electrode Cartel Case Study Flashcards
Defining the Market
- The market is global
- There were 9 firms operating in Europe in the 1990s
–Two leaders: SGL and UCAR
- A strong fall in demand from 1982 reduced the number of firms from 18 to 9
- The entry barriers were high because of complicated and expensive production
What is a graphite electrode?
-A graphite electrode is a ceramic-moulded column of graphite used in production of steel (transform old steel into new steel)
What is the 4 firm concentration ratio in the US?
-4 big players in the US (UCAR, SGL, C/G, SDK) CR4=95%
When did the investigation start?
It started in 1997
The European Commission seized computers and files to find incriminating evidence
This is an interesting case because the cartel continued to collude after the start of the investigation, attempting to obstruct the investigation
When did the European Commission conclude the investigation?
It was concluded in June 2001
What was the conclusion by the EC?
8 of 9 firms had price fixed between 1992-98 after “top guy” meetings in Switzerland
Side payments (through purchasing rivals’ products) between firms prevented gains from cheating - this is in case one firm gained more customers than the others despite the same pricing
C/G didn’t attend meetings but received info from the cartel
C/G used this info to undercut the collusive price, more than doubling its sales
How many firms appealed the decision?
7 firms appealed to the Court of First Instance in 2004 (some adjustments were made)
2 firms and the EC later appealed to the European Court of Justice in 2006
What was the punishment?
Firms were fined 218.8mEUR (9.5%of EEA turnover)
How does the EC calculate and apply its fines?
- The EC must consider the Gravity of the crime (how serious it is)
- They will then increase this fine to ensure it has a sufficient deterrence effect - this allows the EC to take into account the economic impact of the crime
- They consider the duration of the crime and increase the fine accordingly
- They then consider aggravating circumstances (increase the fine) or attenuating circumstances (decrease the fine)
* Note; the fine cannot exceed 10% of a firm’s worldwide turnover - so that it can’t bankrupt firms and reduce competition - If firms are cooperative or informed the commission of the cartel then they may get leniency in their fines
- They may reduce the fine further based on the firm’s ability to pay and other factors
There is the final fine
What is the starting fine for a cartel?
20 million Euros
What was the limit for fine increases in 1997?
10% for each year or 5% for 6 months
What is the limit for fine increases now?
100% for each year of the cartel
A summary table of the calculation of fines for Category 1 offenders
Note:
DG Comp is the competition wing of the European Commission
CFI is the Court of First Instance
ECJ is the European Court of Justice
These firms are Category 1 offenders because they were the worst offending firms
Why did UCAR get leniency?
They contributed to establishing important aspects of the case
CFI gave a larger leniency than DG
A summary table of the calculation of fines for Category 2 offenders
Note;
These firms are category 2 because they have a smaller market share than those in category 1
However, SDK was by far the largest firm of all due to its operations in other markets (hence the deterrence multiplier)
SDK received such a high leniency (70%) because it was the first to provide information to the commission
CG received a leniency discount due to them taking a passive role as a price follower and not attending the meetings
CG also appealed that there was an attenuating circumstance due to the economic downturn just before the cartel was set up, but this was rejected
CG received a leniency discount because it provided ambiguous information regarding its involvement in the cartel
How do we calculate optimal deterrence?
Example: If Pd = ¼ and Pc = 4/5 then the fines have to be 5 times the benefits
What is the point in a leniency program?
They should be designed to raise the expected cost of cartelisation
You should offer the first firm to come forward with information about the cartel 100% leniency (this provides the greatest incentive for them to come forward)
Was the commission’s approach to leniency consistent with a policy of deterrence?
NO!
Bare in mind: B ≤ Pd * Pc * F
- Also, the highest amount of leniency given was 70%, not 100%.
- This doesn’t provide the highest incentives to whistleblow because it is not only one firm gaining leniency
Was the commission’s approach to leniency on CG consistent with a policy of deterrence?
Though looking at the actual case rather than just reading the chapter may make one less empathetic with CG
Recent theories also suggest that a cartel is more stable if there aren’t smaller firms included (D’Aspremont, Jacquemin, Gabszewicz and Weymark (1983) - Cartels are more internally stable if firms don’t want to leave)
It is better to have smaller firms leave the cartel, undercut price, and only leave collusion for the remaining firms that are more similar to one another
