Wood Pulp Case

1
Wood Pulp Case

• Are similar prices
• sufficient to prove
• collusion?

2
Overview of the presentation

• Introduction to the theory of collusion.
• Description of the Wood pulp market.
• The Legal Case
• An Economic Analysis

3
What is collusion?
Collusion is a situation where firms coordinate
their actions to be able to exert a higher market
power than they would ususally have.

• Firms agree to set prices higher than the
  competitive (Bertrand) equilibrium price
• Firms agree to set quantities lower than the
  competitive (Cournot) equilibrium quantity
• Other types of coordination such as division of
  market etc.

4
How does collusion occur?

• 2 elements are necessary for collusion to arise
• Firms must be able to detect in a timely way that
  a deviation has occurred.
• There must be a credible punishment which follows
  a detection.
• Large time horizon.

5
Implicit vs. explicit collusion

• Implicit (tacit) collusion

Arises through purely non-cooperative behaviour
by firms Conditons - rapid detection of
deviations - credible and effective
punishments Most likely to occur in an
oligopolistic market Results from rational and
profit maximising market behaviour.
6
Overview of the presentation

• Introduction to the theory of collusion.
• Description of the Wood pulp market.
• The Legal Case
• An Economic Analysis

7
The Product

• Wood pulp bleached sulphate pulp
• Used for paper and packaging
• Wood pulp exists in different qualities depending
  on - geography (North vs. South) - type of trees
  (soft wood vs hard wood)
• Paper manufacturers typically use different types
  of wood pulp

8
The Customers

• More than 800 buyers in the EC
• Main customers paper manufacturers
• Wood pulp is interchangeble, but when changing
  the mixture of different pulps, a paper
  manufacturer might incur large switching costs.
• Wood pulp accounts for 50-75 of the costs in
  paper production.
• Consequence
• diversification of supply sources
• long-term trade relationships

9
The Suppliers

• More than 800 producers worldwide
• 50 of them selling in the EC
• Market leaders US, Canada, Sweden, Finland
• Vertical integration many wood pulp producers
  are also paper manufacturers
• Some wood pulp sold through agents

10
Transparency of market

• System of quarterly price announcements? ceiling
  price
• Wood pulp prices quoted in US dollars
• Vertical integration
• Common agents
• Wood pulp prices listed in trade press

11
Is the Wood Pulp Market perfectly competitive?

• The basic assumptions of perfect competition
• Large number of suppliers (in our case more than
  800 worldwide, 50 selling in EC)
• Large number of consumers (in our case more than
  800 in the EC)
• Homogenous product (wood pulp is highly
  substitutable)
• Perfect information

12
KEA

• Cartel of American pulp producers
• Fixing of export price by executive committee?
  price announcement
• Producers are free to set the transaction price
  below the announced price
• 1975-1981 announced prices coincided with
  transaction prices

13
Fides

• Swiss trust company operating a research and
  information centre for the European pulp and
  paper industry
• Discussions about prices and quantities (at the
  initiative of the Finnish producer Fincell and
  the Swedish producer Svenska)

14
Possible explanations for similarity in prices

• Two strands of argumentation possible
• Wood pulp market perfectly competitive,
  similar prices may be due to explicit collusion
  within producer associations (KEA and Fides)
• Wood pulp market oligopolysimilar prices are
  due to rational profit maximising behaviour of
  competing firms (tacit collusion)

15
Overview of the presentation

• Introduction to the theory of collusion.
• Description of the Wood pulp market.
• The Legal Case
• An Economic Analysis

16
Structure

• I. Decision of the Commission (1984)
• II. Judgement of the Court (1993)
• Conclusion about the Case

17
I. Decision of the Commission (1984)
18
Breach to Article 85 (1)

•  Article 85 (1) of the EEC Treaty prohibits as
  incompatible with the common market all
  agreements between undertakings, decision by
  associations of undertakings and concerted
  practices which may affect trade between Member
  States and which have as their object or effect
  the prevention, restriction or distortion of
  competition within the common market, and in
  particular those which directly or indirectly fix
  purchase or selling prices or any other trading
  conditions and those which share markets or
  sources of supply. 

19
Accusations and condemnations

• Concerted practice proved by
• -since parallel conduct on the wood pulp market
  cannot be explained as independently chosen
  parallel conduct in a narrow oligopolistic
  situation, it can only be explained by concerted
  practice
• -direct or indirect exchange of data between
  firms, obvious proofs of concerted practice
• Condemnations of a whole range of pulp producers
• Concertation on announced and/or transaction
  prices, within or outside of KEA and Fides
• Exports and resale bans
• Fines between 50 000 and 500 000 ECUs

20
Observed parallel conduct

• prices are (almost) simultaneously announced
• announced prices are identical
• transaction prices announced prices
• price level unchanged during period despite
  changes in costs and demand

21
Accusation of concertation relying on the
dismissal of oligopolistic explanations of
parallel conduct

• no precluded competition on the wood pulp market
  (about 50 competitors )
• no equilibrium prices (no trial and error
  process), artificially high and rigid prices
• no market leader
• no inherent market transparency (when prices
  increase, customers dont have any incentive to
  inform their seller)
• no cost uniformity exchange rates, demand
  variations, transportation, different capacity
  utilization ratios
• no coincidence

22
Accusation of concertation relying on material
proofs

• Telexes and meetings
• But the Commission maybe went too far in
  asserting that
• The (quasi-)simultaneity of price announcements
  would not have been possible without a constant
  flow of information between producers
• The system of quarterly announcement constituted
  in itself, at the very least, an indirect
  exchange of information on future market conduct

23
II. Judgement of the Court (1993)
24
Defence Strategy

• To bring the Court to annul the Commissions
  decision or to reduce the amount of the fines the
  defence strategy of the condemned firms consists
  in
• First, reduce legally available evidence
• Then, contest the conclusions of the Commission
  pricing parallelism results from oligopolistic
  structure of the wood pulp market, parallel
  conduct is not a proof of concertation, but part
  of the right of firms to adapt themselves
  intelligently to the existing and anticipated
  conduct of their competitors. This claim was
  supported by the reports of two economic experts
  in charge of imagining a non-colluding economic
  explanation to the parallel conduct of the firms
  (not to make a statement about the
  existence/non-existence of collusion)

25
Reduce legally available evidence

• Infringement of the rights of the defence who had
  no opportunity to respond to
• Certain complaints not included in the statement
  of objections
• Concertation on transaction prices
• Duration of the infringement extended the period
  notified in the statement of objections
• Some complaints have not been notified
  individually to some of the firms in the
  statement of objections
• Certain evidence collected after the statement of
  objections was issued
• Important material proofs

26
Contest the conclusions of the Commission

• Prohibition of exports and resale bans dont fall
  under Art. 85 (1)
• Plea rejected by the Court
• Absence of concertation within KEA and Fides
• Concertation proved by Commission, but legally
  irrelevant proofs
• Absence of concertation on announced and/or
  transaction prices
• Once the legally available evidence has been
  limited, possible to imagine an explanation of
  parallel conduct deriving from the
  characteristics of the market
• Oligopolistic structure
• Inherent transparency

27
No concertation on announced and/or transaction
prices (1)

• System of quarterly price announcement
• Historical origin, required by buyers, no
  artificial transparency
• Uncertainty remains about future behavior of
  firms
• No evidence that the system, in itself,
  establishes concertation
• (Quasi-)simultaneity of announcements inherent
  transparency
• Buyers are in contact with several wood pulp
  producers
• Paper manufacturers exchange information on
  prices
• Some agents works for several producers
• Trade between producers

28
No concertation on announced and/or transaction
prices (2)

• Parallelism of prices as a rational market
  behavior
• Short-term prices are slow to react
• Reluctance to reduce prices because other
  producers would follow and demand for pulp is
  inelastic
• Price increases only when competing firms have
  limited spare production capacity and stocks, so
  that they will follow knowing they cannot
  increase their market share
• Long-term substitution possibilities soften
  oligopolistic trends
• Other evidence
• 40 of market remaining to firms not belonging to
  the supposed cartel (but explicit threats were
  formulated against outsiders)
• Shifts in market shares no quotas, competition

29
Conclusion

• Necessity for the Commission to respect the
  rights of the defendants if she wants to make
  them pay for their crimes. Justice is not law.
• Parallel conduct is not a sufficient proof to
  establish the existence of concertation (explicit
  collusion) since it can be explained by market
  structure, inherent transparency and rational
  behavior (implicit collusion, see final
  conclusion).

30
Overview of the presentation

• Introduction to the theory of collusion.
• Description of the Wood pulp market.
• The Legal Case
• An Economic Analysis

31
Structure

• Cost Uniformity
• Constant Market Shares
• Equilibrium Price
• Strategic Analysis
• Bertrand Competition
• Tacit Collusion
• Symmetry and Collusion
• Stochastic Demand and Collusion (Green-Porter
  model)

32
Cost Uniformity

• Uniform price can be the consequence of perfect
  competition and symmetry.
• In the pulp case
• Different marginal costs due to
• Social systems
• Exchange rates
• Sizes
• however, differences due to quantities do not
  exceed 3.

33
Constant Market Shares

• In a perfectly competitive market, if one firm
  sets its price below the others, it would get the
  whole market.
• The Commission argued that none of the producers
  even tried to increase its market share by
  deviating from the agreed price.
• Cooperation is thus the only explanation
• The Court challenged this point by showing that
  market shares actually varied.
• It could be argued that all firms were at their
  capacity level. Dismissed by the facts.

34
Constant Market SharesWhat does it imply?

• The important point is what type of return to
  scale?
• If constant constant market shares reflect an
  historical situation. No incentive to deviate if
  price is at marginal cost. If it is not, capacity
  constraint.
• If not constant firms with low costs could be
  tempted to deviate in order to get the lion
  share. Competitors are unable to punish it
  without losing money.
• Thus constant market shares can here be
  interpreted as a consequence of collusion.

35
Equilibrium Price

• A uniform price can mean that it is THE
  equilibrium price.
• The Commission was astonished that none of the
  producers tried to test if it were effectively
  the equilibrium price.
• The Court argued that it could be an equilibrium
  price since the market is actually characterized
  by a succession of oligopolies and oligopsonies
  for each kind of pulp.
• ?4 prices.

36
Strategic approachBetrand Competition

• Assuming symmetry between firms, analyzing the
  duopoly case and considering the following
  demand qa-pi?pj.
• We find
• If ?0.
• If ?1.

37
Strategic approachTacit Collusion

• Assume 2 firms competing in Bertrand with a
  time-discounting factor ? during a given number
  of periods T.
• If T lt ? classical Betrand outcome (solve
  backward).
• If T ? the reasoning gets more complex.

38
Strategic approachTacit Collusion / 2

• Consider the following strategy
• Set pm as long as the other sets pm and get ?m/2.
• If the other sets pltpm, set pmc forever and thus
  get ?0 forever.
• Collusion holds if deviating is not profitable,
  I.e.

39
Strategic approachTacit Collusion / 3

• In the Pulp Market, Pim has to be divided by 50
  (if considering only the EC market). This leads
  to a time-discounting factor ? equal to

40
Strategic approachMarket Share and Collusion

• Assume there are 2 firms, one with market share ?
  the other with 1- ?, with ?gt0.5.
• For Collusion to be stable
• Equivalent to
• ??1- ? for the big firm
• ?? ? for the small firm
• Intuitively, the small firm has more incentive to
  deviate.
• The more symmetric firms are, the more
  sustainable collusion is.

41
Strategic approachMarket Share and Collusion / 2

• In the pulp market on the EC market, European
  firms had much bigger market shares than
  Americans.
• However, European producers had similar shares.

42
Strategic approachStochastic Demand and Collusion

• We assume n identical firms selling an
  homogeneous product and facing a stochastic
  demand (can be low or high with given
  probabilities).
• The greater the probability of low is, the more
  difficult it is to sustain collusion.

43
Conclusion

• A straightforward conclusion is impossible.
• Without the factual proofs, it is impossible to
  prove collusion.
• Thus In determining the probative value of
  those different factors, it must be noted that
  parallel conduct cannot be regarded as furnishing
  proof of concertation unless concertation
  constitutes the only plausible explanation for
  such a conduct. It is necessary to bear in mind
  that, although Article 85 of the Treaty prohibits
  any form of collusion which distort competition,
  it does not deprive economic operators of the
  right to adapt themselves intelligently to the
  existing and anticipated conduct of their
  competitors.