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DETTERENCE OF COLLUSION IN EU COMPETITION LAW: AN ECONOMIC

APPROACH
BART MAYENS
Thesis submitted to obtain the degree of
European Master in Law and Economics (EMLE)
Promoter: Dr. B. Targanski




- 2011 -






Bart Mayens


DETTERENCE OF COLLUSION IN EU COMPETITION LAW: AN ECONOMIC
APPROACH

Abstract:
Collusion refers to agreements made between otherwise independent firms with
the goal of raising joint profits hence disturbing the competitive market
equilibrium. The current legal approach to such anti-competitive conduct is one
where the Commission seeks to find evidence of communication and
agreements between undertakings rather than proving actual outcomes on the
market. This thesis demonstrates how such a treatment is unsupported by
economic theory which is incapable of proving the role of communication as a
vehicle to implement collusive prices on the market. As such, a divergent legal
approach is suggested which is coherent with formal economic theories on
collusion.





Promoter: Dr. B. Targanski
- 2011 -




I
Acknowledgements

This thesis is the result of a full year of interesting studies at the European Master in
Law and Economics (EMLE), but would never have been possible without the help of
other people.

Foremost, sincere gratitude is hereby extending to my promoter and assistant Dr.
Bartosz Targanski who guided me through the writing process. He never ceased to offer
help, appealing remarks and very useful input and inspirations throughout the
elaboration of this thesis. All of this made it after all a pleasant work.

I also want to thank my parents, offering me the gratefully appreciated opportunity of
participating at the European Master in Law and Economics (EMLE) program, most
likely the starting point of a hopefully interesting future career.

Finally, I am deeply indebted to all my friends, supporting me in difficult moments and
offering me the chance of changing minds by which new inspirations could arise.

Bart Mayens,
Bologna, July 2011


II
Table of contents

Acknowledgements ........................................................................................................... I
Table of contents .............................................................................................................. II
General Introduction .......................................................................................................... 3
Chapter 1 Economic analysis of collusion ................................................................. 6
1.1 About collusion ................................................................................................. 6
1.2 Stability of the collusive outcome ..................................................................... 9
1.3 The negative welfare effects of collusion ........................................................ 11
1.4 Conclusion ....................................................................................................... 14
Chapter 2 Collusion and competition law: legal responses ...................................... 15
2.1 Introduction: Article 101(1) and collusion ...................................................... 15
2.2 Scope: what is illegal and what is not ............................................................. 17
2.2.1 Agreements .................................................................................................. 17
2.2.2 Concerted practices ..................................................................................... 19
2.3 Judicial treatments of price fixing ................................................................... 24
2.3.1 By object versus by effect ........................................................................... 24
2.3.2 Application of Article 101(3) ...................................................................... 26
2.4 Conclusion: standards of proof ........................................................................ 27
Chapter 3 An economic view on the legal view ....................................................... 29
3.1 Introduction: setting the stage ......................................................................... 29
3.2 Is the current legal approach economically justified? An overview ............... 30
3.2.1 Collusion and its game-theoretic aspects: formal economic theory ............ 31
3.2.2 Experimental and empirical literature ......................................................... 34
3.3 The right approach? ......................................................................................... 35
3.4 The alternative approach ................................................................................. 37
3.5 Policy implications .......................................................................................... 40
3.6 Conclusion ....................................................................................................... 44
General conclusion .......................................................................................................... 45
List of Figures ..47
References...48

3
General Introduction
The capitalistic market economy based on perfectly competitive markets is driven by an
invisible hand towards a Pareto-optimal allocation of resources. This theoretical insight
is well known as the first theorem of welfare economics. It results in profit
maximization by firms on the one hand, and utility optimization of consumers on the
other hand as prices are the lowest and quantities produced the highest as is
economically feasible (De Bondt, 2006).

Competition authorities are installed to safeguard this theoretical insight. They act as the
principal patron of consumers and efficient operating firms to prevent them from failing
markets, diverging from an optimal outcome through higher prices and a restricted
output. This is where antitrust, or competition law arises. It provides legal foundations
in order to protect optimal market competition by convicting anti-competitive business
practices which are to the detriment of society.

Collusion is one of these and is characterized by undertakings agreeing to coordinate on
prices and/or output. By doing so, the competitiveness on the market is reduced which
results in higher prices on the market. Such conspiracies are often secret in build-up and
can accordingly prevail undetected while considerably harm consumers.
Metaphorically, it is frequently referred to as cancers on the open market economy or
supreme evil of antitrust.
1
Fighting collusion is accordingly one of the top priorities of
the European Commission (Commission) in Europe. It seeks to establish an effective
deterrence which is one of the biggest goals in its combat against anti-competitive
conduct.

In its legal answers, the Commission aims to hold a hard stance against collusion. The
legal approach as currently in place focuses on the detection of conspiracies in order for
firms to be found liable instead of proving actual market outcomes. Hence, if parties are
found to be make an agreement they are found to infringe competition law while the
Commission should not proof the actual implementation of it.


1
See Monti (2001) and Justice Scalia in the Verizon Case; 540 US 398 (2004) respectively.
4
Although such an approach is fairly uncontested, practical case law has repeatedly
made clear that the Commission tends to neglect economic considerations. In
Polypropylene
2
for instance, the Court of First Instance pointed to the lack of economic
evidence shortly after the Commission made its decision. Likewise in Flat Glass
3
the
Court held that more economic analysis was necessary in order for the defendants to be
found liable. Consequently, one should ask itself whether it is acceptable for the
Commission to be released from the burden to engage in an economic impact study on
the actual effects of collusion on the market.

In accordance, this thesis seeks to answer this question by taking an interdisciplinary
approach. It aims at reviewing economic literature on collusion and asks itself whether
the current legalistic approach is theoretically consistent with the the micro-economic
aspects of collusionary behavior. In so doing, it is questioned whether the legal
approach as currently in place is in line with economic theory. More precise, the role of
communication as an instrument to implement collusion on the market turns out to be a
blurred one.

This thesis is in line with former work on collusion but differs from it by engaging in a
multi-sided view. While most earlier work focused on the economic and legal aspects
separately (see for instance Ivaldi et al. (2003) or Motta (2003)), this work aims to
interlink both views and searches for consistency between both. As such, it takes an
economic view on the legal view, in line with Whinston (2003).

Consequently, this thesis aims to, (i) clarify the basic economic building-blocks of
collusion and analyze how it negatively harms welfare; (ii) presenting the legal
approach as currently adopted by the Commission; (iii) comparing the legal view with
the economic view and arguing whether the economic analysis validates the legal view;
(iv) presenting a divergent approach from the current one which is more in line with the
economic view.


2
Commission Decision 86/398/EEC, OJ 1986, L230/1.
3
Commission Decision 89/93/EEC, OJ 1980, L33/44.
5
This work will be structured as follows. The first chapter revises the economic
mechanisms that lie behind the functioning of collusion. It revises the equilibrium
characteristics and analyses how it is able to harm consumers. The second chapter lines
out how the Commission aims at deterring collusion by focusing on the scope and
judicial methods of the legislation. Chapter 3 then compares the insights gained in both
previous chapters. It elaborates the economic view by reviewing the literature and
investigates whether it is consistent with the legal view as presented in Chapter 2. It
equally presents an alternative approach to deal with collusion and presents some brief
policy implications based on practical case law.

























6
Chapter 1 Economic analysis of collusion
In order to proceed to the main body of this work, a profound economic understanding
of collusion is a necessary first step approach. Accordingly, this chapter aims at
fulfilling this need by summarizing the economic ingredients of the functioning of
collusion. The next chapter will then focus on the legal aspects of coordinative
behavior.

This chapter will be structured as follows. The first section provides a definition, lines
out the scope of different related concepts and puts forward the economic process
behind collusionary practices. The second section explains why collusion is typically
unstable and thus difficult to sustain. Finally the third section clarifies the detrimental
effects of collusion on society, pointing out to the welfare losses that arise.

1.1 About collusion
Collusion refers to coordinative behavior between legally independent firms aiming at
raising their collective profits by explicitly agreeing to coordinate on prices or output
(Connor, 2008). The conspiracy aims at moving up the market price away from the one
that would prevail in the competitive setting since joint decision making (instead of
independent ones) internalizes the competitive burden that would be present absent the
agreement (Martin, 2001).

Coordination can either be done explicitly as is the case with cartels, or can be done in a
more secret and subtle way. Participants in a cartel communicate with each other by
organizing meetings, making use of associations or even sign contracts. On the other
extreme, coordination can also be done with fewer forms of explicit communication
(informal), or even without communication at all (so called tacit collusion), see Figure
1 depicting the level of formality of the coordination.


Tacit Informal agreements Cartels

Figure 1: Tacit collusion versus cartels
7

More generally speaking capturing both explicit and less overt agreements, one can
define collusion as any situation where firms prices turn out to be higher than the
competitive benchmark (Motta, 2003; Whinston, 2003).
4
Hence, the elevated price can
be reached by organizing explicitly by means of a cartel or can even be sustained by not
meeting up at all. In the latter case, tacit collusion, participants thus do not communicate
directly with each other (Ivaldi et al.,2003).
5


Besides price arrangement (explicit or tacitly), firms may collude on sharing the market
and each serve a specific part of it. As a consequence, local monopolies are created and
thus the ability to increase prices (cf. market allocation). Equally, they can allocate
quotas as to lower the quantity sold, hence again lifting up prices (Motta, 2003).

The most prominent approach however to increase joint profits is to directly agree on
the prices charged to consumers, i.e. price fixing.
6
That is, instead of each setting the
price for the good separately by which competition between both would prevail, one
single agreed upon price will be set which is relatively higher than the one absent the
coordination. In doing so, participants aim at achieving the monopoly profit instead of
the competitive benchmark.

Figure 1 captures this insight by comparing the situation with and without collusion.
Think of two pizza shops in town. Without coordination, firms compete with each other
by which the competitive equilibrium arises, i.e. the market price equals marginal costs,
say . Thus, in terms of the figure, copon = . Indeed, a pizza shops

4
The competitive benchmark is the situation absent collusion. In technical economic terms, collusion
would arise if the price is higher than the one-shot Bertrand equilibrium price when firms decide on
prices, or if the quantity is lower than the one-shot equilibrium quantity if firms compete la Cournot and
thus decide on quantities. See for example Tirole (1988) for a general approach.
5
Since this thesis is concerned with the outcome of coordination rather than the way it is achieved, both
notions, cartel and collusion, will be used as synonyms throughout the remainder of this work. This
approach is equally followed throughout most of literature.
6
Henceforth, this thesis shall only refer to price-fixing cases, though it being understood that other
similar practices do exist. Consequently, collusion can be read as a synonym to price fixing in the
remainder of this work.
8
ability to charge a higher price (hence, its market power) is limited by the presence of
the other shop since nobody would spend more for the same product. On the figure this
is indicated as the Competitive Price and Output Equilibrium and can be seen as the
point where the marginal cost (H) curve intersects with the demand curve (or the
average revenue () curve).











Figure 2: Price fixing
7


Now consider both shops to coordinate on the price they charge. Since decision making
is done jointly the competitive constraint that was present absent the agreement is
internalized. Hence, the firms can agree on charging the monopoly price (say ),
naturally to the detriment of consumers. On the figure this is denoted as the
Monopolist profit maximizes here equilibrium which leads to onopos =
and is indicated by the point where the marginal revenue (H) curve crosses the H
curve. Collusion makes firms thus to decide on prices as would a monopolist do.

Accordingly, collusion can equally be described as the outcome where firms set prices
close enough to the monopoly price (Khn, 2001). Note that the example above
assumes the collusive price to equal the monopoly price. In more realistic settings
however with imperfect information and communication between participants and with

7
Taken from http://www.proprofs.com/flashcards/cardshowall.php?title=MonopolyOligopolyPerf-Comp,
10/05/2011.
9
not all firms participating in the cartel, participants will often not be able to achieve the
full collusive price (Motta, 2003).

More precisely, firms can make mistakes and chose a collusive price which is not
jointly optimal since it is often hard to perfectly communicate with each other. In the
example above, imagine that each pizza shop thinks that the other would set a price of
instead of for example because there is lack of communication or because
external demand and supply shocks make it difficult to estimate correctly the full
collusive price. Then again collusion arises, but now at a level suboptimal for both firms
(Motta, 2003). Therefore, the collusive price can be anywhere in the region |H, p
M
]
with p
M
denoting the monopoly price.

Which economic mechanisms lie behind tacit price-fixing? Under tacit collusion, the
participants do not communicate directly with each other, yet they achieve a higher
equilibrium price on the market relative to the competitive setting.

Firms can accomplish such an outcome by observing and anticipating conduct of its
rivals. If one firm makes profits by selling at a price above its marginal costs while
spare capacity is available on the market, its rival can follow up and equally raise its
price to the same level. Hence, the announcement of a price raise by one firm can act as
a signal to other firms to equally raise prices rapidly. Indeed, competitors know that the
price-raising firm cannot maintain such a price if the others do not follow up since all
consumers would buy at the lowest price (Rodger & MucCulloch, 2004).

All being said, it results from the above that the conspiracy suffers from an internal
instability problem. Indeed, each firm will have the incentive to lower the price below
the collusive one since then it would increase its turnover. So how is collusion remained
in place? And what factors will influence the degree of stability of the agreement? The
next section will provide an answer to those questions.
1.2 Stability of the collusive outcome
Using the example above, imagine that both pizza shops meet on the market place and
decide to fix prices. Although enjoying a higher collusive price, both shops will have
the urge to deviate from the agreement. That is, cutting prices would increase the
10
individual profit of the cheater since turnover would increase while still benefiting from
a high unit margin (Motta, 2003). In such a case, collusion would break and competition
would prevail again.

Stated otherwise, both firms have the incentives to cooperate with its rival by which
joint profits are maximized. But they also have a strong incentive to cheat, i.e. to lower
the price beneath the collusive one. The collusive outcome thus tends to be a highly
unstable one (Gwartney et al, 2009).

The acknowledgement that any participant has the urge to break the collusive outcome
points out two general features of collusion: the ability of detecting deviations and the
degree in which the competitors can punish the cheater through lowering his own price
to the detriment of the profits of the punisher (Ivaldi et al., 2003; Whinston, 2003;
Motta, 2003). The easier it is to detect and punish the deviator, the more stable the
collusive outcome will be (Motta, 2003; Whinston, 2003).

This is an intuitive result. Indeed, if the deviation is observed, the other participant will
naturally try to counter it by equally lowering his price. That is, he will retaliate on the
cheater by which a price war occurs, reducing profits of all participating firms. Hence, if
cheating is detected and punished as well, any collaboration in the future is made
impossible. Punishment thus keeps the members honest, since they anticipate to lose out
on the profitability of the collusion in the remaining periods.

In more formal words, each participant makes the trade of between cheating and reaping
full monopoly profits for one single period and nothing after versus staying honest and
sharing the market ad infinitum. Therefore, collusion is sustained if:
n
C

+ o
n
C

+o
`
n
C

+
n
C

( +o +o
`
+) ~ n
C
+o
with n
C
denoting the collusive profit and o the discount factor (Ivaldi et al., 2003).
8



8
Note that it is assumed both firms (two in this modeling) to have the same discount factor and price
competition yielding a price equal to marginal cost, thus competing la Bertrand. See Ivaldi et al.
(2003).
11
It is generally accepted in literature that some industry factors can increase the
likelihood of collusion based on the two aforementioned features, see for example
Feuerstein (2005) for a summary or Grout & Sonderegger (2005) for an empirical
approach.

Consider for example the number of firms on the market (i.e. concentration). Other
things equal, the more firms active on the market the less sustainable collusion will be
since the gain of deviating from the collusive price will be immense by capturing the
whole market. On the other hand if only two firms would be active on the market
colluding with each other, both get half of the market. Accordingly, gains from
deviating would be relatively much lower by which collusion becomes more attractive
(Motta, 2003).
9


To illustrate another factor, think of the frequency and regularity of orders. Other things
equal, collusion will be harder to sustain if firms interact less frequently (less recurrent
orders) since punishment would only follow after a longer time period, thus being less
effective. Cheating thus becomes more attractive (Motta, 2003).

The analysis above clearly indicated the economic factors behind collusion regarding
businesses. Fixing prices makes the participants able of raising profits through lowering
competition on the market but it suffers from an internal stability problem, i.e. the
temptation to deviate from the collusive price. Yet, little attention has been given to
how this practice affects consumers. The next section will revise how collusion lowers
consumer welfare.
1.3 The negative welfare effects of collusion
As clear from now, a successfully implemented cartel raises profits of the participants
by means of charging a higher price to consumers. Consequently, consumers will be

9
Therefore collusion is often a much bigger threat in oligopolies: industries where only a few producers
are active. This is even more the case when dealing with tacit collusion: if spare capacity is available on
the market and entry barriers exist reducing outside competition, firms will be much more likely to follow
the price raise of a competitor. In accordance, tacit collusion is often referred to as the oligopoly
problem.
12
worse off since they have to spend more resources compared to the situation absent of
collusion.

Figure 2 depicts in depth how welfare is negatively affected. The competitive
benchmark is again the situation where the demand curve crosses the marginal cost
curve H. Output on the market is
C
while price equals marginal cost; H =
C
. As
is well known, this perfect competitive setting is Pareto-efficient: prices are the lowest
and quantities produced the highest as is economically feasible (De Bondt, 2006). If
now a cartel is formed encompassing all firms in the industry, they will maximize joint
profits and will set a price equal to the monopoly price, i.e. =
M
. This increase in
price has two distinct effects on welfare: an overcharge and a deadweight loss (Connor,
2008).














Figure 3: Welfare effects of collusion
10



Regarding the former, a part of consumers will pay the monopoly price for the product
instead of the competitive price.. This effect is actually nothing more than a shift of
welfare from consumers to producers. Absent coordination, producers made zero profits
since price equaled marginal cost. When colluding, profits mount up to (
M
-c) -
M
.
In Figure 2 this overcharge is depicted as the green rectangle and can be interpreted as a
sort of monopoly tax on the good consumers buy (Connor, 2008).

10
Taken from http://www.ken-szulczyk.com/lessons/production_lecture_03.html, 22/05/2011.
13

The latter, deadweight loss, refers to the fact that some consumers will not be able
anymore to buy the product at the higher price. They considered of buying the good but
will leave the market since they cannot afford the product anymore at the higher
monopoly price. On Figure 2 this is denoted as the triangle Deadweight Loss and is a
pure economic waste. Indeed, for all consumers in the area |
M
,
C
] on the horizontal
abscess their willingness to buy as measured by the demand curve exceeds the marginal
cost of the product by which transactions would be efficient. Because of the monopoly
price charged however, these set of consumers will not buy the product at all and seek
an inferior substitute (Connor, 2008).

Stated otherwise, before collusion consumer welfare equals the big rectangle above the
H curve and below the demand curve. Producer surplus is zero and total surplus is the
sum of both. After collusion, the green shaded triangle transfers into producer surplus
while the pink rectangle is neither consumer neither producer surplus anymore
(deadweight loss).

Some surveys have aimed at estimating welfare losses arising from collusion. Werden
(2003), using a dataset of 13 cartels found an average overcharge of 21%, while Posner
(2001) found a mean of 49% investigating a similar number of cartels. Using a larger
dataset, Griffin (1989) estimates the average overcharge around 46%. In contrast to
overcharges, less is known about dead weight losses since they require knowledge about
the elasticity of demand (Peterson & Connor, 1996). Yet, in most industries it can be
approximated to mount up between one-fifth and one-tenth as large as the overcharge
(Connor, 2001).
11


These figures clearly give an indication of how society should seek to prevent collusion
to arise. Accordingly, competition law attempts to safeguard the well being of
consumers by prohibiting coordinative practices which will be the topic of the next
Chapter.


11
While the negative welfare effects are clear-cut, collusion could in theory also lead to pro-competitive
effects, see for example Whinston (2003) who provides an example. Nevertheless, it is unlikely for such a
situation to arise.
14

1.4 Conclusion
This chapter explained the economic mechanisms behind collusion, i.e. the coordinative
behavior between undertakings in order to fix prices on a level higher than the
competitive benchmark. By doing so, the participants jointly decide prices and
accordingly act as a monopolist would do.

Such a collusive equilibrium is an unstable one since each firm has the temptation to
cheat on the agreement, i.e. to lower the price below the collusive one. Thus, the less
possibility to detect and punish deviators the more unsustainable collusion will be.

Collusion is able to considerably harm consumers. Not only will some consumers pay
more for the same good relative to the competitive situation, some other consumers will
also leave the market all together since they cannot afford the respective product
anymore. Both effects, the overcharge and the deadweight loss, have a negative impact
on consumer welfare.





















15
Chapter 2 Collusion and competition law: legal responses
The first chapter presented the economic functioning of collusion: it raises collective
profits of the participants by fixing the price charged to consumers on a higher level
relative to the competitive benchmark. Consumers suffer from higher prices by which
society incurs a welfare loss.
Therefore, authorities naturally seek to prevent these detrimental effects by installing
proper laws ruling out anticompetitive behavior by firms. This chapter aims at summing
up the current approach taken by the European Commission in preventing collusion to
arise, hence protecting consumers on the market.

The first section introduces the topic by presenting Article 101(1) of the Treaty on the
Functioning of the European Union (TFEU) prohibiting collusion and discusses the
necessity for a further elaboration on the concepts used in it. The second section aims at
lining out the scope of the article by taking a look at former case law in order to know
which different modes of collusion are illegal and which are not. The third section then
gives insight in the legal treatment of price fixing cases. Knowing the scope and legal
treatments, the following section draws conclusions on the standards of proof needed to
be found liable. The last section finally sums up the current legal approach.

2.1 Introduction: Article 101(1) and collusion
European competition law prohibits agreements between two or more firms who restrict
competition, as drafted in Article 101(1). Article 101(1) reads as follows:

The following shall be prohibited as incompatible with the internal market: all
agreements between undertakings, decisions 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
internal market: (a) directly or indirectly fix purchase or selling prices or any other
trading conditions, (b) []
12


12
Consolidated version of the TFEU, Article 101(1) (ex Article 81(1) TEC), OJ C 115, henceforth
Article (markings added). Note that the Article consists of three paragraphs, each referred to as 101(1),
101(2) and 101(3). Paragraph 1, as written down, lines out the scope of liable practices. Paragraph 2
16

Although price fixing is in general clearly captured by Article 101(1) (see subsection
(a)), one can immediately notice the broad and loose concepts employed. Indeed, it is
difficult to see what exactly is meant with agreements and concerted practices. Yet,
as we know from the first chapter, collusion can arise in many different forms: firms can
make a formal agreement, firms can restrict themselves to more informal concertation
or they can even not communicate at all by which they collude tacitly. It is however a
priori unclear which kind of collusion is captured by Article 101(1).

As a consequence, one should line out the scope of Article 101(1) by examining its
contents in more detail in order to know what forms of collusion are prohibited by the
Article. In this respect, the concepts agreements and concerted practices used in the
Article should be specified more clearly by looking at former case law. In doing so, one
can then gain insight in what forms of collusion are illegal and which are not by
knowing the precise denotation of the concepts agreement and concerted practice.
The scope of the Article will be discussed in Section 2.2.
13


A second point of attention concerns the legal treatments of cases brought before court.
Put different, should the plaintiff show actual outcomes on the market by looking at
pricing behavior of the defendants, or conversely is intent of collusion sufficient for
being found liable? In this context, the concepts object or effect as can be read in the
Article gives us indications of whether the former (intent, i.e. by object) or the latter
(market outcomes, i.e. by effect) approach is followed when dealing with price-fixing
cases. This will be dealt with in Section 2.3.

In lining out the scope and the judicial treatments, one can then summarize more
concretely what the standards of proof are in order for the defendants to be found liable.

describes the consequences of breaching the practices as described in 101(1): the agreement is declared
void. Paragraph 3 allows under certain strict conditions the inapplicability of 101(1) which is however not
relevant regarding price fixing cases, see further under Section 2.3.2.
13
Note that we do not devote separate attention to the notion decisions by associations of undertakings
since its interpretation is quite straightforward. It is easily understood that associations who act as an
intermediary can be found liable as well as each related company, see for instance UEFA Champions
League, OJ 2003 L291/25.
17
Keeping in mind the diverse modes of collusion, is only an explicit agreement on prices
illegal, or can firms tacitly colluding infringe competition law as well? Additionally, are
firms merely agreeing on prices in a meeting liable of collusion, or should they also
implement the higher prices on the market? In accordance, Section 2.4. concludes the
current legal approach by summing up standards of proof.

Before proceeding however, note that the Commission attempts to combat collusion
also in different ways apart from competition law ex-post, being the subject of
discussion here. Leniency programs for example encourage cartel members to
collaborate with authorities in return for total immunity from fines or a reduction of
fines which the Commission would otherwise have imposed on them.
14
As such, self-
reporting is expected to make enforcement of collusion more effective while saving
resources, see Motta and Polo (2003) and Aubert et al. (2003) for how such a scheme
affects cartel members behavior.

Next to granting leniency programs, authorities could equally attempt to anticipate ex-
ante. Motta (2003) for example, argues how the Commission should focus more on a
structural approach, i.e. to adapt the market structure in a way less suitable for collusion
to arise. In doing so, authorities would then focus on those factors who facilitate
collusion to sustain (see Section 1.2 above) and accordingly try to ban them (e.g. resale
price maintenance which makes prices more observable, see Motta (2003) who even
calls for such a black list of practices).

2.2 Scope: what is illegal and what is not
2.2.1 Agreements
The concept of agreement is a hazy one. One could interpret it very narrowly, by
which it would imply only formal agreements such as a written contract. Conversely, a
broad understanding would entail even oral and informal arrangements.


14
See Commission Notice on Immunity from fines and reduction of fines in cartel cases, OJ 2006,
C298/17.
18
In Polypropylene,
15
the Commission found non-binding oral agreements which lacked
any kind of enforceability to infringe Article 101(1). Likewise, in ACF Chemifarma v.
Commission
16
an unsigned gentlemens agreement was equally found liable. Above
former case law clearly indicates a generous interpretation which is thus not restricted to
a traditional view where an agreement should be legally binding to apply (Ritter &
Braun, 2005). As noted by the Court of Justice:

The minimum requirement for there to be an agreement is an expression of
joint intention of the parties involved to conduct themselves on the market in a
specific way []
17


Hence, all that matters is the expression of intentions of reaching consensus between
parties in order to act in a non-unilateral way. In the extreme, even seemingly unilateral
behavior can be imputed to an agreement when tacit acceptance is observed. As The
Court stated in BAI and Commission v. Bayer,
18
it is necessary for agreements to be
concluded by tacit acceptance that:

the manifestation of the wish of one of the contracting parties to achieve an
anti-competitive goal constitutes an invitation to the other party, to fulfill that
goal jointly.
19


In the same token, participating in meetings without verbalizing any intent of
cooperation suffices to prove involvement in an agreement (Ritter & Braun, 2005).

The Commission thus clearly attaches a very broad scope to the concept of an
agreement. Indeed: there is no need for the agreement to include enforcement
procedures, neither it should be written, neither it should be physical: verbal or even

15
. Cited above.
16
Commission Decision E.C.R. 661, Cases 41/69 [1970].
17
Jaeger/Opel Norge, EFTA Court Of Justice, 1998, E-3/97 at 35-36.
18
Cases C-2 and 3/01, ECR I-23 [2004].
19
Cases C-2 and 3/01, BAI and Commission v. Bayer, ECR I-23 [2004], at 102.
19
tacit understandings are sufficient just as e-mails and phone calls (Ritter & Braun,
2005).
2.2.2 Concerted practices
The term concerted practice has equally been given a very broad interpretation. It was
first defined by the Court in Dyestuffs:
20


[]a form of co-ordination between undertakings which, without having
reached a stage where agreement properly so called has been concluded,
knowingly substitutes practical co-operation between them for the risks of
competition.
21


As noted, the term concerted practice can be read as a meeting of the minds whereby
parties coordinate with each other without reaching the stage where a full-fledged
agreement is made. However, it does enable the parties to anticipate with greater
certainty the future conduct of their competitors, thereby reducing the competitive
burden (Van Bael & Bellis, 2005). In other words: a concerted practice refers to mutual
cooperation or direct/indirect contact in order to influence actual or future conduct on
the market (Jones & Suffrin, 2008).

Indeed, in Suiker Unie v. Commission,
22
the Court stated:

[]any direct or indirect contact between such operators, the object or effect
whereof is either to influence the conduct on the market of an actual or potential
competitor or to disclose to such a competitor the course of conduct which they
themselves have decided to adopt or contemplate adopting on the market.
23


The concept of concerted practice and its according scope as defined above allows for
some observations which will be dealt with below each in turn.


20
Case 48/69, ICI v. Commission ECR 619 [1972].
21
Ibid, at 64.
22
Cases 40/48, 50, 54/56, 111 and 113/73 ECR 1663 [1975].
23
Ibid, at 174.
20
2.2.2.1 Agreements and concerted practices
One can observe the close connection between agreements and concerted practices
where the latter obviously refers to a more looser type of agreement. Nonetheless, it is
hard to see where an agreement stops and a concerted practice begins (Rodger &
MacCulloch, 2004).

By adding concerted practices to the scope of Article 101(1), the Commission clearly
aims to capture all forms of coordination between firms: if not found liable under the
concept of agreement, then still the safety net of concerted practice exists. It can be
argued that in practical case law no real distinction is made between both.

2.2.2.2 Tacit collusion and concerted practices
Since the concept is broadly defined the Commission is given space to intervene in
cases where coordination is less overt, i.e. tacit collusion. Recall that tacit collusion
exists where the coordinating firms do not communicate directly with each other, let
alone they form an agreement (see Section 1.1.). Hence one can ask itself how exactly
the Commission intervenes in cases where there is no explicit proof of direct
communication. Therefore: what is the legal treatment of tacit collusion?

Seminal legal precedents can be found in Dyestuffs and Suiker Unie v. Commission.
24
In
both cases, the defendants communicated price increases to the market after which
competitors followed suit and found themselves operating on a higher equilibrium price.
As a result, the Commission observed prices to jointly raise and thus change in a similar
way. Dealing with so called price parallelism, the question accordingly arises if
parallel conduct infringes Article 101(1). Put different: can market behavior by which
prices are raised in the hope that other competitors will follow be seen as a concerted
practice and hence infringe the Article (Rodger & MacCulloch, 2004) ? In Dyestuffs, the
Court said:

Although parallel behavior may not by itself be identified with a concerted
practice, it may however amount to strong evidence of such a practice if it leads

24
Both cited above.
21
to conditions of competition which do not correspond to the normal conditions
of the market [].
25


It went on to say that:

Although every producer is free to change his prices, taking into account in so
doing the present or foreseeable conduct of his competitors, nevertheless is is
contrary to the rules on competition contained in the treaty for a producer to co-
operate with his competitors.
26


In Suiker Unie v. Commission, the Court of Justice held that:

[] this requirement of independence does not deprive economic operators of
the right to adapt themselves intelligently to the existing or anticipated conduct
of their competitors.
27


Hence, in both cases the Court did not deprived firms of the right to adapt themselves to
market behavior of their competitors, as long as such parallel conduct can be explained
by the normal forces of the market. Indeed, it would be insensible to convict firms just
because prices are observed to follow the same evolution. Such price parallelism can be
caused by other factors apart from the intention to collude, think for example of an
exogenous shock such as a raise in mutual costs due to inflation.

Yet, the above mentioned cases clearly demonstrate the ability of the Commission to
intervene in such conscious parallelism cases. Indeed, in Soda Ash
28
the Commission
literally said:

[]there is no need for an express agreement in order for article [101] to
apply. A tacit agreement would also fall under Community competition law.
29


25
Cited above, at. 66.
26
Ibid, at. 118.
27
Cited above, at 173-174.
28
Soda-Ash-Solvay, ICI, OJ 1991 LI 52/1.
22

Former case law thus shows the Commissions capability to intervene in cases of tacit
collusion under the Article.
30
It should however prove that the underlying reason for the
parallel price levels is a concerted practice since such a practice automatically leads to
price parallelism while the opposite does not hold. The way this is usually done is by
making use of so called plus evidence (plus factors), indicating that parallel prices
are the result of collusion rather than normal forces of the market (Rodger &
MacCulloch, 2004).

Such circumstantial evidence can refer to facilitating factors for collusion to hold (see
Section 1.2.), the defendants record of past violation of collusion-related competition
law, industry factors that facilitate collusion or more blurred elements such as the
presence of rational motives to collude.
31
Nevertheless, this approach has been heavily
critized since it is hard to see what is enough circumstantial evidence and what not,
see for example Kovacic (1993).

Therefore, many scholars have doubted the appropriateness of the Article concerning
tacit collusion, see for example Motta (2003) and Turner (1962). The main argument
raised is that tacit collusion is the result of structural factors on the market who make
tacit collusion easy to arise rather than behavioral factors, i.e. communication between
parties (Rodger & MacCulloch, 2004).

Accordingly, the question arises whether there exist alternative approaches to deal with
tacit collusion. A more sensible approach would be to impose structural remedies, i.e. to
maintain a very competitive market by which collusion is highly unlikely to arise, see
also above. As such, entry barriers could be seeked to remove, allowing new firms to

29
Ibid, at 55.
30
Nevertheless, in Wood pulp (C-89, 104, 114, 116, 117 and 125-129/85) [1993] 4 C.M.L.R. 407) ,
equally a case dealing with price announcements, the Court limited the concept of concerted practice by
noting that [], the system of quarterly price announcements on the pulp market is not to be regarded as
constituting in itself an infringement of Article [101]. Still, concertation has been found easily in many
other cases. One can conclude that it is still not fully clear how price announcements are legally dealt with
(Korah, 2007).
31
See Kovacic (1993) for an elaborated list of plus evidence.
23
enter the market and raise competition.
32
Equally, merger controls could help to block
mergers who considerably increase concentration on the market (Korah, 2007).
33

Finally, sophisticated economic analyses (making use of econometric tools) can be used
in order to filter out price effects who are the result of collusion and which are not, see
also Chapter 3.

2.2.2.3 Exchange of strategic information and concerted practices
Often, firms will seek to share strategic information with competitors in order to
coordinate their behavior on the market. Such information can for example refer to
individual price data, discounts, costs, output levels, capacities and quantities; all of
which would usually be held strictly confidential (i.e. strategic) (Van Bael & Bellis,
2005).

Although there is no direct link between conspiring and sharing strategic information,
the exchange of it is illegal under Article 101(1). Indeed, sharing strategic data between
competitors makes firms able to anticipate with greater certainty future conduct of their
competitors, by which collusion is strongly facilitated. Therefore, the concept of
concerted practices equally captures the exchange of strategic data. Accordingly, firms
who take part in such practices will be found liable, see for example COBELPA
34
and
UK Tractors.
35
As noted in the Guidelines on the Applicability of the Article:
36


communication of information among competitors may constitute an agreement
[or a] concerted practice () with the object of fixing, in particular, prices or
quantities.
37



32
One should note however that the removal of entry barriers often conflict with political forces (Korah,
2007).
33
As a result, it has been debated to deal with tacit collusion under Article 102, referring to collective
dominance.
34
2 C.M.L.R. D28. [1977].
35
UK Agricultural Tractor Registration Exchange, OJ 1992, L68/19.
36
Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union
to horizontal co-operation agreements, 2011/C11/01, henceforth Guidelines.
37
Ibid, at. 59.
24
2.3 Judicial treatments of price fixing
The judicial treatment of cases brought under Article 101 consist of two consecutive
steps. The first step, under Article 101(1), considers the anti-competitive nature of
agreements or concerted practices either by their object or their effect. The second step,
under Article 101(3), becomes relevant only when the anti-competitiveness is
determined within the scope of Article 101(1) (i.e. see above). It involves an assessment
of the likely pro-competitive effects of a certain practice and balances those with the
anticompetitive effects. If detrimental effects outweigh pro-competitive effects, the
defendant will be found liable.
38
Each will be dealt with in turn.

2.3.1 By object versus by effect
We repeat Article 101(1):

[] and which have as their object or effect the prevention, restriction or
distortion of competition within the internal market.

As can be seen, the Article makes a distinction between agreements and concerted
practices that have the object of restricting competition and others that have the effect of
restricting competition, often referred to as per se and rule of reason respectively. This
distinction is vital since it determines the legal treatment of anti-competitive agreements
brought before courts. It is also essential in order to proceed to the remainder of this
work, where it will be debated which of these approaches is most adapted to deal with
price-fixing cases.

Let us first consider concertation that is dealt with by object, i.e. per se. Cooperation
that distorts competition by object refers to those anti-competitive actions that are in
their very nature potentially harmful. Such arrangements are set up with the sole
purpose of achieving a certain outcome which harms consumers and accordingly lowers
welfare.


38
Guidelines, at 20.
25
Dealing with such cases, the Commission holds the burden of proof to establish the anti-
competitive object of a certain case. In so doing, it is however not compulsory for the
plaintiff to show actual effects of the suspected practice. Put different: the mere finding
of the existence of the anti-competitive conduct suffices in order to be found liable:
there is no need to proof the consequences of it on the market. Hence, uncovering a
practice which has an anti-competitive goal automatically leads to conviction since
there is no need to engage in a market impact study. In other words: intention is what
matters, not the actual outcomes.
39


Next we consider concertation that is dealt with by effect, i.e. rule of reason. Contrary to
a by object-approach, the determination of the anti-competitive object of a practice is
not sufficient in order for the defendant to be found liable. Instead, the Commission
holds the burden of proof to actually show the detrimental effects on the market, both
potential and actual. Accordingly, a market impact study is crucial in order to show how
exactly welfare was lowered.
40
Following this approach, a profound economic analysis
of the market is therefore crucial (Rodger & MacCulloch, 2004).

How are price fixing cases dealt with? The Guidelines state:

Price fixing is one of the major competition concerns arising from
commercialization agreements between competitors. Such agreements are
therefore likely to restrict competition by object.
41


This by object-approach is overly applied in practical case law. In Polypropylene
42
for
instance, there was clear evidence that parties were colluding yet there was hardly any
effect to be found on the market. The Court of First Instance however held that the
intent to collude is sufficient, regardless of actual effects. This approach does not differ

39
Guidelines, at. 24-25.
40
Guidelines, at. 26.
41
Guidelines, at. 234.
42
Cited above.
26
whether collusion is found by means of an agreement, or whether a concerted practice is
found to exist. Concerning the latter case, see for example Shell
43
and Rhne-Poulenc.
44


Hence, when dealing with price fixing cases, the Commission has to proof whether the
defendants had conspired, either done by means of an agreement or either done by
means of a concerted practice. Whether the concertation was also implemented on the
market (as shown by its impact on prices, i.e. higher market prices in the period of
collusion) is irrelevant.

On the one hand this approach seems logic: the anti-competitive effects of collusion are
clear-cut and well-known (see Section 1.3), so why spend additional resources on the
investigation of market outcomes? Yet, as will be argued in the following chapter, some
economic counter-arguments on this legal view can be brought forward as well, raising
attention to the unsustainability of this approach and arguing for an impact-based
treatment, see Chapter 3.
2.3.2 Application of Article 101(3)
Once the anti-competitive object or effect is determined, the second step consists of
investigating whether a possible exemption can be granted of Article 101(1) under
certain conditions (improving production or distribution of goods or promote technical
or economic progress, ensure that consumers receive a fair share of these benefits, not
containing any indispensable restrictions and not substantially eliminate competition).
45


The Commission will then weight anti-competitive effects of the practice with its
efficiency gains to the benefit of welfare. If pro-competitive effects outweigh
detrimental effects, the defendant will not be found liable. Note that the burden of proof
lies with the defendants in order to show these beneficial effects.

Clearly, in order for Article 101(3) to apply, noticeable efficiency gains have to be
proven, considerably benefiting consumers. As we know from Section 1.3., collusion

43
Shell v. Commission, T-11/89, [1992], E.C.R.
44
Rhne-Poulenc v. Commission, T-1/89, [1991], E.C.R.
45
Guidelines, at. 46-47.
27
does not lead to such a result and if it would, this situation would be highly unlikely. As
such, Article 101(3) is completely irrelevant when considering price fixing cases. In
other words: there is no possibility to invoke Article 101(3) as a defence since collusion
is de facto always to the detriment of consumer welfare.
2.4 Conclusion: standards of proof
From the above analysis we should now be able to summarize the standards of proof
regarding collusion, i.e. to fix prices on a level higher than the competitive benchmark
by which overall welfare is reduced. Any evidence of either an agreement or concerted
practice, both within the meaning and scope as lined out above, is sufficient to infringe
Article 101(1).

Agreements can be written (such as e-mails or letters) or can be oral (i.e. meetings). The
formality of these agreements is irrelevant: even very informal notes can constitute as
evidence, as well does communication on a golf court or a gentlemens agreement. Note
also that there is no need to show a formal consent: parties acting in accordance are
supposed to agree. If, for instance, an undertaking participates in a meeting without
expressly agreeing, it will be found liable unless it publicly distances itself from what
have been said (Ritter & Braun, 2005).

Concerted practices are found whenever prices are observed to follow the same trend,
accompanied by plus evidence showing that this is the result of collusion instead of a
normal functioning of the market. Equally, firms sharing strategic information by e-
mails, letters, oral communication, etc. will be found liable.

There is no need for the Commission to proof any visible effects on the market. If
undertakings are found to make an agreement or a concerted practice they will be found
to infringe competition law without further investigations. Hence, whether prices did
indeed stabilized at a higher level is irrelevant. In other words: merely the fact that firms
communicate leads the Commission to believe that collusion will also be implemented.
Accordingly, Article 101(1) is put in place to prohibit such communication.

Even though this legal approach seems at first sight acceptable, it is still questionable if
this legal view is also accepted by economists. Is a by object approach where the focus
28
is on intentions rather than what is priced on the market a right way to deal with price
fixing cases? The next chapter will argue that this approach might be inappropriate by
making use of an economic view instead of a legal one. As such, it will be argued that a
by effect approach might be more suitable.



























29
Chapter 3 An economic view on the legal approach
The first chapter gave us insight on the economic functioning of collusion. It was
presented how such a concertation raises prices but in the same time is inherently
unstable. The second chapter presented the legal view as currently adopted, showing
how courts deal with price-fixing cases brought before court. The present chapter
combines the insights gained in the preceding ones. It aims at arguing whether the
current legal approach is the adequate one by making use of economic theory of
collusion. More precise, it is questioned whether economic literature validates the legal
treatment of price fixing cases.

This chapter will proceeds as follows. The first section introduces the debate by
recalling the current legal treatment together with its according advantages. The second
section reviews the economic literature by which the misalignment between the legal
and economic view is presented. As a result, the third section questions the current
approach while the fourth section presents an alternative one in conformity with
economic insights. The last section finally points out some policy implications.
3.1 Introduction: setting the stage
In the previous chapter the legal responses to collusion were presented. Firms
communicating with each other and agreeing to fix prices, say by meeting in the Hilton
Hotel or by exchanging e-mails, will be found guilty without examining the effects of
the conduct, see for instance Polypropylene.
46
As such, the legal view on price-fixing is
summarized by stating that such behavior is illegal by object: what matters is the anti-
competitive goal rather than the actual outcomes on the market.

It is believed and generally accepted that such an approach is best suited to deal with
price-fixing cases. Since the pro-competitive effects of it are rare and highly unlikely to
arise while the anti-competitive consequences are well-known, it is then best to deter
collusion per se.

The theoretical possibility of a possible pro-competitive justification of collusion makes
little sense to doubt about the appropriateness of the per se rule. Indeed, if it is rare for

46
Cited above.
30
beneficial conspiracies to exist, authorities can better bar them altogether since doing
otherwise would make price fixing cases a lengthy and costly affair. The validation of a
by object approach is thus in fact nothing more than the application of a statistical
decision rule (Whinston, 2003).

In addition, such a per se prohibition has some clear advantages as well. First of all, the
ban on agreements without any assessment of its impact on competition provides for a
clear rule to businesses. As such, firms face a legal environment that reflects
predictability and certainty. Moreover, courts do not face the tough task of analyzing in
detail the economic consequences of the conduct by which resources and time are saved
(Ministry of Economic Development, 2010).

The arguments raised above are reasonable. Nevertheless, so far nothing has been said
whether formal economic theory connects with this legal side of collusion. As such, this
chapter aims at analyzing whether the economic elements of collusion (as presented in
Chapter 1 and here further elaborated and reviewed) justify the legal approach as it is
currently in place (as presented in Chapter 2). Put different: does the economic view
supports the legal view?

In so doing, we will observe a complex economic reality lying behind an apparent
uncontested legal one by which it will be argued the arguments above to be insufficient.
Despite the seemingly uncontroversial status of the by object approach, the analysis
below will make clear that some challenging questions remain unanswered. As a result,
it will be argued that an impact-based prohibition could serve as a better approach in
dealing with collusion.
3.2 Is the current legal approach economically justified? An overview
Undertakings coordinating on prices are found liable by competition authorities based
on the proof of concertation rather than on the economic effects of the conduct. As such,
Article 101 prohibits communication and agreements on prices since they raise prices
and lower welfare.

The statement above departs from the assumption that the communication between
parties (either written or oral) and concurrence on fixing prices automatically leads to
31
the implementation of this conduct on the market. As such, it is believed that talking
acts as a vehicle in order to charge higher prices to consumers. Accordingly, since we
know that such conduct lowers welfare, authorities should ban them.

All of this appears to be straightforward, yet it is not. In particular, it is peculiar to see
how uncontested the above assumption is. Does communication really lead to the actual
implementation of collusion on the market (i.e. higher prices)? And if we believe this,
should we not proof the effects of it on the market?

After all, we know from the economic analysis in Chapter 1 that every collusive
equilibrium is highly unstable. As a result, participants are tempted to cheat on the
agreement by which no higher prices on the market would prevail. Accordingly, when
deviated from the equilibrium, prices on the market would not raise since the conspiracy
is not actually executed on the market.

In accordance, it remains to be seen what economic literature has to say about this. Can
we find theoretical proof whether talking yields higher prices on the market? Or
differently: in what way does the prohibition on talking prevents anti-competitive
pricing on the market and how does it thus raises welfare?

To answer this question, we first take a look at the game-theoretic foundations of the
collusive equilibrium. In so doing, we formally review the function of talking in order
to reach collusion and observe that its role is imprecise. Second, we explore both
experimental and empirical economic literature. Equally, there is few proof that leads us
to believe that communication is the driving force as to implement collusion on the
market.
3.2.1 Collusion and its game-theoretic aspects: formal economic theory
Recall from Section 1.2. above the instability of collusion. Since no enforceable
contract can be signed (as it is illegal!), the collusive equilibrium is a shaky one: each
participant would rather want to cheat by which it captures the whole market, yet it
knows that any cooperation in the future will then be lost since trust is broken.

32
This intuitive trade-off can be formalized by making use of game theory as lined out by
Whinston (2003). Consider the pay-off matrix in Figure 4, formally depicting the
coordination between Firm A and Firm B. Each firm simultaneously set either a low
price (Low) or a high price (High) on the market. Note that at this moment there is
no communication between both firms, since each decides on his price at the same time.
In doing so, they anticipate on the conduct of their competitor by which 4 different
outcomes can arise.

Firm B
High Low
Firm A High (8,8) (-1,10)
Low (10,-1) (1,1)

Figure 4: Pay-off matrix

The pay-offs are marked in each cell, with the left number referring to the pay-off of
Firm A and the right one to Firm B.
47
If both firms set a high price, we end up in the
upper-left cell which is the cooperative outcome, i.e. (8,8). If one firm sets a high price
while the other one sets a low price, we end up with the unequal outcomes, i.e. (10,-1)
and (-1,10). Here, the firm being cheated on ends up with the worst pay-off. If both
firms set a low price we arrive at the lower-right cell depicting the non-cooperative
situation where both firms compete, i.e. (1,1).

While the collusive outcome is definitely the best situation for each firm to obtain, it is
not a Nash equilibrium since both players can do better by deviating (10 > 8).
48
The
only Nash equilibrium here is the outcome where both firms set a low price, on the
figure marked in bald.


47
Note that the absolute level of the numbers are chosen randomly.
48
A Nash-equilibrium is any situation where no single player benefits from deviating unilaterally from it.
See Nash (1951) for the seminal paper.
33
Accordingly, both players know that ending up in the collusive outcome would be
better, yet they are stuck in an equilibrium which yields lower pay-offs ( (1,1) versus
(8,8)). In literature this is referred to as a prisoners dilemma: the game-theoretic
condition characterized by the Nash equilibrium being Pareto dominated by another
outcome preferred by both participants (Farell and Rabin, 1996)

As Whinston (2003) notes, there is clear coordination problem: the self-interest of each
firm guides them to the collusive equilibrium where they can achieve higher profits.
Yet, not being Nash, they both risk ending up in the non-coordinative outcome.
Accordingly, the question arises how such coordination problem can be solved. In
particular, we investigate the role of communication: if both players are allowed to talk,
can they attain collusion?

Farell and Rabin (1996) studied whether communication can solve the prisoners
dilemma by which collusion can arise.
49
Imagine that both firms are now allowed to
talk, unlike the setting above. Think of Firm A approaching Firm B, stating:

Lets make a deal. I would like you to quote a high price on the market. If you
do that, I will also quote a high price. We can than achieve higher profits
instead of competing.

Being the receiver, would you believe that statement and follow up on it? After all, if
Firm A really has the intention of quoting a high price he would get a pay-off equal to 8.
However, if he intends to quote a low price, he would get a pay-off equal to 10. As
such, a firm intending to collude would make that statement just as a firm who is not
since doing so would leave him with an even bigger pay-off. Accordingly, the
communication on intentions is meaningless for the receiver, i.e. it is cheap talk (Farell
and Rabin, 1996).

In the framework of Farell and Rabin (1996), the statement above is neither self-
signaling (Firm A would prefer Firm B to choose High whatever he does) nor is it self-
committing (Firm A has no incentive to follow up on the promise, whether or not she

49
See also Crawford and Sobel (1982).
34
expects Firm B to believe her). As such, it is regarded as communication who is
uninformative: it is communication lacking direct pay off consequences (Whinston,
2003).

Note that industry factors influence the role of communication, as lined out in Chapter
1. If for instance detection of cheating is easy (think of publicly announced prices) or
the number of participants is low (a highly concentrated market) the likelihood that
talking will lead to the implementation of collusion will be higher. As such, industry
factors who facilitate collusion will obviously make it more likely for communication to
establish higher prices on the market.

Hence, is cheap talk able to solve the coordination problem? Put different: can
communication in the setting of a prisoners dilemma (as is the case with collusion),
theoretically make firms able to reach the collusive outcome? As revised above, it is
notable to see how little formal economic theory has to say about this. Maybe
experimental and empirical literature can give us some input on whether the ban on
talking has an effect on the prices charged on the market?
3.2.2 Experimental and empirical literature
Some experimental literature has aimed to investigate whether communication about
intentions matters as to achieve collusion, see Holt (1993) and Crawford (1998) for an
overview on this work.

Some papers were able to show that coordination is achieved to a great extent, while
others showed how talking did not matter a lot. As such, experimental literature is up till
now not able to show how cheap talk is exactly able for parties to reach collusion.
Nonetheless, some of these papers differed what matters the set-up: in some of them for
instance communication was heavily regulated while in others it was less structured
(Whinston, 2003).

Empirical literature has equally seeked at exploring the effect of the ban on talking on
the price charged by undertakings. Just as above, there is surprisingly little evidence to
be found.

35
Sproul (1993) investigates 25 price-fixing cases in the period from 1973 to 1984. For
each of them, he constructs a but for price (the price that would prevail absent
collusion, see later) by extrapolating a regression explaining the price of the good by
closely connected and related prices of other goods taken from the period prior to the
indictment.

Sproul (1993) then analyzes the ratio of the actual price over the but for price in the
period subsequent to the indictment. Surprisingly, prices raised by approximately 7
percent after a filing for price fixing instead of an expected drop in prices. In addition, it
is found that a negative relationship exists between the price ratio and the severity of
punishment: in the period after 1976 when tougher penalties were adopted prices rose
less. Hence, there is little to conclude that collusion enforcement yields a reduction in
prices (Whinston, 2003).

Another study conducted by Block et al. (1981) looks at the market for bread. They
analyse prices in the period between 1965 and 1976 and compute a mark-up which they
then regress against measures of antitrust enforcement such as the budget of the
Department Of Justice. They found a negative result, but a small one and a statistically
insignificant one.

A paper carried out on the macro-level is done by Konings et al. (2001). Here, the
authors question whether a change in competition law has any effect on the price-cost
margins of firms. Using a 4-year dataset, they reveal that such an effect is inexistent. On
the other hand, Warzynski (2001) examined whether stricter competition law and policy
resulted in lower price-cost margins and found such a relationship to hold.

3.3 The right approach?
All being said, the above overview leads us to conclude that we can find little economic
evidence on how exactly the ban on talking makes prices to be lower and hence improve
welfare. Stated otherwise: few literature is able to show how communication is able to
fully implement collusion, i.e. to quote higher prices on the market.

36
It is therefore stunning to see how uncontroversial the per se approach on collusion as
currently adopted is. As Whinston (2003) states:

It is in some sense paradoxical that the least contested area of antitrust is
perhaps the one in which the basis of the policy in economic theory is weakest.

Competition authorities remain overall silent about the underlying economic theories
analyzing the role of communication in collusion. This is no surprise, since such an
economic theory does not exist. We thus observe a fairly uncontested legal approach
which is in the same time not at all supported by the economic literature where a huge
loophole exists. This is quite startling, to say the least.

Yet, in the past cases have been made based on the premise that if people are caught
talking, they are seen as to implement collusion without fully acknowledging the micro-
economic aspects that lie behind all of this, see for example Wood Pulp,
50
and also
further Section 3.5. Such condemnations can often have disastrous results.

Oxford Economics (2010) for instance investigates the follow-on impact of cartel fines
on investment and employment. It is found that a fine of 150 million yields an average
loss of 503 jobs in the respective economy. In addition it is revealed that a higher fine
aggravates this effect.

This is quite intuitive since a fine is generally absorbed by a reduction in the amount it
spends on investment. As a result, the amount of jobs will be lowered together with a
decrease in purchases from suppliers. These suppliers will thus equally be hit by the fine
since they receive less revenues. There is thus a chain-reaction in the economy.

Fines accordingly have the ability to ruin companies with disastrous results of the
economy as a whole. Moreover, in the United States price-conspiracies are criminal acts
by which executives caught guilty are send to jail. On the other hand, as we have seen,
there is no clear evidence whether communication leads to higher prices. How can we
then be sure we are doing the right thing?

50
OJ L 85/1 [1985].
37

Hence, before doing all this, should we not make use of a market impact study which
makes us able to at least proof that prices indeed rose? To be at least significantly sure
before we ruin companies and sentence people to prison? In accordance, the next
section proposes a different approach from the current one, focusing on the actual
outcomes of the market rather than on intent.
3.4 The alternative approach
The approach as currently adopted is one where the Commission has the burden of
proof to show that an agreement or concerted practice exists. If for example a video tape
is made of the discussions taking place in a meeting participants are immediately in
infringement under the per se rule. Nonetheless, this does not have to mean that the
agreement made will actually be implemented.

Accordingly, a divergent approach would be to give the defendants at least the
opportunity to show that their communication did not result in any harm on the market.
As such, one can allow them to use carefully designed econometrics showing that
communication did not surpassed cheap talk (Van Cayseele, 2010, personal
communication).

If the econometric techniques adopted are inspected thoroughly and the methods used
not disproven, one can abstain from conviction since prices are not shown to increase.
More precisely, one should make use of a counterfactual which indicates a but for
price; i.e. the price that would prevail absent collusion by controlling for demand and
supply shocks.

As such, the only proof that matters is the simulated but for price as obtained by the
non-cooperative equilibrium using a regression analysis. This counterfactual is then
compared to the actual price in order to calculate the overcharge which is
mathematically the difference between the actual price and the but for price (Stangle,
2009). If no overcharge can be found, no conviction should take place.

Of course, the key input in such a modeling is retrieving an accurate counterfactual.
Literature puts forward different methods of retrieving the but for price, see for example
38
Stangle (2009). One of the most common and precise estimation methods is carrying
out a residual regression analysis. As such, data from the benchmark period is used in
order to predict prices during the collusive period controlling for demand and supply
shocks. Hence:

() = o +[
1
X
1
() +[
2
X
2
() ++[
m
X
m
() +e(),

where () is the regressed but for price, X
1
, ., X
m
are the independent variables
influencing the counterfactual and e() the residual factor, see Finkelstein and
Levenbach (1983); Page (1996) and Fisher (1980) for a technical exposition and Sproul
(1993) for a practical application.

In Figure 5 for example, the area to the right of the dotted line refers to the conspiracy
period (88-89). By using the above approach, regression analysis is able to simulate
the predicted price (but for price). A positive overcharge was found since the predicted
price was lying below the actual one. Accordingly, the defendants should be found
liable.















Figure 5: But for price by using regression analysis
39

The methodologies described above are not unknown for courts. They are widely used
to calculate private damages arising when private parties sue the defendants for having
paid too much. The reason is that private parties have the right to obtain relief from the
harm caused.
51
As such, they have to bring up evidence and carry out economic analysis
which will then be used to calculate the right amount of damages.
52


Accordingly, econometric models will come up for sure when large sums of money are
involved see for example Air Cargo
53
where companies such as Philips and Ericsson
claimed 500 million euros from KLM-Air France. Hence one can argue why these
resources are not already used in the criminal part of the investigation (Van Cayseele,
2010, personal communication).

One could state such an approach would yield a too high administrative burden
increasing litigation costs significantly. Given that at the same time the pro-competitive
effects are most likely nil and resources are scarce, the argument could make sense.

Nonetheless, it is mistaken since such a point of view disregards the huge personal,
corporate and economic costs that fines generates on the respective economy which
equally have to taken into respect while there is no proof of harm on the market.
Moreover, such an approach can be harmful for an effective antitrust policy since price
fixing cases with harmful consequences can go undetected due to the lack of overt
agreements, while negligible ones not if by accident agreements are found (Posner,
1976).

Being said, the above leads us to conclude that the viability of the alternative approach
boils down to comparing: (i) the costs of regulatory error under the current per se

51
See the Guidance Paper Quintifying harm in actions for damages based on breaches of article 101 or
102 of the Treaty on the Functioning of the European Union, public consultation, European Commission,
2011.
52
See http://www.carteldamageclaims.com/damage%20quantification.shtml, 20/06/2010
53
See IP/10/1487 European Commission.
40
approach (false positive) with; (ii) the costs of a more lengthy treatment under an effect-
based approach as suggested here, assuming that the latter does not contain legal errors.

While (i) can be roughly estimated from the past (see above), it is much more difficult
to gain insight on the total costs that would prevail when using a rule-of-reason
treatment in the future. This intrinsically depends on the development and adaptability
of econometric techniques who on their turn influence the easy by which economic
evidence is brought forward. Yet, in the past few years considerable improvements are
made especially in its application (note that these techniques until recently were
inexistent in private damage claims). One can assume that in the near future they will
somehow increase in importance while in the meantime being able to keep legal costs at
an acceptable level.

The approach suggested above is not an isolated one. It is in line with the generally
shared opinion among economists who do not believe that cases can be made solely on
the basis of intent, see also Whinston (2003) and Werden (2004). Posner (1976) for
instance equally presents an economic approach to price fixing cases consisting of two
consecutive steps: (i) indentifying markets in which collusion is likely to show up; (ii)
determining whether collusive pricing is really present on those markets.

The issues raised above were up till now focused on a theoretical loophole. Nevertheless
the next section attempts to place the discourse above in a broader context by reviewing
practical case law. As such, it intends to put light on the practical policy implications of
this thesis.
3.5 Policy implications
Since decades the Commission struggles to accept sound economic analysis in its cases.
In both Polypropylene and Flat Glass
54
for example the Court of First Instance critized
the lack of economic proof in the decision made. The Commission itself acknowledges
this caveat and accordingly has taken steps to move away from a fully legalistic
approach by for instance appointing a Chief Competition Economist considerably
extending the team of economic experts.

54
Both cited above.
41

Nevertheless, the per se doctrine concerning price-fixing cases leaves few space for
economic considerations to be made. If firms are caught concerting they are
immediately in infringement by which any economic analysis of its market impact are
excluded. Despite attempts to modernize the application of Article 101 by moving
more to an effect-based approach (and hence allowing for some economic analysis)
practical case law frequently makes clear that the Commission still sticks to a
formalistic and over-inclusive approach (Jones, 2010).

Several cases demonstrated the Commissions focus on communication without
indulging in an impact-based analysis surpassing the possibility of cheap-talk cases. In
Polypropylene the Commission found documentary evidence of 15 firms active in the
polypropylene market forming an agreement in order to fix prices. There was proof of
regular contact and meetings held between the undertakings every two months on a
Community-wide basis.

In its investigation the Commission decided that all contact between firms can be seen
as a single agreement with the object of restricting competition. Accordingly, the
participants were found to infringe Article 101(1). Although there was no single
indication of the actual anti-competitive effects of the conspiracy on the market, a large
fine was imposed since the Commission held that there was no need to investigate the
effects of the agreement given that its object was clear.

On appeal, the CFI questioned the lack of economic input but upheld the decision made.
While the defendants raised the argument that the agreement did not caused any harm
on the market, the CFI agreed with the Commission that such an argument is
irrelevant (Rodger & MacCulloch, 2004).

In Wood Pulp
55
undertakings were found liable by sharing information making use of
quarterly advance price announcements. The Commission was of the opinion that the
information exchange was set up with the intention of fixing prices since it observed
prices to change in a parallel manner.

55
Cited above.
42

Nonetheless, a team of experts employed by the Court later found out that those
information sharing schemes were actually on the request of consumers who apparently
were asking for a more transparent and stable market. As such, the communication did
not resulted in any collusive prices on the market yet the Commission held the
participants liable. Accordingly the Court smashed the decision and stated that there
was no proof of collusion (Stroux, 2004).
56


The Commissions focus on documentary proof of an agreement is equally illustrated in
LdPE
57
and the Cement
58
case. In Cement the Court made clear that the Commission is
entitled to rely on even one single document in order to decide that Article 101(1) has
been infringed by the defendants (Van Bael & Bellis, 2005). In LdPE, evidence was
found of documents and minutes of (secret) meetings between some producers who
were, based on this, found liable of price-fixing. As was stated by the Commission:

It is inherent to the nature of the infringement [] that any decision will to a
large extent have to be based upon circumstantial evidence.
59


The decision was eventually annulled by the CFI who even had to pay all legal costs of
the case. (McGowan, 2010).

The cases above clearly indicate the limits of the per se approach. In Polypropylene
there never was no proof of harm on the market, yet personal and corporate costs as a
result of the conviction aroused. In Wood Pulp legal costs were spend on a mistaken
decision while in the same time considerably harming the defendants business
reputations. Likewise, in LdpE no market impact study was done by which a wrong
decision was reached.


56
In a similar setting in the Petrol cartel (ruled in Italy) the decision made by the Supreme Administrative
Court was equally annulled based on the fact that it did not consider any other grounds for parallel prices
to arise, see Esso Italiano v. Autorita Garante della Concorrenza e del Mercaton n. 4053/2001.
57
OJ L74/21 [1989].
58
Cimenteries CBR and others v. Commission; ECR II-491 [2000]
59
As cited in Van Bael & Bellis (2005), page 53.
43
Taking into account the above, it has often been stated that the protection of consumers
is the main goal of the Commission. Neelie Kroes, former Commissioner for
Competition stated:

Consumer welfare is now well established as the standard the Commission
applies when assessing mergers and infringements of the Treaty rules on cartels
and monopolies.
60


However, it is doubtful whether the per se approach on collusion is fully in line with the
statement above. While the welfare reducing object of price fixing is known, this thesis
made equally clear that it is less straightforward to believe that communicating parties
automatically would implement collusion on the market. As such, it is doubtful how the
by object approach is connected with consumer welfare.

Meanwhile, economic tools applicable to competition law keep on gaining in
importance. In contrast to the past, it is nowadays possible to make use of sophisticated
econometric techniques such as adequate regression analysis to calculate precisely the
impact of a certain conduct on the market. As explained above, estimating a but for
price can serve this role concerning price fixing cases. In times to come, one can expect
the role of economic instruments to increase and be even more reliable.

If the Commission wants to keep up with these developments, a rigid per se approach
will no longer be sustainable. As such, we argue for a more flexible impact based legal
treatment which is (i) able to make use of reliable economic tools adapted to the case at
hand; (ii) accordingly is in line with the goal of protecting consumer welfare; (iii) and is
coherent with economic literature on collusion.







60
Neelie Kroes (2005).
44
3.6 Conclusion
This chapter analyzed how the economic view on collusion relates with the legal view
and has found both to be inconsistent with each other. Economic theory formalizes the
role of communication in collusion by making use of game theory. By doing so it is
revealed an ambiguous role of talking in order to reach the collusive outcome. Likewise,
empirical and experimental literature leave us with few proof on the consequences of
communication.

Consequently the current approach was questioned since an inconsistency was revealed
between the legal approach and economic theory. As a result, this chapter advocated for
a rule of reason approach where the Commission makes use of correct economic tools
able to demonstrate the real effects on the market.



















45
General conclusion
This thesis has aimed to discuss the correct legal approach in order to deter collusion,
the anti-competitive conduct characterized by firms conspiring on prices in order to
raise mutual profits to the detriment of consumer welfare. The work was structured in
three chapters. The first two focused on respectively the economic and the legal view
while the third chapter intertwined these insights in order to reach a conclusion.

Chapter 1 illustrated the economic functioning of collusion and consisted of three
consecutive parts. The first part demonstrated the profit-increasing effect of price fixing
on the conspiring companies. It was shown that price coordination makes firms to act as
a monopolist by which higher mark-ups arise. The second part focused on the instability
of the collusive equilibrium. Since each participant can do better by cutting prices below
the collusive one the outcome tends to be unstable. The last part explained how such a
practice lowers consumer welfare, giving rise to the necessity of legal interventions.

Chapter 2 focused on the legal side of collusion. It revised in depth how price fixing is
in violation with Article 101(1) of the Treaty. However, it was equally apparent that the
article used vague concepts which needed further clarification. As such, the first part
lined out the scope of agreements and concerted practices and concluded that both
require a very broad interpretation. In so doing, the Commission is given space to
intervene in cases dealing with tacit collusion, though there is lack of agreement
whether such intervention is justified. The final part raised attention to the legal
treatment of cases. It was shown how the Commission makes use of a by object
approach, hence proving conspiracy instead of actual effects on the market.

The third chapter made use of the insights gained in the prior ones. It builded on the
knowledge gained in the first chapter by extending the economic formalization of
collusion. Consequently it was seen how economic literature has surprisingly little to
say about the role of communication in order to implement collusion on the market. It
then coupled these insights to the information presented in the second chapter. More
precisely, it focused on the role of communication in order to implement collusion by
which it was revealed that talking does not necessarily lead to higher prices on the
46
market. In accordance, an alternative impact based approach was suggested which is
line with the aforementioned conclusion.

It goes beyond saying that this work has to be read in its particular context and
additional research could be done. This thesis does not want to claim that the current
per se approach is entirely wrong. As raised above, there are proper arguments who
support such a view. Nevertheless, it reveals that economic counterarguments exist as
well, namely that economic literature is not able to support the current approach. As
such, this thesis is a theoretical representation of the seemingly ignored disjointed
economic and legal view on collusion.

Hence, a more practical implication of this work could give us better insights of how
legislation precisely affects consumer welfare. Equally, an estimation of the additional
costs that would show up when making use of an effect-based approach could make us
able to compare more precisely the tradeoff with the costs arising from false positive
decisions under a per se approach. Finally, more support from past practical case law on
the arguments raised would be more than welcome.

















47
List of Figures

Figure 1: Tacit collusion versus cartels..7
Figure 2: Price fixing..8
Figure 3: Welfare effects of collusion...12
Figure 4: But for price by using regression analsysi..37














.












48
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52