Decatur High School (Georgia, USA)

International Competitor

Price-fixing’s a crime; Lock Them Up!

From pianos to cereal, price-fixing is a widespread issue that plagues markets around the globe. It increases prices and lowers wages, preventing consumers from accessing necessary products and further impoverishing the working class. With that in mind, how can we fix this social malady?

If price-fixing is so destructive, what’s being done to fix it?
The European Union currently handles price-fixing through the General Directorate for Competition, which investigates price-fixing and fines guilty corporations. Price-fixing is nonetheless rampant, causing substantial harm to consumers.

Why does price-fixing continue, and how can it be disincentivized and deterred?
The General Directorate for Competition solely fines companies. The issue is, these fines are consistently too low to deter price-fixing.1

If the issue is that fines are too low, why not just increase them?
Increased fines, while initially appealing, are impossible due to the hurdle of bankruptcy. If fines were sufficient to be a deterrent, 58% of companies would go bankrupt due to an inability to pay.2 This would result in worse outcomes, as a reduction in the number of companies competing in the market would likely decrease competition by increasing the likelihood of both further price-fixing and reduced competition due to the smaller size of the industry.

If corporate fines aren’t the solution, then how can price-fixing be disincentivized and deterred?
The solution is robust individual sanctions, including bans on working in the field, fines, and jail sentences for individual managers. Individual sanctions effectively increase deterrence for price-fixing; they have empirically increased deterrence in the Netherlands.3

To do so, however, would require an overhaul of the way the European Union manages price-fixing. Due to a lack of due process, the European Court of Human Rights only allows the General Directorate for Competition to fine companies; arresting managers would violate human rights law.4

If individual sanctions are currently impossible, then what is to be done?
To solve this, the European Union should switch to a Bifurcated Justice Model of price-fixing prosecution. Under this model, an agency would investigate the crime and prosecute it in front of a judge; this would allow for statistically effective individual sanctions while also increasing due process by allowing the case to be heard in a court. Finally, this model would not increase the time it takes for cases to be heard; the current appeals system is inefficient—taking up to 12 years for some cases—so a new system, with trials, wouldn’t take more time.4

Price-fixing can be deterred, and those who commit it can be punished. We need only the will to change the European Union’s price-fixing policy by implementing individual sanctions.

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1 Combe, Emmanuel, and Constance Monnier. “Fines against Hard Core Cartels in Europe: The Myth of Overenforcement.” The Antitrust Bulletin 56, no. 2 (June 2011): 235–75. https://doi.org/10.1177/0003603X1105600203.

2 Craycraft, Catherine, Joseph L Craycraft, and Joseph C Gallo. “Antitrust Sanctions and a Firm’s Ability to Pay.” Review of Industrial Organization 12, 1997: 171–83. doi:10.1023/A:1007718618005.

3 Dijkstra, Peter T. „Sanctions and Leniency to Individuals, and Its Impact On Cartel Discoveries: Evidence From the Netherlands.“ De Economist : Netherlands Economic Review ; Quarterly Review of the Royal Netherlands Economic Association 166, no. 1 (2018).

 4 Ducci, Francesco. “Cartel Criminalization in Europe: Addressing Deterrence and Institutional Challenges.” Vanderbilt Journal of Transnational Law 51, no. 1 (2018): 1–38. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3285405#.

Their YES! topic

WHAT ENCOURAGES PRICE-FIXING BETWEEN COMPANIES? AN ECONOMIC EXPERIMENT.

by Claudia Möllers, DICE Düsseldorfer Institut für Wettbewerbsökonomie

Do we as consumers pay too much for coffee, petrol, magazines, beer or sugar? How do “too high” prices come about?

The goal of companies is to make as high a profit as possible. They might invest in their product quality or launch a new product to attract as many consumers as possible. This often involves high costs and uncertainty. Alternatively, they can escape competitive pressure by agreeing on an inflated price with their competitors. However, by doing so, they not only cause considerable economic damage but may also violate applicable competition law. In Germany, the Federal Cartel Office is responsible for detecting and investigating cartels. Last year alone, it imposed fines of 850 million euros for violations.

Restriction of competition can take many different forms; this research project will focus on coordination at a high price.

Several factors can be relevant:

  • How many competitors are there?
  • How big is the hurdle to enter the market as a new company?
  • How well can competitors observe each other’s pricing decisions?
  • Do competitors compete with each other repeatedly, do they know each other personally?
  • Do they have the opportunity to exchange ideas in person (for example, at industry meetings)?
  • How are cartels uncovered and punished?
  • Is there, as in Germany, a leniency program?

In this research project, you can address this or a similar question. After working out the research question, I would be happy to advise you on the design, implementation and evaluation of an economic experiment.