Pearson - Always learning

All your resources for Economics

RSS icon Subscribe | Text size

A European cartel – fixing the price of car parts

The European Commission has recently carried out a number of investigations into the various sectors of the industry that supplies parts to car manufacturers. Firms have been found guilty of engaging in anti-competitive practices in the supply of bearings, wire harnesses and the foam used in car seats. The latest completed case relates to firms that supply alternators and starters – both important components in a car engine.

On January 27th the European Commission announced that it was imposing fines on some Japanese manufacturing companies. Melco (Mitsubishi Electric), Hitachi and Denso were found guilty of participating in a cartel between September 2004 and February 2010 that restricted competition in the supply alternators and starters to car manufacturers.

The Commission gathered evidence showing that senior managers in the three businesses held discussions about how to implement various anti-competitive practices. These either took place on the phone or at meetings in offices/restaurants. In particular the firms agreed:

to co-ordinate their responses to tenders issued by car manufacturers. This involved them agreeing on the price each firm would bid.
to exchange commercially sensitive information about pricing and marketing strategies.
which of them would supply each car manufacturer with alternators and starters.

These activities are in breach of Article 101 of the Treaty on the Functioning of the European Union (2009). The European Commissioner for Competition, Margrethe Vestager, stated that:

“Today’s decision sanctions three car part producers whose collusion affected component costs for a number of car manufacturers selling cars in Europe, and ultimately European consumers buying them. If European consumers are affected by a cartel, the Commission will investigate it even if the cartel meetings took place outside of Europe”

The fines imposed on the three businesses were as follows:

– Denso €0
– Hitachi €26 860 000
– Melco €110 929 000

How are these fines calculated? When calculating the size of the fine to impose on a firm the Commission takes into account a number of factors. These include:

the size of its annual sales affected by the anti-competitive activities.
its market share.
the geographical area of its sales.
how long it had taken part in the cartel.
whether it had previously been found guilty of engaging in anti-competitive practices.
if it initiated the cartel in the first place i.e. was it the ring leader?

In this particular case the size of the fine imposed on both Hitachi and Melco was increased because they had both previously been found guilty of breaking EU competition rules.

If a member of the cartel comes forward with information that helps the Commission with its investigation, a reduction in the size of the fine can be applied under a provision called a Leniency Notice (2006). Timing as well as the quality of the information provided influences the size of this reduction. For example, only the first firm to come forward with relevant information can receive a reduction of up to 100% i.e. obtain full immunity. This explains how Denso could be found guilty but not have to pay a fine. (This firm’s initial approach to the Commission actually triggered the investigation.) Any subsequent firms that come forward with information receive smaller fine reductions. Hitachi and Melco received reductions of 30% and 28% respectively.

If a firm accepts the Commission’s decision a further reduction of up to 10% can be applied. This is called a Settlement Notice (2008). All three firms were awarded the full 10% discount in this case.

The European Commission is currently investigating the behaviour of firms that supply car thermal systems, seatbelts and exhaust systems.

Articles
Car parts price-fixing fines for Hitachi and Mitsubishi Electric BBC News 27/01/16
EU antitrust regulators to fine Japanese car part makers: sources Tech News 26/01/16
Mitsubishi Electric and Hitachi get $150 EU cartel fine Bloomberg 27/01/16
EU fines Mitsubishi Electric, Hitachi for car part cartel Reuters 27/1/16

Questions

  1. What market conditions would make the formation of a cartel more likely?
  2. Draw a diagram to illustrate the impact of a profit maximising cartel agreement on the price, output and profit in an industry.
  3. Draw a diagram to illustrate the incentive that each firm has to cheat on an agreed cartel price and output.
  4. Why did the European Commission introduce Settlement Notices?
Share in top social networks!

Comments are closed.