The EU competition acuthorities have just fined ten producers of memory chips a total of €331 million for operating a cartel. One of the ten, Micron, will pay no fine because it blew the whistle on the other nine. They, in turn, have had their fines reduced by 10% for co-operating with the authorities. According to the EU Press Release:
The overall cartel was in operation between 1 July 1998 and 15 June 2002. It involved a network of contacts and sharing of secret information, mostly on a bilateral basis, through which they coordinated the price levels and quotations for DRAMs (Dynamic Random Access Memory), sold to major PC or server original equipment manufacturers (OEMs) in the EEA.
“This first settlement decision is another milestone in the Commission’s anti-cartel enforcement. By acknowledging their participation in a cartel the companies have allowed the Commission to bring this long-running investigation to a close and to free up resources to investigate other suspected cartels. As the procedure is applied to new cases it is expected to speed up investigations significantly”, said Commission Vice President and Competition Commissioner Joaquín Almunia.
Articles
Chipmakers to pay fines of €330m over cartel Financial Times, Nikki Tait (20/5/10)
Chipmakers fined by EU for price-fixing BBC News (19/5/10)
European Commission douments and findings
Antitrust: Commission introduces settlement procedure for cartels Europa Press Release (3/6/08)
Antitrust: Commission introduces settlement procedure for cartels – frequently asked questions Europa Memo (30/6/08)
Antitrust: Commission fines DRAM producers € 331 million for price cartel; reaches first settlement in a cartel case Europa Press Release (19/5/10)
Antitrust: Commission adopts first cartel settlement decision – questions & answers Europa Memo (19/5/10)
Questions
- Explain how the new fast-track cartel settlement procedure works.
- Are the incentives built into the procedure appropriate for reducing oligopolistic collusion?
- Are the any reasons why the chip cartel might have been in consumers’ interests?
- Why does EU competition legislation apply in this case given than all but one of the companies are non-EU businesses?
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
Below you will find links to the manifestos of the three main UK-wide parties for the general election on May 6. It’s not our role to suggest to those of you living in the UK with the right to vote how you should vote. The one thing we would suggest is that you consider carefully what the parties are proposing.
What is clear is that the state of the economy and the policies necessary to tackle economic problems are central to all the manifestos. As a student of economics, you should be able to assess the manifestos in terms of how the parties set out the economic problems facing the UK and what they propose doing about them.
So look through the manifestos below and then answer the questions we’ve posed about the UK economy and about the economic policies being proposed. If you are uncertain about how to answer them, then ask yourself what extra information would I need to enable me to give a good answer.
The manifestos (in alphabetical order)
The Conservative Party manifesto
The Labour Party manifesto
The Liberal Democrat Party manifesto
Other sources
We are reluctant to recommend newspaper articles, as all newspapers at election time tend to be highly partisan and are therefore likely to give you a very specific ‘spin’ on the parties’ proposals. Perhaps the two best independent sources are the BBC and the Institute for Fiscal Studies. See:
Election analysis 2010 Institute for Fiscal Studies
Election 2010 BBC News
Stephanomics Stephanie Flanders’ blog (this links to the archive).
Questions
- How do the analyses of the economic problems facing the UK differ between the three manifestos?
- Compare the policies of the three parties for cutting the public-sector deficit. Consider the following issues: the size and nature of any cuts in government expenditure; the size and nature of any tax increases; the timing of the meaures.
- What assumptions are being made about the determinants of aggregate demand over the coming months and the role of fiscal policy in this?
- Compare the policies of the three parties towards the distribution of income. To what extent have the parties taken into account possible incentive/disincentive effects of policies of redistribution?
- To what extent are the parties proposing using the tax system to tackle problems of externalities? Give examples and assess how effective the policies are likely to be.
- To what extent do each of the manifestos leave you with unanswered questions about the economy and how their proposed policies will tackle economic problems?
In 2003, the Office of Fair Trading launched an investigation into possible collusion between tobacco manufacturers and retailers to fix prices. The investigation sought to establish whether the firms had breached the Chapter I prohibition of the Competition Act 1998. Chapter I is concerned with Restrictive Practices.
The allegation was that two tobacco manufacturers, Imperial Tobacco and Gallaher, had colluded with 11 retailers to fix the retail prices and thereby reduce competition. The details of the allegations are given in a 2008 press release.
As a result of its investigations, the OFT has decided to impose fines of £225m. “The OFT has concluded that each manufacturer had a series of individual arrangements with each retailer whereby the retail price of a tobacco brand was linked to that of a competing manufacturer’s brand. These arrangements restricted the ability of these retailers to determine their selling prices independently and breached the Competition Act 1998.” As the Times Online article states:
The OFT said that the companies were guilty of “price-linking” or “price matching”. It said that Imps and Gallaher had come to an arrangement with each retailer that if one or other manufacturer increased or decreased prices the retailer would alter the price of the competitor brand in line, up or down accordingly – a practice known in competition law circles as “vertical price collusion”.
Articles
‘Unlawful’ tobacco pricing leads to £225m fine by OFT BBC News (16/4/10)
OFT levies £225m fine for cigarette price fixing Guardian, Richard Wray (17/4/10)
Tobacco giants face £225m fine for price-fixing Independent, Alistair Dawber
(17/4/10)
OFT case will send smoke signals Financial Times, Michael Peel, Elizabeth Rigby and Pan Kwan Yuk (16/4/10)
Imperial and Morrison set to appeal OFT fine Financial Times, Michael Peel, Pan Kwan Yuk and Elizabeth Rigby (16/4/10)
OFT faces challenge to £225m price-fixing ruling Times Online, Robert Lea (17/4/10)
OFT gets tough on tobacco as price-fixing net is cast wider Independent, Nick Clark (26/4/08)
OFT Press Release
OFT imposes £225m fine against certain tobacco manufacturers and retailers over retail pricing practices OFT Press Release (16/4/10)
Questions
- What are the allegations against the tobacco manufacturers and retailers?
- Why has the OFT judged that such behaviour is in breach of the 1988 Competition Act, and hence against the public interest?
- What are the arguments put by the tobacco companies and retailers in their defence?
- Is giving companies an amnesty if they alert the OFT an example of a prisoners’ dilemma game? What credible threats or promises may the companies have in such a situation?
The UK has adopted a relatively open market policy towards takeovers of domestic companies by ones from overseas. True, takeovers have to be in accordance with competition legislation, namely the 2002 Enterprise Act, or, in the case of takeovers affecting competition in the UK and at least one other EU country, the EU 2004 merger control measures and Article 102 of the Lisbon Treaty. The EU regulations disallow mergers if they result in ‘a concentration which would significantly impede effective competition, in particular by the creation or strengthening of a dominant position’ (see Economics (7th ed) pages 370–3 or Economics for Business (5th ed), pages 443–50). The UK legislation is similarly concerned with a substantial lessening of competition. But in both cases, competition policy is not concerned with whether the takeover is by a foreign company rather than a domestic one. So should we be concerned?
Interest in this question increased recently with the takeover of Cadbury by Kraft. Many saw it as yet one more example of British companies being taken over by foreign ones. Other examples include the takover in 2008 of Scottish and Newcastle (brewers of Courage, John Smith’s, Fosters and Kronenbourg) by the Carlsberg/Heineken consortium; the sale of the Rover group, with Minis now made by BMW, and Jaguar Land Rover now owned by Tata Motors of India; and the takeover in 2007 of Corus, the Anglo-Dutch steelmaker, by India’s Tata Steel. One of the key complaints about foreign takeovers is when they result in job losses. Although Kraft gave assurances that the Cadbury plant at Keynesham, near Bristol, would remain open, as soon as the takeover was completed, Kraft announced the closure of the Keynesham factory. Tata Steel earlier this year decided to mothball its steelworks at Redcar, on Teesside. It may never re-open.
But there are many arguments on either side about the desirability of takeovers by foreign companies. On the positive side, they may result in investment in new plant and new products and a faster growth of the company. This could result in more employment, not less. They may bring in foreign expertise and give access to new technology; they may be able to achieve various economies of scale through joint operations; productivity may increase. As the article from The Economist states:
For 30 years the consensus has been that Britain has more to gain than to lose from its open embrace of globalisation. … Britain has enjoyed a strong inflow of foreign direct investment. It has consistently attracted more than any other European country. A report on British manufacturing for Policy Exchange, a centre-right think-tank, notes that the openness of the economy “makes Britain a magnet for foreign companies looking for acquisitions on which they can build their manufacturing operations” for Britain and elsewhere.
On the negative side, there may indeed be job losses as ‘rationalisation’ takes place. Head office functions and key research facilities may move abroad. Hostile takovers may result in the stripping of assets for short-term gain, thereby undermining the loing-term viability of the company.
The article from The Economist explores these issues.
Article
Small island for sale The Economist (25/3/10)
Data
A summary of cross-border mergers, acquisitions and disposals by UK companies and foreign companies in the UK can be found at: Mergers & Acquisitions data Office for National Statistics
For statistical bulletins and press releases see: Mergers and Acquisitions involving UK companies Office for National Statistics
For international data on foreign inward and outward direct investment see: Interactive database on Enterprise and Investment UNCTAD
See also: World Investment Report UNCTAD
Questions
- Explain what is meant by the ‘competition for corporate control’. In what ways does this competition affect consumers?
- From the point of view of a multinational company, assess the strategy of acquiring foreign companies by hostile takeovers.
- Has the UK benefited from an open policy towards inward investment and foreign takeovers of UK companies?
- How do short-term flows of funds prior to a takeover impact on the takeover process?
- Compare the trends in inward investment to the UK with outward investment by the UK.
- Examine the arguments for and against the government blocking takeovers if they threaten jobs.