On 11 November, the European Commission announced that it was imposing fines totalling €173 million on plastic additives producers for operating a price fixing and market sharing cartel. There were 24 companies involved in the cartel. As Competition Commissioner, Neelie Kroes, said, “These companies must learn the hard way that breaking the law does not pay and that repeat offenders will face stiffer penalties. The companies’ elaborate precautions to cover their tracks did not prevent the Commission from revealing the full extent of their determined efforts to rip-off their customers”.
An interesting feature of this particular case is that one of the companies fined is AC Treuhand, a Swiss-based consultancy company. It is not a plastics producer, but took on the role of organising the cartel. Neelie Kroes said that “the company’s Swiss premises were chosen for secret meetings of cartel participants as they were outside the EU and beyond the commission’s jurisdiction. This made it harder for the watchdog to seize documents.”
Antitrust: Commission fines plastic additives producers €173 million for price fixing and market sharing cartels Europa Press Release (11/11/09)
FACTBOX-EU fines heat stabilisers cartel 173 mln euros Reuters (11/11/09)
EU fines consultant for alleged cartel role Financial Times, Nikki Tait (11/11/09)
EU cartel fine for plastics firms BBC News (11/11/09)
EU fines plastics cartel euro173 million Forbes (11/11/09)
Questions
- What conditions must apply if a cartel is to succeed in raising prices? To what extent did these conditions apply to the plastic additives cartel?
- What powers does the European Commission have under Article 81 of the Treaty of Amsterdam? (See and also. See also page 369 in Sloman and Wride Economics 7th ed.)
- Are cartel activities necessarily against the interests of the consumer? Explain.
In February 2009, the world’s largest concert ticket agency, Ticketmaster, and the world’s largest concert promoter, Live Nation, announced that they intended to merge. The deal would have been worth around £550 million. This immediately sparked concerns that the new company would have such power in the market that ticket prices would rise. On 10 June 2009, the Office of Fair Trading, in line with the 2002 Enterprise Act, referred the proposed merger to the Competition Commission.
On 8 October 2009, the Competition Commission published its preliminary findings that “the creation of that situation may be expected to result in a substantial lessening of competition (SLC) in the UK market for the primary retailing of tickets for live music events”. The following articles look at the findings and the competition issues. You will also find links below to the Competition Commission press release and the Provisional Findings Report.
Competition body opposes Ticketmaster and Live Nation merger Guardian (8/10/09)
Competition watchdog vetoes Ticketmaster deal Times Online (8/10/09)
The Competition Commission has ruled against the proposed Ticketmaster / Live Nation merger MusicWeek (8/10/09)
British Regulator Objects to Ticketmaster Merger New York Times (8/10/09)
See also the following documents from the Competition Commission:
Press Release
Provisional findings report
Questions
- How would the proposed merger benefit the two companies concerned?
- How would it affect CTS (the second largest ticket agent in the world)?
- From the consumer’s perspective, what would be the potential advantages and disadvantages of the merger?
- What additional evidence would the Competition Commission require to make its final judgment?
Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.
It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”
So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.
Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)
Questions
- For what reasons are many dairy farmers now making a loss?
- For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
- How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
- Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
- What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
- “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.
Is the power supply industry a cartel? Are the energy companies exploiting a position of market dominance to increase profits at the expense of consumers? At first sight, it would certainly seem so. Despite falling wholesale prices for gas and electricity, the six main power suppliers have not reduced prices to their customers. The result has been a substantial rise in profits. Over the past three years, the average annual gross profit for supplying each dual-fuel customer has been £110. The figure has now risen to £170, a rise of 55%. This is likely to rise further in the short term with further reductions in wholesale energy prices over the next few weeks.
But despite this large increase in profits, the power companies are considering increasing prices this coming winter if wholesale energy prices start to rise again, even though the expected wholesale price rise would still leave them with a gross profit of £140 per dual-fuel customer.
Ofgem, the gas and electricity industry regulator, wrote to the six main companies asking them to explain their pricing position. You can read Ofgem’s report from the link below. In it, Ofgem argues that there is scope for the companies to cut their prices. But Ofgem no longer has the power to cap prices: in 2002 the RPI-X system of price cap regulation was abandoned, since it was felt that there was enough competition between suppliers not to warrant price regulation.The articles below consider the question of whether the companies are justified in their pricing policy or whether they are exploiting their market power to make excessive profits.
No energy cuts despite huge profits (video) Channel 4 News (18/9/09)
Energy bills may rise despite wholesale price drop Times Online (19/9/09)
Where is the will to power? Times Online (19/9/09)
Energy bills set to rise further, companies warn Guardian (18/9/09)
Energy bills ‘unlikely to fall’ BBC News (18/9/09)
Bills face a power surge (Douglas Fraser’s Ledger) BBC News (18/9/09)
An Electricity and Gas Price Cartel? Why Ofgem Can’t Tell iStockAnalyst (17/9/09)
Evidence from Ofgem:
Ofgem’s letter to the six main suppliers and their responses to Ofgem can be read here
Ofgem’s findings can be read in Quarterly Wholesale / Retail Price Report – August 2009
Ofgem Factsheet: Household energy bills explained
Questions
- Assess the justification by the power companies for not reducing the price of gas and electricity to their customers.
- Explain what is meant by ‘hedging’ in the context of the purchase of gas and electricity.
- The power suppliers are an oligopoly. If there is collusion between them, what form does it take? Why is it very hard to find evidence of collusion?
It’s probably one of the most recognisable names in the world – Disney. Well, as if the company wasn’t already established enough, it’s just got a bit bigger, with a $4bn deal with Marvel Entertainment, Inc. Characters such as Mickey Mouse, Cinderella and Donald Duck have now been joined by some more masculine characters including Spider-Man, Iron Man and the X-Men. Much of Disney’s recent success has come from films appealing to girls, but in-house Disney franchises appealing to boys are fewer and further between. “We would love to attract more boys, and Marvel skews more in the boys’ direction, although there is universal appeal to many of its characters” said Bob Iger, Disney chief executive. “Marvel’s is a treasure trove of characters and stories, and this gives us an opportunity to mine characters that are well known and characters that are not well known.”
This new deal is likely to have major repercussions for Warner Bros and all of the major Hollywood studios, as well as those with a vested interest in Marvel. It is also hoped that this deal will restore some of Disney’s profits, which have been reduced through the current economic downturn. The following articles consider this deal and the likely results.
Weaker sales dent Disney profits BBC News (30/7/09)
Disney to buy Marvel in $4bn deal BBC News (31/8/09)
Walt Disney buys Marvel Entertainment in £2.5billion deal Mirror News (1/9/09)
Disney take-over of Marvel Telegraph, Paul Gent (2/9/09)
Disney’s Marvel Deal Forces DC’s Hand Defamer, Andrew Belonskey (10/9/09)
Disney deal puts Marvel online slots at risk for Cryptologic Online Gambling News (9/9/09)
Disney’s picl-up of Marvel not so super: Citi FP, Trading Desk (4/9/09)
Disney to buy Marvel in $4bn deal (video) BBC News (1/9/09)
Of mouse and X-men Economist (3/9/09)
Disney buys Marvel, Now in Business with every studio in Hollywood Defamer, Brian Moylan (31/8/09)
For Disney’s announcement of the take-over, see:
Disney to acquire Marvel Entertainment Disney Corporate News Release
Questions
- Discuss the pros and cons for consumers of the take-over of Marvel Entertainment by Disney.
- Which factors will have had a significant impact on Disney’s profits in the current recession? Explain why.
- What do you think will be the likely impact of the take-over on Marvel’s shareholders?
- Discuss the main ways in which a business can grow and consider their advantages and disadvantages.
- How will Disney’s Marvel deal affect its competitors and those with whom it does business? Is Disney going to be able to control prices and other aspects of business deals?