In December the European Commission (EC) fined 5 envelope makers from Sweden, France, Germany and Spain a total of almost €20m for participating in a cartel. Between 2003 and 2008 these firms had coordinated responses to tenders, fixed prices and exchanged information. This increased the prices paid by their buyers who were stationary distributors and large companies.
Commenting on this case the European Competition Commissioner Margrethe Vestager stated:
On this case we have closed the envelope, sealed it and returned it to the sender with a clear message: don’t cheat your customers, don’t cartelise.
The EC initiated an investigation and undertook dawn-raids on the companies involved following a tip-off from a whistleblower. The Commissioner also had this message for other firms considering taking part in a cartel:
I do hope that you realise that just a simple tip-off from a whistle-blower, from within the company or from a customer is all it takes for your cartel to come up on our enforcement radar.
A previous post on this site highlighted the fact that the game of golf has played a prominent role in a number of previous cartels and that in these code names for their activities were sometimes adopted. The envelope cartel seems to have gone one step further by combining the two and referring to their cartel meetings as ‘golf’ or ‘minigolf’ appointments.
All firms involved in the cartel settled their case with the EC, resulting in reduced fines. The EC encourages such resolution of cases because it frees up resources and allows them to pursue a larger number of cases. In addition, the fines imposed on two of the companies were reduced due to their inability to pay.
Finally, it is also interesting to note that, following the collapse of the cartel, one of the companies involved went into liquidation and subsequently merged with one of its former cartel co-conspirators. This coincides with broader evidence of merger activity following the breakdown of cartels. One explanation for this is that merger activity is a response to competition breaking out in the post cartel environment.
Antitrust: Commission fines five envelope producers over €19.4 million in cartel settlement European Commission – Press release (11/12/14)
EU regulators bust envelope cartel in time for holiday cards The Guardian (11/12/14)
European Commission fines envelope cartel €19.5m PrintWeek, Simon Nias (06/01/15)
Kipper Williams on the envelope cartel The Guardian, Kipper Williams (12/12/14)
Questions
- What are the key features of the market for envelopes?
- Do the features of this market make it particularly prone to collusive behaviour?
- What are the trade-offs involved in reducing the fines for firms that are willing to settle?
- Is it right that cartel fines are reduced if firms are unable to pay?
The Competition and Markets Authority (CMA), launched in October 2013, has been operating since April of this year. It is the successor to the Office of Fair Trading (OFT) and the Competition Commission. One of the current cases under investigation by the CMA is that of suspected criminal cartel activity in the supply of galvanised steel tanks.
On 11 July, Clive Geoffrey Dean, a former director of Kondea, and Nicholas Simon Stringer, a former director of Galglass, appeared before Westminster Magistrates Court. They were charged with dishonestly agreeing with others to divide customers, fix prices and rig bids between 2004 and 2012. The deals were with a number of companies. The charges are under section 188 of the Enterprise Act 2002.
This is the second prosecution in this case. On 17 June 2014, Mr Peter Nigel Snee, Managing Director of Franklin Hodge Industries, pleaded guilty to similar charges.
Under the Act, directors found guilty face custodial sentences of up to 5 years and unlimited fines. The CMA and government are keen to send the message that they will not tolerate cartels and that board members had better beware of colluding with other companies. Indeed, the CMA is committed to pursuing cases of suspected criminal cartels more frequently and more rigorously.
The question is whether this will deter criminal collusion or whether it will simply make companies more careful to keep collusion hidden from the authorities.
Two men face charges in ongoing criminal cartel investigation CMA Press Release (11/7/14)
The First Real Test of Sentencing for the UK Cartel Offence Competition Policy Blog: UEA/ESRC/ccp, Andreas Stephan (24/6/14)
An Important Watershed in the CMA’s Prosecution of the Criminal Cartel Offence Eversheds (18/6/14)
Questions
- What types of restrictive practices constitute ‘cartel agreements’?
- In what ways are cartels against the interests of their customers?
- Are there any ways in which consumers might gain from a cartel?
- What factors are taken into consideration in deciding whether a director is guilty under section 188 of the 2002 Enterprise Act.
- Find out what other cases are being considered by the CMA. Choose one or two and examine how the activities of the firms/people involved might adversely affect consumers or other firms.
- Is anti-cartel legislation in the UK similar to that in the EU for cartels operating in more than one EU country?
Some eyebrows were raised when the English Premier League (EPL) recently published the final payments to each of the clubs from the revenue generated by the latest TV deal. The headlines were that Liverpool received the highest individual pay-out of £97,544,336! Cardiff City received the lowest pay-out of £62,082,302. What caught the eye of the headline writers was that the revenue from the lowest pay-out this season (the payment to Cardiff) was greater than the highest pay-out from the previous season (a payment of £60,813,999 to Manchester United).
The 2013-14 season was the first year of the latest 3 year deal for the rights to broadcast EPL games on the television, internet and radio. As part of this deal BSkyB are paying £760 million each year for the rights to broadcast 116 EPL games per season in the UK. BTSport are paying £246 million per year for the rights to broadcast 38 EPL games per season. In addition to selling the rights to broadcast games in the UK, the EPL also separately sells the rights to broadcast games in other countries. For example Cable Thai Holdings paid £205 million for a 3 year deal to show EPL matches in Thailand while NowTV paid £128 million for a similar deal in Hong Kong. In total the EPL earns approximately £1.8 billion per season from the sale of their domestic and international media rights.
The approach taken by the EPL to manage the sale of the broadcasting rights has raised considerable debate amongst economists and policy makers. There are two very different methods that can be used by teams in a league to sell the rights. They are the Individual Sales Model (ISM) and the Collective Sales Model (CSM). In the ISM each club is responsible for marketing and selling the rights to broadcast its home games. The ISM is currently employed by both La Liga in Spain and Primeira Liga in Portugal. In the CSM the rights are sold jointly by the league, federation or national association on behalf of the teams involved. This CSM is currently used by the majority of the football leagues in Europe. The EPL sold the rights for 2013-16 on behalf of the 20 clubs using a sealed bid auction.
Some economists and policy makers have criticised the CSM, claiming that it is an example of a cartel that simply restricts output and leads to higher prices. Each club is considered to be the equivalent of a firm in a traditional industry. The argument is based on a number of observations about the teams. They:
• are each separately owned and submit their own individual set of accounts
• compete with each other to buy inputs (i.e. the players) to produce an output (i.e. a match)
• individually market and set the price for the outputs they produce i.e. the ticket for the games and the prices of the merchandise such as football shirts
If this view of the industry is taken, the league or federation looks rather like a restrictive agreement between independent competitors that creates monopoly market power. As evidence to support this interpretation of the CSM, reference is often made to the details of the contract between the EPL and BSkyB and BTSport. As part of this agreement the number of live matches that can be broadcast is restricted to 154.This represents just over 40% of the maximum total of 380 that could be shown. Teams are effectively prohibited from individually selling the rights to matches that are not selected for broadcast in the collective deal as they must seek permission from the EPL. Over ten years ago the Director General of the Office of Fair Trading commented that:
Within the market the Premier League has a major if not unique position. By selling rights collectively…it is acting as a cartel. The net effect of cartels is to inflate costs and prices. Any other business acting in this way would be subject to competition law and I see no reason why the selling of sport should be treated differently.
The EPL has always defended it actions by claiming that any increase in the number of televised games would have a negative impact on the attendance at matches.
An alternative view focuses on the peculiar or unique characteristics of sports leagues. In particular it is argued that sport is unusual because the level of co-operation required between the teams and a league to produce matches is far greater than that required by firms in other industries to produce output. Agreements have to be made about issues such as the timing and venue of the games as well as the rules under which they will be played. However unlike a traditional cartel arrangement these agreements do not simply control and restrict output. They also improve the entertainment value of the game and hence the quality of the product. Some authors have argued that because of these unique characteristics, the league rather than the individual team should be considered as the equivalent to a firm in a more traditional industry. In this ‘single entity theory’ teams are viewed as divisions of a single organization i.e. the league. The league is treated as a natural monopoly that legally owns the broadcast rights of the clubs rather than a cartel of separate firms. Others have argued that it is more sensible to think of the league as a joint venture between the teams.
Not only are the levels of co-operation required much greater than in traditional industries but it is also argued that competitive balance is important for a successful league. If the same teams always win most of the games then there are concerns that fans will find this boring and it will reduce their willingness to pay to watch matches in either the stadium or on television. It is argued that the CSM makes it easier to distribute the TV money more equally and so helps to maintain competitive balance in a league. The White Paper on Sport published by the European Union in 2007 stated that:
Collective selling can be important for the redistribution of income and can thus be a tool for achieving greater solidarity within sports.
The debate continues about whether the CSM used by the EPL is an example of a restrictive cartel which acts against the public interest or a business practice that helps to improve the quality of the product for the customer.
Premier League clubs earn record-breaking sums thanks to TV bonanza The Telegraph (14/5/14)
Liverpool top earners over season with £99m – and bottom side Cardiff got £64m (so see what your team received in 2013-14 Mail Online (11/5/14)
Cardiff earn more TV cash than champions Man Utd did in 2013 BBC Sport (14/5/14)
Relegated Cardiff Earn More TV Revenue than Man Utd Tribal Football (14/5/14)
TV Bonanza for Premier League Clubs Pars Herald (18/5/14)
Season of woe hits home in money league Express & Star (15/5/14) .
Questions
- What is a natural monopoly? Draw a diagram to illustrate your answer.
- What is a cartel? Find three real-world examples of cartel agreements.
- It was explained in the article how the EPL sells the rights to broadcast just over 40% of the total number of matches played per season. Draw a diagram to illustrate and explain how this might be an example of a cartel agreement that restricts output and results in higher prices.
- The EPL defends its decision to restrict the number of games that can be televised in its domestic deal by claiming that any increase would have a negative impact on attendance at the matches. To what extent do you think that watching a live game on the television is a substitute for watching it in the stadium? Draw a demand and supply diagram to illustrate a situation where they are strong substitutes. Explain how the concept of cross price elasticity could be applied to this example.
- Outline how a sealed bid auction works. What are the advantages of using a sealed bid auction as opposed to other types of auction.
- Can you think of any other economics arguments that could be used to defend the use of the CSM for the sale of the broadcast rights?
Last month the Swiss air freight company Kuehne + Nagel International AG was fined just over NZ$3m (around £1.5m) by the New Zealand Commerce Commission for their part in a price fixing cartel that ran for 5 years.
In 2002 the firms in the industry faced higher costs due to increased security measures imposed by the British government. They formed a cartel to agree to pass these increased costs on to their customers for air freight services from the UK to a number of countries, including New Zealand. The investigation by the New Zealand competition authority followed a leniency application by one of the participants in 2007. Five other participants had previously been fined, but Kuehne + Nagel decided to fight the case. The fine imposed on them brought the total fines to almost NZ$12m (around £6m).
A previous post on this site highlighted how golf played a prominent role in several previous cartels. However, this cartel seemed to have had a fixation on gardening and referred to the cartel as the gardening club. Other parties involved in the cartel were referred to as fellow gardeners and the agreed upon price as the price for asparagus! When a participant suspected a rival may have cheated on the cartel agreement email exchanges such as this one took place:
I hear… concerns about the price of produce from the garden of Velcro, which appears to be operating as a charitable cooperative for the benevolence of vegetable eaters rather than growers…
It is not known whether the Kuehne + Nagel employees involved in the cartel were placed on gardening leave during the investigation!
‘Gardening Club’ hid hardcore air freight cartel New Zealand Herald, Hamish Fletcher (04/04/14)
‘Gardening Club’ Air Freight Forwarding Cartel Finally Buried by High Court Handy Shipping Guide (08/04/14)
Swiss firm fined $3.1 million over cartel 3 News (08/04/14)
‘Gardening Club’ freight cartel participant, Kuehne + Nagel, fined $3.1m The National Business Review (08/04/14)
Questions
- Why is an increase in costs likely to trigger price fixing behaviour?
- Why might the members want to use code names to run a cartel’s activities?
- Why do competition authorities grant leniency to cartel members that inform them about price fixing behaviour?
As Elizabeth noted in Fuelling the Political Playing Field, there has been much debate recently about energy prices in the UK. Four of the ‘Big Six’ energy companies have now announced price rises. They average 9.1% – way above the rate of consumer price inflation and even further above the average rate of wage increases. What is more, they are considerably above the rate of increase in wholesale energy prices, which, according to Ofgem, have risen by just 1.7% in the past year.
The bosses of the energy companies have appeared before the House of Commons Energy and Climate Change Select Committee to answer for their large price increases. The energy companies claim that the increases are necessary to cover not only rising wholesale prices, but also green levies by the government and ‘network charges’ for investments in infrastructure. 
However, it is hard to see how, even taking into account all three of these possible sources of cost increases, the scale of price increases can be justified.
Another possible explanation for the price hikes is that they are partly the result of a system of transfer pricing (see). The energy industry is vertically integrated. Energy companies are not only retailers to customers, but also generators of electricity and wholesale shippers of gas. It is possible that, by the producing/shipping arms of these companies charging higher prices to their retailing arms, the retailers’ costs do indeed go up more than the wholesale market cost. The result, however, is higher profits for the producing arms of these businesses. In other words, a higher transfer price allows profits to be diverted from each company’s retailing arm to its producing arm.
This is an argument for making the wholesale market more competitive and for stopping the by-passing of this market by producing arms of companies selling directly to their retailing arms. What the companies are being accused of is an abuse of market power and possibly of colluding with each other, at least tacitly, to support the continuation of such a practice.
So is the answer a price freeze, as proposed by the Labour Party? Is it an investigation of the energy market by the Competition Commission? Or is it, at least as a first step, much more openness by the energy companies and transparency about their pricing practices? Or is it to encourage consumers to switch between energy companies, including the smaller ones, which at present account for less than 5% of energy supply? The videos, podcasts and articles consider these issues.
Webcasts and Podcasts
Energy bosses blame high bills on wholesale prices Channel 4 News, Gary Gibbon (29/10/13)
Why are energy bosses being questioned? BBC News, Stephanie McGovern (29/10/13)
Key questions Big Six energy companies must answer The Telegraph, Ann Robinson (29/10/13)
Energy bosses offer excuses for prices rises The Telegraph (29/10/13)
Energy bosses face MPs over price rises BBC News, John Moylan (29/10/13)
Energy boss ‘can’t explain’ competitors’ price hikes The Telegraph (29/10/13)
Ovo boss: Competition Commission would take too long BBC News (30/10/13)
Dale Vince: Energy market is ‘dysfunctional’ BBC Today Programme (30/10/13)
Tony Cocker: Public mistrust energy industry BBC Today Programme (30/10/13)
Ed Davey: Energy deals not just for ‘internet savvy’ BBC Today Programme (31/10/13)
Articles
Energy giants ‘charge as much as they can get away with’ The Telegraph, Peter Dominiczak (29/10/13)
UK energy markets need perestroika Financial Times (27/10/13)
Britain’s energy utilities must embrace glasnost Reuters, John Kemp (29/10/13)
Small energy firms ‘escape levies’ BBC News (30/10/13)
Is the energy market structurally flawed? BBC news, Robert Peston (30/10/13)
The energy market needs a Competition Commission investigation Fingleton Associates, John Fingleton (12/10/13)
Energy firms raised prices despite drop in wholesale costs The Guardian, Rowena Mason (29/10/13)
Only full-scale reform of our energy market will prevent endless price rises The Observer, Phillip Lee (26/10/13)
Energy Giants Blame Rising Bills On Green ‘Stealth Taxes’ Huffington Post, Asa Bennett (29/10/13)
Big Six energy firms ‘like cartel’ Belfast Telegraph (30/10/13)
Energy boss says he hasn’t done sums on green levies The Telegraph, Georgia Graham (30/10/13)
Graphic: How your energy bills have soared in ten years The Telegraph, Matthew Holehouse (30/10/13)
British energy suppliers’ explanations for price hikes just don’t add up The Guardian, Larry Elliott (31/10/13)
The 18th energy market investigation since 2001: Will this one be different? The Carbon Brief, Ros Donald (31/10/13)
Energy: Is there enough competition in the market? BBC News, Hugh Pym (26/11/13)
Information and Reports
Wholesale [electricity] market Ofgem
Wholesale [gas] market Ofgem
Response on wholesale energy costs Ofgem Press Release (29/10/13)
Response to Government’s Annual Energy Statement Ofgem Press Release (31/10/13)
Real Energy Market Reform The Labour Party
Questions
- Why may the costs of energy paid by the energy retailers to energy producers/shippers have risen more than the wholesale price?
- Explain what is meant by transfer pricing. How could transfer pricing be used to divert profits between the different divisions of a business?
- How can transfer pricing be designed by multinational companies to help them minimise their tax bills?
- Why is policing transfer pricing arrangements notoriously difficult?
- What evidence is there to show that switching between retailers by customers can help to drive retail energy prices down?
- How did the old electricity pool system differ from the current wholesale system?
- Should electricity companies be forced to pool the electricity they generate and not sell it to themselves through bilateral deals?
- Comment on the following: “The current electricity trading arrangements ‘create the very special incentive for the oligopolists. …The best of all possible worlds is where nobody invests. As supply and demand close up, the price spikes upwards, and supernormal profits result.'”
In December the European Commission (EC) fined 5 envelope makers from Sweden, France, Germany and Spain a total of almost €20m for participating in a cartel. Between 2003 and 2008 these firms had coordinated responses to tenders, fixed prices and exchanged information. This increased the prices paid by their buyers who were stationary distributors and large companies.
