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.
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?
There are seven Indian airlines: state-owned Air India and six private carriers. Since the onset of recession they have all been making losses and were considering a one-day ‘strike’ when services would be removed. The aim was to force the Indian government to reduce fuel and airport taxes.
Do the losses suggest that there is overcapacity in the Indian airline market? Does it matter if, during the current recession, some airlines go out of business? Are bankruptcies necessary if the surviving carriers are to be stimulated to make cost savings and are to achieve sufficient economies of scale? Or should governments offer support to struggling airlines? Is oligopoly the best market structure for such an industry and, if so, how can collusion be avoided? The following articles consider these questions.
How many airlines do we need? Business Line (The Hindu) (4/8/09)
Indian airlines call off Aug 18 strike Forbes (3/8/09)
When corporations capture the state Rediff Business (7/8/09) (see middle part of article)
Blaming everyone else Indian Express (3/8/09)
India’s air carriers spin loss riddle Asia Times Online (8/8/09)
A strategic vision for Indian aviation The Economic Times (8/8/09)
Flight to value The Economist (6/8/09)
Federation of Indian Airlines
Questions
- Describe the features of the market structure in which Indian airlines operate.
- Is the Federation of Indian Airlines a cartel?
- Should (a) any; (b) all Indian airlines be given government support, and, if so, what form should the support take? Should Air India be treated differently from the other Indian airlines? Explain your answer.
- Is it in Air India’s long-term interests to embark on a price war with the other Indian airlines?
- Is oligopoly necessarily the optimal market structure for a capital-intensive industry?
Changes in the price of oil have effects throughout the economy. And it’s not just on the obvious things, such as petrol prices, energy bills and rail, bus and air fares. Most companies are significantly affected by the price of oil, as oil is a key input into their production, whether for transporting their inputs or the goods they produce, or as plastics or other petrochemicals. This is why the price of oil receives so much attention: we’re all affected by it. You will have seen the price of petrol changing dramatically over the past year or so and this is largely due to changing oil prices. The price of oil peaked at $147 a barrel in July 2008 and fell as low as $32 a barrel in December 2008.
So what is it that causes these changes in oil prices and what does it mean for the world’s economies? Read the following articles, which discuss these issues, and look at recent developments in the oil industry.
First fall in oil use since 1993 BBC News (10/6/09)
Trump’s world view Fox News, Interview between Greta van Susteren and Donald Trump (30/6/09) Oil settles above $71; China to boost reserves The Associated Press, Dirk Lammers (29/6/09)
Nigeria worries push up oil price BBC News (29/6/09)
Oil up to near $72 on dollar fall, Nigeria attack Town Hall, Pablo Gorondi (30/6/09)
Chinese demand forecast to boost oil price The Star Phoenix, Joanne Paulson (30/6/09)
Lower oil price hits Total profit BBC News (6/5/09)
Oil price hovers at $70 amid pipeline attacks Financial Times, Miles Johnson, Javier Blas, London (27/6/09)
What is going on in the oil market? BBC News (27/10/08)
Rising oil prices poses threat to recovery, Alistair Darling warns Telegraph (12/6/09)
Fears of oil crunch recede as recession knocks down global demand The Independent, Sarah Arnott (30/6/09)
Questions
- How is the price of oil determined? Give 2 examples of factors that could cause (a) the price of oil to increase and (b) the price of oil to decrease.
- How are company profits affected by the changing price of oil?
- OPEC is an oil cartel. What are the factors that make collusion more likely to succeed? Do they apply to OPEC?
- When prices of oil increase, why do we still use similar amounts of energy; still buy petrol? What’s so special about this commodity? Think about elasticity.
- How is the price and consumption of oil affected by the macroeconomic situation?
Energywatch, an industry watchdog, has argued in a recent report to MPs that Britain’s electricity and gas supply industry is a “comfortable oligopoly” that feels little need to innovate or compete. They have called for the sector to be subject to a Competition Commission investigation.
Power companies are ripping off consumers Times Online (21/5/08)
Age of cheap power is over Times Online (21/5/08)
Call to investigate energy ‘oligopolies’ Guardian (21/5/08)
Questions
| 1. |
Explain the main characteristics of an oligopolistic industry. |
| 2. |
What aspects of the electricity and gas supply market would the Competition Commission consider if asked to investigate the industry? |
| 3. |
Assess the extent to which the electricity supply industry exhibits oligopolist collusion. |