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SPEECH/00/295

Mr Mario Monti

Member of the European Commission in charge of Competition

Fighting Cartels Why and How?Why should we be concerned with cartels and collusive behaviour?

3rd Nordic Competition Policy Conference

Stockholm, 11-12 September 2000

Dear Minister, Ladies and Gentlemen,

I very much welcome the initiative taken by the Swedish Competition Authority to arrange this conference and I am very honoured to give the opening speech.

Fighting cartels is one of the most important areas of activity of any competition authority and a clear priority of the Commission. Cartels are cancers on the open market economy, which forms the very basis of our Community. By destroying competition they cause serious harm to our economies and consumers. In the long run cartels also undermine the competitiveness of the industry involved, because they eliminate the pressure from competition to innovate and achieve cost efficiencies.

Recent anti-cartel actions of the Commission and other competition authorities clearly demonstrate that in spite of our efforts cartels continue to exist. Moreover, since by nature cartels are secret and therefore difficult to uncover, it is likely that what we are seeing is only the tip of the iceberg. In the words of Adam Smith there is a "tendency for competitors to conspire". This tendency is of course driven by the increased profits that follow from colluding rather than competing. We can only reverse this tendency through tough enforcement that creates effective deterrence. The risk of being uncovered and punished must be higher than the probability of earning extra profits from successful collusion.

As Commissioner responsible for competition I am determined to further strengthen our fight against cartels. Our efforts to reform the rules implementing Articles 81 and 82 are very important in this respect. However, before dealing with the issue of effective enforcement, I would like to begin by saying a few words about the anatomy of cartels and why fighting them should be a priority.

A cartel is essentially an agreement to limit output with the objective of increasing prices and profits. In practice, this is generally done by means of price fixing, allocation of production quotas or sharing of geographic markets or product markets. It is important, however, to keep in mind that harmful collusion does not need to take the form of a full blown cartel. Less elaborate structures such as information exchanges can also lead to significantly higher prices. A recent case study shows that the publication of firm specific transaction prices led to an increase in average prices of almost 20%.

Cartels differ from most other forms of restrictive agreements and practices by being "naked". They serve to restrict competition without producing any objective countervailing benefits. In contrast, a joint venture between competitors, for example, while restricting competition may at the same time produce efficiencies such as economies of scale or quicker product innovation or development.

In these cases a proper analysis requires that the positive and negative effects are balanced against one another. This is not so with cartels. In cartel cases the positive side of the equation is zero. There are simply no countervailing benefits.

Cartels, therefore, by their very nature eliminate or restrict competition. Companies participating in a cartel produce less and earn higher profits. Society and consumers pay the bill. Resources are misallocated and consumer welfare is reduced. It is therefore for good reasons that cartels are almost universally condemned. Of all restrictions of competition, cartels contradict most radically the principle of a market economy based on competition, which constitutes the very foundation of the Community. Even those who sometimes criticise competition law as being a form of interventionism into the free play of market forces, accept the prohibition of cartels as inevitable. Indeed, it seems that there is nowadays a consensus that "no economy that claims to be free can exist without effective deterrence of cartels" to use the words of Lipsky in his article on Deterring Cartel Behaviour.

Which sectors are particularly concerned?

As we all know, cartels do not occur with the same frequency in all sectors. Indeed, some sectors have been particularly prone to cartelisation. These sectors are generally characterised by a relatively high degree of concentration, significant barriers to entry, homogeneous products, similar cost structures and mature technologies. In such stable sectors it is easier to reach consensus on the collusive outcome and to maintain it. The steel, cement and chemical industries can be mentioned as examples of sectors that fit this description and in which the Commission has in the past uncovered cartels.

However, our experience shows that cartel behaviour is not limited to such traditional industries. Recent investigations concerning the banking sector and the liberal professions demonstrate that we should certainly not lose sight of other sectors. In the case of the liberal professions collusion has generally involved the fixing of tariffs. In these sectors it is often quite difficult to assess with precision the level of quality. Price competition is therefore quite an important aspect of competition. It is also interesting to note that in these cases the cartels have virtually always been operated by a trade association. The involvement of an association is necessary due to the large number of operators. One study has found that trade associations were involved in most of the cases that involved more than 10 undertakings. Moreover, in the case of the liberal professions the rules of the association can be a very effective weapon in maintaining discipline.

When examining the anatomy of cartels, we must also take due account of the impact of globalisation and new technologies. Recently we have seen the emergence of global cartels, and in some cases collusion is facilitated by new technologies that allow for rapid dissemination of information and create more transparency in the market.

It would be a serious mistake to downplay the effects of cartels. The damage caused by cartels to the economy and consumer welfare is substantial and has in fact been underestimated for a long time. Estimations by the OECD in its recent Report on Hard Core Cartels have provided dramatic figures on the harmful effects of cartels.

The average increase from price fixing is estimated to amount to 10 % of the selling price and the corresponding reduction of output to be as high as 20 %. In some recent big cases prices have been increased by the cartel participants 30 % (graphite electrodes) and 50 % (citric acid).

From the perspective of the Community it is also important to keep in mind that illegal cartels can seriously undermine our efforts to liberalise and integrate our markets. They can also limit the benefits promised by the introduction of the Euro.

It is essential to ensure that the removal of state measures that have shielded companies from competition is not replaced by collusion, having the same effect. Companies that have been used to the absence of effective competition, may have a particularly strong incentive to collude rather than to compete. Indeed, liberalisation of markets and removal of other regulatory obstacles to effective competition increases competition and thereby the payoffs from successful collusion. The higher the degree of competition in a market, the greater the incentive to form a cartel and the greater the harm to the economy and consumers.

The same considerations apply to the Euro. In the past the existence of national currencies have protected some sectors against the forces of competition. The Euro effectively eliminates this obstacle to effective competition. By doing so, it promotes market integration and an efficient allocation of resources.

In order to shield themselves from the increased competitive pressure, companies may have greater incentive to collude.

Let me now turn to the issue of enforcement. It is clearly our job to ensure that cartels are punished with a sufficient deterrent effect. However, we should not forget the importance of also helping consumers get repair for the damage suffered. In this area, Member States have a particularly important role to play by providing for the necessary laws and procedures, allowing consumers to claim damages in courts. Here is a whole field of national law that may need revisiting, at least in those Member States where claims for damages for competition law violations are difficult to bring.

Fighting cartels is not an easy business to be in. Companies operating cartels are of course very much aware of the illegality of their conduct under the antitrust laws. For that reason, cartels are typically operated in secrecy and considerable efforts are devoted by the participants to avoiding detection by the authorities. Meetings are held in exotic places around the globe. Incriminating documents are destroyed or stored outside the premises of the companies. Practices are arranged so as to simulate normal market behaviour and so on.

In order to be successful a competition authority must be able to play a number of different cards. In particular, a successful fight against cartels presupposes an effective leniency programme, effective enforcement powers and sanctions, and close cooperation amongst competition authorities.

In 1996 the Commission adopted for the first time a Leniency Programme. The first experience shows that it has led to a substantial increase in the number of cartels that have been uncovered and punished.

The programme provides a strong incentive for companies to come forward and to co-operate. Companies which provide information on a secret cartel before the Commission has opened an investigation can benefit even from total immunity from fines. Moreover, companies which cooperate with the Commission in the course of a pending investigation can benefit from a substantial reduction of their fines. In the Lysine Decision adopted in June this year the Commission granted reductions in the fines of up to 50 % for those companies which contributed substantially to its investigation. Such substantial reductions of the fines are based on the premise that the public interest in detection and prohibition of cartels is higher than the interest in fining colluding companies.

Considering the effectiveness of leniency programmes, it would in my view be useful to explore the possibilities of adopting a Community wide programme.

Indeed, to the extent that leniency programmes differ significantly, companies will naturally take advantage of the most generous programme. Moreover, such differences can cause problems for the exchange of information between competition authorities.

Leniency programmes are not effective in isolation. To be effective they must be backed up by strong enforcement powers and effective sanctions.

In contrast to US law, the Commission under Community law has no power to impose criminal sanctions and it has no jurisdiction over individuals. It can only impose fines on undertakings. To have a real deterrent effect fines must be sufficiently large to eliminate the gains from the cartel and, in addition, impose a significant punishment on the individual undertaking. As we have seen, the gains from cartelisation can be very significant. Fines must therefore be substantial. Otherwise companies will gain from collusion, even if they are caught.

Initially, the fines imposed by the Commission were quite modest. In later years, however, fines have been increased significantly.

The adoption at the end of 1997 of the Guidelines on the method of setting fines constitutes a very important development in the Commission's fining policy. The application of the principles set out in these Guidelines have helped to further strengthen the deterrent effect of fines and to make the Commission's policy more coherent and transparent.

Since the publication of the Guidelines, the Commission has imposed the highest ever fines on a single undertaking (102 million Euro on Volkswagen in 1998, a decision which was very recently largely confirmed by the Court of First Instance) and on a group of companies (273 million Euro on the Trans-Atlantic Conference Agreement ("Taca") in September 1998).

Other examples of substantial fines are the 99 million Euro fine imposed in December 1999 on a cartel formed by steel tubes producers and the fine of almost 110 million Euro imposed in June of this year on producers of lysine.

These were the first cartel cases decided by the new Commission. I firmly believe that such substantial fines are justified in the case of particularly serious infringements, such as those engaged in by the companies in these cases. A tough fining policy is essential in order to deter firms from engaging in collusive behaviour, and I can assure you that I will continue this policy of dealing severely with the most serious breaches of the competition rules.

That being said, I must also stress that, in calculating the fine, we observe carefully the general principles of Community law, such as the "fairness" doctrine and the principle of proportionality. These considerations are in fact incorporated into the Guidelines and serve to individualise the fine. According to the Guidelines the fine is related to the infringement, the size of the undertaking concerned, its responsibility for the infringement and so on. Another highly relevant factor in the calculation of the amount of the fine is the application of the Leniency Notice which, as I mentioned already before, can lead to a substantial reduction of the fine imposed on companies that cooperate with the Commission.

I will now turn to the topic that I mentioned initially, namely the reform of Regulation 17. This reform is highly relevant to our fight against cartels. In fact, the very aim of the reform is to strengthen the enforcement of the Community competition rules in the field of cartels and other serious infringements.

Given the importance of cooperation between competition authorities, we consider it essential that the new system establishes mechanisms for close cooperation between the Commission and the national competition authorities and between the national competition authorities.

What we have in mind is a network of competition authorities that work closely together in the application of Community competition law.

Within this network of competition authorities there should be free movement of evidence, allowing one authority to use as evidence information collected by another competition authority. Indeed, the competition authorities should assist each other actively in collecting the evidence required to prove an infringement.

Naturally, the free movement of evidence must be subject to certain appropriate safeguards. All authorities must be bound by a confidentiality obligation. We would also consider it appropriate to limit the use of confidential information to the purposes for which it was obtained by the transmitting authority. In addition, it would seem appropriate to exclude the use of information by the receiving authority to impose sanctions on individuals. Such a rule would ensure that differences in fact-finding powers and sanctions do not lead to heavier sanctions on individuals.

Another important aspect of the envisaged reform is the abolition of the notification system, which will allow the Commission to refocus its resources on pursuing the most serious infringements. As I have already indicated, fighting cartels will continue to be a priority of the Commission.

Very importantly, it is also envisaged to strengthen the Commission's powers of investigation. In a global economy where infringements become more and more sophisticated, it is of a paramount importance that the Commission is properly equipped with investigative powers that allow it to effectively detect infringements of the Community competition rules. To do so, we must make the Commission's inspection powers more "biting".

Currently, these powers cover only the premises of undertakings. However, in our experience it is increasingly the case that incriminating documents are stored in private homes. In a recent case, where an undertaking chose to cooperate, it handed over documents some of which were marked "for home archives". One document stressed that all incriminating material had to be either destroyed or taken home and that all such material should be deleted from the computer system. To ensure that the Commission remains in a position to enforce the rules effectively it is essential that it be given the power to search private homes, when it can be suspected that professional documents are kept there. Such a power exists in certain Member States and has allowed a substantial number of secret cartels to be uncovered. It goes without saying that the exercise of such a power should be subject to control by the courts.

We also envisage that the Commission should be empowered to ask questions on the subject-matter of the inspection. At present, Commission inspectors can only ask for explanations concerning documents that have been discovered. The envisaged extension would be subject to the protection against self-incrimination as defined by the Community Courts.

Finally, I would like to mention that it is necessary to bring the fines for breaches of procedural rules up to date. The current level of such fines, which are maximised at 5,000 Euro, have no deterrent effect what-so-ever. The level of fines must therefore be increased substantially. Indeed, it would seem appropriate to work with ceilings based on percentage figures rather than with absolute amounts. Such a system already exists in the ECSC Treaty.

Even though we are experiencing success at home, we are ever more aware that international co-operation is essential to effective enforcement. International cartels ignore national borders and we find increasingly that cartels are global in scope. Industry and commerce expand on a world-wide basis, so do cartels.

As no World Policeman or World Court exists, there is an absolute need for an intensive co-operation between the antitrust authorities of different countries in today's global economy.

Thus, the Commission has concluded formal bilateral co-operation arrangements with a number of jurisdictions, and co-operates on an ad hoc basis with many others. Recent cases have added new impetus to this climate of co-operation. In Vitamins, Graphite electrodes and several other big cases the US Department of Justice and the Commission have worked together to ensure we are all going in the same direction.

In my view, however, we should not rest on our laurels. At least in the medium term the Community should seriously contemplate concluding "second generation" co-operation agreements with the US and other main trading partners.

These agreements would give us the opportunity to exchange confidential information, thereby enabling us to combat the most serious violations of our respective competition rules more effectively and efficiently. This would, moreover, be in line with the 1998 OECD Recommendation on combating "hard-core" cartels, which encourages member countries to make inter-agency exchange of confidential information possible.

Before finishing my intervention here in the home country of Volvo and Scania, I feel compelled to say a few words about merger control issues. As you all know, the Commission decided in March this year to prohibit the proposed merger between these two companies. Understandably this decision received quite a lot of attention in Sweden. Although much has happened since March, I nevertheless think that it would be useful to give you a few comments on the prohibition decision and the ensuing debate.

First, we have the impression that the debate in Sweden centred on the Commission blocking a merger that created concerns "only" - in quotation marks - on the Swedish truck market. This was clearly not the case. As can be seen from the decision, which is publicly available on our home page, we found that the merger would have led to competition problems on 15 relevant truck and bus markets in Sweden, Finland, Norway, Ireland and in the United Kingdom.

I would also like to remind you that, fundamentally, merger control is about protecting the competitive process in the market and thereby to ensure consumers a sufficient choice of products at competitive prices. This is why we need to define relevant markets.

Some commentators have criticised the Commission for taking an unrealistically narrow approach to market definition in the truck and bus industries. In their view these markets are European, not national.

Obviously the Commission would very much like to see that all traditional barriers to trade would disappear and that these and other markets become European. However, competition policy must be based on market realities.

When we studied how these markets work in practice, we found that truck suppliers were able to price discriminate between customers in the relevant countries. Most of you in this audience are familiar with competition policy. Therefore, I do not think that I need to elaborate on the significance of an ability to charge prices differing by more than 10% between neighbouring areas.

I should also say that there is little or no parallel trade in these products. The most important explanation for this is probably that trucks are sold in combination with an important local component, which is the after-sales service.

In conclusion, the Volvo/Scania case was not exceptional for us.

We used normal market definition standards and found strong competition concerns on a large number of markets. In those circumstances a prohibition decision will always be the natural decision, unless the parties are able to propose clear-cut remedies to the identified concerns.

Let me now turn for a moment to the outcome following the prohibition decision. Since then both Volvo and Scania have found alternative strategic partners. Scania has teamed up with Volkswagen, which was not previously active in the production of heavy trucks and buses. This transaction strengthened the company without increasing the concentration in the market.

Just a few days ago the Commission approved Volvo's acquisition of Renault's heavy truck division (RVI) in exchange for 15% of the shares in AB Volvo.

The clearance decision is subject to three divestiture commitments, namely that Volvo sells its Scania shares and Renault its interests in Irisbus (JV with Fiat) and in Sisu (a truck producer in Finland). The maintenance of such links is not healthy in a competitive market.

The speed and success with which these two latter operations were put in place shows that the Volvo/Scania merger was by no means a sine qua non, but that there were alternatives which ensure both the presence of competitive players in this market and vigorous competition between them. The new partnerships that have arisen may even contribute to make this market increasingly European over the years to come.

Minister, Ladies and Gentlemen,

Let me now conclude: The fight against cartels is essential to the welfare of our economies and should be a priority for all enforcement authorities. Effective repression of this menace requires that we work closely together and coordinate our actions.

Our envisaged reform of Regulation 17 will create a new framework for cooperation between the national competition authorities and the Commission, and - very importantly - also between the national competition authorities themselves. I am confident that together we will be able to fight cartels effectively and substantially increase the deterrent effect of our rules.


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