In July 2016, the Commissioner for competition, Margrethe Vestager, announced a fine of € 2.93 billion against the “truck cartel”. According to the Commissioner for competition, this is the highest fine ever imposed in a case of cartel in the European Union (EU).
A cartel is a formal agreement between two or more producers to regulate supply in order to manipulate prices of the goods they produce or services they render.The purpose of this paper is to study cartels and their effects on the economy and how the European Commission (EC) copes with it. It is separated into four parts: the first part explains what a cartel is and why it is illegal, the second part discusses in detail the “truck cartel case” managed by the EC, the third part is an explanation on how the EC decides a fine, and the last part is a conclusion on everything that was said before.What is a cartel and why is it illegal?A cartel exists when businesses make an agreement instead of competing.
Before explaining how do cartels affect the economy, a few terms should be clarified: monopoly, competitive market, average total cost, marginal cost, marginal revenue, consumer surplus, and deadweight loss. A monopoly is a supplier with no concurrent as it is the only supplier of a good that has no close substitute. The curve in figure 1 shows the typical relationship between the quantity demanded and the price per unit in the case of a monopoly. The downward sloping curve of the curve shows that, among other factors influencing the demand curve, consumers demand decreases as the price increases.A competitive market is a market in which buyers and sellers are price takers, it means that sellers cannot set the price of their products as this price is determined by supply and demand. This leads to a horizontal demand curve as shown in figure. This curve explains that people are willing to buy as much as firms can sell at any price less than or equal to $250. If the price increases, even slightly, above this price, the demand falls to zero, the demand curve is “perfectly elastic”.
The average total cost is the sum of all the production costs divided by the number of units produced. The marginal cost is the decrease or increase in the total cost of production generated by the production of one more unit, the marginal cost’s formula is ?C/?Q (the change in cost divided by the change in quantity produced). The marginal revenue is the decrease or increase in revenue by the production of one more unit, the marginal revenue’s formula is ?TR/?Q (the change in the total revenue divided by the change in quantity produced). The consumer surplus is the monetary difference between the total amount a consumer is willing to pay for a good and the amount he actually end up paying.
Finally, the deadweight loss is the loss of consumer and producer surplus caused by an inefficient level of production. Some factors resulting in a deadweight loss are: price ceiling, price floors and taxation.Cartel situations necessarily affect consumers who cannot benefit from the positive effects of real competition between sellers. Indeed, competition between businesses drives innovation and quality, and improves customer emphasis. Such agreements are anticompetitive and illegal because, in addition to cheating other businesses and consumers who end up paying more for less quality, they restrict healthy economic growth. Indeed, by reducing competitiveness of a sector in the long run, cartels can have a harmful impact on the global performance of a country’s economy.
A cartel seeks to behave like a monopoly: it maximizes the profit of its members as if they formed only one entity and its impact on welfare tends to be the same as a monopoly. In a competitive market, firms must generally produce their products at the lowest average total cost, and sell at a price that equals marginal cost. However, a cartel does not use the same way to set the price. In order to maximize its profit, it rather chooses a price on the demand curve where the marginal revenue equals the marginal cost, which is a higher price than in the previous situation. The price rising caused by the cartel has harmful effects on consumers and society.
Consumers who keep buying the product pay more, transferring money from the consumers to the cartel members. Moreover, the price increase leads also some consumers to stop buying the product. This loss is not recovered by the cartel members, and it is therefore a deadweight loss for the society.The truck cartel caseThe Commission’s investigation began in 2011 following a request for immunity from MAN. It blames the groups Daimler, MAN, Scania, DAF, Iveco and Volvo for agreeing for around 14 years, between 1997 and 2011, to delay the introduction of technologies to reduce carbon dioxide emissions and to have agreed on prices. These companies accounted together for about 90% of all medium and heavy trucks produced in Europe and covered the entire European Economic Area (EEA).
Under the Commission’s 2006 Leniency Notice, MAN was fully immune from fine for informing the EC about the cartel and avoided a fine of around € 1.2 billion. As the manufacturers Volvo, Daimler and Iveco cooperated with the investigation, they also benefited from reductions of their fines under the same notice.As all the members of the cartel agreement acknowledged being part of the cartel, under the 2008 Settlement Notice, the EC applied a reduction of 10% to their fines. They have therefore all received a total fine of 2.93 billion of euros for unlawful agreement. This is the highest fine ever imposed by the EU.
These fines are paid directly to the budget of the EU.The European Commission’s methodThe Commission can start to investigate on a case due to a complaint, a leniency application from one of the participants of a cartel, information reported by individuals or the opening of an own-initiative investigation.After the initial investigative phase, where the EC is empowered, among others, to send requests to companies, examine records related to a business and take copies of them and ask members of staff or company representatives questions relating to the subject-matter and purpose of the inspection, it can decide whether to pursue the case as a matter of priority or to close it. In the case of a cartel, the EC decides whether the case is suitable for the settlement procedure.
The EC (2014) stated: “A settlement is used by the Commission to speed up the procedure for adoption of a cartel decision when the parties admit to the Commission’s objections, and in return receive a 10% reduction in the fine”. The amount of the fines depends on, for example, how long the cartel has been going on, how many markets and consumers have been affected by this agreement, and its geographic scope. Furthermore, there are some aggravating factors such as the refusal to cooperate or the disturbance of the Commission’s investigation from a member of the cartel. Another factor that could play against a cartel member is if a company reoffends or continues a similar violation. The record fine imposed to the members of the truck cartel is therefore justified considering the duration of the agreement, the large number of consumers affected and the fact that the scope of the cartel covered the entire EEA.
However, there are also mitigating factors. For example, the company involved can benefit from a reduction of fine if it was part of the cartel for a short period or if it has not applied the competition restrictions upon which the cartel had agreed.ConclusionThe European Commission fights cartels because, by removing competition, they’re bad for both consumers and the economy. Lack of competition is bad for consumers because, as the producers do not try to innovate or to offer the best possible prices anymore, they end up paying more for less quality, and bad for the economy of countries because they cause a deadweight loss. This is the reason why the EC has made the fight of cartels one of its priority.The Truck cartel case is a good example of how the EC take actions against cartel agreements.
The fines are based on the number of customers affected and the duration of the agreement. As the cartel existed for around 14 years, from 1997 to 2011, and its extend was 90% of the medium and heavy trucks produced in Europe, the members of the cartel received a record fine of around € 3 billion.