Turns out the very logic that backs cartels as a rational profit-maximization mechanism also
rushes encourages firms to turn themselves in.
The international war waged against cartels in the auto industry can be traced back to 2010, at the latest. In the U.S., collusion has been illegal since the passage of the Sherman Act in 1890, but law enforcement didn’t get tough until the lysine conspiracy in the 1990s. Before then, most companies “saw it as like going 5mph over the speed limit,” Roxann Henry of Morrison & Foerster, a law firm, told The Economist.
Policies and penalties have grown harsher. The maximum corporate fine in the U.S. soared 10 times, and a few dozen
s of executives in the auto industry were put behind bars in during 2010-2015. In Europe, firms can be fined up to 10 percent of their turnover.
Severe consequences should make it more challenging to bust cartels, right? Not with the incentives to “spill the beans” provided by the American program, which was
quickly gained copied globally popularity: The first firm to cooperate with law enforcers can avoid fines and prison time; the second and third could secure lesser benefits, but no criminal immunity.
That’s not hard to understand, given the logic that motivates cartels. Research shows that two-thirds of cartels are in industries where the top four firms own 75 percent or more of the entire market. Cartels’ median duration is five years, and many last decades. A study, “Cartels as Rational Business Strategy: Crime Pays”, looks at 75 cartels and finds they typically raise prices by 20 percent.
The auto industry is particularly a good fit: with each carmaker only approving a few suppliers of each part, the barriers to entry are high and the market encourages supplier concentration.
Fearing other suppliers would lower prices to gobble up more market share, the few players in the game — if behaving rationally and assuming the market size is fixed — would all offer to sell for less, resulting in a profit drop for every one. Instead, they cheat the system by holding, rising or cutting prices together, so no one has to suffer a decrease in profits due to competition.
Those firms find themselves in a similar situation when it comes to law enforcement: if one reveals the scheme to investigators, others not only lose the choice to keep the secret, but also pay an opportunity cost of the “first spiller” benefits.
The price tag on cartels? Last week, Mitsubishi Electric and Hitachi Ltd were fined a total of 137.8 million euros, or $149.8 million for fixing prices of car alternators and starters in Europe. Last year in the U.S., Japanese supplier Kayaba had to pay $62 million in criminal fines, Bosch had to pay $57.8 million, Espar Inc. paid $14.9 million, just to name a few.