Economics becomes an enforcement weapon
The South African competition authorities are expected to use all tools available to them, including economic analysis, to detect cartel behaviour
PRICE fixing, market division or bid-rigging agreements among competitors or cartels are often cited by the legislature, competition authorities, courts, journalists and consumers as the most egregious form of anticompetitive conduct. In SA, the government, policymakers and the competition authorities have demonstrated their commitment to the eradication of cartels.
Cartels are by their nature secretive and difficult to detect. Outcomes in markets (uniform prices) can as easily be ascribed to competitive processes as to cartel agreements. Competition authorities have found that a most useful tool for the detection of cartels is the implementation of a leniency programme whereby the leniency applicant (whistleblower) is granted immunity from prosecution if it brings to the competition authorities adequate evidence of cartel behaviour that allows the competition authority to prosecute the remaining cartel members. The South African Competition Commission’s Corporate Leniency Policy is considered one of its success stories, with the commission having received hundreds of leniency applications since the policy’s inception.
However, leniency programmes are successful in detecting and prosecuting hard core cartels only where a cartel member or members perceive a real threat of detection and are willing to break out of the close knit cartel. Competition authorities therefore have to rely on other tools to detect tacit collusion or close knit hard core cartels.
Developments in the field of the economics of industrial organisation and econometric techniques have equipped economists with tools to deduce whether firms are involved in price fixing, market division or bid rigging arrangements when explicit evidence is not available. These tools can be used to deduce the converse.
Where cartel-busting exercises were historically viewed as factual and legal enquiries, competition authorities are now more than ever before using economic approaches and econometric techniques to detect cartels. By using economic data (amongst other things, such as price, volume, market shares, demand shifters, cost shifters and the like) and applying econometric techniques, economists can distinguish between tacit collusion and competition, as well as being able to identify episodes where a firm is involved in explicit collusion. As the techniques can also be used to demonstrate competitive outcomes, they can be used to actively dismiss claims of collusion (if supported by the economic data).
Essentially, the use of economics in cartel prosecution requires a testing whether the economic outcomes (as presented by the data) support the economic model and outcome of competition or collusion (whether tacit or outright).
Economic techniques used to find out whether cartels are active normally run through a process of first identifying the industry which may exhibit anti-competitive characteristics (either through identifying abnormalities in pricing or authorities responding to complaints of alleged cartels), verifying that the industry may in fact be controlled by a cartel (through analysing market data such as price, costs, demand and supply shifters) and lastly, by formulating an economic argument that can be used by the courts to either defend or bust firms involved in anti-competitive behaviour.
Techniques used by economists to analyse whether firms have been active, usually start at modelling an industry which would be seen as “competitive” and using this as a benchmark to test whether there has been any deviation from the competitive landscape over the years where suspicion of cartel-like behaviour has occurred. These models tend to analyse whether a firm’s pricing model is correlated with demand and supply shocks — or whether prices run independently of factors characteristic of the industry. Usually, models such as these are more equipped to deal with homogenous products (products that are similar in characteristics) as opposed to differentiated products.
However, just as testing whether an industry has deviated from competition, another useful method of identifying collusion is through identifying whether there has been a noticeable structural break in a firm’s behaviour. This normally occurs when cartels have been formed, or as they have been broken up (through firms cheating on one another in the cartel). Here, pricing data in relation to costs can be used to identify noticeable patterns in firms’ behaviour or where prices have diverged significantly from each other which may indicate that coordination has broken down. Similarly, such an analysis is complemented if it is found that participants have formulated trade associations to be used to facilitate or to cover for cartel meetings.
The above approaches have recently been supplemented by economists formulating models that specifically detail the structural competitive and collusive models of the industry — seemingly by estimating what a firm’s behaviour in relation to price would be under competition or under collusion. Testing these models against the industry under investigation may disclose whether firms are actively involved in any collusive behaviour and may provide insight into which firms have been engaging in anticompetitive behaviour.
Economic models are also frequently used to show that accused firms have not been involved in any of the alleged anti-competitive behaviour. Economic modelling can show that a firm’s pricing behaviour is rational and competitively neutral in reaction to market dynamics, rather than behaviour explicable by collusion. Whether defending or prosecuting, doing so through economic techniques is both data and time intensive and requires correctly controlling for the many determinants of a firm’s behaviour.
While the economic approaches such as those described above have been frequently used in the US and in European jurisdictions, South African case law remains relatively quiet on implementation of screening devices and economic techniques to actively detect prosecute and defend cartels. To date, most (if not all) successfully prosecuted South African collusion cases have relied on evidence of collusion provided to the competition authorities by a leniency applicant. The results of an explicit economic investigation have not featured prominently in cartel enforcement and prosecution.
SA, albeit a young jurisdiction, is considered by its peers to be relatively sophisticated in its use of economics as a competition enforcement tool. The South African authorities are expected to use all tools available to them and as such it is reasonable to expect that, when leniency applications fail to unearth cartels, that these economic tools could be successfully deployed to assist such detection.
The field of competition economics and law is continuously converging with the use of economic techniques being increasingly required in order to render sound competition law compliance advice to South African firms.
Scott Havemann and Lizel Blignaut are economists in the competition law department at ENS.