Collusive behaviour, ranging from fixing market shares to abuses of dominant position, has long given rise to concern from economists. At the same time, research examining the feasibility of and empirical evidence on such behaviour ranks amongst the most exciting taking place in Economics. What kind of environments support collusive behaviour, and how can welfare losses be estimated? These are questions that are not only relevant to IO research but also in institutions such as the Board de la Concurrence of France. Consequently it was a great pleasure to welcome someone as distinguished as Anne Perot to the TSE Business Talks. She is not only a former vice president of the French competition authority, but also a former Paris 1 and ENSAE full professor and now a partner at MAPP consultancy.
Case presented during the TSE Business Talk on October 17th
In June 2012, Groupe Casino, previously owner of 50% of Monoprix SA, acquired the additionnal 50% of shares held by Galeries Lafayette. While the acquisition had long been consented to by both companies, competition issues were at the core of the debate within the competition authority, which had to decide on the takeover. This is when MAPP, a Paris and Brusssel based consultancy mainly focusing on competition issues, came into play. By nature of the retailing firms, they are direct competitors and this proved to be especially valid within the city of Paris. Hence Groupe Casino asked the consultancy to perform an economic analysis on whether the market power hold by the new company was too big. How would MAPP answer this question in order to convince the competition authority? Clearly both Casino and Monoprix had a very high density of supermarkets within Paris. However, their ability to exert market power depended heavily on the competitive pressure imposed by hypermarkets outside of Paris. If cus- tomers were willing to consider rather distant hypermarkets when buying food then the market power held by Casino and Monoprix would not be sufficient to reject the plan. To answer this question, MAPP used a wide range of data including Ipsos surveys, Nielsen data base and index prices from Monoprix and Casino itself. The consultants went on to define a utility func- tion that would include age, family situation and the location within Paris as parameters in order to derive demand functions. The behaviour of consumers would then be estimated apply- ing a logit model. Indeed the results were quite illuminating.
Based on the analysis, Casino convinced the competition authority to consent with the takeover. At the same time the authority had a powerful tool at hand to assess in which areas the market power of the new company would exceed an exceptable level. Thus in the end Casino was required to sell 55 supermarkets, of which 53 were located in Paris. (Case presented during the TSE Business Talk on October 17th)
Uncovering secret collusions and abuse of market power - isn’t that rather the plot for a good detective story than formal economic theory? How and why do these investigations usually begin?
Well, it is sure that detecting a cartel has something to do with a detective story. But you may know the policy imple- mented some ten years ago in France that we call the leniency program. The leniency program guarantees total immunity of sanctions to firms that cooperate with the competition author- ity and are themselves member of the cartel, in order to see who the other firms involved in the cartel are, how the cartel works and what the increase in prices were, for instance. This leniency program is one of the main tools used to detect secret cartels. When a firm comes to the competition authority to say “I am a member of a cartel and I will tell the names of the other members involved”, usually the competition authority will request further informa- tion on the form taken by this cartel. Very often the competition authority will let the cartel keep going until they have sufficiently identified the individ- uals participating in it; once they have identified the people involved, they will come out and stop the cartel, and then cooperation between the authority and the firm can begin. But you see there is still a little bit of a detective story.
Do you think that firms often adopt collusive behavior or other types of anticompetitive practices? Are there estimates on welfare losses?
Well, it is difficult to say because what we observe is an important feature of the leniency program. The leniency pro- gram is a very efficient tool to discover a cartel. However, if you are involved in a cartel then you benefit from the cartel because it allows you to have higher prices and higher profits. This trade-off only changes when it is less profitable to remain in the cartel than to stop the cartel, and if this happens it is because the cartel is less profitable than it used to be. So now in the economy there are probably a lot of cartels that work very well which we don’t observe because no one involved has an incentive to stop them.
Are sanctions credible? Why can’t they be a sufficient incentive for companies not to collude or abuse market power?
There has been a lot of work during the last years among economists and academics to try to see whether the fines imposed by the European Commission are sufficient to discour- age anti-competitive behavior. All these studies are not totally consistent with one another. Some say that fines are not sufficient to give the appropriate incentive to behave in a competitive way, some others find that fines are sufficient. What we observe is that a good way to say whether fines are sufficiently high is to see whether the same firm is detected several times in a cartel. If it is the case it means that the fine imposed in the first time was clearly not enough to convince the firm to behave in a pro-competitive way. Here we should have a real rigorous analysis to see who are the firms who repeat anti-competitive practices, who are punished two, three or four times in order to have an idea of whether or not these fines are at a sufficiently high level.
Secondly there is a discussion in Europe over whether we should favour a policy which would not impose particular monetary sanctions but jail sanctions for the people who are responsible, that is, commercial directors for instance who are in charge of the prices. These people clearly have a huge responsibil- ity. In the U.S. you have jail sentences for the people who are responsible in cartel cases but not for abuse of domi- nant position. And this is clearly a very strong incentive. Thus as economists we have to ask ourselves if we prefer to take value from the firm which has to pay a fine or put a person in jail and possibly destroy people? This topics has been discussed in many panels. One of them involved the competition authority in England. They argued that the level of standard of proof was so high in order to prove that a person should go to jail that in fact it was never applied. But if you have a policy which is impos- sible to implement and in the end nobody goes to jail, and at the same time you have no important financial sanctions, you have lost the two major sanctions that make an impact.
What industries do you find most often involved in anti-competitive behavior?
In the near past, telecoms. I would say for cartels in general, base chemical products or raw materials; that is, all products that are not differentiated. Since the goods are homogeneous, the market is exclusively characterised by price competition and no competition through product differenciation. This is very bad for profits and gives an incen- tive to cartelise the industry.
Secondly, we see a lot of cartels in crisis periods, and of course crises do not affect all sectors equally. For instance, some sectors are protected by the fact that there is innovation. In fact, for a very innovative sector there is almost no collusion. For example, if you work on cancer products, then you do not compete with another firm specialised in, say, infectious diseases. This is why in the pharmaceutical industry you have a lot of abuse of dominant position, but firms do not seem to collude much, since they work on very differentiated products.
Is there a link between the number of firms involved in a cartel and its effectiveness?
What is important for the success of a cartel? Not too many firms! There is an academic paper in game theory whose title is “four are few and six are many.” This paper shows that when there are four competitors in the market it is rela- tively easy to implement a cartel policy, to watch what the others are doing and punish free-riding firms. Whereas when there are many firms, and six firms can be a lot, then it is very hard to make the cartel successful. If on the other hand you are two firms among, say, ten of equal size your market share is simply too small to make the cartel work. All the others will price at a lower level, take your market share and force you to exit the market. This is the kind of trade-off you face. Thus the ideal situation for a cartel is the occurence of not too many oligopolists with all the oligoplists involved in the cartel.
Do you feel that there are still prejudices against women in economics?
I cannot speak generally. I was involved in three different professional lives. First as an academic, second in the competition authority, now in a consul- tancy. What I can say is that academic life is very very hard for women. Why? Being between 30 and 40 in the field of research, in order to be seriously considered you must be prepared to go to many conferences and with small children this is not easy at all. But I think this should be a problem for men who have small children too. From what I observed at Paris 1 I can say that below the position of professors, that is, assis- tant professors for instance, the gender ratio was almost half half. But at at a level of professors there were 50 profes- sors in the Economics department and we were four women and I think this is
really a small number.
After that in the competition authority it was a very egalitarian world, probably because in law there are much more women than in economics. In law it was very common to find women everywhere at any position, including vice president. Before me there were other female vice presidents and in addition to me there was another women who was also vice-president.
But for business lawyers and consul- tants I think that the problem of women is very hard to solve. I see that with the young women we have in Mapp. For instance we have a senior consultant, a young woman who just had a child nine months ago. Sometimes she is involved in a project where we have a deadline in two days. Then she can spend 48 hours with very short nights without seeing her child. This is not easy at all. But again this is true for any young parent, including men.
What kind of profile is your consultancy MAPP looking for?
What we want for professional skills are people that are used to IO arguments and are familiar with the basic literature, that is the type of models you will find in the Tirole or Massimo Motta. We do not necessarily hire perfect econome- tricians but people who have the ability to switch from theory to the real world. People who are used to saying, “ this is compatible with my microeconomic story and this is not, so what should I do with this piece of evidence that does not fit with the theory I had in mind at first?”
What is the best way to apply?
Just send us an application letter and a CV. We take a lot of interns and in fact we do not want to hire anyone without having completed an internship. By labour market regulation we can only have six month internships in the same academic year, but we do not want less.
A simple model of imperfect competition, where 4 are few and 6 are many International Journal of Game Theory; 1973, Volume 2, Issue 1, pp 141-201 http://www.imw.uni-bielefeld.de/papers/files/imw-wp-8.pdf
Latest published anti-trust cases of the European Comission http://ec.europa.eu/competition/elojade/isef/index.cfm?fuseaction=dsp_at_by_date