Lessons for Competition Policy from the Vitamins Cartel

• DOI: https://doi.org/10.1016/S0573-8555(06)82006-7
• Pages: 149-176
• Date: 01 April 2007
• Published date: 01 April 2007
• Author: William E. Kovacic,Robert C. Marshall,Leslie M. Marx,Matthew E. Raiff

CHAPTER 6

Lessons for Competition Policy from the

Vitamins Cartel

William E. Kovacica, Robert C. Marshallb, Leslie M. Marxcand

Matthew E. Raiffd

aU.S. FederalTrade Commission

bPennsylvania State University,USA

cDuke University, USA

dBates White, LLC

Abstract

Mergers have the potential for negative social welfare consequences from in-

creased likelihood or effectiveness of future collusion. This raises the question

of whether there are meaningful thresholds for the post-merger industry that

should trigger significant scrutiny by the Department of Justice or Federal Trade

Commission. This chapter provides empirical analyses relevant to this question

using data from the Vitamins Industry, where explicit collusion was admittedly

rampant in the 1990s. In analyzing prices in the post-plea period, which is a

period of potential tacit collusion, we find that vitamin products with two con-

spirators continue as if the explicit conspiracy never stopped, while products

with three or four conspirators return to pre-conspiracy pricing, or lower, quite

quickly. Although it is difficult to extrapolate to other industries, the evidence

suggests that, by itself, a proposed reduction in the number of firms manufactur-

ing a given product from four to three via a merger is not problematic in terms

of the efficacy of tacit collusion. The danger of a three firm industry is that it is

close to duopoly, and the benefits of explicit collusion in a duopoly appear to be

sustainable via tacit methods well past intervention by enforcement authorities.

6.1. Introduction

A major social welfare concern regarding a potential merger is the impact of

increased concentration on the future suppression of interfirm rivalry within the

industry. The Horizontal Merger Guidelines of the Department of Justice (DoJ)

and Federal Trade Commission (FTC)1implicitly mandate an analysis of the in-

creased chances of future coordination as well as the increased payoffs from any

1Availableat http://www.usdoj.gov/atr/public/guidelines/horiz_book/hmg1.html.

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

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DOI: 10.1016/S0573-8555(06)82006-7

150 W.E.Kovacic et al.

incremental coordination among firms in an industry.2Incremental coordination

can be explicit collusion or tacit collusion. Although the latter is not illegal, the

Guidelines are clear in expressing concern about approving mergers where tacit

collusion may become easier and more effective, and thus lead to diminished

social welfare.3

Any empirical study of an industry that tries to assess the impact of explicit or

tacit collusion will confront basic issues. First, prices can vary for a large num-

ber of reasons related to demand and cost conditions that are largely unrelated

to the nature of interfirm rivalry in the industry. Second, even if controls exist

for many of these factors, it can be difficult to separate tacit from explicit col-

lusion. Yet, these are important to disentangle. Suppose that explicit collusion

can be profitably sustained with relatively large number of market participants,

but the profitability of tacit collusion is highly sensitive to the number of market

participants. Specifically, suppose that a duopoly can sustain prices with tacit

collusion that are not different from those attainable by an explicit cartel, but a

four-firm oligopoly can only sustain tacitly collusive prices that are half of what

was possible with explicit collusion. Then it would be sensible for the FTC to

devote considerably more resources to challenging “three-to-two” mergers than

“five-to-four” mergers.

We argue that there exist some natural experiments in this regard that are

commonplace and for which data should be readily available, especially to en-

forcement agencies.4Specifically, when the DoJ discovers explicit collusion,

there is typically a plea period, with the conspirators admitting to collusion dur-

ing that period. In the abstract, the end of the plea period marks the end of the

conduct (although there can be substantial lingering effects on price from ex-

plicit collusion). Although the explicit collusion has ended, the nature of the

agreements that existed between the firms for organizing their illegal conduct,

2Arguments regarding the change in coordinated effects from a merger havehistorically consisted

of four components. First, if there are a substantial number of firms remaining after the merger, then

adverse effects are viewed as relativelyunlikely. Second, if the Herfindahl index rises substantially,

then the merger is viewed as being worthy of further investigationfor adverse social effects through

coordinated effects. Third, the Guidelines make special note of “Maverick” firms—if a Maverick

is part of a merger, then the merger is viewed as having potentially adverse social effects, but if a

Maverick exists in the industry and is not involvedwith the merger, then the merger is viewed with

less concern. Fourth, arguments are made, rooted in the Folk Theorem and economics literature on

tacit collusion, about how firms’ abilities to monitor each other and punish deviant behavior might

change as a result of the merger.

3According to the Horizontal Merger Guidelines (at Section 2.1): “A merger may diminish com-

petition by enabling the firms selling in the relevant market more likely,more successfully, or more

completely to engage in coordinated interaction that harms consumers. Coordinated interaction is

comprised of actions by a group of firms that are profitable for each of them only as a result of the

accommodating reactions of the others. This behavior includes tacit or express collusion, and may

or may not be lawful in and of itself.”

4Enforcement agencies should mandate as a condition of merger approval that certain information

be made available to them post-merger on an ongoing basis, and they should devote staffresources

to the analysis of this data.