CALCULATING ANTITRUST FINES & DAMAGES THEORETICAL UNDERPINNINGS & PRACTICAL APPROACHES

1. CALCULATING ANTITRUST FINES & DAMAGESTHEORETICAL UNDERPINNINGS & PRACTICAL APPROACHES Presentation to Commissioners Malaysia Competition Commission by Rughvir (Shyam) Khemani, PhD (LSE) Microeconomic Consulting and Research Associates (www.micradc.com) and Former Advisor, Competition Policy The World Bank Group, Washington D.C., USA Kuala Lampur, Malaysia, 8-9 June 2013

2. Effective Administration of Competition Law and Policy • The effective administration of competition law and policy requires balancing of EnforcementFostering Compliance • Enforcement-> Investigation, Prosecution, Adjudication, Judgment, Imposition of Fines & Penalties • Compliance-> Research & Policy Analysis, Market Studies, Publications & Speeches, Meetings with Stakeholders, Advocacy • Effective enforcement (including appropriate levels of fines and sanctions) ->Compliance • Compliance->Lowers administrative & enforcement costs, legal and economic uncertainty….

3. Definitions • Fine—“a sum imposed as punishment for an offense” • Penalty—“the suffering in person, rights, or property that is annexed by law or judicial decision to the commission of a crime or public offense” • Sanctions—“the detriment, loss of reward, or coercive intervention annexed to a violation of a law as a means of enforcing the law” • Damages—“compensation in money imposed by law for loss or injury” • Remedies—“the legal means to recover a right or to prevent or obtain redress for a wrong/something that corrects or counteracts”

4. Powers to Impose Fines and Other Remedial Measures Section 35 MyCC can apply Interim Measures Section 61 MyCC can impose penalties: Corporate body fine of >5 million ringgit for initial offense; >10 million ringgit for 2nd & subsequent offense(s) Non-corporate person(s) >1 million ringgit and/or imprisonment of 5 years; 2nd and subsequent offense(s) > 2 million ringgit, and/or 5 years imprisonment Section 62:Compounding of offences MyCC can impose fines on enterprises up to 10% of world-wide turnover Section 64: Rights of private action (by persons directly/indirectly affected)

5. Characteristics of Illegal Price-fixing 1. Higher prices 2. Lower variance 3. Price increases gradually to prevent detection 4. Price falls after detection, with lag to reduce estimate of damages

6. Example of Price-fixing: Level and Variance Source: Abrantes-Metz, Froeb, Geweke and Taylor

7. Empirical Estimates of Cartel Pricing Regression meta-analysis concludes that increase in price due to cartel is between 20% and 30% Source: Connor 2005

8. Case Study: European Cement BACKGROUND: MiCRA retained by participant in collapsed cartel to appeal penalty based on agency’s estimate of price effect of cartel ISSUE: Can fall in price after cartel collapse serve as estimate of effect of cartel on prices?

9. Laspeyres Price Indices for Selected Cements, 2000-2003 1.200 1.000 0.800 Price Index 0.600 0.400 0.200 Agreement Area 0.000 2000 2001 2002 2003 Year European Cement Price falls by almost 50% with collapse of cartel Implies cartel raised prices by € 30/ton

10. European Cement • Cartel agreement was to maintain assigned market shares. • Assigned shares based on capacity • Induces massive excess capacity • Prices collapse with collapse of conspiracy to unsustainably low levels • Fall in price with collapse of conspiracy overstates price effect of conspiracy

11. Compare to Margins in Other Countries • Implies prices 3.5% higher due to cartel • Approximately € 2.11/ton

12. Assessing Damages • Assessing size of ‘consumer harm’ arising from anticompetitive conduct influences size of fine to be imposed • Key issue in commercial disputes estimate compensation • General approach: compare actual outcomes(prices) with what would have been absent anticompetitive conduct (‘but for’ analysis) • Econometric analysis controlling for main factors affecting prices viz., changes in costs, demand and customer mix….’before and after’ study of market and firm pricing-output behavior….

13. Vitamin Case Vitamins • 1999: Hoffmann-La Roche and other firms pled guilty to operating a world-wide cartel over previous decade for main vitamins (especially vitamins A & E) • Investigations & prosecutions in EU and other jurisdictions • Documents indicate price levels and changes pre-post cartel period, gradual, systematic price increases and rapid steep decreases post US investigation.. • Differentials facilitated estimates of ‘over-charge’ • US fine $500 million; EC fine euros 462 million

14. GOOGLE On-line Mapping • 2012 France’s Commercial Tribunal of Paris (CTP) found Google abused its dominant position  fined euros 500,000. • Relevant market: “online mapping allowing for the geolocalisation of sales points on company websites” • CTP held Google dominant (de facto monopoly) in France in search engine market. • Allowed for dominance in connected online mapping market free • Disadvantaged Bottin, a French company offering online mapping for annual subscription fee

15. GOOGLE online mapping-continued • Free’ service did not allow for covering of costs e.g. acquiring geographic/aerial rights necessary for mapping charged by 3rd parties • Google pricing strategy exclusionary, drove all competitors (e.g. Maporama) out of the market • Google strategy maximized its advertising revenue to detriment of competitors that needed to charge fees for online mapping service • CTP rejected Google defense: • Predatory pricing conditions as per EC guidelines not proven • Google was sacrificing short-term profits….and other arguments…..

16. Polypropylene Carpet • Polypropylene carpet low grade floor covering used in low-income houses/offices • Mid-1990s US DoJ investigated alleged price collusion: firms’ prices which had previously increased declined rapidly • Econometric analysis and actual prices pre-investigation > post-investigation prices • During alleged cartel period, cost declines of principal inputs notpassed thru’ rapidly suggesting collusion; but cost increases post investigation also not passed thru rapidly • Parties argued this as evidence of competitive pressures-fear of losing market share….

17. Polypropylene Carpet--continued • In ‘oligopolistic’ markets, prices tend to increase when costs increase but tend to be ‘sticky’ downward when costs decline • Case settled before adjudication, empirical analysis, evidentiary issues unresolved Some Complexities: • Econometric analysis data intensive, require well-specified models, inclusion of all relevant variables • ‘But for’ analysis needs to consider ‘structural changes’ between pre-post anti-competitive periods • ‘Pass thru’ calculations: final vs. intermediate purchasers, inter-connected markets….

18. Pass-Through Rate • Direct and indirect purchasers • Illinois Brick in US vs. EU approach • Theory: Pass-through rate depends on • Competition – oligopoly – monopoly • Firm-specific vs. industry-wide cost increase • Shape of demand curve • Slope of marginal cost curve • Conduct parameter

19. Price Infinitely elastic supply curve Upward-sloping supply curve Price PT = 1 PT < 1 ∆P < ∆C ∆P = ∆C Quantity Quantity Pass-Through Rate Under competition, pass-through rate depends on the supply elasticity and demand elasticity

20. Constant elasticity demand curve Price Price Linear demand curve ∆P = 2∆C PT = 1/2 PT = 2 ∆C MR Quantity Quantity Pass-Through Rate Under monopoly, pass-through rate depends on the convexity of the demand curve ∆P = 1/2∆C ∆P ∆C

21. Implementation Issues • Optimal penalties • Theory: harm divided by probability of detection • Financial penalties vs. jail time • Level of fines: cost recovery + punitive + deterrent • Fines: Too low license fee to commit infractions?  Proportionate, deterrent • Factors to consider: Magnitude of price differentials, profits earned, time duration of anticompetitive conduct, size of market affected, nature and type of customers (individual consumers vs. business firms, income group, etc.), nature of product (staple vs. other), importance in budget/cost….. • Amnesty-Leniency