Saturday, December 13, 2008

Illegal cartels and the prisoner's dilemma

Paraffin wax is a humble byproduct of oil refining, and the EU's competition commission recently fined a passel of big oil refiners for having maintained a paraffin cartel that illegally coordinated prices. Here's the story: Inside Europe’s High-Living Wax Cartel.

The cartel seems to date from the 1970's, so it was quite long lived. But when it collapsed, it collapsed quickly, because of the prisoner's-dilemma way the anti-cartel laws are written and enforced.

"In the paraffin case, as in others, some of the biggest offenders walked off with no, or relatively small, fines because they were first in the door with information implicating less-involved conspirators."
"By late February 2005, the cartel started to fracture. It gathered for what would be its last meeting in the brightly colored four-star Hotel Madison Residenz in Hamburg but was unable to come to an agreement on prices.
Three weeks after the Hamburg meeting, the cartel was shattered.
Shell, facing $360 million in fines for its participation in other cartels — involving synthetic rubber and bitumen, a thick form of petroleum — revealed the paraffin scheme to European Union authorities on March 17, 2005. Under European Union regulations, Shell won complete forgiveness for what would have been a nearly $130 million fine, as calculated by the commission. Other companies — some far less implicated — faced fines eventually totaling nearly $900 million."


Gu Si Fang said...

You argue that the design of anti-cartel laws caused the quick collapse of the paraffin cartel. The timing of events described in the NYT article do provide some evidence. The possibility to bargain a smaller fine for offenders who turn in early in the process seems to be key. Do you know when this law was passed?

This is indeed a typical case of a prisoners' dilemma. On similar grounds, cartels are usually short-lived because the cooperative equilibrium is unstable. Yet, the paraffin cartel lasted several decades. Further, when suspicious customers started to look for providers outside Europe, those quickly aligned their pricing more or less on cartel prices. This begs the question : how do you explain such a lack of appetite on behalf of competitors?

Is it far-stretched to imagine that some other law was instrumental in making the cartel stable until 2005, thus enabling it to last so long?

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