Celebrating Cynics – watch out for cartels

In the last of our series, “Celebrating Cynics”, we’ll look at cartels.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice” Adam Smith, The Wealth of Nations, 1776.

Often, procurement people don’t spot cartels very quickly. Most of those that have been exposed come to light some years on, usually via the actions of whistle blowers. "I never suspected anything", says the buyer whose firm  has been exploited for years.

And cartels can spring up anywhere. I admit, until I started researching this article, I didn’t know that the EU had fined three producers of tinned mushrooms € 32 million! The sellers were quite sophisticated: “... the cartel members exchanged confidential information on tenders, set minimum prices, agreed on volume targets and allocated customers”.

Here is arguably a more serious example.

“The European Commission has found that 11 producers of underground and submarine high voltage power cables operated a cartel, and has imposed fines totalling €301millon... Such cables are typically used to connect generation capacity to the electricity grid or to interconnect power grids in different countries. From 1999 onwards and for almost ten years, these companies shared markets and allocated customers between themselves on an almost worldwide scale”.

So how do we put on our ‘celebrating cynics’ T-shirt and set about spotting cartels? Here are a few possible signs of cartel type activity in an industry.

  • Suppliers not bidding where we might have expected them to.
  • OR firms bidding but with very different pricing or poorly presented bids – “it almost looks like they don’t want to win the work”.
  • Few active suppliers in an industry (although that is not always true – 21 firms in the German sausage industry got fined recently for cartel activity)!
  • Signs that suppliers are well informed about what is going on in your organisation and in the industry – maybe because they are comparing notes.
  • An industry with a lot of well developed trade associations.

If you suspect there is a cartel operating, how do you break that?

Game theory suggests that cartels are inherently unstable, as cartel members can usually make more profit by breaking the cartel agreement (producing a greater quantity or selling at a lower price than that agreed) than it could make by abiding by it. However, if all members break the agreement, all will be worse off. But that incentive to cheat explains why there aren’t more cartels, and why they don’t last longer.

But if you think you have identified one, complaining and looking for regulatory action is one route. You could make your fears known publicly – but proceed with care and take legal advice. You don’t want to get sued for libel!

One approach my first boss in procurement told me was to use what you might call “random allocation of business”. If it is a weak cartel, giving your business to a firm who wasn’t supposed to win it under the agreed ‘allocation’ can cause tension within the cartel.

So we hope you have enjoyed our series on “celebrating cynics” and found it useful or at least thought provoking. Don’t go through life thinking the worst of everybody and everything, but do in a business context keep your eyes and ears open. And remember, not everyone you deal with shares your goals and objectives, or indeed your high ethical standards!

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Voices (4)

  1. bitter and twisted:

    What collusion between buyers is legal to uncover cartels?

  2. Alan Holland:

    Non-cooperative Game theory may suggest cartels are unstable but Coalitional Game Theory teaches us about devices that instil trust among cartel members that can make them very stable. Just has criminal gangs conjure up devices to injure members who defect (e.g. punish family members), so too can cartel members retain evidence of shared illegal behaviour or issue credible threats so that everyone has an incentive to avoid punishment. Cartels can become very stable equilibria and we have no idea how prevalent they may be. The best deterrent is in fact competition designs that cause confusion or uncertainty among bidders. Rather than trying to find a ‘smoking gun’ to punish cartels, instead you can use a combinatorial bidding mechanism to make it computationally challenging for cartels to understand how they should split up the business. Prevention is better than cure!

    1. Secret Squirrel:

      As does practice. OPEC seems to have done rather well for rather long.

      1. Alan Holland:

        Very true, good example.

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