Andrius Guzavičius

Assessment of Cartel Impact on the National Economy: Integrated Model

The focus of the academic and legal literature has been mainly put on the analysis of cartel harm, especially to specific affected groups. The popularity of this issue has been mainly determined by its practical applicability based on the right of injured parties to damage compensation which is entrenched in EU and Lithuanian laws, as well as in case law.

Cartel Occurrence and Operation in Market

Profit seeking actions of undertakings often depend on the structure of the market in which they operate. Although economic theories usually distinguish among four types of market structures—perfect competition, monopoly, oligopoly and monopolistic competition, two of them appear to be more common in practice, i.e. oligopoly and monopolistic competition. By its characteristics, monopolistic competition is closer to the perfect competition model, while oligopoly is more similar to monopoly. In oligopolistic markets, firms very frequently start operating in an interdependent manner in order to maximise their profits and thus form cartels. It is namely the oligopolistic market in which several firms, even occupying small market shares, are in a position of controlling a large market share, i.e. joint collective actions enable maximising the generated profits. In addition, in markets with a small number of players, the market players are well aware that pricing or output decisions taken independently by every firm have a direct influence on the profits of all competitors. Therefore, both theoretical and empirical studies have proved that cartels are most commonly seen in the oligopolistic markets. For that reason, analyses of collective corporate actions and modelling of effects thereof have been extensively integrated into and supplemented the theory of oligopolistic markets.

Methodological Principles of Assessing Cartel Harm (Effects)

There is no doubt that a cartel-induced harm assessment is the object of economic analysis. However, since the economic aspect requires a complex approach to the problem, underlining only harm is too narrow. Even though a cartel in general has an adverse effect on the economy, the integrated assessment of its effects on the national economy as a whole needs to consider both a negative (harm) and a positive, even though minor, effect. Despite the necessity for an integrated assessment at macro (national) or mezzo (regional) level and its importance for enforcing antitrust policy decisions, the academic literature mainly focuses on problems relating to the assessment of harm suffered by individual affected parties rather than on the integrated impact assessment due to poor practical applicability of this assessment compared with a harm assessment. Considering that the assessment of harm is a constituent of the integrated impact assessment it is assumed that the methodological principles of harm assessment correspond to the principles of effects assessment. Therefore, formulation of methodological principles for the integrated assessment of cartel impact on the national economy was mainly based on the methodological principles of harm assessment.

Recommendations to Minimise an Adverse Impact of Cartels on the National Economy

The European Commission and most countries of the world consider that anti-competitive agreements concluded between undertakings, i.e. cartels, constitute the most serious infringement of competition law inflicting major harm on consumers and the economy and therefore anti-cartel fight is regarded as an important competition policy priority. In alleviating harm caused by cartels to the Lithuanian economy, it is recommended to add cartel prevention, detection and punishment to the priorities of Lithuania’s competition policy. For its efficient and successful implementation, it is recommended to work in the following areas:

Analysis of the Impact of Cartels on National Economy and Competitiveness

Evaluation of the impact of cartels on national economy and competitiveness is a relevant issue for EU Member States and Lithuania, as the country of small economy with developing culture of competition; however, apart from episodic discussions in the public domain this topic has been scarcely analysed in Lithuania. This explains why most conclusions in this monograph rely on studies carried out by foreign authors. Although it is widely known that cartels are harmful to society, there is a lack of research and studies on the cartels’ impact on national economies and competitiveness. The literature generally analyses the adverse effects (harm) of cartel outcomes on an individual affected party (e.g. on the final and/or intermediate customer, competitors, suppliers), but not on national economy or competitiveness. Insufficiency of studies on the impact of cartels on national economy and competitiveness justifies the relevance and timeliness of the problems addressed.

Legal Regulation of Cartels

Cartel detection and punishment is the essential condition for fair and free competition the success of which for the most part depends on the efficient legal regulation. Formally, the regulation of anti-competitive agreements among undertakings in Lithuania does not differ from that in the EU. The success of the efficiency of legal regulation depends not only on formal harmonisation of the legal framework. Efficiency is greatly impacted by the practical peculiarities of the application of law, society’s cultural aspects, political will and a number of other factors.

Empirical Application of a Model for an Integrated Assessment of Cartel Impact on the National Economy in the Case of Lithuania

Before carrying out an empirical study on a model for an integrated assessment of cartel impact on the economy it is important to emphasise that each economic modelling is associated with assumptions directly affecting assessment results. For this reason the determination of the extent of cartel impact is related to major limitations in the sense of a probable degree of confidence and accuracy. Despite the fact that the very essence of cartel impact assessment already determines the absence of ‘true’ value of the impact but only estimates based on assumptions and approximations, this empirical study aims to contribute not only to the development of a methodological framework for cartel impact assessment but also a rise in the general level of competition culture in Lithuania, the shaping of national competition policy, improvement of the practice of competition law and prevention of the formation of cartels.

Conception of Cartels: Definition and Diversity

According to various sources, since 1880 or 1888, hundreds of economists, historians, lawyers, and prosecutors have laboured to crystallise the concept of cartels, define the causes of cartel formation, generalise the mechanism of cartel functioning, assess their role in the market and the effects on the economy and the wealth of nations, as well as to develop legal regulation for cartels. Although a tendency of rivals to collude was already mentioned in the Wealth of Nations (1776), a magnum opus by the father of political economy, Adam Smith, Connor and Bolotova (2006) note that one of the first economists to analyse cartel issues was Bullock (1901) who investigated cartels existing around 1890 and arrived at the conclusion that the price effects of cartels could not be adequately estimated. More than a century has passed since the first attempts to analyse and estimate cartels. An increasing number of researchers, economists, lawyers, businessmen, and politicians become interested in cartel-related problems. As a result, there appear more and more research papers, studies and surveys on these topics. The scope of economic research has considerably grown since 1999 in the context of intensive efforts being taken in the European Union, the United States of America, Canada, and Japan in the area of competition law-making and legislative modifications with regard to cartels and compensation for damages caused by cartel practices. The growing interest and abundance of new research produce new results and conclusions, or specify and supplement the existing ones that were not possible in early cartel analyses due to insufficient information and historical data, and unavailability of research methods and technical possibilities.

Critical Analysis of Economic Efficiency of Fines Imposed on Cartels

A discovery of an active cartel represents only one stage in antitrust enforcement. Another important stage, which is quite widely discussed among scholars, is the imposition of fines against cartels. The economic efficiency of cartel fining is broadly covered in the academic literature and legal documents providing a number of analyses and study aspects, such as compensation of damages, deterrence from other violations of competition law and/or punishment of violators.

INTEREST GROUPS AND SOCIAL ECONOMY

Impact of the action undertaken by the interest groups for the social economic prosperity is still the topic of the longterm scientific debates. According to some researchers the interest groups contribute to the boost of the society’s prosperity, while according to the others monopolistic structures tend to emerge due to the interest groups. Taking into consideration the scientific academic approach development of the uniform opinion on the role of the interest groups as the connecting element between economy and politics would be of high importance. The present opinion would facilitate process of the society’s judgment about the outcomes of the action undertaken by the groups. During the recent 40 years the influence made by interest groups on the country’s social economic environment has been in the focus of attention. In the 6-th decade the formation of economic interest groups was analysed, in the eighth decade rent seeking theories made their influence. Rent seeking theory includes the analysis of interest representation effectiveness and resource distribution. In the 9 th decade research included the influence of interest groups on nation growth and recession. Later research embraced the influence of interest groups on the regional development of countries as well as on the policy of European environmental safety and on the economic growth of developing countries. Evaluation of the efficiency of the action undertaken by the interest groups is of great importance for development of the uniform opinion, that in turn calls for objective evaluation of the profits received due to and costs spent by the entities for participation in the shared action. Papers of some economists provide analysis of both the interests groups and impact they make for the entities that make and implement strategic decisions. On the other hand, the lack of the analysis of the efficiency of the action undertaken by the interest groups with respect to the social economics, when evaluating the profits received from the shared action and the costs related to that with respect to the economic entity, as well as a shortage of the original patterns to demonstrate efficiency of the shared action undertaken by the interest groups are obvious. Taking into consideration diversity of the forms of the action undertaken by the interest groups and after having completed the comparative analysis of the concepts on the interest groups, the below definition of the concept on the interest group is provided: the interest group is a union that joins different subjects seeking for the benefit, and that represents their interests as well as provides members of the group with the products of selective encouragement. The costs incurred during the shared action is covered by the interest groups using the members’ fees collected and other purpose-driven contributions as well as means independently earned in a way of selling the products of selective encouragement. Membership in the interest group is based on the principle of voluntariness.