A Competition Policy and Regulation Case Study ECON3440
A Competition Policy and Regulation Case Study
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A Competition Policy and Regulation Case Study
ECON3440
Introduction
Vitamins are primarily manufactured for the consumption of animals and humans. The benefits
associated with vitamin consumption is known widely, particularly in vulnerable groups such as
children, mothers and the ill, as it may provide health benefits. Seeing this as an opportunity, the largest
producers of vitamin supplements decided to rapidly increase prices by almost twofold throughout the
1990s. The establishment of this cartel prompted an investigation into competition policy on a broader
level to protect the consumers’ interests, and eventuated in a record $725 million (Lichtblau, 1999) fine
to the conspirators. The aim of this report is to provide a detailed review of the infamous vitamin cartel
established in the 1990s.
Case Summary
As previously mentioned, vitamins were widely popularized as a form of treatment to animals and
people at risk. In order to maximize profits from inelastic demand, the leading vitamin manufacturers
chose to utilize price-fixing methods across various products. Following several meetings amongst
representatives from Rhône-Poulenc, F. Hoffmann-La Roche, Eisai and BASF in 1989, the cartel was
initially established for two products – Vitamin A and Vitamin E. (Springer et al, 2008)
The cartel expanded rapidly across the globe in both products and participants, with a total of 12
products by the late 1990s (The Guardian, 2001), as seen in Figure 1 (Springer et al, 2008)
Figure 1 – Timeline of cartels’ operations
From its inception in September 1989, the cartel ran for almost 10 years, until February 1999, with a
total of 21 suppliers of vitamins in the cartel.
In the end, the cartels saw an end due to either two reasons – investigations or difficultly in
management. The rise of fringe producers (smaller firms who supply the rest of the market) made
markets more competitive, making it more difficult to maintain the best interests of the cartel
participants. This led to the end of 6 cartels by 1995. (Igami & Sugaya, 2016)
The other 10 cartels were brought to an end in late 1998 to 1999, mainly due to various independent
and government led investigations globally. In the late 1990’s, the Department of Justice yielded guilty
pleas from some of the vitamin manufacturers, which provided confirmation as to the existence of an
international price fixing cartel.
Due to the cartel breaking antitrust laws across several jurisdictions, members were charged record
fines. The EU charged €855.2 million – which actually represented a reduction of 50% as a result of the
conspirators’ cooperation. In the USA, fines extended up to US$1 billion, with Roche executives being
sentenced to prison for their involvement and hefty individual fines. Notably, the ACCC also charged
the cartel for violating anti-trust laws.
Market Summary
As previously mentioned, the leaders of the vitamin cartel were Roche, RP and BASF, who dominated
the global industry for vitamins. Roche and BASF organised a large majority of these cartels (14 and 12
respectively) as the leading players across markets. Figure 2 depicts a summary of the market share of
all cartel participants in their respective vitamin market. (Connor, 2006)
Figure 2 - Market share breakdown across 16 vitamin markets
Internally, the cartels operated on a quota system, where profits were split proportionally based on an
agreed market share (Igami & Sugaya, 2016). In meetings conducted on a regular basis, members
would also exchange internal sales records to monitor profits and ensure no deviation from the
agreement. Any documentation proceeding meeting would also be destroyed to hide the identity of the
conspirators.
As indicated in Figure 2, the cartel’s dominant total market concentration across all the products
ensured its success. The efficiency of the cartels’ operation allowed them to markup prices by almost
40%, as seen in Figure 3 (Connor, 2006). To prevent potential arbitrage opportunities for third party
traders, global price spreads were also set to be within 10% between regions. (Connor, 2006)
Figure 3 – Average Markups (%) to US Prices across markets
Arguments
Defendants
The eventual downfall of the cartel was attributed to two main factors, as alluded to earlier. With the
vitamin cartel having highly concentrated market dominance, the emergence of fringe competitors
meant that the vitamin industry no longer enjoyed the benefits associated with high barriers to entry.
With a higher supply (Figure 4) provided to consumers due to the emergence of fringe producers, the
cartel was left with no choice but to decrease prices, as they faced a flatter residual demand curve.
(Haworth, n.d.) This made the future value of collusion profits less attractive to participants.
Figure 4 - Supply of Fringe Competitors into Vitamin Markets (Igami & Sugaya, 2016)
Later in 1999, RP’s decision to request amnesty under the DOJ’s Corporate Leniency Program caused
a domino effect on the rest of the cartel participants and an end to the cartel. When exposed,
defendants claimed that the inflated cartel prices (in the US) were a result of 3 main reasons –
insufficient production capacity to meet demand, increased production expenditure and a weaker US
dollar against the Yen and/or European currencies. (Springer et al, 2008)
Government
The primary motivation behind the DOJ and other similar authorities was to punish the cartel members
for their blatant greed to take advantage of consumers. Most products related to the healthcare industry
are known for their inelastic demand – whereby the level of demand in the market for products is not
sensitive to large changes in price. This allowed for cartels to use price fixing mechanisms and
increased global prices by 60% to 100% by the mid-1990s. (Connor, 2006) Users of vitamins were
victimized by the cartel members, who stood to earn substantial profits.
Following RP’s decision to plead guilty to the DOJ and assist the investigation, the DOJ and FBI
successfully penalized all participants of the cartel, and prompted worldwide prosecution. Notably the
cartel was accused of violating Section 45 of the Trade Practices Act 1974 (In Australia), Article 81 of
the Treaty of Rome (now Article 101 TFEU) and also Section 1 of the Sherman Antitrust Act of 1890.