The following aai column appeared in the FTC:WATCH dated Sept. 22, 2003 and is reprinted with permission.
CARTEL CATYLIST AT WORK: A NOTE ON HOLMAN JENKINS
John M. Connor and Albert A. Foer*
For a decade or more, Holman W. Jenkins, Jr. has been carrying on a one-man war against the world’s antitrust agencies from the editorial pages of the Wall Street Journal. In a score of signed op-ed pieces and in more than a hundred editorials that bear his fingerprints, if not his name, Jenkins regularly attacks the alleged antibusiness effects of the antitrust laws and what he believes to be the excessive zeal of antitrust officials. In recent years, he has been one of the few critics of the prosecutions of large international cartels by the U.S. Department of Justice (DOJ) and the Competition Directorate of the European Commission (EC).
For example, in a July 24, 2000, editorial Jenkins described the Antitrust Division of the DOJ as a “… place where business is still regarded as the enemy” and where “entirely political” decisions are made to use government power to trample on shareholders’ rights. The editorial goes on to impeach the Division’s head as an “unelected official” operating free from presidential accountability and motivated solely by “media attention and career visibility.” This is only one of more than 20 WSJ editorials excoriating Joel Klein, who is now Chancellor of the New York City schools. Klein should feel lucky: the EC’s Mario Monti has been criticized in more than 60 pieces on the paper’s editorial pages.
In a series of signed op-ed pieces, Jenkins has extended his animus to antitrust in several bizarre directions. Only “moral and intellectual rot” can explain the DOJ’s “persecution” of international price fixers for the “figmentary crime of price fixing.” Modern trustbusters methods are Stalinist, and their corporate leniency programs Orwellian. In one opinion piece Jenkins posits the highly original notion that “… a commission is not a price, so colluding about commission rates is not price fixing”. Revealing his debt to the ultra-libertarian philosophy of Ayn Rand, he states: “Firms that engage in conversations with competitors are doing no more than exercising their freedom of speech, property rights, and freedom of contract”.
Fortunately, this remarkable enlargement of commercial free speech will cause no harm, because the customers of cartels “…are perfectly free to walk away from any deal they don’t like.” Even if one generally accepts his extreme libertarian perspective, this last comment reveals a fatal flaw in Jenkins’ argument. The typical international cartel is the single global supplier for an essential business input, and remains so for several years. In most cases, therefore, the customers of effective cartels cannot in fact “walk away” from the colluding firms.
Jenkins has other purported reasons for decrying the government’s prosecution of cartels. He claims, for instance, that some of the conspiracies were “flops” because some participants continued to give secret discounts to their biggest clients. In fact and for good reason, in price fixing conspiracies, the effectiveness of the cartel is not the legal issue, only whether an agreement was knowingly made. The purpose of the law is to deter businesses from entering into collusive agreements whose effects are almost always harmful.
Jenkins’ latest jab at anticartel enforcement was published on July 2, 2003, under the title “Want More Deflation? Let’s Go Hunting Cartels.” This piece was written in the context of 17 enumerated international cartels in global markets for intermediate products and business services. Jenkins lays out three reasons why pursuing such cartels is a “fool’s errand.”
First, the buyers of the cartelized products are “most often” giant, powerful, sophisticated companies, which, he asserts, seldom complain to antitrust officials about the alleged price fixing. This phenomenon, in his view, demonstrates that anticartel enforcement is unnecessary, driven by bureaucratic caprice, and contrary to the interests of big business.
As always with Jenkins it is best to question his command of the facts. Businesses do complain about price fixers but most often remain mum about it out of fear of retaliation. Moreover, in the few cases where firms seeking leniency from the government have revealed their identities (Rhone-Poulenc, Crompton Chemical, ADM, Ajinomoto, Stolt-Nielsen, et al.), they are frequently leaders in their industries with more than a billion dollars in assets. It is true that cartels have more difficulty succeeding when the buyers are only a few giant firms, but in every case raised by Jenkins the cartels sold to hundreds of manufacturers worldwide, most of them small or mid-sized companies. An uncomfortable fact for Jenkins is the avid participation of the giant firms he talks about as plaintiffs in treble-damages suits. Finally, a fact that Jenkins misses entirely is that in many situations the corporate purchaser of goods that have been subject to price- fixing passes on the increased prices to end-use consumers. In these cases, the direct purchaser has no reason to squeal. Unfortunately, because of a Supreme Court decision in the 1970’s, indirect purchasers (consumers) are deprived of standing to seek monetary damages under Federal law.
Second, Jenkins suggests that cartels are unlikely to raise prices above competitive market levels; rather cartel participants are often “… sad-sack commodity producers…trying to divvy up losses in times of slack demand.” Perhaps Aventis, Hoffmann-La Roche, and other world-champion price fixers would object to Jenkins’ characterization, but his suggestion that global price fixers would be so irrational as to form and operate these ambitious joint ventures only to share fiscal pain seems truly preposterous. Add to that the risk of being indicted, and it is only simple business logic to infer that these firms expected a return on investment that is higher than normal. . Even if Jenkins were correct about the profitability of cartels, it is still likely that the losses observed would be smaller than they would have been absent the cartel. In fact, however, the overcharges imposed on buyers over the lives of the very cartels cited by Jenkins have averaged about 25% of sales – a rate that would triple or quadruple the historical profits of cartel participants.
Jenkins’ third and nuttiest hypothesis is that because we are living in a deflationary world, a little price fixing is a good thing for the economy. His premise that the world is deflationary is wrong, except for Japan. (Perhaps he confuses deflation with disinflation). Even if he were correct, while global cartels have affected more than $400 billion in global commerce over the last decade or so, that is still such a small slice of world GDP that price increases of 25% would have only a miniscule effect on average global prices.
Connor, a member of the AAI Advisory Board, is an economist at Purdue University and the author of Global Price Fixing (Kluwer 2001), which recently received the Jerry S. Cohen Award for Antitrust Scholarship. A working paper with up to date information on global cartels may be obtained from email@example.com. Foer is President of the American Antitrust Institute, www.antitrustinstitute.org.