Saturday, February 11, 2006

Amcor vs. Visy: no honour among thieves?

A cartel between two large firms can arranged to maximise the total profit advantage to the firms. In the recent case involving Amcor and Visy’s alleged cartel in the Australian fibreboard packaging market, the firms basically agreed not to take away each other’s customers and for each to then charge hefty prices to their established customers. If a customer of Amcor approached Visy to cut a better deal, Visy was obliged to thwart this by always tendering a price above that of Amcor’s. In this latter case Visy would look ridiculous in the market if Amcor was already charging an exorbitant price. The incentives in this situation are for Visy to ask Amcor to cut its prices a bit and to allow some sensible sort of competition. It stops a bad impression idf nothing else.

The ACCC action on Amcor and Visy, seeks to prosecute the alleged cartel arrangement in the Courts but has exempted Amcor from prosecution because it has acted first in coming forward with details of its alleged role and acting as a whistleblower. To keep their immunity Amcor must co-operate fully with the ACCC. The twist is now that Amcor seems not to be co-operating. It has refused to hand over 27 documents to Visy claiming it provided them to the ACCC on a commercial-in-confidence basis and so would not be released to Visy.

The ACCC claim that the fallout between the colluders was the greed of Amcor, particularly in the Queensland market where, as Matt Drummond in today’s AFR (subscriber only) suggests, ‘price gouging’ was occurring. Amcor sought to charge customers prices that were so high, Visy’s tenders under the cartel agreement became implausible. Customers started getting stroppy. Visy challenged Amcor to cut its prices a bit so Visy could quote prices that looked more reasonable. Unfortunately here Visy kept its prices reasonably high while Amcor offered a discount to the firms concerned and got the business. Visy was doubtless angry with Amcor and Amcor responded by running to the ACCC and did the whistleblowing trick.

Its a instance of how the corporate regulator can exploit well-known instabilities (of the Prisoners Dilemma type) in attacking cartel agreements.

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