Friday, November 16, 2007

Amcor & Visy - more spy-vs. spy intrigues

This conflict gets richer and richer, deeper and deeper. Recall that Visy has just been fined $36 million for colluding with Amcor to restrict competition within the cardboard packaging industry.

Visy’s Richard Pratt has been publicly disgraced but Amcor has not been levied with anti-trust penalties on the grounds that it blew the whistle first on the cartel arrangement. The ACCC chairman, Graeme Samuel argued too that Visy was the prime mover in establishing the cartel.
Initially, it seems, Amcor tried to set prices so high that they were implausible and Visy responded with moves to undercut. Visy’s prices however remained high so Amcor undercut further and got the business. Visy got angry and Amcor squealed to the ACCC.

Richard Pratt claimed that the cartel was a ruse and the intent was to make Amcor relax and to then go behind its back to steal market share. A Federal Court judge, Peter Heerey, described this as the ‘John le Carre defence’.

Now in today’s Australian it is claimed that Amcor’s sacked CEO Russell Jones had told the ACCC that Amcor had initiated the price-fixing deal with Visy because it was frightened of its more dominant competitor. ‘Pratt ran a very aggressive and effective company that had a far better manufacturing footprint than Amcor had, and he would take work from Amcor almost at will…it was quite clear to me there was no other way (than to collude)’.

Does who did what first matter? Probably not a lot. No-one is pretending that Amcor was an angel in this setting. The intent of the ‘first whistleblower’ exemption from prosecution ruling is to exploit instabilities in cartel arrangements so that (i) that tend not to arise or, (ii) they tend to self-destruct quickly should they arise. Visy should not have acted illegally even if they believed Amcor was prepared to do so and future potential colluders will have to keep this sort of vulnerability in mind.

On the other hand it does seem strange that Visy entered into this arrangement with Amcor when they were evidently doing so well. Maybe Pratt really did have a secret plan to steal more of Amcor’s business.

This is a great business case study and deserving of thesis length treatment. I’d be interested in any takers.


Anonymous said...

On the other hand it does seem strange that Visy entered into this arrangement with Amcor when they were evidently doing so well. Maybe Pratt really did have a secret plan to steal more of Amcor’s business.

And another example that cartels in contestable don't work.

Harry, you may one day want to explain just how you support laws that prevent firms from dropping prices to gain market share (predatory pricing) and others that behave like these two. It's absolutely laughable anyone (and there are a lots of you) could actually do this intellectual juggling with a straight face.

observa said...

That's what I always understood that Amcor approached Visy first yet it was Visy that copped the penalty. Nice work if you can get it I suppose.

The really big picture is it was never going to work and it didn't. Clearly they could theoretically collude on price up to the point where customers would go looking overseas. Actually a tad below that in order for them not to switch allegiances permanently and some economies of scale be lost. In that sense there are probably small run niche box makers locally ready to make inroads from the bottom up if the cartel actually succeeds. All the ACCC achieved was to penalise Visy customers $36 mill in costs in the long run, as well as the overaching oncosts of their share of running the ACCC. For ultimate consumer wellbeing, that could well be much higher than the price of the odd temporary collusion. When you look at the AWOTE for the ACT compared with the rest of the country, you have to suspect that's probably the case.

observa said...

Or more succinctly, the ACCC basically added $36 mill in costs to Visy to halt it aggressively continuing to poach Amcor's customers on price as was the a priori case and all customers are still paying their ongoing share of ACCC and larger court infrastructure overheads. Somehow this supposedly all benefits the ultimate consumer.