how a cartel operates. evidence from graphite electrode cartel from a social network perspective
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How a cartel operates.Evidence from Graphite Electrode Cartel: a
Social Network Perspective
Carlos Ponce (*) & Flavia Roldan (**)
(*) Universidad Alberto Hurtado—ILADES(**) Universidad ORT Uruguay
August 2016
The aim of the paper
The aim of this article
• The aim of this article is to gain understanding about howcartels work.
• To this end, we describe how a cartel operates:
• the Graphite Electrode (GE) cartel.
The aim of the paper
The aim of this article
• We explore what Levenstein and Suslow (2006) claim:
• ”Successful cartels develop mechanisms for sharinginformation, making decisions, and manipulating incentivesthrough self-imposed carrots and sticks.”
• The success of a cartel depends on the conspirators’sability to design appropriate decision making structures.
• Organizational structures should be able to challenge anyinternal and external threat.
The aim of the paper
The description of the Graphite Electrode (GE) cartel:
• How?
• What?
• What for?
• and what for?
• Why?
The aim of the paper
The description of the Graphite Electrode (GE) cartel:
• What and how?:• we describe the social organization of the cartel by using
tools from social network analysis.
• What for?• to understand the main features of its internal organization,• to shed light to the main variables that contribute to shape
such structure.
• And what for?: At least two reasons:
1. Policy reasons2. It’s a part of a bigger project.
The main problem
The description of the Graphite Electrode (GE) cartel:
• Why GE cartel?:
• This cartel is an example among successful profitablecartels.
• The U.S. DOJ:
1. present and future prices,
2. elimination of price discounts,
3. allocation of volume among conspirators,
4. the division of world market,
5. restriction of non-conspirator companies ’access totechnology, among other.
Related Literature
Related Literature
• Economic literatures
• Genesove and Mullin (2001)• Harrigton (2006)• Clark and Houde (2013)• Wang (2008)• Asker (2010)
• Socilogical literature
• Baker and Faulkner (1993)• Faulkner et al (2003)• Morselli et al (2007)
GE cartel: Product description
• Graphite electrodes are large carbon columns used by electric arcfurnaces (EAF) in the making of steel.
• These EAFs use graphite electrodes to generate the heat to meltscrap metal and convert it back into a marketable steel product.
• Electrodes can be up to 700 mm in diameter and 2,800 in lengthand weigh up to 2,200 kg.
• They form part of the roof structure of the furnace.
• It is necessary nine electrodes, joined in columns of three, whichare consumed in approximately every eight hours.
GE cartel: Product description
• The manufacturing process of electrodes takes approximatelytwo moths to be completed.
• There are no product substitutes for GE, other than traditionalmethods of making steel (oxygen or open hearth process).
• It is important to note that GEs make up only 6-7 percent of thecost of production in EAF.
GE cartel: Supply side
• The major producers of GE are multinational firms.
• The market is characterized by an oligopolistic structure withhigh entry barriers.
• It takes approx. 4 years to build a new plant with a capacity of20,000 tones.
• No significant new player has entered in the industry since 1950.
• Participants in the world market:
1. UCAR (US-EU)2. SGL Carbon (US-EU)3. Showa Denko (Japan)4. Others: VAW, Conradty, C/G...
GE cartel: Demand side
• The demand for GE is linked to the production of steel inEAF.
• The customers are steel producer (85% of demand).
• World electric arc steel production grew 38% between1987-1997.
• By 1997, forecasts predicted that capacity of EFA wouldincrease.
• A challenging matter in a conspiracy:• Many variants in order to match to diversity of consumer
preferences.
• The product could change by means of the length, diameteror weight.
GE cartel: The conspirancy
• The principal data source is the information publicly accessibleby the European Commission.
• It include 244 paragraphs with information about carteloperation and description.
• The conspiracy took place between 1992 and 1998 approx..
GE cartel: The conspirancy
• The firms involved: SGL, UCAR, VAW, Showa DenkoK.K.(SDK), Tokai, Nippon, SEC, The Carbide Grapite GroupInc. (C/G).
• Practises contrary to competition law:
a. fix the prices of the product;b. agree on and implement a mechanism for implementing
price increases;c. allocate markets and market share quotas;d. agree not to increase production capacity;e. agree not to transfer technology outside cartel members.
GE cartel: The conspirancy
• The machinery to define, to implement and to monitoragreements was by meetings:
• periodic ”Top Guy” meetings,
• regular ”Working Level” meetings,
• national and regional meetings, and
• bilateral contacts between firms.
• We concentrate on Top Guy, and Working Level meetingsand some bilateral contacts in the European market.
Theoretical framework
Theoretical framework
• A price-fixing project involves certain necessary tasks in order toaccomplish its goals.
• Price-fixing conspirators need a device that allows them tocoordinate and communicate with each other.
• Such device should be designed to challenge two crucial issues inillegal projects, namely
• efficiency, and• concealment.
Theoretical framework
Efficiency aim
• Efficiency aim of the organization structure calls for fluidcommunication among its members.
• More communication may positively impacts on carteleffectiveness:
• cartel members could be aware about cartel’s activities as awhole.
• More communication could also reduce possibility ofmisscoordination among agents.
• Face-to-face meetings, phone calls...are the devicescommonly used to coordination and communicationspurposes.
Theoretical framework
Secrecy aim
• Concealment aim calls for low level of contacts, and networks aremarked by high level of distance between participants (sparsenetworks).
• This configuration offers security but communication flow amongits members is low.
• Nonetheless, a centralized structure might be preferred:
• it reduces the number of agents with relevant informationabout illegal activities.
Social description
Social description
• The cartel studied here is organized along a set of meetings thatallow to elaborate and institutionalize cartel rules of exchange.
• A social organization structure is defined by the triple
S = {M,N, g}
where
• M is the set of meetings held by cartel members• M = {m1,m2, ...}
• N is the set of employees (or actors) who participate incartel activities:• they are executives of different rank in the hierarchy from
firms participating in the collusion.
• g is the affiliation network of relationships between thesetwo sets, i.e. M and N .
Social description
Social description
• The design of the affiliation network g implies to set themeetings, and define who goes to which meeting.
• In an affiliation network context, employees are linked amongthem only by mean of meetings; and meetings are linked amongthem only by mean of the employees.
• Additionally, it is worth to note that to assign persons tomeetings also implies to:
• define the frequency of contacts,
• the frequency of attendance to certain kind of meetings,
• the co-attendance of employees to meetings, and
• the design of meetings in regarding the rank of employeeswho attend to them among other elements.
Social organization of GE cartel
Social organization of GE cartel
• 21 individuals (employees) and 33 meetings.
• Employees: by rank and by firms
• Rank 1= CEOs; rank 2= gral managers; rank 3= salemanagers.
• Meeting: S - I - I/M - M
Social organization of GE cartel
Social organization of GE cartel. 1992-98
Type of meeting # meetings # attendances Avg rankS 5 27 1I 4 25 2,25
I/M 1 2 3M 14 115 2,74
Subtotal 24 169Bilateral meetings
SB 1 2 1IB 3 6 1,67
IB/MB 2 4 1MB 3 6 1,33
Subtotal Bilateral 9 18Total 33 187
Governance structure and allocation of authority
Efficiency vs. Security:Density
Efficiency vs. Security:Density
Density =#ties
(n×m)= 0.2366
• where n is the # of rows (employees) and m is # of columns(meetings).
• Among all possible ties, 23.6% are actually present.
• The collusive network is not so dense.
• Efficiency vs. Security and Density :
• as # of ties increases, more information can flow amongnodes; but
• as # of ties increases, it is more easy to discover theseillegal activities.
Efficiency vs. Security: Centrality
Degree centrality
• The degree centrality of an employee is the number of eventswith which its is affiliated.
• The degree centrality of an event is the number of actorsaffiliated with it.
• This measure gives an idea about how active is an actor or howpopular is a meeting.
• This centrality measure points out the more active nodes but, atthe same time, the more visible nodes for any external scrutiny.
• In GE cartel, employees that have more degree centrality areSGL2 followed by SGL3 and UCAR3.
• And the more central meetings are M7 (implementation ones)and M11 (monitoring meeting).
Efficiency vs. Security: Centrality
Degree centrality
Efficiency vs. Security: Centrality
Betweenness centrality
• This measure focuses on the extent to which actors sit ongeodesic paths between other pairs of actors.
• Betweenness centrality measures the ability of a node to controlflow of information.
• An event gains betweenness centrality if it contains non centralactors.
• The betweenness centrality of an event increases to the extentthat pairs of actors share only that event in common.
• Betweenness centrality captures how cartel’s designer solves thetrade-off between efficiency and security.
• Actors with highest betweenness centrality are SGL1 and SGL2.
• The highest betweenness centrality meetings is the implementingmeeting M6.
Efficiency vs. Security: Centrality
Betweenness centrality
Efficiency vs. Security: Centrality
Eigenvector centrality
• The centrality of an actor is proportional to the centralities ofmeetings to which the actor has attended; and the centrality of ameeting is proportional to centrality of members affiliated to it.
Efficiency vs. Security: Covert coordinators
Covert coordinators. Betweenness vs. Eigenvector
Concluding remarks
• We reconstruct and analyze the GE cartel from aperspective that combines elements from economic theoryand tools from sna.
• We study the internal structure of communication amongparticipants.
Concluding remarks
• The network of communication as a result of the trade-offbetween efficiency and security aims.
• The rank of individuals: key in the organization ofmeetings.
• Labor division among cartel members as a function ofexpertise and hierarchical position.
• The low level of density in the overall network may suggestcartel’s designers take care about security.
• From the analysis of different centrality measures,it ispossible to state that:• cartel’s instigators exert a role of coordinators, but• in a position such that they try to remain hidden from
antitrust scrutiny.• That is, efficiency may was limited by the security target.
Concluding remarks
• The network of communication as a result of the trade-offbetween efficiency and security aims.• The rank of individuals: key in the organization of
meetings.
• Labor division among cartel members as a function ofexpertise and hierarchical position.
• The low level of density in the overall network may suggestcartel’s designers take care about security.
• The flow of information between I and M tasks is large bycomparing with the flow of information that takes placebetween S and M tasks.
• Given the attendees of each kind of meeting: Rank 1s haveno contact with Rank3s: cartel’s designers maximizesecurity subject to a necessary level of efficiency.
Efficiency vs. Security: Centrality
Closseness centrality
• One actor might be tied to a large number of others, but thoseothers might be rather disconnected from the network as awhole.
• In a case like this, the actor could be quite central, but only in alocal neighborhood.
• Closeness centrality takes into account the distance of a node toall others in the network.
Centrality measures
Closseness centrality
• Actors with highest closeness centrality are SGL2 and UCAR2followed by SGL3 and UCAR3.
• The more closeness meetings are M6 and M7, both monitoringones .
• As less closeness centrality, more distant the node is from allother.
• In such a case, the node get less information from the networkbut, at the same time, it is more invisible to antitrustauthorities.
• It is possible to interpret that in these cases, cartel ’s designerprefers keep these nodes in a secure position rather thanprioritize the efficiency of the node.
Governance structure and allocation of authority
Efficiency vs. Security:Core-periphery analysis
• Core-periphery analysis captures a notion of centralization.
• Centralization measures the extent a network is dominated by asingle node.
• Core-periphery analysis describe a network that can bedominated by a group of nodes, i.e., employees and meetings.
• Core employees attend to core meetings and peripheral actorsattend to peripheral events.
• The core is a group of cooccurring employees and events;
• Periphery consists of both a subset of employees who arenot co-attending to the same meetings, and a partition ofmeetings that are disjoint because they are not attended bythe same employees.
Governance structure and allocation of authority
Efficiency vs. Security:Core-periphery analysis
Meetings
The following graph represents the similarities among meetings:
Meetings
Allocation of authority
Type of meeting Average of rankS 1I 2,25M 2,74
Meetings: Density
• Members of the cartel need to meet frequently to reachagreements and to put the agreements in actions depending onthe complexity of them.
• Attendance on meeting impacts on the success of agreementsthat have been reached.
• Joint attendance and also the continuity of attendance are goodsince cartel’s s member could be involved in a repeated game.
• Density is measured as the number of pairs in common.
• The density index for GE cartel= 2.04, i.e., in avg, a pair of
meetings have 2.04 actors in common.
Meetings
Mobilization: Density
S I M IB MB
S 3.60 0.37 0.00 0.83 0.78I 0.37 1.60 3.07 0.32 0.33
M 0.00 3.07 7.52 0.20 0.31IB 0.83 0.32 0.20 0.5 0.87MB 0.78 0.33 0.31 0.87 0.67
Employees
The following graph represents the similarities among employees:
Employees
Mobilization: Density
• The density for the co-membership matrix: avg # of meetings towhich pair of actors belong.
• Density = 2.55 that is in average, a pair of actors meet together2,55 times.
Employees
The density by taking into account the rank of employees.
1 2 3
1 3.24 0.071 0.00
2 0.071 1.96 3.70
3 0.00 3.70 12.14
Centrality measures: Employees
Centrality measures: Meetings
Motivation
Motivation
Our starting points are:
• The organizational design of a cartel is a tool to solve theproblem of moving towards the collective goals.
• It is a tool to reconcile conflicts and demands imposed bycompetition among firms participating in the conspiracy.
• The social organization must assure efficiency of its actions, andmust take into account external and internal sources ofdisruption.
Motivation
Motivation
• The social organization of a price-fixing conspiracy is a device ofcommunication among participants.
• It should has two aims: efficiency and an secrecy aim against anyexternal menace.
What we do
• Our description includes the hierarchical aspects of taskallocations among employees of firm participants.
• Internal organization of the cartel = the internal organization ofthe communication.
• Cartel designers have to define:
• the contacts, the frequency of contacts, who would be incontact, and for what.
What we do
• That implies to define:
• tasks, and• the allocation of authority of decision making.
• Some relevant issues that cartel designer should solve are:
• who and how decides on prices and on market allocations,• who and how implements such allocations, and• who and how monitors those agreements.
• In the ”who” and ”how” cartel designers have take into account:
• the market conditions, and• the aim of efficiency in functioning and protective against
any external disruption.
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