consultant evaluation: collusion general electric & westinghouse firms & markets group 6 15...
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Consultant Evaluation:Collusion
General Electric & Westinghouse
Firms & MarketsGroup 6
15 November 2001Peter Gallagher
Daniel Masnaghetti
Kristin Messner
Hyok Oh
2
AGENDAAGENDA
Introduction of industry
GE Overview
Westinghouse Overview
Buying Process in 1950s
Conflict with Department of Justice
Change in Pricing Policy
Collusion
What Happened
4
Turbine Industry OverviewTurbine Industry Overview
Product Small, medium and large turbine generators (biggest mkt)
Players* GE (MS: 61%) Westinghouse (MS: 32%) Allis-Chalmers (Out of market in 1962)
Buyers Government (Big buyer, Lowest bid) Investor-owned utilities (Numerous, Negotiation)
High barrier to market entrance Capital intensive, steep learning curve
* Postwar Period Data
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Overview: GEOverview: GE
Price leader Offered high discount Variable pricing strategy
Technological leader and pioneer
Enjoyed high MS among government customers
Low cost strategy
Highest industry capacity Spent over $100 mil for capacity since WWII Capacity a year or two ahead of WH
Product focus: Large turbines
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Overview: Westinghouse Overview: Westinghouse
Market follower Deeper discount to win
Moderate capacity Spent over $50 mil for capacity since 1948
Product focus: Small and Medium turbines
Launch standardization program Standardized unit and component
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Buying process in 1950s: open market system
Buying process in 1950s: open market system
Government
Bid invitationSpecificationBook price
DeterminationFinal
Negotiation
Investor Owned Utilities
Sealed bidSpecification Lower bid winBid invitation
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Conflict with Department of JusticeConflict with Department of Justice
“Electrical conspiracy” price-fixing case Large turbine generators & other electrical products
Seven executives had been imprisoned
Cost GE and Westinghouse over $100 million USD each
Consent decree on pricing had been signed in 1962
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Pricing policy change in 1963 Pricing policy change in 1963
GE’s new pricing policy A new price book was published Simplified price formula Introduction of multiplier (e.g. book price * uniformed multiplier =
actual price) Resulting in lowered book prices Uniformed application to all customers, Price protection clause was instituted
Consequences Westinghouse’s instant adoption of GE’s new pricing policy No deviation from published price between the two Price negotiation and discounting ceased
without exceptionswithout exceptions
Increasing concern by DOJ of possible collusion
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CollusionCollusion
Fix, raise, lower, stabilize or peg prices
Establish a range of prices, minimum price, a maximum price, or a common pricing system
Related law: Sherman Act
No formal guidelines exist to which the DOJ adheres
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Is this collusion? Is this collusion?
Price fixing
Horizontal restraints
Common pricing system
Refrain from bidding
Unlawful Practice
Identical prices
Competitor relationship
Pricing using multiplier
Lack of price negotiation
GE & Westinghouse
This is
Collusion!
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What happened? - Modification to the Consent Decree
What happened? - Modification to the Consent Decree
The formula for pricing generators prohibited
Price book not disclosed outside of the firm
No price protection policy
Forbidden communication on pricing, terms and conditions with outside persons
Absolutely no information exchange between the players on sales