U.S. v. Stolt-Nielsen and the Economics of Cartels

Economists Ink: A Brief Analysis of Policy and Litigation


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Barry C. Harris testified on behalf of Stolt-Nielsen in U.S. v. Stolt-Nielsen S.A., has consulted or testified in numerous matters related to potential price fixing or bid rigging.

Matthew B. Wright who assisted with the analysis in this matter, also has extensive experience in matters involving potential collusion.

For a conspiracy to be effective, firms must be able to raise prices and maintain the price increase. Even where entry is not easy and the colluding firms control a large proportion of capacity in the relevant market, effective collusion can be difficult to maintain. While firms have a collective incentive to coordinate their activities to restrict output and raise prices, firms individually have an incentive to cheat on a cartel agreement. A firm that secretly undercuts a conspiracy stands to benefit, at the expense of other conspiracy members, by increasing its sales and earning higher profits than it would as a member of the conspiracy. Thus, quick detection and punishment of cheating are important to maintaining a conspiracy.

Punishment in this context refers generally to price cutting in response to cheating by other firms on the cartel agreement. When one firm undermines a cartel, the other firms participating in the cartel will lose sales and profits. Cartels therefore tend to break apart when cheating is discovered. Because a timely exchange of information within the cartel can deter such cheating by reducing its potential benefits, communication among firms is generally necessary to maintain an effective cartel.

The economics of cartel behavior influenced the recent federal district court decision in U.S. v. Stolt-Nielsen S.A. This case has its genesis in a bid-rigging conspiracy among parcel tanker operators. (Parcel tanker shipping is the ocean transport of bulk liquid cargoes on vessels equipped with numerous compartments designed to carry a variety of different cargo simultaneously.) In late 2002, parcel tanker operator Stolt-Nielsen sought admission to the Antitrust Division’s Corporate Leniency Program. Once admitted to the program, Stolt-Nielsen and its employees provided the Division with substantial evidence of the firm’s involvement in a customer allocation conspiracy prior to 2002. The Antitrust Division, however, suspended and later revoked its Conditional Leniency Agreement with Stolt-Nielsen, claiming that Stolt-Nielsen had not met the conditions for leniency. Stolt-Nielsen and two of its executives were later indicted for their roles in the parcel tanker conspiracy.

The defendants moved to dismiss the indictments, and in the spring of 2007 a hearing was held on the defendants’ motion in Federal District Court in Philadelphia. The primary issue at the hearing was whether Stolt-Nielsen “took prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity.” In November 2007, Judge Bruce W. Kauffman ruled in favor of the defendants and dismissed the indictments.

In his ruling, Judge Kauffman noted that Stolt-Nielsen instituted a revised antitrust compliance program when concerns were raised about anticompetitive activity within the company. Elements of this program included, inter alia, distributing a handbook containing the revised antitrust policy to employees and competitors, requiring employees to sign certifications representing that they would comply with the new policy and report any violations of it, and informing its competitors of the new policy and its intention to comply with it. At the district court hearing, defendant’s expert economist testified that the revised policy made price fixing unlikely. By disclosing its revised policy to competitors, Stolt-Nielsen signaled its intention to compete more aggressively. The economics of cartel behavior suggests that Stolt-Nielsen’s competitors would be expected to compete more aggressively if they perceived that Stolt-Nielsen was itself less likely to behave cooperatively.

Perhaps most significantly, Stolt-Nielsen’s revised policies reduced opportunities and created significant disincentives for Stolt-Nielsen employees to participate in conspiratorial acts. Stolt-Nielsen operated throughout the world, and it shipped in dozens of different trade lanes. In order to make informed decisions about specific shipping contracts, Stolt-Nielsen relied on regional managers and their subordinates, who are familiar with the competitive conditions in specific regions and with the requirements of regional customers, to develop and negotiate bids.

Stolt-Nielsen’s revised Antitrust Compliance Policy clearly limited contacts between Stolt-Nielsen employees and competitors to legitimate issues, such as joint bids and sublets. The revised policy also separated Stolt-Nielsen employees with primary responsibility over submission of bids and negotiation of contracts from the small number of high-level executives with authority to initiate or oversee legitimate contacts with competitors. Moreover, by requiring employees to report any violations of the policy, the revised policy raised the expected cost of coordinating a conspiracy within Stolt-Nielsen, because it reduced the likelihood that a coworker would maintain the secrecy of any conspiratorial discussions.

In particular, the policy made it difficult for the high-level Stolt-Nielsen employees who were authorized to talk to competitors to enlist lower-level employees to help carry out a conspiracy. Citing the testimony of the defendant’s economic expert, Judge Kauffman noted that “the revised Antitrust Compliance Policy effectively ‘severed’ the internal company communication pathways-i.e., the links between those who were in contact with competitors and those responsible for bidding-that made it possible for Stolt-Nielsen to implement the customer allocation conspiracy.” The evidence indicated that after Stolt-Nielsen revised its antitrust compliance policy, Stolt-Nielsen and its competitors aggressively competed for contracts previously subject to the conspiracy. For example, Stolt-Nielsen bid aggressively on one shipping contract only to have a competitor, the incumbent operator for this contract, undercut Stolt-Nielsen’s bid by roughly seven percent. The defendant’s economic expert explained that such bidding behavior was not consistent with a well-functioning conspiracy for the contract. The district court cited this contract as one of several examples of robust competition among Stolt-Nielsen and its competitors after Stolt-Nielsen revised its antitrust policy.