Why Do Companies Collude?

In March, Loblaw executive chair Galen Weston appeared in front of a parliamentary committee probing high food prices in Canada. His testimony was filled with a few memorable jabs at those blaming grocers, including this one: “No matter how many times you read it on Twitter, the idea that grocers are causing food inflation is not only false, it’s impossible.” 

The eye roll emoji responses from the Twitterati were almost immediate. Forgive us if we don’t automatically believe you, went the typical tweet. Remember the great bread price-fixing scandal? The one your company confessed to in 2015? The one that allegedly resulted in Canadian consumers being overcharged by about $5 billion over 16 years? 

It wasn’t the only act of collective collusion remembered that day. As multiple reps of the alleged bread cartel took to the mike in Ottawa, some on social media recalled other famous Canadian cabals. Quebec and Ontario’s gas price-fixing scandals were mentioned. Montreal’s asphalt bid-fixing plot was brought up too.

Of course, none of this means that Canadian grocers are colluding to fix food prices today. But all the reminiscing did make some wonder about how widespread collusion is in Canada. 

It’s a tough question to answer, says Robert Clark, a Queen’s economics professor and the Stephen J.R. Smith Chair in Economic Policy. Clark has studied collusion for the past 15 years and says it’s difficult to know how widespread collusion is because it is, by nature, secretive. 

“Canada’s Competition Bureau also tends to be pretty tight-lipped about the cases they’re investigating,” he says. “Still, even with the cartel cases we know they’re prosecuting, I definitely think that there are more out there.”

That’s a problem because, as former EU Commissioner Mario Monti once put it and Clark quoted in one of his papers, “cartels are cancers on the open market economy.” They not only mean potentially higher prices on things like bread and gas for consumers but they can also inflate the prices of public projects like bridges and roads, which costs taxpayers money too. 

So how do we stop collusion? Smith Business Insight contributor Jordan Whitehouse put that question — and a few others about cartels — to Professor Clark. 

Even though we don’t know how widespread collusion is, does it surprise you that it still happens? In this age of corporate transparency and government oversight, you wouldn’t think so, especially in “reputable” industries like the grocery business. 

Well, there’s a big incentive for firms to earn lots of profits no matter the industry. And sometimes these things can start fairly benignly where people may be at trade shows, they talk to their rivals about how much their bread is or whatever, and then it kind of spirals into something worse. But no, it doesn’t surprise me. These big companies have profit motives, and collusion is going to potentially yield higher profits. You hope that the corporate and legal structures that they have in place are enough to fight against it, but not always. 

How does competition, or lack thereof, play a part here? Does the relative lack of competition in some industries in Canada make them more susceptible to collusion? 

For sure. Collusion is always easier to sustain when there are fewer firms. We don’t have any kind of causal analysis for this, but at least coincidentally the (grocery industry’s) bread cartel started up after a period of consolidation in the retail and wholesale markets. So it’s definitely not impossible that there’s some link there. If you’re co-ordinating a big arrangement, the more players that have to come on board and charge the same price, or adjust prices simultaneously, the more challenging that is. So absolutely, the fact that we have very concentrated markets in a lot of industries in Canada is potentially making us more at risk of seeing collusive activity. 

You’ve looked extensively at bidding rings such as in the Montreal asphalt collusion case. In these cartels, contractors get together to assign the winning bid for a contract to one of the firms. How do they do that exactly? 

The cartel needs to decide which of its members will win a particular contract. There are two ways to do this. One is through a bid-rotation scheme in which cartel members decide before a series of auctions who will win which ones in order to achieve a desired market share allocation. The other is to proceed on an auction-by-auction basis and at each auction determine which cartel member values the contract the most. This could be done, for instance, via a preliminary knockout auction. In these cases, some cartel members may rarely be the designated winners and might be compensated via side payments after the fact from the winning contractor. 

You’ve suggested that authorities could go after bidding rings by looking for specific patterns like whether the same firm wins again and again. You also write that they could look for clusters of bids and a gap around a winning bid. How would that work? 

It’s really about looking to see whether or not the winning bids look different from all the other bids. Suppose I’m in an auction featuring only cartel members and I’m designated to win. I might say to the other members, “Look, I’m going to bid below a million dollars. Just make sure your bids are above a million dollars.” They don’t spend a lot of time thinking about what their bids should be and so you might see a bunch of them clustered around the same figure just over a million. I’d like to go as close to a million as possible because then I can make more, but I’ve got to leave a little bit of a gap between my bid and the other cartel members in case one of them deviates. Therefore I might bid $950,000. And so in a potential collusion case, you can look for this clustering and this gap.   

You’ve written about hub-and-spoke cartels where firms at one end of the supply chain facilitate collusion at the other. Canada’s alleged bread cartel is an example of this in that it could have involved both wholesalers and retailers. This seems counterintuitive, no? If a retailer colludes to help a wholesaler raise their prices, wouldn’t that mean higher prices for the retailer? 

It is bizarre when you see it, but these tend to be cases where there’s a lot of competition at both ends of the supply chain. So much so that if they weren’t colluding, or if the companies at one end of the supply chain were trying to collude independently, they would do a lot worse. In Canada’s bread case, even though there are just two wholesalers, there’s intense competition because they’re always trying to compete to be the main supplier at each retailer. So collusion helps prevent them from constantly having to undercut their prices or their competitors.

On the retail side, the competition is also intense. Let’s say they try to collude without wholesalers by setting a single price for a loaf of bread. The wholesaler that isn’t the main supplier for that retailer has incentive to lower their prices to get that business. This makes it harder for the retailers to keep the cartel together and that loaf price steady, which is why the wholesalers get involved. 

So whether collusion takes the form of a hub-and-spoke cartel, a bidding ring or some other scheme, what can be done to stop it? 

There are a few things. I think from a policy perspective, just ensuring that there are lots of players active in Canadian markets is going to minimize the opportunities for collusion. There’s also the Competition Bureau’s leniency program. It’s their best tool, and it offers immunity from prosecution to the first party to disclose an as-yet undetected offense. Loblaw took advantage of this in the bread case. But for this to work, cartels need to know the bureau is already prosecuting some cases, requiring a larger budget for the bureau. 

The Competition Bureau has received a cash injection recently, so hopefully that will also mean market studies that take into account some of these statistical screens we talked about, like clusters of bids and gaps around winning bids. I also think that education is important. Some people might not be fully aware that some of these activities are illegal, so I think that needs to be built into business school programs and just passed on more generally.