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This book recounts how a modest number of highly placed managers in prominent multinational companies built and ran three global cartels, a way of doing business that had rarely been seen for half a century. For periods ranging from three to 11 years, these enterprises raised prices and reaped extraordinary profits. Although highly lucrative for the participants in these cartels, the tragic reality is that financial fortunes were created for the few at the expense of the many. The cartels' effectiveness rested on the exploitation of their customers and their customers' customers who traded in markets that were twisted out of their natural shapes. These clandestine conspiracies operated with impunity, but through a combination of serendipity, cupidity, and routine police work they were discovered, investigated, and punished by several of the world's antitrust agencies. The sanctions imposed set historical precedents for severity. In the aftermath of prosecutorial victories lay shattered corporate reputations, broken careers, and a glimmer of hope that the next generation business leaders might learn from the mistakes of the past.

This chapter offers a non-technical economic explanation of the causes and effects of price fixing, beginning with a description of how prices are formed in competitive markets and in the presence of a monopoly. These two analytical models of how prices and output evolve in markets are too unrealistic to fit natural markets, yet their contrasting results are useful because they bracket the price/quantity outcomes in real markets. That is, perfect competition and pure monopoly are the extreme points on a continuum of market environments, and the performance of real-world markets tends to be “in between” the two extremes.

These “in between” markets have a small number of sellers or buy ers. Small numbers raise the possibility of strategic behavior among sellers, of which price fixing is one type. Price fixing is more than just fixing prices, so an enumeration behaviors that constitute a broader notion of price fixing is provided. This is followed by an explanation of the economic factors that affect the formation and success of cartels. The chapter ends with a brief empirical analysis of the economic harm imposed on market participants by effective cartels and a brief historical survey of global cartels.

Monopolies and cartels are the epitomes of destructive forces that can wreck markets. They do so by wielding market power. This chapter explains the nature of market power, the laws that are meant to contain it, and what nations have done to combat international cartels.

Citric acid is a product found in thousands of grocery products. This chapter answers the following questions: what is citric acid used for, who makes it, how do they make it, how much is made, and where is it made?

Citric acid is an organic chemical with a unique molecular structure. As an additive in foods like yogurt, sausages, and soft drinks, citric acid is one of several acidulents purchased by food manufacturers. Acidulents serve several useful functions in food formulations: sterilization, bacterial stabilization, flavor fixation, flavor enhancement, and standardization of acid levels. Besides its uses in the food industries, approximately one-third is purchased by detergent manufacturers. Citric acid has been replacing phosphorus in detergents because it does less harm to the ecology of rivers and lakes. Although there are about six other commercially important acidulents, citric acid accounts for more than 80 percent of the value of all acidulents sold in the U.S. market.1 In most food and beverage formulations, citric is the only feasible acid.

In January 1991, Terrance Wilson and Barrie Cox, two top-level officers of the large U.S. agribusiness firm Archer Daniels Midland Company, flew to Europe to meet with representatives of the three largest European manufacturers of citric acid. The two men were unlikely companions. Wilson was a Corporate Vice President and the President of ADM's big corn products division. He had joined ADM decades before, straight from the U.S. Marine Corps, and had worked his way up from near the bottom of the corporate ladder to be only one step removed from the giant company's powerful chairman, Dwayne O. Andreas. Although Wilson lacked a college education, his fierce loyalty to the Chairman and dogged pursuit of ADM's interests had yielded him a position of power and responsibility in ADM unmatched by all but three other officers.

Wilson made quick use of his new contacts. Within a month of the European trip, Wilson had arranged a meeting of the four largest makers of citric acid in the world, a group they would jokingly refer to as the G-4 (Tr. 2626). Wilson, Cox and six other top managers of the G-4 met in Basel, Switzerland on March 6, 1991 to discuss a long list of agenda items, among them how to go about raising prices globally. The citric acid cartel was off and running.

Market forces usually overwhelm any attempts by a firm to deviate from its assigned role in an industry. With a given plant in place, once a seller in a competitive market observes the market price and input costs, it passively sets its output level at the profit-maximizing point. If, as was the case in the global market for citric acid, food-grade product made by alternative sellers was viewed by buyers as perfect substitutes, sellers had few strategic options to try to improve their profitability. Efforts by a firm to distinguish itself on the basis of delivery terms or after-sales service can easily be imitated by rivals. Investing in a lower cost production technology might yield better profits for a few years but carries the danger of operating at inefficiently low levels of utilization or betting on the wrong technology. Price cuts can be quickly matched by other sellers and can lead to a price war that hurts everyone until it is abandoned. Price increases will simply lead to an erosion of a firm's market share and a build up in excess capacity that further squeezes margins.

While single-firm actions contrary to market forces are doomed to failure in most commodity markets, joint actions by a group of sellers large enough to dominate supply are another matter. For millennia, sellers have realized that collective action on prices or output levels can raise the profits of all suppliers in a market. The citric acid cartel met these criteria. It chose to raise selling prices simultaneously around the globe. With control of about two-thirds of the world’s supply and a system for detecting and compensating for cheating by its members, the cartel clearly was efficacious in raising prices in North America, South America, and Europe. In this section, the effects of the cartel’s collusive behavior on prices, international trade, profits, and consumer welfare in the U.S. market are detailed as precisely as possible.

The modern lysine industry developed as a result of basic scientific discoveries in biochemistry in the late 1950s. The now dominant method of industrial production of lysine is based on fermentation of liquid sweeteners derived from sugar cane or starches of many kinds. Since being commercially introduced around 1960, manufacturers of mixed animal feeds have grown to view lysine as an essential ingredient. In the last four decades of the 20 century, lysine grew and developed into a major biochemical product market, attracting more and more biotech companies from Asia, North America, and Europe to the industry. The purpose of this chapter is to sketch the uses, methods of production, market size, and structure of supply of the global lysine market.

Two top executives of the giant U.S. agribusiness firm Archer Daniels Midland flew from the company's headquarters in Decatur, Illinois to Tokyo, Japan in April 1992. Terrance Wilson, President of the sprawling corn-products division of ADM, disliked long flights because he reacted badly to the effects of jet lag, but he was epitome of the loyal manager, and this trip could make tens of millions of dollars for his company if everything went according to plan.

This chapter documents the economic effects of the lysine cartel on prices, production levels, international trade, and buyers' incomes. Monetary estimates of these effects typically play a key role in legal actions to punish cartels or compensate their victims. The legal ramifications of the lysine cartel are discussed in Chapters 13 to 15.

The principal objective of the lysine cartel was to raise selling prices around the world, thereby generating profits well in excess of the profits cartel members would have earned if the normal forces of demand and supply had been allowed to play out. The decision to collude or not to collude involves a weighing of expected benefits and costs. The corporate benefits are primarily the increases in company profits above normal levels combined with a subjective probability of the likelihood of success. Personal benefits may accrue to participants as well through faster job promotions, profit sharing, and the excitement of undercover activities. The costs are probabilistic notions of the social and economic pain that might be imparted by prison time or fines for antitrust violations adjusted downward by the probability of being caught, indicted, and found guilty. The probability of discovery is well under 100% (see Box).

Basel, Switzerland is an historic city of about a half million people located at the intersection of the French, German, and Swiss borders. Home to Switzerland's first university established in 1460, the city played a pivotal part in the Protestant Reformation. Although the city houses many architecturally important medieval buildings, manuscript and art collections, and a pretty late-Gothic Rathaus fronting the central market place, Basel receives more business visitors than tourists. Aided by its fortuitous location on the Rhine River, Basel was the Swiss city most affected by the 19 century forces of industrialization. By the turn of the century, it had become the center of Switzerland's chemical and pharmaceutical industry, second only to Germany's in Europe. Basel pharmacist Felix Hoffmann-La Roche was the founder of a pharmaceutical manufacturing partnership that would become a global leader in medicinal products. Its corporate successor, Roche Holdings, remains headquartered in the city of its birth and is still controlled by the founding families.

Most of the conspiracies were exposed to the world one day in May 1999 at a widely publicized Department of Justice press conference in Washington DC. Eventually, the antitrust authorities of at least nine countries and the European Union would open formal investigations of the vitamins cartels, and several of them would impose record fines on the companies involved.4 For the first time in the history of the 1890 Sherman Act, the United States imprisoned several high-ranking foreign executives for price fixing. In addition to actions of government prosecutors, more than 100 law suits were filed by buyers of bulk vitamins in the United States, Canada, Australia, and the United Kingdom seeking compensatory and punitive damages. In 2004 the U.S. Supreme court became involved in the vitamins cartels by issuing a ruling that significantly altered the way in which defendants in international cartels can be sanctioned. By the end of 2005, the members of these cartels had in absolute dollar terms become the most harshly punished antitrust violators in the history of the world.

Despite the heavy sanctions imposed by prosecutions around the world, the most somber lesson to be drawn from these dreary episodes is that the crime of price fixing pays.