Auctions, Collusion & Auctions, Collusion & AntitrustAntitrust

Lessons from “Lessons from “Radiopaque Agents”Radiopaque Agents” in in ItalyItaly

Antonio NicitaAntonio NicitaSiena Doctorate in L&ESiena Doctorate in L&E

Lecture 4

ContentContent

Collusion in public tendering on Collusion in public tendering on pharmaceuticalspharmaceuticals

Case studyCase study General lessons for Antitrust and General lessons for Antitrust and

Competition Policy:Competition Policy:

(a)(a)Economic criteria to evaluate faciltating Economic criteria to evaluate faciltating factors in repetead auctions;factors in repetead auctions;

(b)(b)Debate on Regulatory SolutionsDebate on Regulatory Solutions

(c)(c)Ambiguity of Centralised Purchasing Ambiguity of Centralised Purchasing through Tenderingthrough Tendering

““Radiopaque Agents”Radiopaque Agents”

The Competition Authority has resolved that the The Competition Authority has resolved that the Bracco, Byk Gulden Italia, Farmades, Nycomed Bracco, Byk Gulden Italia, Farmades, Nycomed Amersham Sorin e Schering companies are liable for Amersham Sorin e Schering companies are liable for having infringed section 2 (2) of the Competition Act having infringed section 2 (2) of the Competition Act on the markets for the supply of for the supply of on the markets for the supply of for the supply of radiopaque agents in Italy. radiopaque agents in Italy.

These are pharmaceutical specialties that are These are pharmaceutical specialties that are procured virtually in their entirety by Italian public procured virtually in their entirety by Italian public hospitals and local health authorities (ASLs) to be used hospitals and local health authorities (ASLs) to be used for radiological examinations, such as with TAC. for radiological examinations, such as with TAC.

In view of the seriousness of the offence, the Authority In view of the seriousness of the offence, the Authority imposed a fine of 5.5% of the turnover of these imposed a fine of 5.5% of the turnover of these companies on the relevant market, totaling about 8.5 companies on the relevant market, totaling about 8.5 billion lire.billion lire.

The investigation began as a result of a complaint The investigation began as a result of a complaint from a Local Health Authority which reported that from a Local Health Authority which reported that there was there was an anomalous similarityan anomalous similarity of the prices of the prices charged by all the companies for non-ionic radiopaque charged by all the companies for non-ionic radiopaque agents for radiological use, suggesting the existence agents for radiological use, suggesting the existence of a concerted agreement between the companies.of a concerted agreement between the companies.

AGREEMENT:AGREEMENT: - system of common prices charged for their products;- system of common prices charged for their products; - strategies to interfere with the competitive bidding of - strategies to interfere with the competitive bidding of

the Local Health Authorities (for example by sharing the Local Health Authorities (for example by sharing batches of orders and deciding on which companies batches of orders and deciding on which companies would tender for individual orders);would tender for individual orders);

- other forms of co-operation which included - other forms of co-operation which included coordinating some of their promotional and advertising coordinating some of their promotional and advertising activities and through the systematic exchange of activities and through the systematic exchange of information on quantities of products sold.information on quantities of products sold.

The Relevant MarketThe Relevant Market

1995 1996 1997 1998 1999

124.465.684 129.795.370 135.835.983 147.427.417 153.933.953

• Public Procurement by auctions and direct tendering

•“decrease of 5% in average price in 1995-1999”

1995 1996 1997 1998 1999 Totale

Procedure di "gara" 16 19 18 19 14 86

Procedure a "trattativa esclusiva" 46 64 56 62 49 277

Forniture complessive 62 83 74 81 63 363

Market shares Market shares (value and volume)(value and volume)

Impresa 1995 1996 1997 1998 1999

Bracco 52,2% 52,4% 50,2% 48,1% 46,5%

Schering (Farmades)

31,2% -

31,2%

29,3% -

29,3%

28,4% 1,3% 29,7%

28,4% 2,6% 31%

28,1% 3,8% 31,9%

Nycomed 10,6% 11,9% 14,2% 15,2% 16,1%

Byk Gulden 6% 6,4% 5,9% 5,6% 5,5%

Impresa 1995 1996 1997 1998 1999

Bracco 51,9% 52,4% 50,4% 48,4% 47,2%

Schering (Farmades)

31,8 -

31,8%

29,7 -

29,7%

29% 1,3%

30,3%

29,2% 2,7%

31,9%

28,5% 3,8%

32,3%

Nycomed 10,7% 12% 13,8% 15,1% 15,8%

Byk Gulden 5,6% 5,9% 5,5% 4,6% 4,6%

Law 24/12/1993 obliges companies to Law 24/12/1993 obliges companies to practice a 50% rebates on (negotiated) practice a 50% rebates on (negotiated) public prices when selling to Hospitalspublic prices when selling to Hospitals

Radiopaque agents had different Radiopaque agents had different negotiated pricenegotiated price

Each company made a (different) rebate Each company made a (different) rebate so as to equalize the discounted price of so as to equalize the discounted price of the firm with the lowest public pricesthe firm with the lowest public prices

The final price defined was the price The final price defined was the price generally generally offered in tendering offered in tendering

The “anomalous price The “anomalous price mechanism”mechanism”

The “anomalous price The “anomalous price mechanism”mechanism”

Impresa Nome farmaco

Conc. iodio

Vol. Prezzo pubb. con

IVA

Prezzo pubb.

senza IVA

Prezzo con sconto al

50%

Sconto effettivo

Prezzo minimo

Bracco iopamiro 300 50 ml

81.800 74.363 37.181 58,31 31.000

iomeron 300 50 ml

100.700 91.545 45.772 66,13 31.000

Schering ultravist 300 50 ml

75.800 68.909 34.454 55,01 31.000

Nycomed imagopaque 300 50 ml

68.200 62.000 31.000 50 31.000

omnipaque 300 50 ml

81.800 74.363 37.181 58,31 31.000

visipaque* 270 50 ml

68538 62.273 31.136 50,21 31.000

Byk optiray 300 50 ml

80.900 73.545 36.772 57,85 31.000

Farmades xenetix 300 50 ml

85.700 77.909 38.954 60,21 31.000

EvidenceEvidence

AGCM found a general evidence of a AGCM found a general evidence of a massive application of the mechanismmassive application of the mechanism

ASL and Hospitals decisions were: (i) ASL and Hospitals decisions were: (i) invite to rebates; (ii) adjudications by invite to rebates; (ii) adjudications by

Gare Trattative

Procedure con prezzi offerti corrispondenti al meccanismo per tutte le confezioni

18 145

Procedure con prezzi offerti corrispondenti al meccanismo per almeno una confezione

14 110

Procedure con prezzi offerti diversi dal meccanismo per tutte le confezioni da parte di almeno un'impresa

54 22

Other collusive practicesOther collusive practices Selective participation (Suspect of rotative Selective participation (Suspect of rotative

shifts)shifts)

Selective discount (Suspect of Cartel)Selective discount (Suspect of Cartel)

Lotto Bracco Schering Byk Gulden Nycomed

Ioprom./iopamid.300/50 no offerta 31.009 (M) n.d. n.d.

Ioprom./iopamid.300/100 62.019 (M)* no offerta n.d. n.d.

300/100 62.019 (M) no offerta 62.000 (M-19 lire)

62.019 (M)

350/100 67.850 (M-0,05%)

n.d. 67.884 (M) 67.500 (M-0,56%)

370/50 33.942 (M) 33.900 (M-0,12%)

n.d. n.d.

370/100 67.884 (M) 67.800 (M-0,12%)

n.d. n.d.

Lotto Bracco Schering Byk Gulden Nycomed Farmades

300/100 62.000 (M) 61950 (M-0,08%) 62.000 (M) 62.000 (M) 62.000 (M)

320/100 n.d. n.d. 64.000 67.863 (M) n.d.

350/100 67.863 (M) n.d. 67.863 (M) 67.800 (M-0,09%)

67.863 (M)

370/50 33.954 (M) 33.890 (M-0,19%) n.d. n.d. n.d.

370/100 67.800 (M-0,09%) 67.863 (M) n.d. n.d. n.d.

Evidence on agreementsEvidence on agreements

(vertical) correspondance with local (vertical) correspondance with local agentsagents

information exchange on market datainformation exchange on market data Role of Farmindustria Role of Farmindustria

Farmindustria had introduced into its Code of Conduct a Farmindustria had introduced into its Code of Conduct a provision prohibiting its member companies from provision prohibiting its member companies from granting a discount in excess of the statutory minimum granting a discount in excess of the statutory minimum 50% discount on the retail price of each drug when 50% discount on the retail price of each drug when bidding for competitive tenders. Fines could be imposed bidding for competitive tenders. Fines could be imposed on member companies which failed to complyon member companies which failed to comply))

AGCM conclusionsAGCM conclusions Price parallelism in auctions in accordance Price parallelism in auctions in accordance

to the ‘mechanism’ (M), and even in to the ‘mechanism’ (M), and even in ‘exclusive tendering’‘exclusive tendering’

heterogeneity in costs (?!)heterogeneity in costs (?!) Several anomalies in some other auctions Several anomalies in some other auctions

(selective participation, selective discounts (selective participation, selective discounts over M)over M)

Substantial stability of market shares in Substantial stability of market shares in 1995-19991995-1999

A cooperative framework (Farmindustria, A cooperative framework (Farmindustria, Cross-licencing, information exchange on Cross-licencing, information exchange on data…)data…)

Some local evidence on some local cartelSome local evidence on some local cartel

Is there any space for economic Is there any space for economic defence?defence?

Agcm’s argument Agcm’s argument is a is a diabolicdiabolic proof proof

1. Too many (non homogeneous) evidences

2. Is the ‘mechanism’ M really anomalous?

3. Could M be a focal point in a repeated game?

4. How to explain evidence (in auctions and in private documents) of competitive war prices?

5. To collude is costly, why using simultaneous alternative mechanisms?

6. Why using M instead of selective participation for ‘true’ minimum discount (the ‘true’ Optimal collusive equilibrium)?

7. Is this variance compatible with a condition of stability for detecting collusion and free-riding?

8. Is the information exchange really relevant?

9. Are market shares really stable?

Is the ‘mechanism’ M really anomalous? /1

In order to be anticompetitive the In order to be anticompetitive the parallelism parallelism of conduct of conduct should not be explicable other than should not be explicable other than on the ground that it had been co-ordinated on the ground that it had been co-ordinated by means of a concerted practice (by means of a concerted practice (Dyestuffs, Dyestuffs, Wood Pulp,…Wood Pulp,…))

Oligopolistic frameworkOligopolistic framework (few firms, (few firms, interdependence, transparency, barriers to interdependence, transparency, barriers to entry…): few players may align their conduct entry…): few players may align their conduct as a as a rational responserational response to the market to the market circumstancescircumstances

AGCM AGCM implicit assumptionimplicit assumption of a one-shot of a one-shot Bertrand gameBertrand game (McAfee&McMillan, 1993) (McAfee&McMillan, 1993)

Is the ‘mechanism’ M really anomalous? /2

Repeated game Repeated game ad infinitumad infinitum with exogenous focal with exogenous focal point (implicit collusion)point (implicit collusion)

RegulationRegulation induces M as focal point induces M as focal point andand strategic strategic interdependence selects M as the (non-cooperative) interdependence selects M as the (non-cooperative) equilibrium price: equilibrium price: hospitals do not follow the same hospitals do not follow the same rules for adjudication rules for adjudication

conscious parallelismconscious parallelism:: “the process, not in itself “the process, not in itself unlawful, by which firms in a concentrated market unlawful, by which firms in a concentrated market might in effect share monopoly power, setting their might in effect share monopoly power, setting their prices at a profit-maximizing supra-competitive prices at a profit-maximizing supra-competitive level by recognizing their shared economic level by recognizing their shared economic interests and their interdependence with respect to interests and their interdependence with respect to price and output decisions” price and output decisions” [[Brooke Group Ltd. v. Brown & Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.Williamson Tobacco Corp., 509 U.S. 209, 227 (1993) , 509 U.S. 209, 227 (1993) ]]

Collusion in repeated games Collusion in repeated games

There are multiple NE in a repeated There are multiple NE in a repeated settingsetting

How is selected the equilibrium?How is selected the equilibrium? Answer: analysis of the economic Answer: analysis of the economic

environmentenvironment

p2

q2

Marginal cost

Q (1/2)Q

p°

p°°

Range of infinite non cooperative equilibria (Folk Theorem)

Maximum price A Aassimo A Maximum price B

Regulation is a facilitating factor (Gal, 2000). In some cases a government-supported maverick is a solution for oligopoly pricing

Exogenous focal point reduces uncertainty and may even overcome the economic significance of asymmetry in cost structure in order to induce self-enforcing equilibria: even the most efficient firm may have an incentive to align to focal points (winner takes all vs. satisfacing)

Information exchange was virtually non influent

Irrational collusion?Irrational collusion? On the other hand: AGCM has observed also selective

participation and selective discount Why enforcing M, when a superior pay-off was obtainable

by concerted practice? Ambiguity and Paradoxes What about concordance of facts and behaviours? Was the price war compatible with optimal penal codes? Were the anomalies observed a local issue? Great diversity in 63% of tenders sample. In 33% of them

on average a discount of 5% with respect to M. M is observed only in 45% tenders sample.

A simulation of repeated A simulation of repeated gamesgames

0 500 1000 1500 2000 2500 300030

32

34

36

38

40

42

44

46

48

50

numero gare (tempo)

payoff

medio

gare a cui partecipano imprese rivali tipo 1-2 gare a cui prende parte l'impresa tipo 3

The Agcm conclusionThe Agcm conclusion

““The whole purpose of this The whole purpose of this was to avoid any possibility of was to avoid any possibility of competition for their products competition for their products on the basis of their prices, on the basis of their prices, and to interfere with and to interfere with competition for the supply of competition for the supply of non-ionic radiopaque agents non-ionic radiopaque agents for radiological use to for radiological use to hospitals and Local Health hospitals and Local Health Authorities”. Authorities”.

Bracco S.p.A. 3,938,950,730 Schering S.p.A. 2,379,511,251

Nycomed 1,362,258,595 Byk Gulden Italia 464,894,100 Farmades S.p.A 320,752,779

Antitrust issuesAntitrust issues ““the factors which imply tacit collusion is more the factors which imply tacit collusion is more

likely are similar to those which make likely are similar to those which make sustainable cartel behaviour more likelysustainable cartel behaviour more likely” ” (Bishop&Walker, 1999)(Bishop&Walker, 1999)

Alternative explanations to concerted practice Alternative explanations to concerted practice were in this case consistent with the diversity were in this case consistent with the diversity observedobserved

How to explain irrational collusion when How to explain irrational collusion when there isthere is collusion?collusion?

Is there a threshold for minimal consistency?Is there a threshold for minimal consistency? Is there a risk of considering firms’ behaviors in Is there a risk of considering firms’ behaviors in

pharmaceutical auction always anticompetitive pharmaceutical auction always anticompetitive when there is no one shot Bertrand competition? when there is no one shot Bertrand competition?

New tools for understading New tools for understading collusioncollusion

Complementarity and supermodular Complementarity and supermodular games [Milgrom&Roberts (1990); Topkis games [Milgrom&Roberts (1990); Topkis (1998); Vives (2000); Aoki (2003)](1998); Vives (2000); Aoki (2003)]

Institutional complementaritiesInstitutional complementarities

Economic agents face different domains of Economic agents face different domains of games in selecting their choice in a given games in selecting their choice in a given institutional framework; choices in one institutional framework; choices in one domain act as exogenous parameters in domain act as exogenous parameters in other domains and vice-versa.other domains and vice-versa.

The Notion of Institutional The Notion of Institutional ComplementarityComplementarity

two domains of choices X and Y; {X1, X2} and {Y1, two domains of choices X and Y; {X1, X2} and {Y1, Y2}, with agents i choosing in X and agents j choosing Y2}, with agents i choosing in X and agents j choosing in Y, according to their utilities (respectively, u for i in Y, according to their utilities (respectively, u for i and v for j). and v for j).

a)a) for agent i for agent i

b) for agent j b) for agent j

There can be one Nash equilibrium, but also two pure There can be one Nash equilibrium, but also two pure Nash equilibria (institutional arrangements) for the Nash equilibria (institutional arrangements) for the system as (X1,Y1) and (X2,Y2).system as (X1,Y1) and (X2,Y2).

When such multiple equilibria are possible, we say When such multiple equilibria are possible, we say that that

(i) X1 and Y1 are institutional complements; (i) X1 and Y1 are institutional complements; (ii) X2 and Y2 are institutional complements.(ii) X2 and Y2 are institutional complements. Initial conditions (regulation, barriers to entry, Initial conditions (regulation, barriers to entry,

technology…) mattertechnology…) matter

);();();();( 22211211 YXuYXuYXuYXu

);();();();( 11122122 XYvXYvXYuXYv

Regulatory solutions: benefitsRegulatory solutions: benefits

MaverickMaverick ( (using focal points to reduce using focal points to reduce equilibrium pricesequilibrium prices))

Deregulated pricesDeregulated prices ( (eliminating eliminating exogenous focal points so as to detect exogenous focal points so as to detect collusioncollusion))

Centralised Purchasing through Regional Centralised Purchasing through Regional TenderingTendering ((securing lower prices through securing lower prices through Hospitals buyer power and by shifting Hospitals buyer power and by shifting from repeated to one-shot gamefrom repeated to one-shot game))

Regulatory solutions: opportunity costsRegulatory solutions: opportunity costs MaverickMaverick ( (uncertainty to detect collusionuncertainty to detect collusion))

Deregulated pricesDeregulated prices ( (risk of determining a level of risk of determining a level of price even greater than that associated with implicit price even greater than that associated with implicit collusioncollusion))

Centralised Purchasing through Regional TenderingCentralised Purchasing through Regional Tendering ((it may increase the likelihood of market it may increase the likelihood of market concentration and segmentation as tendering rounds concentration and segmentation as tendering rounds are repeated over time. “This occurs when the same are repeated over time. “This occurs when the same suppliers keep winning contracts for a certain drug, suppliers keep winning contracts for a certain drug, discouraging other suppliers from continuing to bid discouraging other suppliers from continuing to bid for that drug, and perhaps encouraging them to let for that drug, and perhaps encouraging them to let their product licence expire altogether” their product licence expire altogether” (Oxera, (Oxera, 2000))2000))