• October 22, 2014

An Economist Corners the Market on Global Cartels

An Economist Corners the Market on Global Cartels 1

Kelvin Ma for The Chronicle

John Connor, shown here near his house on Cape Cod, is a retired economics professor from Purdue U. who has created a new career as an expert on international price-fixing conspiracies.

Shaded under a blue umbrella at a Cape Cod beach club, a beer in hand and his banana-yellow Porsche convertible parked nearby, John M. Connor, an emeritus economics professor at Purdue University, had a confession to make: The cartels have been very good for him.

It started nearly two decades ago, with an FBI raid in Illinois that uncovered a global conspiracy to raise prices on animal-feed supplements. At the time, Mr. Connor had spent his days probing, say, the efficiency of the U.S. butter market. (It's good, by the way.) Yet somehow this international cartel had sat in his academic and geographic backyard, and he had had no idea it was even possible.

"How did I not know about that?" he said as he read front-page coverage of the scandal at Archer-Daniels-Midland, the U.S. company that colluded with several Asian firms. "I used to tell people that I love cartels, but that's really—that's the wrong word. I became fascinated."

That fascination reshaped Mr. Connor's career and led to a second act as the "King of Cartels," a status recognized this month by a lifetime-achievement award from the American Antitrust Institute, a bipartisan center where he serves as a senior fellow. Mr. Connor's work, including his book Global Price Fixing, is influential. His private database, where he has recorded nearly 900 international price-fixing scandals, has no known parallel. He has become a courtroom fixture, consulting for cases against putative cartels. (That explains the car.) And he's a government gadfly, arguing that the country hasn't done nearly enough to protect its consumers.

For cartels, he says, the evidence is clear. Crime does still pay.

Often business-on-business offenses, international cartels rarely rise to public notice, but they are a pervasive, costly phenomenon. Since the 1990s, they have accrued more than $80-billion in U.S. government fines.

More cases go undetected; generous estimates suggest only a third come to light. These cartels thrive, then fail, in the hidden abysses of the market, but not before they've garnished profits from the budgets of everyday shoppers out to buy meat, computer monitors, or cars.

"It's the dark side of globalization," Mr. Connor said. Communication costs are low; cultural differences are eroding. The M.B.A. is ascendant. "They all speak the same language. Use the same spreadsheets."

Tanned, with curly white hair, Mr. Connor spends his days scouring the trade press and court proceedings for news about cartels. That work hasn't slowed with his retirement, and extends to his summer vacations on Cape Cod, where a second consecutive August was being undermined by consulting projects.

On top of that, he has to keep his database current. Each year, that gets harder. Either the number of global cartels is rising, or more are now being fished out.

"I used to add 30 or 40 a year just a few years ago," he said. "Now it's 90, 100 a year"—and that's only counting international cartels. "I'm running out of time in my days. I'm frazzled keeping up with it."

Conspiring in Babylon

Cartels stretch back into antiquity. For as long as there's been a market, entrepreneurs have tried to rig it. Babylon's Code of Hammurabi had antitrust rules; Lysias documented a bid to corner Athens's grain market during wartime. Cartels have also been fostered by the nation-state: Japan's zaibatsu conglomerates fueled its empire, and the United States was a hotbed of collusion well into the early 1900s. Indeed, for many countries outside the West, domestic cartels and monopolies were ubiquitous until a few decades ago.

That changed as the American ideal of competition went global. But few suspected that cartels would follow in capitalism's wake toward globalization (cartels that centered on exports, like oil, being a notable exception). That included Mr. Connor, who instead examined things like how, for most foods, the packaging costs far exceed the cost of raw ingredients. It just seemed like more compelling work.

"The only cartels I knew about, for 20 years, were piddly little things, like companies that ripped off schoolchildren by getting together and rigging school milk contracts," Mr. Connor said. "It would be in one little school district in Kentucky."

How had he missed the feed-supplement scandal? In short, several Japanese and South Korean companies had dominated the global production of lysine, an essential amino acid. Bolstered by a biotech innovation, Archer-Daniels-Midland entered the market, but rather than take on the Asian manufacturers, they collectively agreed to keep prices inflated for three years. An informant blew the pact up.

Initially Mr. Connor was on the sidelines at Purdue, clipping the news. (His database had begun.) Then he read about a proposed settlement in a suit against the cartel, which sounded far too small to him. He wrote The Wall Street Journal saying so, and somehow that letter, unpublished, wound up in the hands of a prosecutor on the case. Care to run the numbers? he asked.

Mr. Connor did.

In theory, cartels are simple; no theoretical innovations are needed to understand why they exist. The toughest questions are empirical. How do they work in the real world? That's what Mr. Connor has explored, assisted by reams of internal documents. Much of that knowledge is locked behind legal deals—he'll tell you he worked on the LCD-monitor cartel for Dell and on the vitamins "supercartel," and that's about it—but it's been a boon for his research, as well.

"I get to see what executives are saying to each other," he said. E-mails, planning documents. "All their dirty laundry."

Effective Deterrence

Before Mr. Connor, cartel scholars would scrounge up a few cases and generalize from there, said Robert H. Lande, a law professor at the University of Baltimore.

"John has taken the opposite approach. And the reason nobody else did it is it's such a pain," Mr. Lande said. "Boring doesn't even begin to describe it," he added.

Armed with these data, Mr. Connor is comfortable espousing some truths about global cartels. They require a limited number of market players, homogenous products, few individual conspirators, and the opportunity for face-to-face meetings every three months or so, possibly to deal with currency changes.

They rarely last longer than a decade, often torn apart by internal instability, as one firm tries to cheat the others. (The Justice Department banks on that suspicion, granting leniency to the first company to defect from a cartel.) The government also punishes price-fixing against itself more severely than such offenses against the private sector, he has found, and its sanctions result in a net benefit to national accounts.

The Justice Department is aware of this work, said Albert A. Foer, the antitrust institute's president. "I know that. Because we make them aware of it. They don't always love it. They don't always agree. But it's a fact."

One more frequent criticism of Mr. Connor's research, often coming from those working inside the government to deter cartels, is the question of sampling bias: His records reflect only the cartels that governments have exposed. What about those unseen leviathans?

Nobody knows if the sample is biased, Mr. Connor said. "My own feeling is that the undiscovered cartels probably do last a bit longer." Maybe they raise prices by less, allowing them to pass unseen. That's only a gut feeling, though.

What he can show, however, in a study published last year in the Cardozo Law Review with Mr. Lande, is that given existing U.S. sanctions, including prison time, cartels remain a rational business strategy. Sanctions are one-fifth of where they should be, they found.

"My numbers tend to show that the fines that have been imposed historically have been too low to deter cartels," Mr. Connor said. "And the fact that more and more cartels are popping up every year would seem to reinforce the point."

That paper, along with their past work, has prompted the American Antitrust Institute this July to call on the U.S. Sentencing Commission to at least double the economic-damage figure it uses for calculating fines in cartel cases. The petition may not work, Mr. Lande admitted. "We're just a bunch of academics," he said. "The commission will do what it wants."

But thanks to Mr. Connor, he added, no longer can it ignore that its numbers are wrong.

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