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“Our Customers are the Enemy”: Five Lesser-Known Cartels
May 8, 2008
“Our competitors are our friends. Our customers are the enemy.” -James Randall, former president of ADM
Everybody’s heard of the Organization of Petroleum Exporting Countries (OPEC), which is an international cartel dedicated to maximizing profits on oil for its members, and the news is filled with tales of “drug cartels” around the world. Price-fixing via collusion of supposedly competitive industries is often suspected in high-cost, abstract industries such as insurance. But did you know that there have been cartels artificially inflating the price of goods as diverse as light bulbs, vitamins, and groceries?
1. The Phoebus Cartel
If you think that it is difficult to convince people to convert from incandescent light bulbs to CFLs, try getting people to convert when virtually every manufacturer of light bulbs is colluding with each other to raise prices of all bulbs and reduce their average life expectancy (causing more bulbs to be bought). Named after the Latin form of the Greek sun-god, the cartel included every major manufacturer of light bulbs in the world, including General Electric, Philips, and Osram. For almost twenty years, from 1924 until the beginning of World War II, the cartel kept prices fixed for light bulbs in the rest of the world, including Europe, at around four times the cost of light bulbs in the United States. The cartel has also been accused of retarding research into more cost- and energy-efficient light bulbs for all of those years. Eventually, effects of both the war and the entry of lower-cost Scandinavian manufacturers into the market led to the demise of the Phoebus Cartel.
2. The 1990s Vitamin Cartel
Although some people think that cartels are just a memory of a gilded age past, they are alive and well even today. There was a lull in most cartel activity for fifty years after World War II, but they are popping up more and more in the last few decades. One of the largest and most sophisticated cartels operated in the mid-1990s to fix the price of various vitamins and amino acids, such as lysine, citric acid, and vitamin A. Consisting of several massive, blue-chip companies, including Roche, BASF, and ADM, this cartel made hundreds of millions of dollars in excess profit in a few short years. The cartel came to end after an FBI raid in 1995, with several ADM executives going to prison, one for 36 months (the first time this maximum sentence was ever handed down).
3. The Uranium Club
Between 1972 and 1976, a group of non-US governments and various uranium suppliers, both in the United States and elsewhere, caused the price of uranium to rocket upwards. This group - “The Uranium Club” - created a cartel with price floors and production quotas to ensure that certain countries would provide a certain amount of uranium to buyers. Major members included companies from Australia, Canada, South Africa, and France, and these governments, monitoring the export of uranium for “security reasons,” provided a way for the cartel to check if any individual companies were cheating the system by underselling or selling more uranium than allowed. Prices of uranium more than sextupled within four years. This apparently had little direct effect on the US uranium, as foreign uranium was mostly barred from trading on the market at the time, but it is alleged that it caused an indirect rise.
4. The Horse Racing Cartel
The Asian Racing Federation is a collection of various racing horse racing organizations, many of them government monopolies, that have conspired to ensure that only their affiliates can legally gamble on racing outcomes. Representatives have stated the goal of their “Good Neighbour Policy” is to restrict illegal, off-shore gambling, and thus provide more tax revenue to their respective governments. However, since they minimize the number of competitors, they have artificially kept profits higher for their preferred bookmakers, and thus act exactly like a cartel.
5. The Supposed British “Supermarket Cartel”
Last month, the United Kingdom’s Office of Fair Trading (OFT) started an investigation into the four largest supermarket chains in the UK, on suspicion of conspiring to fix prices. Theoretically, this makes no sense. Virtually all cartels tend to be in commodity businesses with little room for branding (for example, graphite, industrial dyes, freight shipping and bulk chemicals). This makes it easier for companies to detect cartel “cheaters,” since they are selling basically the same product. In addition, most companies involved in cartels have little direct interaction with the end consumer but rather with other businesses. Finally, cartels prefer to operate in markets with a relatively small number of buyers. Supermarkets seem like the epitome of companies that would not be involved in cartel formation and operation. However, the OFT has been asking very specific questions. If they find out that the supermarkets have been colluding in a cartel, it will bring up several difficult questions on how prevalent cartels are in this day and age.
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