An Initial Study on the Feasibility of Using Price Changes to Screen for Cartels

1. Background of Study
Competition authorities are finding it increasingly difficult to adopt regular administrative investigation procedures to obtain direct proof of mutual understanding behind concerted actions (cartel practices). Besides resorting to economic analysis to establish circumstantial evidence, the leniency policy has been adopted to provide the incentive to encourage cartel members to turn against the organization and cooperate with the competition authority to reduce the difficulty in gathering evidence of cartel practices.
In This study the theories and literature associated with screening of cartels, methods of cartel detection, the regulations in the Fair Trade Law against concerted actions, and the precedents of concerted actions in relation to daily commodities in recent years are examined to assess the regulatory measures taken by the Fair Trade Commission (FTC) in cartel cases.

2. Methods and Process of Study
Initially, theories and literature associated with screening of cartels are discussed and methods of cartel detection are introduced so that the focuses of structural methods and behavioral methods can be understood.
Next, the regulations against concerted actions set forth in the Fair Trade Law are analyzed. A description of the preventive surveillance mechanism adopted by the FTC in control of monopolistic practices involving daily commodities is provided, and cases concerning concerted actions in relation to daily commodities that the FTC has processed are also presented.
Lastly, according to the theories on screening for cartels and methods of detection of cartels, conclusions with regard to the approaches the FTC may apply in the future to detect in advance and prevent hardcore cartels from exercising monopolistic practices with regard to daily commodities are established.

3. Principal Suggestions
This study indicates that the investigations by the FTC in cases involving manipulation of daily commodity prices have been conducted mainly in accordance with concerted action regulations and some of these investigations have been initiated by the FTC after reading media reports on overpricing of certain products or receiving complaints about price increases. Based on the findings of this study, the following suggestions are proposed:
(1) Keeping a close watch on daily commodity markets
When there are abnormal fluctuations of market prices and concerted actions or other illegal practices cannot be ruled out, the FTC should intervene and investigate and impose severe sanctions when evidence of illegal activities is found. This can deter businesses intending to engage in illegal acts and indirectly help stabilize commodity prices. Therefore, the FTC should fully understand and regularly check the market structure of important daily commodities and price changes. The concrete measures to be taken include: 1) pay attention to reports on the reactions of the public to commodity prices, screen out developments where violations of the Fair Trade Law are suspected, and initiate efforts to understand or investigate such developments. Meanwhile, establish a variety of channels (writing, email, telephone, and fax) for private citizens and businesses to file complaints regarding violations of the Fair Trade Law and collect evidence extensively; 2) in response to daily commodity cases forwarded by related agencies and county/city governments, act in accordance with the regulations in the Fair Trade Law and activate investigations to find out whether concerted actions are involved, or if there is abnormal hoarding or refusal of transaction and sales at abnormal prices, and present the investigation results to be reviewed in commissioners’ meetings; and 3) continue to educate businesses on the regulations in the Fair Trade Law at various occasions and through different channels, and enhance competition advocacy work to maintain competition in every market.
(2) Keeping in mind the difference between the price fluctuations of agricultural and livestock products and that of other commodities when making observations
Agricultural and livestock products are different from the products of other industries. Since the supply and demand of agricultural and livestock products lack flexibility, drastic price fluctuations are likely to be triggered when changes occur to the supply and demand conditions in the market. The prices of agricultural and livestock products are not subject to government regulation. They are determined by market mechanisms. Hence, after natural disasters such as typhoons, the resulted decrease of supply and increase of prices are an inevitable process of market adjustment. In particular, there are a large number of participants on both the supply and demand sides. The market is not concentrated, and manipulation is relatively unlikely. The function of the FTC here is not to replace market mechanisms but to ensure normal trading order in the market. On the other hand, abnormal price fluctuations may suggest violations of the Fair Trade Law like joint price increases and in-depth investigations are therefore necessary. As the factors constituting a concerted action are rather complicated, price increases cannot be used as proof of concerted actions. The FTC needs collect enough evidence before making the conviction and sanction. However, through continuous investigations and enforcement of the Fair Trade Law, potential concerted actions can be deterred and commodity prices can be stabilized.