Yet another airline cartel story…..

Just in case you wanted one more example of price fixing, cartels, collusion and whistle blowing, here it is. The EU has boosted its revenue for the year by fining 11 airlines almost 800m euros for fixing cargo prices between 1999 and 2006. AirFrance-KLM are hit the hardest, at 340m, followed by BA at 104m - but Lufthansa, who blew the whistle on the other airlines involved, are not fined at all.

This gives yet another example of game theory, and the mind-games that colluding companies must engage in as they try to second-guess which fellow cartel member is most likely to alert the authorities in order to escape a fine, and exactly when that will happen.

The maximum possible fine, of 10% of a companies world-wide revenues for the year, sounds as it is enough to deter businesses from entering into cartels. Yet a look through a number of examples that we have used in class this week to investigate the practice, makes me wonder if the potential benefits to the colluding firm, over the years that they manage to get away with it, are greater than the fine that they risk when, or if, they are found out.

Do they see the potential fine as a legitimate expense of running the business, which is unfortunate but worth the risk? The BBC report that “BA said it had already made a £350m provision for any possible fines over the cargo price fixing. A BA spokesman said the airline’s fine fell “within the provision made by the company in its 2006/7 report and accounts”.” - almost as if it was depreciation. Should the fines be higher?

In case you want more on a similar theme, you might want to try some of the links below - I usually find that my students are scandalised by the way that the firm that betrays other cartel members to the authorities gets away without a fine!

BA and Virgin fuel price fixing - Q&A
Sotheby’s fined £13million for price fixing
Billionaire in cardboard cartel
Hasbro fined for toy price fixing
Firms tried to fix price ‘by text’
Probe into chocolate price fixing
Fine for cigarette price fixing
LCD manufacturers are screened for price fixing
Hotels under investigation for price fixing

BBC news video on cartels

Unit 3 Micro: Game Theory and Business Economics [21 May 2012]
Unit 3 Micro: Innovation in Markets [10 May 2012]
Unit 3 Micro: Quiz on Market Structures [11 Apr 2012]
Apple Being Naughty! [11 Apr 2012]
Unit 3 Micro: Evaluation Question on Supermarkets [11 Apr 2012]
Unit 3 Micro: Revision on Entry Barriers [10 Apr 2012]
Mortgage interest rates, LIBOR and game theory [3 Mar 2012]
Unit 3 Micro: Samsung and LG fined for price fixing [13 Jan 2012]
Unit 3 Micro: Oligopoly and Duopoly in Bus Markets [20 Dec 2011]
Unit 3 Micro: Tacit Collusion in the Supermarket [27 Nov 2011]
Collusion in the Classroom [8 Oct 2011]
Slicing up the Apple - globalisation graphic [22 Aug 2011]
A2 Micro: Competition Policy [20 May 2011]
A2 Micro: Oligopoly and Collusion [20 May 2011]
A2 Micro: Oligopoly [20 May 2011]
A2 Micro: Market Structure, Conduct & Performance [19 May 2011]
A2 Micro: EU Aviation - State Aid and State Ownership [28 Apr 2011]
Wiki Revision: A to Z on Monopoly [23 Apr 2011]
Key AS Micro Terms: Competition and Monopoly [17 Apr 2011]
Soap powder cartel leaves stain on colluders [13 Apr 2011]
Tracking Market Share in Web Browsers [4 Feb 2011]
A2 Economics Diagram Checklist [7 Jan 2011]
Orange, iPads and the Lock In effect [29 Nov 2010]
Energy Oligopoly - Price Investigation is Launched [26 Nov 2010]
Using Google Docs - A2 Applied Micro on Collusion [21 Nov 2010]
A2 Micro: Monopoly Price and Output [28 Oct 2010]
Book war over 92% Market growth! [5 May 2010]
A2 Micro: Oligopoly and Duopoly [3 May 2010]
Record fines for tobacco price-fixing as cartel goes up in smoke [16 Apr 2010]
Orange tries to make the broadband market more contestable [16 Apr 2010]
2009 - a desperately difficult year for airlines [27 Jan 2010]
Tories plan break up of energy oligopoly [4 Dec 2009]
GlaxoSmithKline and Pfizer choose to collaborate on HIV drugs [3 Nov 2009]
Banana Price War Must Hit Growers [7 Oct 2009]
Airlines scramble to find new revenue streams [7 Oct 2009]
Oracle-Sun merger [3 Sep 2009]
Economics Snapshot - Losses in Global Aviation [23 Jul 2009]
LCD manufacturers are screened for price fixing [14 Jul 2009]
Air passenger duty - a tax too far? [11 Jul 2009]
Petrol price war breaks out [9 Jul 2009]
CAPEX under pressure as spare capacity grows [4 Jul 2009]
BoE Health Check on the UK Economy [27 Jun 2009]
EU single market creaks under the pressure of the recession [1 Jun 2009]
Server demand dips as downturn bytes [1 Jun 2009]
Grey Skies for BA as Revenues Fall and Losses Take Off [24 May 2009]
Revision: Market Structure, Conduct and Performance [22 May 2009]
HMV diversifies into cinemas [28 Apr 2009]
Q&A: Why do cartels often collapse? [14 Apr 2009]
Global airlines nudge towards carbon emissions trading [10 Apr 2009]
Premum Flyers Go Awol [7 Feb 2009]
Apple introduces variable pricing [7 Jan 2009]
Cash and a buffer against difficult times [1 Jan 2009]
Airline mergers and competition policy [29 Oct 2008]
Maintaining profitability in the airline industry [21 Sep 2008]
Turbulent times for airlines -  Take your bets for the next failure [13 Sep 2008]
BAA faces break up after Competition probe [21 Aug 2008]
Nokia cuts prices as battle for market share in handsets hots up [2 Aug 2008]
Cheap flights - elasticity and effective demand [28 Jul 2008]
Cross elasticity: Demand for new aircraft [14 Jul 2008]
Cross elasticity: Demand for Airline Movie Systems [12 Jul 2008]
Tobacco price fixing [12 Jul 2008]
EU airlines to be included in emissions trading [10 Jul 2008]
Cross elasticity: High speed rail and oil prices [10 Jul 2008]
EU Tells Airlines to Pay for Emissions [30 Jun 2008]
Weigh less - pay less [28 Jun 2008]
Will your grand-children fly? [22 Jun 2008]
A2 Economics revision - The Great Energy Rip-Off? [26 May 2008]
“Benign”, eh? [17 Apr 2008]
Revision: Console wars [12 Apr 2008]
Oasis Airlines - Don’t Look Back in Anger [10 Apr 2008]
A new era for air travel [30 Mar 2008]
BAA raises passenger charges [11 Mar 2008]
Learning Lessons from: Cento Veljanovski [9 Mar 2008]
Money Programme on Airline Price Wars [15 Feb 2008]

ECONOMICS TEACHER RESOURCE NEWSLETTER

Join over 6,000 other Economics Teachers in the UK and around the world who receive the tutor2u regular Economics Resource Email Newsletter. Get special offers, first news of latest resources, teaching ideas, conferences and workshops + loads of great ideas for teaching economics from our blog authors.