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Industrial Thread Essay

2345 words - 10 pages

An Economic Analysis of Cartels in the Industrial Thread Market

Table of contents

1. Introduction

2. The market of industrial thread

2.1. Market structure of industrial thread and its products

2.2. Presentation of the operating cartels 3. Illustration of the EC’s judgment using economic theories

3.1. Economic effects of the industrial thread cartels

3.2. Description of collusions strategy in the market by abusing market power

3.3. Legal aspect of an industrial thread collusion case

4. Conclusion

5. References

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1. Introduction

In a competitive market firms experience a constant pressure to offer the best goods and services to customers. ...view middle of the document...

The following section of the paper examines whether the EC’s decision can be supported using economic theories. Finally, the paper concludes with an evaluation of whether or not the assessment of the EC was correct.

2. The market of industrial thread

2.1. Market structure of industrial thread and its products Industrial thread is a key component of the textile industry but additionally used in several other industries. It is required for stitching various products such as seat belts, automotive seats, mattresses, home furnishings, clothes, footwear and ropes (European Commission, 2006). The European market of industrial thread is shared by a few companies. Producing thread requires specified equipment such as machines. Raising a significant amount of capital for equipment is an entry barrier which characterizes the market as an oligopolistic market (Mankiw, 2004). Inversely, free entry would characterize a monopolistically competitive

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market. Entry condition is the key difference between these two market structures (Perloff, 2009). The firms that joined together forming cartels have a dominant market position in the European market. Geographically, the companies focused on the market of the EEA and divided it into industrial customers for the automotive market and the rest of industrial thread market (European Commission, 2006). Dividing the market into the automotive market and the rest of industrial thread market was due to the fact that the automotive market required separate specialization standards in production (European Commission, 2005).

2.2. Presentation of the operating cartels Oligopolistic firms have rival firms and therefore experience strong pressure. One option to achieve increasing market share is to pay greater attention to their competitors and to seek competitive advantages. Another option is to eliminate competition by cartels. In 2005, the EC discovered three operating cartels in the thread market (European Commission, 2005). The thread producers manipulated the market price. They determined agreements to increase prices or to set target prices and to share customers (European Commission, 2005). Additionally, they exchanged confidential data on price lists and on price details they charged individual customers (European Commission, 2005). By exchanging this data, they aimed to allocate customers and to anticipate lower prices being offered. The three detected cartels were firstly, a cartel in Benelux and Nordic countries, secondly a cartel in the United Kingdom and lastly, a cartel for automotive customers in the EEA (European Commission, 2005). The first two cartels mentioned were meant specifically for industrial customers whereas the last cartel was concerned in the market of automotive thread (European, Commission, 2005).

3. Illustration of the EC’s judgment using economic theories

3.1. Economic effects of the industrial thread cartels An output change in one’s firm affects profit of all cartel...

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