Price Fixing in the Auto Supply Industry

Price Fixing in the Auto Supply Industry

Introduction Antitrust laws are set into place with the goal of preventing monopolization, promoting competition within markets and allowing for the efficient allocation of resources. These goals are meant to support the economic well being of society by allowing for less of an efficiency loss, as well as less lost income from the consumer (McConnell, Brue & Flynn, 2012, p. 375). There are companies that break such antitrust laws, either knowingly or unknowingly, and therefore find themselves in the midst of an investigation.
The Investigation of Tokai Rika Co. In early February of 2010, the Federal Bureau of Investigation raided the United States offices of three auto suppliers to auto manufacturers as part of an ongoing antitrust investigation (“Auto parts”, 2010).
Price fixing and covert collusion through cartels results in new firms not entering the industry, excessive profit by those involved in collusion, as well as loss of income by the consumer (McConnell, Brue & Flynn, 2012, pp. 230-231). The suppliers involved are the only ones who benefit due to the maximization of their profits. Price-fixing is easiest within an Oligopoly where there are a few dominant producers; making discussion and cooperation in price setting is easier. The Investigation Results The FBI investigation of Tokai Rika CO. led to charges against the company of anti-competitive conduct; price-fixing and collusion through the formation of a cartel and bid rigging. These charges were filed by the Department of Justice in the U.S. District Court in Detroit, where the U.S. subsidiary of Takei Rika is based. Tokai Rika Co. pled guilty to the charges when they were filed. The fines from the antitrust law violation led to a $17.7 million fine (UPI, 2012). The maximum fine for price fixing in violation of the Sherman Act is $100 million (DOJ Office of Public Affairs, 2012, para. 9). The company also set in place more stringent compliance rules for employees to follow. These more stringent rules are set in place in the hopes that future antitrust violations will not occur and fines will not have to be paid. While monopolies and oligopolies may seem at first to always be undesirable to society, they are sometimes desirable. This sort of government regulated monopoly reduces costs to consumers because the mail routes have a high costs associated with their establishment. Having only one firm deal with the initial set up allows for lower costs passed onto the consumer. In other words, if multiple carriers were introduced the mail routes and procedures would continually change causing large costs for set up to be continually passed on to consumers. One provider allows for initial costs to be passed to consumers only once and over a longer period of time. From stating the reasons why both a monopoly and oligopoly would be desirable, it can be clearly seen why the case of Tokai Rika Co. was indeed undesirable and deemed illegal within the United States. There are no high costs associated with the start up of the heater panel production and little confusion associated with its supply. A government-regulated monopoly would not be necessary or advantageous. The company also took part in collusive behavior in which prices were fixed to their advantage, while adding cost to the consumer. This is clearly a case of the possible disadvantage of an oligopoly: covert collusion.