Focus on the Economic Arguments and Principles Underlying the Wood Pulp Case

Maastricht University School of Business and Economics Maastricht, 2 November 2009 Huynh, M. P. ID number: I 6003147 Study: Economics Course code: EBC1010 Group number: 31 Tutor name: RJD Wilkinson Language tutor name: RJD Wilkinson Writing Assignment: Second short paper

Wood pulp, the main material to produce paper, was manufactured by 800 companies all over the world and among them 50 companies were producing in the EC. Besides that there was a high demand and wood pulp is a homogenous product, which means, that you can easily substitute a product. All these assumptions indicate that the wood pulp market was perfectly competitive. However, in 1985 the European Commission accused forty wood pulp manufacturers for violating against Article 81 of the Treaty by concerting on the same prices, which is also considered as cartels. After a number of firms appealed against the decision of the EC, in 1993 the European Court of Justice withdrew many of the adjudications of the EC. This paper focuses on the main economic arguments which led the European Commission to its decision and whether they are replicable or not. The wood pulp market situation was obvious for the EC: Some companies determined their prices higher than the competitive market equilibrium price. Further the number of output produced by these companies was smaller than the equilibrium quantity. (European Commission, 1984). Since the parallel behaviour could not be explained as independently selected, the EC concluded severely that it cant be anything but collusion, where rival companies cooperate secretly for their benefit to gain a higher market share. In addition, there was no market leader identifiable, no cost uniformity and the market transparency was not inherent. For example members of the US association KEA arranged fixed export prices for wood pulp and exchanged information about these prices (European Court of Justics, 1993). The Swiss Trust company Fides also exhanged information about their delivery prices with a number of other Swedish, Norwegian, Spanish and Portuguese producers (European Court of Justice, 1993).Thus the affected companies were condemned to fines from one thousand to one million ECU, reconciliation on announced and transaction prices and bans on export and resale (European Commission, 1984). After that the European Court of Justice intervened in this case, because the evidences for collusion were not clear enough to accuse the companies. According to them, there could be other reasons which have led to the wood pulp market situation: First of all there was no clear evidence that the system justified collusion. Also a consumer often has more than one wood pulp producer and paper manufacturers could have just exchange information about their companies or some producers engage the same agent. Another important factor is that the parallelism of prices is not that unusual for a market, because producers avoid lowering their prices assuming that competitive companies would follow which would result in an inelastic demand. On the other hand a company does not want to increase its price above the equilibrium except the competitive companies face scarce resources.

To sum up, the European Commission drew its conclusion too hastily, just because of parallel behaviour in the market, it doesnt connote that the producers established a collusion since it can be rationally explained by other factors like market structure, inherent transparency or rational behaviour.

Reference List European Commission (1984), Commission Decision of 19 December 1984 relating to a proceeding under Article 85 of the EEC Treaty. Retrieved November 25, 2009 from http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31985D0202:EN:HTML

European Court of Justice 1993), Concerted practices between undertakings established in nonmember countries affecting selling prices to purchasers established in the Community. Retrieved November 25, 2009 from http://eur-lex.europa.eu/LexUriServ/LexUriSerThe Swiss trust cv.do?uri=CELEX:61985J0089(01):EN:HTML