Price Fixing Dirty Laundry

Meanwhile in Europe, innocent old Belgian babushkas using Tide laundry detergent have learned that despite diligently washing their soiled linens, they still have a load of dirty laundry. Procter & Gamble, the manufacturer of Tide, Gain and Era brands of detergent, was recently busted by the European Commission along with accomplice Unilever (Omo and Surf brands) who organized a price-fixing cartel on laundry detergent between 2002 and 2005.

Laundry detergent is produced by many different competing firms, so the marketplace should resemble one of perfect competition. In such a marketplace, competing firms who attempt to raise prices and capture more revenue are undercut by the lower prices of other firms. This results in firms taking equilibrium prices, which are driven by the quantity where market supply equals demand. Things went differently in Europe. Reuters.com reported that P & G and Unilever, both major players in the sale of laundry detergent in Europe, “agreed not to decrease prices when making their packages smaller and even agreed later to raise prices.” They used their shared environmental initiatives as an alibi to discuss restricting shipment packages without decreasing price. With this agreement, there was no longer fear that one company would undercut the price of the other and revenues for both companies would increase substantially. 

Why is this bad? The European Commission commented on the matter saying that cartels are “the worst violation of competition rules” because they “[extract] higher prices from consumers than they would pay when companies compete fairly and on the merits.”  While this is true, the price increase isn’t the real reason cartels are so damaging. Prices go up all the time with cost increases in a firm’s production line or demand shocks increasing quantity demanded. What’s different here is that costs for P&G and Unilever never actually went up. This results in extra profits for our detergent producers, stolen from what had previously been consumer surplus, and leaves a heavy deadweight loss to the economy. In addition to this economic damage, the two collaborating detergent giants effectively become a monopoly with increased market power. The New York Times reported that they “developed the cartel to make sure none gained a competitive advantage over the others.”  That sounds nice and fair, but the ability to shift prices as they please (as long as they aren’t caught) becomes a barrier for entry for other potential detergent producers, unless they get in on the cartel as well.

The announced penalties for Procter & Gamble and Unilever correspond to the crime. Combined, they are being fined 315.2 million Euros  for their criminal activity. I assume that on top of this they will be open to compensate purchasers for the amount overpaid compared to a normal competitive marketplace.