Whose Welfare? An Economist Assesses the Cost to Society of Corporate Collusion

ALBANY, N.Y. (April 29, 2021) — There are several ways for a business to make a dollar, including the often illegal one of collusion. This usually involves a private agreement among companies to keep prices high or quantities low. Less frequent — and less investigated by regulators — is collusion on non-compliance of regulations, including environmental regulations.

Such may have been the case with three of Germany’s biggest carmakers — BMW, Daimler and Volkswagen (which owns Audi and Porsche) — when the European Commission in September 2018 began an inquiry into their possible collusion to limit the effectiveness of clean emissions technology.

That same month, Cuicui Chen of Economics, an expert in environmental and energy economics, along with three colleagues began studying the causes and welfare effects of these firms’ alleged collusion. The specific technologies in question were nitrogen oxide (NOx)-control technologies in the companies’ diesel engine vehicles from 2007 to 2018.

The result is a study released on April 5 as a working paper for the Toulouse School of Economics and a research discussion paper for the Centre for Economic Policy Research, titled “Colluding Against Environmental Regulation.” Coincidentally, the paper came out just 15 days before the EU is expected to impose billions of dollars of fines against those three automakers over their collusion regarding emission-reducing technologies.

The paper, co-authored by Jorge Ale-Chilet of Bar-Ilan University in Israel, Jing Li of MIT and Mathias Reynaert of the Toulouse School of Economics in France, looked at a technology called Selective Catalytic Reduction (SCR), which requires a large quantity of Diesel Exhaust Fluid (DEF) to neutralize NOx emissions to comply with EU standards. The companies allegedly colluded to reduce the size of the DEF tanks, resulting in more NOx pollution.

Chen and colleagues investigated how this collusion could aid the companies’ profits. Among their findings: “Large DEF tanks reduce firms’ profits because they take up valuable trunk space and increase marginal production costs. [The automakers] gained 0.68-5.04 billion euros in variable profits from this alleged collusion.”

Other advantages to collusion would be the companies each having “skin in the game,” minimizing the chance of one informing environmental or antitrust investigators about the others’ non-compliance. Environmental regulators also would be less likely to become suspicious. Non-compliance would also benefit car buyers, the smaller DEF tank allowing for larger trunk space ("enough space for golf bags," said one chassis manager) at little or no cost.

“However, those benefits to automakers and car buyers come at the cost of grave NOx damages,” said the study, “The alleged collusion in this market did not reduce other market participants’ profits or surplus, but damaged public health, an externality not usually considered in antitrust cases.”

In effect, Chen and colleagues assessed and regarded a greater “welfare.” “Our results,” they wrote, imply that the combined antitrust and environmental penalties [in this case] would have to reach between 1.46 billion and 14.63 billion euros to remedy the welfare damages of the alleged collusion.”

Chen said her group’s research in the EU context has implications for the U.S. antitrust and environmental policy. “Antitrust enforcement in the U.S., or anywhere in the world, has mostly focused on price/quantity collusion, even though antitrust law encompasses more ways to collude,” she said. “Collusion in dimensions other than price or quantity, such as the emissions control technology in our context, may be more challenging to detect and evaluate.

“This project can assist antitrust authorities in better allocating enforcement resources by (1) identifying conditions most conducive to non-price/quantity collusion, and (2) illustrating how to structure the welfare calculations differently from price/quantity collusion, when the impact of the collusion involves environmental externality.”

Chen said the study also illustrated “the interplay between antitrust and environmental regulation, by showing that antitrust can step in where environmental enforcement is weak to remedy the welfare damages of firms’ pollution.” That seems to be the case in this month’s EU Commission decision, which Chen said “will definitely be a cautionary tale for U.S. automakers — especially if the antitrust and environmental policy makers are informed of our research.”