Bayou Business Review, May 31, 1999

In past columns, I have criticized U.S. antitrust policy, in such cases as the current cases against Microsoft and American Airlines, for being more about protecting certain competitors than about protecting competition. Some of our antitrust law makes sense, however. Cartels, industry-wide conspiracies to cut supply and raise prices, can survive despite the strong incentive that cartel members have to cut prices to increase sales. Industry agreements to cut supply invariably cut the options of consumers and raise prices, harming those they are supposed to serve.

Three major multinational pharmaceutical firms, F. Hoffmann-LaRoche, BASF and Rhone-Poulenc, recently plead guilty to conspiring to raise the prices of vitamins, in suit brought forth by the Antitrust Division of the Justice Department. The companies met each year to divide the markets up and to set prices The higher prices hurt buyers of animal products, vitamin-enriched foods and supplemental vitamins. The three firms controlled 95 percent or more of the world markets for vitamins A, C, and E, and they also set prices for beta carotene and some of the B vitamins. Rhone-Poulenc cooperated in the investigation and received no fine, while the other two agreed to pay a total of $725 million in fines, setting a record for fines in an antitrust case.

Economists once thought that all cartels would naturally break up because a firm in a cartel stands to make even higher profits by cutting its price a little, while the other firms are keeping their prices up. In fact, this is what I was taught as an undergraduate only a few years ago (well, it feels like only a few years). However, what is now understood is that when the cartel realizes that one of its members is undercutting the agreed-upon price, a price war quickly ensues. Cheating on the cartel arrangement brings about super high short-term profits for the cheater followed by low profits for a very long time. Abiding by the cartel agreement brings merely high profits as far as the eye can see. In many cases, firms are better off by sticking with the cartel.

The vitamin cartel was begun in 1990, and only fell apart this past February as a result of the antitrust suit. The vitamin cartel would not have been stopped without antitrust action of some sort.

In all of this, I am reminded of a quote from Adam Smith, the father of modern economics, from his book, The Wealth of Nations. Smith wrote: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." This was certainly the case with what the three vitamin producers called "Vitamin, Inc."

Cartels must rely on each firm’s expectation of higher future profits from abiding by the cartel price and production quotas than the profits from any break from the cartel-arranged prices. What cartels usually lack is any way to enforce their decisions. For enforcement, they often must rely on government regulation of some sort, regulations barring some potential suppliers from the market. Perhaps, the worst instances of reliance on regulations to keep competitors out of a market are in the learned professions.

Recently, Wallace Tomlinson, the Associate Dean of the Tulane Medical School, wrote a letter that appeared in the Daily Comet on May 14th, and, I am sure, in many other local papers around Louisiana near that date. In his letter, Dr. Tomlinson appealed to Louisiana citizens to fight against proposed legislation to allow psychologists authority to prescribe a limited number of drugs to treat various mental illnesses after completing a course on psychoactive drugs. The real intent of Dr. Tomlinson’s letter should be clear. He wishes to keep the supply of mental health providers low in order to keep the pay for psychiatrists high.

A few pages prior to the quote from Adam Smith above, Smith explains why certain labor policies in Europe (in his day of the late 1700s) led extreme inequalities of income. First on Smith’ list was "by restraining the competition in some employments to a smaller number than would otherwise be disposed to enter them."

Fixing prices is indefensible and should be illegal. It has clearly shifted wealth away from those who use vitamin supplements and consume such supplements indirectly, as in the case of enriched milk, breads, and juices. However, using the power of the state to do the same thing to also keep supply artificially low, shifting wealth from mentally ill to pad the paychecks of doctors is just plain wrong. Could the reason that people self-medicate with vitamins and dietary supplements be that it is so costly to get treatment from a doctor?