Tricky Dicky, the Colluder-in-Chief

So what does the ACCC mean by Visy and Amcor “colluded”? And how did it hurt customers?

A collusive agreement between Visy and Amcor was a pact designed to raise profits, raise prices and restrict output.

Once the illicit pact was created, both Visy and Amcor could either comply with it or could cheat on it. “Compliance” means to carry out the agreement. “Cheating” means to repudiate the agreement. Cheating is the means where one firm seeks to advantage itself and simultaneously cause harm to its rival.

In the case of the Visy-Amcor cartel, there are several possible outcomes to any agreement:

• both firms could comply with the agreement; or
• one firm complies while the other cheats (for example, Visy complies and Amcor cheats or Amcor complies and Visy cheats); or
• both firms could cheat on the agreement.

Given Amcor sang like a kookaburra to the ACCC, it is a safe bet that both firms complied with the illegal agreement, until Amcor realised that it was financially better off by repudiating the agreement than by sticking to it. It no doubt actively considered the benefits of the collusive agreement against the looming financial and reputation related costs that could flow from the ACCC case against it.

Let’s look at the different scenarios.

Both firms comply

In order to maximise industry profit, Visy and Amcor must act in concert as though they are one huge firm. As though they were a monopoly, where there is no competition in price or in output. The two players combine their total costs and revenues, agree on what price to eye gouge their customers and how to share the market spoils between them. The obscene profits made by colluding oligopolists in such a market mirror those made by a monopolist.

To maximise profit, production is restricted to the point where the industry’s marginal cost (being the opportunity cost of producing one more box) equals the industry’s marginal revenues (being the change in total revenue resulting from one more box sold).

The industry’s marginal cost is the sum of Visy’s and Amcor’s production at each level of marginal cost. Let’s assume (see the table below) that at this point for the industry as a whole, no more than 3.1 million boxes can be manufactured and they can fetch no higher price than $1.75 per box. In this case industry revenues of $5.425 million and economic profit (for a definition see below) of $0.775 million, are the highest achievable. This is Case 1.

Visy cheats Amcor complies