Collusion: Exploitation or benefit?

In 2011, two soap and detergent firms, Unilever and Procter & Gamble, were fined a total of 315m

(US$ 220m) for fixing the price of washing powder in eight European countries. Procter & Gamble

is the world's largest consumer products company. The two firms had colluded over prices for more

than three years. The collusion began when they agreed to implement an industry-wide program to

improve their environmental impact by obtaining their raw materials from sustainable sources. They

also agreed to reduce the amount of packaging they used but to keep the prices unchanged. Then,

later, they collectively agreed to raise prices in Belgium, France, Germany, Greece, Italy, Portugal,

Spain and the Netherlands. This collusion was against the European Union competition laws and was

regarded as 'unfair competition'.

Some information from the 2010 financial report of Procter & Gamble (P&G) is shown in Table 1.

Table 1: Annual Report of Procter & Gamble

2006 2007 2008 2009 2010

Total Revenue US$ million 64416 72441 79257 76694 78938

Profits US$ million 8684 10340 12075 13436 12736

Distributed Profit per Share

US$ per share 1.1 1.28 1.45 1.64 1.80

The report states that 'No company in the world has invested more in market research than P&G. We

conduct over 20,000 research studies every year. Over the past 15 years, P&G had 125 notable

innovations - more than our six largest competitors combined. P&G is the brand-building leader of

our industry with 50 brands that are among some of the world's best-known household names - and

which together make up 90% of P&G's sales and more than 90% of profits.

P&G is creating the advantage of large scale by integrating across our different businesses and

markets, allocating resources more efficiently than any small business can do on its own.'

(Source: Adapted from P&G Annual Report 2010)

Questions:

a) Explain what is meant by 'collusion' and when it is most likely to occur in an industry. [5 points]

b) Analyze, using Table 1, whether price fixing benefited Procter & Gamble. [ 5 points]

c) Suggest why creating the advantage of large scale by 'integrating across its different businesses'

might benefit a firm. [5 points]