Competition Commission Cement Investigation – CC v Lafarge Tarmac

Summary
The Anglo/Lafarge, joint venture case, was opened in 2012 and closed in 2016. This case investigated an intended partnership between Tarmac, a subsidiary of Anglo American, and Lafarge to establish a new business (joint venture) in the United Kingdom (UK). The two companies planned to contribute equally to the joint venture in the production of cement, aggregate, cement, asphalt, and RMX (Gov.UK (a), 2018.). Since the relevant activities in this paper are those about RMX and cement.
From the investigation, the CC established that the cement market had been coordinating to fix prices, which had an adverse effect competition. However, the CC was unable to identify whether the major cement producers were using tacit collusion strategy or a cartel. Further, the CC concluded that the coordination between the major cement producers resulted in high prices, which was shown by the three largest cement firms having a stable EBITDA or even an increase between the year 2007 and 2011, when the country’s economy was in ruins (Gov. UK (a), 2018). During the stated period (2007-2011), there was a national decrease in demand of 36% and businesses nationally, including cement firms, should have had a decrease in the EBTIDA.
Additionally, the investigations also showed that the cement manufacturers were using the tit-for-tat share balancing tactics, cross-sales as a mechanism for transparency, signaling, and on occasion share balancing. The companies were also using price announcement behaviors, which were contributing to price parallelism and the softening of customer resistance to price increases. Finally, these firms were targeting importers beyond normal competition through speed of service and price.
The CC suggested that the main problem within the market was tacit collusion rather than cartel. Their reasoning was founded on the fact that the market was highly concentrated with producers who were selling homogeneous producers. Additionally, the established producers had a lot of information about each other since the market was too transparent. Therefore, they concentrated on retaining their market shares rather than competing. The investigation showed that the Lafarge Tarmac joint venture was in a highly concentrated market and the producers were manufacturing and selling homogeneous products. This strategy was making prices to stay high since the firms had adopted an anticompetitive behavior that was beneficial to all parties of the cartel. The oligopoly had also created high barriers of entry into the cement market, which made it difficult for new entrant to participate in the cement sector. Overall, the non-competitive cement market made cement users in Britain to lose 30 million pounds annually, which could have been used to develop other public infrastructure and enhance public welfare. Due to these issues, the CC was compelled to intervene so that it could prevent future losses among cement buyers, which would be occasioned by the overpricing of cement.
Remedies
The CC recommended four major remedies for the Anglo/Lafarge merger, which were:

  1. Cement plant divesture remedy
  2. Transparency-reduction measures
  3. GGBS remedy

Cement Plant Divesture Remedy
In the cement plant divesture remedy, Lafarge Tarmac merger was to divest either its Cauldon plant or the Tunstead plant. Regarding the supply of limestone, which is used in cement production, the joint venture had the option of divesting Cauldon quarry if the Cauldon plant was sold. In the case the Tunstead plant was the one divested, the joint venture could either sell all or part of the quarry to the buyer of the Tunstead plant. Alternatively, the joint venture could enter into a long-term supply agreement (on arm’s length terms) with the buyer of the Tunstead plant for guaranteed supply of limestone. The divestment was to also include depots that can operate sufficiently as stand-alone cement plants (Gov. UK (a), 2018). Moreover, the buyer of either Cauldon or Tunstead would have the option buying some fixed RMX plants. In addition, a non-coordinating Great Britain plant was to be given the opportunity to participate in the joint venture.
Remedy on Transparency
To reduce the level of transparency in the cement sector, which could facilitate tacit collusion, the CC established that the GB cement market data, which is published in the MPA and BIS, should have a time lag that is more than three months before the information is made public. Additionally, an order was to be issued that would prevent any GB cement produces from providing sales and production data that had not passed the three-month time lag to third parties, unless where such information would be used for a company’s internal operations.
GGBS Remedies
Hanson was required to divest one of its three active GGBS plants. According to the CC, the most suitable plant was the one at Scunthorpe. Nonetheless, CC would still accept other divestures, such as the Port Talbor or Purfleet plants, if Hanson could proof that it manage the risks associated with these divestures. The GGBS plant divesture would include the full transfer of assets and operations on a stand-alone basis. In addition, Lafarge Tarmac was required to continue its operations with its GBS supply agreement with the acquirer of the divested GGBS so that it could give effect to its novation. The purchaser of the divesture was not to be a GB cement producer, and was to agree not to sell the acquired GGBS plant to a GB cement producer.
Relevant Economic Theory
Cartel: Transparency and Tacit Collusion
Enhanced transparency in the producer side is anti-competitive. It is extremely difficult for firms that are unaware of their competitors’ prices to have tacit collusion because it is much harder to detect price undercutting. Therefore, an increase in transparency enhances tacit collusion. An increase in transparency in the consumer side can counter the effects of transparency in the producer side. In a static setting, a market becomes more competitive as a firm’s demand elasticity increases (Schultz, 2003). The increase in elasticity of demand usually makes firms to become more willing to undercut their competitors, which can destabilize collusions. Given that more severe forms of punishment are possible in a transparent market, a transparent market facilitates collusion (Whinston, 1990). The net effect of these two forces is what determines the level of collusion (Schultz, 2003). In homogenous market, such as the cement market, a change in transparency has no significant effect on collusion (Porter, 1983).
Kinked Demand Theory
If a firm in an oligopoly decides to change its prices, the others in the industry can either follow or ignore. If a firm increased its prices, other firms will not follow, which will allow them to acquire the market share of the one that has increased its prices (Levenstein and Valerie, 2006; Ruhmer, 2011). In case a firm lowers its prices, the other forms in the industry will follow so that they do not lose their market share. Therefore, the demand curve at this level becomes inelastic because firms react in a similar manner (Fraas and Greer, 1997; Davies, Olczak, and Coles, 2011). Therefore, in an oligopoly, if one firm raises its price, it will lose its market share to others. If a firm lowers prices, all firms lower prices, which makes them to be less profitable (“Oligopoly Pricing Models,” n. d.).
Contestable Market Model
The contestable market model is one based on barriers to entry and exit, which determine a firm’s price and output. In the cement industry, the initial establishment cost is prohibitively expensive, which forms a barrier to entry (“Oligopoly Pricing Models,” n. d.). If barriers are high, oligopolistic set high prices, and when they are low, they will set a low price to discourage other firms from entering (Davies, Olczak, and Coles, 2011).
Arguments For and Against the Decision
Arguments for the Decision
The joint venture would lead to an increase in the available information among the market players. The presence of fewer players in the market would enhance the likelihood of all companies knowing the downward stream market conditions for cement, which will improve the possibility of businesses colluding and reducing consumer welfare (Fudenberg and Eric, 1986; Selten 1973; Martin, 2006). The requirement for diversification and acquisition of the property by a non GB player would increase competition.
The formation of the joint venture would also result in better alignment of incentives to coordinate, which would enhance Lafarge’s ability and motivation to punish firms due to the improved symmetry in vertical integration (Gillett and Ingo, 1999; Gov.UK (a), 2018). In the pre-merger joint venture state, Lafarge is highly exposed to external market; therefore, the punishment of deviations by others can be more costly to the company. Additionally, the establishment of the joint venture will result in the elimination of Tarmac, which will increase the rate of concentration in the market.
Finally, the post-merger joint venture would lead to symmetry in spare capacity and vertical integration. There will also be enhanced symmetry in vertical structures after the merger (Fonseca and Normann, 2008). Overall, the increased levels of symmetry will lead to more welfare cost. In summary, the joint venture will facilitate the three conditions of coordination, which are a monitoring position, a credibility position, and a deterrence condition.
Argument Against the Decision
In some cases, the establishment of a joint venture, such as the Anglo/Lafarge joint venture can enhance efficiency in a sector. Norman (2009) opines that joint ventures result in more efficiency if it is assumed that the upstream input is sold at linear prices instead of two-part tariffs (Bon, Francesca, and Randal, 2012). Linear prices do not make the business to realize maximum profits since this would only occur when there is double marginalization. Therefore, although vertical mergers may facilitate upstream collusion, this collusion will not result in a decrease in welfare (Bagwell and Robert, 1997). Actually, by the vertical mergers removing double mark-ups, they may eliminate the effects of increased upstream coordination.
Overall Conclusion
The divesture in the cement and RMX plants would reduce the market concentration of the production of cement in United Kingdom. The Lafarge Tarmac partnership had the potential of resulting in concentrating the production of cement in three major companies. However, the measures implemented by the CC ensured that the concentration in the cement and RMX market was reduced since the divested cement, quarry, depots, and RMX plant of Lafarge and Tarmac were to be sold to a non GB cement producer.
The regulation requiring the firms to only make data that was three months or more public through publishing in the MPA reduced the level of collusion in the market. The time lag in the publication of data made firms less aware of their competitors’ prices, which reduced the chances of them forming tacit collusion since it would be harder for them to detect price undercuts (Andreoli-Versbach and Jens-Uwe, 2015; Davies, Olczak, and Coles, 2011; Annesley and Tessa, 2009).
The divesture of Hanson GGBS plant reduced the concentration of this sub-market. The joint venture would have resulted in more concentration the GGBS market, with the market leader being Hanson. Therefore, the requirement that Hanson divest its plant to a non GB company ensured that the level of concentration in the GGBS market was reduced (Devetag, 2003).
Wide Implication Beyond the Specific Case
What happened in the cement market in the UK can happen in other industries in the future. The likelihood is specifically great in markets that are highly concentrated, sell homogeneous products, sellers have significant knowledge of the other firms’ prices and outputs, and where there are significant barriers to entry. In the Anglo/Lafarge case, the CC proposed the parties in the joint venture to divest some of their cement plants and large RMX plants.
Besides ensuring that the companies had diversified, the CC should ensure there is a reduction in factors that can promote tacit collusion. The CC should ensure there are no price announcement behaviors. It should also target for importers that purchase more than necessary for competition, and also the speed of service and price at which these products are sold. Finally, CC should check for tit-for-tat tactics used in ensuring share balancing. Whereas these policies were primarily established for the cement sector, they can be applied in other markets such as the grocery and supermarket stores sector.
Competition Commission Supermarket Investigation: CC v Tesco
The investigation report of the CC vs. Tesco case was first published in 2008. Although the CC acknowledged that the competition was good, it noted that there was a need to investigate Tesco since its dominant position created a barrier to entry in the market (Gov.UK (b), 2018). From the investigation, it was established that competition in the supermarket sector was mostly good. Nevertheless, the CC argued that in concentrated markets, there is little competition, which results in customers getting poor quality goods and services.
Land resource and restrictive contracts with key suppliers were the main barriers to entry in the grocery sector. These barriers are similar to the high capital outlay and ownership of mines needed for entering the cement sector. The Lafarge Tarmac case requirement for companies to divest some of their assets was still applied in this case. Similarly, the CC established a controlled land order, which enabled the grocery market to be more competitive since small grocery stores got access to land in concentrated-areas (Trapp and Josh, 2009; (Levenstein and Suslow, 2013). Additionally, the prohibition against imposing restrictive covenants and enforcement of any existing exclusivity agreement by the CC for all large retailers would reduce the barriers to entry and ensure small grocers can compete. Importantly, this strategy had the potential of reducing market concentration.
Besides these guidelines, the CC can in the future require supermarkets and other firms to delay the presentation of their financial data, by up to three months, just as in the cement sector, to reduce the level of transparency among large retailers in this market, which reduce chances of tacit.
 

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