The Vitamins Cartel.pdf Collusion agreements

Vitamins case study for UPF course

1. The Vitamins Cartel:
Collusion and Its
Economic Impact
How Price-Fixing Distorted Global Markets and Led
to Record-Breaking Fines
Carla Fernández & Ariadna Forcada
Pompeu Fabra University

2. TABLE OF
CONTENTS
01
02
Introduction
Economic and Theoretical Background
03
How the Cartel Operated
04
Economic Impact
05
Collusion vs. Competition Analysis
06
Discovery and Penalties
07
Conclusion and Final Thoughts

3. Global price-fixing conspiracy in the
pharmaceutical and food industries.
Operated between 1989 and 1999.
Major companies such as Roche, BASF,
and Rhône-Poulenc.
Roche & BASF
(Switzerland &
Germany) establish
the Vitamins Cartel.
Rhône-Poulenc
(France) joins the
cartel, agreeing to
freeze market shares
at 1988 levels.
1994
BASF and Roche
announce a 5% price
increase for Vitamins
A & E in industry trade
journals.
Prices of vitamins
skyrocket, with
Vitamin C increasing
by over 300% despite
stable production
costs.
The cartel is exposed by
regulatory authorities in
the US & Europe.
Roche and BASF pay a
record-breaking $725
million in fines
Understanding the Vitamins Cartel
What was?
1989
TIMELINE
1990 1995 1999

4. Artificially inflated prices for essential
vitamins, causing billions in economic harm.
One of the largest antitrust cases in history,
leading to record fines and lawsuits.
Understanding the Vitamins Cartel
Why is it relevant ?

5. La competencia
First: Why the market is
vulnerable to collusion? Market before collusion
Distinct & Non-Substitutable Markets
Each vitamin serves a unique biological function no
substitutes.
Strict production barriers of entry
Dependence on existing suppliers (vulnerability to
price manipulation).
How the market works?
Broad Demand, Weak Buyer
Power
Vitamins are essential
Diverse buyers
Buyers had low bargaining power
against dominant suppliers.
Standardized Pricing, Easier Collusion
Bulk vitamins were homogeneous, making
price the main factor in purchases.
Minimal product differentiation meant
price-fixing was easy to enforce.
Multiple Firms Competing
Lower Prices for Consumers
Market Efficiency
ACTIVE
COMPETITION
Incentive for Research &
Development
Technological Advancements
Better Product Offerings
Market-Driven Prices
Informed Consumers
No Artificial Inflation
CONSTANT
INNOVATION
TRANSPARENT
PRICING

6. COORDINATED PRICE
ANOUNCMENTS
1994: BASF announced a 5% price increase for vitamins
A and E through specialized trade press. These
increases were uniformly implemented by the cartel
members,
These regional price variations were typically less
than 10%, a strategy designed to prevent
international arbitrage opportunities.
PRICE FIXING
STRATEGIES
FIXED PRICE STRUCTURES
PENALTIES
How the cartel operated?
SECRET INTERNAL
PRICING AGREEMENTS
A mandatory minimum price was enforced and
discounts were banned to maintain artificially
high prices.
Publicly declared price increases in trade journals
ensured that all cartel members raised prices
simultaneously.
Private meetings determined regional pricing
strategies to tailor increases and avoid regulatory
scrutin
Financial Penalties Firms exceeding their market share or
offering discounts had to compensate other members.
Quota Adjustments Companies that over-sold their quota faced
reduced sales limits in the next period.
Exclusion & Retaliation Violators could be barred from key
meetings or face deliberate price cuts in their markets to force
losses.
Executive Pressure High-level warnings, threats, and collective
action ensured compliance.

7. Predefined Market Shares :Firms secretly divided sales territories
and customer bases to eliminate competition.
Production Quotas :Companies were assigned fixed sales limits
based on historical market shares, preventing price wars.
Enforcement Mechanisms :Firms exceeding quotas had to
compensate others or reduce future sales to maintain balance.
Barrier to Entry :The cartel used price retaliation and supplier
restrictions to block new competitors.
How firms shared the market?
HERFINDAHL-HIRSCHMAN INDEX
(HHI) :
46² + 17² + 8² + 7² + 2² + 2² + 1² + 1² + 9² =
2609
HIGHLY CONCENTRATED CATEGORY

8. SECRET MEETINGS NO PAPER TRAIL
STABLE MARKET
SHARES GRADUAL PRICE
INCREASES
01 02 03 04
How they avoid detection?
PRICE RANGE
AGREEMENTS
FINANCIAL
MANIPULATION
LOBBING
&INFLUENCE
06 07 08

9. What was the impact on the economy?
Global Economic Losses & Market Disruption
Massive Financial Impact: The Vitamins Cartel imposed over $10 billion
in excess costs on industries such as pharmaceuticals, food production,
and animal feed.
Artificial Price Inflation: consumers and businesses faced significantly
higher prices for essential vitamins.
Market Manipulation: disrupted natural supply and demand, and
eliminating fair competition.
Severe Impact on Developing Countries: restricted access to vital
vitamin supplements, exacerbating malnutrition and public health issues.
Suppressed Innovation: The cartel dominance reduced incentives for
research and development, hindering technological progress in the
vitamin industry.
END OF THE CARTEL END OF THE CARTEL

10. Case study: impact on the food industry
Source: FRED - Federal Reserve Bank of St. Louis
Animal Feed Price Index in the US (1986-2002)
VITAMIN CARTEL OPERATING
Reduced Nutrient Access
Government food programs and aid organizations
struggled to afford vitamin-fortified foods at inflated prices,
leading to nutritional deficiencies in vulnerable populations.
Increased Production Costs + Increased price
of Livestock and Animal Feed Sector
=Global Food Price Increase

11. Baseline Model of Cartel Behavior
Why did some cartels survive for a decade while others collapsed after only a few years?
MEASURING THE INCENTIVE TO COLLUDE:
The Vitamin Cartels, 1990–1999
Mitsuru Igami (Yale Department of
Economics)
Takuo Sugaya (Stanford Graduate School of
Business)
The Review of Economic Studies, Volume
89/3 (2022)
Economic evaluation of the incentives to
collude and defer in each specific market

12. Vitamin C Market
Baseline Model of Cartel Behavior
Why did some cartels survive for a decade while others collapsed after only a few years?
Transaction prices1.
Homogeneous goods
2. Internally used unit cost data 
Includes the costs of labor, raw materials, &
intermediate inputs
Hard capacity was never binding, with utilization
rate around 70%.
3. Markup
Homogeneous goods and N > 2, hence data reject
Bertrand model. 
Cournot seems more suitable
Soft capacity setting & price competition in every
period: Production plans need time-to- execute (e.g.,
work shifts; ordering & procuring raw materials and
intermediates) 

13. Overview of ModelProduct Characteristics
Players (firms): A fixed set of firms, I = {1, 2 n}, each
making decisions on supply.
Market Characteristics: Independent markets for
specific categories, stable cartel behavior within each.
Firms observe an economic state, Xt , which drives their
supply decisions.
Time Frame: Periods indexed by t, with information
exchange and lag (L = 3 months).
Demand & Supply: Firms choose supply quantities,
which affect market price based on demand sensitivity.
Baseline Model of Cartel Behavior
Each vitamin constitutes a separate market.
Demand side: Unique metabolic functions
Supply side: Unique manufacturing processes
Homogeneous within each vitamin
Price is king in wholesale bulk chemicals.
No differentiation across producers
Widely viewed as commodities
Geographically global market
No cross-border arbitrage by independent traders

14. WHY DO WE NEED VITAMINS
PRICE FIXING
STRATEGIES
EUROPEAN “BIG THREE”
JAPANESE DRUG MAKERS
Demand
Roche (Hoffmann-La Roche): a pioneering Swiss drug
company
BASF (Badische Anilin und Soda Fabrik): a German chemical
giant
RP (Rhône-Poulenc): a French chemical maker
Avoidance of deficiency symptoms and Broader “health
benefits” for humans
92% of vitamin C and β-carotene is for human use.
87% of vitamin A, and 73% of vitamin E, are for animals
Population of humans and animals
GDP per capita
“Perceived benefits” and “educational marketing”
Sophistication of animal husbandry
STEADY GROWTH
MANY SMALL BUYERS
4,000+ class plaintiffs from 9,000+ purchasers
Manufacturers of feeds, foods/beverages, and drugs
Farmers, cooperatives, and premix blenders
Even Coca-Cola is only 2.14% of the vitamin C market
Supply
Takeda, the largest in Japan, followed by Eisai, Daiichi
American companies had exited by the 1980s
E.g., Pfizer, Merck, American Home Products
MATURE TECHNOLOGIES
Stable market structure
No major innovations in production processes since 1980
No major entry or exit, except for the Chinese fringe

15. Cartel Agreement
VISIÓN
Continue Compliance Cartel Breakdown
Return to Nash Equilibrium in
Cournot Game
Equilibrium Collusion Vs. Competiton
Act as Monopolist, Quantity
depends on fixed MS
PDV Collusion > PDV Deviation
in any predictable future
outcome
Estimate demand and costs by using FOC along with data on prices, outputs, and cost1.
Calculate hypothetical market outcomes (i.e., prices, outputs, and profits) under static Nash equilibrium2.
Calculate the PDV of collusion and defection to evaluate the incentive compatibility condition3.
Steps

16. 01
Data: Prices, Costs, Output
① Demand growth
Both P and Q increase
Suggests X increases
Marginal cost constant
② Cartel output
Reduced in 1991-95
③ Fringe output
Sudden increase from 1992

17. Linear Demand Cournot FOC Effective demand shifter
Estimating Demand and Costs1.

18. Key Equations
Profits
3 cases
2. Calculating Prices and Profits
Cartel maximizes its joint profit via quotas
Its target price is “monopoly” price
Deviation (non-compliance) for 3 periods
Lagged public monitoring
Static Nash if someone has ever cheated
Punishment (trigger strategy)

19. 01
2. Calculating Prices and Profits

20. VISIÓN
Profit maxim.
PDV Colluding
PDV Deferring
3. Values and Incentives: Equilibrium
Key Equations
Payoff if comply with the cartel
agreement
Payoff if not comply
ICC

21. 01
3. Values and Incentives: Equilibrium

22. 01
RESULT
The fringe supply consisted mostly of Chinese exports.
Fringe supply was negligible during the 1980s but suddenly
increased in the mid 1990s, more than quadrupling between 1991
and 1996.
Chinese state-owned enterprises led this output growth by building
large plants and exporting through the traders of bulk chemicals.
Cartel formed static expectations at each meeting For example, at its
January 1995 meeting, the cartelís quota allocation assumed the 1995
fringe supply to be equal to the actual 1994 level.
However, at the annual meeting in August 1995, the January
forecast turned out to be too optimistic, and the revised, more
realistic forecast seemed to persuade the cartel to abandon the
quota scheme.
The level of beta that is the most consistent with this historical timing is
0.7 because it sets V to approximately zero, thereby perfectly
rationalizing the cartelís collapse in the middle of 1995. 

23. 01
RESULT

24. 01
Meanwhile in Other Markets

25. 01
Who killed the Vitamin C cartel

26. 01
BASF-TAKEDA merger before 1991
In 2001, Takeda sold almost all of its vitamin businesses to BASF, and the
antitrust authorities across the globe eventually approved this transaction.
According to the merger report by the U.K. Competition Commission,
Takeda’s vitamin C plants were more efficient than BASF’s, and BASF
planned to retire its own plants.
We capture this aspect of the transaction by
modeling the merged entity to inherit Takeda’s lower cost structure
rather than BASF’s
eliminating what used to be BASF’s vitamin C business from the
market. Thus this merger simply amounts to the exit of pre-merger
BASF as an independent producer.
Figure suggests Roche’s incentive compatibility constraint would have
been satisfied throughout the sample period for all plausible levels of
discount factor . The merger eliminates the fourth player and helps
create a triopoly, thereby increasing each firms quota and relaxing their
constraints

27. 01Cartel Exposure
1999: Rhône-Poulenc cooperated with
regulators, triggering a global antitrust
investigation.
Secret meetings, price-fixing, and market
allocations were uncovered.
Company
Fine Amount (in
milion USD)
Hoffman-La
Roche
$500
BASF $225
Aventis $171
Solvay
Pharmaceuticals
$9.1
Merck KGaA $9.24
Dai-ichi
Pharmaceutical
$23.4
Eisai $13.23
Takeda
Chemicals
$37.05
Cartel expousure and fines
U.S. Department of Justice (DOJ) and
the European Commission imposed
significant fines
These fines were among the
largest ever imposed for antitrust
violations at the time, reflecting
the severity of the collusion and its
impact on global markets.
Sources:
• U.S. Department of Justice Press Release: F. Hoffmann-La Roche and BASF Agree to
Pay Record Criminal Fines for Participating in International Vitamin Cartel
• European Commission Press Release: Commission imposes fines on vitamin cartels

28. 01
02
The Vitamins Cartel artificially inflated prices, costing businesses and consumers
over $10 billion globally.
Essential industries like pharmaceuticals, food production, and animal feed were
severely affected.
The cartel eliminated fair competition by fixing prices, restricting supply, and dividing
markets among major producers.
① Companies profited at the expense of consumers, while innovation in the industry
stagnated.
② This case showed how corporate collusion can distort entire global supply chains.
03
Repeated game theory is particularly useful when “right” data & evidence are
supplied.
① Explains diverging fates of cartels in reality
② Quantifies the effects of demand & fringe on ICC
③ Predicts the “coordinated effects” of merger
Conclusions

29. 04
In 1999, the cartel was exposed, leading to record-breaking fines:
U.S. DOJ: Over $1 billion in penalties (largest antitrust fines at the time).
EU Commission: More than €800 million in fines.
Hoffmann-La Roche, BASF, and Takeda were among the biggest offenders.
Leniency programs helped expose the cartel, encouraging whistleblower cooperation.
How can governments improve cartel detection without increasing business surveillance?
Should consumers be compensated when price-fixing inflates costs for essential goods?
How does globalization affect cartel formation and enforcement?
Can AI and big data help regulators detect cartels more effectively?
Discussion