Court Services Victoria (CSV) takes over the administration of courts in the state from today. CSV is a new statutory authority, independent of the executive branch of government. Previously, court administration was provided by the Department of Justice, meaning those who administered the courts reported both to the civil service and to judges. This weakened accountability and presented challenges for judicial independence.
Some judges have argued for changes to court administration in Victoria for several years. In 2004, Philip Williams, Chairman of Frontier (Australia), co-authored a report published by the Australian Institute of Judicial Administration, The Governance of Australia’s Courts: A Managerial Perspective, which recommended that court administration be removed from the executive branch. The Victorian government took to the 2010 election a policy to adopt the recommendations of the report by establishing CSV.
A Courts Council consisting of Victoria’s six heads of jurisdiction and up to two co-opted non-judicial members will govern CSV. Philip is the first non-judicial member to have been co-opted.
Frontier (Australia) regularly advises governments and companies on dispute support and policy reform.
For more information please contact Philip Williams at philip.williams@frontier-economics.com.au or call +61 (0)3 9620 4488.
Explicit agreements among competitors that fix prices are illegal – and for good reason. If the collusion is successful, prices will be higher and output lower. But cartels are not always very successful. How can the effects be determined and the detriments measured? Frontier Economics has advised both plaintiffs and defendants in several recent cases in Australia where significant damages from cartel activities were sought or paid. This bulletin examines two major cases, looking at the challenges in modelling the effects of the cartels.
Australian competition law is enforced by the Australian Competition and Consumer Commission (ACCC) and the Federal Courts. The Courts have the authority to impose pecuniary penalties on cartel members when a cartel is discovered. Two of the highest fines in Australia for cases of this sort were in relation to vitamins – totalling A$26 million – and cardboard boxes – A$36 million.[1] In addition, the customers who were charged the inflated prices can form a class action and sue the cartel members for the damages suffered. On 10 March 2011, a class action led by Jarra Creek Central Packing Shed, which originally sought more than A$1 billion in damages from cardboard box manufacturers, was settled out of court. The Federal Court hearing outlined a settlement sum of A$95 million plus all costs. This is the largest payout for victims of a price-fixing cartel in Australia.
Evidence that a cartel existed provides sufficient grounds for prosecuting firms. However, for damages claims, evidence that the cartel was successful is imperative.
While we often assume that collusion is in a firm’s interest, cartels are often unsuccessful because there are powerful incentives for individual firms to cheat on the cartel. If the cheating firm can steal business by charging a little less than the agreed collusive price, it may well sell many more units with close to the monopoly profit margin on each unit.
So what determines a cartel’s success? There are many potential factors. Some relate to the ability of firms to monitor each others’ conduct, which is required to ensure agreements are being adhered to. Others change the balance of incentives to defect from or commit to the cartel. Some particularly important factors are highlighted in Figure 1. Rarely will they all be present at once.
This list of factors only gives a broad feel for likely cartel success in any one case. Ultimately, for damages claims, each case requires a careful analysis of the available data – making the estimation of damages caused by a collusion an empirical matter. Generalisations, whether from theory or from other empirical research, are of little help.
At this point the role of quantitative economic analysis becomes critical. Different techniques can be applied and models developed to estimate the effects of a cartel, and to quantify the size of any damages. Generally, the first step is to estimate what price would have prevailed in the absence of the cartel arrangements, known as the “but-for” price. This may be done in different ways, reflecting market characteristics and data availability. However, the vagaries of the real world make this task complex.
In the cartel cases mentioned, what were some of the challenges Frontier faced in estimating “but for” prices?
Meeting the challenges that arose in estimating damages required the sound application of economic principles as well as the use of a variety of data analysis and modelling techniques. In addition, since the analysis was subject to challenge by the other side’s experts, it was vital for us to have a thorough understanding of any potential pitfalls in applying the various techniques.
Litigation is always complex, and a cartel damages class action case is no exception. For such cases, the success of the collusion in raising prices must be proved because cartels are not always successful. Therefore, the critical issue in settling damages cases is reaching an agreement on what prices would have prevailed absent the collusive arrangements.
The textbook scenario of a perfectly competitive industry becoming a monopoly under a cartel would give us simple answers about the effects of a cartel that all would agree on. Unfortunately, these textbook scenarios are as common as Harry Truman’s one-handed economist! Thankfully, there are tools and techniques that enable us to deal with the vagaries of the actual context in which the cartel operated and to develop realistic estimations of its effects.DOWNLOAD FULL PUBLICATION[1] ACCC v Roche Vitamins Australia Pty Ltd and Others totalling $26 million ($15 million to Roche, $7.5 million to BASF and $3.5 million to Aventis); and ACCC v Visy Industries and Others totalling $36 million (all borne by Visy.
The Australian Competition Tribunal (ACT) today granted approval for AGL to pursue its proposed $1.5bn acquisition of Macquarie Generation, the largest generation portfolio in New South Wales. AGL had sought authorisation from the Tribunal to allow the transaction to proceed following the ACCC’s rejection of the proposed acquisition during its informal merger clearance deliberations.
The ACCC – both in rejecting informal merger clearance and in arguing that authorisation should not be granted – stated its belief that the proposed transaction raised both vertical and horizontal competition concerns. A key issue argued by the ACCC was that AGL’s acquisition of Macquarie Generation would materially reduce the supply of hedge contracts available to second-tier retailers in New South Wales, thereby harming retail competition.
In handing down its judgement the ACT dismissed these concerns, finding that the costs and risks of the proposed acquisition were small, and very likely to be outweighed by the benefits of the transaction proceeding.
Frontier (Australia) was retained by AGL’s solicitors – Ashurst Australia – to provide expert economic and competition policy advice and modelling as input to both AGL’s informal merger clearance submissions as well as its application to the ACT requesting authorisation. Dr Philip Williams, Mr Danny Price and Prof. Stephen Gray appeared before the ACT as expert witnesses on behalf of AGL.
For more information please contact Philip Williams at philip.williams@frontier-economics.com.au or Danny Price at danny.price@frontier-economics.com.au or call +61 (0)3 9620 4488.
As excitement over the 2014 World Cup finals in Brazil mounts, Frontier’s economists have been getting into the party spirit in the way that only economists can: by collecting data. We have been building a rich database of club transfers, using statistical techniques to relate the prices paid for footballers to their past performance. Now we have used this work to put a valuation on different World Cup teams, and the results – putting Argentina in top place – are at odds with the bookies’ rankings. This contrast shows just what a hurdle Brazil has to jump to beat the big value teams.
Over the past few seasons, Frontier has been building a database of football transfers involving clubs in Europe’s richest leagues. This has allowed us to use statistical techniques to estimate how the characteristics of the individual players transferred (for example, their age, goals scored and assisted, and their international experience) have affected their transfer fees. As a result, we have developed a model that we can use to estimate the “value” of different players.
By picking a likely starting line-up for each country in the World Cup finals, and valuing each individual player in the line-up, we have estimated the combined economic value of each national team. The chart below summarises our findings.
Figure 1. Economic value of national teams at the World Cup 2014
Source: Frontier analysis
Note: The rankings according to the bookmaker’s odds are presented in the green boxes. Italy and Uruguay are joint 7th favourites, and England and Holland are joint 10th favourites.
In 2010, Frontier carried out a similar exercise, although on the back of a smaller database. According to that analysis, the most valuable team heading to South Africa was Spain – which, of course, did indeed go on to achieve its first-ever victory in the World Cup. But this time, there is an important difference in results of the analysis.
In 2010, Spain was also the bookies’ favourite – in other words, betting odds and economic calculations pointed in the same direction. This time, they don’t. Argentina tops the economic league table – Brazil, the tournament favourites, come only fourth. That’s a very big hurdle to jump.
Ahead of the tournament, we identified the top teams who – according to one typical bookmaker’s odds in the fortnight before the contest began – are the most likely to win the game’s biggest prize. Host nation Brazil are ranked as favourites, with Argentina in second place. Next come Germany, and reigning champions Spain. Belgium, France, Uruguay, Italy, Portugal, the Netherlands and England round off the top 10.
As the chart shows, Argentina has a combined team value we estimate at £284 million. This is largely thanks to star man Lionel Messi, who alone is valued at an eye-watering £130 million – nearly as much as the entire Italian team. (Without Messi, Argentina would tumble to eighth place in our table.) But Argentina isn’t the bookies’ favourite.
Defending champions Spain come second in our rankings, with a combined economic value of £267 million. Andrés Iniesta is their most valuable player (£53 million). Spain, however, only comes fourth with the bookies.
Germany comes third on both scores, with an economic value of £264 million. Arsenal’s Mesut Özil (£54 million) and Bayern Munich’s Thomas Müller (£51 million) are their star players. But the tournament favourites and host nation Brazil only make it to fourth place in terms of economic value, with a combined worth of £227 million. (Barcelona’s Neymar is the most expensive player for Brazil at £54 million.)
And meanwhile the England team, whose economic value we estimate at a sizeable £212 million (putting them into fifth place in the value table) are ranked in joint 10th place as 33-1 outsiders, according to the bookmaker’s odds. (Manchester United’s Wayne Rooney boosts the figure substantially, being valued at £47 million.)
Cristiano Ronaldo – the second highest valued player in the tournament, with our estimates putting him at £118 million – helps take Portugal to £200 million and sixth place in the economic value table. But the betting odds put them down in ninth place. In contrast, dark horse Belgium – which the bookies put in fifth place – is only eighth in terms of economic value. France comes between the two, with an economic value of £177 million giving it seventh place, and sixth place in the bookies’ rankings. Holland (£149 million), Uruguay (£147 million), and Italy (£132 million) complete the list. The chart below summarises how our rankings, in terms of economic value, differ from the betting odds.
Figure 2. The difference in rankings between the betting odds and economic value
Note: For each country, the difference is calculated as their ranking according to the betting odds minus their ranking according to economic value. For example, England are ranked 10th according to the betting odds, and 5th according to economic value.
So what accounts for the differences? We’ve identified a number of factors.
Will it be enough to fire Brazil up to make it seven out of twenty for the host nations (and, more importantly, a record-breaking six out of twenty World Cup wins for the country itself?) There’s a powerful emotional tide flowing that way, but our analysis shows just how big an ask it is for the Brazil team.
For even if arch-rivals Argentina falter because Messi doesn’t quite justify the value that would be put on him for his club performance, what this analysis makes painfully clear is that both Germany and Spain have teams with significantly higher value than Brazil’s. And neither of those two valuations of the top European teams is over-reliant on one key player. Meanwhile even the little-fancied England team have an economic value barely less than Brazil’s, so ought to be able to give them a run for their money.
It’s probably because there are four (even, perhaps five) teams whose economics ought to put them in contention that these other factors are affecting the odds so markedly. Which will tip the economic scales? Time for another footballing cliché: Only Time Will Tell.DOWNLOAD FULL PUBLICATION
With the World Cup kicking off this week, Frontier (Europe)’s latest bulletin estimates the economic value of the leading national football teams taking part.
Frontier undertook a similar analysis for the 2010 World Cup, when eventual champions Spain also topped our list of most valuable teams. The results this time, however, throw up some surprises. Argentina heads our economic league table, largely thanks to star man Lionel Messi, who alone is valued at an eye-watering £130 million – nearly as much as the entire Italian team. By contrast, Brazil, the tournament favourites, only have the fourth most valuable team – barely ahead of little-fancied England.
So is an upset in store? Or will home advantage propel Brazil to lift the trophy for a record sixth time? Let the debates - and the games - begin.
For more information, please contact Marita O'Keeffe at m.okeeffe@frontier-economics.com.au or call +61 (0) 3 9620 4488.
