Cartel screening

Cartel screening tools involve statistical tests based on an econometric model and a theory of the alleged illegal behavior, designed to identify whether manipulation, collusion, fraud, or any other type of cheating may exist in a particular market. The Coordination Failure Diagnostics (CFD) is one such tool developed for the detection of cartels by observing market process patterns.

The CFD methodology is based on the assumption that existing cartels cause disturbances in observed process patterns by detecting disequilibria through identifying circumstances that indicate welfare losses. The CFD model exploits five market processes as control loop mechanisms in a cybernetic sense where shocks affect the adjusted variable (e.g. the difference in quantity between demand and supply) and the control variable (e.g. the price) and drives the adjusted variable back to its equilibrium value. The equilibrium of the adjusted variable is zero as the equilibrium quantity supplied equals the quantity demanded. This implies that all other values constitute defects and cause welfare loss. As a result, the value of the adjusted variable can show the level of workability of the market process.

The following are the five microeconomic market processes taken in CFD, each of which has a characteristic adjusted variable:

  1. Market Clearing Process
  2. The Rate-of-Return Normalization Process
  3. Erosion of Market Power Process
  4. The Product Innovation Process
  5. The Technology Innovation Process

Cartels affect these market processes in a special manner which can be observed by the CFD cartel auditing method. If these indicators point towards coordination failures in any specific observation market, then this could be evidence for the prevalence of cartel structures. 

Alternative tools are often preferred under a limited data scenario or used as an initial procedure to filter candidates for further investigation. In particular, the first four statistical moments of the distribution of price series are investigated and contain information about suspiciously high prices, stable prices, frequency of price rises and magnitude of price changes.