Consultant Evaluation:Collusion

General Electric & Westinghouse

Firms & MarketsGroup 6

15 November 2001Peter Gallagher

Daniel Masnaghetti

Kristin Messner

Hyok Oh

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AGENDAAGENDA

Introduction of industry

GE Overview

Westinghouse Overview

Buying Process in 1950s

Conflict with Department of Justice

Change in Pricing Policy

Collusion

What Happened

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Turbine generators look like this…Turbine generators look like this…

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Turbine Industry OverviewTurbine Industry Overview

Product Small, medium and large turbine generators (biggest mkt)

Players* GE (MS: 61%) Westinghouse (MS: 32%) Allis-Chalmers (Out of market in 1962)

Buyers Government (Big buyer, Lowest bid) Investor-owned utilities (Numerous, Negotiation)

High barrier to market entrance Capital intensive, steep learning curve

* Postwar Period Data

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Overview: GEOverview: GE

Price leader Offered high discount Variable pricing strategy

Technological leader and pioneer

Enjoyed high MS among government customers

Low cost strategy

Highest industry capacity Spent over $100 mil for capacity since WWII Capacity a year or two ahead of WH

Product focus: Large turbines

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Overview: Westinghouse Overview: Westinghouse

Market follower Deeper discount to win

Moderate capacity Spent over $50 mil for capacity since 1948

Product focus: Small and Medium turbines

Launch standardization program Standardized unit and component

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Buying process in 1950s: open market system

Buying process in 1950s: open market system

Government

Bid invitationSpecificationBook price

DeterminationFinal

Negotiation

Investor Owned Utilities

Sealed bidSpecification Lower bid winBid invitation

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Conflict with Department of JusticeConflict with Department of Justice

“Electrical conspiracy” price-fixing case Large turbine generators & other electrical products

Seven executives had been imprisoned

Cost GE and Westinghouse over $100 million USD each

Consent decree on pricing had been signed in 1962

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Pricing policy change in 1963 Pricing policy change in 1963

GE’s new pricing policy A new price book was published Simplified price formula Introduction of multiplier (e.g. book price * uniformed multiplier =

actual price) Resulting in lowered book prices Uniformed application to all customers, Price protection clause was instituted

Consequences Westinghouse’s instant adoption of GE’s new pricing policy No deviation from published price between the two Price negotiation and discounting ceased

without exceptionswithout exceptions

Increasing concern by DOJ of possible collusion

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CollusionCollusion

Fix, raise, lower, stabilize or peg prices

Establish a range of prices, minimum price, a maximum price, or a common pricing system

Related law: Sherman Act

No formal guidelines exist to which the DOJ adheres

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Is this collusion? Is this collusion?

Price fixing

Horizontal restraints

Common pricing system

Refrain from bidding

Unlawful Practice

Identical prices

Competitor relationship

Pricing using multiplier

Lack of price negotiation

GE & Westinghouse

This is

Collusion!

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What happened? - Modification to the Consent Decree

What happened? - Modification to the Consent Decree

The formula for pricing generators prohibited

Price book not disclosed outside of the firm

No price protection policy

Forbidden communication on pricing, terms and conditions with outside persons

Absolutely no information exchange between the players on sales

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Thank you.

Questions?

Thank you.

Questions?

* Logos taken from respective web sites.