Ethics @ Work: Fighting cartels with cartels

Are the insurance examiners increasing or eliminating competition?

stock traders 88 224 (photo credit: Bloomberg)
stock traders 88 224
(photo credit: Bloomberg)
For many years the insurance companies in Israel have sought to limit the amount paid to assessors. Once an insurer even tried to require customers to use its own assessors, but that initiative eventually died out due to the obvious conflict of interest. Even so, the assessors feel the pinch and claim that their rates have been unchanged for more than a decade.
In an effort to hold a firm line against the pricing pressure from the insurance companies, who are the main clients of the assessors, the head of the trade association, the Israel Loss Adjusters Association, sent a letter to the several hundred members, recommending united action on establishing fees.
Their desire to join together to protect their joint economic interest is perhaps understandable, but the Antitrust Authority was not so understanding and announced plans to indict the association for price fixing. Insofar as the assessors are supposed to be competing against each other for business on the basis of price and service, and the association is urging them to toe the line on fees, the Antitrust Authority’s position is understandable.
But MK Shelly Yecimovich (Labor) is trying to come to the aid of the adjustors. She has introduced a bill in the Knesset that would empower the self-employed to act in concert to counteract the influence of large economic interests. Is this just interestgroup politics, or is it a serious initiative in the public interest?
The first thing to point out is that professional organizations to a large extent already act as cartels. Anytime a professional organization, whether it is examiners or physicians or lawyers, is able to decide on qualifications to practice, they are acting as a cartel to limit competition.
It is also worth pointing out that the law recognizes an exception to antitrust in the form of workers unions. Originally unions were also subject to antitrust legislation, but for about a century they have been exempt in most countries. However, these examples only beg the question of whether they have a valid public interest or represent only subjugation to special interests.
We are accustomed to think that a cartel (when competing businesses conspiring to fix prices or service) is anticompetitive, and it usually is. But if part of the supply chain is already dominated by a monopoly or a cartel, then such cooperation up or down the chain can sometimes have the effect of countering market domination and partially restoring competition.
The economist John Kenneth Galbraith called attention to this phenomenon, which he termed “countervailing power.” One example is government workers. There is little competition for workers in many lines of government work, thus the government may have monopoly power; unions in this case could be moving the outcome closer to what competition would produce.
The key question here would seem to be if the insurance companies are themselves acting in concert, even implicitly. Yecimovich’s bill refers to small businesses that supply services to a small number of clients. But small number does not always mean a lack of competition.
Sometimes an economic branch may have only two or three firms that compete furiously, or even only one firm that sets service and prices, knowing that potential competitors are breathing down its neck. At other times even a comparatively large number of firms are able to limit competition.
The key question here is what is in the back of the minds of insurers when they squeeze assessors for low fees. If they are thinking, “There are plenty of assessors out there, and if you won’t work for this fee, someone else will,” that is competition at work. If they are thinking, “There are only a few insurance companies out there, and if I won’t pay you a decent wage, the other companies won’t either,” then that is collusion, even if tacit.
I don’t really know the answer in this case, and certainly I don’t see any evidence that the insurance companies are colluding. As a general principle, being that small businesses are working for a small number of firms is not by itself a sufficient reason to enable them to collude and fix prices.

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Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).