Kristoffer Strandqvist SCORE
The Swedish Pipe- and Tube Market – Attempts to Organize andResistance.
Studying the Pipe- and Tube Wholesalers over the legislation process leading to the New Competition Act of 1953.
Abstract
The Swedish Pipe- and Sanitation market traces its origins to the late 19 century, supplying material to the emerging gas- and water systems in Swedish towns and cities. A cartel was formed in 1909 between the wholesalers. In 1924 the cartel had pricing agreements added and gradually during the interwar years the Swedish Pipe- and Tube Wholesalers cartels evolved and became into several. The 1930s was a jumpy period with the depression but during the war the government crisis planning agencies managed the Pipe and Tube Cartels into form new ones for different products to act as import cartels with responsibilities of official character.
At the end of the war a discussion was started in Sweden about the importance of competition for the market and for its functioning, inspired by the American perceptions of trusts and cartels. In 1946 legislation about cartel monitoring was enacted in Sweden, based on the results of a 1930s investigation. But it didn´t stop there. In the summer of 1946 the Minister of Commerce appointed a committee that would examine "inappropriate methods of competition, such as boycotts, exclusive contract, and price differentiation”, and the need to eliminate private control over entry into the business sectors. Reform of Swedish markets was in the air. The committee would work for over five long years.
The Pipe- and Tube Wholesalers cartels wondered in what direction this would end, and felt some concerns about a too close scrutiny and possible special interventions into their trade. They therefore acted proactively and shut down the cartels with their price collaborations already in 1947. Instead they started a trade association.
The article follows and analyses this development from historical sources and tries to give a picture of what really happened with the Pipe- and Tube Wholesalers cartels, and if they really stopped their previous collaborations, and how the Pipe- and Tube market developed after the new Competition Act - which was the result of the committees investigation - entries into force at the end of 1953/54. A law that among economists in Sweden today has been seen as hopelessly weak and unable to bring more competition to Swedish industry and trade.[1] This article however presents empirical evidence pointing in another direction.
Background
The 1920s witnessed a major upsurge of new construction in Sweden, which combined with modernization lead to widespread demand for pipes and plumbing products. There was lively start-up operation of plumbing wholesale businesses. The almost sleeping pipe and tubes wholesale cartel organization formed in 1909, Svenska Rörkonventionen, also became more active.
In 1925 the cartel introduced price collaboration which, in particular, would discourage competition in tendering. Developments in the field of cartels came in the period to be great. Internationally, the pipe manufacturers introduced a cartel that worked, with some interruptions, during most of the 1920 - and 30s’. Interruptions were periods of severe price war. The Swedish organized pipe and tubes wholesalers managed to reach exclusive agreements with the foreign manufacturers and could to a certain degree stifle supply to outsiders, and maintaining the price level in Sweden.[2]
However, the established iron merchants, firms with high turnover, made their advent into the pipe market during the 1930s, spearheaded by the big company Söderberg & Haak.[3] This, combined with the depression which also made compliance to cartel rules among its members weaker, led to falling prices and some shrinking profitability. Further organizing such as quotas became the response of the organized wholesalers. But such solutions, however, was short-lived.
Already in the 1930s when the international situation tightened up the Swedish National Commission for Economic Defense Preparedness was set up. This prepared the way a crisis management in Sweden would look in the event of war and blockade. In addition it also drafted a contingency legislation for this purpose.[4]
When the war came 1939 a number of boards and commissions was quickly established. And the state was able to organize and control the different markets and thus to uphold what was then commonly referred to as national economy[folkhushållningen]. Two of the major agencies were the National Price Control Board(Priskontrollnämnden), whose function was to monitor and limit price rises, and the State Industrial Commission(Statens industrikommission) that would look better organize and coordinate the production, but also imports and exports.[5]
In order to meet the Swedish demand for pipe- and tube materiel at a situation with the risk of total blockade, which appeared possible immediately after the outbreak of the war, the Industrial Commission worked to achieve two things. One was to ensure that the imports endured and the other to ensure that the production of goods that previously had been imported was founded or expanded in Sweden. The German-Swedish Trade Agreement assured Sweden a large amount of German made pipes and tubes of various kinds. These tubes would also be distributed in a fair and equitable manner and not be assigned a price enabling wholesalers with big supplies earning excessive money on them.[6]
The incentives to kick-start production notably lead to the production of cast pipe and fittings at several companies.[7] This type of increases in Swedish manufacturing would potentially in the longer run be able to provide conditions for better competition. To organize imports and achieve a distribution of tubes the commission interacted with pipe- and tube wholesalers cartel organization and induced it to set up additional import cartels or associations. Three different types of pipes should have their own import association: forged pipes, cast pipes and fittings. Their main task was to allocate import tubes and this was based on the wholesalers’ delivery figures from 1939. The Industrial Commission guaranteed that outsider firms would get their share, so these could not be stifled by the organized wholesalers assisting with the war administration. Problems arose, however, about the prices of the Swedish and German pipes. The latter were significantly cheaper, even though lowest prices to the market were agreed. The solution was a further cartel, a cartel quota, and a firmer connection of the Swedish pipe manufacturers into the organizing. After a few years of war the organized pipe- and tube wholesalers came to have an almost complete control over the market for tubes, despite some lull in demand.[8]
The immediate post-war Swedish Pipe and Tube Market
During the first postwar year, 1946, availability of plumbing products increased markedly in Sweden. The war years had not resulted in totally stalled activity, and now the building sector got a boost. The goods contained within the HVAC sector where produced by firms belonging to various industry sectors; ironworks, machine shops, foundries and porcelain factories. Items could be divided into six groups: pipes, radiators, boilers, bathtubs, bathroom fixtures and fittings, where the former is usually divided into several subgroups. The domestic production responded in 1946 to over 90 percent of the domestic demand in most of the commodity groups, foreseen cast tubes and sleeve pipeswhere imports were above 50 percent.[9]
A building materials survey noted the good self-sufficiency in Swedenin the 1940s and explains it as a result partly due to the addition of new production units. The production had expanded rapidly during wartime blockade. Late in the war and in the first post-war years large factories for the manufacture of cast pipes and bathtubs had been started. Government regulations and initiatives had had a certain importance for the establishment of the business during the war years.[10]
A relatively large number of cartel agreements were also in operation. The manufacturer level there were nine registered in the official register of cartels(Cartel index. No. 2, 3, 12, 14, 50, 56, 189, 190 and 323).At the wholesale level there were four cartels: Swedish Pipe Convention (Svenska rörkonventionen - cartel index. No. 52), Swedish Society of Pipe Wholesalers (cartel index. No. 55), Swedish Pipe Association (Svenska Rörföreningen upa - cartel index. No. 46) and Normal Pipe Association (Normalrörföreningen upa - Cartel index. No. 53). The latter two were imports compounds formed by the supply commissions’ participation shortly after the outbreak of World War II.[11] Finally, at the Installer level was four cartel agreements registered, (Cartel index. No. 42, 193, 197 and 203). .
Production in Sweden of the main products were divided into about 190 companies, wholesalers was about 40 with about 1,500 employees and installers over 2,800 firms with more than 20000 employees.[12]
The four wholesale cartels were closely related to each other, they had the same members, the same members of the boards and a single ombudsman. Furthermore, the association agreements follow the same structure: they consisted of two separate agreements on pricing and on quotas. In addition, there was a specific annex on sales and delivery terms.
A changed view on competition.
At the end of the war a discussion was started in Sweden about the importance of competition for the market and for its functioning. Similar trends existed in much of Western Europe at the time, inspired by the American perceptions of trusts and cartels.[13] An initiator in Sweden was the Professor of Economics and Social Democrat Gunnar Myrdal, who took place as Minister of Commerce in the new post-war labour government. As minister Myrdal appointed a committee–the Experts of New Establishment– the summer of 1946 that would examine the need to eliminate private control over entry into the business sectors and "inappropriate methods of competition, such as boycotts, exclusive contract, and price differentiation”. Before the committee was named in 1946, legislation about cartels was enacted in Sweden, based on the results of a pre-war investigation. It did however not include a direct ban on cartels, but rather that these would be recorded in an official registerof cartels. The register would be organized by the government body Commerce-College (Kommerskollegium) and it’s newly formed Monopoly Investigation Bureau. This would increase the transparence and knowledge of how the competition situation looked like in the Swedish industry.[14]
Actually this legislation was the result of ideas and proposals emanating from an investigation in the 1930s, The 1936 Professional Body of Commercial Expertswith their report from 1940, and further developed by the Commission for Economic Post-War Planning and their report from 1945.[15] At that time, the 1930s, economic nationalism had made cartels poplar among governments that wanted to use them as tools in controlling the economy. So the state also wanted control over the cartels and for that reason registration of cartels became mandatory in some European countries during the 1930s; e g Hungary in 1931 Czechoslovakia and Poland in 1933.[16]
Chairman of the new committee was economics professor Karin Kock, and members were appointed among commerce, trade union and cooperative movement representatives. The directive to the investigation referred to what had emerged in a few previous investigations; The 1936 Professional Body of Commercial Experts (näringsorganisationssakkunniga) (SOU 1940:35), the Commission for Economic Post-War Planning (SOU 1945:42) and the consultation responses to these. The former investigation found practices of private control to entry, including banks' reluctance to lend in industries that required large capital investment or through exclusive contracts, dubious. However, given the war situation waived proposals for action. The latter commission found that start-up control had been strengthened during the war and recommended that the issue of further tightened legislation should be investigated urgently. The new committees mission was to, in collaboration with the Commerce-College Monopoly Investigation Bureau, examine private entry control and submit legislative proposals that "as far as possible eliminate[d]" the same.[17]
Contrary to arguments from commerce about ending up with too many small competitors going bankrupt causing "unnecessary supplier losses", Minister Myrdal thought that "a stronger price competition from more efficient companies would represent, from society's point of view, a far superior method of preventing less efficient companies to subsist in the market and that this method should allow an increase in turnover per company and a general rationalization of the relevant industries ". Thus competition was the theme of the day.[18]
Gunnar Myrdal, resigned as Minister of Commerce in 1947 and the new minister appointed was Karin Kock. On April 30, 1947 Kock resigned as chairman of the committee and was replaced by Richard Stern, the former secretary. One and a half year later, on 12 November 1948, the directives to the committee were extended. Now the investigation would also look into "the need for legislation to prevent socially harmful cartel agreements". The extended mission was preceded by a letter from the Swedish Cooperative Union (KF) to the Government in June that same year, as reported in the open, where the Cooperative Union laid down a thorny problem for the legislature to consider. The Cooperative Union asked that if a party to a cartel agreement violated the same agreement would it be reasonable that the legal system helped enforce the agreement? Should the other parties to a cartel agreement be entitled to through the legal system "bring an action for penalties in the form of damages or liquidated damages due to breach of contract" against a violating party? The Trade Ministry understood the worrying in that "public bodies" appeared to maintain "in the public interest unsuitable cartel agreements."[19]
The Committee noted in their final report that of the 510 cartel agreements "and similar restrictive agreements'” the monopoly investigation bureau had recorded in December 1950, 350 was yet in force.[20] Resale price maintenance was part of the content of most agreements; either horizontal - different vendors coming together on a price to their clients - or vertical - manufacturers set a price that retailers must charge its customers (also known as a gross price system). If prices were to deviate the alleged threat was the stopping ofsupplies or similar measures. But also a retailer's belief or perception that such penalties could be inflicted led to "effective price linkages" according to the investigators. Discounts advantaged and disadvantaged, exclusive contracts between suppliers and retailers, market sharing agreements, collusive tendering and dominant local firms were among other problematic occurrences the experts listed. They noted that “In different ways, the competition is thus in broad areas of the economy strongly inhibited.”[21]
The committee report also noted that developments in competition in the industry went in the right direction, especially after the investigation had started and the monopoly investigation bureau publishing business had begun. The threat of action against harmful competition, would probably had been capable of “stimulate interest in the elimination of conditions which may be subject to criticism and used as a justification for the legislation”, in many businesses and cartel organizations.[22]
However, the committee did not believe that it was enough with this self-purification. It was inadequate when the measures "do not go any further than just the business, which account for a particular restriction of competition, considered reasonable." Moreover the intensified interest in self-regulation would be significantly reduced if the state declined to take "direct action".[23]
The committee suggested that a Freedom of Trade and Industry Board (Näringsfrihetsnämnd) would be established. A body that would assess the extent to which specific restrictions on competition would be harmful. However the committee was a bit divided in how far to go. The labour majority of the committee, which also came to dictate the final report, suggested that to assist the board it would have a new law which stated competition standards and in the practical work the monopoly investigation bureau would assist. In addition to assessing the harmfulness of agreements and barriers the board would "be empowered to take action with binding force". Negotiations with the parties involved, in order to reshape the way business was done or remove barriers to competition, would however be the first option. Coercive action would take place by injunctions presented by the board which required a party to lift or reshape a restriction of competition. If such an injunction was not followed, it should become a case for court.[24]
The committee also proposed that the board would be assisted by an independent Ombudsman for the Freedom of Trade Issues (Näringsfrihetsombudsman) which would be set up and that could act like a prosecutor, choosing which cases to pursue.[25]