Lessons from salmon: Vertical relationships, price indices … and collusion?

Valerie Suslow, professor of economics at Johns Hopkins Carey Business School, has always enjoyed sitting down to a meal of freshly cooked salmon. But until recently she hadn’t given much thought to how the delicious filet made its way to her plate — or whether possible collusion on the part of Norwegian salmon producers had impacted the price she paid for it.

That changed when Suslow and long-time collaborator, University of Michigan Professor Margaret Levenstein, were invited to examine antitrust allegations brought against some of the world’s largest suppliers of farm-raised salmon. The invitation was part of a journal symposium examining collusion in “protein markets,” such as cattle, chicken, pork, and canned tuna. The result of their analysis is a recently published paper, jointly written with Danial Asmat and Zhihan Wang—former and current PhD students at the University of Michigan’s Ross School of Business, respectively.

“Once we started investigating, we were very intrigued, because the factors involved with the alleged collusion in the salmon industry connected closely with research, we have done over the past several years into ‘vertical integration’ and how it can facilitate anti-competitive behavior,” Suslow says.

Eating up smaller fisheries

The issue of possible collusion made headlines in 2019 when the European Commission raided some of Norway’s largest producers of Atlantic farm-raised salmon, citing concerns that the inspected companies may have violated European Union antitrust rules. The U.S. Department of Justice Antitrust Division subsequently launched its own investigation, which appears to have closed without charges. A civil class action suit was filed in 2020 against five Norwegian suppliers. The salmon producers ultimately agreed to an $85 million settlement with direct seafood purchasers in the U.S., but did not admit to any wrongdoing.

In their analysis, “Swimming in Pools: Collusion in the Salmon Market,” Suslow and Levenstein found that since the early 2000s, the salmon industry in Norway had undergone significant “horizontal consolidation,” with the largest firms buying up smaller fish farms. Five major companies subsequently embarked upon a strategy of vertical integration, streamlining their operations by taking direct ownership of various stages of the production process, rather than relying on external contractors or suppliers.

“Until that happened, state interventions in Norway had kept salmon fisheries fairly small, and they tended to be vertically separated,” explains Levenstein. “One firm would own a fishery, and they would rely on a broker to sell the fish. Then another company would process it. Then another would distribute and sell it to markets around the world. But that all changed with deregulation.”

With the move to vertical integration, says Levenstein, Norway’s largest salmon suppliers took control of distribution networks. And that’s important, Suslow notes, “because the combination of horizontal and vertical consolidation in this industry could lay a foundation to support anti-competitive coordinated behavior.”

A change in the price index

Crucial to their study, the researchers say, is that during the period of alleged collusion, salmon industry leaders changed the way they calculated the salmon price index. The new Nasdaq Index, which replaced an earlier industry-produced salmon index, was launched in 2013.

The previous price index was based on market transaction prices from independent distributors, while the new index was constructed from reports of distributors, including those who were vertically integrated.

“The concurrent timing of yet another vertical merger in the industry and the creation of a new price index was very interesting,” says Suslow, “so we began to look more deeply into the role that the salmon price index, which is publicly available, could have played in facilitating or supporting coordinated behavior.”

Ultimately, Suslow and Levenstein were not able to definitively determine whether there was strategic manipulation of the price index or whether the Norwegian salmon firms engaged in collusion.

“Such an analysis would require more information than is presently available to us,” they note in their paper.

“But through this analysis, we have become interested more broadly in the role that price indices may have had or could have in potentially harming competition within other industries,” says Suslow. She and Levenstein say the unique confluence of events in Norway’s salmon industry—that is, the move to vertical consolidation among major firms coupled with the redesign of the industry’s price index—raise issues that deserve the attention of antitrust economists and policymakers.

Traditionally, the researchers note, antitrust authorities investigating cases of collusion have not focused on vertical relationships except in passing, partly because the evidentiary requirements to establish that illegal price-fixing has occurred typically make it unnecessary, and also because long-established economic theory has maintained that, in general, vertical integration benefits consumers.

That should change, they believe, because firm behavior can hurt competition, even if it is not illegal.

“We want to shine a light on two things,” says Suslow. “The first is to raise awareness that vertical relationships can undermine competition and thus deserve greater scrutiny. The second is to suggest that economists modeling collusion should be cognizant of the role of public price indices in inter-firm communication and price-setting.”