Consultant Evaluation: Collusion General Electric & Westinghouse Firms & Markets Group 6 15 November 2001

1. Consultant Evaluation:CollusionGeneral Electric & WestinghouseFirms & MarketsGroup 615 November 2001 Peter Gallagher Daniel Masnaghetti Kristin Messner Hyok Oh

2. AGENDA • Introduction of industry • GE Overview • Westinghouse Overview • Buying Process in 1950s • Conflict with Department of Justice • Change in Pricing Policy • Collusion • What Happened

3. Turbine generators look like this…

4. Turbine 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

5. Overview: 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

6. 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

7. Bid invitation Specification Book price Determination Final Negotiation Sealed bid Specification Lower bid win Bid invitation Buying process in 1950s: open market system Government Investor Owned Utilities

8. Conflict 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

9. 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 exceptions Increasing concern by DOJ of possible collusion Pricing policy change in 1963

10. Collusion • 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

11. Is this collusion? Unlawful Practice GE & Westinghouse • Price fixing • Horizontal restraints • Common pricing system • Refrain from bidding • Identical prices • Competitor relationship • Pricing using multiplier • Lack of price negotiation This is Collusion!

12. 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

13. Thank you.Questions? * Logos taken from respective web sites.