Models are a surprising face for cartel economics

June 2, 2016

What do Richard Branson, Kate Moss and restaurant waiters have in common? Following the Competition and Markets Authority’s (CMA) move to investigate London’s model agencies on May 25, they all are associated with sectors that have been probed by the UK competition watchdog for alleged price-fixing. While the CMA has yet to prove any of its initial allegations, the modelling business does have some cartel-friendly features.

At first sight, the business of supplying companies and fashion houses with attractive clothes horses – over 5 foot 8 inches in height for women and 5 foot 11 inches-plus for men, according to requirements listed on agency websites – looks hard to rig. Economic theory suggests that cartels need barriers to entry, otherwise attempts to fix prices can be undermined by new entrants. Unlike the start-up costs involved in supplying new aircraft or building materials, an aspiring model agent can theoretically just stand in the street and flag down appealing-looking specimens as they walk past.

In fact, taking on the likes of Storm, Models 1, Premier, FM Models and Viva – the agencies listed by the CMA – probably does mean scaling sizable barriers. The more big name models on the roster, the more clients use the agency – a variant of what economists call network effects. Those that want to crash the party either have to take models from their existing employer, or do something special – as Storm founder Sarah Doukas famously did in 1988 when she discovered the 14-year-old Moss at New York’s JFK Airport.

Even if an agency successively establishes itself as a Facebook-style dominant platform connecting up models and clients, there is still a theoretical incentive to protect prices. The economy is struggling, and retail sector clients are constantly themselves battling murderous competition. Agents can’t just charge what they want.

One difference between fixing the price of models and, say, trucks, is that the value of the former would seem much more variable than the latter. But modelling contracts are in fact quite standardised, according to booking term guidelines issued by the Association of Model Agents (AMA), a sector trade body. Of the invoice that clients pay, models receive two-thirds and the agent the rest. Storm, for example, invoiced 15 million pounds in 2014 and paid 10.3 million pounds out to models, according to accounts lodged at Companies House. This relative standardisation may not be specifically related to so-called “AMA Alerts” sent out by the trade body that the CMA alleges incited agencies to reject fees being offered by specific customers. But it suggests agency pay is more coordinated than it might look from the outside.

If they provide clear evidence of price-fixing, the Alerts may provide the biggest problem for agencies contesting the CMA. To issue fines that can extend to 10 percent of a company’s revenue, the antitrust watchdog does not have to prove that attempts to collude had any actual impact on a market. BA and Virgin’s fixing of air passenger fuel surcharges – for which the former paid a 58.5 million pound penalty in 2012 – is a more conventional example of guilty verdicts in high-barrier to entry markets. But a 2006 ruling on anticompetitive practices among manufacturers of stock check pads – used by waiters to take customer orders in restaurants – is cited by competition lawyers as proof that companies will be found guilty even if the offence occurred in sectors where new entrants could easily waltz in. As such, the focus on barriers to entry is a red herring.

The model sector should bear all this in mind. The CMA may yet choose not to take its probe any further. But given it has come under fire of late for a less-than-aggressive approach to addressing the competition issues in UK banks, it may feel model agencies are a quick win – as well as higher profile and more interesting than their usual, less glamorous targets.

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