Cartelization

News: The Competition Commission of India (CCI) has slapped certain penalties on paper manufacturing companies from agricultural waste and recycled wastepaper against Cartelization.

What is a Cartel?

  • According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”. The International Competition Network, which is a global body dedicated to enforcing competition law, has a simpler definition.
  • The three common components of a cartel are:
    • an agreement
    • between competitors
    • to restrict competition

What is Cartelization?

  • Cartelization is when enterprises collude to fix prices, indulge in bid rigging, or share customers, etc. But when prices are controlled by the government under a law, that is not cartelization. The Competition Act contains strong provisions against cartels. It also has the leniency provision to incentivise a party to a cartel to break away and report to the Commission, and thereby expect total or partial leniency. This has proved a highly effective tool against cartels worldwide. Cartels almost invariably involve secret conspiracies.
  • According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:
    • price-fixing
    • output restrictions
    • market allocation and
    • bid-rigging
  • In sum, participants in hard-core cartels agree to insulate themselves from the rigours of a competitive marketplace, substituting cooperation for competition.
  • While it may be difficult to accurately quantify the ill-effects of cartels, they not only directly hurt the consumers but also, indirectly, undermine overall economic efficiency and innovations.
  • A successful cartel raises the price above the competitive level and reduces output. Consumers choose either not to pay the higher price for some or all of the cartelized product that they desire, thus forgoing the product, or they pay the cartel price and thereby unknowingly transfer wealth to the cartel operators.

Legal provisions:

  • There are provisions in the Competition Act against abuse of dominance. One of the abuses is when a dominant enterprise “directly or indirectly imposes unfair or discriminatory prices” in purchase or sale of goods or services.
  • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as an abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
  • However, it should be understood that where pricing is a result of normal supply and demand, the Competition Commission may have no role.

Cartels v/s Monopoly:

  • It is generally well understood that monopolies are bad for both individual consumer interest as well as the society at large.
  • That’s because a monopolist completely dominates the concerned market and, more often than not, abuses this dominance either in the form of charging higher than warranted prices or by providing lower than the warranted quality of the good or service in question.
  • Cartels are not easy to detect and identify. As such, experts often suggest providing a strong deterrence to those cartels that are found guilty of being one. Typically, this takes the form of a monetary penalty that exceeds the gains amassed by the cartel. However, it must also be pointed out that it is not always easy to ascertain the exact gains from cartelization. In fact, the threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.