CONTROLLING THE CARTELS

by Dr. Kartik Hegadekatti; Money Wise; May-2016

“Competition is always a good thing. It forces us to do our best. A monopoly renders people complacent and satisfied with mediocrity.”

Nancy Pearcey

A cartel is a group of firms or organizations, who have agreed explicitly among themselves to co-ordinate their activities, in order to artificially increase market value of particular products or services, that is, they have entered into some form of price-fixing agreement.
Cartels are of different types internationally. The first type of cartel are called hard core cartels and are fundamentally made up of private manufacturers, who collaborate to control prices or apportion shares in global market. Another kind of cartel are private export cartels, wherein, non-state related producers from one country take steps to fix prices or engage in market sharing in export markets, but not in their domestic market.
Basically, cartels are arrangements to limit output with the purpose of increasing prices and profits. This is carried out in practice by means of price fixing, allocation of production or sharing geographic markets, bid rigging, establishment of common sales agencies, and the division of profits or combination of these.

Cartels hamper competition, in which resources are mismanaged and consumer well-being is reduced. The aim of such collusion (also called the cartel arrangement) is to increase individual participants’ profits by reducing competition.

Cartels usually occur in an oligopolistic setup, where the numbers of sellers are small and the demand is high. Fighting cartels is one of the most important areas of activity of any legal authority. Cartels are malignancies in the open market economy.
Price fixing, involves an arrangement by businesses to set or determine the price or value of a merchandise or service, which they buy or sell from others [outside their group]. The price set by them in collusion and at a specific level. If their understanding (not necessarily written) is strong, the general term for these businesses is a cartel. It is immaterial whether the businesses succeed in increasing their profits. Such collusion itself is illegal.

However, a monopoly by a government entity is acceptable because, first, it has the people’s consent in the form of parliamentary approval. Second, it is undertaken in keeping public welfare in mind.

Another way, cartels function is through greedy pricing. This happens when big businesses with huge cash reserves and large lines of credit can suffocate competition by marketing their products and services at a loss for some time. It forces the smaller players out of business. Without any competitors left, they are then free to gain full control of the business and set prices as they wish. In this case, there is little motivation for investing in further research, and innovations since, there are no challengers left to gain an advantage in the market. When a common person goes to the market to buy vegetables, he sees many vendors. If all the vendors have agreed to sell vegetables at a fixed high price and not below it, then it is cartelisation. Cartelisation is one of the main reasons of high and sustained inflation.
For cartelisation to be eliminated a legal Authority should follow three steps:

  1. The relevant [cartelization] conduct has to be detected.
  2. The relevant conduct has to be prosecuted.
  3. The relevant conduct has to be ‘penalized’.

The good intentions of lawmakers in enacting strong competition laws are weakened by the following six factors 2.

  1. Interference by government ministers, officials, and other politicians.
  2.  Interfering by interested people.
  3. Legal lacunae [shortcomings]
  4. Dubious decisions
  5. Shortage of human capability.
  6. Lack of finance.

The main challenges for a legal authority with regard to enforcement are two-fold. First, it must address the question, how it can detect and intervene against existing cartels. Second, it needs to work out the ways to reduce the motivations to form cartels.Thus, the legal authority must, in aiming towards these objectives, make use of Pre-emptive and post crime tools

Legal Enforcement Of Competition Laws
Preventive enforcement tools

There are several ways for a legal authority to reduce the formation of cartels before they are formed One of them is the collection and publication of blacklists, specifying the particular behaviour and conduct, which most likely belong to the category namely ‘hard core cartels’.

A second option to prevent the creation and complicity of cartels is the early recognition of types of meetings between competitors that should raise suspicions as attempts to form a cartel (or implicitly collaborate) and should be blacklisted

It is advisable to ban certain types of interactions between firms that are, likely to result in cartels but obviously not in the public interest, or likely to encourage healthy competitions.
Following are some such collaborative moves

  • Any private dialogue about future production prices or output plans,
  • Personalized communications regarding earlier rates and quantities and,
  • The interchange of individualized price and demand details.

A third method of preventive methods for checking the formation of cartels is alterations in market designs4. The application of contemporary auction theory, for example, can help in designing auction mechanisms that offer fewer possibilities for bid rigging than standard auction types. Such an analysis investigates whether a proposed merger would create a post-merger environment, in which collusion is more likely than in the pre-merger environment.
Post crime enforcement methods:
Although Preventive methods are certainly useful in reducing the number of cartels to some extent, they do not suffice in stopping cartelisation effectively.

Hence, it is important to identify hard-core cartels. Of course, cartel members always keep their agreements a secret. The crucial action for a legal authority is the early detection of such illegal agreements along with collection of strong evidence to succeed, in the court of law. The legal authority can use a selection of reactive and proactive recognition tools to raise the possibility of cartel detection.
Mere imposition of fines on detection of cartels shall not suffice to contain them. It should be coupled with personal fines and imprisonments to those who are all involved in this illegal activity.
Detection:
Generally, the detection of cartels comprises of reactive methods and proactive methods. According to the International Competition Network, (ICN, 2010) reactive methods rely on some external happenings before the legal authority becomes aware of the activity while proactive methods are initiated from within the authority and do not wait for an external event to happen.
Collection of strong evidence:
Raids are unexpected visits by state officials (with a search warrant) at the cartel company, and elsewhere to search for a documented proof.
In addition, the legal authority can offer a reduction or an exemption of fines through an Amnesty program, if any of the cartel members comes forth to testify with evidence.
Intervention:
Interventions against cartels benefit consumers, even if they dissuade the cartel formations effectively.
Private enforcement of hard-core cartels:
Private parties such as competitors, suppliers, customers or consumers must be encouraged to bring anti-cartel lawsuits if they believe that they were damaged by a competition law violation.
This provision for private enforcement should not be allowed to be abused. Such people who abuse it must be punished.

What Should Be Done?
The Government of India should reconstitute the Competition Commission of India as The Competition Regulation Authority (CRA).
To get rid of unjust competition shall be the main purpose of CRA. Illegal arrangements and deceitful practises amongst competitors are harmful to the society, economy and the consumers. India being a developing country with huge contribution to world market needs a strong competition law along with powerful national competition policy.
Even international cartels working within Indian soil should be heavily penalized. Developing nations like India require an early and effective competition administration. Because of the enlarging global mergers, privatizations and many deregulations Powerful Cartel activity inside third world nations have made anti cartel measures ineffective. Strong competition policy comes from cooperation between society, administration, and business sectors.
The CRA can implement the following changes in competition laws:

  1. CRA should have powers to treat offenses in business suits as criminal offenses. CRA should generate fear among cartel members. The amnesty plan should made use of on this sense of fear.
  2. CRA should take steps to improve the possibility of getting crimes detected early and punished severely. Both the companies and the persons behind cartels must be punished severely.
  3. Social as well as Institutional sanctions: General opinion of community should be made to treat cartelisation, as serious criminal offense. And the people who are part of illegal business activity should be treated as criminals.
  4. Clear cut Procedures – The CRA should be transparent in its activities and procedures-
    a. Clear guidelines with regard to investigations.
    b. Transparent procedures regarding amnesty programs.
    c. Open policies on determination of penalties.
  5. The CRA (Competition Regulation Authority) should take measures to eliminate cartelisation at the origins. I.e. cartelisation on the streets (the example of vegetable vendors given above). It should have district branches that keep a check on grass root cartels like street shops, real estate prices, hoarding etc. The revenue and police authorities in the district or city must have full powers to take action and curb grass root cartelisation when and where it appears.
  6. Punishments to individuals: Imprisonments and disqualification of directors and executives, who participate in cartels are effective punishments. Hence India should make use of detention, fines and disqualifications as essential steps to prevent cartels by making the concerned person individually liable. Effective surveillance program to identify criminals must be set up. Prohibited communication should be watched for.
  7. Personnel Pardon plans. The individual amnesty program may be made easy by making people able to approach the CRA directly and confess their participation or report anti-competitive activity of which they were forced to participate.
    Those who report through this program shall pardoned for the reported anti-competitive activity. This provision shall help the legal authority to watch the criminal activities within the organization. Provisions with regard to prison sentences to management personnel make them report inside criminal activities because of fear of imprisonment
  8. CRA should focus on commodity cartelisation as well as service cartelisation. It should ensure service competition among service providers too and make them provide timely and quality services to consumers.

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