Consentia on Law

CARTELS AND COMPETITION: ANTI ETHICAL RELATIONSHIP

ABSTRACT:

There are a variety of International Competition laws that are working actively towards the motive of eradicating the system of cartels from the economy and there is one feature that unites all these statutes i.e. that they all condemn the “hard core” cartel agreements even if they differ in the ways in which such agreements maybe prosecuted and punished.

This essay focuses on the anti competitive agreements which are entered into by various companies, narrowing it to the existence of cartels in the economy and the laws working against its existence, curtailing the functioning of the same. The essay also discusses the international perspective of the problem of cartels, the Acts which are working. Since cartels are international in nature whereas most systems of competition law are purely national in scope, special care has to be taken in this regard.

Cartels are agreements between enterprises (including association of enterprises) not to compete on price, product (including goods and services) or customers. The objective of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy. For the consumers, cartelization results in higher prices, poor quality and less or no choice for goods or/and services.

This works on the basic principle that: Competitors are meant to compete with each other and not cooperate to distort the process of competition.

In this essay, I focus upon how the existence of cartels curbs healthy competition among companies, deteriorate the quality of the products and services and create a comfortably stable market for the consumers.

Article

Under section 2 (c) of the Indian Competition Act 2002 (the Act), the term “cartel” is defined as including

“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”.

It is increasingly recognized that competition in the markets creates increased efficiency, improves quality, boosts choices, reduces costs and leads to lower prices of goods and services. By forming cartels there exists a clear violation of the basic unwritten rules of the market and economies, since the power goes to the hands of the owners of the company and thus they work solely towards one motive: Maximization of profits. The competition laws of a country are working towards the existence of a cartel-free economy and it must be noted that there is widespread consensus against cartels formation and it exists in various Acts of various countries.[1]

The rise of cartels has a variety of reasons behind it. Due to small number of firms in a particular industry and in scenarios of barriers to entry or low technological advancements there are high chances of cartels being formed in a particular industry.

The competing firms are usually strong players of the market and have an ability to exchange information on prices and other terms of sale, uniformity in costs or efficiency. Moreover, these cartels eventually become like a cult or a group of highly influential people and severe punishment maybe inflicted on those who are found to cheat. Moreover firms don’t put any of their agreements to cartelize on paper, which reduces majorly the risk of detection and punishment. [2]

In India, Cartels are alleged to have influenced a number of Industries, namely the cement, steel, tired and family planning devices industries etc. There has also been some international cartelizing, in the industry of petrol and bulk vitamins. Forming of these associations tends to raise the price of the products and reduce the choices available to the consumer. There is no improvising of the economy and the basic objective of a healthy trade practice is violated. In light of the Competition Act, cartels are considered as the most serious infringements of the act. Developing countries are a bigger victim of this, due to inability to detect, discover and prosecute domestic as well as international cartels.

The Competition Act defines what anti competitive agreements are. It includes in its ambit, any such agreement, which is presumable expected to have appreciable adverse effect on the competition (AAEC). It essentially includes-directly or indirectly fixing the prices; limiting or controlling production, supply, markets, technical development, investment or provision of services; sharing or allocation of geographical area of market, customers or in any other similar way; and directly or indirectly resulting in bid-rigging or collusive bidding. The above mentioned activities which are restricted as per the Act, are essentially also the basic feature of cartels. The formation of cartels are included in the AACEs and clearly not permitted by the law.[3]

An obvious question arises as to why a ‘Cartel’ is presumed to have AAEC. In a layman language, competition law seeks to promote, maintain and sustain competition in market being beneficial to various stakeholders in society. In case of ‘Cartel’, competitors agree not be compete on price, product, customers etc. since in the case of a Cartel, direct competitors agree to forego competition and opt for collusion, the consumers and business houses lose the benefits of competition. Thus, cartels are inherently harmful.

Further, competitors know that such an agreement is unlawful and it compels them to keep such agreement secretive and resultantly it is invariably not reduced to writing and it is often found to be in the form of arrangement or understanding. Moreover, the best evidence against ‘Cartel’ is usually in possession of the charged parties, which are not likely to easily part with and make available to the investigator or enquiring authority.

These compulsions seem to have persuaded the law makers to prescribe that ‘Cartel’ is presumed to have AAEC.[4]

When cartels are formed in a market, competitors agree not to compete on price, the product or customers. All the rules are pre planned, discussed and nothing is left to the discretion. It creates a situation where in the customers are left helpless and at the pure mercy of the organizations who are a part of them cartel. What they deicide must be accepted by them, and there is no alternative made available. Due to the arbitrary nature in which cartels dominate the markets of any flourishing economy, they are strongly condemned by The Competition Act, 2002. The Act aims at fostering competition and protecting Indian markets against anti-competitive practices by enterprises. The act prohibits abuse of dominant position by enterprises and regulated entering into combinations (although mergers and acquisitions or amalgamations are legally enforceable and provided for in the Company’s Act yet, they need to be regulated so as to maintain checks and balances) with a view to assure that there is no adverse effect on competition in India.

Thus, ‘agreement’ needs not be in writing, not necessarily to be legally enforceable and an arrangement or understanding is as good as a formal written agreement.

It is has been established that cartels are not only inherently harmful but also an illegal association, in which the members agree to not compete on price, product and customers etc. Direct competitors agree to forgo competition and opt for collusion and thus the consumers and business lose the benefits of competition. Competitors know that such an agreement is unlawful and are compelled to keep it secret and therefore such agreements are never reduced to writing. The best evidences which are available against cartels are usually in possession of the charged parties, which they are not likely to easily part with and make available to the investigating authorities.

Since the competition commission acts like a police to the cartel organizations, thus the cartels are compelled to function in secrecy and the members of cartels seek to camouflage their activities to avoid detection by the commission. Even within those cartels, there exists a system of rules to be followed by all member organizations. Perpetuation of cartels is ensured through retaliation threats.

The effective competition in an economy makes it difficult for cartels to be formed and function effectively. High concentration, high entry and exit barriers, homogeneity of products, similar production cost, and excess capacity are some of the factors that are conducive to cartelization. [5]

If we look into the legal remedies for such cartelization, the answer can be found in Section 19 of the Act, the Commission may inquire into any alleged contravention under section 3(3) of the Act that proscribes cartels. The Commission, on being satisfied that there exists a prima facie case of ‘cartel’, shall direct the Director General to cause an investigation and furnish a report. The Commission has the powers vested in a Civil Court under the Code of Civil Procedure in respect of matters like summoning or enforcing attendance of any person and examining him on oath, requiring discovery and production of documents and receiving evidence on affidavit. The Director General, for the purpose of carrying out investigation, is vested with powers of civil court besides powers to conduct “Search and Seizure”.

Competition Act does not fall behind while taking into account the checks to be made on cartels and their formations. The Commission is empowered to inquire into any cartel, and to impose on each member of the cartel, a penalty of up to 3 times its profit for each year of the continuance of such agreement or 10% of its turnover for each year of continuance of such agreement, whichever is higher. In case an enterprise is a ‘company’ its directors/officials who are guilty are also liable to be proceeded against.

When cartels are formed the police bodies of the corporate world immediately spin into action, and work toward contributing positively to the removal of such exigencies from the economic society.

While the formation of a cartel amounts to an anticompetitive trade practice, which is indisputably against the public interest, the existence of a cartel is seldom proved by direct evidence. Generally speaking, no express agreement showing its existence is ever found. It has to be proved by circumstantial evidence, and by setting up and proving a chain of events leading to a common understanding or plan. The underlying issue is what, at the minimum, constitutes that “meeting of the minds” which must be directly or circumstantially established to prove that there is a restrictive effect on competition.

However once discovered, the cartels are then subject to the conditions as imposed upon them by the Competition Commission. Under Section 27 of the Act, later the commission on discovery of such cartels may pass inter alia, orders to ensure discontinued existence of the cartels and direct the enterprise concerned to modify the agreement or to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs. However the Act does portray some leniency toward the one who provides full, true and vital information regarding the cartel. The scheme is basically designed to induce members to help in detection and investigation of cartels. Similarly leniency schemes have proved very helpful to competition authorities in successfully proceeding against cartels.[6]

International Perspective:

A system of competition law which is intended to protect the process of competition is typically concerned with three major issues: firstly the anti competitive agreements that have the object or effect of preventing, restricting or distorting competition; secondly the abusive behavior by a monopolist or dominant firm with significant market power that is and could be harmful to consumer welfare; and thirdly mergers that would reduce (or which have reduced) rivalry between firms in the market, again with detrimental consequences for consumer welfare. The widespread condemnation of cartel agreements, the important lead that the OECD[7] has taken in the fight against cartels, and some legal points about anti cartel legislation and judicial practices are noted and discussed, while providing details of recent cartel cases from a number of jurisdictions around the world. There are many complex issues that arise in systems of competition law, for example, the extent to which the unilateral conduct of firms with market power should be controlled; the price with a competitor or customer should pay for access to an essential facility such as a gas pipeline or a sea port; the extent to which mergers should be prohibited, or transactions modified, because of potential harm to competition.[8]

The OECD has been at the forefront of policy in relation to cartels. This in itself reflects an obvious but important point, that cartels are often international in nature, whereas for the most part, systems of competition are purely national in scope. The rules of European Union are an important exception, since they apply throughout the 25 Member States as well as three additional contracting states of the European Economic Area. International business phenomena such as cartels necessitate an international response, and the OECD is in an important position to give lead in this respect.

The OECD has published a number of documents which are of particular interest to the issue of cartel enforcement. In its 2001 Report on leniency Programs to fight Hard Core Cartels,[9]the OECD discussed the need to penetrate the cloak of secrecy that surrounds hard core cartels, and the contribution that the encouragement of whistle-blowers can make to this need. It is noted that the seriousness of the penalties, including the risk of personal liability can be a powerful motivating force in encouraging whistle blowing or leniency application.[10]

Firms go to great lengths to keep cartel agreement secret, and are in some cases explicit in their contempt for the competitive process. The principle purpose of sanctions in cartel cases is deterrence. Strong sanctions against enterprises and individuals increase the effectiveness of leniency programs. And although there is a move towards the imposition of larger penalties for infringement of anti-cartel legislation, sanctions have yet to reach the required level for deterrence.

It is increasingly recognized that the remarkable increase in the number of successful hardcore cartel (HCC) cases as well as in the level of fines imposed in those cases in jurisdictions such as US, the European Union and Canada is largely attributable to refinements that have been made to the leniency programs in those jurisdiction. Cartel construction is more probable to appear and occur in a concentrated than in a fragmented industry. The lower is the number of firms in the market, the easier is for the trust members to control and detect the conduct of other partners. In a concentrated market, besides, the typical firm gets a greater share of benefits if prices become higher: the deviator’s short term gain is in fact smaller since it started with a larger market share. Thus, the more concentrated is the market, the larger are the benefits from collusion and the smaller is the cost of cooperation. Instead, in a fragmented market, given that observing a price cut becomes harder because the number of enterprises increases, superior is the earnings from cheating. In fact the higher is the number of undertakings, the more likely is one of those acting as a maverick, that is, a firm acknowledged for practicing aggressive pricing strategy (actually, even in the circumstance of a concentrated industry with few enterprises, the presence of such a firm could threaten the collusive nature of the agreement). All this is confirmed, anyway, by the fact according to which, with an increasing number of participants to cartel or more generally to oligopolistic structure, the market tends progressively to assume a perfection competition form: consequently, the price comes up to the marginal cost and the production to the efficient level.[11]

Cartels can occur in almost any industry and can involve goods or services at the manufacturing, distribution or retail level. Some sectors may be more susceptible to cartels than others because of their structure or the way in which they operate. For example, a cartel may be more likely to exist in an industry where there are a few competitors, the products have similar characteristics and communication channels between the competitors are already established for example by way of Trade Unions.[12]

The best defense against secret cartels is to be alert to the fact that they exist and to operate an effective purchasing policy that takes this into account. It is helpful to make clear dealings with suppliers that are well aware of the temptations of cartel activities but are on the lookout for signs of price fixing or market sharing and will bring any suspicions of such activity to the attention of the authorities.[13]

Conclusively, Cartelization of the industry is a deterrence of the basic principle of Business and they need to be complied with. For this purpose, the Competition policies, worldwide as well as in India, continue to work towards eliminating the phenomena from the global economy. Efforts are being made all over the world to rid ourselves but sadly, with the growing number of industries and the benefit of technology to conceal wrongful acts, the cartels and its existence becomes easier to hide and the main key to erasing cartels lies in actually discovering one.


[1] G.R Bhattiai, Combating Cartels in Markets: Issues and Challenges.
[2] Gibbon R.(1992( Game Theory for Applied Economics.
[3] Hard Core Cartel: Third Report on the implementation of the 1998 recommendation
[5] A quick Guide to Cartels, Competition Commission of India.
[6] G.R Bhattiai: Combating Cartels in Markets: Issues and Challenges in Times of India, 12-03-2011.
[7] Organization for Economic Cooperation and Development
[8]Richard Whish, Control of Cartels and other Anti-competitive agreements in Competition Law today.
[10] Crampton and Reynolds: Cartels and International Law, 19th Edition.
[11] Cf. Besanko D., Dranove D., Shanley M., Schaefer S. (2006), Economics of Strategy, John Wiley & Sons
[12]Richard Whish, Control of Cartels and other Anti-competitive agreements in Competition Law today. [13] Law of Monopolistic, Restrictive & Unfair Trade Practices by Dr.S.M.Dugar (1997 Edition)
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