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The Process of Cartelization

Context

Competition Commission of India (CCI) has fined 11 firms for of bid rigging, cartelization in Indian Railways tenders.

Relevance

GS-III: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Dimensions of the Article

  • What is a Cartel?
  • What is Cartelization?
  • Philosophy behind
  • How do they work?
  • How do cartels hurt?
  • Are there provisions in the Competition Act against monopolistic prices?
  • What is the penalty for cartelization?
  • How might cartels be worse than monopolies?
  • How to stop the spread of 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 three common components of a cartel are:
  1. an agreement
  2. between competitors
  3. 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 law, that is not cartelization.
  • The Competition Act contains strong provisions against cartels.
  • It also has the leniency provision to incentivize 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.

Philosophy behind

  • Cartels, which involve a group of businesses colluding to keep prices high, have been viewed by economists as a significant threat to the market economy.
  • When businesses cooperate with each other rather than compete against each other, there could be many adverse consequences to consumers.
  • For one, consumers will have to pay higher prices for goods and services.
  • It should be noted that the way cartels keep prices high is by limiting the supply of their output. Further, in the absence of any threat from competition, cartels also have very little reason to innovate or cater to consumers in better ways.
  • In other words, they essentially act like a monopoly.
  • The Organization of the Petroleum Exporting Countries (OPEC) is the most well-known international cartel that influences the price of oil globally through coordinated efforts to limit supply.

How do they work?

  • 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 rigors of a competitive marketplace, substituting cooperation for competition.

How do cartels hurt?

  • 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.

Are there provisions in the Competition Act against monopolistic prices?

  • 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 the purchase or sale of goods or services.
  • Thus, excessive pricing by a dominant enterprise could, in certain conditions, be regarded as abuse and, therefore, subject to investigation by the Competition Commission if it were fully functional.
  • However, where pricing is a result of normal supply and demand, the Competition Commission may have no role.

What is the penalty for cartelization?

  • The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
  • However, in case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

How might cartels be worse than monopolies?

  • Monopolies are bad for both individual consumer interests as well as society at large.
  • Monopolist completely dominates the concerned market and, more often than not, abuse 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.

How to stop the spread of cartelization?

  • 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 and it is not always easy to ascertain the exact gains from cartelization.
  • The threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.

Source – The Hindu

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October 2022
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