CCI and Cartelisation

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    In News

    • The Competition Commission of India (CCI) recently fined 3 beer companies and then gave them a varying degree of relief.

    Complete Incident

    • CCI found that 3 beer companies had colluded to fix beer prices for a full decade (2009- 2018).
    • As a result, the CCI slapped a penalty of Rs 873 crore for cartelisation in the sale and supply of beer in 10 states.

    Cartel: Definition

    • 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 has a simpler definition in form of 3 common components of a cartel:
      • An agreement: Maybe formal and written or informal or unwritten.
        • Cartels almost invariably involve secret conspiracies.
      • Between competitors: It refers to companies at the same level of the economy (manufacturers, distributors, or retailers) in direct competition with each other to sell goods or provide services.
      • To restrict competition: It is the conduct that targets open competition from benign, ordinary course of business agreements between firms.
    • The  International Competition Network is a global body dedicated to enforcing competition law.

    Functioning of Cartels

    • According to ICN, 4 categories of conduct that are commonly identified across jurisdictions (countries) are:
      • Price-fixing;
      • Output restrictions;
      • Market allocation and
      • Bid-rigging
    • Bruce Wardhaugh in his book titled Cartels, Markets and Crime explains that participants in hard-core Cartels substitute cooperation for competition.
      • They do this by agreeing to insulate themselves from the rigours of a competitive marketplace.

    Ill Effects of the Cartels

    • Adversely affect efficiency in a market economy:
      • According to the OECD, “A successful cartel raises the price above the competitive level and reduces output.
      • Thus it reduces the efficiency of the overall economy.
        • OECD stands for Organisation for Economic Co-operation and Development.
    • Black marketing, Hoarding and Poverty by excluding consumers:
      • By artificially holding back the supply or raising prices in a coordinated manner, companies 
        • either force some consumers out of the market by making the commodity (say, beer) more scarce or
        • by earning profits that free competition would not have allowed.
    • Undermine overall economic efficiency and innovations:
      • A cartel shelters its members from full exposure to market forces, reducing pressures on them to control costs and innovate.

    Cartels versus monopolies: Which one is more Harmful?

    • Monopolies are bad for both individual consumer interest as well as the society at large because
      • a monopolist completely dominates and then often 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.
    • As per  Bruce Wardhaugh, Monopoly distorts the market in 2 ways
      • Fewer investments towards making the methods of production more efficient
      • Reduced product innovation
      • Both the aforementioned problems get aggravated in cartels.

    Monopoly

    Cartelisation

    • Both end up charging higher prices than actual worth.
    • But Monopolists may be forced to undertake product innovation due to fear of new entrants.
    • Monopolists again may be apprehensive of less expensive technology entering the market. It will force him to make necessary upgrades to Production efficiency.
    • Both end up charging higher prices than actual worth.
    • Here, due to the explicit agreement of non-competition and profit guarantees among cartels, any incentive to improve one’s product is removed.
    • In a cartel, there is no fear of new entrants being more efficient as the cartel will lobby and keep them out or merge them in the cartel.
    • Thus, in a nutshell, these social costs of reduced product innovation may be greater with cartels.
      • In other words, apart from the whole issue of charging higher prices, 
        • cartels (as against monopolists) 
          • neither has any incentive to invest in research aimed at improving their product 
          • nor do they see any reason why they should boost investments towards making the methods of production more efficient.
    • The end result is that both the individual consumer as well as the society at large suffers.

    Way Forward

    • To Sop Cartelisation, one needs to 
      • Identify Cartels
        • Cartels are not easy to detect and identify.
      • Provision for strong deterrence
        • A monetary penalty that exceeds the gains amassed by the cartel.
    • Challenges to these steps
      • It is not always easy to ascertain the exact gains from cartelisation.
      • Lower Prosecution Rate: 1 in 6 or 7 cartels are detected and prosecuted, implying a multiple of at least six as per the OECD document.
    • 100% relief should not have been provided to Anheuser Busch InBev India 
    • Further, there is a need to incentivise whistleblowers exposing cartels and their functions.

    Competition Commission of India (CCI)

    • It is the competition regulator in India. 
    • Established in 2003 under the provisions of the Competition Act 2002  but became fully functional by 2009. 
    • The Competition (Amendment) Act, 2007 was enacted to amend the Competition Act, 2002.
      • This led to the establishment of the Competition Appellate Tribunal.
    • Later, the Competition Appellate Tribunal (COMPAT) was replaced with the National Company Law Appellate Tribunal (NCLAT) in 2017.
    • Aim: 
      • To establish a competitive environment in the Indian economy through proactive engagement with all the stakeholders, the government, and international jurisdiction. 
    • Objectives of Commission
      • To prevent practices that harm the competition.
      • To promote and sustain competition in markets.
      • To protect the interests of consumers.
      • To ensure freedom of trade.
    • Members: 3 full-time members
      • 1 Chair person+ 2 Members
      • Eligibility
        • They shall be a person of ability, integrity
        • And who, has been, or is qualified to be a judge of a High Court
        • Or, has special knowledge of, and professional experience of not less than 15 years in 
          • international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administration 
        • or in any other matter which, in the opinion of the Central Government, may be useful to the Commission.

    Source: IE