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.
- An agreement: Maybe formal and written or informal or unwritten.
- 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.
- By artificially holding back the supply or raising prices in a coordinated manner, companies
- 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.
- a monopolist completely dominates and then often abuses this dominance
- 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.
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Monopoly |
Cartelisation |
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- 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.
- cartels (as against monopolists)
- In other words, apart from the whole issue of charging higher prices,
- 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.
- Identify Cartels
- 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.
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Competition Commission of India (CCI)
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Source: IE
