CCI and Cartelisation

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.

• 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.

Source: IE