A-224                        Competition Law Reports                         [Vol. 1

        Predicting Business Carte...
2008]                 Predicting Business Cartels – Lessons for India                A-225

create better awareness on th...
A-226                           Competition Law Reports                            [Vol. 1

consumers in many countries by...
2008]                 Predicting Business Cartels – Lessons for India                A-227

Japan was fined with a reduce...
A-228                          Competition Law Reports                         [Vol. 1

leading manufacturers of vitamins ...
2008]                 Predicting Business Cartels-Lessons for India                A-229

Though the MRTPC, based on the ...
A-230                          Competition Law Reports                        [Vol. 1

still be difficult to sustain a car...
2008]                 Predicting Business Cartels-Lessons for India               A-231

cartelized or not depends on how...
A-232                          Competition Law Reports                          [Vol. 1

anti competitive violation under ...
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Predicting Business Cartels Sharma

  1. 1. A-224 Competition Law Reports [Vol. 1 Predicting Business Cartels-Lessons for India Comdt. M M Sharma* Cartels create an adverse effect on the market and hits inconsiderately at the root perception of fair competition. It has been regarded as the most insidious form of violation wherein the competitors by collusive agreements fix prices, restrict outflow/supply of products, engage in bid rigging, sharing of markets etc. In India the recent rise in prices and scarcity of certain select products such as steel, cement, tyre etc., suspect the existence of hard-core cartels in these sectors and has grown as a serious concern for the Competition Commission especially in the absence of full operationalisation and enforcement of Competition Act, 2002. In this article, the Author Comdt. M. M. Sharma while trying to create awareness on this new economic offence also tries to highlights some factors, which the new CCI may like to consider while investigating allegations of cartels. Last few months evidenced a spurt of of such subordinate legislation, articles in the print media, mainly the involving almost all stakeholders, financial newspapers and journals, on including Apex Chambers of Industry the suspected cartelisation in some Associations like the FICCI, CII, select sectors of industry such as ASSOCHAM etc. and professional steel, cement, tyre etc. and concerns regulatory bodies like the ICAI, ICSI, have been expressed over the lack of ICWAI etc. besides a few international action due to the present status of the experts. These draft regulations are Competition Commission of India, available on the website of the which continues to await its full Commission for adoption by the full operationalisation and notification of Commission as and when constituted. the enforcement provisions of the In short, the Commission is now Competition Act, 2002 (amended in gearing up to fulfil its mandate of, inter 2007). alia, curbing anti competitive business The Commission, on its part, under the practices including cartels. leadership of its sole Member, Vinod In the absence of specific legal Dhall (who recently relinquished his provisions defining and expressedly office) and a skeletal team of officers, prohibiting cartels amongst sellers, including the author, has completed producers or buyers under the MRTP the drafting of the implementing Act, except as one of the restrictive regulations. Noticeably, this has been trade practice, there is little awareness preceded by a long consultative process, about such business cartels in India. perhaps, unique in legislative drafting This article, inter-alia, attempts to Apr. 08 - Jun. 08
  2. 2. 2008] Predicting Business Cartels – Lessons for India A-225 create better awareness on this Cartels being agreements relatively new economic offence and draws attention to the seriousness with formed in secrecy, which which it is treated in rest of the World may or may not be in and also highlights some factors which writing, between firms in the new CCI may like to consider while direct competition with one investigating allegations of cartels. another in the relevant market are the most Business Cartels Across the Globe pernicious form of anti – A Curtain Raiser competitive business Of the 106 systems of competition laws practices which silently in the world today ranging from the result in super normal over century old Sherman Act, 1890 profits due unreasonable of USA to the latest Chinese Anti increase of prices by the Monopoly Law, 2007 (scheduled to be cartel at the cost of enforced from 1 st August, 2008), exploitation of the prevalent in the six continents and in all kinds of economies, a singular customers of the feature which is common in all is that wholesalers as well as and of condemning “hard core “cartels consumers of the retailers. though treatment of such cartels may differ. The Indian modern Competition European Union, Mario Monti, the Act, 2002 (amended in 2007), soon to former Commissioner for Competition, replace the archaic MRTP Act, 1969, once described cartels as “cancers on defines a cartel for the first time and open market economy” 1 and the US prescribes heavy penalties. Supreme Court has referred to cartels Cartels being agreements formed in as “the supreme evil of antitrust”1. Of secrecy, which may or may not be in late, the concept of a cartel and in writing, between firms in direct particular that of “hard core cartel” competition with one another in the has been used with greater precision relevant market are the most in developed economies. pernicious form of anti competitive The fight against cartels was given business practices which silently increased priority around the end of result in super normal profits due 1998 after the OECD council came unreasonable increase of prices by out with a specific Recommendation the cartel at the cost of exploitation entitled “Effective Action Against Hard of the customers of the wholesalers Core Cartels” in March, 1998. The as well as and consumers of the Recommendation provided an explicit retailers. Business cartels have been recognition of the objectionable known to exist in industrialised character of such cartels as being the countries for over 100 years now and (quote) most egregious violations of a huge economic literature and competition law that injures jurisprudence exists on cartels. In the 1. Quoted by Richard Whish in his article “Control of Cartels and other Anti Competitive Agreements” in the book “Competition Law today” by Vinod Dhall (2007), Oxford University Press (Pp. 41). Apr. 08 - Jun. 08
  3. 3. A-226 Competition Law Reports [Vol. 1 consumers in many countries by European Commission imposed a fine raising prices and restricting supply, of Euro 273 million for operating a thus making goods and services cartel on the beer market in completely unavailable to some Netherlands. The brewers of the purchasers and unnecessarily Netherlands co-ordinated prices and expensive for others.”2 Subsequently, price of beer increased considerably the OECD published a Report on during at least 1996 and 1999. The Leniency Programme to Fight Hard Belgian based In Bev group also Core Cartels in 2001 followed by the participated in the cartel but received Report on the Nature and Impact of immunity from payment of fines by Hard Core Cartels and Sanctions providing decisive information about against Cartels under National the cartel under the Commission’s Competition Laws in 2002. In this Leniency Programme. Continuing the subsequent report of 2002, the OECD tirade, The EC, in November, 2007, noted that the world wide economic busted an international cartel that harm from cartels is very substantial, fixed prices of flat glass used in the though hard to quantify: it was manufacture of glass products such estimated that 16 large cartel cases as double glazing and safety glass. The investigated in the US may have cartel involved famous manufacturers caused harm in excess of US $ 55 of glass i.e. Asahi of Japan, Guardian billion.3 of the US, Pilkington of the UK and The European Commission has also Saint – Gobain of France. The made great strides in fighting cartels. Commission established that in 2004 Between 2000 and 2005 the and 2005 the representatives of these Commission adopted 38 infringement companies met covertly in hotels and decisions i.e. an average six decisions restaurants around Europe and per year, targeting both European and conspired to increase prices for flat worldwide cartels, and imposed total glass, discussing both the amount fines of Euro 4.4 billion. The and the timing of price increase. These Commission under its new companies drew huge profits from Commissioner Ms. Neelie Kroes has selling flat glass at artificially inflated declared a crack down on cartels by prices at the cost of not only down – setting up a dedicated cartel busting the- line companies, which used flat directorate within the DG Competition, glass as the input for making products besides revising its Leniency such as double glazing and safety Programme, as a tool to detect and glass but also ordinary European destabilize hard core cartels, which consumers, who had to pay the high resulted into the ECN Model Leniency prices for the glass used in buildings, Programme published in September, private homes and apartments. The 2006,(which was useful in drafting the EC imposed fine of Euro148 million on draft leniency regulations adopted by Guardian, 140 million on Pilkington, the Competition Commission of India). and 133 million 900 thousand Euros More recently, in April 2007, the on Saint-Gobain. Again Asahi of 2. OECD, Paris, 27-28 April, 1998 (C (98) 35/Final). 3. Quoted by Richard Whish in his article “Control of Cartels and other Anti Competitive Agreements” in the book “Competition Law today” by Vinod Dhall (2007), Oxford University Press (Pp. 42-43). Apr. 08 - Jun. 08
  4. 4. 2008] Predicting Business Cartels – Lessons for India A-227 Japan was fined with a reduced Cartels are equally or rather penalty of 65 million Euros for more harmful in developing providing substantial co-operation to the EC during investigation under its economies where the rate of Leniency Programme. detection and quick judicial punishments may not Cartels are equally or rather more match with those in the harmful in developing economies where the rate of detection and quick developed world. judicial punishments may not match with those in the developed world. is the largest fine imposed in South Mexico and Colombia are classical Korea against a single company.5 In examples where the ill famed drug cartel South Africa, the Competition Tribunal, mafia are known to be constantly inquired into an alleged cartel of four engaged in a state of “drug war” forcing airline companies that had conspired the newly elected government of to announce a fuel surcharge Mexican President Felipe Calderon to simultaneously in May, 2004. On the treat it as military as well as criminal basis of cooperation extended by one challenge. The “gangland” type of these companies to provide useful executions by Mexican gangs have evidence to the Tribunal against the reportedly increased dramatically since cartel under the leniency programme, 2001 and in 2007 an estimated 2,500 the Tribunal established the charge executions took place.4 In Argentina, in and the remaining three companies July, 2005, 5 Cement companies were were recommended to be fined up to prosecuted for a cartel that lasted for 10 per cent of the total turnover of each 18 years from 1981 to 1999. The of them. companies agreed on a market division that was closely monitored by their In the developed economies, some of trade association. The cartel members the other famous cases of international were fined US $ 107 million, the largest cartels are the (i) Lysine cartel case in antitrust fine in the nation’s history.5 US, in which two Japanese, two South In Brazil, in 2005, CADE, the Korean and one US Company agreed competition authority of Brazil, found not to compete on price. As a result, cartels in relation to Pharmaceuticals, price of lysine, an amino acid that Steel and Crushed Stone. Heavy fines stimulates growth, rose on account of are likely to be imposed.5 In South collusion from 68 cents per pound to Korea, in May, 2005, the Fair Trade 98 cents in 1990 and continued at that Commission of South Korea fined KT level until detection in 1995. In this case Corporation with a record fine of Korean evidence was collected by Department Won 115.9 billion (about US $ 115 of Justice with the assistance of FBI million) for price collusion in broadband which included documents/ internet and landline telephone transcripts of secretly recorded services two small rivals, conversations; (ii) The International Hanarotelecom and Dacom Corp. This Vitamins Cartel case, in which all 4. Article “Mexico’s Cartel War: Calderon in the Cauldron” by Austin Bay. Available at http://www.realclearpolitics.com/aerticles. 5. Quoted by Richard Whish in his article “Control of Cartels and other Anti Competitive Agreements” in the book “Competition Law today” by Vinod Dhall (2007), Oxford University Press (Pp. 47-49). Apr. 08 - Jun. 08
  5. 5. A-228 Competition Law Reports [Vol. 1 leading manufacturers of vitamins with the Department of Justice (DOJ) located in Belgium, Canada, France, of US. (iii) The Lombard Club case in Germany, Japan, the Netherlands, which the European Commission Switzerland and the United States, imposed fines totaling Euro 124.26 including the famous Hoffmann-la million on eight Austrian banks (the Roche AG and BASF of Germany, ‘Lombard Club’) for their participation Rhone-Poulenc of France which in a wide ranging price cartel which deserves a special mention. Takeda extended to all banking products and Chemical of Japan formed a cartel services and the member banks fixed dividing the world market and fixing interest rates for loans and savings for prices of different types of vitamins private and for commercial customers during the 1990s. The cartel operated with the object to avoid competition in for over 10 years from 1989 to 1999 and ‘interest rates’. The minutes of was later prosecuted with the help of meetings, memoranda, records of Rhone-Poulenc of France after merger telephonic conversations, with Aventis in 1999, which sought correspondences unearthed a network leniency and co-operated with US of cartel committees (e.g. ‘Lending authorities. This cartel involved 13 Rates Committees’, the ‘Deposits Rates Pharmaceutical companies, six Committees’, etc.) (iv) The Auction European and seven Japanese and Houses Cartel involving the famous covered all major vitamins consumed auction houses, Christie’s and the world over forming the so called Sotheby’s of UK, which were found to cartel of “alphabet soup” Vitamin A to be involved in a collusive agreement H. The overcharge on vitamins imports fixing trading terms. The purpose of the by 90 economies during the years 1990 cartel was to reduce the fierce to 1999 was estimated to be US $ 2709. competition between them that had 87 million, which is an underestimate developed during the 1980s and early of the total overcharges made in all 1990s. The European Commission vitamins transactions during the fined Sotheby’s with Euro 20.4 million duration of the cartel. Meetings of the which was six of its world wide turnover. cartel members took place mostly in This fine included 40 reduction for its Switzerland and were shown as budget co-operation in the investigation. meetings ostensibly for the purpose of Christie’s, on the other hand, escaped freezing the market shares at 1988 a fine being the first to provide crucial level. During the investigation, Rhone evidence to the Commission under its provided lot of documents and got 100 Leniency Programme. per cent lesser fine (of Euro 1 million); BASF and Roche pleaded guilty and Cartels – Cases Investigated in were fined US $ 225 million and 500 India million respectively. Total fine collected In the absence of sound legal exceeded US $ 1 billion in the US alone. provisions under the MRTP Act under Two senior most executives of the MRTP Commission (MRTPC), there Hoffmann-la Roche pleaded guilty and are only three reported cases of cartel served four of five months prison in India, so far. (i) The Soda Ash Cartel, sentences. Similarly, Takeda, Eisai and in which the American Natural Soda Daiichi also pleaded guilty and paid Ash Corporation (ANSAC) comprising fines totaling $137m whereas six American producers of soda ash Rhone-Poulenc was granted attempted to shift the consignment of conditional immunity for co-operating soda ash at cartelized price to India. Apr. 08 - Jun. 08
  6. 6. 2008] Predicting Business Cartels-Lessons for India A-229 Though the MRTPC, based on the citadels of free market economy, ANSAC membership agreement, held substantiates this argument. The it to be a prima facie cartel and granted available competition literature on interim injunction in exercise of its cartels suggests that there are three powers under Section 14 of the MRTP broad features of a market, which Act, but this order was set aside by makes it easier for the firms to reach the Supreme Court, inter alia, on the an agreement to collude to fix prices or ground that section 14 of the MRTP otherwise avoid competition between Act did not give any extra territorial them. The foremost being the elasticity jurisdiction to the MR TPC. This of demand. In markets such as oil and lacuna in law has now been removed gas, cement, steel, power and other as Section 32 of the Competition Act, essential products linked to the 2002 confers extra territorial automobile or construction sectors, jurisdiction to the CCI in respect of where the demand is inelastic, such anti competitive agreements, meaning that there are no substitute which though executed outside India products available and increase in may have an effect on competition in price will have no effect on the demand, the relevant market in India. (ii) there being greater scope for huge Trucking Cartel case, of 1984, involved profits by price rise, there is always a members of the Bharatpur Truck chance of such collusive behaviors Operators Union and the Goods Truck among the firms. The second important Operators Union, Faridabad, which factor is the level of competition in the colluded to fix freight rates individually. market. The fiercer is the competition (iii) The Cement cartel case, involving and lower is the prices, in absence of 40 manufacturers of cement, initiated cartel, the greater are the likely benefits in 1990 and fixing of prices of cement from setting up of a cartel. The airline through the Cement Manufacturers sector with a large number of private Association (CMA) was proved recently players competing with one another for in December, 2007 before the MRTPC. each priority route or on favored timings In both these cases MRTPC could only in a busy route such as between pass a ‘cease and desist’ order. metropolitan cities could be an However, unlike the MRTPC, the CCI example. The third factor is the barriers may not be helpless in imposing heavy to entry in a given market, which is fines as the Competition Act, 2002 again linked to the level of competition. prescribes very heavy penalties under If there are low barriers to entry or Section 27(b). expansion in a given market and the market is open for such entry by a new Factors Facilitating or Hindering player or expansion of capacity by Cartelization or Agreements existing players, it will be difficult to Between Business Rivals to sustain a cartel as any new “ maverick” Collude player with better efficiencies or low marginal costs can undermine the Ironically, the existence of a free market cartelized price. Retail consumer economy by itself does not restrain the sectors such as those of readymade existence of cartels or such other anti garments, handicrafts etc. could be competitive business practices. The examples of such situation. example of large international cartels, detected by the competition authorities It may be important to note that while in the European Union and the US, the it may be easier to form a cartel, it may Apr. 08 - Jun. 08
  7. 7. A-230 Competition Law Reports [Vol. 1 still be difficult to sustain a cartel for long for reasons which are interesting It can be said that whether to note. The first being, an inherent an industry can become tendency amongst each member of a cartelized or not depends on cartel to derive maximum benefits by how great the incentives are cheating on the other cartel members for the firms in the industry i.e. by undercutting the cartel price. If to form a cartel and how such cartel member is more efficient sustainable the cartel is. than other members i.e. have lower The incentives to create a marginal costs, greater would be the cartel depend on the benefit of such cheating. Such cheating will also be easier in case the difference between the cartel is between firms making many profitability of the firms in products or brands and operating the presence of a cartel and simultaneously in a large number of in the absence of a cartel. geographic markets. A large number of firms in a given market also facilitate such cheating as the detection punishment also may provide for the becomes difficult. The second reason other firms to compete in the exclusive is the likelihood of the cheating being territory of the cheater firm. The longer detected by other cartel members. On this punishment can be sustained such detection, the cartel either fails against such cheater firms; stronger by itself or clue about the same is will be the deterrence against such invariably given by a victim of such cheating. cheating to competition authorities Apart from the above broad reasons leading to the detection and successful on which the sustainability of cartels prosecution of such cartel by the largely depend, factors such as authorities. The leniency programme frequent interaction among firms of competition authorities comes as a whether through trade associations handy tool for such ‘defectors’ to or otherwise, institutional links mitigate their likely punishments. between firms such as cross Detection of cheating is also facilitated ownership or cross licensing, multi- by price transparency, small number market interactions between firms, of firms, homogenous products and markets with low fixed cost, small, predictability of demand. The third regular and predictable demand by reason is the extent of punishment buyers, symmetries in costs and that other members of the cartel can capacities of firms, production of impose on the cheater firm. same quality goods, homogeneity of Punishment by the cartel usually products and absence of buyer power leads to the restoration of the and practices that help companies competitive pricing by other cartel to observe their competitors prices members thereby reducing the benefit such as resale price maintenance, of the cheater firm. This again meeting the competition clause etc depends upon three factors viz. also facilitate the formation of availability of spare capacity with the cartels. On the other hand cartels are other members, the speed with which difficult to be sustained in innovative the punishment is resorted to and the or networking markets. In number of markets in which it can be conclusion, it can be said that enforced upon the cheater firm. The whether an industry can become Apr. 08 - Jun. 08
  8. 8. 2008] Predicting Business Cartels-Lessons for India A-231 cartelized or not depends on how by increasing the fines or making great the incentives are for the firms cartel a criminal offence and lastly (v) in the industry to form a cartel and establishing a creditable competition how sustainable the cartel is. The authority, like those in EU, USA, incentives to create a cartel depend Australia to signal that cartels will be on the difference between the detected and punished. Examples of profitability of the firms in the ex post anti-cartel policies could be presence of a cartel and in the adoption of sophisticated investigating absence of a cartel. A sustainability techniques to search for “hard” of a cartel, in turn, depends whether evidence of collusive agreements, the incentives of the firms to cheat giving strong legal powers for search on the cartel agreement outweigh the and seizure to competition authorities likelihood of the cheating being and introducing a modern leniency detected and punished. At the same programme to encourage members of time, the supply side responses by cartels to come forward by whistle non cartel members can undermine blowing and having a corresponding the cartel especially where the entry immunity programme. in a market is easy or it is easy for non cartel members of the industry A Word of Caution to expand their output in response There appears to be some to the cartel members raising their misconception that firms making high prices, making the cartel no longer profits must be involved in sustainable. In this way the supply cartelization. This may not be always side responses by non cartel true as the high profits may be due to members can neutralize a cartel better efficiencies or other market which can also be described as “the factors such as sudden increase in response of the market forces”.6 demand etc. However, there are no guidelines available even in Anti-cartel policies international competition literature to The adoption of policies both ex ante determine when can profits be as well as ex post, can affect the considered as “too high”, except, probability of formation of a cartel in perhaps, the UK OFT guidance on the sectors where such possibilities “Assessment of Market Power” which exist due to the market structure itself suggests that the following “conditions and to the detection thereof by making that need to exist before a firm can be its sustainability difficult for the cartel held to be making excessive profits in members. Examples of ex ante anti– anti competitive sense: (a) profit cartel policies are (i) issuing fewer should be substantially above the cost regular orders and moving to a few of capital; (b) on a persistent basis; and irregular large orders, (ii) prohibition (c) without any evidence that entry is of pricing rules such as resale price likely to undermine these profits in the maintenance, (iii) reducing cross medium-term.7 Similarly, “excessive ownership between companies, (iv) pricing” is by itself no proof of raising the level of punishment, either cartelization and is not listed as an 6. “The Economics of EC Competition Law” by Simon Bishop & Mike Walker (2002), Sweet & Maxwell, (Para 5.31) 7. UK OFT guidance on “Assessment of Market Power” (OFT 415, December 2004) Apr. 08 - Jun. 08
  9. 9. A-232 Competition Law Reports [Vol. 1 anti competitive violation under the pricing as an “exploitative abuse”.. Competition Act, 2002, though it may This is similar to the provision of the be considered as an abuse of dominant Indian Competition Act. But nowhere position as an “unfair” price under the “excessive pricing” is linked to Act.8 In the United States a high price cartelization which is primarily an anti charged by a monopolist is not competitive agreement between direct considered anti-competitive per se and competitors to collude to fix prices is left for the Courts to decide. The artificially which may appear to be European Union has, on the other “excessive” to a common man but are hand, taken an interventionist not really so in the competition approach and condemns excessive literature. 8. Section 4(2) of the Competition Act, 2002 * The author is the Additional Registrar in CCI. Views are personal. Comments may be sent on cci-mms@nic.in. Apr. 08 - Jun. 08