Submitted To:

Mr. Bishnu Prasad Adhikari

Economics Faculty


Submitted By:
Pulakit Binod Adhikaree
M.B.A Spring 2013
1
st
Semester
Roll No. 24



July 10, 2013



School of Management Tribhuvan University
Cartels and Nepalese
Market
Term Paper for "Economics for the Firm"
Cartels and Nepalese Market
Introduction
Cartels are essentially agreements between independent companies or associations, concluded for a
joint purpose, apt to influence, by restraining or eliminating competition, the production or
commercialization and in general to alter the market conditions regarding certain goods or
services. (Guerrin & Kyriazis, 1992) Cartels may be overt or covert as the producers and
suppliers of goods and services can have a tacit understanding or open agreement to fix the
market price, allocate market, increase prices and decrease the quality of the goods and
services. Such practices are generally considered as the worst forms of anti-competitive
behavior and condemned by the laws of various countries. Nepal has also banned the cartels.
There are two typical forms of cartels: (a) cartels aiming at joint-profit maximization, that is,
maximization of industry profit, and (b) cartels aiming at the sharing of the market.
(a) Cartels aiming at joint-profit maximization
It implies direct (although secret) agreements among the competing oligopolist with an aim of
reducing the uncertainty arising from their mutual interdependence. In this particular case the
aim of the cartel is the maximization of the industry (joint) profit. Here, the firms appoint the a
central agency, to which they delegate the authority to decide not only the total quantity and
the price at which it must be sold so as to attain maximum group profits, but also the allocation
of production among the members of the cartel, and the distribution of the maximum joint
profit among the participating members. The authority of central cartel agency is complete.

Figure 1: Joint-profit Maximization under Cartel
Clearly the central agency will have access to the cost figures of the individual firms, and for the
purposes of understanding we suppose that it will calculate the market demand curve and the
corresponding MR curve. From the horizontal summation of the MC curves of the individual
firms the market MC curve is derived. The central agency, acting as a multiplant monopolist,
will set the price defined by the intersection of the industry MR and MC curves. For simplicity
we assume that there are only two firms in the cartel. Their cost structures are shown in figure
1. From the horizontal summation of the MC curve we obtain the market MC curve. This is
implied by the profit maximization goal of the cartel, i.e. each level of industry output should be
produced at the least possible cost. Thus if we add the outputs of A and B that can be produced
at the same MC, clearly the resulting total output is the output that can be produced at this
common lowest cost. Given the market demand DD (figure at the extreme right) the monopoly
solution, which maximizes joint profits, is determined by the intersection of MC and MR (again,
figure in the extreme right). The total output is Q and it will be sold at price P. now the central
agency allocates the production among firm A and firm B as a monopolist would do, i.e, by
equating the MR to the individual MCs. Thus firm A will produce Q
1
and B will produce Q
2
.

But,
we have to take care that the firm with the lower costs produces a larger amount of output.
However, this does not mean that A will also take the larger share of the attained joint profit.
The total industry profit is the sum of the profits from the output of the two firms, denoted by
the shaded areas of first two figures. The distribution of the profits is divided by the central
agency of the cartel.
(b) Market-sharing cartels
This form of collusion is more common in practice because it is more popular. The firms agree
to share the market, but keep a considerable degree of freedom concerning the style of their
output, their selling activities and other decisions. There are two basic methods for sharing the
market: non-price competition and determination of quotas.

Non-price competition agreements
In this form of 'loose' cartel the member firms agree on a common price, at which each
of them can sell any quantity demanded. The price is set by bargaining, with low-cost firms
pressing for a lower price and high-cost firms for high price. The agreed price must be such as
to allow some profits to all members. The firms agree not to sell at a price below the cartel
price, but they are free to vary the style of their product and/or their selling activities. This form
of cartel is more unstable than the complete cartel aiming at joint profit maximization. If all
firms have the same costs, then the price will be agreed at the monopoly level. However, with
cost differences the cartel will be inherently unstable, because the low cost firms will have a
strong incentive to break away from the cartel openly and charge a lower price, or to cheat the
other members by secret price concessions to the buyers. And, even with same cost structure
these cartels are naturally unstable because if one firm splits away and charges a slightly lower
price than the monopoly price P
M
while the others remain in the cartel, the splitting firm will
attract a considerable number of customers from the others, then its demand curve will be
much more elastic and its profits will be increased. All firms will have the same incentive to
leave the cartel, which thus becomes inherently unstable, unless supported by tight legislation.

Sharing of the market by agreement on quotas
The second method for sharing the market is the agreement on the quotas. This is the
agreement on the quantity that each member may sell at the agreed price. Another popular
method of sharing the market is the definition of the region in which each firm is allowed to
sell. In this case of geographical sharing of the market the price as well as the style of the
product may differ. (Koutsoyiannis, 1979)



Laws for Cartels and Cartel Practice in Nepal
Countries have developed their own competition laws in order to prevent unhealthy business
practices. The Competition Promotion and Market Protection Act (CPMPA) was passed by the
Parliament of Nepal in 2006 and the Government of Nepal came up with the relevant
regulations in 2009. The act basically defines the anti-competitive practices and dealings, and
prohibits the anti-competitive agreements between two or more parties with the intention to
limit or control competition. Such anti-competitive agreements may be in the form of fixing the
sales or purchase price, limiting the quantity of production or sales, market allocation, creating
barriers for market entry to the producers and suppliers of similar goods and services,
determining the terms and conditions of sales, imposing quota and applying syndicate system
in transport and distribution of services. Similarly, the act prohibits the abuse of dominant
position by a producer or distributor or their conglomerates with the intent of controlling
competition. Besides, merger and acquisition of enterprises with a takeover of more than 50
per cent share and acquisition of more than 40 per cent market share are the prohibited
behaviors that have the effect of creating monopoly in the market. Bid rigging, exclusive
dealing, market restrictions, tied selling and misleading advertisements are other anti-
competitive practices and offences under the competition act. The United States of America
has enacted two such basic laws, called anti-trust laws. Named the Sherman Act and the
Clayton Act, these are enforceable by the Department of Justice and Federal Trade Commission.
Similarly, the European Union has provisions under the Treaty of Rome to maintain fair
competition and Australia has its Trade Practices Act 1974. In India, the Monopolies and
Restrictive Trade Practices Act was brought out in 1969 and later replaced by the Competition
Act in 2002. The Indian Competition Act is quite comprehensive and has provision to constitute
the Competition Commission and the Competition Appellate Tribunal among others. The
objectives of the act have been defined as: to prevent practices having adverse effect on
competition, promote and sustain competition in markets, protect the interest of consumers
and ensure freedom of trade carried out by other participants in the market.
Cartels and syndicates are the anti-competitive agreements according to section 3 of the CPMP
Act. Such an agreement may be in the written form or as a tacit understanding which is difficult
to prove by the document but can be judged from the behavior and resultant outcomes of such
dealings. Let us look at some representative cases in the context of Nepal.
Transportation services are a prime example of the most-hit sector by cartels and syndicates.
The transporters are usually smart enough to make a hefty profit through the application of
syndicates. First, they bond together within the umbrella of their associations that culminates
into the federation redoubling the institutional strength to protect and persuade the vested
interest of transport operators around the country. Such strength can yield dominant positions
in the market collectively and the abuse of such position is imminent. Price fixation, particularly
regarding plying on minor roads, application of higher charges on services, queue and rotational
system in operation, use of old and worn out vehicles and overload in cargo transportation are
some elements associated with the syndicate behavior of the transporters. The transporters
deter the entry of new transport equipments through physical threat or assault in case
somebody dared to enter their market or put heavy syndicate charges for such entry. This has
put the consumers in worse conditions as they need to pay higher transportation charges, meet
with frequent road accidents, and travel in crowded sitting positions in the buses. This sort of
practice rewards inefficiency and discourages firms to provide services in an environment of
open and healthy competition.
Transportation of petroleum products and their distribution is another sector affected by
hardcore cartels and syndicates. Different associations that are in existence demonstrate the
collective anti-competitive behavior of their members. Such a behavior usually include the
pressure or demand for increasing profit margin, cheating in the measurement of volume and
weight, raising barriers to the entry of new traders and dealers etc. It was noted that one of the
demands of LPG Bottlers Association during their recent strike was against the governments
plan for granting license for a glass bottling plant. Moreover, these associations often exert
pressure through the means of strikes, lock-outs and interruptions in services to make the
government accept their demands. Any compromise with the demands based on such unlawful
means of threat and violence by the associations and its members would reduce the efficiency
of the economy and harm the interests of the common consumers.
The third cartel group belongs to the distributors and wholesalers of fruits, vegetables and
meat products. These are organized groups and have their own associations while their
upstream and downstream stakeholders in the supply chain do not have strong enough
associations to offset their unruly behavior. Hence, the farmers are fetching low prices on their
products on the one hand and the consumers are forced to pay higher prices at the other to the
hefty benefit of those middlemen. A market survey done at the Kalimati Vegetable Market
shows that the price paid by the consumers for some vegetable products are 10 times higher
than the price paid by the middlemen to the farmers for the same vegetables. This shows the
intensity of unfair trade practices, much to the embarrassment of law enforcing authorities.
Cartel groups in Nepal are found in other sectors as well. For example, there are tacit
understanding and clandestine agreements among the importers and distributors of food grains
in order to fix price and control supply and raise the price particularly during the festive season
of Dashain and Tihar. Sugar industries collude to pay less to the farmers against purchase of
canes and fix high prices of sugar for sales to the end consumers with a bigger price arbitrage,
while manufacturing industries like cement, noodles and water pipes sell their product at the
identical price as a result of tacit understanding among the manufacturers. (Ojha, 2012)
Conclusion
Cartels create a loss of economic efficiency because their operation stops or eliminates the
effects of market forces. In a competitive market, goods and services are priced so that
resources are allocated to the production of goods and services with the most value to
consumers. A successful cartel raises the price above this level and reduces the demand and
hence production of the good or service. As a result, resources are not deployed where they
will be of maximum benefit. In economic terms this is a loss of allocative efficiency. A cartel also
protects its participants from the risk that they will lose sales in response to competition from
another firm, thus creating less incentive for them to innovate by reducing costs or improving
the quality of their product in order to retain their market share. Cartels protect inefficient
firms and create a drag on productivity improvements. This is a loss of productive efficiency.
Cartelized businesses may also attract greater levels of investment because they are more
profitable than they would be in a competitive environment. This would create distortions in
investment. In economic terms this is a loss of dynamic efficiency. Hard-core (strong) cartels
cause direct harm to consumers as they result in a transfer of wealth to cartelists. If a consumer
purchases a good or service from a cartel, they pay more than would have been necessary if the
market had been competitive. If the consumer had known that the price of the transaction had
been set by a cartel rather than by market forces, they might not have been willing to pay that
price. However, as the consumer has operated under the pretence of a competitive market,
they will have unknowingly supported the higher profits achieved by the cartelists at their own
expense.
Overall, a cartel causes economic distortions and deprives consumers and the other market
participants of the benefits of a competitive business environment. Even if the transfer of
wealth from consumers to cartelists is considered to be neutral, the operation of a hard-core
cartel still causes harm through the loss of economic efficiency. Hence, hard-core cartel
conducted in any form should be prohibited.





Works Cited
Guerrin, M., & Kyriazis, G. (1992). Cartels: Proof and Procedural Issues. Fordham International Law
Journal, 16(2), 268-381.
Koutsoyiannis, A. (1979). Collusive Oligopoly. In A. Koutsoyiannis, Modern Microeconomics (pp. 237-
242). London: MACMILLAN PRESS LTD.
Ojha, P. (2012, November 1). Economy: Economy and Policy: New Business Age. Retrieved July 7, 2013,
from New Business Age Web site:
http://www.newbusinessage.com/Economy%20And%20Policy/730