MAHINDRA & MAHINDRA-NUJS ESSAY COMPETITION

CARTELS AND COMPETITION: AN ANTITHETICAL RELATIONSHIP

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WORD COUNT OF ESSAY: 2148 (including title, excluding bibliography)

People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices. It is impossible indeed
to prevent such meetings, by any law, which either could be executed,
or would be consistent with liberty and justice.
– AdamSmith

As an increasing number of countries have taken economic reforms and embraced the market
economy, many of them have also introduced competition law to maintain competition in their
markets. Also, many economic activities that were earlier state monopolies or natural
monopolies or natural monopolies and were shielded from competition are now subject to
competition law. With the growing integration of the global economy, any anti-competitive
activity can have effect across national borders. Competition law has, therefore, become an
important part of international trade dialogue. Cooperation on competition issues figures in an
increasing number of bilateral or regional trade agreement.

CARTELS AND THEIR IMPACT ON COMPETITION

A cartel is a horizontal agreement to fix prices, allocate customers or territories, restrict output or
rig bids. A cartel is regarded as the most pernicious form of violation of competition law since it
unequivocally damage competition and causes loss to the economy and to consumers. Under
section 2 (c) of the Indian Competition Act 2002 , the term “cartel” is defined as including “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”.

A cartel is a horizontal agreement to fix prices, allocate customers or territories, restrict output or
rig bids. A cartel is regarded as the most pernicious form of violation of competition law since it
 MAHINDRA & MAHINDRA-NUJS ESSAY COMPETITION

unequivocally damage competition and causes loss to the economy and to consumers. Owing to
the seriousness of cartels, they are subject to the per se rule1 in many jurisdiction e.g., in the laws
in the US2 and in the European Union.3 Accordingly, a cartel is considered to be inherently anti-
competitive and injurious to the public without any need to determine whether it has actually
injured competition. In many jurisdictions it is treated as a criminal offence subject to prison
terms for the individuals involved in the crime. This is the case for example, in the United States,
Canada, Japan, Ireland, Korea, Norway, the Slovak Republic, and Germany and, since recently,
in the United Kingdom. It is believed that in Australia too a proposal for amendment is likely to
treat cartels as a criminal offence; the penalties reserved for cartels could be particularly high.

Cartels are not easy to detect since the colluding parties go to great lengths to cover their tracks.
Therefore, competition agencies have been resorting to and seeking greater investigative powers
for unearthing evidence, such as ‘dawn raids’ and the power to order production of documents or
summon witnesses. In the case of the famous global lysine cartel, agents of the department of
justice along with the FBI agents simultaneously raided the office of ADM (the cartel leader)
across the country. To help them nail the cartel they have taped telephone conversation and
videotaped meetings held in secret locations. The Directorate General of Competition of
European commission recently acquired the power of ‘Dawn raids’.

A relatively recent development in the completion law has been the use of leniency provisions
(called the amnesty program in the US) to detect or investigate cartels. This allows the court or
the competition authority to offer lenient treatment to any party to the cartel that blows the
whistle on the cartel and provides the substantial information and fully cooperates with the
authority. The leniency provision has led to a quantum jump in the detection and successful
investigation of the cartels. It has proved a powerful tool in the hands of authorities, offering the
huge incentive to the cartel members to the abandon the cartel and be the first to reach the door
of the competition authority. The fear of the ‘empty seat at the table’ has aggravated the inherent
instability of cartels.

1
The per se rule is the judicial principle that a trade practice violates the Sherman Act simply if the practice is a
restraint of trade, regardless of whether it actually harms anyone, Blacks Law dictionary (7th Edn) p.1162.
2
Price-fixing, market allocation, output limitation etc. are subject to the per se rule in the United States. See White
motor Co. v. Unites States 371 US 253 (1963).
3
In EU law, the prohibition under Article 81 applies in particular to, inter alia, agreements to directly or indirectly
fix purchase or selling price or any other trading conditions.
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Economic theory points to certain conditions that are conducive to the formation of cartels.
These include homogeneity to the product, high concentration in the market (which implies large
shares for the big players), and high entry barriers. Other facilitating conditions include a large
number of buyers, relative equality of production costs amongst firms relatively stable or
predictable demand conditions. Cartels tend to emulate the position of a monopolist by
attempting to raise their prices and lower output, or do both. Cartels have all along been familiar
phenomenon in the market place. Recent years, however, have witnessed a hardening of the
attitude of authorities against cartels. Countries or their competition authorities have also been
collaborating with each other in acting against hard-core cartels, especially global cartels.
Prominent examples of recently detected global cartels are the lysine cartel, vitamins cartel, and
the graphite electorate cartel.

Developing countries are particularly vulnerable to the damage from global cartels. A World
Bank Background Paper shows that in 1997 developing countries imported US $ 81.1 billion
worth of goods from industries which have been a process fixing conspiracy during the 1990s’.4
Those imports represented 6.7 percent of the imports and 1.2 percent of the GDP in the
developing countries and an even larger proportion of trade in the poorest developing countries
for whom the 16 products in question represented 8.8 percent of the imports.5 OECD’s Global
Forum on Competition, 2001, contains a list of 26 cartel and bid rigging cases reported by 12
developing countries.6 However, there are only a few examples of global cartels being
successfully penalized in developing countries, the reasons for this are well known, such as
limited capacity of the domestic competition agencies to investigate and unearth evidence,
difficulty in securing cooperation of the corresponding agencies in industrialized countries, and
limitations in the law.

4
Levenstein, Margaret and Valerie Suslow(2001) ‘Private International Cartels and their effect on Developing
Countries’, Background Paper for World Bank’s World Development Report 2001, available at
http://www.worldbank.org/wdr/2001/bkgroundpapers/levenstein.pdf.
5
Ibid.
6
OECD (2001): ‘Global Forum on Competition: Summary of Cartel cases described by invitees’, available at
http://www.oecd.org/dataoecd/41/30/2491386.pdf.
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COMPETITION LAW AND CARTEL

Competition is not defined in law but is generally understood to mean the process of rivalry to
attract more customers or enhance profit or both. The Competition Act, 2002, deals with anti-
competitive agreements in section 3. The provisions specifically deal with cartels and distinguish
between horizontal and vertical agreements. While horizontal agreements are dealt with under
presumptive rule, i.e. appreciable adverse effect on competition is presumed, vertical agreements
are dealt with on a rule of reason basis, i.e. appreciable adverse effect on competition needs to be
proved by the Competition Commission of India.

Undoubtedly, the CCI is better equipped than the erstwhile MRTP Commission to detect and
punish cartels as the Act as it defines “cartel” and thus, ambiguity as to its scope does not
subsist anymore and it does not entitle the charged party to claim and avail of the benefit of
all or any of escape valves enshrined in the repealed law, it also provides for a leniency
programme for a member of a cartel to defect and make true and full disclosure (corresponds
to concept of approver to bust conspiracy in criminal law), and mandates advocacy to create
awareness and build strong competition culture and encourages public to submit information
fearlessly by ensuring confidentiality.

IRONICALLY OF PRICE PARALLELISM

The most crucial ingredient of cartelisation behaviour is collusive manipulation of prices by the
competitors. A mere simultaneous movement of prices, especially for homogeneous products, is
not by itself sufficient to prove a cartel7. Sometimes manufacturers raise their prices to match the
leading players. Such a practice cannot be termed cartelisation. If a given competitor is placed in
a price leadership position, then, if the price leader alters the price of its goods or services for
reasons such as an increase in the cost of production or changes in the demand and supply
position, most of the other competitors may follow suit. This cannot be said to be illegal because
the behaviour of market participants is not based on any prior discussion or understanding.

In almost all countries, including India, more evidence is required than just parallel pricing to
support a cartel prosecution. US and European courts have adopted a “parallelism plus”

7
Re Alkali and Chemical Corporation of India Ltd, Calcutta and Bayer (I) Ltd, Bombay RTPE 21 of 1981, Order
dated 3/7/1984, Association of State Road Transport Undertakings v. Kar Mobiles Ltd, 2002 CTJ 433 (MRTP).
 MAHINDRA & MAHINDRA-NUJS ESSAY COMPETITION

approach, which requires the existence of “plus factors” beyond merely parallel behaviour by
firms in order to prove that firms have indulged in cartelisation behaviour.

HARM CAUSED BY CARTELS

There is worldwide recognition and consensus that Cartels harm consumers and damage
economies. Japan has estimated that recent cartels raised prices on average by 16.5 percent. In
Sweden and Finland, competition authorities observed price declines of 20-25 percent following
enforcement action against asphalt cartels. The football replica kits case in the United Kingdom
has resulted in long-term price reduction to the extent of 30 percent following the OFT’s
enforcement action. In Israel, the competition authority observed that prices declined by
approximately 40-60 percent after it uncovered a bid rigging cartel among envelope producers.

Estimates in the United States suggest that some hard core cartels can result in price increases of
up to 60 or 70 percent. Based on a review of a large number of cartels, it is estimated that the
average overcharge is somewhere in the 20–30 percent range, with higher overcharges for
international cartels than for domestic cartels.8

In India too, cartels have been alleged in various sectors, namely cement, steel, tyres, trucking,
family planning device (Copper T) etc. India is also believed to be a victim of overseas cartel in
soda ash, bulk vitamins, petrol etc. All these tend to raise the price or reduce the choice of
consumers. The business houses are affected most by cartels as the cost of procuring inputs is
enhanced or choice is restricted making them uncompetitive, unviable or be satisfied with less
profits. It is in these backdrops that “Cartels” are considered as most serious competition
infringements and supreme evil of antitrust. The 1998 OECD Recommendation proclaimed that
Cartels are “the most egregious violations of competition law”. Further, developing countries are
affected more either due to absence of competition regime or inadequate capacity to detect,
discover and prosecute domestic as well as overseas cartel.

ANTI-CARTEL ENFORCEMENT UNDER INDIAN COMPETITION ACT

The commission is empowered to inquire into activities of cartel. In case the commission is
convinced that prima facie case exists against a cartel, it shall direct the director general to

8
Hard Core Cartel: Third Report on the implementation of the 1998 recommendation © OECD 2006.
 MAHINDRA & MAHINDRA-NUJS ESSAY COMPETITION

inquire and furnish report. Director General for the purpose of inquiries is vested with the powers
of civil court besides powers to conduct ‘search and seizure’. if after inquiry the commission
finds that any anti-competitive agreement was entered into by cartel, it may impose upon each
producer, seller, distributor, trader, or service provider included in that cartel, a penalty of up to
three times of its profit for each year of the continuance of such agreement or ten percent of its
turnover for each year of the continuance of such agreement, whichever is higher. In addition,
the commission under section 27 also has the power to pass, inter-alia any or all of the following
orders: (a) Direct the parties to a cartel agreement to discontinue and not to re-enter such
agreement. (b) Direct that the agreements shall stand modified to the extent and in the manner as
may be specified in the order of the commission. (c) Direct the enterprises concerned to abide by
such other orders as the commission may pass and comply with the directions, including
payment of costs, if any.

CONCLUSION

The availability of explicit definition of ‘Cartel’, incorporation of a leniency programme for a

member of a cartel to defect, the power to impose deterrent penalty linked with profits or
turnover on each member, explicit provisions to exercise jurisdiction in respect of overseas acts
having adverse effects on competition in India coupled with provisions to enter into cooperation
agreement with contemporary overseas competition agencies along with efforts to build strong
competition culture including encouragement to public to submit information by ensuring
confidentiality, coordination with Government Departments & sectoral regulators and by
stressing the need for strong sanctions in view of irredeemable harms caused, the Competition
Commission will be able to effectively combat domestic as well as cross border cartels.
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REFERENCES

1. Document No.TD/RBP.CONF:6/4 of 5th September, 2005 regarding “A Synthesis of

Recent Cartel Investigations”, United Nations Conference on Trade & Development
(UNCTAD).

2. Hard Core Cartels, Third Report on the Implementation of the 1998 Recommendation,
OECD.

3. International Competition Network, Anti Cartel Enforcement Manual, April, 2005.

4. International Competition Network, Working Group on Cartels, Report, Defining Hard

Core Cartels Conduct Effective Institutions Effective Penalties, 6-8 June, 2005.

5. Mehra Madhav, Competition Law: an instrument for inclusive growth, International

academy of law, MM Publisher, New Delhi, 2009.

6. Rab Suzanne, Indian Competition Law: an international perspective, Wolters Kluwer

(India) Pvt. Ltd., Gurgaon, 2012.

7. Law of Monopolistic, Restrictive & Unfair Trade Practices by Dr.S.M.Dugar (1997

Edition)