predicting business

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Competition Law Reports [Vol. 1A-224

Apr. 08 - Jun. 08

Last few months evidenced a spurt ofarticles in the print media, mainly thefinancial newspapers and journals, onthe suspected cartelisation in some

select sectors of industry such assteel, cement, tyre etc. and concernshave been expressed over the lack ofaction due to the present status of theCompetition Commission of India,

which continues to await its fulloperationalisation and notification ofthe enforcement provisions of theCompetition Act, 2002 (amended in2007).

The Commission, on its part, under theleadership of its sole Member, VinodDhall (who recently relinquished hisoffice) and a skeletal team of officers,including the author, has completedthe drafting of the implementingregulations. Noticeably, this has beenpreceded by a long consultative process,perhaps, unique in legislative drafting

of such subordinate legislation,involving almost all stakeholders,including Apex Chambers of Industry

Associations like the FICCI, CII,

ASSOCHAM etc. and professionalregulatory bodies like the ICAI, ICSI,ICWAI etc. besides a few internationalexperts. These draft regulations areavailable on the website of theCommission for adoption by the fullCommission as and when constituted.In short, the Commission is nowgearing up to fulfil its mandate of, interalia, curbing anti competitive businesspractices including cartels.

In the absence of specific legalprovisions defining and expressedlyprohibiting cartels amongst sellers,producers or buyers under the MRTP

Act, except as one of the restrictivetrade practice, there is little awarenessabout such business cartels in India.

This article, inter-alia, attempts to

Predicting Business Cartels-Lessonsfor 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 insidiousform of violation wherein the competitors by collusive agreements fix prices,

restrict outflow/supply of products, engage in bid rigging, sharing of marketsetc. 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 CompetitionCommission especially in the absence of full operationalisation andenforcement 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 whileinvestigating allegations of cartels.


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create better awareness on thisrelatively new economic offence anddraws attention to the seriousness with

which it is treated in rest of the Worldand also highlights some factors whichthe new CCI may like to consider whileinvestigating allegations of cartels.

Business Cartels Across the Globe A Curtain Raiser

Of the 106 systems of competition lawsin the world today ranging from theover century old Sherman Act, 1890of USA to the latest Chinese AntiMonopoly Law, 2007 (scheduled to beenforced from 1st August, 2008),prevalent in the six continents and

in all kinds of economies, a singularfeature which is common in all is thatof condemning hard core cartelsthough treatment of such cartels maydiffer. The Indian modern Competition

Act, 2002 (amended in 2007), soon toreplace the archaic MRTP Act, 1969,defines a cartel for the first time andprescribes heavy penalties.

Cartels being agreements formed insecrecy, which may or may not be in

writ ing, between firms in direct

competition with one another in therelevant market are the mostpernicious form of anti competitive

business practices which silentlyresult in super normal profits dueunreasonable increase of prices bythe cartel at the cost of exploitationof the customers of the wholesalersas well as and consumers of theretailers. Business cartels have beenknown to exist in industrialisedcountries for over 100 years now anda huge economic literature and

jurisprudence exists on cartels. In the

European Union, Mario Monti, theformer Commissioner for Competition,once described cartels as cancers onopen market economy 1 and the USSupreme Court has referred to cartelsas the supreme evil of antitrust1. Oflate, the concept of a cartel and inparticular that of hard core cartel

has been used with greater precisionin developed economies.

The fight against cartels was givenincreased priority around the end of1998 after the OECD council cameout with a specific Recommendationentitled Effective Action Against HardCore Cartels in March, 1998. TheRecommendation provided an explicitrecognition of the objectionablecharacter of such cartels as being the(quote) most egregious violations ofcompetition law that injures

Cartels being agreementsformed in secrecy, which

may or may not be inwriting, between firms in

direct competition with oneanother in the relevant

market are the mostpernicious form of anticompetitive business

practices which silentlyresult in super normal

profits due unreasonableincrease of prices by the

cartel at the cost ofexploitation of the

customers of thewholesalers as well as andconsumers of the retailers.

1. Quoted by Richard Whish in his article Control of Cartels and other Anti CompetitiveAgreements in the book Competition Law today by Vinod Dhall (2007) , OxfordUniversity Press (Pp. 41).

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consumers in many countries byraising prices and restricting supply,thus making goods and servicescompletely unavailable to somepurchasers and unnecessarilyexpensive for others.2 Subsequently,the OECD published a Report onLeniency Programme to Fight HardCore Cartels in 2001 followed by theReport on the Nature and Impact ofHard Core Cartels and Sanctionsagainst Cartels under NationalCompetition Laws in 2002. In thissubsequent report of 2002, the OECDnoted that the world wide economicharm from cartels is very substantial,though hard to quantify: it was

estimated that 16 large cartel casesinvestigated in the US may havecaused harm in excess of US $ 55

billion.3

The European Commission has alsomade great strides in fighting cartels.Between 2000 and 2005 theCommission adopted 38 infringementdecisions i.e. an average six decisionsper year, targeting both European and

worldwide cartels, and imposed totalfines of Euro 4.4 billion. TheCommission under its new

Commissioner Ms. Neelie Kroes hasdeclared a crack down on cartels bysetting up a dedicated cartel bustingdirectorate within the DG Competition,

besides revising it s Leni encyProgramme, as a tool to detect anddestabilize hard core cartels, whichresulted into the ECN Model LeniencyProgramme published in September,2006,(which was useful in drafting thedraft leniency regulations adopted bythe Competition Commission of India).More recently, in April 2007, the

European Commission imposed a fineof Euro 273 million for operating acartel on the beer market inNetherlands. The brewers of theNetherlands co-ordinated prices andprice of beer increased considerablyduring at least 1996 and 1999. TheBelgian based In Bev group alsoparticipated in the cartel but receivedimmunity from payment of fines byproviding decisive information aboutthe cartel under the CommissionsLeniency Programme. Continuing thetirade, The EC, in November, 2007,

busted an international cartel thatfixed prices of flat glass used in themanufacture of glass products such

as double glazing and safety glass. Thecartel involved famous manufacturersof glass i.e. Asahi of Japan, Guardianof the US, Pilkington of the UK andSaint Gobain of France. TheCommission established that in 2004and 2005 the representatives of thesecompanies met covertly in hotels andrestaurants around Europe andconspired to increase prices for flatglass, discussing both the amountand the timing of price increase. Thesecompanies drew huge profits from

selling flat glass at artificially inflatedprices at the cost of not only down the- line companies, which used flatglass as the input for making productssuch as double glazing and safetyglass but also ordinary Europeanconsumers, who had to pay the highprices for the glass used in buildings,private homes and apartments. TheEC imposed fine of Euro148 million onGuardian, 140 million on Pilkington,and 133 million 900 thousand Euroson 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 CompetitiveAgreements in the book Competition Law today by Vinod Dhall (2007) , OxfordUniversity Press (Pp. 42-43).


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Japan was fined with a reducedpenalty of 65 million Euros forproviding substantial co-operation tothe EC during investigation under itsLeniency Programme.

Cartels are equally or rather moreharmful in developing economies

where the rate of detection and quickjudicial punishments may not matchwith those in the developed world.Mexico and Colombia are classicalexamples where the ill famed drug cartelmafia are known to be constantlyengaged in a state of drug war forcingthe newly elected government ofMexican President Felipe Calderon totreat it as military as well as criminal

challenge. The gangland typeexecutions by Mexican gangs havereportedly increased dramatically since2001 and in 2007 an estimated 2,500executions took place.4 In Argentina, in

July, 2005, 5 Cement companies wereprosecuted for a cartel that lasted for18 years from 1981 to 1999. Thecompanies agreed on a market divisionthat was closely monitored by theirtrade association. The cartel members

were fined US $ 107 million, the largestantitrust fine in the nations history.5

In Brazil, in 2005, CADE, thecompetition authority of Brazil, foundcartels in relation to Pharmaceuticals,Steel and Crushed Stone. Heavy finesare likely to be imposed.5 In SouthKorea, in May, 2005, the Fair TradeCommission of South Korea fined KTCorporation with a record fine of Korean

Won 115.9 billion (about US $ 115million) for price collusion in broadbandinternet and landline telephoneservices two small rivals,Hanarotelecom and Dacom Corp. This

is the largest fine imposed in SouthKorea against a single company.5 InSouth Africa, the Competition Tribunal,inquired into an alleged cartel of fourairline companies that had conspiredto announce a fuel surchargesimultaneously in May, 2004. On the

basis of cooperation extended by oneof these companies to provide usefulevidence to the Tribunal against thecartel under the leniency programme,the Tribunal established the chargeand the remaining three companies

were recommended to be fined up to10 per cent of the total turnover of eachof them.

In the developed economies, some ofthe other famous cases of internationalcartels are the (i) Lysine cartelcase inUS, in which two Japanese, two South

Korean and one US Company agreednot to compete on price. As a result,price of lysine, an amino acid thatstimulates growth, rose on account ofcollusion from 68 cents per pound to98 cents in 1990 and continued at thatlevel until detection in 1995. In this caseevidence was collected by Departmentof Justice with the assistance of FBI

which included documents/transcripts of secretly recordedconversations; (ii) The InternationalVitamins Cartel case, in which all

Cartels are equally or rathermore harmful in developingeconomies where the rate ofdetection and quick judicial

punishments may notmatch with those in the

developed world.

4. Article Mexicos Cartel War: Calderon in the Cauldron by Austin Bay. Available athttp://www.realclearpolitics.com/aerticles.

5. Quoted by Richard Whish in his article Control of Cartels and other Anti CompetitiveAgreements in the book Competition Law today by Vinod Dhall (2007) , OxfordUniversity Press (Pp. 47-49).

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leading manufacturers of vitaminslocated in Belgium, Canada, France,Germany, Japan, the Netherlands,Switzerland and the United States,including the famous Hoffmann-laRoche AG and BASF of Germany,Rhone-Poulenc of France whichdeserves a special mention. TakedaChemical of Japan formed a carteldividing the world market and fixingprices of different types of vitaminsduring the 1990s. The cartel operatedfor over 10 years from 1989 to 1999 and

was later prosecuted with the help ofRhone-Poulenc of France after merger

with Aventis in 1999, which soughtleniency and co-operated with US

authorities. This cartel involved 13Pharmaceutical companies, sixEuropean and seven Japanese andcovered all major vitamins consumedthe world over forming the so calledcartel of alphabet soup Vitamin A toH. The overcharge on vitamins imports

by 90 economies during the years 1990to 1999 was estimated to be US $ 2709.87 million, which is an underestimateof the total overcharges made in all

vitamins transactions during theduration of the cartel. Meetings of the

cartel members took place mostly inSwitzerland and were shown as budgetmeetings ostensibly for the purpose offreezing the market shares at 1988level. During the investigation, Rhoneprovided lot of documents and got 100per cent lesser fine (of Euro 1 million);BASF and Roche pleaded guilty and

were fined US $ 225 million and 500million respectively. Total fine collectedexceeded US $ 1 billion in the US alone.

Two senior most execut ives ofHoffmann-la Roche pleaded guilty and

served four of five months prisonsentences. Similarly, Takeda, Eisai andDaiichi also pleaded guilty and paidfines totaling $137m whereasRhone-Poulenc was grantedconditional immunity for co-operating

with the Department of Justice (DOJ)of US. (iii) The Lombard Clubcase in

which the European Commissionimposed fines totaling Euro 124.26million on eight Austrian banks (theLombard Club) for their participationin a wide ranging price cartel whichextended to all banking products andservices and the member banks fixedinterest rates for loans and savings forprivate and for commercial customers

with the object to avoid competition ininterest rates. The minutes ofmeetings, memoranda, records oftelephonic conversations,correspondences unearthed a networkof cartel committees (e.g. Lending

Rates Committees, the Deposits RatesCommittees, etc.) (iv) The AuctionHouses Cartel involving the famousauction houses, Christies andSothebys of UK, which were found to

be involved in a collusive agreementfixing trading terms. The purpose of thecartel was to reduce the fiercecompetition between them that haddeveloped during the 1980s and early1990s. The European Commissionfined Sothebys with Euro 20.4 million

which was six of its world wide turnover.

This fine included 40 reduction for itsco-operation in the investigation.Christies, on the other hand, escapeda fine being the first to provide crucialevidence to the Commission under itsLeniency Programme.

Cartels Cases Investigated inIndia

In the absence of sound legalprovisions under the MRTP Act underthe MRTP Commission (MRTPC), thereare only three reported cases of cartelin India, so far. (i) The Soda Ash Cartel,in which the American Natural Soda

Ash Corporation (ANSAC) comprisingsix American producers of soda ashattempted to shift the consignment ofsoda ash at cartelized price to India.


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Though the MRTPC, based on theANSAC membership agreement, heldit to be a prima facie cartel and grantedinterim injunction in exercise of itspowers under Section 14 of the MRTP

Act, but this order was set aside bythe Supreme Court, inter alia, on theground that section 14 of the MRTP

Act did not give any extra territorialjurisdiction to the MR TPC. Thislacuna in law has now been removedas Section 32 of the Competition Act,2002 confers extra territorial

jurisdiction to the CCI in respect ofsuch anti competitive agreements,

which though executed outside Indiamay have an effect on competition in

the relevant market in India. (ii)Trucking Cartel case, of 1984, involvedmembers of the Bharatpur TruckOperators Union and the Goods TruckOperators Union, Faridabad, whichcolluded to fix freight rates individually.(iii) The Cement cartelcase, involving40 manufacturers of cement, initiatedin 1990 and fixing of prices of cementthrough the Cement Manufacturers

Association (CMA) was proved recentlyin December, 2007 before the MRTPC.In both these cases MRTPC could only

pass a cease and desist order.However, unlike the MRTPC, the CCImay not be helpless in imposing heavyfines as the Competition Act, 2002prescribes very heavy penalties underSection 27(b).

Factors Facilitating or HinderingCartelization or AgreementsBetween Business Rivals toCollude

Ironically, the existence of a free market

economy by itself does not restrain theexistence of cartels or such other anticompetitive business practices. Theexample of large international cartels,detected by the competition authoritiesin the European Union and the US, the

citadels of free market economy,substantiates this argument. Theavailable competition literature oncartels suggests that there are three

broad features of a market, whichmakes it easier for the firms to reachan agreement to collude to fix prices orotherwise avoid competition betweenthem. The foremost being the elasticityof demand. In markets such as oil andgas, cement, steel, power and otheressential products linked to theautomobile or construction sectors,

where the demand is inelastic,meaning that there are no substituteproducts available and increase inprice will have no effect on the demand,

there being greater scope for hugeprofits by price rise, there is always achance of such collusive behaviorsamong the firms. The second importantfactor is the level of competition in themarket. The fiercer is the competitionand lower is the prices, in absence ofcartel, the greater are the likely benefitsfrom setting up of a cartel. The airlinesector with a large number of privateplayers competing with one another foreach priority route or on favored timingsin a busy route such as between

metropolitan cities could be anexample. The third factor is the barriersto entry in a given market, which isagain linked to the level of competition.If there are low barriers to entry orexpansion in a given market and themarket is open for such entry by a newplayer or expansion of capacity byexisting players, it will be difficult tosustain a cartel as any new maverickplayer with better efficiencies or lowmarginal costs can undermine thecartelized price. Retail consumer

sectors such as those of readymadegarments, handicrafts etc. could beexamples of such situation.

It may be important to note that whileit may be easier to form a cartel, it may

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still be difficult to sustain a cartel forlong for reasons which are interestingto note. The first being, an inherenttendency amongst each member of acartel to derive maximum benefits bycheating on the other cartel membersi.e. by undercutting the cartel price. Ifsuch cartel member is more efficientthan other members i.e. have lowermarginal costs, greater would be the

bene fi t of such cheat ing . Suchcheating will also be easier in case thecartel is between firms making manyproducts or brands and operatingsimultaneously in a large number ofgeographic markets. A large numberof firms in a given market also facilitate

such cheating as the detectionbecomes difficult. The second reasonis the likelihood of the cheating beingdetected by other cartel members. Onsuch detection, the cartel either fails

by itself or clue about the same isinvariably given by a victim of suchcheating to competition authoritiesleading to the detection and successfulprosecution of such cartel by theauthorities. The leniency programmeof competition authorities comes as ahandy tool for such defectors to

mitigate their likely punishments.Detection of cheating is also facilitated

by price transparency, small numberof firms, homogenous products andpredictability of demand. The thirdreason is the extent of punishmentthat other members of the cartel canimpose on the cheater firm.Punishment by the cartel usuallyleads to the restoration of thecompetitive pricing by other cartelmembers thereby reducing the benefitof the cheater firm. This again

depends upon three factors viz.availability of spare capacity with theother members, the speed with whichthe punishment is resorted to and thenumber of markets in which it can beenforced upon the cheater firm. The

punishment also may provide for theother firms to compete in the exclusiveterritory of the cheater firm. The longerthis punishment can be sustainedagainst such cheater firms; stronger

will be the deterrence against suchcheating.

Apart from the above broad reasonson which the sustainability of cartelslargely depend, factors such asfrequent interaction among firms

whether through trade associationsor otherwise, institutional links

between firms such as crossownership or cross licensing, multi-market interactions between firms,markets with low fixed cost, small,regular and predictable demand by

buyers, symmetries in costs andcapacities of firms, production ofsame quality goods, homogeneity ofproducts and absence of buyer powerand practices that help companiesto observe their competitors pricessuch as resale price maintenance,meeting the competition clause etc

also facilitate the formation ofcartels. On the other hand cartels aredifficult to be sustained in innovativeor networking markets. Inconclusion, it can be said that

whether an industry can become

It can be said that whetheran industry can become

cartelized or not depends onhow great the incentives arefor the firms in the industry

to form a cartel and howsustainable the cartel is.

The incentives to create acartel depend on the

difference between theprofitability of the firms in

the presence of a cartel andin the absence of a cartel.


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cartelized or not depends on howgreat the incentives are for the firmsin the industry to form a cartel andhow sustainable the cartel is. Theincentives to create a cartel dependon the difference between theprofitability of the firms in thepresence of a cartel and in theabsence of a cartel. A sustainabilityof a cartel, in turn, depends whetherthe incentives of the firms to cheaton the cartel agreement outweigh thelikelihood of the cheating beingdetected and punished. At the sametime, the supply side responses bynon cartel members can underminethe cartel especially where the entry

in a market is easy or it is easy fornon cartel members of the industryto expand their output in responseto the cartel members raising theirprices, making the cartel no longersustainable. In this way the supplyside responses by non cartelmembers can neutralize a cartel

which can also be described as theresponse of the market forces.6

Anti-cartel policies

The adoption of policies both ex ante

as well as ex post, can affect theprobability of formation of a cartel inthe sectors where such possibilitiesexist due to the market structure itselfand to the detection thereof by makingits sustainability difficult for the cartelmembers. Examples ofex anteanticartel policies are (i) issuing fewerregular orders and moving to a fewirregular large orders, (ii) prohibitionof pricing rules such as resale pricemaintenance, (iii) reducing crossownership between companies, (iv)raising the level of punishment, either

by increasing the fines or makingcartel a criminal offence and lastly (v)establishing a creditable competitionauthority, like those in EU, USA,

Australia to signal that cartels will bedetected and punished. Examples ofex postanti-cartel policies could beadoption of sophisticated investigatingtechniques to search for hardevidence of collusive agreements,giving strong legal powers for searchand seizure to competition authoritiesand introducing a modern leniencyprogramme to encourage members ofcartels to come forward by whistle

blowing and having a correspondingimmunity programme.

A Word of Caution

There appears to be somemisconception that firms making highprofits must be involved incartelization. This may not be alwaystrue as the high profits may be due to

better efficiencies or other marketfactors such as sudden increase indemand etc. However, there are noguidelines available even ininternational competition literature todetermine when can profits be

considered as too high, except,perhaps, the UK OFT guidance onAssessment of Market Power whichsuggests that the following conditionsthat need to exist before a firm can beheld to be making excessive profits inanti competitive sense: (a) profitshould be substantially above the costof capital; (b) on a persistent basis; and(c) without any evidence that entry islikely to undermine these profits in themedium-term.7 Similarly, excessivepricing is by itself no proof ofcartelization 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)

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8. Section 4(2) of the Competition Act, 2002

* The author is the Additional Registrar in CCI. Views are personal. Comments may besent on [email protected].

anti competitive violation under theCompetition Act, 2002, though it may

be considered as an abuse of dominantposition as an unfair price under the

Act.8 In the United States a high pricecharged by a monopolist is notconsidered anti-competitiveper seandis left for the Courts to decide. TheEuropean Union has, on the otherhand, taken an interventionistapproach and condemns excessive

pricing as an exploitative abuse..This is similar to the provision of theIndian Competition Act. But nowhereexcessive pricing is linked tocartelization which is primarily an anticompetitive agreement between directcompetitors to collude to fix pricesartificially which may appear to beexcessive to a common man but arenot really so in the competitionliterature.

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