Cartelization

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Cartelization

• Cartelization is a formal agreement among firms in an industry.

• Cartel members may agree on such matters as prices, total

industry output, market shares, allocation of

customers, allocation of territories, bid-rigging, establishment

of common sales agencies, and the division of profits or

combination of these.combination of these.

• They work together

– Organize And Control Distribution

– To Set Prices

– To Reduce Competition

– To Share Technical Expertise

– To Lower Total Production

– To Raise List Prices.

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Why Cartels are formed?

Economies of Scale

• Standardized products offer consumers price

reductions driven by economies of scale and supplier

substitution effects.substitution effects.

• However a relatively small number of suppliers of

any commodity gives rise to the possibility of price

fixing and collusive behavior.

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Why Cartels exists in India?

• High concentration – few competitors

• High entry and exit barriers

• Homogeneity of the products

• Similar production costs

• Excess capacity• Excess capacity

• High dependence of the consumers on the product

• Cartels exist in an attempt to do primarily two things:

– Have as much control over something as is possible

– To control the price thereof

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Success of Cartels in India

• Even if monetary penalties are imposed, that is not a

deterrent for companies to return back to such malpractices.

• Both the Central and State governments are empowered to

take complaints to the MRTP Commission.

• Not a single case has been filed under the MRTP Act by any• Not a single case has been filed under the MRTP Act by any

government.

• ‘Cease and desist’ orders were issued, which were often

ignored.

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Cartelization in Telecom Industry

Same Hike On Same Day!

• GSM operators Bharti Airtel, Vodafone Essar and Idea Cellular

were allegedly forming a cartel.

• The telecom operators

increased the tariff of theirincreased the tariff of their

local call at Rs 1.20 a minute.

All the three operators revised

the tariff rates on the same

date. All the operators

intimated the TRAI post

revision on same day (i.e.

August 16, 2007).

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Cartelization in Cement Industry

• Prices of cement are kept artificially high.

• An internal investigation by the Monopolies and Restrictive

Trade Practices Commission (MRTPC), revealed cartelization

leading to 'exorbitant' increase in cement prices.

• The government allowed imports from Pakistan to meet the• The government allowed imports from Pakistan to meet the

demand.

• The price of cement sold by Indian co’s were approx. 50%

higher than the landed price of imported cement.

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• Apparently such a high price differential between the

international prices and the domestic prices was a indication that

all is not well within the cement industry.

• The cement lobby raised the issue of Pakistani factories not

having ISI license .

• But the MRTP Commission passed only cease and desist orders,

which have had no penal impact.

• In June 2012, CCI imposed a fine of 6,307 Crore (US$1.15• In June 2012, CCI imposed a fine of 6,307 Crore (US$1.15

billion) on 11 cement companies for cartelization. CCI claimed

that cement companies met regularly to fix prices, control

market share and hold back supply which earned them illegal

profits.

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Cartelization in Petrol

• After carrying out an initial enquiry on the matter, the

Competition Commission of India(CCI) found that ‘there was

no valid reason why OMCs – Indian Oil, Hindustan Petroleum

and Bharat Petroleum – were increasing and decreasing price

of petrol in unison, as the product was already decontrolled’.

• The CCI had written to the petroleum ministry on the issue,

but the ministry said it had no role in deciding the price ofbut the ministry said it had no role in deciding the price of

petrol as it was a deregulated commodity now.

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Tyre Cartelization• The All India Tyre Dealer’s Foundation complained to the

Government that tyre manufacturers in India were colluding in

price and trading malpractices.

• There was a cartel among tyre manufacturers in India based on

economic evidence including

– Price parallelism across the manufacturers related to the net

weighted average dealer price of tyres and the percentage changeweighted average dealer price of tyres and the percentage change

in prices;

– Positive correlation of data involving production, capacity

utilization, cost analysis, cost of sales, margins, etc.

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How to Handle cartels in India?

• In United States and Brazil there are provisions of

imprisonment, which nowhere exist in India.

• Belgium – member of the European Union has this provision

of rewarding cartel whistle blowers.

• Authorities have power to tap phones.• Authorities have power to tap phones.

• Conduct raids to unearth evidence of cartels.

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“When economy slows, Cartelization grows.”

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