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Cartelisation

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.

Adam Smith in ‘The Wealth of Nations’.

Presented by
Deepa Chandrasekar IIPM Gurgaon
Cooperative Oligopoly
 When there are only small number of firms Non
Cooperative & Cooperative behaviour .
 Firms operate in a cooperative mode when they
try to control competition
 They engage in collusion.
 Two or more firms jointly set prices

 Divide the market among them

 Make business decision jointly


What is cartelisation?
 Cartel is an arrangement of independent
firms, producing similar products.
 They work together
 Organise and Control distribution
 To set Prices
 To Reduce Competition
 To Share Technical Expertise
 To Lower Total Production
 To Raise list Prices
Cartels are formed .
 Economies of Scale
 Standardized products offer consumers
price reductions driven by economies of
scale and supplier substitution effects.
 However a relatively small number of
suppliers of any commodity gives rise to
the possibility of price fixing and collusive
behaviour.
Handsome Monopoly Profit

Price Marginal Cost

G
P1
Average Cost

P
E MR=MC

Total Demand
Of the Industry

Marginal Revenue

Q Output
Same Hike On Same Day!

 GSM operators
Bharti Airtel,
Vodafone
Essar and Idea
Cellular for
allegedly
forming a
cartel .
GSM Operators get slammed
for forming cartel
 They all fixed the tariff of their local call at Rs 1.20 a
minute…
 Tariff hike targeted especially at low-end users
indicates the operator’s concern about declining
ARPUs.
 Consumer groups, however, pointed out that the
operators have not given any publicity to the
increase in tariffs to create awareness among
users.
Coincidences……
 The telcom operators
increased 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).
Free to Fix any Tariff
 TRAI refused to intervene in this cartel as
GSM operators are free to fix any tariff for
their services
 “But it can not be mere coincidence” that the
tariff revision by them is of the identical
scale.”
 The MRTPC Bench directed the three
companies to give explanation.
Cartel in union for 17 years

• Prices of cement are


kept artificially high.
• Government warned
that the companies
should work to bring
down the cement
prices.
• Companies
suggested to
Nationalise them.
Cartelisation in cement sector
 An internal investigation by the MRTPC,
revealed cartelisation leading to 'exorbitant'
increase in cement prices.
 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.
Cartelisation in cement sector

 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.
Cartels formed by the Truckers

 Truckers’
strike hit the
nation in late
2008
Cartelisation in Aviation industry

 The Jet-Kingfisher alliance is seen as


one such.
 Though the professed reason for the alliance is
reduce the operational expense
 The outcome could well be the exploitation of
passengers through such means as route
rationalisation and higher tariffs.
Penalised Cartels
 October 2005 The United States Department of
Justice slapped a fine of $300 million on
Samsung Electronics for participating in an
international conspiracy to fix prices in the DRAM
market.

 October 2004 Infineon Technologies AGcompany


was sentenced a fine of $160 million for
participating in the conspiracy to fix prices in the
DRAM market.
The Cartel Attack
 October 2003 The European Commission fined
Aventis €99 million for its alleged involvement
in a cartel alongside four Japanese companies
for controlling price of the sorbates. The five
companies controlled up to 85% of European
sorbates market and met twice a year to set
prices and production quotas.
Why Cartels exists in India?
 The MRTP Act is still the extant competition law in
India, as the Competition Act has not yet been fully
implemented
 It might take at least three years from now for the
Competition Act to come into full swing .
 Competition Commission of India can actually
impose monetary penalties on companies, but it
hasn’t done yet since the commission is not fully
operational yet .
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 government.
 cease and desist’ orders were issued, which were often
ignored.
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 .
 Conduct raids to unearth evidence of cartels.
Thank you

DeepaChandrasekar