This article is written by Sehaj Sofat who is pursuing a Certificate Course in Competition Law, Practice and Enforcement from LawSikho.
Table of Contents
Introduction
A cartel is a group of almost similar individual companies which, instead of competing with other corporations in the market, enter into collusive agreements engaging in activities such as price fixation, fixing the production or supply of certain products or dividing the market share or customers between/amongst themselves. Such members are called cartel members wherein they rely on each other and work according to the previously agreed upon terms and conditions amongst themselves.
Such an arrangement reduces the incentives which companies desire while competing with each other and at the same time hinders the companies’ willingness to provide better or new products or services at competitive prices to the consumers, which in turn affects the consumer who have to pay more for lesser quality. The competition law jurisprudence across the jurisdictions in the world agree that the existence of cartels will lead to deterioration of the competition amongst the companies and hence negatively impact consumer welfare.
However, the question arises as to what conduct of companies constitutes a cartel? In majority of jurisdictions, fixing of prices of the products/services, influencing production/supply of goods according to agreed upon terms and conditions, distributing market areas and bid-rigging amongst a group of companies; fall under the ambit of cartelization. But different jurisdictions treat a specific kind of arrangement of cartel differently.
For example, in India and Malaysia, limiting technical investment and development would amount to formation of a cartel. Russian definition of cartel covers agreements refusing to enter into contracts with particular sellers or buyers. In Brazil, the activities covered under the notion of cartels involve the promotion of uniform or coordinated commercial behaviour among the competitors. In Israel, cartel arrangements include agreements between competitors whereby a restriction on the profit to be made has been agreed upon amongst the competitors.
Thus, buyer’s cartel essentially refers to those companies or firms which enter into collusive agreements whereby they either fix the purchase prices of certain commodities or determine and influence the supplies.
Types of cartel
- International Cartel: When the companies (members of the cartel) in a cartel belong to different countries domiciled under more than one government or when a cartel formed is affecting market (demand/supply/prices) of more than one country, such cartels are referred to as international cartels.
- Import Cartel: It consists of agreements entered into by companies which gets together for the purpose of determining the aggregate quantities of imports of certain commodities into the country. Further, it would also include in case such companies involved have fixed a particular source of supply of a commodity or agreed upon a fixed price which such member companies would be paying for the imports.
- Export Cartel: This cartel is made for the companies based in one country with an agreement to cartelize in different countries. Considering the effects of activities of such an export cartel is not felt in the domestic markets, such export cartels are less sought after by the governments in their own jurisdictions and also conferred exemptions in some cases.
Indian scenario
The Competition Law Review Committee (“Committee”) in India recently suggested the inclusion of other kinds of cartels such as ‘buyers cartel’ and ‘hub & spokes cartels’. The Committee also proposed that the term ‘buyer’ be included in the definition of ‘cartel’ in Article 2(c) of the Competition Act, 2002 (“the Act”) in accordance with the decisional procedure of the Competition Commission of India (“CCI”) in order to ensure that it is detailed.
However, since the implementation and extensive expansion of competition law, the use of buyer power has become increasingly conscious and the successful performance of Indian markets have raised little concern. The Act was adopted specifically to provide a better framework for dealing with growing problems relating to anti-competitive practices. However, it was modified and replaced from the Monopolistic and Restrictive Trade Practice, 1969 (“MRTP Act”), because it was time-consuming and inefficient as numerous escape routes were available for the companies to control the market forces.
The legislature had not neglected the buyer’s cartel and instead focussed on seller-oriented cartel arrangements to identify any anti-competitive practices under the ambit of cartel. However, the need was felt to legislate such provisions that would ensure a comprehensive framework to avoid cartels impacting competition in the market As a result, the Draft Competition Amendment Bill (2020) (“Amendment Bill”) of the Competition Act, 2002 provides for the inclusion of buyer’s cartel in the definition of cartel under.
In the market arena, the buyers’ group is distinct from the buyer’s cartel and is prima facie not illegal. There is a minor difference between the buyer’s group and the buyer’s cartel. The buyers’ group uses a combined purchasing power in theory, in order to gain volume or desired discounts in purchasing, using or reselling goods/services, while the only objective of a buyers’ cartel is the establishment, allocation, association and utilization of buyer’s power for the purpose of controlling and influencing competition in the market, especially by overpowering the sellers. But the Indian courts find it difficult to interpret “buyers” in such light while carefully examining the current concept of a cartel in the Act,2002 which includes manufacturers, dealers, traders or service providers.
There are different ways that the CCI has considered and punished cartels as having an adverse effect on competition in Indian markets. However, certain instances where the CCI may have taken effective action against buyer cartels are known as missed opportunities. In the first case of India Glycols, the joint appointment of the oil marketing firms concerned, and the supposed arrangement of them to procure ethanol at a fixed price, was argued before the CCI, which was in violation of Section 3 of the Act, 2002.
But this argument was refused on the ground that the price was fixed by the Cabinet Committee on Economic Affairs, Government of India. In addition, allegations of anti-competitive practices were levelled against the buyers in the case of Pandrol Rahee. Ltd. vs. Delhi Metro Rail Corporation and Ors where the CCI refused to hold the buyer’s responsible stating that the scope of purchasing is not within the ambit of Section 3(3) of the Act… It further observed that, under Section 2(x) of the Act on the production, delivery, distribution, storage or control of products, the buyer’s aspect would not be protected by the concept of “Trade”.
The courts in the United States, however, recognize the buyers’ cartel as anti-competitive. Therefore, any such agreement entered into between the buyers is illegal, whereas in India, the existing legislation has restricted the court’s understanding of the provision to the definition of cartel under the Act, 2002. In the light of the aforementioned gap, the Competition Amendment Bill, 2020 has proposed the inclusion of the definition of ‘buyer’s cartel’ as well as ‘hub and spoke cartel’, within the ambit of the cartel under the Act, 2002.
Other Jurisdictions
United States
The seller cartels, and their anti-competitive consequences, historically have been the focus for the antitrust system in most parts of the world. The buyer’s side of the market, which shows increasing instances of buyer cartel formation, indicates the potential for competing buyers to enter into such predetermined price allocations.
Buyer cartels include a big bunch of competitors that focus on the market’s input side and try to remove competition therein by fixing the price of purchase of the products/commodities or by regulating the actions of the supplier’s purchases. Such cartels could lead to predatory buying, which means that the groups formed via collusion buy high-price inputs to push the competitors out of the market. The supplier could also give such buyer’s cartel more favourable terms than those usually offered. Such collusion tends to deter suppliers from investing in innovation, though studies indicate that bulk orders may provide incentives for the business to enter the market through organized behaviour.
Buyer cartels are especially difficult to detect for antitrust authorities, in part because, while seller cartels generally influence both customers and competitors’ welfare, buyer cartels do not have a similar effect. The concept of customer welfare comes into the picture in the sense that they earn the rewards in the form of reduced prices to the end-users. Furthermore, a buying group is always hard to differentiate from a buyer’s cartel. A simpliciter buying group (especially the small buyers) that establishes a joint purchasing structure will potentially allow member organizations to make savings in their size and benefit from reduced transport, warehousing storage costs etc.
While this is so complicated, some U.S. courts have penalized buyer cartels for predatory buying. Such sales were treated similar to that of predatory seller price even if the monopsonic conduct of the purchasers during this predatory era is not inherently injurious to the customers, with the view that the misallocation of resources and the subsequent manipulation of the market input side, may itself be an anti-trust problem, regardless of whether the transaction is completed.
European Union
Spill-over cases vs. purchase price fixing
Cases of collusion include an intentional fixing of purchase price by the buyers and the alliance formed by the buyers which leads to spillover affects. Such cases which do not reflect any affects under the theory of harm based on the principles of consumer protection must be necessarily excluded.
For example, the Directorate General of European Commission (“DG COMP”) opened an enquiry into the potential collusion between two French retailers in an alliance. The (“DG COMP”)stated that ‘Casino’ and ‘Intermarché’ have gone beyond the intent of their partnership and have committed themselves to anticompetitive conduct. Specifically, the DG COMP will research whether Casino and Intermarché’s efforts in improving their shop networks and pricing policies for customers have been organized.
German long steel
One most recent example of the seemingly pure case for the price-fixing of the purchases included the German car manufacturers’ decision to penalize the German car manufacturers EUR 100 million on scrap alignment and alloy surcharges, which form a part of the purchase price of steel. The statement released explained that the aforementioned surcharges were not negotiated individually with the suppliers which led to elimination of price competition.
Car batteries
The General Court in Recyclex and Others upheld the most recent ruling by the European Commission on the purchase of price collusion. Under normal market conditions, when demand is greater than supply, recycling companies compete as buyers and thus tend to provide high enough rates to attract the required supply of scrap batteries. In the present case, the parties coordinated pricing actions and shared information by agreeing on target rates and high prices to buy from suppliers and reaching agreements with respect to the overall purchase quantities.”
The EU claims that purchasers cannot circumvent the usual dynamic of exempting themselves from higher costs in order for insufficient products to be purchased. This theory appears to consider competition as an end per se, which probably goes against the common opinion that protecting the competitive process is a way to encourage consumer protection or, depending on who you are asking, maximum welfare.
Conclusion
In the market regime, the presence and abuse of buyer power is a major concern. The members of such buyer’s cartels have often been talked about posing a challenge to the current competitive market. This is why cartels under the majority of the jurisdictions are illegal and businesses participating in such cartels are subject to heavy penalties.
There is thus no doubt that the term ‘buyer cartel’ is a misnomer when enforcement and intervention principles are based on the standards of consumer welfare. As competition authorities seldom forget to remind everyone that there is a lack of enforcement tools, it is curious that we are still seeing cases such as car batteries and German Steel which, if anything, seems to do very little for consumers.
Some experts have noted that the CCI’s reservations in buyer’s cartels cases are troubling, for these cartels pose a serious concern for the above reasons. Hopefully, there will be improvement in this respect in the anti-trust case law, both in India and other jurisdictions. In fact, the recommendation of inclusion of the definition of buyer’s cartel under the current Competition Amendment Bill, 2020 is a positive step in the direction of curbing the role of such buyer’s cartels in the Indian markets.
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