This article is written by Anushka Ojha, a third-year student of ICFAI University, Dehradun. In this article, she discusses the Indian law on the cartel, types of the cartel, characteristics of the cartel, why do cartels fail, tools for discovering the cartel.
Concept and meaning of Cartels
In the case of Union of India v. Hindustan Development Corporation, the cartel was an association of producers who, by mutual agreement, attempted to control the production, sale and prices of the product to obtain a monopoly in a particular sector or commodity. This amounts to an unfair commercial practice that is not in the public interest.
The intention to acquire monopoly power may be expressed as soon as such a cartel is formed by some of the producers. Determining whether such an agreement unduly restricts trade depends on the nature of the agreement and the circumstances that led to the inference that the parties intended to limit trade and monopolise it.
“An association of producers, vendors, distributors, merchants or service providers who, by agreement, limit, control or attempt to control the production, distribution, sale or price of or trade in goods or the supply of services. “
In the case of Union of India v. Hindustan Development Corporation, the cartel was an association of producers which, by mutual agreement, attempted to control the production, sale and prices of the product to obtain a monopoly in a particular sector or product.
This amounts to an unfair commercial practice that is not in the public interest. The intention to acquire monopoly power may be expressed as soon as such a cartel is formed by some of the producers. Determining whether such an agreement unduly restricts trade depends on the nature of the agreement and the circumstances that lead to the inference that the parties intended to restrict trade and monopolise it.
Paragraph 2 (c) of the Competition Act 2002 defines cartels:
“An association of producers, vendors, distributors, merchants or service providers who, by agreement, limit, control or attempt to control the production, distribution, sale or price of or trade in goods or the supply of services.
The three essentials of the cartel are as follows.
- The existence of an arrangement or agreement between the competitors.
- The agreement concerns producers, sellers, distributors, traders or service providers, that is to say, that the parties engage in the same or similar trade or service.
- The agreement aims to restrict, limit, control or attempt to control the production, distribution, sale, price or trade of goods or services.
The antithesis of competition is the monopoly, which usually happens when a few producers, instead of competing, meet and form an association or cartel. The monopoly created by the cartels is as such, not conducive to progress. It stunts growth and hampers the improvement of the standard of living of the population.
Cartels are the most egregious violations of competition law and are widely regarded as the most detrimental anti-competitive behaviour on the market today and are banned in most countries. The agreements are part of the agreements considered to have a significant adverse effect on competition. Cartels can occur in almost any sector and may involve goods and services at the manufacturing, distribution and retail levels.
Indian law on Cartel
- In India, the Competition Act 2002, as amended by the Competition (Amendment) Act 2007, prohibits any agreement that causes or is likely to cause a significant adverse effect on competition in Indian markets. Such an agreement is void.
- Agreements within the meaning of the law are explicit or implicit agreements between companies (including professional associations) to avoid competition for prices, products (including goods and services) or customers, but to set prices, limit production and supply, allocate market share or sales. quotas, or participate in collusive bidding or bid-rigging in one or more markets. An important dimension of the cartel definition is that it requires an agreement between competing companies, so as not to compete or restrict competition.
- The agreement aims to raise prices above competitive levels, causing harm to consumers and the economy. Cartelization leads to higher prices for consumers, poor quality and a very limited choice of goods and/or services. All the consequences of the agreement are related to each other. When we consider that cartels reduce competition in the market between suppliers of identical or similar products in the market, quality and price are inevitably adversely affected consumers.
- There are different types of cartels, for example, an international cartel, which would exist when not all companies in a cartel are based in the same country or when the cartel affects markets in more than one country.
- Another form of agreement is an import agreement, which includes companies (including an association of companies) that group together to import into the country, in which an export agreement is made up of companies established in a country. countries and having contracts with other countries. By working together, cartel members can behave like monopolies.
- These types of cartels not only affect the market of the country in which they are based but can also harm consumers in different countries. Since then, forming agreements is an easy process; these cartels can be easily formed without any intervention of national or international laws.
- Since two or more companies only need to agree on simple conditions to raise the price above a level of competition in order to eliminate competition in the market. This can be done by a formal written agreement, an agreement that is not legally enforceable, or without written agreement.
- It is therefore very obvious that any contract prejudicial to the interests of the consumer would be considered illegal and contrary to Indian law, as stated in the law. Any agreement to improve the welfare of consumers by increasing supply, providing storage facilities for surplus products and improving product quality. As a result, any agreement reached by companies for this type of work does not fall within the definition of the cartel because it would not be detrimental to consumers and the economy of the country.
Cartels: Presumed as dangerous
Agreements between undertakings engaged in the trading of goods or the provision of identical or similar services (commonly referred to as horizontal agreements), including cartels, of four types specified in the law, are presumed to have a significant adverse effect on competition and are therefore anti-competitive and anti-competitive empty.
However, the horizontal agreements of the four types referred to above in the previous paragraphs, concluded through joint ventures, are not expected to have a material adverse effect on competition and are excluded from the above-mentioned provisions of section 3 of the Competition Act if they increase the efficiency of the production, supply, distribution, storage, acquisition or control of goods or the provision of services. Agreements other than those referred to in section 3 (3) of the Competition Act, includes as follows.
- Tie-in arrangement.
- An exclusive supply arrangement.
- An exclusive distribution agreement.
- A refusal to deal.
- Resale price maintenance.
Section 46 of the Competition Act empowers the Commission to grant leniency by imposing a lesser penalty on a member of the cartel who provides complete, truthful and essential information about the agreement. The system is designed to encourage members to participate in the detection and search of agreements.
This system is based on the principle that the prosecution of cartels requires evidence provided by a member of the cartel. Similar leniency systems have proved very useful for competition authorities in foreign jurisdictions to successfully prosecute cartels.
The Commission has notified the 2009 Regulation of the Indian Competition Commission (minimum penalty) setting the process, procedure and method of granting leniency to members of the cartel that fall within the scope of the cartel and who become useful to the Commission and helped to eliminate the so-called cartels.
Why do Cartels fail?
Cartels are challenging to maintain because some economists believe that price-fixing cartels are inherently unstable, and at some point, they inevitably come under pressure and collapse. The problem is that cartel members will be tempted to cheat their agreement to limit production. By producing more output than she has agreed to produce.
There are several potential sources of instability for pricing arrangements.
- The drop in demand is creating tension between companies.
- The entry of companies other than cartels in the industry increases the supply on the market and puts downward pressure on the price of the cartel.
- The fact that the government or other regulators illegally set prices ends an agreement.
- Overproduction and over-supply of cartel members nullify price fixing.
Tools for discovering Cartel
Whistleblowing – Competition authorities face difficulties in gathering evidence, as cartel activities take place in closed rooms and conference rooms. It’s a place where a whistleblower is important. Competition authorities around the world are persuading whistleblowers to approach them to give them information about companies that are coming together to form a cartel. However, certain conditions are attached, such that the whistleblower must not be involved in the illegal activity of the cartel.
Cases on Cartel
A complaint has been received that some of the largest companies in northern India have formed a cartel to raise prices for their products. The prices of chlorine gas and hydrochloric acid increased by 277% and 200% respectively in six and four months in 1992. This resulted in an agreement between the parties to create an artificial shortage in order to increase the prices of their products. Since raw material prices, namely sodium chloride and electricity, remained virtually unchanged, this would be a fictional crisis created to take advantage of the market and increase the prices of their products.
Price Parallelism vs. Price Fixing
In Alkali & Chemical Corporation of India Ltd. And Bayer India Ltd, the companies were engaged in the manufacture and sale of rubber chemicals and held a dominant share of the total market for these products. Charges were laid against them, raising them to identical prices five or six times on or about the same date. However, there was no direct evidence available behind the price increase.
Conclusion and suggestions
For detecting a cartel, the competition authority should have some extraordinary power, such as:
- Most agreements are formed secretly. The competition authority should, therefore, have certain special characteristics to detect an agreement, that is, it has something more than a general investigation agency has.
- More units of the competition authority should be formed, with a special wing for the detection of cartels.
- More importance should be given to the whistleblower system.
- Hefty penalties should be imposed, with the criminalisation of those involved in an agreement.
- The focus should be on the presence of any arrangement on the market and not on the consequences of such a mechanism for the economy.