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Cartels Conduct, Restricted Trade Practice

This week’s article continues on cartels. It highlights the importance of conducts that are restricted under the Fiji Commerce Commision Decree(2010) and the types of cartels.   What is Cartel
06 Jun 2016 10:36
Cartels Conduct, Restricted Trade Practice
Bobby Maharaj, Commerce Commission

This week’s article continues on cartels. It highlights the importance of conducts that are restricted under the Fiji Commerce Commision Decree(2010) and the types of cartels.

 

What is Cartel

Cartel involves two or more competing undertakings, businesses or individuals that agree to act together instead of competing with each other. This agreement is designed to drive up the profits of cartel members while maintaining the illusion of competition. Cartel conduct is the most serious form of restrictive trade practice and a breach of competition law under the Commerce Commission Decree 2010. Industries characterized by a few firms provide the ideal opportunity for formal or informal collusive agreements in which firms agree not to compete against each other. The conditions for cartel arrangements are, but not limited to the following:

 

  • Few competitors in the sector or industry
  • Similar products being sold
  • Communication channels already existing between competitors

 

Besides increasing the cost of goods and services, cartels are associated with low labour productivity and low incentives to innovation. Community, consumers, businesses and even governments can be forced to pay higher prices for goods and services. Cartel also distort economic markets and serve to slow innovation, after all, companies charging abnormal prices (similar to monopoly prices) have little incentive to spend money on research and development.

 

Types of Cartels

n Price Fixing

Takes place when competing businesses make an agreement that has the purpose or effect of fixing, controlling or maintaining the price of goods or services. This may be in the form of agreed selling or buying; agreed minimum prices; agreed formula for pricing or discounting goods and services; agreed rebates, and allowances or credit terms. Such agreements may be in writing but are often informal and verbal. Signs of price fixing agreements include:

  • Large price changes by competing firms who sell similar products. The price changes are usually of similar amounts and occur at the same time;
  • Evidence proving that firms coordinated on price of products, the amounts to be sold, where or to whom the products should be sold;
  • Statements made by firms regarding their inability to sell a product because of its agreements with other firms indicating that the latter would be the supplier of the product;
  • Similar explanations used by rivals in announcing price changes;
  • Price movements which over time reveal a constant and systematic leader/follower scenario, that is difficult to explain in the absence of contracts; and

n Market Sharing

Refers to agreements between competitors that split up the market so that the participants are privileged from competition. Such agreements include allocating customers by geographic area; dividing contracts within an area; agreeing not to compete for established customers.

Agreeing not to produce each other’s products or services; and agreeing not to expand into a competitor’s market. The key is that competitors agree among themselves how the market will operate, rather than allowing competitive market forces to work.n Controlling the output or limiting the amount of goods and services available

Occur when participants in an industry agree to prevent, restrict or limit supply.

These can occur in the form of production or sales quota arrangements and has the effect of inflating prices in the market. The purpose is to create scarcity in order to increase prices (or counter falling prices) while also protecting inefficient suppliers.

n Rigging Bids

Is where two or more competitors agree they will not compete genuinely with each other for particular tenders, allowing one of the participants in the agreement to win the tender.

Collusive tendering is a dangerous form of anti-competitive behaviour, some of the common bid rigging tactics are:

  1. Cover bidding – competing businesses choose a winner while the others deliberately bid over an agreed amount, which ensures the selected bidder has the lowest tender and also helps to establish the illusion that the lowest bid is indeed competitive;
  2. Bid suppression – a business agrees not to tender, thus ensuring that the pre-agreed participant will win the contract;

iii.          Bid withdrawal – a business withdraws its winning bid so that a competitor will be successful instead;

  1. Bid rotation – competitors agree to take turns at winning business, while monitoring their market shares; and
  2. Non-conforming bids – businesses deliberately include terms and conditions that they know will not be acceptable to the purchasers, ensuring that they will not win the bid and that the pre-agreed business will be successful.

 

Why are Cartels Illegal?

Cartels are considered to be illegal because they lead to a significant restriction of competition and it makes it a criminal offence for business and individuals to participate in a cartel. Cartels are immoral and illegal because they not only cheat consumers and other businesses; they also restrict healthy economic growth by:

  • Increasing prices for consumers and businesses through artificially inflating input and capital costs across the supply chain, including the cost of buildings and equipment rent, interest and decreased opportunities over the life of an asset;
  • Increasing taxes and reducing services by targeting the public sector and extracting extra costs paid for by all consumers through rates and taxes; and
  • Decreasing infrastructure by rigging bids in public infrastructure projects which inflates costs and ultimately reduces the public sector capacity to invest in beneficial projects.

 

Drawback of Cartels from a Business Perspective:

 

The drawback of cartels from a business perspective includes the following, but not limited to:

 

  1. Lack of stability: Cartels are voluntary associations and do not have complete control over their members.

Members may exit a cartel any time if they feel that their interests are not being served.

Therefore they are weak and lack stability.

  1. Protection to inefficient firms: There is no incentive for efficiency. As cost plus pricing is followed, member units are assured of profits. Firms lack the incentive to improve efficiency and reduce costs.
  2. Creation of monopoly: Cartels lead to creation of monopoly.

Such monopolies adversely affect the interest of the consumers by resorting to restricting output, creating artificial scarcities, producing low quality products and selling them at high cost, lack of innovation etc.

  1. Creation of excess capacity:

Encouraged by the high profits earned by the members of the cartel during boom periods.

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