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Combating Cartels: Benefits Of Competition

In economics, a cartel is any organisation of producers or sellers of goods who collude to raise prices by controlling supply, effectively acting as a monopoly. Detecting and castigating cartels
31 Jan 2018 10:55
Combating Cartels: Benefits Of Competition

In economics, a cartel is any organisation of producers or sellers of goods who collude to raise prices by controlling supply, effectively acting as a monopoly.

Detecting and castigating cartels are top priorities of the Fijian Competition and Consumer Commission (FCCC) because of their potential harm to consumers’ welfare and the economy as a whole.

Hard core cartels (when firms agree not to compete with one another) are the most serious violations of the FCCC Act 2010.

They injure customers by raising prices and restricting supply, thus making goods and services completely unavailable to some purchasers and unnecessarily expensive for others.

For the consumers, cartelisation results in higher prices, poor quality and less or no choice for goods and/or services.

Each consequence of cartel is inter related to each other.

When we consider cartel decreasing the competition in the market between the suppliers of same or similar commodities in the market, then the quality and price are bound to get affected in a negative way for the consumers.

The categories of conduct most often defined as hard core cartels are: price fixing, output restrictions, market allocation, and bid rigging (the submission of collusive tenders). One way to hamper the competition and creating monopoly in the market is forming cartels.

Cartels have got adverse effect on competition.

It hampers promotion and sustenance of competition in markets.

It fails to protect the interests of consumers and restricts the freedom of trade carried out by other participants present in the market. It gives the parties to the agreement an undue benefit which helps them to dictate different variables of the market.

There are different kinds of cartels, like an international cartel, which is said to exist, when not all of the enterprises in a cartel are based in the same country or when the cartel affects markets of more than one country. Another form of cartel is an import cartel, which comprises enterprises (including an association of enterprises) that get together for the purpose of imports into the country, where as an export cartel is made up of enterprises based in one country with an agreement to cartelise markets in other countries. By working together, the cartel members are able to behave like a monopolist.

These sorts of cartels not only affect the market of the country they are based but have got the ability to harm consumers of different nations.

Since formation of cartels is an easy process, these cartels can be formed with ease without any intervention as two or more enterprise only have to agree on simple terms to increase the price over a competition level to kill the competition prevailing in the particular market.

This can be done through a formal agreement in writing, agreement which is not legally enforceable, or without any agreement in writing.

 

Further on disadvantages of Cartels

  1. Malfunction of Market Economy Mechanism

Even though it might sound economically sensible in exceptional circumstances to raise prices to improve profits in a distressed industry, the principle applies to limitedly rare cases.

Even though the exceptional cases have positive effects on the economy, it is important not to make the exception a main principle to justify the economic harms that most cartels bring about.

Noticeably, even in the exceptional cases, cartels might do harm by aggravating the evil circulation of under-investments, under-employment, and decreasing demand power for other products with less incentive to invest.

 

  1. Consumers’ Damage

Cartels cause large damages to consumers through fixed prices.

Total harm to consumers consists of consumers’ loss and consumers’ damages.

Consumers who would pay the price determined by market mechanism of price-competition will face higher prices in the market where suppliers collude to set price or quantity.

It has been greed that, unless consumers have market power to decrease the price, consumers’ collective decisions to purchase less of the product at the cartel-determined higher price means an overall loss of consumers’ welfare.

 

  1. Loss of Faith in Social Integrity and Honesty

Besides economic harm, a cartel has a negative influence on social justice.

When such an agreement as usually secret among competitors brings huge profits to themselves, enterprisers tend to be more concerned about their competitors rather than about their consumers’ interests. Social respect toward successful enterprisers and faith in their honesty will be reduced when the public, usually consumers, realises their cartelistic behaviours, which has the effect of transferring the welfare of consumers to enterprisers.

The sneer attitude toward business might result in the loss of faith in the integrity and honesty of the whole society.

 

How to avoid cartels

If you are invited into an arrangement that seems like a cartel, you should seek independent legal advice and notify FCCC immediately on the same.

Remember that if you don’t report suspicious activities to FCCC, others might choose to break ranks and report your involvement to us.

Should FCCC receive any complaint, that complaint would be dealt by FCCC under Section 67 of FCCC Act 2010.

For more information on Fijian Competition and Consumer Commission, please visit our website on http://www.commcomm.gov.fj or find us on Facebook.

Feedback:  maraia.vula@fijisun.com.fj

 

 

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