Relevance: GS-3: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key Phrases: cartel, market economy, civil offence, price fixing, bid rigging, statutory body, competition commission of India, enforcement policies.

Context

• Recently India’s antitrust body is investigating the trustee units of State Bank of India,Axis Bank And IDBI bank for suspected collusion of fees, triggering a lawsuit by a group representing them.

What is Cartel?

• A cartel is a group of independent market participants who collude with each other in order to improve their profits and dominate the market.
• Cartels are usually associations in the same sphere of business, and thus an alliance of rivals.
• Cartel behavior includes price fixing, bid rigging, and reductions in output.
• Cartels, which involve a group of businesses colluding to keep prices high, have been viewed by economists as a significant threat to the market economy.
• The three essentials of the cartel are as follows.
  1. The existence of an arrangement or agreement between the competitors.
  2. 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.
  3. The agreement aims to restrict, limit, control or attempt to control the production, distribution, sale, price or trade of goods or services.

Ill Effects of Cartelization

1. Adverse consequences to consume
   • When businesses cooperate with each other rather than compete against each other, there could be many adverse consequences to consumers.
   • For one, consumers will have to pay higher prices for goods and services.
   • It should be noted that the way cartels keep prices high is by limiting the supply of their output.
2. Little reason to innovate
   • Further, in the absence of any threat from competition, cartels also have very little reason to innovate or cater to consumers in better ways.
   • In other words, they essentially act like a monopoly.
   • For Example: The Organization of the Petroleum Exporting Countries (OPEC) is the most well-known international cartel that influences the price of oil globally through coordinated efforts to limit supply.

Steps to Deal with Cartelization

1. Strict Laws
   • The usual recommendation to deal with the threat of cartelisation these days is to enact strict anti-trust laws and create a powerful anti-trust body that actively goes after cartels.
2. Active government Intervention
   • Cartelisation is seen as a natural phenomenon in a market economy that needs to be tackled through active government intervention.
3. Provide Transparency
   • Antitrust enforcers should maximize the transparency and predictability of their enforcement policies. Informing market participants of the rules and likely consequences provides a critical foundation for effective deterrence.
4. Treat Cartels as Serious Crimes, and Cartel Members as Criminals
   • The penalty for cartel behavior should fit the crime. Penalties should reflect the fact that cartels inflict enormous consumer harm with no likelihood of corresponding efficiency gains.

Penalties for Cartelization

• The Competition Act calls for a penalty on each member of the cartel, which is up to three times its profit for each year of anti-competitive behavior, or 10% of turnover for each year of its continuance, whichever is higher.
• In case of a leniency petition, CCI can waive the penalty depending on the timing and usefulness of the disclosure  and  full cooperation  in  the  probe.

Conclusion

• 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.

Sources: The Hindu

Mains Question

Q. What is Cartelization? How entry of competitors affect a cartel? (250 words).