Cartels may be overt or covert as the producers and suppliers of goods and services can have a tacit understanding or open agreement to fix the market price, allocate market, increase prices and decrease the quality of the goods and services.
A cartel is generally understood as the arrangement among producers and suppliers of goods and services to control the production, sales and price so as to restrict competition and obtain monopoly or oligopoly in the market. On the other hand, a syndicate is a self organizing group of individuals, companies or entities formed to transact some specific business or promote their common interests. Cartels may be overt or covert as the producers and suppliers of goods and services can have a tacit understanding or open agreement to fix the market price, allocate market, increase prices and decrease the quality of the goods and services. Such practices are generally considered as the worst forms of anti-competitive behaviour and condemned by the laws of various countries.
Competition is the cornerstone of open and liberalized economy as the anti-competitive behaviour of the enterprises, industries or traders take a toll on the economic performances of a country by promoting inefficient firms, producers and distributors and punishing the efficient ones. Consumers are compelled to pay higher prices and use low quality goods and services in a situation of anti-competitive markets. In view of this, countries have developed their own competition laws in order to prevent unhealthy business practices. The United States of America has enacted two such basic laws, called anti-trust laws. Named the Sherman Act and the Clayton Act, these are enforceable by the Department of Justice and Federal Trade Commission. Similarly, the European Union has provisions under the Treaty of Rome to maintain fair competition and Australia has its Trade Practices Act 1974. In India, the Monopolies and Restrictive Trade Practices Act was brought out in 1969 and later replaced by the Competition Act in 2002. The Indian Competition Act is quite comprehensive and has provision to constitute the Competition Commission and the Competition Appellate Tribunal among others. The objectives of the act have been defined as: to prevent practices having adverse effect on competition, promote and sustain competition in markets, protect the interest of consumers and ensure freedom of trade carried out by other participants in the market.
The Competition Promotion and Market Protection Act (CPMPA) was passed by the Parliament of Nepal in 2006 and the Government of Nepal came up with the relevant regulations in 2009. The act basically defines the anti-competitive practices and dealings, and prohibits the anti-competitive agreements between two or more parties with the intention to limit or control competition. Such anti-competitive agreements may be in the form of fixing the sales or purchase price, limiting the quantity of production or sales, market allocation, creating barriers for market entry to the producers and suppliers of similar goods and services, determining the terms and conditions of sales, imposing quota and applying syndicate system in transport and distribution of services. Similarly, the act prohibits the abuse of dominant position by a producer or distributor or their conglomerates with the intent of controlling competition. Besides, merger and acquisition of enterprises with a takeover of more than 50 per cent share and acquisition of more than 40 per cent market share are the prohibited behaviours that have the effect of creating monopoly in the market. Bid rigging, exclusive dealing, market restrictions, tied selling and misleading advertisements are other anti-competitive practices and offences under the competition act.
Cartels and syndicates are the anti-competitive agreements according to section 3 of the CPMP Act. Such an agreement may be in the written form or as a tacit understanding which is difficult to prove by the document but can be judged from the behaviour and resultant outcomes of such dealings. Let us look at some representative cases in the context of Nepal.
Transportation services are a prime example of the most-hit sector by cartels and syndicates. The transporters are usually smart enough to make a hefty profit through the application of syndicates. First, they bond together within the umbrella of their associations that culminates into the federation redoubling the institutional strength to protect and persuade the vested interest of transport operators around the country. Such strength can yield dominant positions in the market collectively and the abuse of such position is imminent. Price fixation, particularly regarding plying on minor roads, application of higher charges on services, queue and rotational system in operation, use of old and worn out vehicles and overload in cargo transportation are some elements associated with the syndicate behaviour of the transporters. The transporters deter the entry of new transport equipments through physical threat or assault in case somebody dared to enter their market or put heavy syndicate charges for such entry. This has put the consumers in worse conditions as they need to pay higher transportation charges, meet with frequent road accidents, and travel in crowded sitting positions in the buses. This sort of practice rewards inefficiency and discourages firms to provide services in an environment of open and healthy competition.
Transportation of petroleum products and their distribution is another sector affected by hardcore cartels and syndicates. Different associations that are in existence demonstrate the collective anti-competitive behaviour of their members. Such a behaviour usually include the pressure or demand for increasing profit margin, cheating in the measurement of volume and weight, raising barriers to the entry of new traders and dealers etc. It was noted that one of the demands of LPG Bottlers Association during their recent strike was against the government’s plan for granting license for a glass bottling plant. Moreover, these associations often exert pressure through the means of strikes, lock-outs and interruptions in services to make the government accept their demands. Any compromise with the demands based on such unlawful means of threat and violence by the associations and its members would reduce the efficiency of the economy and harm the interests of the common consumers.
The third cartel group belongs to the distributors and wholesalersof fruits, vegetables and meat products. These are organized groups and have their own associations while their upstream and downstream stakeholders in the supply chain do not have strong enough associations to offset their unruly behaviour. Hence, the farmers are fetching low prices on their products on the one hand and the consumers are forced to pay higher prices at the other to the hefty benefit of those middlemen. A market survey done at the Kalimati Vegetable Market shows that the price paid by the consumers for some vegetable products are 10 times higher than the price paid by the middlemen to the farmers for the same vegetables. This shows the intensity of unfair trade practices, much to the chagrin of law enforcing authorities.
Cartel groups in Nepal are found in other sectors as well. For example, there are tacit understanding and clandestine agreements among the importers and distributors of food grains in order to fix price and control supply and raise the price particularly during the festive season of Dashain and Tihar. Sugar industries collude to pay less to the farmers against purchase of canes and fix high prices of sugar for sales to the end consumers with a bigger price arbitrage, while manufacturing industries like cement, noodles and water pipes sell their product at the identical price as a result of tacit understanding among the manufacturers.
Cartel is globalizing as well along with the globalization of economies. The famous example of international cartel is the Organization of Petroleum Exporting Countries (OPEC) which has been increasing the world prices of petroleum products at various times by imposing the production quota and fixing of prices. Besides, cartels are noticed in the international production system for steel, fertilizers, rice and other commodities.
Thus, in a situation of cartel, producers and suppliers control the production and supply to maintain an artificially high price. This kind of behaviour is supported by a situation where there is less number of suppliers but large number of customers in the markets, market demand is not too variable and individual firms output can be easily monitored by the cartel organizations. The organized behavior of such cartels is pronounced in the syndicated system. The ultimate effect of these anti-competitive practices is that the efficient firms lose to the inefficient firms or suppliers as there are no incentives for bringing down the cost and increasing the quality of goods and services. In such a situation of duopoly or oligopoly, all the firms within the cartel groups benefit by sharing the market without the need of improving efficiencies in production or supply.
Perfect competition is an ideal situation that is hard to achieve in any economy. However, it should be the ultimate goal and direction to move forward which can be stepped upon by gradually building on the legal, institutional and human resources base for defying the anti-competitive behaviour. Reining the cartel and syndicate requires comprehensive and concerted approaches from all stakeholders and the effectiveness of law enforcement agencies. The most important factor is the requisition of political will and commitment to establish a competitive and healthy market that could be the precursor to increased trade and foreign direct investment in the country. Many developing countries including Nepal are mired by the dilemma of politics protecting the cartels and syndicates as those who are engaged in anti-competitive practices dole out substantial money to the political parties and their leaders.
Ojha is a Former Secretary, Government of Nepal. The views expressed in the article are personal of the author.
