Detection And Investigation Of Cartels

How to Identify Cartels?

It is important to understand how cartels operate before understanding how to identify cartels. It is also important to understand the problems that cartels face because that is the key to finding evidence of their existence. It must be in a position to raise prices above the competition level and keep it up long enough to earn profits, in order to be successful. To be a successful cartel: o All the significant players in the market must be a party to the cartel. o The players must agree on what price to charge, or the allocation of market among them. o The players must make sure that none of them should try and cheat on the cartel by cutting prices a little bit, thereby making significant additional sales. Each of these problems is likely to create evidence of the existence of the cartel which are discussed elaborately under:

Agreement of every party to the Cartel Agreement

If there are other competitors who are not members of the cartel, it cannot function successfully for long. Such competitors will sell for a lower price than the cartel members. This situation will put pressure on the cartel members to reduce their price. There are strong reasons why the cartel wants all major competitors to join the cartel. So the attempts to include all firms may create evidence of the cartel. There may be documents within the cartel firms complaining about the outsider’s failure to participate in the cartel that simply explain or refer to the cartel. It is often helpful to invest in efforts especially to find outsider firms that were approached but did not join the cartel because they remain outsiders and are often willing to provide true information. It is useful to approach parties to cartel because they usually were given complete information in order to be convinced to join. As an investigative tool, it is useful to have the authority to promise such people or firms that they will not be punished if they make a vital disclosure.

Reaching the Agreement to form a Cartel

The cartel must agree on its fundamental terms. For example, a price fixing cartel must agree on what price to charge. This may not be easy because different firms may have different pricing strategies. The more complex the agreement is, there is a necessity of more meetings or calls and the more likely a situation wherein they have created documents discussing, recording, or implementing the terms of the agreement. Similarly, if we look into a cartel that allocates customers or geographic territories or bids must agree on the allocation. The parties probably will have to bargain to determine who gets the most desirable territories. These discussions, too, generate evidence. A study into the process of reaching the cartel agreement may produce evidence. Travel and similar record plan might show that meetings took place.

Policing the Cartel

Cartels are inherently unstable as even a single member can increase its profits greatly if it sells the product a little bit below the agreed price. But if every party does this, the cartel will break down. Therefore, it is in collective interest to make sure that no member cheats by lowering its price. Offering secret discounts; raising the quality of their product; not charging for delivery; and so on can be the indirect ways of cheating. Hence it is important to take steps to police such cheating, so as to prevent it, or detect it and punish the member doing so.

Operational/ Functioning Recommendations for CCI

Need for educating Business houses/ Trade Association on cartels

It is important for the CCI to educate business houses/ trade associations on cartels. There have been instances where business houses or associations form a cartel without having an understanding of the fact that their action would come under the ambit of being a cartel. The CCI should prepare and publish reader-friendly booklets and pamphlets with case studies from around the globe, explaining what cartels are, the harm that they cause and how to report them. This would be a great help to curb cartel activities and business houses could be stopped from forming a cartel or running an existing cartel. This as a result would save a lot of the time and resources of the CCI.

Develop cordial relationships with Businesses/Media House/Consumers so as to get information on Cartels

Private notification or complaint is an important source of information to trigger cartel case investigations. Therefore, CCI should develop a cordial relationship with the business houses, consumers and media and encourage them to give information about cartel activities in the industry.

Capacity Building of CCI officials by trainings for exposure to Cartels

It is important to build in-house capacity on the understanding towards cartels. The officials of the CCI, who would be interacting with business houses, association etc, need to have a sound understanding of cartels. Thus they should undergo training programs that would give them an exposure on cartels. In addition, CCI should also involve external advisers as experts for providing training programs. External advisers should handhold CCI to undertake various activities including curbing of cartels in India.

Studying Precedents passed by the Supreme Court after squashing off MRTPC’s orders

Many of MRTP Commission's decisions were challenged in the Supreme Court and in many cases the apex court turned down these decisions. Such and other similar judicial orders have set a precedent. However, it is important to appreciate that the context under which these cases were decided has changed drastically and the past judgments need to be interpreted under the provisions of the Competition Act. CCI should study such precedent-setting orders in depth and prepare its strategy/arguments accordingly to deal with them when such a situation arises in the future. The alleged practices might be similar, but the legal and economic environment has changed substantially.

Action against Existing Cartels

There have been several reports of cartels in cement, steel, pharmaceuticals etc. industry time and again. CCI should undertake in-depth study of such sectored cartels. For instance, in recent time, various media houses have reported the maiden attempts of airlines to form a cartel. The newly formed Federation of Indian Airlines comprising of eight domestic airline companies, had in principle agreed that the full service carriers like Jet, Kingfisher, Indian Airlines would not price tickets lower than Rs. 2. 40 a mile and the low cost airlines such as Air Deccan, Spice jet, etc would not price tickets lower than Rs. 2. 00 a mile. The companies reached an agreement twice, but the cartelisation efforts broke down both times, with low cost airlines demanding a free run at the last minute

Tie-ups with Media Houses and Consumer Organizations

Often cartels are reported in the media, which have a lot of useful information on the activities that take place in the market. CCI should build cordial relationships with media and consumer organisations, which could provide the CCI with vital information on existence of cartels.

Sound Government Policies

As brought out in several reports, there have been cases where government procurement policy or its implementation created channels for formation of cartels. Hence, while investigating a case, the CCI should keep this factor in mind that it is important to create an environment that discourages formation of cartels rather than continue to detect and prosecute cartels without doing much about the root causes.

Need for improving Leniency Program

The existence of a leniency programme to tackle "pernicious practice of cartelization" has "still not been used so far". This statement was issued in the wake of the Commission slapping a whopping fine of Rs 6307 crores on 11 companies involved in the cement cartel. In India, cartels have thrived mostly because there simplicity was not an effective watchdog till the CCI was set up and mandated to go after such cartels. Unfortunately, even after introducing Lesser Penalty Provisions in 2009, CCI has not been quite efficacious in implementing leniency program. The economic damage caused by cartels to the interests of consumers and the wider market is severe. Cartels are secret,the competition authorities need to dedicate enormous efforts to discover cartels and deter them. Quite frequently due to lack of evidence, it’s difficult to take an action against a cartel even though the commission has its knowledge Scope of Improvisation.

Need for Proper Marker System in India

With more than one member constituting cartel, there might occur a situation where there are applications coming from cartel members at the same time. This creates a lot of confusion as to the order of the queue. This queue is of utmost importance as it plays a crucial role in determining the reduction of fine amount or penalty. The questions might be raised on the basis of which a cartel member was kept above the other.

Essential Elements to Curb Cartels

The following elements must be implemented into the leniency program to curb cartels:

• Deterrence: Imposing stringent penalties would deter a cartel member to continue anticompetitive activities as there is an increased risk of keeping inside information to him rather than revealing it to the competition authorities. An effective leniency program would encourage cartel players to come forward with evidence, thereby assisting and cooperating with the competition authorities to crack cartel.
• Detection: It would enable the competition authorities to discover cartels in the relevant sectors by conducting investigations and cracking the collusion for promoting fair and healthy competition in the market. With disclosure of information by cartel participants under Markers system, more than one cartel can be detected which would eliminate such practices from the relevant market. In European Union, after the introduction of the Leniency Notice in cartel cases in 2002, there was increase in number of leniency applications to 159 from 2002 to 2005.