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Cartelization
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Cartelization
• Cartelization is a formal agreement among firms in an industry.
• Cartel members may agree on such matters as prices, total
industry output, market shares, allocation of
customers, allocation of territories, bid-rigging, establishment
of common sales agencies, and the division of profits or
combination of these.combination of these.
• They work together
– Organize And Control Distribution
– To Set Prices
– To Reduce Competition
– To Share Technical Expertise
– To Lower Total Production
– To Raise List Prices.
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Why Cartels are formed?
Economies of Scale
• Standardized products offer consumers price
reductions driven by economies of scale and supplier
substitution effects.substitution effects.
• However a relatively small number of suppliers of
any commodity gives rise to the possibility of price
fixing and collusive behavior.
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Why Cartels exists in India?
• High concentration – few competitors
• High entry and exit barriers
• Homogeneity of the products
• Similar production costs
• Excess capacity• Excess capacity
• High dependence of the consumers on the product
• Cartels exist in an attempt to do primarily two things:
– Have as much control over something as is possible
– To control the price thereof
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Success of Cartels in India
• Even if monetary penalties are imposed, that is not a
deterrent for companies to return back to such malpractices.
• Both the Central and State governments are empowered to
take complaints to the MRTP Commission.
• Not a single case has been filed under the MRTP Act by any• Not a single case has been filed under the MRTP Act by any
government.
• ‘Cease and desist’ orders were issued, which were often
ignored.
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Cartelization in Telecom Industry
Same Hike On Same Day!
• GSM operators Bharti Airtel, Vodafone Essar and Idea Cellular
were allegedly forming a cartel.
• The telecom operators
increased the tariff of theirincreased the tariff of their
local call at Rs 1.20 a minute.
All the three operators revised
the tariff rates on the same
date. All the operators
intimated the TRAI post
revision on same day (i.e.
August 16, 2007).
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Cartelization in Cement Industry
• Prices of cement are kept artificially high.
• An internal investigation by the Monopolies and Restrictive
Trade Practices Commission (MRTPC), revealed cartelization
leading to 'exorbitant' increase in cement prices.
• The government allowed imports from Pakistan to meet the• The government allowed imports from Pakistan to meet the
demand.
• The price of cement sold by Indian co’s were approx. 50%
higher than the landed price of imported cement.
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• Apparently such a high price differential between the
international prices and the domestic prices was a indication that
all is not well within the cement industry.
• The cement lobby raised the issue of Pakistani factories not
having ISI license .
• But the MRTP Commission passed only cease and desist orders,
which have had no penal impact.
• In June 2012, CCI imposed a fine of 6,307 Crore (US$1.15• In June 2012, CCI imposed a fine of 6,307 Crore (US$1.15
billion) on 11 cement companies for cartelization. CCI claimed
that cement companies met regularly to fix prices, control
market share and hold back supply which earned them illegal
profits.
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Cartelization in Petrol
• After carrying out an initial enquiry on the matter, the
Competition Commission of India(CCI) found that ‘there was
no valid reason why OMCs – Indian Oil, Hindustan Petroleum
and Bharat Petroleum – were increasing and decreasing price
of petrol in unison, as the product was already decontrolled’.
• The CCI had written to the petroleum ministry on the issue,
but the ministry said it had no role in deciding the price ofbut the ministry said it had no role in deciding the price of
petrol as it was a deregulated commodity now.
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Tyre Cartelization• The All India Tyre Dealer’s Foundation complained to the
Government that tyre manufacturers in India were colluding in
price and trading malpractices.
• There was a cartel among tyre manufacturers in India based on
economic evidence including
– Price parallelism across the manufacturers related to the net
weighted average dealer price of tyres and the percentage changeweighted average dealer price of tyres and the percentage change
in prices;
– Positive correlation of data involving production, capacity
utilization, cost analysis, cost of sales, margins, etc.
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How to Handle cartels in India?
• In United States and Brazil there are provisions of
imprisonment, which nowhere exist in India.
• Belgium – member of the European Union has this provision
of rewarding cartel whistle blowers.
• Authorities have power to tap phones.• Authorities have power to tap phones.
• Conduct raids to unearth evidence of cartels.
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“When economy slows, Cartelization grows.”
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