1. A-224 Competition Law Reports [Vol. 1
Predicting Business Cartels-Lessons
for India
Comdt. M M Sharma*
Cartels create an adverse effect on the market and hits inconsiderately at the
root perception of fair competition. It has been regarded as the most insidious
form of violation wherein the competitors by collusive agreements fix prices,
restrict outflow/supply of products, engage in bid rigging, sharing of markets
etc. In India the recent rise in prices and scarcity of certain select products
such as steel, cement, tyre etc., suspect the existence of hard-core cartels in
these sectors and has grown as a serious concern for the Competition
Commission especially in the absence of full operationalisation and
enforcement of Competition Act, 2002. In this article, the Author Comdt. M. M.
Sharma while trying to create awareness on this new economic offence also
tries to highlights some factors, which the new CCI may like to consider while
investigating allegations of cartels.
Last few months evidenced a spurt of of such subordinate legislation,
articles in the print media, mainly the involving almost all stakeholders,
financial newspapers and journals, on including Apex Chambers of Industry
the suspected cartelisation in some Associations like the FICCI, CII,
select sectors of industry such as ASSOCHAM etc. and professional
steel, cement, tyre etc. and concerns regulatory bodies like the ICAI, ICSI,
have been expressed over the lack of ICWAI etc. besides a few international
action due to the present status of the experts. These draft regulations are
Competition Commission of India, available on the website of the
which continues to await its full Commission for adoption by the full
operationalisation and notification of Commission as and when constituted.
the enforcement provisions of the In short, the Commission is now
Competition Act, 2002 (amended in gearing up to fulfil its mandate of, inter
2007). alia, curbing anti competitive business
The Commission, on its part, under the practices including cartels.
leadership of its sole Member, Vinod In the absence of specific legal
Dhall (who recently relinquished his provisions defining and expressedly
office) and a skeletal team of officers, prohibiting cartels amongst sellers,
including the author, has completed producers or buyers under the MRTP
the drafting of the implementing Act, except as one of the restrictive
regulations. Noticeably, this has been trade practice, there is little awareness
preceded by a long consultative process, about such business cartels in India.
perhaps, unique in legislative drafting This article, inter-alia, attempts to
Apr. 08 - Jun. 08

2. 2008] Predicting Business Cartels – Lessons for India A-225
create better awareness on this
Cartels being agreements
relatively new economic offence and
draws attention to the seriousness with formed in secrecy, which
which it is treated in rest of the World may or may not be in
and also highlights some factors which writing, between firms in
the new CCI may like to consider while direct competition with one
investigating allegations of cartels. another in the relevant
market are the most
Business Cartels Across the Globe pernicious form of anti
– A Curtain Raiser competitive business
Of the 106 systems of competition laws practices which silently
in the world today ranging from the result in super normal
over century old Sherman Act, 1890 profits due unreasonable
of USA to the latest Chinese Anti increase of prices by the
Monopoly Law, 2007 (scheduled to be cartel at the cost of
enforced from 1 st August, 2008),
exploitation of the
prevalent in the six continents and
in all kinds of economies, a singular
customers of the
feature which is common in all is that wholesalers as well as and
of condemning “hard core “cartels consumers of the retailers.
though treatment of such cartels may
differ. The Indian modern Competition
European Union, Mario Monti, the
Act, 2002 (amended in 2007), soon to
former Commissioner for Competition,
replace the archaic MRTP Act, 1969,
once described cartels as “cancers on
defines a cartel for the first time and
open market economy” 1 and the US
prescribes heavy penalties.
Supreme Court has referred to cartels
Cartels being agreements formed in as “the supreme evil of antitrust”1. Of
secrecy, which may or may not be in late, the concept of a cartel and in
writing, between firms in direct particular that of “hard core cartel”
competition with one another in the has been used with greater precision
relevant market are the most in developed economies.
pernicious form of anti competitive
The fight against cartels was given
business practices which silently
increased priority around the end of
result in super normal profits due
1998 after the OECD council came
unreasonable increase of prices by
out with a specific Recommendation
the cartel at the cost of exploitation
entitled “Effective Action Against Hard
of the customers of the wholesalers
Core Cartels” in March, 1998. The
as well as and consumers of the
Recommendation provided an explicit
retailers. Business cartels have been
recognition of the objectionable
known to exist in industrialised
character of such cartels as being the
countries for over 100 years now and
(quote) most egregious violations of
a huge economic literature and
competition law that injures
jurisprudence exists on cartels. In the
1. Quoted by Richard Whish in his article “Control of Cartels and other Anti Competitive
Agreements” in the book “Competition Law today” by Vinod Dhall (2007), Oxford
University Press (Pp. 41).
Apr. 08 - Jun. 08

3. A-226 Competition Law Reports [Vol. 1
consumers in many countries by European Commission imposed a fine
raising prices and restricting supply, of Euro 273 million for operating a
thus making goods and services cartel on the beer market in
completely unavailable to some Netherlands. The brewers of the
purchasers and unnecessarily Netherlands co-ordinated prices and
expensive for others.”2 Subsequently, price of beer increased considerably
the OECD published a Report on during at least 1996 and 1999. The
Leniency Programme to Fight Hard Belgian based In Bev group also
Core Cartels in 2001 followed by the participated in the cartel but received
Report on the Nature and Impact of immunity from payment of fines by
Hard Core Cartels and Sanctions providing decisive information about
against Cartels under National the cartel under the Commission’s
Competition Laws in 2002. In this Leniency Programme. Continuing the
subsequent report of 2002, the OECD tirade, The EC, in November, 2007,
noted that the world wide economic busted an international cartel that
harm from cartels is very substantial, fixed prices of flat glass used in the
though hard to quantify: it was manufacture of glass products such
estimated that 16 large cartel cases as double glazing and safety glass. The
investigated in the US may have cartel involved famous manufacturers
caused harm in excess of US $ 55 of glass i.e. Asahi of Japan, Guardian
billion.3 of the US, Pilkington of the UK and
The European Commission has also Saint – Gobain of France. The
made great strides in fighting cartels. Commission established that in 2004
Between 2000 and 2005 the and 2005 the representatives of these
Commission adopted 38 infringement companies met covertly in hotels and
decisions i.e. an average six decisions restaurants around Europe and
per year, targeting both European and conspired to increase prices for flat
worldwide cartels, and imposed total glass, discussing both the amount
fines of Euro 4.4 billion. The and the timing of price increase. These
Commission under its new companies drew huge profits from
Commissioner Ms. Neelie Kroes has selling flat glass at artificially inflated
declared a crack down on cartels by prices at the cost of not only down –
setting up a dedicated cartel busting the- line companies, which used flat
directorate within the DG Competition, glass as the input for making products
besides revising its Leniency such as double glazing and safety
Programme, as a tool to detect and glass but also ordinary European
destabilize hard core cartels, which consumers, who had to pay the high
resulted into the ECN Model Leniency prices for the glass used in buildings,
Programme published in September, private homes and apartments. The
2006,(which was useful in drafting the EC imposed fine of Euro148 million on
draft leniency regulations adopted by Guardian, 140 million on Pilkington,
the Competition Commission of India). and 133 million 900 thousand Euros
More recently, in April 2007, the on Saint-Gobain. Again Asahi of
2. OECD, Paris, 27-28 April, 1998 (C (98) 35/Final).
3. Quoted by Richard Whish in his article “Control of Cartels and other Anti Competitive
Agreements” in the book “Competition Law today” by Vinod Dhall (2007), Oxford
University Press (Pp. 42-43).
Apr. 08 - Jun. 08

4. 2008] Predicting Business Cartels – Lessons for India A-227
Japan was fined with a reduced Cartels are equally or rather
penalty of 65 million Euros for
more harmful in developing
providing substantial co-operation to
the EC during investigation under its
economies where the rate of
Leniency Programme. detection and quick judicial
punishments may not
Cartels are equally or rather more
match with those in the
harmful in developing economies
where the rate of detection and quick developed world.
judicial punishments may not match
with those in the developed world.
is the largest fine imposed in South
Mexico and Colombia are classical
Korea against a single company.5 In
examples where the ill famed drug cartel
South Africa, the Competition Tribunal,
mafia are known to be constantly
inquired into an alleged cartel of four
engaged in a state of “drug war” forcing
airline companies that had conspired
the newly elected government of
to announce a fuel surcharge
Mexican President Felipe Calderon to
simultaneously in May, 2004. On the
treat it as military as well as criminal
basis of cooperation extended by one
challenge. The “gangland” type
of these companies to provide useful
executions by Mexican gangs have
evidence to the Tribunal against the
reportedly increased dramatically since
cartel under the leniency programme,
2001 and in 2007 an estimated 2,500
the Tribunal established the charge
executions took place.4 In Argentina, in
and the remaining three companies
July, 2005, 5 Cement companies were
were recommended to be fined up to
prosecuted for a cartel that lasted for
10 per cent of the total turnover of each
18 years from 1981 to 1999. The
of them.
companies agreed on a market division
that was closely monitored by their In the developed economies, some of
trade association. The cartel members the other famous cases of international
were fined US $ 107 million, the largest cartels are the (i) Lysine cartel case in
antitrust fine in the nation’s history.5 US, in which two Japanese, two South
In Brazil, in 2005, CADE, the Korean and one US Company agreed
competition authority of Brazil, found not to compete on price. As a result,
cartels in relation to Pharmaceuticals, price of lysine, an amino acid that
Steel and Crushed Stone. Heavy fines stimulates growth, rose on account of
are likely to be imposed.5 In South collusion from 68 cents per pound to
Korea, in May, 2005, the Fair Trade 98 cents in 1990 and continued at that
Commission of South Korea fined KT level until detection in 1995. In this case
Corporation with a record fine of Korean evidence was collected by Department
Won 115.9 billion (about US $ 115 of Justice with the assistance of FBI
million) for price collusion in broadband which included documents/
internet and landline telephone transcripts of secretly recorded
services two small rivals, conversations; (ii) The International
Hanarotelecom and Dacom Corp. This Vitamins Cartel case, in which all
4. Article “Mexico’s Cartel War: Calderon in the Cauldron” by Austin Bay. Available at
http://www.realclearpolitics.com/aerticles.
5. Quoted by Richard Whish in his article “Control of Cartels and other Anti Competitive
Agreements” in the book “Competition Law today” by Vinod Dhall (2007), Oxford
University Press (Pp. 47-49).
Apr. 08 - Jun. 08

5. A-228 Competition Law Reports [Vol. 1
leading manufacturers of vitamins with the Department of Justice (DOJ)
located in Belgium, Canada, France, of US. (iii) The Lombard Club case in
Germany, Japan, the Netherlands, which the European Commission
Switzerland and the United States, imposed fines totaling Euro 124.26
including the famous Hoffmann-la million on eight Austrian banks (the
Roche AG and BASF of Germany, ‘Lombard Club’) for their participation
Rhone-Poulenc of France which in a wide ranging price cartel which
deserves a special mention. Takeda extended to all banking products and
Chemical of Japan formed a cartel services and the member banks fixed
dividing the world market and fixing interest rates for loans and savings for
prices of different types of vitamins private and for commercial customers
during the 1990s. The cartel operated with the object to avoid competition in
for over 10 years from 1989 to 1999 and ‘interest rates’. The minutes of
was later prosecuted with the help of meetings, memoranda, records of
Rhone-Poulenc of France after merger telephonic conversations,
with Aventis in 1999, which sought correspondences unearthed a network
leniency and co-operated with US of cartel committees (e.g. ‘Lending
authorities. This cartel involved 13 Rates Committees’, the ‘Deposits Rates
Pharmaceutical companies, six Committees’, etc.) (iv) The Auction
European and seven Japanese and Houses Cartel involving the famous
covered all major vitamins consumed auction houses, Christie’s and
the world over forming the so called Sotheby’s of UK, which were found to
cartel of “alphabet soup” Vitamin A to be involved in a collusive agreement
H. The overcharge on vitamins imports fixing trading terms. The purpose of the
by 90 economies during the years 1990 cartel was to reduce the fierce
to 1999 was estimated to be US $ 2709. competition between them that had
87 million, which is an underestimate developed during the 1980s and early
of the total overcharges made in all 1990s. The European Commission
vitamins transactions during the fined Sotheby’s with Euro 20.4 million
duration of the cartel. Meetings of the which was six of its world wide turnover.
cartel members took place mostly in This fine included 40 reduction for its
Switzerland and were shown as budget co-operation in the investigation.
meetings ostensibly for the purpose of Christie’s, on the other hand, escaped
freezing the market shares at 1988 a fine being the first to provide crucial
level. During the investigation, Rhone evidence to the Commission under its
provided lot of documents and got 100 Leniency Programme.
per cent lesser fine (of Euro 1 million);
BASF and Roche pleaded guilty and Cartels – Cases Investigated in
were fined US $ 225 million and 500 India
million respectively. Total fine collected In the absence of sound legal
exceeded US $ 1 billion in the US alone. provisions under the MRTP Act under
Two senior most executives of the MRTP Commission (MRTPC), there
Hoffmann-la Roche pleaded guilty and are only three reported cases of cartel
served four of five months prison in India, so far. (i) The Soda Ash Cartel,
sentences. Similarly, Takeda, Eisai and in which the American Natural Soda
Daiichi also pleaded guilty and paid Ash Corporation (ANSAC) comprising
fines totaling $137m whereas six American producers of soda ash
Rhone-Poulenc was granted attempted to shift the consignment of
conditional immunity for co-operating soda ash at cartelized price to India.
Apr. 08 - Jun. 08

6. 2008] Predicting Business Cartels-Lessons for India A-229
Though the MRTPC, based on the citadels of free market economy,
ANSAC membership agreement, held substantiates this argument. The
it to be a prima facie cartel and granted available competition literature on
interim injunction in exercise of its cartels suggests that there are three
powers under Section 14 of the MRTP broad features of a market, which
Act, but this order was set aside by makes it easier for the firms to reach
the Supreme Court, inter alia, on the an agreement to collude to fix prices or
ground that section 14 of the MRTP otherwise avoid competition between
Act did not give any extra territorial them. The foremost being the elasticity
jurisdiction to the MR TPC. This of demand. In markets such as oil and
lacuna in law has now been removed gas, cement, steel, power and other
as Section 32 of the Competition Act, essential products linked to the
2002 confers extra territorial automobile or construction sectors,
jurisdiction to the CCI in respect of where the demand is inelastic,
such anti competitive agreements, meaning that there are no substitute
which though executed outside India products available and increase in
may have an effect on competition in price will have no effect on the demand,
the relevant market in India. (ii) there being greater scope for huge
Trucking Cartel case, of 1984, involved profits by price rise, there is always a
members of the Bharatpur Truck chance of such collusive behaviors
Operators Union and the Goods Truck among the firms. The second important
Operators Union, Faridabad, which factor is the level of competition in the
colluded to fix freight rates individually. market. The fiercer is the competition
(iii) The Cement cartel case, involving and lower is the prices, in absence of
40 manufacturers of cement, initiated cartel, the greater are the likely benefits
in 1990 and fixing of prices of cement from setting up of a cartel. The airline
through the Cement Manufacturers sector with a large number of private
Association (CMA) was proved recently players competing with one another for
in December, 2007 before the MRTPC. each priority route or on favored timings
In both these cases MRTPC could only in a busy route such as between
pass a ‘cease and desist’ order. metropolitan cities could be an
However, unlike the MRTPC, the CCI example. The third factor is the barriers
may not be helpless in imposing heavy to entry in a given market, which is
fines as the Competition Act, 2002 again linked to the level of competition.
prescribes very heavy penalties under If there are low barriers to entry or
Section 27(b). expansion in a given market and the
market is open for such entry by a new
Factors Facilitating or Hindering player or expansion of capacity by
Cartelization or Agreements existing players, it will be difficult to
Between Business Rivals to sustain a cartel as any new “ maverick”
Collude player with better efficiencies or low
marginal costs can undermine the
Ironically, the existence of a free market
cartelized price. Retail consumer
economy by itself does not restrain the
sectors such as those of readymade
existence of cartels or such other anti
garments, handicrafts etc. could be
competitive business practices. The
examples of such situation.
example of large international cartels,
detected by the competition authorities It may be important to note that while
in the European Union and the US, the it may be easier to form a cartel, it may
Apr. 08 - Jun. 08

7. A-230 Competition Law Reports [Vol. 1
still be difficult to sustain a cartel for
long for reasons which are interesting It can be said that whether
to note. The first being, an inherent an industry can become
tendency amongst each member of a cartelized or not depends on
cartel to derive maximum benefits by how great the incentives are
cheating on the other cartel members for the firms in the industry
i.e. by undercutting the cartel price. If to form a cartel and how
such cartel member is more efficient sustainable the cartel is.
than other members i.e. have lower The incentives to create a
marginal costs, greater would be the
cartel depend on the
benefit of such cheating. Such
cheating will also be easier in case the
difference between the
cartel is between firms making many profitability of the firms in
products or brands and operating the presence of a cartel and
simultaneously in a large number of in the absence of a cartel.
geographic markets. A large number
of firms in a given market also facilitate
such cheating as the detection punishment also may provide for the
becomes difficult. The second reason other firms to compete in the exclusive
is the likelihood of the cheating being territory of the cheater firm. The longer
detected by other cartel members. On this punishment can be sustained
such detection, the cartel either fails against such cheater firms; stronger
by itself or clue about the same is will be the deterrence against such
invariably given by a victim of such cheating.
cheating to competition authorities Apart from the above broad reasons
leading to the detection and successful on which the sustainability of cartels
prosecution of such cartel by the largely depend, factors such as
authorities. The leniency programme frequent interaction among firms
of competition authorities comes as a whether through trade associations
handy tool for such ‘defectors’ to or otherwise, institutional links
mitigate their likely punishments. between firms such as cross
Detection of cheating is also facilitated ownership or cross licensing, multi-
by price transparency, small number market interactions between firms,
of firms, homogenous products and markets with low fixed cost, small,
predictability of demand. The third regular and predictable demand by
reason is the extent of punishment buyers, symmetries in costs and
that other members of the cartel can capacities of firms, production of
impose on the cheater firm. same quality goods, homogeneity of
Punishment by the cartel usually products and absence of buyer power
leads to the restoration of the and practices that help companies
competitive pricing by other cartel to observe their competitors prices
members thereby reducing the benefit such as resale price maintenance,
of the cheater firm. This again meeting the competition clause etc
depends upon three factors viz. also facilitate the formation of
availability of spare capacity with the cartels. On the other hand cartels are
other members, the speed with which difficult to be sustained in innovative
the punishment is resorted to and the or networking markets. In
number of markets in which it can be conclusion, it can be said that
enforced upon the cheater firm. The whether an industry can become
Apr. 08 - Jun. 08

8. 2008] Predicting Business Cartels-Lessons for India A-231
cartelized or not depends on how by increasing the fines or making
great the incentives are for the firms cartel a criminal offence and lastly (v)
in the industry to form a cartel and establishing a creditable competition
how sustainable the cartel is. The authority, like those in EU, USA,
incentives to create a cartel depend Australia to signal that cartels will be
on the difference between the detected and punished. Examples of
profitability of the firms in the ex post anti-cartel policies could be
presence of a cartel and in the adoption of sophisticated investigating
absence of a cartel. A sustainability techniques to search for “hard”
of a cartel, in turn, depends whether evidence of collusive agreements,
the incentives of the firms to cheat giving strong legal powers for search
on the cartel agreement outweigh the and seizure to competition authorities
likelihood of the cheating being and introducing a modern leniency
detected and punished. At the same programme to encourage members of
time, the supply side responses by cartels to come forward by whistle
non cartel members can undermine blowing and having a corresponding
the cartel especially where the entry immunity programme.
in a market is easy or it is easy for
non cartel members of the industry A Word of Caution
to expand their output in response There appears to be some
to the cartel members raising their misconception that firms making high
prices, making the cartel no longer profits must be involved in
sustainable. In this way the supply cartelization. This may not be always
side responses by non cartel true as the high profits may be due to
members can neutralize a cartel better efficiencies or other market
which can also be described as “the factors such as sudden increase in
response of the market forces”.6 demand etc. However, there are no
guidelines available even in
Anti-cartel policies international competition literature to
The adoption of policies both ex ante determine when can profits be
as well as ex post, can affect the considered as “too high”, except,
probability of formation of a cartel in perhaps, the UK OFT guidance on
the sectors where such possibilities “Assessment of Market Power” which
exist due to the market structure itself suggests that the following “conditions
and to the detection thereof by making that need to exist before a firm can be
its sustainability difficult for the cartel held to be making excessive profits in
members. Examples of ex ante anti– anti competitive sense: (a) profit
cartel policies are (i) issuing fewer should be substantially above the cost
regular orders and moving to a few of capital; (b) on a persistent basis; and
irregular large orders, (ii) prohibition (c) without any evidence that entry is
of pricing rules such as resale price likely to undermine these profits in the
maintenance, (iii) reducing cross medium-term.7 Similarly, “excessive
ownership between companies, (iv) pricing” is by itself no proof of
raising the level of punishment, either cartelization and is not listed as an
6. “The Economics of EC Competition Law” by Simon Bishop & Mike Walker (2002),
Sweet & Maxwell, (Para 5.31)
7. UK OFT guidance on “Assessment of Market Power” (OFT 415, December 2004)
Apr. 08 - Jun. 08

9. A-232 Competition Law Reports [Vol. 1
anti competitive violation under the pricing as an “exploitative abuse”..
Competition Act, 2002, though it may This is similar to the provision of the
be considered as an abuse of dominant Indian Competition Act. But nowhere
position as an “unfair” price under the “excessive pricing” is linked to
Act.8 In the United States a high price cartelization which is primarily an anti
charged by a monopolist is not competitive agreement between direct
considered anti-competitive per se and competitors to collude to fix prices
is left for the Courts to decide. The artificially which may appear to be
European Union has, on the other “excessive” to a common man but are
hand, taken an interventionist not really so in the competition
approach and condemns excessive literature.
8. Section 4(2) of the Competition Act, 2002
* The author is the Additional Registrar in CCI. Views are personal. Comments may be
sent on cci-mms@nic.in.
Apr. 08 - Jun. 08