The Competition Commission of Pakistan (CCP) has specified major 'risk factors' which increases the chances of market players to get involved in cartels. Sources told Business Recorder here on Sunday that the CCP has pinpointed 'risk factors' which increase the chances of market players to get involved in cartels. These 'risk factors' form the basis for CCP to tighten the noose around market players involved in cartels.
According to the CCP, it is difficult to predict cartel formation with a high level of certainty. However, there are some factors that increase the chances of market players to get involved in a cartel. These 'risk factors' are as under:
1. Homogenous Products: When the products being produced in an industry are homogenous or similar, such as commodities like cement or fertilizer, the formation of cartels is easier, and hence such industries have a greater chance of Cartelisation.
2. Small Number of Firms: The existence of a small number of firms in an industry increases the chances of the existence of a cartel in that industry, as difficulty in monitoring individual firm's behaviour increases with higher number of firms.
3. High Entry Barriers: Cartel formation tends to be easy when there are entry barriers, which hinder the entrance of new firms in the market. The type of entry barriers may vary from industry to industry. Generally, these include:
Natural barriers: Like heavy investments, access to technology that is potentially at the disposal of incumbent firms and is not accessible to new entrants. Economies of scale, a deeper penetration or wider distribution network can serve as a barrier for new entrants.
Strategic barriers: Strategic entry deterrence involves any move by existing firms to strengthen their position against other firms or potential rivals.
Regulatory barriers: The government's policy framework can also act as an entry barrier.
3. High Concentration and Large Firm Size: Large firm size with high concentration makes cartel easier. With economies of scale, firms can indulge in price wars to deter the entry of new firms. Market shares that remain highly stable over time are also probable indicators of Cartelisation.
4. Stable Demand over Time: A stable demand encourages the formation of a cartel and its persistence over a longer period. If the demand changes over the years, cartels are not very likely. Under conditions of low demand, members would like to deviate from the cartel, while high demand makes it attractive for cartel members to break the cartel and earn more profits by secretly reducing price.
5. Low Capacity Utilisation: Chances of cartelization in an industry also increase when there is low capacity utilisation or availability of excess capacity with a firm, even when demand is high. The excess capacity serves as a threat to new entrants, as incumbent firms can always destroy a new entrant by utilising the excess capacity in a price war which the incumbent firm would win.
6. Changing Cost to Sales Ratio: Increase in the price of a commodity or service provided by the firm, which is not correlated with the corresponding increase in the input costs, provides inference about Cartelisation or collusion to raise price.
The CCP said that by watching out for the mentioned factors, cartels can be detected.
The Competition Commission of Pakistan conducts 'Competition Assessments' of various sectors of the economy, which thoroughly examine the above mentioned 'risk factors'. The Commission has so far concluded studies on sugar, cement, fertilizer, polyester staple fiber, cooking oil and ghee, automobile, aviation, banking, private sector healthcare and schooling. These reports serve as a 'diagnostic tool' to identify anti-competitive practices including cartels. These also provide an opportunity to the Commission to recommend pro-competition policy reforms to the government, CCP added.
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