Encountering cartels

In the Wealth of Nations (1776), Adam Smith pointed out the cartel problem as the "people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary". Smith did not suggest any legislative measures or policy framework to encounter cartels. However, by the latter half of 19th century, the economic theory of firm and trade shifted with emphasis on free market and different models of competition. A group of the US and Austrian lawyers, judges, and economists at the University of Chicago laid down the underpinnings of the modern competition law. And apart from the United States, Canada, the United Kingdom and Germany, today more than 130 nations have systems of competition law even in the formerly command economies such as Cuba, Russia, and China.
In Pakistan, Section 4 of the Competition Act 2010 provides for anti-cartel enforcement provisions. Section 4 of the Act takes into account all forms of agreements or arrangements between business undertakings or decisions by their association whether they are legally enforceable or not, whether they are in writing or not, and whether they are followed by cartel participants or not. It is an undisputed principle of competition law that cartel enforcement is the top priority of competition agencies across jurisdictions. Hence, in terms of resource allocation, whether monetary or human, it is the top priority of competition agencies to detect, investigate and punish businesses that break the anti-cartel law followed by addressing competition distortions posed by monopolies and anti-competitive mergers. In addition, competition agencies do undertake some supplementary functions that include carrying out market studies and competition advocacy.
Cartel agreements are universally condemned across jurisdictions. In essence, the anti-cartel provisions look into the very object or effect of cartel agreements, arrangements or decisions. The object approach is more legal and formalistic. It means if an agreement by its very object is prohibited, then competition agencies do not need to investigate the effect of such practices. In other words, the competition agencies do not investigate or conduct an effect-based economic analysis of the impact of such practices on market participants and consumer harm. Where the object of an agreement, the arrangement between businesses or decisions by their association is anti-competitive, the practice is strictly prohibited and penalized.
Cartels are economic termites. They eat away the economy and deprive consumers the benefits of the competitive process resulting in higher prices for lower quality goods and services. Cartelists eat away the economy at both micro and macroeconomic levels.
Broadly, there are four major types of cartel in all kinds of economies, ie, whether it is tech-driven, agricultural or hybrid. The price-fixing cartel is a situation in which cartel participants, who are usually competitors or in the same line of business, agree to fix the price of a product or services. In other words, they agree not to sell goods or services below a certain price. Then there are output restriction or production limitation cartels. In output restriction cartels, the cartel participants agree to limit or reduce their output and artificially create a shortage in order to maintain or raise the prices of goods or services which they are offering in a given market. The output restriction cartels also include putting constraints on research and development in an industry. The cartel participants agree not to innovate or invest in producing better quality and cheaper products.
Third, there are market-sharing cartels. In market-sharing cartels, the participants agree not to compete with each other in a territory or not offer their goods or services to certain customers in a specified region. Hence, they deprive consumers of the choices and charge monopoly prices. And lastly, there are bid rigging cartels which can manifest in many forms. The most common examples are cover bids wherein the bid participants agree to submit higher and lower bids and the lowest one, wins the bid. Price fixing, output restriction, market-sharing and bid rigging cartel agreement are strictly prohibited. There is no exception or exemption to them and the cartel participants are penalized.
One common theme behind all cartel agreements is sharing of strategic data or commercially sensitive information regarding prices, rebates, discounts, margins, output, bids, marketing strategies, etc. Any information which increases transparency or reduces uncertainty among the competitors in a given market is very likely to infringe the anti-cartel law. Information sharing is also universally condemned as hardcore or naked cartels all around the world.
To determine the effectiveness of any anti-cartel regime, there are four universally acknowledged measures for it. These are heavy penalties, effectual legal tools, a high risk of cartel detection, transparency and predictability in the application of the enforcement process, and cross-border cooperation between the competition agencies.
One of core goals of the anti-cartel law is "general deterrence". There is a general consensus among competition law enforcement agencies that to effectively encounter cartels, the enforcement program must provide significant penalties. By imposing significant penalties on the cartel participants, the anti-cartel law aims to discourage others from entering into or continuing to engage in cartel activity. The anti-cartel economics suggests that cartelists might not be deterred if potential penalties are perceived by firms as outweighed by cartel gains. If the penalties are sufficiently significant, the fines will likely be absorbed merely as a cost of doing business like taxes. In the United States, Canada, Hong Kong and some other countries, cartels' activity is treated as a felony or crime and is punished with fines and imprisonment. Both firms, as well as their directors, can be punished with fines and imprisonment. However, in the majority of the jurisdictions such as the European Union and its member states, China, India, Singapore, Malaysia, Australia, including Pakistan, cartels are penalized with fines only. Of course, there is damage to firm's reputation in all cases. Heavy cartel fines send a powerful deterrent message.
Effective legal tools to detect cartels are elemental to encounter cartel activity. If there are no adequate cartel detection mechanisms and tools available to a competition agency, heavy penalties are useless. The fear of cartel detection plays a very important role in the enforcement process. Cartels are often detected by information received from a cartel participant. However, if a competition agency has reason to believe that certain firms are engaged in a cartel activity, it has the power to call for all information relevant for its purpose or it can also enter and search premises and impound documents whether in paper form or electronically stored. In many countries, competition agencies can seek the assistance of other agencies of the Government to collect information or impound documents and evidence necessary to detect cartels. There is a heavy penalty in case a firm obstructs the agency in the search process.
A more modern phenomenon is a grant of leniency to cartel informants. In leniency programmes when a firm comes forward - technically blows a whistle and provides the competition agency information relating to a cartel, especially when the whistleblower is itself involved in it, the agency may grant such firm a 100% waiver in fines as long as the informant (i) terminates its involvement in the cartel; and (ii) fully co-operates with the agency to unearth the cartel. Also, there are reward pay schemes in place to encourage anyone who has information and evidence about a cartel, can approach the agency to initiate an investigation. In Pakistan, such rewards could be up to 2 million rupees, depending upon the quality of information or evidence, the informant's name is kept confidential.
Third, it is the transparency and predictability of the enforcement process. From the detection to the imposition of penalty, it is crucial to have transparency in the enforcement process and predictability of the outcome. For instance, in the case of leniency applicants, it is essential that they know what would be the outcome of their whistleblowing and leave a cartel. The competition agencies seek to provide a transparent mechanism during their enforcement process which includes gathering evidence, conducting an investigation, the opportunity of hearing the alleged cartelist and proportionality while imposing the fines. Equal treatment for all unless alleged cartelists are proven guilty is a standard consideration during the anti-cartel law enforcement process. In this regard, the competition agencies notify and publish rules, regulations, and guidelines and compliance manuals to ensure transparency and predictability of its enforcement process.
Cooperation and assistance among competition law enforcement agencies is relatively a recent process and is becoming an important ingredient of the enforcement process. All competition agencies have a shared commitment in respect of cartel law enforcement. Price-fixing, output limitation, bid rigging and market sharing agreements between competitors are universally condemned and prohibited. Many of the competition agencies are members of international organisations such as International Competition Network, OECD, UNCTAD and besides knowledge sharing they are pursuing mutual agreements to share information and evidence to prosecute cartels.
To sum up, based on writer's experience of cartel law enforcement, the hallmark of any successful anti-cartel programme is the availability and imposition of heavy penalties on those who engage in cartel activity, the competition agency is equipped with sufficient legal tools to detect cartels, and there is transparency and predictability in the enforcement process. These, combined with cooperation and assistance among competition law enforcement agencies, provide a solid foundation for successful anti-cartel enforcement.
(The writer is Member, Competition Commission of Pakistan. The views expressed in this article are not necessarily those of the newspaper)