GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation
Cartelisation: CCI Penalty on Beer Companies
Context: Recently, the Competition Commission of India found that three beer companies — United Breweries Ltd (UBL), Carlsberg India Pvt Ltd (CIPL) and Anheuser Busch InBev India (AB InBev)— had colluded to fix beer prices for a full decade — between 2009 and 2018.
As a result, the CCI slapped a penalty of Rs 873 crore on the companies as well as the All India BrewersAssociation (AIBA) and 11 individuals for cartelisation in the sale and supply of beer in 10 states and Union Territories.
AB InBev received a 100% relief from the penalty because its officials helped the CCI investigation into the functioning of the cartel.
Oddly enough, the companies blamed government rules, which require them to seek approvals from state authorities for any price revisions, as the main reason for forming a cartel.
What is a cartel?
Cartels can be difficult to define. According to CCI, a “Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
The International Competition Network (ICN), which is a global body dedicated to enforcing competition law, has a simpler definition. The three common components of a cartel are:
an agreement;
between competitors;
to restrict competition.
The agreement that forms a cartel need not be formal or written. Cartels almost invariably involve secrecy.
How do cartels work?
According to ICN, four categories of conduct are commonly identified across jurisdictions (countries). These are:
price-fixing;
output restrictions;
market allocation and
bid-rigging
Overall, participants in hard-core cartels agree to insulate themselves from the rigours of a competitive marketplace, substituting cooperation for competition.
How do cartels hurt?
Directly hurt the consumers as cartel raises the price above the competitive level and reduces output.
In other words, by artificially holding back the supply or raising prices in a coordinated manner, companies either force some consumers out of the market by making the commodity (say, beer) more scarce or by earning profits that free competition would not have allowed.
Consumer’s helplessness and lack of power to bargain for better prices ensure transfer of wealth to the cartel operators.
Due to the explicit agreement of non-competition and profit guarantees among cartels, any incentive to improve one’s product is removed. Therefore, cartelisation undermines innovations and the overall economic efficiency.
How to stop the spread of cartelisation?
Cartels are not easy to detect and identify. However, there has to be strong deterrence to those cartels that are found guilty. Typically, this takes the form of a monetary penalty that exceeds the gains amassed by the cartel.
The penalty has to be high enough so as to offset any gain realised by the cartel.
Along with penalties, leniency has to be provided (like 100% relief for AB InBev) to firms in order to incentivise whistleblowers exposing cartels and their functions
