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Understanding the Cartel PDF Print

Industries characterised by a few firms provide the ideal opportunity for formal and informal collusive agreements in which firms agree not to compete against each other.

These types of arrangements include instances where firms seek to:

  • Artificially divide up and allocate subsections of a market among each other;
  • Collude on tenders to affect the outcome of a bidding process; or
  • Limit production or technical development to falsely influence price changes.

These arrangements are often referred to as cartels, and are illegal under the Fair Competition Act. Today’s article attempts to identify the signs that tell us that a price-fixing cartel is in operation.

Statistics show that, in 1997 developing countries imported U.S. $81 billion of goods from various industries which were involved in price-fixing conspiracies. During the 1990s, thirty-nine international cartels were detected and twenty four of these have been in existence for at least four years. A price-fixing cartel is an arrangement between a group of firms to charge prices higher than what they would normally charge if the same firms were competing against each other.

The ideal conditions for the development of cartel arrangements are:

  • Few competitors in the sector or industry
  • Similar products being sold
  • Communication channels already existing between competitors

Beware however, that a cartel can still operate in the absence of these conditions.

Imagine a market where two firms who manufacture televisions agree to sell their products at a fixed price. A few cents added to the price of each television is hardly felt by a customer, but will ultimately generate thousands of dollars in profits to the manufacturers. Price-fixing agreements also include agreements that jointly predetermine the size of discounts, the magnitude of profit margins, the level of price increases, or minimum prices.

These types of Price-fixing cartels are designed to benefit the cartel members only, with huge profits being earned at the customers’ expense.

A price-fixing cartel’s main objective is to ensure similar net prices. A net price is the difference between the price of an item and the cost to produce that item. If similar trends were to be observed between competing rivals over a period of time, the lack of competition would without doubt raise suspicion. Agreeing on common net prices makes detection of cartel agreements difficult as members can offer a varied list of prices and different levels of discounts without any signs of collusive behaviour.

The responsibility to detect and stop cartels lies with the Commission, however, businesses and consumers can assist as they are the purchasers of the goods and services; and are the ones who can best monitor markets, and identify suspicious trends in price changes.

The Commission is aware that from time to time agreements need to be made between firms in order for industries to function effectively. Organisational arrangements of this nature are to be encouraged. The Commission will not seek to obstruct helpful legitimate activity, however, where evidence reveals that the Fair Competition Act is being infringed the Commission will intervene and conduct the necessary inquiries.

Signs of price-fixing agreements include:

  • Large price changes by competing firms who sell similar products. The price changes are usually of similar amounts and occur at the same time
  • Evidence proving that firms coordinated on price of products, the amounts to be sold, where or to whom the products should be sold.
  • Statements made by firms regarding their inability to sell a product because of its agreements with other firms indicating that the latter would be the supplier of the product.
  • Similar explanations used by rivals in announcing price changes.
  • Price movements which over time reveal a constant and systematic leader/follower scenario, that is difficult to explain in the absence of contact.
  • Questionable phrases such as ‘the industry has decided to increase margin levels.

Indications of exchanges of information such as prices or proposals. These circumstances though not conclusive evidence of a price-fixing Cartel are strong indicators that such agreements may be ongoing, and sufficient for the Commission to initiate an inquiry. Where the Commission finds conclusive evidence of “hard core” collusion, it will seek to enforce the Act.

For further competition or queries about Fair Competition, please contact the Commission at 4212-FTC.
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