Cartels & information exchange

Financial Express, May 02, 2012

By Pradeep S Mehta

Towards the end of January 2011, Spain’s competition authority, the National Competition Commission, fined motorcycle manufacturers Honda and Suzuki a total of ¤4 million for cartelised behaviour in the form of price collusion. What was unique about the case was the fact that the cartelised behaviour was not a result of the two companies sitting down and agreeing on prices to be charged, but by exchanging information on their pricing strategies.

The competition authority discovered that the two companies had arranged for their employees to send each other emails sharing sensitive information regarding the price of all the companies’ motorcycles with engines between 125cc and 1800cc. The information exchange was actually a disclosure of both the wholesale prices and the recommended retail prices. It was noted that the exchange of information eliminated uncertainty about competitors’ retail prices, which kills competition in price-setting, and fined Honda ¤2.1 million and Suzuki ¤1.9 million.

This represents important lessons for the Competition Commission of India (CCI) as it wets its beaks in competition enforcement. In cartel investigations, information exchange as a conduit for cartelisation is often overlooked by competition authorities. Existence of cartels is mostly premised on the existence of an agreement, and meetings to come up with such an agreement. The key elements that are taken on board to assess the sustenance of cartels include the ability to reach such an agreement, and the ability to monitor adherence to the agreement. However, information exchange can actually prove to be very effective in creating conditions that enable all these three elements. Disaggregated and sensitive information shared on a regular basis reduces strategic uncertainty about competitors’ actions, which would serve as some form of an agreement on what course of action each firm should take. In addition, the shared information would form the basis for monitoring adherence.

If the information exchange is confined to only a few players, competition distortions would also arise through disadvantaging a supplier who chooses not to become a member of the exchange. The supplier would not have access to the detailed and accurate market information about other suppliers that is available to competitors who are members of the exchange. On the other hand, if the supplier opts to join, then it would be forced to disclose its strategies, which eliminates its chances for successfully outwitting its competitors.

It is however important to note that although exchange of some information could prove to be very harmful to competition, there are instances where such exchange could prove to be in the interest of the economy, especially when the shared information results in synergies and avoidance of unnecessary duplication of research costs. It is on this basis that in some jurisdictions, information exchange is not considered bad per se, but each case is treated on its own merit. For example, in April 2000, the US Federal Trade Commission and the US Department of Justice issued the Antitrust Guidelines for Collaborations among Competitors, which recognised that the sharing of information among competitors may be pro-competitive and necessary to achieve the pro-competitive benefits of certain collaborations, such as sharing certain technology, know-how or other intellectual property. However, competition authorities from across the world have descended heavily on information exchange-induced cartels. A few examples will illustrate this.

In Europe, the UK Agricultural Tractor Registration Exchange case of 1992 can be considered a leading case on information exchange between competitors as the European Commission’s decision withstood appeals at two courts. The Commission concluded that a detailed exchange of sensitive information increases the likelihood of collusive outcomes in the market, especially in a market that is highly concentrated and not exposed to external competitive pressure.

In the US vs Container Corporation of America et al case of 1969, the Court found that an agreement between container manufacturers to exchange information was anti-competitive, even if there was no evidence of intent to adhere to a price-fixing scheme. Under the scheme, each participant, upon request by a competitor, would offer information as to the most recent price charged or quoted to individual customers, with the expectation of reciprocity and with the understanding that it represented the price currently being bid.

In the RAS-Generali/IAMA Consulting case of 2004 in Italy, the Competition Authority investigated a case whereby all insurance companies acquired access to the same database, which included detailed information on life assurance and pension insurance products. The competition authority ruled that the acquisition of the database by the insurance companies amounted to a concerted practice to exchange horizontal sensitive information between them.

In 2006, the South Africa Competition Commission investigated a case involving major processors of dairy products, for directly and indirectly fixing milk prices for purchase from producers through the exchange of price information. The information exchanges included forthcoming price reductions, their magnitudes and strategic decisions of individual processors. The Commission concluded that the removal of uncertainty about rivals’ actions was anti-competitive.

The big question then is whether such communication and information exchange, through various avenues such as using employees, is also not taking place in India. While Section 3 of the Competition Act, 2002, might not necessarily mention information exchanges, the fact that an agreement is defined to include any arrangement or action taken in concert, even if it is not formal or in writing, implies that the understanding to exchange information is also covered. It is however the identification and successful prosecution of such activities that calls for much vigilance, not only on the part of CCI but for all stakeholders.

In India, it also appears as if the Competition Act, 2002, has not provided for justifiable reasons for exemption, as Section 3 generally describes all such agreements as void. Since there are some information exchange platforms that can yield pro-competitive outcomes, there might also be a need for CCI to take a lead in calling for necessary amendments to ensure that, as is the case in other jurisdictions, only those information exchange arrangements that have an appreciable adverse effect on competition are prohibited.

The author is secretary general, CUTS International. Cornelius Dube of CUTS contributed to this article

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