Trade associations as cartels

Financial Express, October 13, 2011

By Pradeep S Mehta

The prophetic words of the great economist Adam Smith—to the effect that when traders meet they do not just talk about the weather, but scheme to profiteer—are still true to this day, more than a few centuries later. Our own Chanakya, in 400 BC, had prescribed standards and punishments for traders ganging up as cartels. Given that all jurisdictions with competition laws descend harshly on cartels, producers of different products have tried to beat the system by smuggling in cartelisation discussions into meetings held under the auspices of trade associations. The rationale for trade associations is often presented as an avenue for the members to discuss with one voice issues such as problems with the market, and lobbying government for policy reforms. These discussions rarely end there; cartelisation has often emerged following such club meetings. Therefore, in many countries, associations have also been penalised along with their members for collusive activities. In India, we are yet to penalise a cartel, not to mention their clubs.

Examples of trade association-induced cartelisation can be found from countries from all corners of the world. In India, trade associations have been assisting members on cartelisation even during the golden days of the MRTP Commission. In 1977, the MRTP Commission had to issue a cease and desist order to the Indian Woollen Mills Federation after it had facilitated a price fixing cartel among its members. The Commission was forced into action again in subsequent years, passing similar orders against the Food Grains and Kirana Merchants Association (1983), the Alkali Manufacturers Association (1985) and various local Truck Operators Unions which had transformed themselves into conduits for cartelisation by members. Unfortunately, the MRTP Commission had no teeth, so the cartels were let off with warnings.

The MRTPC had also taken timid action against the cement cartel in India, but could not act against their association. However, the Builders Association of India has named the Cement Manufacturers Association as a party in its recent complaint to the Competition Commission of India against colluding cement companies. The matter is yet to be decided. Competition authorities in other countries have, in fact, taken action against mischievous trade associations. In September 2003, the Korea competition authority had to fine seven cement companies a total of $22 million, with $428,000 being imposed on their association, the Korea Cement Manufacturers Association for facilitating the cartel.

In August 2010, the Competition Commission of Pakistan (CCP) imposed a penalty of 50 million Pakistani rupees on the Pakistan Poultry Association for alleged cartelisation in the chicken and egg markets. In February, CCP imposed a penalty of 23 million Pakistani rupees on the Pakistan Jute Mills Association and its ten-member mills on the charges of cartelised behaviour and other malpractices.

In Europe, the Finnish Competition Authority also found a price fixing cartel operating under the guise of the Finnish Hairdressers’ Association, and recommended to the Market Court the imposition of a fine of 33,000 euros for the conduct, which had taken place between 2000 and 2006. In March 2010, the Oslo District Court upheld the decision of the Norwegian Competition Authority to impose a fine of NKr400,000 on a Norwegian trade association for bus charter operators, which had encouraged its members to increase their prices together. In June this year, the National Competition Commission in Spain issued a fine of 100,000 euros to the National Association of Canned Fish and Shellfish, after the association had imposed a collective recommendation to transfer the price increase of metal containers to canned seafood.

A look at the general factors that facilitate cartelisation would make it easy to understand how trade associations end up fuelling cartelisation. First, a cartel can only be formed if the members know that they will be able to raise prices above the non-cartel level without being forced out of business by non-member firms. As a result, an association, which is usually composed of all members or of all the influential members, would be assured of profitability as the decisions made become binding to all firms. Any firm that would deviate from the agreed position could be easily whipped into line through the association. Second, the cost of establishing and enforcing a cartel must be low, relative to its expected gains. A trade association implies that the cost of organisation and monitoring are lowered as this would be done under the auspices of the association, which would also bear the costs. Third, a well functioning cartel would require lobbying and strategising by the cartel leader to induce other firms to join. Getting a platform to air out the strategy is a very difficult task as this would entail meetings with rivals. However, the presence of an association makes it easy for leaders to get the platform to achieve this.

It is in the same vein that one would expect CCI to also target trade associations. Under the Competition Act, 2002, trade associations are not defined as such, and not only CCI, but a Government Committee is also working on a better definition to punish trade associations if found to be aiding and abetting carte. There are so many sectors in India that are characterised by associations, and the associations claim that they do not discuss prices but just ways of improving their operations.

Just recall Adam Smith and Chanakya here.

CCI can demand access to the minutes of meetings that the associations have been holding, with a view to assessing whether price issues were also discussed by their members. One would not be surprised to see prices being among the issues discussed and minuted by these associations, especially in those cases where the meetings are often followed by increased prices or market allocation. Some associations would be discussing pricing issues due to ignorance, as found in the Pakistan Jute Mills Association case referred to earlier. However, ignorance of the law is no defence, and the sooner the practice is nipped the better.

I do not wish to use a paint brush to say that all trade associations function as cartels. The mere presence of associations does not necessarily imply that they are cartelising, but there is need for vigilance on CCI’s part, especially since trade associations in India and across the world have a history of assisting the formation of cartels.

Pradeep S Mehta Secretary General, CUTS International and Cornelius Dube of CUTS contributed to this article

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