Cartels are the most egregious form of anticompetitive practice, wreaking great harm on the economy. It is therefore that in many countries cartel activity is treated as a criminal offence ending in jail terms and fines for the executives of the colluding firms also. While most big cartels are formed through a covert and a civil dialogue, some of the colluding activity is done through coercive means, because all parties may not agree. Both require a different approach by the competition agency when it comes to busting them.

One classic form of cartelisation which takes place in India is the collusion among small truck owners who form unions at the local level to extract high prices from the factories situated in the regions. Only the members of the unions can lift export cargo, though import cargoes do come in from trucks outside the region. Such trucks have to return empty when leaving the region, which only adds to the costs of production etc.

One of the well-reported cases of truck unions during the MRTP days came in from Alwar in the 1980s. Alwar is an industrial township in Rajasthan and situated near Delhi. While the MRTPC passed a cease order against the union, they could not care less. The union?s president was a local MLA. Some truck owners expressed their inability to continue in the union, but they were browbeaten to stay on. The local factorywallahs were quite pissed off that in spite of the MRTPC order they could not get lower freight offers. It then became a law and order situation, with clashes between the factories and truck operators. Only then did the district administration get into action and the union activities came to a standstill in spite of the MLA?s intervention.

Similar incidents have also been reported from Nepal, where truck and bus operators form syndicates to ensure that there is no competition. When the local business chambers agitated against their mafia-like methods, they also tasted mafia-type response. The buildings of one of the local chambers of commerce were also attacked by the syndicate hoodlums, protected by local marxist politicians.

Politicians are involved in such issues in one way or another. They usually support business cartels for financial support. However, in one case a study done by us convinced the government in Rajasthan to change the excise policy for auctioning of liquor vends. Such liquor vends are usually run by tough businesses because of huge stakes. They end up cornering the territories as their fiefdoms. Challengers are dealt with through strong-arm methods, and thus competition is reduced to dust. Not only that but such types of cartels, like our doctors and lawyers, also indulge in strikes whenever one of their fellow members get into some problem. Thus, they keep the administration on its toes, with a great incentive not to interfere in cartels’ wanton actions.

In a 2005 CUTS study, whose recommendations were taken heed of, the state?s excise revenues jumped by over 19% in 2005-06. Auctioning liquor vending through district-wise tenders was changed to a lottery system for each individual vend. Over time, the revenues have been buoyant and every year revenues continue to rise, while prices for consumers have been coming down. Many other states had been following the same system, including in UP.

As the year 2011 ended, the Brazilian competition authority instituted proceedings against members of two truck transportation associations following a complaint by the National Association for the Promotion of Fertilisers. The country?s Commercial Association of Autonomous Transporters and the Union of Road Transporters of Bulk Cargo were alleged to be running a long-term price fixing agreement for shipments of fertiliser taken from the Port of Santos?the country?s largest port and a major transport hub in Latin America. The cartel was able to survive, not due to incentives offered to members or due to other structural economic advantages, but due to violence perpetrated against dissent.

According to the economics of cartels, one key factor that facilitates the formation and sustenance of cartels includes the elasticity of demand for the product, where high elasticity of demand would imply that the cartel will not be profitable as an increase in price will result in customers switching to non-members or other modes. But the bigger players in the sector ensure that non-members are unable to take advantage by forcing compliance through coercion.

The Brazil transport case referred to above would not have survived for so long had the cartel not resorted to coercive methods to ensure that non-members comply. Arm twisting by cartel leaders has been found to be very effective in many parts of the world over the years. In 2006, in Bangladesh, a cartel of bus owners was reported to have proposed a raft of measures to threaten some operators who wanted to act outside the dictates of the cartel by reducing the agreed fares. This was after a new short-cut road had been constructed, which shortened the distance by 85km. However, the cartel refused to reduce fares and issued a notice, threatening a fine of Tk500 per ticket and closure for five days for operators who were not adhering to the old fares.

In Laos, an association in the drinking water industry was able to survive because the Vientiane Drinking Water Group forced compliance harshly, with three water companies, that refused its diktat, being shut down through unorthodox methods. Coercion in cartels has also been widely reported in South Africa, where it was reported that taxi associations were organised into territories. By fear, they protected their bits of turf, resulting in higher fares and routes. Not only that, but a passenger had to split his journey and take two different taxis to go to work. Such behaviour is also prevalent in most developing countries, including India.

Many such cartels owe their existence to actual and implied threats of closure or forceful ouster from business. Alas, competition laws do not cover coercion, and thus they can issue restraining orders, but the same would not be worth more than the paper on which they are written. Therefore a fresh look is needed at how a competition authority can effectively deal with this in cooperation with law enforcement agencies. Only then can action yield better results.

Alas, our competition law does not have provisions to treat cartels as criminal activities, otherwise the colluders can face a double whammy. First, for cartelising from the competition agency, and secondly from the police and courts for coercing reluctant operators to fall in line. There is therefore a sound need to evaluate such an amendment in the competition regime.

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