Last week, the antitrust regulator Competition Commission of India (CCI) said it has found 6 companies guilty of “price-fixing”. And in today’s Finshots we explain why companies engage in such behaviour and how the CCI scuttles this devious scheme.
The Story
For the uninitiated, here’s a brief about cartels and the competition commission of India — “Cartels crop up when all the big players come together and collectively make decisions that benefit the group. They aren’t good for consumers. They tame competition and discourage innovation in products. Moreover, when cartels dominate a market, consumers don’t get the benefits of price discounts. So, we have elaborate checks and balances in place to make sure cartels don’t ruin our lives and we’ve delegated this sacred task to the Competition Commission of India (CCI). These good people are tasked with regulating companies that indulge in anti-competitive behaviour.”
With that introduction out of the way, let’s talk about the case in point — The 6 firms found guilty of anti-competitive behaviour. It seems these firms were trying to extract a pretty premium by duping the Food Corporation of India. But they weren’t duping them outright. Instead, they were cartelizing i.e. they were colluding with each other to optimize outcomes for the group.
So here’s how it went — The Food Corporation of India floats tenders to procure Low-Density Poly Ethylene covers (LDPE) — covers probably meant to store food grains. Now ideally they’d want to conduct an open auction and invite bids that are competitive. They’d want to get the best price possible, for the specifications they seek. But it seems these 6 firms decided to collude with each other and rig the entire auction. They decided who was going to bid what sum and optimized their outcomes. Maybe one firm gets the contract this time around and another firm wins the bid next time. This way they get to extract as much money from FCI as possible each time they go to auction.
And obviously, this is a big no-no. When FCI bears a higher burden, it’s ultimately the taxpayers that end up footing the bill. Besides, this kind of anti-competitive behaviour is plain illegal. Which is why the CCI had to intervene —They filed a cease and desist order, barring these firms from pursuing this LDPE business any further, but stopped short of imposing a penalty. Why? You ask.
Well as the order notes —
CCI refrained from imposing any monetary penalty considering that four out of six firms had filed lesser penalty applications and admitted their conduct, confessed their modus operandi during investigation thereby fully cooperated with CCI. Moreover, the firms were also MSMEs with limited staff/ turnover and the prevailing economic situation arising due to the outbreak of COVID-19, stress wrought upon the MSME sector in the wake of the said pandemic.
So perhaps a little soft spot for the struggling MSMEs of this country.
But the CCI doesn’t take things lightly when it’s the big boys doing the price rigging. The Competition Commission of India imposed a combined penalty of Rs. 870 crores on the likes of United Breweries Limited (UBL) and Carlsberg India Private Limited (‘CIPL’) after finding them guilty of forming a “beer cartel” and rigging prices. In fact, we wrote about this rather extensively when we covered the matter a few months earlier.
Cartels tend to work best in secrecy which makes detecting them even more difficult. But every now and then, a complaint makes its way to the CCI and blows the lid off the whole scheme. On certain occasions, the tip-offs can come from inside the cartel and these cases often turn out to be the most compelling ones. And to incentivize insiders to come clean, CCI is also empowered with an ace up its sleeve— ‘The Leniency Program.’ Through this initiative, companies can come clean and co-operate with the commission’s investigation in exchange for lower penalties.
And this is what eventually led to the unravelling of the Beer Cartel in India.
The story of SABMiller India.
In 2016, Belgium’s AB InBev — the world’s largest brewer decided to acquire its rival SABMiller for around $100 billion. It was a mammoth global deal that involved merging both businesses together, including their respective India operations.
At the time, SABMiller was the second-largest brewer in the world and had a strong foothold in India, with famous brands such as Haywards and Fosters. However, while AB InBev was trying to integrate SABMiller India into its fold, it discovered a rather nefarious secret. SABMiller’s India executives had been involved in a price-fixing cartel. And soon, AB InBev brought this to CCI’s notice and filed a ‘leniency application’. Later in 2018, United Breweries and Carlsberg followed suit. The whole thing quickly turned into a game of prisoner’s dilemma. Neither side knew what evidence the other companies were passing on to the competition commission. So all they could do was spill everything they had, in the hopes of getting some of that ‘leniency’.
And eventually, based on this information, CCI raided the company offices in 2018 and seized hundreds of files and more than 2 terabytes of data from laptops, pen drives and smartphones. CCI found emails and WhatsApp chats that clearly showed how executives regularly discussed beer prices, violating Indian anti-competition laws. Around 19 executives from these companies, at the highest level of management, were found to be involved.
Now bear in mind, the implicated brewers control 88% of India’s $7 billion beer market and they wield considerable influence. So if they come together and decide to inflate prices it can be particularly damaging to consumers.
But why do rivals ever work together? Why would they help each other out.
Well, the simple answer is that working together has its perks sometimes. India’s alcohol market is quite complex. Individual states regulate taxes and prices. This is why you’ll often find bottles stamped “Only for sale in Karnataka” or “Only for sale in Maharashtra”. And every year, any price hike would have to be approved by the state authority. In a state like Karnataka, price changes are permitted only on three specific dates in any given year.
So imagine UBL decides to hike prices by 5% and Carlsberg thinks a 15% increase would do the trick. This would put Carlsberg at a huge disadvantage considering price-conscious customers may now switch brands. But if they exchanged notes and made identical price revisions, nobody would have to lose. They’d even have more bargaining power with authorities. So it definitely makes sense to collude. In fact, there’s a whole discipline within economics that helps you optimize outcomes when you are participating in such a game — Game theory.
But when you decide to go overboard and actively collude with your competitors, then the CCI will show up and make sure you mend your ways. No game theory is going to help you at that point.
Until then…
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Edit: We've also added extra context surrounding CCI's investigation into the Beer Cartel to more accurately reflect the details of the case
Correction: In yesterday's article titled "The curious case of IRCTC" we wrote that the company was listed on October 2020, when in fact IRCTC listed back in October 2019. The error is regretted
