In the month of June 2012, competition commission had passed a judgment (Case no 29/2010 – Builders Association of India’s case) in a complicated case which involved interpretation of economic variables and substantial question of facts. Students of professional courses should know about the case since in my opinion questions relating to this case might appear in the Law paper. I will try my level best to explain the case as lucidly as possible.
About Oligopoly & Cartel
Please recall what we have learnt during our CPT or during our college days in Economics. Oligopoly is a market situation wherein there are very few sellers when compared to the quantum of buyers. Since competition is very low in an oligopolistic market, the prices will certainly cover the cost. The price is not determined by the demand. It is determined by the profit fixed by the sellers. Every seller is watchful of his competitor. If one seller reduces price by say 5%, the other will cut by 6% and all the others will follow the suit. So there is always a risk of price war in an oligopolistic market.
Now look at section 2(c) of Competition Act. It says that "cartel" includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services. What has happened in the current case is that the Builders Association of India (BAI) has proved that cement companies have formed a cartel due to which the companies have been penalised to the extent of 50% of the net profits.
Contention of Builders Association of India
BAI stated that the cement industry in India is an oligopolistic market. Most of the big companies have formed Cement Manufacturers Association (CMA). BAI said that CMA holds lot of meetings during which all the members of CMA had agreed to raise the price of cement. It was proved that almost every time there was CMA meeting, the prices of cement increased. It also brought before the attention of commission various statistics released by CMA itself which stated that the cement companies have underutilised their capacity. BAI further alleged that the CMA members deliberately under-utilised their capacity to create shortage of cement supply. There was strong correlation of price, dispatch and production of all the members of CMA. This is achieved because all the members of CMA share price sensitive data and they have agreed not to compete among themselves. BAI said that all the members have agreed among themselves that they will uniformly increase the price so that all the players will make good profit. It stated that the total quantity produced by cement manufacturers had increased in Fyr 09-10. Also the cost of production of cement have come down because they have been increasingly using Fly ash for cement production which is available for free of cost from State owned thermal plants. If there was genuine economics, increase in quantity of production would have resulted in economy of scale – which would have resulted in fall in cost and price. However, the prices have increased significantly. Also profit margins as per their audited financials have increased significantly.
Reply by the CMA and its members
CMA and its members stated price of cement is not fixed based on cost plus margin basis – because it is in an oligopoly. The members stated that one member fixed the price only to respond to the price fixation by his competitor. This resulted in positive correlation among the prices. Most of them said that they have under-utilised the capacity since there was fall in demand of cement. They also said that CMA is not an association with an intention to limit supply and hence cannot be considered as cartel. It is just like any other association. There is no agreement among the cement companies or among the CMA members to restrict the supply of cement. The provisions of cartel came to effect only by notification dated 20.5.09. However the Director General had considered the data prior to 20.5.09 in proving the presence of cartel.
Final verdict by Commission
Commission after going through the arguments of both the parties observed the following:
1. It is unacceptable to state that the demand of cement has come down because the real estate sector has grown rapidly.
2. To brand an association as a Cartel, it is not necessary that there should be a formal agreement. The existence of cartel can be proved using circumstantial evidence. Sharing of price sensitive data, production and dispatch details etc are strong circumstantial evidences that suggests that the members of CMA have indulged in a cartel. U/s 2 of Competition Act, "agreement" includes any arrangement or understanding or action in concert,—
(i) Whether or not, such arrangement, understanding or action is formal or in writing; or
(ii) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings
3. If the members of CMA had fixed the price to respond to competitors’ pricing, why didn’t they produce documentation to prove that they have fixed the price to respond to competitors’ price?
4. The director general had used data prior to 20.5.09 only to understand the trend of economic variables. Consequently, it can’t be stated that the law had been enforced retrospectively.
5. The circumstantial evidences are strong enough to suggest that the CMA and its members indulged in cartel.