Context: Last week, Competition Commission of India slapped a penalty of Rs 873 crore on the companies as well as the All-India Brewers Association and 11 individuals for cartelization in the sale and supply of beer in 10 states and Union Territories.

• United Breweries Ltd (UBL), Carlsberg India Pvt Ltd (CIPL) and Anheuser Busch InBev India, had colluded to fix beer prices between 2009 and 2018.

About Cartel

• A cartel is an organization created from a formal agreement between a group of producers of a good or service to regulate supply in order to regulate prices.
• It is a collection of independent businesses or countries that act together as if they were a single producer and thus can fix prices for the goods they produce and the services they render, without competition.

The three common components of a cartel are:

• an agreement;
• between competitors;
• to restrict competition.

Key Points

• Cartels are competitors in the same industry and seek to reduce that competition by controlling the price in agreement with one another.
• Strategy used by cartels include reduction of supply, price-fixing, collusive bidding, and market carving.
• In most regions, cartels are considered illegal and promoters of anti-competitive practices.
• The actions of cartels hurt consumers primarily through increased prices and lack of transparency.

How Cartel can be worse than Monopoly?

• Cartels could extract a higher social cost than even monopolies.

Monopolies are a source of social loss through productive inefficiencies. The reduced product innovation, is a greater problem with cartels than monopolies.

• Given that innovation would require the expenditure of research and development costs, such investment would not be undertaken.
• Since the monopolist, unlike the cartelist, must be concerned with other firms developing goods which may be less expensive substitutes for its goods,
• The monopolist may have greater incentive for research and development expenditure.
• Thus, the social costs of reduced product innovation may be greater with cartels.
• Cartels neither have any incentive to invest in research aimed at improving their product nor do they see any reason why they should boost investments towards making the methods of production more efficient.

How to stop the spread of cartelisation?

• Cartels are not easy to detect and identify.
• As such, experts often suggest providing a strong deterrence to those cartels that are found guilty of being one.
• Typically this takes the form of a monetary penalty that exceeds the gains amassed by the cartel.
• However, it must also be pointed out that it is not always easy to ascertain the exact gains from cartelisation.
• In fact, the threat of stringent penalties can be used in conjunction with providing leniency — as was done in the beer case.