Let competitive juices flowWhether it’s called a cartel or a syndicate, the ultimate goal is the same: price-fixing
Addressing the ruling party Members of Parliament earlier this month, Prime Minister KP Sharma Oli said that the recent crackdown on transport syndicates was just a beginning, and that the effort would be expanded to syndicates in other sectors too. Words like ‘syndicate’ and ‘cartel’ have come up a lot in recent weeks. These are powerful words with negative connotations. In the old days in the US, the cartel run by the Mafia was called the syndicate. There are two main types of cartels: horizontal and vertical. Horizontal collusion takes place between firms in the same industry, for example, bus operators in some cities. Vertical collusion, on the other hand, is an agreement about reselling. An example would be auto manufacturers restricting the ways in which distributors can market their products. In either case, consumers are at the receiving end.
The KP Oli government and the Federation of Nepalese National Transport Entrepreneurs early this month reached an agreement to scrap all transport syndicates. This was preceded by strikes and protests called by transport operators, inflicting hardship on consumers. Soon followed arrests of several office bearers of the federation and freezing of their bank accounts. The government, accusing the sector of being run as a cartel, acted tough. Rightly so. We can call it a cartel or a syndicate, or simply say that competitors were working together. The end goal in all this is the same: price-fixing. And it is not only a Third World problem.
If we broaden our horizon and look at the issue of price-fixing globally, the Organisation of the Petroleum Exporting Countries (OPEC) is probably the most famous cartel. Its 14 member countries account for more than two-fifths of global oil production, and wield a major influence on global oil prices. Here is a case in point. The price of Brent crude began dropping from a high of $115.71 per barrel in June 2014. By January 2016, it had plunged to $27.10. In November that year, OPEC as well as Russia, a non-member, began cutting production from 33.8 million barrels per day to 32.5 million barrels. The goal was to prop up prices. This month, Brent crude hit a high of $80.50. One might ask, why is OPEC allowed to exist in the first place? Well, if price-fixing is permitted under a multilateral treaty or if it involves sovereign nations, the agreement to control prices may be protected from lawsuits. OPEC is more the exception than the rule.
Here are some examples of busted price-fixing attempts involving products with a global reach. In 2005, Samsung pleaded guilty in the US to conspiring with other DRAM makers including Infineon and Hynix Semiconductor to fix the price of DRAM memory. Also in the US in 2008, LG Display, Sharp Corp and Chunghwa Picture Tubes pleaded guilty to conspiring to fix prices of LCD panels. In March this year, the European Commission fined eight firms, mostly Japanese, for price-fixing on capacitors.
In all these instances, the entities involved are individual companies. They were collectively working together to fix prices rather than compete against each other. Consumers are the ones to bear the brunt of the problem in the form of higher prices. Hence the need for governments to step in. Their job gets easier if the culprits are all based and operate in the same jurisdiction, which was the case with transport operators that the Oli government stood up against.
In the simplest of terms, governments need to act for the greater good of the country. Further, the longer a cartel is left on its own, the odds are their roots go deeper. Uprooting them then becomes a challenge. They become so powerful they begin to defy the law of the land. Mexican drug cartels come to mind. Cartels do not always succeed. More often than not, in due course, they fail because there is an incentive for one or more members to begin to cheat. A rebel of sorts. As prices are kept artificially high, this can put downward pressure on demand. Member firms then try to offset this by over-producing, which, in turn, results in excess capacity or inventory, particularly during economic contraction.
Shades of grey
The banking industry in Nepal was witness to one such rebel recently. In early March, NIC Asia Bank, one of the 28 commercial banks, announced that it would start paying 12 percent interest on fixed deposits. In normal circumstances in a free market, that would be just fine. But in this particular instance, NIC was going against an understanding to cap the savings rate at 8 percent and the fixed deposit rate at 11 percent, prompting the Nepal Bankers’ Association (NBA) to announce that the other 27 member banks would suspend interbank transactions with NIC. Three days later, NIC decided to lower the deposit rate back to 11 percent. In other words, the rebel was subjugated.
Can we call this a cartel-like behavior? If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. With that said, these things are not always black and white. There are lots of shades of grey. A little off-topic, but are trade unions a cartel? They aim to raise the price of labour by banding together. The NBA, too, is clearly looking out for its own interests. The problem in this is that critics can point to this as an act of setting interest rates, which should fall within the purview of Nepal Rastra Bank, the country’s central bank.
The temptation among the concerned authorities is to look the other way, accepting this as growing pains. The risk in this strategy is that while this lets the inefficient to survive, and even prosper, the efficient do not get rewarded enough. The risk-reward curve gets out of whack. Let the competitive juices flow. Hopefully, what transpired in the transport sector is just the beginning, as pledged by Prime Minister Oli.
Pandey specialises in portfolio investment and economic issues