I wanted to discuss the deterrence effect of high fines on cartels in light of the reduction of penalty by COMPAT in the Aluminium Phosphide tables bid rigging cartel matter. The facts of the matter and my observations on the same have already been provided in one of the previous blog entries.The same can be accessed here.
At the outset, I hope that the Competition Commission of India is appealing against the reduction in penalties by COMPAT in the aforesaid case to the Supreme Court of India. I read certain news articles which stated that Competition Commission of India’s headline grabbing penalties are nearing an end and that CCI’s enthusiasm regarding high penalties against cartels is over. In regard to the same, i wanted to point out couple of things. Firstly, it is not an ego boost for the Commission to impose such huge penalties against enterprises for violating competition laws. They are doing the same for the good of the consumers. The Commission levies the penalties in order to punish colluding enterprises that form a cartel and cheat the consumers of the country of crores of rupees every year through various anti-competitive activities like price fixing, output reducing, market allocation etc. The Commission while deciding on the penalty takes into account the gravity of the anti-competitive infringement and also ensures that the colluding enterprises don’t engage in such activities again in the future.
Why high penalties are necessary to deter cartels?
Cartels is one of the most serious form of anti-competitive practice that harms the consumers through higher prices, lesser quality and reduced choice. As a result of cartelisation, the consumers have no other choice but to buy products at high prices. It also leads to less innovation as enterprises don’t have any competitive constraints and therefore are not motivated to bring new products and services to the market. With the passage of time, cartelisation damages the overall economy of the country.
The probability of detecting cartels is extremely low as they operate in a secret and clandestine manner. The optimal fine for deterrence and punishment of cartels needs to take into account the low probability of cartel detection. High fines are necessary as the same would result in enterprises hesitating to engage in collusive activities. The costs of colluding i.e. the penalties that may be imposed by the Commission needs to be higher than the expected benefits of cartelisation by the enterprises. Only then would the competition laws have any impact for the benefit of the consumers. If the fines are less then the deterrence effect becomes weak. Further, if the fines are low then it may even encourage those enterprises, that are not colluding, to actually cartelise after doing a cost benefit analysis and earn higher profits. Considering the same, the competition agencies need to impose a penalty that punishes colluding enterprises but also ensures that colluding/non-colluding enterprises are always hesitant and discouraged to collude in the future.
Another impact of less penalties is that it reduces the benefits of the leniency programme. The primary purpose of the leniency programme is cartel detection. It encourages colluding enterprises to come forward and provide details of cartel activity to the Commission in exchange for immunity from high penalties. Leniency programmes have proved to be a vital tool in the arsenal of the competition authorities and has led to the detection of numerous cartels around the world. The said programme would only have an impact if the corresponding penalties that may be levied for cartels is significantly high. The fear of (if I may say so) headline grabbing fines/penalties would result in enterprises approaching the Commission for leniency. Concluding, I would hope that the Competition Commission of India appeals against the reduction in penalty to the Supreme Court of India.