COMPETITIVENESS is the adrenaline of all economies.

Many businesses, however, either collude through cartels or plainly abuse their dominance through monopolistic and exclusionary behavior. Every other day, cartels are being hauled up by fair-competition agencies around the world. But a more difficult fight is against dominant players abusing their preeminence through monopolistic practices. For example, the fight of the European Commission with Microsoft Corp over alleged abusive behavior.

In its first-ever and biggest fine on a single company, the commission recently levied a fine of US$1.4 billion against Microsoft for noncompliance with its order.This is a typical case of an intellectual property rights holder that misuses its position by ensuring that consumers have little choice, and are thus pushed into buying their products. In India, Monsanto is facing a competition action (involving the Competition Act) on grounds that it charges excessively for its patented Bt cotton seeds.The case has not been resolved finally, but shows how intellectual property rights holders abuse their monopolistic status.

Abusive behavior can also be seen in many other cases, where there are natural monopolies, such as airports, energy and utility companies. Energy companies around the world create onerous conditions for their consumers, most of whom do not have a choice at all. Another type of abusive behavior has been observed in segments like microprocessors.In Europe, and in parts of Asia, monopoly power is still seen as problematic and worth serious competition action.

In North America, monopoly power has been relegated largely to a regulatory also-ran as agencies focus on cartels and merger reviews.

The key questions for all those interested in fair competition policy are first, does the divergence have any practical impact on consumers and economies? Second, does it matter if agencies differ on abusive monopoly power.

So how are we facing a situation in which the European Commission is seen to be blazing a trail against abuse of monopoly power while the US Department of Justice treats monopoly power as seriously as rowdiness at a game?

The answers lie in more than one place. One answer could be that the US and the EU simply enforce their competition rules differently.

The Author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at psm@cuts.org

A new competition law passed in 2002, further amended in 2007, will be operational soon. One of its active agenda will be to curb abusive monopolistic practices by businesses.

Contestability of markets is the adrenaline of all economies. While countries liberalise their economies, an extremely vital concomitant reform is the enactment and implementation of appropriate competition laws so that consumers and businesses get the benefits of liberalisation. In India, a new competition law was passed in 2002 to replace the archaic Monopolies and Restrictive Trade Practices Act of 1969. The new law has been further amended in 2007 and will be in operation soon. One of its active agenda will be to curb abusive monopolistic practices by businesses.

Businesses either collude through cartels or abuse their dominance through exploitative and/or exclusionary behaviour. Every other day, cartels are being  hauled up  by competition agencies around the world. But a more difficult area for competition authorities is taking action against dominant players abusing their dominance through monopolistic practices. The complex analysis can take time and care has to be taken to see whether the dominance has actually harmed competition. The use of ‘rule of reason' rather than the ‘rule of law' will need to be applied to ensure that actions do not end in stifling competition and growth.

Abuse of dominance (AOD) is broadly of two types: Exclusionary and exploitative.

Exclusionary abuse involves driving out competitors from the market. For example, in some states in India, truck operators are not allowed to load and unload goods on a particular spot unless they join the truck union. The truck union charges tariffs almost 35-40 per cent higher than prevailing market rates. The Monopolies and Restrictive Trade Practices Commission (MRTPC) has taken action against over two dozen such cases in its history, but only with an order to cease and desist. The MRTP Act has no bite, hence these cases of ‘collective abuse of dominance' continue to function. Hopefully, the new Competition Act, 2002 will be able to deal with them in an effective manner.

Exploitative abuse is when a firm is exploiting customers by ignoring their needs as well as those of its competitors. For example, a contemporary case in India relates to Monsanto's high pricing of Bt cotton seeds: A farmer-consumer has little choice because Monsanto has a global patent on such seeds. This matter had come up before the MRTPC, which ruled that Monsanto's charging of a high royalty is unconscionable. The matter is now pending in an appeal to the Supreme Court.

Exploitative monopolies are also common place across natural monopolies like energy and utility companies, airports and toll roads. For instance, bills generated by a utility can impose onerous terms on the consumer, who has no choice but to pay up or face no supply. Where intellectual property rights are involved, as in the Monsanto case, both types of abuses can take place.

For example, in its first ever and biggest fine on a single company the European Commission recently levied a fine of $1.4 billion on Microsoft for non-compliance of its order.

The fine stemmed from a 2004 decision by the Commission in which Microsoft was required to disclose "complete and accurate" technical information on reasonable terms that would allow competitors to develop products compatible with its patented Windows system. In complying with the order, the royalties that Microsoft demanded from its competitors were pretty unreasonable, thus negating the spirit of the order.

This is a typical case of an IPR holder which misuses its position by ensuring that consumers have little choice and are pushed into buying their products. Microsoft also has allegedly stacked national standards sub-committees of the International Organisation of Standards (ISO) with its nominees to finalise international standards that are loaded in favour of Microsoft's own products. For example, the ISO accepted Microsoft's Office Open XML in April 2008 as the format for an international standard, in spite of serious objections by India and South Africa.

A similar type of abusive behaviour and unfair practice has been observed in segments like microchips. Intel dominates the world market for microchips with an 80 per cent share, while the other US-based firm, AMD, has a 20 per cent market share. In a recent case filed in the US District Court of Delaware, AMD claims that Intel paid off Acer, Dell, major Japanese manufacturers, system builders and distributors ‘to close their doors to AMD'. Where it could not buy exclusivity from PC makers, AMD alleged that Intel focused its payments on keeping away computers based on AMD microchips from large business customers.

Recently, while the cases in the US and Europe are still being adjudicated, Korea has been the first country to charge Intel with a ¤16.5 million fine for rebates offered to Samsung and Trigem to buy only its chips and not from AMD.

In India, AMD is fighting the same battle with Intel. In February 2008, its India chief alleged that most procurement tenders from both central and state government units ask bidders for PCs only with Intel chips. For example, the Lok Sabha tenders for 105 laptops and 80 palmtops last year required a bid from OEMs on only Intel-based products.

These two monopoly power cases in the technology sector strike at the heart of a modern economy. With the presence of both Microsoft and Intel, competition regulators need to ensure that innovation for the benefit of consumers, and indeed the entire economy, is protected. No two firms should be able to retard the ability of rivals and customers to innovate. Without a wide supplier base, the future trajectory of computing is left in the hands of a Wintel monopoly.

An AMD spokesman in a conversation told me their assessment is that the consumer-cost burden of Intel's dominance is around $30 per PC, whereas the consumer-cost impact of Microsoft's dominance is about $8 per PC. If the Wintel monopoly can be broken, then it would increase gains not only for consumers but also competing businesses and our growing IT industry. Imagine their impact in India today, and tomorrow, when we may become world leaders as the largest consumers of PCs, software, and exporters of IT services.

The Author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at psm@cuts.org

The wholesale price index has scaled new heights and reached 8.75%; with prices and temperatures threatening to go through the roof. This promises to be a hot and expensive summer. Such long bouts of inflation generate anger against two lobbies — the incumbent political coalition for its allegedly faulty policies and the suppliers of essential inputs like cement and steel.

In this article we examine the allegations of cartelisation against the iron and steel industry. Note that iron and steel are inputs into a wide variety of goods — from cycles to automobiles, bridges to stadiums, apartments to offices. When iron and steel prices rise, accusations, even if they are not justifiable, are understandable on the grounds of human psychology.

An entire assortment of items becomes more expensive to produce and therefore to consume. Producers are unhappy because they produce less at a higher cost and lose out on profits. Consumers feel cheated as they consume less but at higher prices.

A large number of dissatisfied businesses and consumers implies that it is inevitable that some potshots are taken at the steel industry in the country. For example, on January 25, 2008, the United Cycle Manufacturers Association came out with a public appeal to the prime minister, finance minister and minister of steel in a leading English daily to check the price rise in iron and steel.

This attributed the price rise to the partnership of six iron and steel barons, and added that it was putting the purchase of a bicycle beyond the reach of the aam admi. Other manufactures have also made similar protests.

Why is this state of affairs not desirable? When people react to the world around them their reactions are often exaggerated. When rumour mills are abuzz with talk about steel cartels jeopardising our national interests these result in defensive purchases; consumers rush to buy more of the commodity fuelling further price increases. Therefore, it is essential to maintain a level head during times of inflation.

The smiling, and even stern, ministers who pacify the world around them that an inflationary episode is about to end is surely of some use. Their calmness and confidence, even though it might be a façade, can help cool off some of the inflationary tendencies in the economy resulting from knee-jerk actions by consumers and businesses.

If the existence of a steel cartel is revealed it is essential that we catch the wrongdoers and bring them to book. However, in a modern society and economy everybody is innocent until proven guilty. The same is true of cartels even though circumstantial evidence that shows the formation of cartels is admissible in litigation against them.

However, circumstantial evidence does not stand the test in a court of law. This is because a single phenomenon such as price rise might have several possible reasons — operation of a cartel, rising costs, a decline in world supply and so on.

When factors other than the operation of a cartel are active it is very difficult to attribute high inflation to cartelisation. Price watching might be the answer — this involves watching international and domestic prices over time and looking out for sudden increases or decreases in the gaps separating the two which might be representative of cartelised interventions. Let us look at the story that unfolds if we use this technique.

The latest available data for the world iron and steel price index pertain to the financial year 2006-07 and point to a price rise of 75 % for that year, much in excess of the rise of 18% in the Indian iron and steel price index.

What about the very recent past for which organised data do not exist? In India fears of cartelisation in the steel industry have been sparked by a price rise of around 20% in iron and steel in the first three months of this year. But this change has to be evaluated in the perspective of what is happening globally.

Kommersant, a Russian online daily, reported on April 29 this year that world steel prices have risen by as much as 40% on average this year, primarily due to the imposition of an export tax on steel by the People’s Republic of China that has significantly reduced that country’s steel exports and partially due to a hike in costs of production. The 20% rise in domestic iron and steel prices, though large in absolute terms, is dwarfed by the global rise of 40%.

The iron and steel price index is an aggregate which is determined by the prices and volumes bought of many different types of the metal. Could it be that the producers of one or more variety have ganged up to form a cartel — a phenomenon not discernible from the bird’s eye view of indices?

Variety specific comparisons for the last 12 months or even before are fraught with risks of inaccuracy as the international and Indian classifications of varieties do not match. But sampling indicates that detection of cartelisation should not be guided by the magnitude of price rise.

For example, in the financial year 2007-08 the price of pig iron went up from Rs 22,000 to Rs 34,500 a tonne in India. Before we attribute this phenomenon to cartelisation some more evidence needs to be examined.

Towards the end of April this year Pakistan Steel Mills raised the price of pig iron to Rs 39,200 per tonne, attributing this to a $148 (Rs 6,000) rise in the price of pig iron in the global market over the course of just one week. Our pig iron prices are not only much lower than that in neighbouring Pakistan, their upward mobility is also fairly restricted in comparison to global prices.

It seems that it is difficult to prove cartelisation in India’s steel industry, given the information available about the national and global picture or the lack of it. This does not mean that a cartel does not exist. All that we can say is that available information and knowledge does not allow us to vouch for the existence of a cartel with any degree of confidence. It seems that we are better off tinkering with macroeconomic curbs on pollution and waiting for the inflationary heat in the world economy to cool off.

The authors are Secretary-General and Director (Research), CUTS International and can be reached at psm@cuts.org and sm2@cuts.org respectively.

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WHILE inflation touches new highs, a finger continues to wag accusingly at producers of basic inputs like cement and steel. Over the last year or so, cement prices have increased by around 15% which exceeds by far the general rise in the level of wholesale prices.

Such statistics confirm the positive role that cement prices played in the recent upsurge in the wholesale price index (WPI), with inflation reaching the 8% mark. Price surges in the cement sector have contributed to spiralling inflation in two ways — directly, but not very significantly, as cement has only a 1.74% weight in the WPI and indirectly, but much more significantly, as cement is a basic input into construction with a rise in its price contributing significantly to upward surges in rentals and real estate prices.

Interestingly, the recent jump in the level of cement prices is a phenomenon that both cement companies and government have failed to explain adequately. Such rapid price appreciation in the cement sector over the last year is surprising given that the financial year 2006-07 barely saw a 5% increase in cement prices. Paradoxically, the rate of economic growth in the just concluded financial year was 8.7%, considerably below the 9.6% mark attained in the FY 2006-07. As economic growth rates constitute a fair barometer of growth in demand for basic inputs, the recent spurt in prices cannot certainly be explained by a rise in demand.

It is not surprising, therefore, that suspicions about a cartel operating in this sector have been roused and fanned by the media. Such attention has culminated in the government issuing a warning to cement companies that any established complicity in cartelisation would result in stern action. However, it is easy to allege that a cartel exists; establishing cartelisation is a completely different ball game. As this article goes to press, the government has convinced cement producers to lower prices. But this cannot be interpreted as the consequence of an anti-cartel action; it is merely a quid-pro-quo for excise duty cuts.

The inherent difficulties involved in cartel busting are compounded by India’s institutional setup for tackling competition issues, which is currently in a transitory stage and, therefore, has not become fully effective. Successful cartel busting requires a committed and capable regulatory authority. In India, the Monopolies and Restrictive Trade Practices Commission (MRTPC), which has for very long served as the country’s competition authority, has not addressed the issue of cartelisation adequately. The Competition Commission of India (CCI) which has been empowered to enforce India’s new competition law (Competition Act 2002, as amended in 2007), is still at a nascent stage and it might take another year or two for it to be full operational.

While the institutional setup for formally investigating and tackling anti-competitive practices has not become fully effective, it is still possible to detect cartelisation through an intelligent analysis of data on prices, consumption and capacity utilisation. A study by Ritu Raj Arora and Runa Sarkar of IIT Kanpur points to the presence of a few dominant firms and the existence of constant levels of capacity utilisation in the face of fluctuating demand; and they conclude that these data indicate cartelisation over the last two years.

Such evidence appears to be convincing; for example, a constant capacity utilisation in the face of fluctuating consumption levels implies that in many periods, demand and supply does not match, with excess production in some periods compensating for deficits in others. In competitive markets, on the other hand, prices automatically adjust to balance supply and demand. That such competitive price levels are not attained in the case of the cement industry points to cartelisation – price being set at a level which is different from the competitive level through an act of collusion. The motive behind such cartelisation could probably be to avoid the low competitive prices which occur in the slack seasons and send profit levels tumbling to rock bottom levels.

A look at price data in the north zone shows that prices in the last two years have not fallen during the slack season implying that there is probably a concerted action by producers to restrict supply to the market in times of slack demand and maintain prices at the high level enjoyed during times of boom. Strangely, the Central zone data do not exhibit similar trends, thus indicating the presence of regional cartels.

Why is this issue of cartelisation so important? Both the government and private sector have been increasingly promising investment in infrastructure, construction and other industry. This implies that such activities are going to lead to a boom in cement demand; but with cartels operating, such expansion plans might be sabotaged by artificially-created shortages. This in turn implies that an effective regulatory framework with both the ability to investigate into potential cartelising behaviour and a mandate to adequately punish proven cartels is probably the need of the hour

While the transition mentioned in the regulatory structure pertaining to competition needs to be effected with due care and attention to detail, such needs have to be balanced against the damage effected by delays in transition that result in the expansion of vital industries such as cement and consequently economic growth being crippled by cartels.

The authors are Secretary-General and Director (Research), CUTS International and can be reached at psm@cuts.org and sm2@cuts.org respectively.