Cartels: The Unseen Economic Burden on Consumers
By David Kemei
NAIROBI, Kenya, Nov 14 – The term 'cartel' carries a negative reputation, and for good reason. These clandestine networks, operating across various sectors, are formed with a singular goal: to benefit their members at the expense of consumers and the broader economy. In the realm of competition law, cartels manifest in numerous forms, with 'hardcore cartels' being the most insidious. These entities engage in harmful practices designed to subvert the principles of a free market, where supply and demand dictate prices, and competitors strive to attract customers with their offerings.
When cartels form, they eliminate the pressure to innovate and improve. Instead of competing, cartel members collude to maximize profits. This collusion results in higher prices for consumers, whether it's a bag of cement or a tub of margarine. Studies by the World Bank and the OECD reveal that cartels can lead to price increases of 20-25%.
The most egregious form of cartelization is price fixing. Members conspire to set prices, coordinate adjustments, and manipulate discounts. Production costs, profit margins, and competitor dynamics are often ignored in favor of these predetermined prices. Another insidious practice is market allocation, where businesses divide supply routes and customers, creating protected territories free from competition. Imagine not finding your favorite soap brand at the supermarket due to a 'no-go zone' rather than supply constraints.
Output restriction is another tactic where businesses limit production to create artificial shortages, driving up prices and profits. Bid rigging, or collusive tendering, involves bidders agreeing on the successful supplier in advance, with deliberate withdrawals, omissions, or outrageous quotes to ensure disqualification. This undermines fair competition and investor confidence.
In such an environment, fair-competing businesses struggle to survive or grow. Investors, both local and international, are less likely to commit resources to sectors controlled by cartels, hindering productivity and economic growth. This is why competition agencies worldwide dedicate significant resources to investigating and sanctioning cartel behavior, recognizing its detrimental impact on a country's economic goals and consumer welfare.
The Competition Authority of Kenya (CAK) is mandated to investigate and sanction cartels. Under the Competition Act, the CAK can impose administrative penalties of up to 10% of a culpable firm's previous year's gross annual turnover in Kenya. Guilty parties may also face criminal prosecution.
In August 2023, the CAK penalized steel manufacturers for KES 338 million in cartel conduct, including price fixing and import restrictions. In 2021, a KES 66 million fine was imposed on paint manufacturers for price fixing and transport charge agreements. These practices can inflate construction costs, hindering the government's affordable housing agenda.
The CAK has also sanctioned cartels in concrete and treated wooden pole tenders and is probing other sectors like agriculture and financial services, targeting powerful trade associations that restrict competition. The authority continues to monitor various markets.
Despite efforts, cartels persist in our economy. We acknowledge the need for further action. To enhance our capabilities, we've invested KES 45 million in a forensics laboratory to improve evidence gathering and analysis. Our case handlers are trained to identify collusive behavior in a digitalized ecosystem.
One of our intelligence-gathering tools is offering leniency to cartel participants who voluntarily disclose and cooperate. Under certain conditions, these parties receive reduced fines or full pardons. Additionally, non-participants aware of cartel conduct can report it to the CAK.
The writer is Director-General at the Competition Authority of Kenya
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