Businesses in a cartel price their offerings based on their collective desire for extraordinary profits. For them, it is more profitable to collude than compete. The result is an invisible tax on consumers, David Kemei, Director-General, Competition Authority of Kenya, writes.
The word cartel evokes negative connotations, and rightly so. Cartels, irrespective of the sector in which they exist, are formed to benefit the proponents of the scheme, at the expense of consumers and the economy.
In competition law, cartels exist in many forms and this antipathy is reinforced by the term hardcore cartels. Hardcore cartels exhibit harmful conduct meant to undermine the principles of a free market – where forces of demand and supply dictate the market, and competitors face off on the merits to woo as many customers as possible.
Without the pressure to compete, cartel members have no incentive to innovate and improve their products and services, or processes. Businesses in a cartel price their offerings based on their collective desire for extraordinary profits. For them, it is more profitable to collude than compete.
The end result is that you and I are charged more than would prevail in a competitive environment. Whether you are in the market for a bag of cement or a tub of margarine, you encounter the same high price at different stores. This limits consumer choice and leaves less money in our pockets to buy other essentials.
The truth is that cartels remain pervasive in our economy. We concede that more needs to be done to address this challenge.
Cartels are an invisible tax on consumers. Different studies by the World Bank and the OECD indicate that cartels result in price increases of between 20% - 25%.
The most egregious form of cartelization is price fixing. Members of the cartel agree to charge a certain price, coordinate price adjustments, and discounts. Production costs, profits margins, and competitor dynamics take a backseat when determining ex-factory prices.
Another example is market allocation where businesses divide supply routes and customers. Each firm in this arrangement benefits from a protected territory free from competition by “cartelmates.” Consider not accessing your favourite soap brand at the supermarket, not due to supply constraints, but because it is located in a “no-go-zone.”
On the other hand, output restriction happens when businesses tinker with the forces of supply and demand. By agreeing to limit their production levels, they create an artificial shortage, driving up prices for customers and profits for the schemers.
Bid rigging, also known as collusive tendering, occurs where bidders agree on the successful supplier in advance. A bidder may deliberately withdraw a bid shortly before the deadline, submit one with intentional omissions, or quote an outrageous cost with the intention of being disqualified. In the end, their accomplice supplier secures the job.
Businesses that are competing fairly struggle to survive or grow in such environments. A potential investor, whether local or international, is unlikely to commit resources into a sector that is controlled by incumbents operating a cartel. Erosion of investor confidence stunts productivity and economic growth.
This is why competition agencies worldwide dedicate significant resources to investigate and sanction cartel behaviour as it represents a grave sabotage a country’s economic goals and prospects, while harming consumers.
Kenya's Fight Against Cartels
One of the mandates of the Competition Authority of Kenya (CAK) to investigate and sanction cartels. Under the Competition Act, the CAK may impose an administrative penalty of up to 10% of a culpable firm's preceding year's gross annual turnover in Kenya. Those found guilty may also face criminal prosecution.
In August 2023, the CAK penalized various steel manufacturers over KSh 338 Million for cartel conduct including price fixing, coordinating price adjustments, and agreeing to limit imports of certain inputs. In 2021, we imposed a KSh 66 million fine against four paint manufacturers for price-fixing and agreeing on transport charges and discounts. Such practices potentially inflate the cost of constructing homes and infrastructure projects, undermining the Government’s affordable housing agenda.
The Authority also sanctioned cartel conduct in tenders for supply of concrete and treated wooden poles for electricity transmission, and undertaken probes into other sectors like agriculture and financial services, targeting powerful trade associations implementing rules that restrict competition. The CAK continues to screen various other markets.
The truth is that cartels remain pervasive in our economy. We concede that more needs to be done to address this challenge. To bolster our work, we have invested in a KSh 45 Million forensics laboratory to enhance our evidence-gathering and analysis capacity. Our case handlers are also continuously trained to better attend to collusive behavior in a highly digitalized ecosystem.
One of the tools through which we gather intelligence is by offering leniency to cartel participants who voluntarily disclose a cartel and cooperate with the investigation. Subject to various conditions, such parties receive reduced fines or full pardon. Additionally, if you are aware of a cartel conduct, but are not a participant in it, you can report to the matter to the CAK.
