CARTEL MICRO ECONOMICS

46
Ajay Agarwal Akhilesh Singh Rawat Alok Veer Yadav Ashish Rawat 9 TH PGP-PPM (GP-I) artelization in Cement Industry in Ind

description

CARTEL , MICRO ECONOMICS, CEMENT

Transcript of CARTEL MICRO ECONOMICS

Page 1: CARTEL MICRO ECONOMICS

Ajay AgarwalAkhilesh Singh RawatAlok Veer YadavAshish Rawat

9TH PGP-PPM (GP-I)

Cartelization in Cement Industry in India

Page 2: CARTEL MICRO ECONOMICS

The boom in real estate and construction industry in India

India saw a sudden & sharp increase in price of cement

Price increment was as high as 17% in a single month

Investigative arm DG Investigations (DGIR) pointed cartelisation and slammed Cement Manufacturers' Association for the "exorbitant" increase in prices”. ( Economic Times, 25 July, 2007)

Anti-monopoly watchdog MRTPC issued notices to 14 cement firms including Grasim, ACC and Ultratech

Page 3: CARTEL MICRO ECONOMICS

Probability of ongoing collusive behaviour among major cement players continues

It took 17 years for MRTPC to come to a decision on an old case of pernicious cement cartel in India of 1990s

In spite of notices & warnings by Govt. and competition commission, price of cement has breached all limits

High investment need in construction & infrastructure industry, high price of cement seriously impact economy’s growth

Page 4: CARTEL MICRO ECONOMICS

Topics to be Discussed Our presentation attempt to explain reason

behind rapid rise in cement price Further it attempt to explain elements of

cartel detection and highlight continuing cartelization in the Indian cement industry

We discuss issues about cartels and collusive behavior of sudden increase , Competition Versus Collusion:

Followed by a brief overview of the competition law in India

We conclude the cement industry has behaved in a collusive manner and suggest measures to deal with it

A. Problem of Cement Industry in India

B. Cement Cartels in India

C. Oligopoly and understanding cartels

D. Way ahead to bring competition and secure customers

Page 5: CARTEL MICRO ECONOMICS

Cement Industry in India

1. Era of dominant imports: 1914 to 1924

2. Era of struggle and survival: 1924-1941

3. Era of price control: pre-plan 1942-51

4. Era of planning and control:1951-1982

5. Era of partial decontrol: 1982-1988

6. Era of total decontrol:April1989

Page 6: CARTEL MICRO ECONOMICS

Ranking of Cement Production

World Ranking Country million

tonnes

1  People's Republic of China 2,300

2  India 280

3  United States 77.8

4  Iran 75

5  Brazil 70

6  Turkey 70

7 Russia 65

8 Others 1062.2

9  Total 4000

Page 7: CARTEL MICRO ECONOMICS

CEMENT INDUSTRY STRUCTURE : India ranks second in world cement producing countries –

produces 7%. While it took 8 decades to reach the 1st 1000 Lakh tonne

capacity, 2nd 1000 Lakh tonne was added in just 10 years. The Indian cement industry is weakly oligopolistic in

nature on a national level with top 11 to 12 firms among more than 100 firms capturing 70% of the cement market.

The major players are ACC Ltd, Ambuja Cements, Ultratech Cement Ltd., India Cements Ltd., Jaiprakash Associates Ltd., Birla Corporation Ltd., Lafarge India Pvt. Ltd, Madras Cements .

The shares in terms of All India cement production, of these top companies have fluctuated by small amounts in the last six years.

Page 8: CARTEL MICRO ECONOMICS

Demand driver for cement in India

Page 9: CARTEL MICRO ECONOMICS

High Concentration – Few Players In Market

Indian cement Industry is a oligopolistic in nature on a national level with 11 or 12 among more than 100 firms are capturing almost 70% of market

Page 10: CARTEL MICRO ECONOMICS
Page 11: CARTEL MICRO ECONOMICS

Latest case of Cartelization

BAI lodged a complaint with the Competition Commission of India.

The CCI investigated allegations of cartelization against major cement companies - Lafarge India, India Cement, JP Associates, Binani Cement, Ambuja Cement, Madras Cement and J K Cement etc.

CCI imposed a heavy fine of Rs 6307 Crores on all cement producers in June 2012.

These companies together control a little over one-third of the country's total cement manufacturing capacity of 300 million tonnes.

Page 12: CARTEL MICRO ECONOMICS

Conditions conducive for cartel formation in cement industry

1. High concentration: few players in market

2. Excess Capacity

3. High entry and exit barriers

4. Similar production cost

5. High dependence of consumers on product

6. History of collusion in the industry

7. Shareholding pattern data

8. Unusually high profit

9. Demand variability

Page 13: CARTEL MICRO ECONOMICS

1. High concentration: few players in market

Zone wise production in the 2013

ZoneTotal

players

No. of companies producing

major chunk

% share of the companies

North 15 5 77%

West 15 4 73%

Central 8 3 70%

East 17 4 81%

South 25 7 74%

Page 14: CARTEL MICRO ECONOMICS

2. Excess Capacity

Page 15: CARTEL MICRO ECONOMICS

Contd….

Page 16: CARTEL MICRO ECONOMICS

Contd…

Page 17: CARTEL MICRO ECONOMICS
Page 18: CARTEL MICRO ECONOMICS
Page 19: CARTEL MICRO ECONOMICS

3. High entry and exit barriers

very high cost of cement production plants, be it cost of setting up new plants or

operational costs of existing plants.

To exit a losing position in cement industry would incur huge losses for the firm(s)

Page 20: CARTEL MICRO ECONOMICS

4. Similar production cost The cement manufacturers’ share in market has

remained steady at national level and also at regional levels in past years

Similarity in pattern of increasing (and decreasing) Operating profit and Profit after Tax of cement manufacturers shows that production costs in same markets are highly similar

Page 21: CARTEL MICRO ECONOMICS

5. High dependence of consumers on product

Cement, practically, has no substitutes and thus cement industry traditionally has high degree of supplier power

Page 22: CARTEL MICRO ECONOMICS

6. History of collusion & role of trade associations in the industry

History of collusion in the cement industry in various countries in the world

Cement as an industry has been known to have collusive behaviour among firms operating in the same market

Cement manufacturers are registered with the Cement manufacturers’ Association

Presence of such an association can always fuel collusion among member firms

Page 23: CARTEL MICRO ECONOMICS

7.Shareholding pattern data

Page 24: CARTEL MICRO ECONOMICS

Contd…. ACC Ltd. and Ambuja Cement Ltd. operating

across India in almost every zone

Dalmia Cement Ltd. operating in the southern zone and OCL India Ltd operating the eastern zone

Grasim Industries Ltd. and Ultratech Cement Ltd. operating across India in almost every zone

Page 25: CARTEL MICRO ECONOMICS

8. Unusually high profit

Research shows that during 2005-06 to 2010-11, the operating profit margin all the companies has soared to reach new high.

Also, the Profit after Tax (PAT) for all the companies closely resembles the path of the operating margin, though for most of the cases, the PAT is still well above the 2005 levels

Page 26: CARTEL MICRO ECONOMICS
Page 27: CARTEL MICRO ECONOMICS

9. Demand variability

A stable demand encourages the formation of a cartel. If the demand is variable and changing over the years, cartels are unlikely

Under conditions of low demand, members would like to deviate from the carte, while high demand gave more incentives to the cartel

Page 28: CARTEL MICRO ECONOMICS

UNDERSTANDING CARTELS

“people of the same trade seldom meet together, even for merriment or diversion; but the

conversation ends in a conspiracy against the public or in some contrivance to raise the prices”

Adam Smith in “The Wealth of Nations”

Page 29: CARTEL MICRO ECONOMICS

OLIGOPOLY

Greek word meaning “ few sellers”

Oligopoly is an industry dominated by a small number of firms

Characteristics:

Profit maximization conditions/Non-Price Competition

Ability to set price

Barrier to entry

Fewer number of firms

Long run profits

Interdependence

Page 30: CARTEL MICRO ECONOMICS

COLLUSIONCOLLUSION

Agreement among firms in industry to divide market and fix price

Objective: Minimize industry costs for any given output. Allocate quotas to members so the MC of each producing firm at its quota output is equal to MC of every other firm.

0 X

$

0 X

$

0 X

$

DMR

ACb

MCb

MCa

ACa

MC

Firm A Firm B Industry

QcQbQa

Page 31: CARTEL MICRO ECONOMICS

MOTIVATIONS FOR COLLUSION

Decrease competition

Achieve monopoly-like behavior

Decrease uncertainty

Decrease ease of entry

Page 32: CARTEL MICRO ECONOMICS

WHAT IS A CARTEL group of firms that agree to collude so they

can act as a monopoly to increase profit

Colluding firms produce less, charge more, block new firms and earn more profit

Consumers pay high prices and potential entrants are denied opportunity to compete

Cartels occur in an Oligopolistic Industry

Page 33: CARTEL MICRO ECONOMICS

PRIVATE / PUBLIC CARTELS Public cartels : Government is involved to

enforce the cartel agreement and the government's sovereignty shields such cartels from legal actions. To pass on benefits to the populace as a whole. Coal mining, OPEC

Private cartels : the purpose of private cartels is to benefit only those individuals who constitute it.

Private cartels in most jurisdictions are viewed as violating antitrust laws. Cement, Airlines,

Page 34: CARTEL MICRO ECONOMICS

Price Fixing in Cartel

Individual Firm Industry

Firms Output Industry Output

MC (industry)

DemandMR

P(cartel)

MC

AC

Quota IndustryOutput

Page 35: CARTEL MICRO ECONOMICS
Page 36: CARTEL MICRO ECONOMICS

The way ahead Spectrum of competition: Perfect Comp---- MonopolyFree Market ….Cartel: Multiple firms functioning like a monopoly

Free entry and exit Perfect knowledge In the long-run, free entry and exit

will eliminate economic profits or losses.

Page 37: CARTEL MICRO ECONOMICS

The way ahead

One requirement for efficiency is Everyone who values the good for at least its cost gets it

and P=MC produces that result

The other is that the product only be produced if the total value>total cost

Regulation

Order the monopoly to sell at marginal cost? (How does the government know what MC is?)

Page 38: CARTEL MICRO ECONOMICS

The way aheadPreventing Cartels

Not enforcing cartel agreements

Indeed, trying to punish them, If detected

Firms might merge--perhaps lose some efficiency but solve the cartel problem ?

So restrictions on merger to monopoly

But … what about mergers for efficiency?

Price Discrimination

One approach is to separate markets

Another is different prices for one customer

Perfect PD solves that problem, imperfect could make it worse !

Page 39: CARTEL MICRO ECONOMICS

Recommendation to contain cartelization

A. The effective regulatory body and legal framework set up-

a. Antitrust laws and Regulations used to reduce market power and move outcome closer to competition and efficiency.

B. CCI/Govt to make intensive investigation into the offices of companies in question and of Cement Manufacturers’ Association , collect evidence of an agreement and pursue stringent punishment by competition regulatory authorities.

C. Collect data on plant level cement production and capacity utilization

D. Collect data on timing of the capacity additions done

E. Government regulators controlling output and price ?

F. Support smallest members to have more influence (If the Saudis increase output, the cartel breaks)

Page 40: CARTEL MICRO ECONOMICS

A glimpse of general historical trend in number of Domestic Cartels

Year Germany Austria Czech.

Switzerland

France

Britain

Japan 1865 4

1887 70

1890/1 117

1900/2 300 50

1905/6 385 100 40 [93]

1911/2 550-660 120

1921 446 8

1929/30 2100 40-50, 70-80

100+ 90+

80+ 30+

*Source: Fischer and Wagenführ (1929); Wagenführ (1931); Hadley (1970)

Page 41: CARTEL MICRO ECONOMICS

A different view Cartels are not necessarily opposite of liberalism and competition

but a variation on them. For better or for worse, they shaped economic and business history since the late 19th century.

Business historians have shown varied effects and services provided by cartels (quality standards, technology transfers, or risk management) that extend beyond conspiratorial motivation to raise prices.

Voluminous scale of cartels before 1939, and after 1945 in Europe and Japan means that any analysis of corporate strategy, and organization

National Economic Development must incorporate impact of cartels

Yet the most neglected area of research is the most important one for business historians

What impact did cartels have on economic and corporate development

Cartels do not abolish competition, but regulate it.

The question is not cartels or competition, but cartels and competition

Page 42: CARTEL MICRO ECONOMICS

Cartels and Alliances enabled greater competition

Regulators have made hard-core types of cartels illegal.

Antitrust regulations often exempt four types of industrial or social policy cartels because of their alleged benefits.

Yet they also enabled breakthroughs.

Cartels and networks are interrelated phenomenon. In reality and in concept they reinforce one another.

Can cartels act as an incentive to innovate like networks even if consumers lose in the short-run?

If one conceives of cartels as a subset of networks, a richer set of motivations than just the desire to raise prices would come to fore.

Studies of the networks of social and professional ties that embedded cartels would enhance our understanding of the critical organizational and “idiosyncratic” factors that help cartels endure.

Page 43: CARTEL MICRO ECONOMICS

Cartels are a surprisingly slippery subject !Rather than conspiracy (Mariti and Smiley 1983)

Putting the cartel question into a wider framework of regulation There is no mystery as to cartel dynamics, yet those dynamics are

not sufficient to explain any given cartel

So far the weight of research has stressed why cartels fail, rather than why they endure.

The internal organizational dynamics of cartels needs more research, embedding it in economic, organizational, and political theory.

Constant negotiations and monitoring that allow cartels to work created new social networks- Once one learns to cooperate over time, the socialization process might strengthen further cooperation/collusion

The more one moves from markets to networks,

more social history approaches would prove invaluable and

less effective price considerations alone can gauge relationships

Page 44: CARTEL MICRO ECONOMICS

Perspective on joining cartels as form of competitive strategy, on the road towards future competition

why cartels have not damaged economic growth as much as some might expect ?

Economic analysis works with a stark dichotomy of markets (cartels as distortions) or hierarchies (cartels as incomplete, inefficient internalization).

This conceptual straitjacket leads to one of largest misconceptions about cartels that they halt competition and innovation. Instead they reshape rules of the game on which competition rests (similarly Wurm 1993: 291).

If one reframes cartels as private self-management of an industry,

Cartel research can fruitfully intersect with studies of government regulation and

The burgeoning discussion about business self-regulation.

Page 45: CARTEL MICRO ECONOMICS

Studying cartels opens intriguing question when is competition essential to efficiency and innovation?

The cartel question highlights the tradeoffs between

Costs of stop-go, boom-and-bust volatility under capitalism

Benefits of moderate stability and risk management

between price and quality,

between consumer and producers

Tradeoffs not easily answered.

Graham and Richardson (1997: 6) noted

“While competition is familiar to most, few reflect deeply on cooperation

Almost all market competitors are business organizations (social groupings) that are, for the most part, internally cooperative, not competitive.”

Cartels provide one forum for reflecting on how and when cooperation can be efficient and innovative.

Page 46: CARTEL MICRO ECONOMICS

Thanks for your kind attention