IN the recent past, the Competition and Consumer Protection Commission (CCPC) was reported to have raided the offices of two major fertiliser suppliers to establish allegations of collusion in the fertiliser industry.
Additionally, there have been reports of manufacturing companies attempting to form pricing cartels.
In Business Trends today, we focus on the effects of collusive pricing that could be affecting businesses in our economy.
A cartel exists in an industry to fix prices and consequently agree to share the market and allocate production and sales quotas.
The cartels also employ mechanisms to ensure compliance of its members with its illicit activities.
On October 6 2015, CCPC chief investigator, Naomi Fuluza, was reported to be aware of four businesses that were alleged to have intentions to form cartels to rig bids and fix prices in the face of the recent tides against the Zambian kwacha.
In 2006, the European Commission collected fines amounting to 1.846 million Euros from cartel-related offences.
The above incidences provide increasing empirical evidence that the vices of cartels are real and cannot be ignored.
The CCPC defines a cartel as a formal group of otherwise independent competing businesses whose concerted goal is to lessen or prevent competition among its participants.
Members of cartels enter into agreements or arrangements to engage in one or more anti-competitive activities to: fix prices, allocate markets or customers, limit production or supply and rig bids.
It is also important that we should note that Section 9 (1) of the CCP Act prohibits cartels.
We will note that for a cartel to successfully exist, there are a number of conditions that have to enable them.
The higher the degree of competition in a market, the greater the incentive to form a cartel and the greater the harm to the ultimate consumer and the economy!
The fewer the number of dealers or manufacturers on the market, the simpler it is to control and coordinate the market and the illicit actions.
Additionally, the larger the market share each participant has, the greater the potential earnings from the illicit act.
Collecting credible evidence relating to cartel activities is a mammoth task. As a sigh of relief, cartels may not always be smart; we have to be good at reading the indicators!
Barriers to entry in an industry are critical enhancers of cartels. An increase in price should economically attract new competitors into the market but in this unusual case, the existence of barriers will inhibit new entrants.
In Zambia, goods that are similar in nature, and where the manufacturers compete on price, as the main dimension, pose a fertile ground for cartels to thrive.
Such commodities and services include items such as sugar, cement, lime, mealie meal, wheat, fertilisers, the seed industry and telecommunication industry.
Empirical evidence reveals that companies which were once parastatals are not used to competing and, therefore, may fall prey to form cartels.
We will agree that our manufacturers do not operate the same manufacturing technologies and, therefore, the country may not have similar exorbitant prices.
Industries with similar cost structures and efficient technologies make it easier for firms to cooperate and agree on the prices to be charged.
The cost of price cartels and collusive tendering is enormous to the economy.
Cartels harm consumers and have harmful effects on economic efficiency. A successful cartel raises prices above the competitive level and reduces output.
Consumers have an inevitable option of either not to pay the exorbitant price for the cartelised product or service and forgo the product or service, or pay the uneconomic price and thereby unknowingly transferring wealth to the cartel operators.
Cartels do not just harm the customers. Businesses are interconnected.
The entire supply chain suffers. Suppliers, customers and the entire value chains are affected.
If, for example, our local road transporters of maize inflated freight through a cartel, the price of for example maize, would inevitably rise.
This reaction will trickle down to the millers who would want to recover their costs by charging the final consumer of mealie meal.
We should note that price fixing has some exceptions. Businesses can legally agree to fix the price on joint venture projects.
Contractors and suppliers can also form cartels by agreeing to inflate prices of large projects and consequently choosing within themselves who should quote comparatively lower than others.
When one of them is chosen for a project the others will intentionally lose. The losers will agree to be winners in other bids.
In conclusion, it is clear that pricing cartels is a typical global concern that is apparent in Zambia. We have also seen that the presence of stiff competition in some sectors of our economy is an incentive for price cartels to form.
It is imperative for the general public and the CCPC to be vigilant, diligent and skillful in the detection and fight against the scourge.
The author is the Managing Consultant at GN Grant Business Consultant, a fellow of the Association of Chartered Certified Accountants (ACCA), a Master of Business Administration (MBA) holder, and a candidate for the Herriot Watt University (Scotland) Doctor of Business Administration (DBA)