A cartel is an agreement between competitors not to compete. The most well-known and publicised form of cartelising conduct is an agreement between competitors to fix prices. Such conduct is prohibited by Australia’s Trade Practices Act (TPA) because it is seen as inherently anti-competitive.
Current civil penalties mean that bodies corporate participating in a cartel can face fines of up to $10 million, 10 percent of their annual turnover, or three times the gain to the cartel (whichever is higher). However, the federal government thinks that existing civil penalties do not go far enough and proposes to introduce a jail term of a maximum of 10 years for individuals found guilty of serious cartel conduct. Its thinking, and that of other advocates of criminal provisions for cartelisation offences, appears to be motivated by three perspectives.
First, it has been argued that cartelisation is like fraud or theft and should be treated accordingly. However, this contention is inconsistent with the approach taken by the current law or with the government’s proposed bill criminalising cartels, since both contain significant exceptions to the prohibition. What this suggests is that in reality the decision to punish cooperative agreements between firms is a matter of public policy—reflecting a balancing act between the promotion of competition and the facilitation of the potential benefits of cooperative agreements between firms.
Second, it has been argued that cartels are so destructive to the Australian economy that a stronger emphasis on rooting them out should be adopted. However, while it has been widely assumed that the anti-competitive effect of hidden cartels on economic welfare is significant, not many studies have successfully documented the benefits of regulatory interventions to remove cartels. Many recent post-mortem analyses of successful cartel prosecutions have failed to find that the relevant markets after such prosecution actually reaped any benefits in terms of lower prices. Furthermore, cartels by their nature tend to be unstable as they depend on the parties agreeing to price above market rates, and there will be a constant temptation on the part of these parties to undercut the agreed cartel price. This means that even without intervention, they may be unlikely to persist for long; even if they do persist, they may not be as effective as they intended to be because of the constant temptation for cartel partners to ‘cheat,’ which may erupt into price wars. Third, it has been argued that civil penalties as they are implemented in practice cannot adequately deter cartels irrespective of the theoretical merits of such penalties. The strongest version of this contention relies on the claim that a credibly deterring level of civil penalty would bankrupt the individual offender and the body corporate. Therefore, it would not be possible to credibly enforce such a civil penalty because it renders the individual offender ‘judgment proof.’
Moreover, the courts would be reluctant to inflict collateral damage on the body corporate’s other stakeholders. However, more recent research, which takes into account the impacts of relatively new initiatives such as whistleblower programs, suggests that these initiatives have significantly increased regulators’ ability to detect and deter cartels.
Jason Soon is a Visiting Fellow at The Centre for Independent Studies and an economic consultant.
