unctad.org | Measuring the Economic Effects of Cartels in Developing Countries
Measuring the Economic Effects of Cartels in Developing Countries
 
Background

Anticompetitive agreements, particularly hardcore cartels, harm consumers both in developed and in developing countries. In addition, cartelized industry sectors lack competition, which reduces competitiveness in the long run and may have a negative impact on the overall performance of a country's economy. The objective of competition law and policy is to eliminate such anticompetitive practices, including hardcore cartels, thereby enhancing consumer welfare and contributing to a country's competitiveness. Nonetheless, the question remains as to whether competition law enforcement in fact positively impacts economic growth in developing countries.

To date, research on this question has mainly taken a qualitative approach without measuring the actual harm caused by cartels in developing countries. Within the framework of UNCTAD's Research Partnership Platform on Competition Law and Consumer Protection Policies, the present research project, under the leadership of the Toulouse School of Economics, aims to bridge this gap by carrying out a quantitative assessment of economic effects of cartels in developing countries. This research project will provide the required economic data to allow for a quantitative assessment of the potential for competition law enforcement to contribute to economic development.

Competition authorities in developing countries could benefit from the results of the project in several ways. Firstly, current research brings more comprehensive data on price overcharges. Significant aggregated cartels' excess revenues related to the GDP provide an opportunity for the competition authority of a certain country to advocate the enforcement of the competition law. The original methodology developed to estimate price overcharges may be of practical interest, especially in developing countries, as it uses a very limited set of input data. Second, the efficiency of the penalty rule can be then assessed by comparing the imposed fines with cartels' excess revenues. Actual excess revenue/penalty rates may be compared against relevant benchmarks that define optimal penalty policy, both theoretical and empirical (i.e., existing best practices). Third, the aggregated harm in terms of cartels' excess revenues related to the budget of the corresponding competition authority is a helpful indicator in assessing the efficiency of the competition policy enforcement.

Finally, the cartels database may be seen as a reference list that contains industries potentially vulnerable to collusive behavior. Evidence from other countries can (and should) be employed by the competition authorities in local investigations. Cartel members often enter into collusive agreements in multiple, often neighboring, economies. This may encourage involved countries to create a platform that would allow sharing and maintaining the common cartel database.

Objectives

The project's objectives can be summarized as follows:

  • Gaining a better understanding of the types, characteristics and functioning of the cartels affecting developing countries as a prerequisite to measure their impact on economic development;

  • Measuring the impact of cartels on economic development by using econometric methodology.

Project plan

The project is carried out in three phases, as described below:

Phase 1: Data collection

During the first phase a database on hardcore cartels in selected developing countries was created. For this purpose, competition authorities in these countries were asked to fill out a questionnaire on the basic micro and macro data necessary for simulations.

Phase 2: Calibration and simulation

Based on the received data, the hypothetical market conditions without cartelizing conduct were simulated and compared to the conditions which were characterized by the presence of cartels. This allows the calculation of price overcharges, losses in consumer welfare and possibly outputting effect.

Phase 3: Estimation of the impact of cartels on economic growth

By extrapolating results obtained in phase 2 onto the macro-economic level were estimated, among others, i) affected sales and cartel's excess revenues related to GDP and, ii) the minimum level of losses in economic growth due to cartelization.

Current phase of implementation

As of today, the collected database contains information on 225 major 'hard-core' cartels prosecuted in more than 20 developing countries from 1995 to 2013.

Besides providing several interesting observations over the whole sample of cartels, collected data allowed estimating some country specific aggregated cartels' economic impacts, namely for Brazil, Chile, Indonesia, South Africa, Mexico, Pakistan, Zambia and South Korea. Obtained results confirm that cartels` impact can indeed be substantial. In terms of affected sales related to GDP taken in average for the considered period it varies among countries from 0.5% to 3.74% while its maximal value reaches up to 6.38% for South Africa in 2002. In terms of cartels' excess revenues, the actual harm is also significant, with maximal rates reaching almost 1% of GDP for South Korea in 2004 and South Africa in 2002. Our analysis also shows that, on average, a cartel decreases the production level by about 15% on the concerned market. If a cartelized industry makes a significant contribution to the national economy, then collusive practices harm consumers not only in terms of inflationary effects, but also because they limit consumption. Furthermore, as we estimate the deterrence rate, i.e., the annual probability of uncovering a cartel, to be around 24%, we suggest that the actual damage is at least 4 times bigger.

Even though assessed effects already demonstrate a sound negative impact of cartelization, data collection process is still ongoing. With an extended database we expect to obtain more convincing and robust estimations for the totality of selected developing countries, as well as to improve country -specific results. Therefore, we invite the concerned competition authorities for a mutually beneficial collaboration.

Contact Information

Marc Ivaldi
Professor of Economics
Toulouse School of Economics
E-mail: marc.ivaldi@tse-fr.eu

Aleksandra Khimich
PhD student at Toulouse School of Economics
E-mail: aleksandra.khimich@tse-fr.eu

Graham Mott
Economic Affairs Officer
Competition and Consumer Policies Branch (CCPB)
UNCTAD
E-mail: Graham.Mott@unctad.org

 

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