Academic journal article Economics, Management and Financial Markets

Business Practices of Indian Cement Industry: An Evidence of Possible Cartelization

Academic journal article Economics, Management and Financial Markets

Business Practices of Indian Cement Industry: An Evidence of Possible Cartelization

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The cement industry of India has time and again attracted the attention of the market regulator over its alleged price hiking through collusion. There are strong concer ns raised over the existence of a horizontal cart el in t he industry. In 2010, the Competition Commission of India (CCI) observed that cement companies used the Cement Manufacturer's Association (CMA), the apex body of cement manufacturers, as a platform for communication on production and pr icing t o fa cilitate collusive beha vior. During the sa me period, the Commission also raised concerns about price parallelism among pla yer s wher e pr ice i ncr eases by a firm wer e f ollowed by the other s in simulta neity (CCI, 2012). All thr oughout t he year 2012 the industry has remained in the news over its alleged price hiking and subsequently cement ma nufa ctur ers attracted pena lty by the competition watchdog. However , despite penal measures in the past, cement manufacturers are till date in news for suspected cartelization. Studies in the past have undertaken the singular question of cartel detection. While price parallelism may not always necessarily indicate collusive behavior, however, the unique cost structure of the industry builds upon huge cost differences along differ ent geographic belts particularly due to differences in transportation costs. Hence, any kind of price parallelism between firms located in different regions raises direct concerns on the possibility of prior consultation among firms.

The Builder's Association of India (BAI), the apex construction body in the country, has in the past raised concerns over alleged price hiking, unutilized capacity and artificial restriction of supply by cement manufacturers. In 2012, the association filed a law suit against CMA raising concerns over its role in "collusive price fixing" by large cement manufacturers. The association was originally brought into existence to act as an interface between the industry and the government for policy making on issues involving enhancement of efficiency, competitiveness and growth and development opportunities in the industry. In 2014, the Joint Action Committee working under BAI protested against abnormal price hike and decided to stop purchasing cement for approximately a week's time in the states of Andhra Pradesh and Telangana. As reported in news (The Economic Times, August 04, 2014), infuriated by abnormal price rises, builders and property developers in the south were considering setting up own cement manufacturing units to meet bulk demands at lower prices.1 Recently, the Confederation of Real Estate Developers Association of India (CREDAI) threatened to file a suit CMA on abnormal price rise in cement. The body has publically opined on numerous occasions that an active cement cartel is in operation.2 The fair trade regulator had imposed cumulative penalties amounting to Rs. 6,714.83 crore on 11 cement companies and the CMA (The Economic Times, July 25, 2014).

2. Cartels and Welfare Costs

From an economic point of view, collusion can be defined as a situation where prices are above the competitive prices. Economists call it the most egregious form of violation of the competitive law. According to structureconduct-performance (S-C-P) framework, any departure from perfect competition, will lead to higher profits only at the cost of efficiency (deadweight losses) and social welfare loss. Gunster, Carree and Dijk (2011) study the impa ct of cartels on ec onomic eff ici ency conceptualized as a lloca tive efficiency (profitability), productive or x-efficiency (labor productivity) and dynamic efficiency (innovation). Based on the data for 141 listed companies in 49 European cartels, they show that both pr oductive and dynamic efficiency marked a decrease during cartel periods. However, due to increase in prices during cartel periods, profitability or allocative efficiency was high. …

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