Did the Competition Authority Find a Vicious Cartel in Kenya?
Category: Competition
By: Kwame Owino,
In a statement dated August 23, 2023, the Competition Authority of Kenya published this statement in which it stated the series of actions taken in response to its finding that there has been a cartel among nine steel trading firms in Kenya. The press statement that was issued by the authority is referred to here and here on the Competition Authority’s communication.
Section 7 of Kenya’s Competition Act establishes the Competition Authority, asserts it independence in section 8 and confers upon it specific functions in section 9. The extensive inquiry that the press statement addresses is an investigation into the steel market in Kenya and is permitted by the specific specific provisions of section 9 (g). This clause enables the Competition Authority of Kenya to ”carry out inquiries, studies and research into matters relating to competition and the protection of the interests of consumers”. Thus this clause provides the strong and plausible justification for the enquiry on the conduct of market players in the steel industry in Kenya.
The succeeding clause 9 (h) supplement the previous clause by directing the authority to, “investigate impediments to competition, including entry into and exit from markets, in the economy as a whole or in particular sectors and publicise the results of such investigations. In publishing the statement under reference, the Competition Authority is performing a function contemplated by this section because it provides a summary of the findings and the particulars of the case.
It it essential to look at the reasoning of the Competition Authority in terms of its findings and the remedies proposed. As the title of the press statement implies, the specific investigation considered whether a cartel existed in Kenya in the steel and related products market. The Competition Authority’s statement confirms that the investigation ascertained that there was collusion among the nine named steel manufacturing and trading firms. Specifically, these nine firms colluded in order to fix the price of steel and also to restrict quantities produced and sold. As a result of the finding of misconduct, the Competition Authority of Kenya Imposed a financial penalty on the nine firms all adding up to Kshs. 338,849,427.89 .
The Competition Authority’s enforcement action is material because this is the largest financial penalty (in nominal terms) in Kenya through enforcement action. Meaning that this decision has important implications for future application of Kenya’s competition law. The provisions of Kenya’s laws aside, what rationale exists for government action of this kind and what would its effects be on markets? A quick survey of theories of welfare economics provides some answers.
Lessons from Economic Theory
The two fundamental theorems of welfare economics provide a sensible justification for the interventions by the Competition Authority. The first of the two theorems is that a market equilibrium presents the most efficient price for economic activity and therefore ensures the greatest possible gains in welfare for both the consumers and suppliers. This first theorem is based on the first principles of micro-economics which bears mention that exchange of goods such as steel products presents value to both the consumers of the products and the producers too. The combined gains from both sides of the market, constitute the total surplus gained by society because of that exchange.
The second fundamental theorem of welfare economics states that under market competition, an efficient allocation can be supported as a market equilibrium. Bearing these two theorems in mind (they have limited constraints), points to competition policy enforcement that reduces frictions that may result and distort competition and open markets for trade of goods and services.
It is evident that collusion and quantitative restraints among sellers is an attempt to change the price and does not lead to the most competitive prices because the collusion shifts the prices and amounts traded to the benefit of the members of the cartel, to the disadvantage of the consumers. This suggests that regulatory intervention should be intended to secure the interest of the consumers.
Basis for the Findings by the Competition Authority
Collusive behaviour on the one hand, and price fixing on the other are classified as restrictive trade practices according to section 21 and subsections 1 to 3 of the Competition Act. In summary, sub-section 1 declares that agreements between undertaking or associations, “which have as their object or effect, the prevention, lessening or distortion of competition in trade in goods and services in Kenya or part of Kenya are prohibited”. The exceptions that are allowed are not applicable to the steel manufacturers and traders and are they were therefore answerable to the Competition Authority of Kenya. Sub-section 3 itemises several violations but the most pertinent for the steel cartel are direct or indirect price fixing, division of markets and limiting and controlling production. The statement by the commission asserts that all these three violations occurred.
The Competition Authority of Kenya justifies the sanctions imposed on the nine firms on two grounds. It found that the nine firms engaged in price fixing, “through agreeing and collectively setting prices and price adjustment timelines”. The CAK makes the credible claim that this collusive behaviour would have significant effects on the prices of steel products by raising the prices above the level that an unfettered market situation would have created. Thus, the Competition Authority asserted that this collusion would raise the prices of steel but also other products derived from steel such as beams, pipes and sheets. A price above the equilibrium price and derived from collusion of the nine suppliers is a condition that violates both the theorems of welfare economics.
There is a strong case that the collusion in setting prices would create a change in the total amount of steel and derived products that consumers would purchase owing to that price change. It is unlikely that collusive price setting would have the effect of reducing the prices and therefore this intervention is sensible policy that seeks to protect consumers against collusion. In sub-section 2, the law emphasises that the forbidden actions may be in respect of horizontal or vertical relationships among firms. Collusive action by the manufacturers who are in a horizontal relationship, enabling them to restrict supply while a vertical relationship could exist with traders of the products.
Under these circumstances, the primary objective of the “steel cartel” was to collude in order to raise its producer surplus at the expense of the consumers of steel products in Kenya. The CAK’s statement argues that 8 of the 9 steel mills “have been penalised for output restriction by agreeing to limit imports of certain steel components, thereby causing an artificial shortage that raised prices”.
Evidence that the regulator cites in support of its enforcement, shows that this association was formalised, sought clear goals of preventing competition and held meetings and wrote minutes confirming the agreements. Further, the members of this steel cartel had discussed agreements to restrict imports of 0.9 mm coils and plates and this was recorded in minutes of meetings referred to above. Additional evidence relied upon included findings that the firms colluded in releasing price lists, monitoring the stock levels of competitors and deferring importation of raw materials to enhance profit margins.
It is worth noting that the association by the members of the steel cartel was not only intended to create favourable terms in the market for cooperating suppliers but also that they monitored the stock levels of competitors. The published statement by the Competition Authority does not specify the reason for the surveillance of non-cooperating traders, it is clear that the purpose was to find ways to create responses that would expand the influence of the cooperating members. Surveillance of competition firms was used to reinforce the illegal action of collusion and to attempt to undermine the operations of the firms that were not parties to this association.
The effect of this surveillance of competitors not only harms the welfare of consumers by shrinking the consumer surplus but also activates aggressive market behavior against non-cooperating traders. Needless to state, this collusion caused harm on both the consumer side and for other traders. In these conditions, the operations of the market and the prices that obtained are unlikely to be consistent with the welfare theorems above.
There is no doubt that the Competition Authority of Kenya has the power to impose financial penalties of up to 10% of a violating firm’s gross turnover of the year preceding an authority”s decision. Table 1 below outlines the breakdown of the penalties that the Competition Authority of Kenya imposed on the nine firms.
To the extent that this enforcement is responding to proven incidents of past collusion, it may serve to deter other collusive undertakings that may exist between firms in critical sector. It is not debatable that this enforcement action, while coming after the fact, doesn’t reduce the harm suffered by consumers who would pay higher prices than would obtain with greater competition. Output restriction and price setting, as was alleged and proven by the commission was primarily harmful to consumers, while the surveillance of firms that did not cooperate in the same activities could have shrunk the markets shares. For these reasons, these enforcement actions are supportable in principle and the penalties are consistent with the law. Transparent enforcement of violations of competition laws are essential to raise public understanding of the role of this commission in addition to raising confidence in the operation of market processes. While the members of this cartel will definitely feel the effect of this large fines, it is unlikely that this is the only set of callusing firms. The Competition Authority of Kenya should be as thorough in surveillance and restore public confidence in working markets.
Photo credits: Competition Authority of Kenya
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Did the Competition Authority Find a Vicious Cartel in Kenya?
| Post date: Tue, Sep 26, 2023 |
| Category: Competition |
| By: Kwame Owino, |
In a statement dated August 23, 2023, the Competition Authority of Kenya published this statement in which it stated the series of actions taken in response to its finding that there has been a cartel among nine steel trading firms in Kenya. The press statement that was issued by the authority is referred to here and here on the Competition Authority’s communication.
Section 7 of Kenya’s Competition Act establishes the Competition Authority, asserts it independence in section 8 and confers upon it specific functions in section 9. The extensive inquiry that the press statement addresses is an investigation into the steel market in Kenya and is permitted by the specific specific provisions of section 9 (g). This clause enables the Competition Authority of Kenya to ”carry out inquiries, studies and research into matters relating to competition and the protection of the interests of consumers”. Thus this clause provides the strong and plausible justification for the enquiry on the conduct of market players in the steel industry in Kenya.
The succeeding clause 9 (h) supplement the previous clause by directing the authority to, “investigate impediments to competition, including entry into and exit from markets, in the economy as a whole or in particular sectors and publicise the results of such investigations. In publishing the statement under reference, the Competition Authority is performing a function contemplated by this section because it provides a summary of the findings and the particulars of the case.
It it essential to look at the reasoning of the Competition Authority in terms of its findings and the remedies proposed. As the title of the press statement implies, the specific investigation considered whether a cartel existed in Kenya in the steel and related products market. The Competition Authority’s statement confirms that the investigation ascertained that there was collusion among the nine named steel manufacturing and trading firms. Specifically, these nine firms colluded in order to fix the price of steel and also to restrict quantities produced and sold. As a result of the finding of misconduct, the Competition Authority of Kenya Imposed a financial penalty on the nine firms all adding up to Kshs. 338,849,427.89 .
The Competition Authority’s enforcement action is material because this is the largest financial penalty (in nominal terms) in Kenya through enforcement action. Meaning that this decision has important implications for future application of Kenya’s competition law. The provisions of Kenya’s laws aside, what rationale exists for government action of this kind and what would its effects be on markets? A quick survey of theories of welfare economics provides some answers.
Lessons from Economic Theory
The two fundamental theorems of welfare economics provide a sensible justification for the interventions by the Competition Authority. The first of the two theorems is that a market equilibrium presents the most efficient price for economic activity and therefore ensures the greatest possible gains in welfare for both the consumers and suppliers. This first theorem is based on the first principles of micro-economics which bears mention that exchange of goods such as steel products presents value to both the consumers of the products and the producers too. The combined gains from both sides of the market, constitute the total surplus gained by society because of that exchange.
The second fundamental theorem of welfare economics states that under market competition, an efficient allocation can be supported as a market equilibrium. Bearing these two theorems in mind (they have limited constraints), points to competition policy enforcement that reduces frictions that may result and distort competition and open markets for trade of goods and services.
It is evident that collusion and quantitative restraints among sellers is an attempt to change the price and does not lead to the most competitive prices because the collusion shifts the prices and amounts traded to the benefit of the members of the cartel, to the disadvantage of the consumers. This suggests that regulatory intervention should be intended to secure the interest of the consumers.
Basis for the Findings by the Competition Authority
Collusive behaviour on the one hand, and price fixing on the other are classified as restrictive trade practices according to section 21 and subsections 1 to 3 of the Competition Act. In summary, sub-section 1 declares that agreements between undertaking or associations, “which have as their object or effect, the prevention, lessening or distortion of competition in trade in goods and services in Kenya or part of Kenya are prohibited”. The exceptions that are allowed are not applicable to the steel manufacturers and traders and are they were therefore answerable to the Competition Authority of Kenya. Sub-section 3 itemises several violations but the most pertinent for the steel cartel are direct or indirect price fixing, division of markets and limiting and controlling production. The statement by the commission asserts that all these three violations occurred.
The Competition Authority of Kenya justifies the sanctions imposed on the nine firms on two grounds. It found that the nine firms engaged in price fixing, “through agreeing and collectively setting prices and price adjustment timelines”. The CAK makes the credible claim that this collusive behaviour would have significant effects on the prices of steel products by raising the prices above the level that an unfettered market situation would have created. Thus, the Competition Authority asserted that this collusion would raise the prices of steel but also other products derived from steel such as beams, pipes and sheets. A price above the equilibrium price and derived from collusion of the nine suppliers is a condition that violates both the theorems of welfare economics.
There is a strong case that the collusion in setting prices would create a change in the total amount of steel and derived products that consumers would purchase owing to that price change. It is unlikely that collusive price setting would have the effect of reducing the prices and therefore this intervention is sensible policy that seeks to protect consumers against collusion. In sub-section 2, the law emphasises that the forbidden actions may be in respect of horizontal or vertical relationships among firms. Collusive action by the manufacturers who are in a horizontal relationship, enabling them to restrict supply while a vertical relationship could exist with traders of the products.
Under these circumstances, the primary objective of the “steel cartel” was to collude in order to raise its producer surplus at the expense of the consumers of steel products in Kenya. The CAK’s statement argues that 8 of the 9 steel mills “have been penalised for output restriction by agreeing to limit imports of certain steel components, thereby causing an artificial shortage that raised prices”.
Evidence that the regulator cites in support of its enforcement, shows that this association was formalised, sought clear goals of preventing competition and held meetings and wrote minutes confirming the agreements. Further, the members of this steel cartel had discussed agreements to restrict imports of 0.9 mm coils and plates and this was recorded in minutes of meetings referred to above. Additional evidence relied upon included findings that the firms colluded in releasing price lists, monitoring the stock levels of competitors and deferring importation of raw materials to enhance profit margins.
It is worth noting that the association by the members of the steel cartel was not only intended to create favourable terms in the market for cooperating suppliers but also that they monitored the stock levels of competitors. The published statement by the Competition Authority does not specify the reason for the surveillance of non-cooperating traders, it is clear that the purpose was to find ways to create responses that would expand the influence of the cooperating members. Surveillance of competition firms was used to reinforce the illegal action of collusion and to attempt to undermine the operations of the firms that were not parties to this association.
The effect of this surveillance of competitors not only harms the welfare of consumers by shrinking the consumer surplus but also activates aggressive market behavior against non-cooperating traders. Needless to state, this collusion caused harm on both the consumer side and for other traders. In these conditions, the operations of the market and the prices that obtained are unlikely to be consistent with the welfare theorems above.
There is no doubt that the Competition Authority of Kenya has the power to impose financial penalties of up to 10% of a violating firm’s gross turnover of the year preceding an authority”s decision. Table 1 below outlines the breakdown of the penalties that the Competition Authority of Kenya imposed on the nine firms.
To the extent that this enforcement is responding to proven incidents of past collusion, it may serve to deter other collusive undertakings that may exist between firms in critical sector. It is not debatable that this enforcement action, while coming after the fact, doesn’t reduce the harm suffered by consumers who would pay higher prices than would obtain with greater competition. Output restriction and price setting, as was alleged and proven by the commission was primarily harmful to consumers, while the surveillance of firms that did not cooperate in the same activities could have shrunk the markets shares. For these reasons, these enforcement actions are supportable in principle and the penalties are consistent with the law. Transparent enforcement of violations of competition laws are essential to raise public understanding of the role of this commission in addition to raising confidence in the operation of market processes. While the members of this cartel will definitely feel the effect of this large fines, it is unlikely that this is the only set of callusing firms. The Competition Authority of Kenya should be as thorough in surveillance and restore public confidence in working markets.
Photo credits: Competition Authority of Kenya
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