The Hindu Business Line : Of collusion and cartelisation

If you’ve been following business news from Europe recently, you may have noticed that there is quite a storm brewing in Italy. And it’s all about pasta. Pasta, I don’t need to tell you, is one of the staple diet items in Italy.

Spaghetti, Fettuccini, Ravioli, Sabatini, Parsimony and, most of all, Maldini are some of the rather popular varieties of pasta that are consumed not just in Italy, but in restaurants and homes all over the world. (Except mine. I am on a low-carb diet. The wife has decreed no more bread or pasta after spotting my belly on Google Earth the other day. Shudder.)

So, in July, when the Industrial Union of Pasta Makers in Italy announced that prices would rise by 20 per cent later this year, the width and breadth of Italy rose in opposition.

The union controls over 85 per cent of all pasta produced in Italy and this price rise would have made people’s hard earned savings a thing of the pasta!

Consumer groups immediately screamed themselves hoarse and asked everyone to abstain from pasta for one day. All of Italy immediately went on a potato diet for a day. A few hours into the next morning, everyone without a blocked nose agreed that it was better to go back to the pasta and to leave the doors and windows open till much later that evening.

The consumers’ groups say that this was simply a case of collusion to increase prices. So what is this collusion and price fixing and cartelisation all about? In a free market, the market should determine the price, right?

Wrong! No points for you.

Welcome to the world of corporate conspiracy and oligopolic crime.

From the outside, it seems that several companies are hardcore rivals. Cola companies, for example, seem to be competing tooth and nail with each other, right?

Then tell me how come they both price their products exactly the same? Huh? Huh?

The reason is simple: collusion, or blatant opportunistic oligopoly.

Well, almost.

Let me explain this by going back to our commodity of the day, pasta. Now if we assume that all pasta is available everywhere and one brand of pasta is comparable to the other, then a free market for pasta would be terrible. (For the pasta maker that is. We pasta consumers would love it and turn into little Google Earth blimps.)

Since each brand was almost identical to the other, the manufacturers would only be able to compete on price or freebies or some such thing. But whatever it was, it would mean a continuous fall in prices as brands began competing, till, finally, they actually paid you to take the stuff home.

Imagine the chaos that would ensue. Companies would go bankrupt, markets would shut down, the entire free world would simply collapse.

‘Price fixing’

Thankfully, companies have figured a way around this. To the outside world it looks like the ‘pricing strategy mechanism’ while the CEO calls it the “quarterly phone call”.

So companies have entire departments who do market research and focus group discussions and pilot testing to determine product price. All their reports are normally stored on the MIS machines in the folder called “eyewash”.

In reality, every three months the CEO makes a call to his equal on the other side. Or there is a conference call of all the CEOs involved:

CEO of Cola Company A: “Yo! Wassup?”

CEO of Cola Company B: “Nothing much. Ten bucks a bottle this quarter?”

CEO A: “But our internal pricing strategy and consumer engagement quantification exercise has determined the optimal price to be Rs 8 for the average consumer of our product.”

CEO B: Deathly silence.

CEO A: “I was kidding! Scared you! Ha ha ha ha.”

CEO B: “Good one! Too much, you old rascal!”

CEO A: “Have a good quarter dude…”

CEO B: “You too…”

Click!

CEO A and CEO B: “Idiot!”

This is the deep dark secret of how companies work together to keep prices at rational levels without spiralling into a fatal price war. But of course, this is an unjustifiably rosy picture of the whole collusion problem. What if the whole thing goes wrong? What if companies decided to just band together and suck the consumer dry? What havoc would that wreak upon the masses?

An analogy

Airport taxis are an excellent example of this sort of thing. Walk out of any decent sized airport in India and you will be immediately accosted by hordes of taxi drivers who are all eager to convey you to your final destination. All of them would like to charge you on one trip a fare that is sufficient to automatically qualify them as private bankers with Titanium credit cards.

In fact, many people wonder why most of the foreign tourists you see are the backpacking low-budget types. Actually, they all land in India with much money and huge trip budgets. But after the first taxi trip out of the airport, they are left with just enough to make it to the nearest ashram and be one with themselves and their insolvency.

In Mumbai recently, we saw the launch of private taxi service fleets with swanky new cars, walkie talkies and fixed, cheat-free fares. Make just one phone call, give your address and within the hour a taxi will be dispatched to reach at the precise time, the exact address of someone else’s flat in Versova, half way across town from your place.

These novel cab people recently decided to ply their services from the domestic airport. This immediately put a spanner in the works of the existing colluding taxi cabbies there.

Thankfully, they were very mature about it and did not burn one of the cabs up completely and only nearly killed a new cabby. A judicial enquiry will soon be launched and is expected to settle the issue by… (enter any year of your choice here).

Closer home

Such collusion can also be seen in the case of domestic help services; where maid after maid will quote almost identical rates to cook, clean and do the laundry, i.e. your salary.

And, more relevant to young managers like you, companies in similar sectors can even keep salaries in check by quietly agreeing on similar salary bands for recruits. Which is why during campus recruitment, you will find intriguing similarities in salary bands across companies.

This is a pain in the neck because then you actually have to look at job content and career progression and all that before choosing a job.

So when you think about it, collusion and cartelisation is pretty much a part of everyday life.

There is really little you can do about it. If I were you, I’d rush out and buy some Italian pasta right away. Just to be safe.

(The writer, an alumnus of IIM-A, was a management consultant before quitting to work as a freelance writer, author and general handyman. He blogs at www.whatay.com)

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