Legislation and penalties
Because cartels are likely to have an impact on market positions, they are subjected to competition law, which is executed by governmental competition regulators. Very similar regulations apply to corporate mergers. A single entity that holds a monopoly is not considered a cartel but can be sanctioned through other abuses of its monopoly.
Prior to World War II, members of cartels could sign contracts that were enforceable in courts of law except in the United States. Before 1945, cartels were tolerated in Europe and specifically promoted as a business practice in German-speaking countries.[36] In U.S. v. National Lead Co. et al., the Supreme Court of the United States noted the testimony of individuals who cited that a cartel, in its versatile form, is "a combination of producers for the purpose of regulating production and, frequently, prices, and an association by agreement of companies or sections of companies having common interests so as to prevent extreme or unfair competition.[37]"
The first legislation against cartels to be enforced was the Sherman Act 1890, which also prohibits price fixing, market-sharing, output restrictions and other anti-competitive conduct.[38] Section 1 and 2 of the Act outlines the law in regards to cartels, Section 1:
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.[39]
Section 2:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100 million if a corporation, or, if any other person, $1 million, or by imprisonment not exceeding ten years, or by both said punishments, in the discretion of the court.[40]
In practice, detecting and desisting cartels is undertaken through the use of economic analysis and leniency programmes. Economic analysis is implemented to identify any discrepancies in market behaviour between both suspected and unsuspected cartel engaged firms. A structural approach is done in the form of screening already suspicious firms for industry traits of a typical cartel price path. A typical path often includes a formation phase in which prices decline, followed by a transition phase in which prices tend to rise, and end with a stationary phase in which price variance remains low.[41] Indicators such as price changes alongside import rates, market concentration, time period of permanent price changes and stability of companies' market shares are used as economic markers to help supplement the search for cartel behaviour.[42] On the contrary, when aiming to create suspicion around potential cartels, a behavioural approach is often used to identify behavioural collusive patterns, to initiate further economic analysis into identifying and prosecuting those involved in the operations. For example, studies have shown that industries are more likely to experience collusion where there are fewer firms, products are homogeneous and there is a stable demand.[43]
Leniency programmes
Leniency programmes were first introduced in 1978 in the US, before being successfully reformed in 1993.[44] The underlying principle of a leniency program is to offer discretionary penalty reductions for corporations or individuals who are affiliated with cartel operations, in exchange for their cooperation with enforcement authorities in helping to identify and penalise other participating members. According to the Australian Department of Justice, the following 6 conditions must be met for admission into a leniency program:
The application of leniency programme penalties varies according to individual countries policies and are proportional to cartel profits and years of infringement. However, typically the first corporation or individual to cooperate will receive the most reduced penalty in comparison to those who come forward later.[46] The effectiveness of leniency programmes in destabilising and deterring cartels is evidenced by the decreased formation and discovery of cartels in the US since the introduction of the programmes in 1993.[47] Some prosecuted examples include:
- 1) The corporation is the first one to come forward and qualify for leniency with respect to the illegal activity being reported;
