Multinational Cartels

• Author: Livia Radu; Carmen Radu
• Pages: 410-417

Livia Radu. Lecturer, Ph.D., Faculty of Social and Administrative Sciences, “Nicolae Titulescu” University, Bucharest, Romania (lgradu2005@yahoo.co.uk).

Carmen Radu. Lecturer Ph.D., Faculty of Social and Administrative Sciences, “Nicolae Titulescu” University, Bucharest, Romania.

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Introduction

The world is run by transnational corporations, which are not only interested in selling as many goods as possible on the international markets, but also in buying and producing various components and materials from abroad or abroad. That is why multinationals should coordinate functional operations outside state borders in order to increase their efficiency. An example is Ford Motor, the second largest cars manufacturer in the world, trying to become a global player in this field. The company performs worldwide reorganization programs aimed at rationalizing processes such as unifying the activities of supply, production, marketing and distribution in a single strategic planning coordination centre.

In order to face the challenges of business globalization, numerous companies are creating strategic alliances or merge with other companies, even from the competitors. Merger takes place when two or more companies unite their operations/activities by creating a new company, while acquisition takes place when a company buys and controls another. Examples include the alliances between Ford and Mazda, Rover and Honda, or General Electric and Matsushita, as well as the true mega-mergers such as those between Exxon and Mobil, Daimler Benz and Chrysler, AT&T and TCI. Reasons for merging or acquisitioning include:

- Increasing the value of companies’ shares;

- Increasing the use of existing production capacities;

- Increasing the performances of the managerial team;

- Reducing taxation etc.

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Mergers, acquisitions and strategic alliances represent the logical and inevitable consequence of the competition in a worldwide economy, partially generating the occurrence and domination of cartels.

A cartel is an agreement by which a group of companies that manufacture or distribute the same product set up certain prices or share the market. The object of the cartel is to raise prices by eliminating competition. Thus, smaller quantities of products are sold, prices are raised and profits are maximized as in the case of a monopoly.

Cartels are viewed as the largest threat to competition. The more so because companies which should compete on the market choose to make pacts by adhering to an agreement by which competition is limited. That is why cartels are deemed to directly damage the buyers of goods and services involved in the agreement. Such also have an indirect destructive effect, namely by reducing competition, the efficiency of the participants decreases, and the prices are raised by cartels over the level of real competition.

Depending on the objectives and the market on which they act, four types of cartels can be identified:

1. National cartel – is formed when two ore more producers or distributors join by agreement for the purpose of controlling the production/distribution chain and the post-sale services network for a product on the level of a country’s market. National cartels have a strong impact over imports;

2. International cartel – is formed when companies in different countries join in order to fix prices and share the market or so that to take turns in obtaining the orders in the allocated projects;

3. Import cartel – often functions as a sole organization which buys a raw material centralized in order to supply it to an industry. Import cartels can be created in order to counter-balance the market power of export cartels in other countries;

4. Export cartels – legislation on competition protection in various countries expressly excepts such cartels, under the condition of the said to be notified and in other countries the legislation has no referrals on such. In the last mentioned case, the “effect principle” is applied, meaning because there are no effects on the internal market, the law provides no sanctions.

The present paper is aimed at providing an incursion in the economic environment in which cartels work. The negative influence of cartels over the free economic competition is of severe repercussions by the control they create over the level of prices and production, markets and clients sharing, restrictions on imports and exports and forged auctions.

The study is based on specialized literature and especially on the international legislation on competition, UNCTAD, OECD and European Commission.

Literature review

The issue of competition has been on the multilateral negotiations agenda for over half a century now (Davidow, J., The Seeking of a World Competition Code: Quixotic Quest?, and Schahter, O, Hellawell, R., Competition in International Business, New York, Columbia University Press, 1981) [1]. Thus, in the discussions for the creation of the International Trade Organization (ITO) at the end of the 40s the issue was discussed of international cartels (German cartels) and of restrictive business practices (Japanese zaibatsu) as factors inhibiting the free access on external markets in the pre-war period. In the context of GATT, the implications of trading policies such as customs taxes, antidumping measures, tariffs quota and technical barriers on competition were widely debated both on the political and economic analysis level (Bhagwati, Jagdish N., The Theory and Practice of Commercial Policy, Princeton University Press, 1968 and Protectionism, Cambridge, MIT Press, 1988) [2]. In the 70s discussions existed on the regulationPage 412 of multinational companies’ restrictive practices, run by the UN and OECD, that adopted recommendations for cooperation in member states. Such took the form of the following guidelines, nonetheless without a mandatory nature: Recommendations on restrictive trading practices (OECD, 1978) and Set of principles...