Picture: THINKSTOCK
Picture: THINKSTOCK

COMPETITION in an industry generally drives prices down towards the cost of making an additional unit of the product. If all firms compete vigorously, prices should be low enough for consumers to benefit. This, in turn, reduces inflation, improves economic growth and benefits the poor. Vigorous competition also forces companies to devise new ways of doing things and/or to do new things, leading to low cost and a variety of choices for consumers. This is called technological innovation and is one of the biggest factors that promotes the continued growth of economies, and so creates jobs.

Cartels prevent competition and cause participating firms to act collectively as a monopoly, or near monopoly. As long as they remain in this state, there is little need to innovate and hence they keep the economy in a low-growth situation, while extracting higher prices from consumers. In almost all cases, cartels are a bad thing for consumers and for the economy. This is why the Competition Commission challenges existing cartels and attempts to prevent new ones from forming.

Many disputes have been successfully initiated by the commission against cartel behaviour in various industries, including cartels in the construction value chain. In fact, the high cartel prevalence in this sector prompted the commission to establish the Construction Fast-track Programme, which encourages companies to "confess their cartel sins" and helps to expose those who fail to "confess".

The concrete products cartel is just one of the cartels in the construction value chain that has been investigated. Precast concrete products are used in building and construction, including road and earthworks, pipeline and transmission networks and other civil engineering works. They are important in our economy because they are used in houses, roads, stadiums, etc. As a result, they affect the prices we pay for just about everything — from road tolls, transport fares and housing, to the price of transported goods and even using a toilet.

The Construction, Education and Training Authority estimates there are 35,000 employers in South Africa’s construction sector. About 95% are micro enterprises, on which many poor and middle-class citizens depend for their livelihood. From 2009 to 2010, employment in the sector dropped 6.4%, to 424,100.

I wrote a paper, which has been reviewed by an independent academic, on the effect of the commission’s "fight" to stop cartels, using the important concrete products industry as an example, and a technical method called the difference-in-difference econometric technique to quantify the results.

Early estimates show that during the existence of the cartel, consumers were paying up to 51% more than the prices they were likely to have paid if there had been vigorous competition in the industry. What is surprising is that those producers that were not part of the cartel also made gains — in some cases up to 15% above what consumers would have paid if there had been vigorous competition. This shows that it does not matter whether all related producers are in a cartel or not — whenever there is a cartel for a product, all the companies producing that product gain, and all the consumers using that product are disadvantaged.

To understand the problem further, it is interesting to note one of the most recent works in this area by John Connor. In a paper titled Cartels and Antitrust Portrayed: Private International Cartels from 1990 to 2008, Connor calculates the range of cartel overcharge to be between 17% and 21%. This does not include South Africa.

It is important to note that research may underestimate the true extent of the higher price that results from cartels. Prices do not fall instantly to realistic levels after the successful fight against a cartel. Rather, prices fall gradually over a period of a few months to a few years, depending on the way people do business in the industry. In the concrete products industry, prices were still falling three years after the commission’s fight.

Researchers have investigated why companies gain more by belonging to a cartel in some parts of the world than others. One reason is that the longer the competition authorities successfully fight against cartels, the less companies are prepared to fix their prices at high levels, even if they participate in a cartel. This means if we help the Competition Commission to fight against cartels all the time, even if cartels are still formed, the cartel prices will not be as high.

Ngepah is a senior economist in the Competition Commission’s policy and research division.