INTRODUCTION

What makes a cartel successful? Is cartelization possible in all markets and sectors? This article looks at the unique case of cartelization by the producers of rolled milled leads in the United Kingdom and analyses the special characteristics of the relevant market that made it possible for the parties to successfully collude.

To that end, this article shall first, briefly discuss the case at hand. Secondly, this paper shall look into the market of rolled leads and analyse the possible barriers to entry of new firms and the factors which added fuel to the goal of collusion of the parties. Thirdly, this paper shall look at the investigation that was launched by the Competition and Markets Authority of the United Kingdom and the decision reached by the same.

FACTS IN BRIEF

PARTIES TO THE CASE:

Associated Lead Mills Limited (ALM) and Jamestown Metals Limited (JML): Both of these firms were involved in the production and distribution of Rolled Leads and were indirectly owned by International Industry Limited Metals Limited. The two firms would be considered as one single entity for the rest of this paper as the two entities were owned by a common parent entity and the managers and directors were mostly found to be common. British Lead Mills (BLM): This firm is involved in the manufacturing and marketing of lead and lead products. It was owned wholly by Ecobat Logistics UK.

THE INFRINGEMENTS:

The parties were found guilty of four anti-competitive or concerted practices between October 2015 and April 2017. The four events were discrete and cannot be considered as part of one single continuous infringement. The infringements included colluding on prices and sharing the market by fixing a higher price for the customer of the other firm, and collectively boycotting a new firm in order to limit competition in the market as well as to maintain good relations with the firm’s existing customers. These practices were undertaken by sharing commercially sensitive information about the firm’s price strategy and expanding customer base.

ANALYSIS: MARKET OF ROLLED LEADS

The relevant product market affected due to the infringements were the market of rolled leads in the United Kingdom. The market is heavily concentrated with only three firms, i.e. the parties involved in the matter and the Calder Group sharing 90% of the market. The long-run market demand is very elastic due to the presence of a lot of alternatives in the market and the changing design of buildings. The demand for rolled leads in the UK had been steadily falling and sales have dropped from a peak of 1,40,000 to around 50,000 tonnes in 2018 as consumers started shifting to newer building designs and using newer alternatives. However, the short-run market demand is mostly inelastic as the buildings which have already been constructed in the old design need rolled leads for maintenance. The relevant geographic market affected by the infringements comprises the entirety of the United Kingdom. The market was mostly supplied by the firms of the United Kingdom only and the amount of imported rolled leads was mostly insignificant. This can be attributed to the presence of entry barriers for foreign suppliers in the form of higher transportation costs and longer delivery times which makes it difficult for them to compete in the UK market. Due to the higher transportation costs, it should be beneficial for firms to produce rolled leads in large quantities and transport them together which should help in reducing the total costs significantly. Thus, the large firms can be said to enjoy economies of scale which can in part, explain the reason for the market being concentrated and conducive to collusion. This acts as a barrier for new entrants into the market as their costs would be higher or they will have longer delivery times.

The producers used to sell their produce to the builder merchants, who in turn, used to supply the leads to the contractors. The merchants were divided into three groups: the majors, who accounted for around 30% to 40% of the market, buying groups, and independents. The goods in the market were homogenous but most of the major merchants had longstanding contractual or informal relationships with one of the primary firms and so the demand was mostly inelastic for the firms. This acted as a barrier to the entry of new firms as the merchants are reluctant to shift to a new firm even if the prices were better for that firm.

The firms used to set their prices as a fixed margin over the price of Lead on the 25th day of every month at the London Metal Exchange (LME). Firms used to get feedback about the prices charged by competitor firms from the merchants. Thus, it was not very difficult to get information about the prices charged by the competitive firms which is very important from the perspective of a cartel as it makes detecting a cheating firm easier.

The market of rolled leads in the UK can thus be considered an Oligopolistic market where only three firms account for almost the whole of the total supply and due to the entry barriers discussed above, new firms find it difficult to enter. The oligopolies were also the only members of LSC which is a trade association for the UK. This helped the directors of the parties to stay in regular contact without raising suspicion and decide prices or output to cartelize.

DECISIONS REACHED BY THE CMA, UK

The CMA started investigating the suspected case of cartelization by the three primary firms in the rolled lead market in July 2017. The CMA had conducted searches on various premises of the three companies. The case against Calder could not be proven up to the requisite legal standards and so the investigation against the Calder group was closed in November 2020.

ALM/JML and BLM were found to be guilty of being a part of concerted practices with the object of limiting or distorting competition with respect to the supply of rolled leads. The parties were held in contravention in the UK under Chapter I prohibition of the Competition Act as well as the internal market of the European Union under article 101 of the Treaty on the Functioning of the European Union for October 2015, August 2016 and April 2017 as the infringements affected the competitiveness of the market of both the UK as well as of the European Union. The CMA, after considering various factors like the turnovers of the parties, the seriousness and distortions caused by the infringements, and all the aggravating and mitigating factors, imposed a penalty of £8,076,504 for BLM and £1,510,228 for ALM/JML.

CONCLUSION

The formation of cartel is an economic concept. Despite the sanctions imposed under UK competition laws, the operationalisation of the same would require certain market conditions to be present which were there in the given case. There are various instances where economic entities collude to engage in such a practice but fail at the very first place. The said article points out various factors which may contribute to the success of cartelising entities.