The Bust of the Dream Team: Applications of Game Theory and Strategic Behavior in taking down the Protective-Tubes Cartel in India

Teamwork is Dreamwork, right? 

What about a team of companies engaged in anticompetitive behavior such as controlling market prices, quantity, and bids in its supply of products to India’s largest employer- the Indian railways? Whose dream is fulfilled here?

The main case

In a case of bid-rigging, 7 companies that jointly formed a cartel in supplying protective polyacetal tubes to the Indian Railways were busted in 2020. Protective polyacetal tubes are products with wide industrial and commercial applications, and what is interesting is that the Indian Railways is a monopsony in this market, so different companies bid to supply the tubes to the sole customer. In ‘response’ to the market situation, 7 firms closely coordinated their actions by discussing prices and tender quantities, asking ‘non-allottees’ of tenders to quote prices that were 8-10% higher, and even asking some to withdraw their offer, indicating direct intervention in the market. 

The companies engaged were Polyset Plastics Private Ltd. (OP1), M/s Anju Techno Industries(OP2), M/s Power Mould (OP3), Jai Polypan Private Ltd. (OP4), M/s Rama Engineering Works (OP5), M/s Polymer Products of India (OP6), M/s Hari Narayan Bihani (OP7). They are hereon referred to as Opposition Parties (OPs) 1, 2, 3, 4, 5, 6 and 7 respectively.

The investigation finds evidence that during the working of the cartel from 2015-2020, OPs 1, 2, 3, and 4 were actively involved in the decision-making process of the bid rigging, whereas OP 6 was seen to be undercutting the prices that were pre-decided. While OPs 5 and 7 make their legal case for not being involved, access to information definitely plays a critical role in how the market situation pans out. What is more interesting is the occurrences post the findings- OP4 decided to provide all evidence to the regulating authority- the Competition Commission of India in order to get a reduced penalty.

While cartelization is designed to undermine fair competition and exploit consumers and has far-reaching consequences, it is important to analyze the economic implications of different actions taken by the firms and how the regulating authorities are succeeding in their goal of reducing anti-competitive behavior.

Economic Analysis of the Case

This section analyzes the economic aspects of the foregoing case and is divided into 4 subsections- the first looks at the welfare implications of cartelization, the second looks at the case against the Indian railways- a monopsony buyer, the third deals with the strategic behavior adopted by firms and the last subsection focuses on the game theoretical implications for the pre and post-bust period.

• The case for (against) cartelisation

Cartels are detrimental because of the loss they cause to consumers and the economy as a whole, which has been empirically proven for developing countries as well. They effectively act as barriers to entry and lead to inefficiencies. 

For the case in point, while the CCI noted that there was no ‘appreciable adverse effect on competition (AAEC)’, not only does the legal framework extend to ‘forbidding agreements that are likely to cause an AAEC, but also that the OPs failed to provide proof regarding the positive effects from their cartelization- which can include scientific, economic development, etc. Moreover, higher profits earned by the cartels by virtue of higher prices (despite claims that ‘the Indian railways were not in any losses’) can in fact be a dead-weight loss to the economy due to higher transfer of funds to the businesses, implying that there can be hidden costs to the transactions on society.

• The case of ‘Monopsony’

The OPs argue that price parallelism was crucial given the monopsonistic position of the Indian Railways, by virtue of which it can negotiate and influence prices, making it pertinent for the businesses to earn their ‘fair share’. However, the CCI argues that the railways are a free consumer- representing all Indian consumers and the government. Thus, it is up to the Railways to decide on the prices and demand. Cartelization with price and quantity fixing still remains a flagrant violation of the legal provisions.

• Strategies adopted by the different OPs during the cartel phase

Cooperation (OPs 1, 2, 3, 4 )

The case reveals that the OPs 1, 2, 3, and 4 were actively engaged in the process of bid rigging through setting of prices and tender quantities that each would quote. Moreover, these parties were following the strategy mentioned and actively cooperated with each other. This is indicative of strategic cooperation on their part, which is a key aspect of cartelization. By the use of information exchanges, the parties directed their action towards increasing the cartel’s profits. 

For these firms, this can be viewed as a coordination game- like the Stag Hunt with the following payoffs: 

OPs 1, 2, 3, 4

Strategies	Cooperate	Defect
Cooperate	Pcc , Pcc	Pcd , Pdc
Defect	Pdc , Pcd	Pdd , Pdd

Here, ‘Cooperate’ stands for quoting the prices agreed on, ‘Defect’ stands for undercutting,  P_cc stands for the profits by the firm when both cooperate, P_cd is profits when the first one coordinates and the second does not, P_dc stands for profits when the firm defect and the other cooperates, and P_dd stands for the profits when both defect (or engage in competitive behavior).

Furthermore, under cartelization and cooperation: P_cc > P_dc > = P_dd > P_cd     (1)

And P_cc / (1 – d) > P_dc + (d/(1-d)) * P_dd    (2)

Where d is a discount factor.

Due to continued playing of the game, i.e. cartelization over 5 years, these firms had an incentive to cooperate if the above condition was satisfied. Thus, this scenario, like any assurance game, weakly ensures that the cartels coordinate their prices and cooperate with each other, rather than defect. 

Nonetheless, the foregoing case suffers from the Enforcement Problem. This is because there was a firm that found it in its interest to defect and not quote the bid-rigging prices.

Non-cooperation by OP 6:

OP 6 decided to underquote prices compared to the cartel prices and makes its case for ‘flatly ignoring’ any intimation to adjusting its quotes. Moreover, it never responded to any of the cartel’s workings. While legally this still implies that OP 6 was privy to inside information, economically it shows that the business did not find it in its interest to cooperate and that defecting and quoting lower prices was more beneficial for it. In other words, the inequality (2) does not hold true in its case. Moreover, it indicates a Prisoner’s Dilemma situation, which in fact accurately depicts the actions of a fellow insider- OP 4.

• Action by the Regulators, The Leniency Policy, and Prisoner’s Dilemma

The regulators charged the opposing parties with a fine of 5% of the average turnover from the sale of protective tubes for the three preceding financial years.

What is astounding is the fact that OP 4, an active proponent of the cartel, was the first to ‘defect’ in the sense that it not only cooperated with the CCI throughout its investigation, but also furnished it with ‘full, true, and vital disclosures’ regarding the anti-competitive cartel agreement. In lieu of this, it applied for the Lesser Penalty Regulations (LPR), a leniency program that allows a penalty to be reduced if the business provides ‘vital information’. It was granted a 100% reduction in its penalties! 

This depicts the classic Prisoner’s Dilemma situation as shown below:

Strategies	Cooperate (Withhold information)	Defect (Supply information to CCI)
Cooperate	Fcc , Fcc	Fcd , 0
Defect	0 , Fdc	Fdd , Fdd

Here, F_cc stands for the fines imposed when both firms cooperate, the fines imposed when the firm defects (and supplies information to the CCI) while the opponent cooperates is 0, F_cd stands for the fines imposed when the other firm defects and F_dd is when both defect. Given these are fines, the payoff ‘F’ has negative values.

Moreover, 0 > F_dd > F_cc > F_cd (3)

This implies that OP 4 successfully provided information to the CCI and got away with the penalties, making this particular game a single-time period one.

The case clearly shows the effective impact that the leniency policy has on not only encouraging competitive behavior but also discouraging anticompetitive behavior since it enables the firms to provide information and ‘get away’ with their own misdeeds. 

Final Remarks

The preceding case clearly shows game theory at work in the formation, maintenance, and breaking of a cartel with a key role played by the regulatory authorities. The ‘dream team’ of the 7 companies provided no proof of any positive impact by virtue of their cartelization. Nonetheless, the survival of the cartel for 5 years implies that there could be a potential deadweight loss to the economy.

While some firms found it in their interest to collude, some found it more beneficial to undercut the prices. Moreover, when given the chance, one firm used the ‘leniency’ policy to get a reduced penalty. This implies that the CCI’s policy is effective in combating at least some form of anticompetitive behavior- in this case, the ‘dream team’ cartel.

Author: Vedika Ramesh

The author is a postgraduate student at the London School of Economics and Political Science (LSE), pursuing an MSc in Economics degree. 

References

Advocates, V. A. (2022, June 28). CCI Busts Cartel Of Seven Suppliers Of Polyacetal Protective Tubes For Axle To Indian Railways Through Leniency Route. Retrieved from Mondaq.

Cartelisation in the supply of Protective Tubes to Indian Railways (2020).

Marc Ivaldi, F. J. (2016). Cartel Damages to the Economy: An Assessment for Developing Countries. Competition Law Enforcement in the BRICS and in Developing Countries. International Law and Economics. Springer, Cham.

Raychaudhuri, D. T. (2020). Using Leniency Effectively in Anti-Cartel Investigations: A Study of Recent Trends in Cases Decided by the CCI. Indian Journal of Law and Justice, 172-195.

Roberts, K. (1985). Cartel Behavior and Adverse Selection. The Journal of Industrial Economics, 401-413.

Robinson, M. S. (1985). Collusion and the Choice of Auction. The RAND Journal of Economics, 141-145.