Republic of the Philippines

BULACAN AGRICULTURAL STATE

COLLEGE Institute of Management
Pinaod, San Ildefonso, Bulacan, Philippines

Example of Homogeneous Products

in Perfect Competition

In Partial Fulfillment

of the Requirements for the Course

Intermediate Microeconomic Theory (AgMgt 201)

Submitted by:

Marjorie Catam

Roselle Joy Santos

Mary Joy Bagan

Mary Roy Hernandez

Ma. Angelica Cortes

BSAM 3C

Submitted to:

Ms. Kathleen Teodoro

Subject Instructor

December 23, 2020

 ABSRACT

It is not easy to live nowadays, everything is not in our control just like the price.
Wherein, cartels make everyone suffers the reason is they manipulated the price/fixed
the price. The main objective of this study is to identify the harmful impacts of the cartel
on the consumer. In this, the economy and industry suffer and ultimately to the
consumers. Consequently, this research aims to know the harmful impacts of the cartel
(price-fixing, lack of transparency, bid-rigging, restricted output, and market sharing/
curving market), and how does it affect consumer consumption, and ability to purchase.
“The higher the degree of competition in a market, the greater the incentive to form a
cartel, and the greater it is, the greater it harms the economy and consumers.”
Therefore, the study found out the impact of a cartel on the consumer, specifically on
increasing price. Wherein, it results in a change especially to the consumption of the
purchaser, which in those poor becomes poorer especially in developing country like the
Philippines. Furthermore, this study claims that the customers pay a lot but earn a few
goods and services in return, while the businesses under the cartel earn a lot but
produce less.
INTRODUCTION

Consumers are the lifeblood of the business. So, what is a cartel? How does it
harm the consumers? Why does the price increases affect the consumption and income
of the purchaser?

The industries are changing into a more competitive and more complicated ones.
Wherein, the things we need are mostly increasing specifically in the price which some
causes are by the cartels. Cartels are the arrangement of two or more competing
businesses (Ahad, M.A., 2011). Wherein, cartels manipulated the price of the goods
and services that some are legal while some are not. The competing businesses under
the cartels can increase their prices. That not just harms the consumer in the market but
also the government and our economy. Cartels also affect the new business.

The more the price increases, the number of goods a person can buy is just a
few like us today‟s pandemic. It is harmful to the consumer the reason that the cartels
cause a lot of changes not only in the market but in the country‟s economy and industry.
Like for example, if a family has a lower income and needs to buy food for their family
they will if they were going to choose between a bags of fruits to a pack of noodles? It is
not shocking at all if the purchaser will choose cheaper goods. In that case, it will result
in a health problem like malnutrition. As many said, it is unfair to the purchaser because
the price is continuously increasing while the wages, salary, or income of the consumer
does not change at all which some people cannot afford to purchase some goods or
services even though it is needed because they are lack of money to budget, which is
complicated for them, according to OECD (n.d). The businesses that are under the
cartel earn a lot of money by producing less of their product. In that case, the poor of
the poor become poorer were impairs the economy in particular to those developing
countries like the Philippines.
RESEARCH NOTE (2000-2500 words)

Review of Related Literature

There are different studies and articles about the harmful impact of the cartel to
the consumers that have been conducted such as:

∙ The Philippine Competition Commission (n.d) claims that cartels cause harm to
consumers by engaging in coordinated anti-competitive behavior such as price
fixing, bid-rigging, output restriction, and market allocation. Wherein, these acts
 are prohibited under the Republic Act No. 10667 or the Philippine Competition
Act (PCA).

∙ Ahad (2011) stated in his article that the cartel harms the consumer especially
those in the urban areas and on the country‟s economy. Likewise, the cartel
results in the community, consumers, businesses, and even the government are
a force to pay higher prices for goods and services. Even though the consumer
cannot afford those product/services but if it is a need they will purchase it no
matter what. Also, he says that cartels steal billions of dollars from taxpayers,
businesses, and ultimately to the consumer. That damages the interest of each
consumer regarding the price increase. And lastly, he stated that setting rules are
essential in oligopolistic markets, as predicted in game theory.

∙ According to Economics Online (n.d), the groups under the cartels works together
only to protect their interest. Then, it can manipulate the price based on their
arrangement that avoids the competition between the prices. Furthermore, it
stated the negative impact of the cartel to the consumer including higher prices,
lack of transparency, restricted output, and carving up a market.

∙ Commercial Law (2019) argued that the cartel has an extraordinary effect,
particularly on pricing for the goods and services. It says that at least 30% to
40% of the price high occurs because of the cartel. Furthermore, it stated the
consumer has to pay a lot for the product/services that cost a lot but getting
fewer goods than what consumer purchased.

∙ EOCD (n.d) confirmed that the cartel injures the consumer by increasing the price
and restricting the supply, which makes it unavailable to some consumers,
particularly to the poor that is unnecessary and expensive for them.

∙ Chen, J. (2020) says that cartels manipulate prices and create few tactics that
include reductions in supply, price-fixing, market carving, and collusive bidding.
With this, it harms and hurts consumers in so many ways.

∙ Somehow, he said that cartels are considered illegal and promoters of anti
competitive practices. He stated that cartels' behavior has an impact in
discouraging the new entrants into the market.

∙ According to CliffNotes (n.d), one of the international cartels' members is the

Organization of Petroleum-Exporting Countries (OPEC) that decides on how
much oil that each member will allow producing. Likewise, they choose the prices
the petroleum which has a very impact on the economy particularly on the
consumer who will consume that product many knows petroleum is a necessity
that no matter high they still pay for it.

∙ Sundberg, A. (2001) stated that consumer welfare and resource are misallocated
and reduced because of the cartel. He also confirmed that the higher the degree
of competition in a market is the greater the incentive to form a cartel, which is
greater it harms the economy and consumers.

∙ The United Nations Conference on Trade and Development (UNCTAD) (2013) says
that scarcely customers suffer the most form effect of the conspiracy in
commerce and public procurement. So that high prices force the poor to
consume less or none of these goods. Hence, the cartel cases from other
jurisdictions in the sector affecting the poor most likely.

Consumers are always affected in many ways cartels move. Whatever the
impact of the cartel the consumer still needs to purchase that certain goods and
services especially if it is a necessity.
Price-fixing

The price-fixing happens when competitors are agreeing on pricing rather than
competing against each other. In price-fixing the Competition and Consumer Act refers
to the fixing, controlling, or maintaining prices. It also occurs when competitors make
written, informal or verbal agreements or understandings on:

∙ price for selling or buying goods or services

∙ minimum prices
∙ the formula for pricing or discounting goods and services
∙ rebates, allowances, or credit terms.

Legitimate commercial reasons for why a business may adjust its prices to match
a competitor include responding to highly visible prices displayed by competitors. (e.g.
petrol price boards) or competitors quickly adjusting their prices to match price
movements known as „parallel pricing‟ (ACC, n.d). Moreover, when businesses get
together to fix, control, or maintain the prices. The consumers are being harmed and
also the small businesses that are relying upon those suppliers for their livelihood.

For example, take the freight. A lot of consumer goods are transported by
freight. If the price of freight is artificially maintained or inflated by a cartel it can affect
the whole supply chain that will result in a higher price for all sorts of goods and
services.

Figure 1.1 This shows the profit maximization by an oligopolistic cartel, on how does the
price increases and the profits identify.
The cartel's profit‐maximizing decision is the same as that of a monopolist, as
Figure reveals. The cartel members choose their combined output at the level where
their combined marginal revenue equals their combined marginal cost. The cartel price
is determined by the market demand curve at the level of output chosen by the cartel.
The cartel is equal to the area of the rectangular box labeled abcd in Figure 1. The
cartel will decide to produce less output and charge a higher price than found in a
perfectly competitive market. (Cartel Theory of Oligopoly. n.d)

Cartels are hard to maintain once it is being established. The problem is the
member of cartels may be tempted to cheat on their agreement to limit production. By
producing more output than it has agreed to produce, a cartel member can increase its
share of the cartel profits. Therefore, there is a built‐in incentive for each cartel member
to cheat. Of course, if all members cheated, the cartel would cease to earn monopoly
profits, and there would no longer be an incentive for firms to remain in the cartel. The
cheating problem has plagued the OPEC cartel as well as other cartels and perhaps
explains why so few cartels exist. (Cartel Theory of Oligopoly. n.d)
 The figures below are from tutor2u (2016). Those figures show the formation of
the members of the cartel in price-fixing.

1.2 This shows

how the cartel increases the price, earn profit by staying at their quotas.

Figure

1.3 This shows how does the cartel cheat by exceeding to the quotas that will result in
high profit in the member under cartel.

Figure 1.4 This shows the over-supply made by the members under cartel that is risky
and illegal.

Lack of Transparency

Lack of transparency is all about hiding the price of the product/services of the
members of the cartel which results in an increase in price that affects the consumers'
consumption and interest. Therefore, the ACCC (2018) highlighted the lack of
transparency in the financial sector as an issue that needs to be addressed. This ACCC
saw this as a significant issue for consumers and the economy when there are a lot of
people running around wasting their time to get price discovery in a market that should
be much more readily available. Likewise, the lack of transparency comes from a lack of
competition in the sector of electricity and banking. Wherein

Somehow, if you had a more competitive market, someone would find it in their
interests to differentiate themselves with a clear product that could attract consumers,
because with more competition the price will be down-fall. Consequently, a lack of
transparency makes it difficult for customers to make notify decisions.

At the hearing, the ACCC identified the lack of transparency in the electricity sector as
a big issue, somehow that the consumers are affected the reason that electricity is so
important and a necessity for our daily lives, which means that no matter its price it will
be consumed by the consumer because it is a need. So that, the ACCC noted that
companies try and hiding the prices of their products and that on some occasions this
ambiguity can „lead to breaches or violations‟.

Bid rigging
Bid rigging happens when the two or more competitors agree they will not
compete genuinely with each other for particular tenders, allowing one of the
participants in the agreement to win the tender (Ahad, M. A., 2011). Also, this may
involve some potential bidders not bidding for a tender to support the designated winner
they might agree on the prices that each party will bid for a tender. Such an agreement
prevents open and effective competition and means procurers are unlikely to achieve
the best value for money for their business, customers, and in some cases, taxpayers.
(Touhokohoko, K., 2020)

According to Ahad, M. A. (2011) Collusive tendering is a dangerous form of anti

competitive behavior, some of the more common bid-rigging tactics:
∙ Cover bidding -- competing businesses choose a winner while the others
deliberately bid over an agreed amount, which ensures the selected bidder has
the lowest tender and helps to establish the illusion that the lowest bid is indeed
competitive.
∙ Bid suppression -- a business agrees not to tender, thus ensuring that the pre
agreed participant will win the contract.
∙ Bid withdrawal -- a business withdraws its winning bid so that a competitor will be
successful instead.
∙ Bid rotation -- competitors agree to take turns at winning business while monitoring
their market shares to ensure they all have a predetermined slice of the pie.
∙ Conforming bids -- businesses deliberately include terms and conditions they know
will not be acceptable to the purchasers, ensuring that they will not win the bid
and that the pre-agreed business will be successful.

The Philippine Competition Commission (n.d) stated that bid rigging is illegal
under Republic Act No. 10667 or the Philippine Competition Act (PCA). The reason that
bid rigging undermines the essence of a competitive bidding process, whose purpose is
to achieve better value for money. Likewise, bid-rigging can affect both government
procurement and biddings that are held by private businesses. Ultimately, the higher
costs are passed to consumers, who are harmed through higher prices and lower
quality of goods and services. In cases involving public procurement, consumers are
harmed twice with the overspending of taxpayer money.

Restricted Output
According to Ahad, M. A. (2011) Output restrictions occur when the participants
in an industry agree to prevent, restrict, or limit supply. Its purpose is to create scarcity
to increase prices or stop prices from falling while protecting inefficient suppliers. It may
also be thought of as supply or acquisition restrictions, according to Touhokohoko, K.,
(2020). Furthermore, restricting output is when two or more competing buyers or sellers
agree to prevent, restrict, or limit the goods or services they are buying or selling or the
goods or services that would likely be bought and sold. Generally, a cartel needs the
support of key market participants to achieve this aim.

Any business may independently decide to reduce output to respond to market

demand, but it is against the law to agree with competitors to coordinate restricting an
output. Touhokohoko, K., (2020).

The impact of output restrictions is it reduces the available supply of particular

goods or services which artificially increases the demand for the product and so
increases the price which affects and harms the consumer.

Market sharing/Carving up a market

Even though it is illegal in many parts of the world for firms to set prices and
carve up a market, the temptation to earn higher profits makes it extremely tempting to
defy the law (ACCC, 2018). It tempted members under cartel to gain much money
cause harm to the consumers who purchased the products/services.

Likewise, market sharing happens when businesses collude to carve up markets

and not compete for the same customers. These could be about the sale of specific
products/services, a geographic area, or a particular type of customer.

The Philippine Competitive Commission (n.d) stated that market sharing occurs
when competitors agree to divide or allocate customers, suppliers, or territories among
themselves rather than competing with each other.
CONCLUSION

The researchers conclude that the negative/harmful impacts of the cartel on the
consumer are because of price-fixing, lack of transparency, bid-rigging, and market
sharing/curving market that just not affecting consumers but also the economy and
industry.

As an outcome, the companies participating in cartels produce less but earn

higher profits. Moreover, society and consumers pay the bills. Likewise, the resources
are misallocated while consumer welfare is reduced. Consequently, the cartel is not
good for a developing country like the Philippines in the reason that it makes the country
poor and more complicated to be a developed one. The government has no right to stop
the cartel until it did not step the law.

I, therefore, conclude that when the prices are high particularly in essential goods
and services it forces the poor to consume less or none of these goods that cause a lot
of damages to the life of each individual. Subsequently, those customers who are not
poor can still afford to buy those goods and services because a person with money can
consume any product even it increases in price, the needs and wants are present. The
consumers purchase less while the businesses under the cartel earn more. It results in
making the poor poorer and the rich richer. The lifeblood of a business is the most
affected one and the neediest in the cartel.
BIBLIOGRAPHY

∙ Ahad, M.A. (2011). Harmful impacts of cartels on consumers. The Daily Star.
Retrieved from https://www.thedailystar.net/news-detail-211766

∙ ACCC. (n.d) Retrieved from https://www.accc.gov.au/business/anti-competitive

behaviour/cartels/price-fixing#what-is-price-fixing-

∙ Bid Rigging is Against the Law! (n.d). Philippine Competition Commission. Retrieve
from https://www.phcc.gov.ph/bid-rigging-is-against-the-law/
∙ Cartels and anti-competitive agreements. (n.d). OECD. Retrieve from
http://www.oecd.org/competition/cartels/

∙ Cartels. (n.d.). Economics Online. Retrieve from

https://www.economicsonline.co.uk/Business_economics/Cartels.html

∙ Chen, J. (2020). Cartel. Investopedia. Retrieve from

https://www.investopedia.com/terms/c/cartel.asp

∙ Cliff Notes. (n.d). Houghton Mifflin Harcourt. Retrieve from

https://www.cliffsnotes.com/study-guides/economics/monopolistic-competition
and-oligopoly/cartel-theory-of-oligopoly

∙ Commercial Law: Cartels Only Have Negative Impact Upon the Consumers
Benefit, (2019). Law Teacher. Retrieve from https://www.lawteacher.net/free-law
essays/commercial-law/cartels-only-have-negative-impact-upon-the-consumers
benefit-commercial-law-essay.php

∙ Current issues in competition and consumer law. (2018). Australian Competition

and Consumer Commission (ACCC). Retrieve from https://www.aph.gov.au ›
ACCC_2017 › Chapter2

∙ Leniency Program. (n.d). Philippine Competition Commission. Retrieve from

https://www.phcc.gov.ph/leniency-application/

∙ Sundberg, A., (2001). Fighting Cartels. Swedish Competition Authority. Retrieve

from https://www.konkurrensverket.se/globalassets/publikationer/pros
cons/rap_pros_and_cons_fighting_cartels.pdf

∙ The Impact of Cartels on the Poor, (2013). United Nations Conference on Trade
and Development (UNCTAD). Retrieve from
https://unctad.org/system/files/official-document/ciclpd24rev1_en.pdf

∙ Touhokohoko, K., (2020). What is cartel? Commerce Commission New Zealand.

Retrieve from https://comcom.govt.nz/business/avoiding-anti-competitive
behaviour/what-is-a-cartel

∙ tutor2u. (2016). Oligopoly and Collusion. Slide share. Retrieve from

https://www.slideshare.net/tutor2u/oligopoly-and-collusion