What is a Cartel?

Collusion between competitors, commonly known as a cartel, is a secret agreement or a concerted practice involving two or more undertakings aimed at restricting competition between them; this allows the undertakings involved to control the market to the detriment of consumer welfare.

These agreements can be reached under a number of ways, but mostly they directly or indirectly fix purchase or selling prices, set selling restrictions and production quotas, or rigging other trading conditions.

Article 9 of the Competition Act (Law No. 19/2012, of 8 of May) prohibits “agreements between undertakings, concerted practices between undertakings and decisions by associations of undertakings which have as their object or effect, to prevent, distort or restrict, in a significant way, competition in the whole or part of the national market”.

Overall, cartels are a very serious competition infringement, as it injures consumer welfare by raising prices and restricting supply and by damaging competitiveness and market efficiency.  

By colluding, competing undertakings coordinate their decisions or market behavior with the aim of preventing, distorting or restricting competition, thus furthering their gains beyond what would be expected under normal competition conditions. Undertakings will aim to do so by waving their business autonomy in terms of prices, trading conditions and market selection. Collusion can also be complemented with an agreement between the undertakings to directly or indirectly share the profits. 

A form of collusion which is particularly relevant in the context of public procurement is bid rigging where competing firms coordinate their bids in advance in order to obtain benefits at the State treasury´s expenses. In this perspective, firms may coordinate themselves in order to obtain the awarding of the public contract at more advantageous conditions than those obtained if firms had behaved in normal competition conditions. In practical terms, this type of coordination can take different forms, among which:

Suppression of bids:

One or more competitors, who in normal circumstances would bid independently, agree not to bid or to withdraw the bid in order to allow another competitor to win the contact and ask for a higher price.

Complementary or “Shadow” bids:
Firms present bids which have the sole purpose of covering the winning bid, supplying wrong information and creating the impression of the existence of normal competition conditions. This behavior leads to bids which include prices which are too high or other unacceptable conditions, which are destined to lose, but induce an artificial price increase or create more advantageous conditions to the operation.

Rotation of bids:

Competitors agree among themselves to rotate winning bids. This strategy eliminates the uncertainty of tenders and permits the allocation of the value of the contracts to be awarded according to a rule of identical or proportional quotas.
 
Sub-contracting

This situation takes place when competitors agree not to bid or to present a “shadow” bid in order not to win the tender, receiving, in exchange, from the winner supply sub-contracts or contracts for the execution of the awarded work.

In all cartels, undertakings taking part in them trust each other, thus eliminating the need to competete for better products or services at more competitive prices. Consumers are eventually those more harmed, having to pay more for less ; but other competing undertakings will also be damaged, thus causing harm to the economy as a whole.
By restricting competition in na artificial way, cartel member will harm market efficiency, preventing the developmente of new products and production methods.
The fight against cartels is a very important task of Competition Authorities in the European Union and a priority for the European Commission, which has established a special anti-cartel unit since 2005.
For information on European Commission (Directorate General for Competition) competition cases, follow this link.

The fight against cartels and bid-rigging in public procurement has also been given special attention, with several National Competition Authorities assigning dedicated task-forces to these investigations.

Cartels are, by their very nature, secret and therefore difficult to detect and investigate. Portugal, like several other European countries, has a Leniency Programme (set by the articles 75 to 82 of the Competition Act, Law No. 19/2012, of 8 of May). The Leniency Programme sets the conditions undertakings will have to satisfy in order to qualify for leniency when reporting to the Competition Authority any agreements and concerted practices in which they are or have been involved; subject to evaluation, undertakings may be granted full immunity or a reduction not exceeding 50% of the total amount of the fine.

Associated Documents

Title Tipo Tamanho
.pdf 377 Kb