Imagine you are in the modest city of Dakar, Senegal in West Africa. As you get out of your Airbnb (a must if you want the true ‘local’ feel of the city you are visiting), you come across a man emptying buckets of sewage into a hole dug in the middle of the street. Curiosity gets the better of you and you decide to put on your investigative cap. Your findings reveal that in Dakar, there are two ways to get the poop out of overflowing sewage pits - by hand (commonly regarded as ‘baay pelle’, meaning the father of the shovel) or by a giant vacuum truck called a ‘toilet sucker’. The latter method is a relatively non-toxic and salubrious method of cleaning septic tanks regularly but is very expensive for the common people (It amounts to about a whole month’s wage - definitely not a popular option). But if money is not a constraint, one has to go to a parking lot behind Dakar's national football stadium to hire a toilet sucker. This is where all the drivers are hanging out next to their idle trucks for the most part of the day.
Did you notice something here? Even though the drivers sit idle a large amount of time meaning that there is excess supply, it is observed that the price is exceedingly high for the common man. Looks like we are missing a part of the puzzle. An elementary study of economics reveals the answer. This seemingly paradoxical situation occurs because the market follows an imperfect market structure. This is where the existence of the ‘poop cartel’ comes into the picture. Yes, you read that right - a poop cartel.
If you are not a student of economics, business or law, chances are that you would associate the term ‘cartels’ with drugs since the phrase is extensively used to highlight the social problem regarding drugs centered in South America, Mexico and the States. Cartels are defined as “a group of similar independent companies who join together to control prices and limit competition”. The basic objective of this type of informal agreement between potential competitors is to increase profits by the means of having a close-to monopolistic control. To put this into perspective, let’s take the case of the disastrous onion price hike that took place last year. Excessive rains destroyed onions in various regions of the country, which eventually led to a fall in the supply of onions. As a ripple effect, onion prices increased throughout the country. This price rise was due to a natural factor i.e. rainfall. Replace this ‘natural factor’ with companies deliberately limiting the production to create an artificial rise in prices. There is an unnecessary loss to the consumers and the economy. These are cartels in their most basic sense.
These collusions are long known to exhibit features which make it reprehensible to the society and the economy. The sewage removal and disposal system in Dakar is a real-life example of cartels exploiting the consumers. This is also reflected by the fact that numerous countries around the globe legally forbid the formation of cartels, considering its anti-competitive behaviour. In the Indian context, the Competition Commission of India (CCI) enforces the Competition Act, 2002 (Competition Act) which regulates anti-competitive conduct in India. Many giants like Unilever and Procter & Gamble (washing powder cartel, 2011); Heineken, Grolsch and Bavaria (beer cartel, 2007); British Airways, Air France and nine other European airlines (air cargo cartel, 2017) etc. have been fined huge sums of money after being proven guilty of forming cartels. Common techniques by which companies conduct these malpractices are -
● Price fixing - Competitors agree on a fixed pricing structure rather than competing against each other. In 2018, the competition watchdog imposed a penalty of 54.36 crores on three domestic airlines - Jet Airways, IndiGo Airlines and SpiceJet for colluding to fix a uniform rate of Fuel Surcharge for cargo transportation.
● Sharing markets - Competitors agree to divide a market so that they are sheltered from competition. An agreement between Du Pont and Imperial Chemical was made in the early part of this century. It enabled the former to have exclusive selling rights for their products in North America (except for British colonies) and the latter in the British Empire.
● Rigging bids - Suppliers communicate before lodging their bids and decide the winner and the winner price among themselves. In the 1950s, a heavy equipment cartel consisting of 47 manufactures was headed by General Electric and Westinghouse. They pre-decided their bids, picking out one winning bid and a separate set of identical losing bids for each project that was auctioned by the government.
Controlling the production - Total output available to buyers is controlled with the aim of creating scarcity. A hefty fine of Rs. 6317.29 crores was imposed on Ultratech cement, J K Cement, Binani and 7 other companies for restricting the production of cement in 2016.
After a prolonged period of perceiving cartels with a lens highlighting the drawbacks of it, in the last few years, economists have observed the perks of cartel formation in certain specific conditions. South Korea becoming one of the top five automobile-producing countries in the world is one of the most prominent evidence of it.
● Rise of smaller firms - Agreements between smaller competitors may improve their ability to compete against larger players in the market.
● Reduction in the risk of doing business - Strategic alliances may help to do so. Since businesses are united, they would able to withstand the adverse effects of business cycles by regulating their output and influencing prices during the time of crisis.
● Less expenditure on advertising - This is a two-fold advantage. Firstly, competitive advertising is avoided since the goods and services are advertised on a common platform. Secondly, since there is a bulk buying of advertising space, the cost of advertising is relatively less.
● Doesn’t eliminate innovation - There is a lot of motivation for individual firms to update their technologies and keep finding efficient means of production. This follows from the fact that the agreement is quite unstable and there is a lot of room for firms to cheat.
● Uniform market structure - A stable price and output is guaranteed which results in greater consumer confidence as expenditure on the good or service can be easily planned. Organization of the Petroleum Exporting Countries (OPEC) in the 1990s is a good example showcasing a stable price for oil by charging between $25 and $35 for each barrel.
Let’s come back to our story of the poop cartel. The system was such that once you would walk up to a trucker, and once they had stated their price, you couldn’t go ahead and ask someone for a better price. In 2018, a team of economist from a non-profit group, Innovations for Poverty Action went to research and curb the problem. They created an auction model, now regarded as ‘uber for poop’, wherein the drivers would be texted by a potential customer on their phone asking for their services. Initially, they sent out outrageous prices, but soon, they started cutting prices to a reasonable amount. It wasn’t long before the truckers were making less money on each job, but they were getting more work. This turnaround is a classic example of what innovative solutions can do. If a system as informal as baay pelle can be disrupted, then it shouldn't be too hard before transnational cartels are brought down to their knees and the ‘Uberization’ of systems might just hold the key to it.
Anvi Agarwal
References:
- https://www.cci.gov.in/sites/default/files/whats_newdocument/Press%20release-%20Cement%20Orders.pdf
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