From a strictly game theory perspective, it should come as no surprise that bypassing competition and forming cartels represents an attractive option for business owners. Why? Simply because the idea that capitalism favors business owners exclusively tends to be a bit of a myth, with those perpetuating it willfully ignoring the fact that realistically speaking, the consumer is on the winning end more often than not, with competition oftentimes ultimately leading to:
- Better and better products for consumers
- Lower and lower prices for consumers
- Higher and higher innovation-related costs for businesses (innovate or die)
- Higher and higher investments of time/energy for business owners
As such, contrary to the picture let’s say anti-capitalist movements tend to paint, capitalism frequently pushes players in established business sectors to the very limit in terms of profitability, with profit margins so low that you as a business owner either have to make up for it through volume (the Amazon approach) or innovate in terms of anything from product development to branding so as to be able to improve your margins (the Apple approach).
Under such circumstances, the idea of forming a cartel sounds downright appealing.
Instead of competing on prices and pushing them lower in a proverbial race to the bottom, why not fix prices? The same way, why not agree on “fair” production targets? On the marketing front, the same principle applies, with it being far easier to simply coordinate campaigns in a way that enables everyone to save face rather than try to constantly outdo your competitors… examples abound.
Needless to say, the authorities aren’t thrilled about cartels, with them essentially representing a specific type of oligopoly which doesn’t just affect the interests of consumers (voters) with respect to prices and product quality in a negative manner but also risks affecting the innovation potential associated with various industries and, by extrapolating, ultimately the economy of the country in question as well (less innovation, less higher value-added products and services that represent an economic blessing).
What about China?
While the average observer pretty much automatically assumes that Western countries such as the United States have frameworks in place with respect to combating cartels, the same isn’t necessarily true about China, in light of the fact that despite its multi-decade economic growth track record and progress on many fronts (from geopolitics to, yes, even sensitive topics such as environmental ones), it is still perceived as a “Wild West” jurisdiction.
Is that the case when it comes to cartels?
At this point in time, China’s anti-cartel framework is governed by the so-called Anti-Monopoly Law (or AML, as it tends to be abbreviated), a law passed back in August of 2007 and which started producing effects as of August the following year. The Anti-Monopoly Law makes it clear that cartels are prohibited and provides clarity through stipulations pertaining to what market participants are and especially aren’t allowed to do. For example, according to Article 13, competitors are not allowed to fix commodity prices, boycott third parties as a joint effort, reach production volume-related agreements, eliminate innovation from the equation or at least delay innovation-related investments that they would have otherwise embraced in a competitive environment and so on.
The same way, Article 14 regulates so-called vertical monopoly agreements, Article 15 does make it clear that under certain circumstances, companies are allowed to engage in cartel-like behavior, for example if they simultaneously invest in R&D, Article 16 regulates industry-wide associations and the list could go on and on.
Of course, some observers who haven’t dug deep enough would perhaps quickly point out that the previously mentioned legal framework is quite new, having barely had its 10-year anniversary. However, it is worth pointing out that a legal framework with respect to cartels had existed in the past as well, for example the Anti-Unfair Competition Law of 1993, the Pricing Law of 1998, the Law on Bid Invitation and Bidding of 2000 and so on. Yes, the AML represents remarkable progress from a legislative perspective in terms of comprehensiveness, but this doesn’t mean it should be considered China’s sole initiative when it comes to combating cartels.
However, the elephant in the room is oftentimes represented by the “real world” in China, in other words sub-par law enforcement rather than just the existence of a legal framework or lack thereof (a topic covered through a previous article).
Is the same principle valid with initiatives pertaining to cartels?
In many situations, that is indeed unfortunately the case.
For example, since the AML started producing effects, less than 200 monopoly cases have been closed and when it comes to abusive market dominance cases, the figure barely surpasses 50. As far as civil cases are concerned, quite a bit less than 1,000 have been properly seen through and the list of examples could continue.
The bottom line is this: just like in many other instances, significant progress has been made in China as far as its goal of combating cartels is concerned. However, progress with respect to meaningful real-world law enforcement is more difficult to achieve than progress on the legislative front, for reasons which range from China’s (in)famous fragmentation issues (with proper law enforcement hard to implement in many poor and/or rural regions, for example) to various political aspects.
Therefore, while it would be a mistake to continue considering China a Wild West jurisdiction as far as cartels are concerned in light of the achievements that have been mentioned in this article and many others, it would be equally unwise as an investor to expect the same effective checks and balances in China that are taken for granted in the West. That is most definitely not the case yet, with embracing realistic expectations being a must for those serious about doing well when investing in Chinese assets, starting businesses in China and everything in-between.