【summary】
A cartel is an act in which multiple companies agree on prices, production quantities, sales areas, bidding conditions, etc. in order to avoid competition.
For companies, it can appear to protect profits in the short term. However, in Japan, this poses a problem under antitrust law because it imposes high prices and few choices on consumers and destroys fair competition in the market.
Even for investors, the detection of cartels and bid rigging cannot be ignored. Financial penalties, criminal charges, compensation for damages, suspension of trading, and brand damage may affect our business performance and stock price.
In this article, we will explain the basics of cartels, how they differ from bid rigging, and the points that investors should check when analyzing companies.
Please note that this article is a general educational article regarding the Antimonopoly Act and is not intended to make legal judgments on individual cases. Whether a specific transaction or corporate action is illegal is determined based on the facts, industry structure, presence or absence of an agreement, and the impact on competition.
What is a cartel?
A cartel is a negotiated arrangement between two or more companies that limits competition.
Normally, in a market, companies compete with each other to acquire customers by lowering prices, increasing quality, and improving services.
But in cartels, companies cooperate to avoid competition.
Typically, the following actions are problematic:
| Type | Content |
|---|---|
| Price cartel | Jointly determining the price of goods and services |
| Production quantity cartel | Limiting production and supply |
| Market segmentation | Divide sales areas and customers |
| Bid rigging | Adjusting potential bidders and bid prices before bidding |
The Japan Fair Trade Commission lists unfair trade practices such as private monopolization and unfair trade restrictions, such as cartels and bid rigging, as acts regulated by the Antimonopoly Act.
In fairly layman's terms for investors, a cartel is an "arrangement in which companies try to protect their interests without competing."
However, from the perspective of the market as a whole, this can be detrimental to consumers and business partners.
Why cartels are a problem
Once a cartel is established, competition between companies is weakened.
If there is competition, companies will compete for customers based on price or quality. However, if companies match prices and quantities, it becomes difficult for consumers to choose cheaper products or better services.
| Item | Market with competition | Market with cartels |
|---|---|---|
| Price | Easily falls | Easily stays high |
| Quality | Easily improved | Improvements likely to be delayed |
| Choices | Easy to increase | Easy to limit |
| Consumer benefits | Easy to increase | Easy to lose |
The Fair Trade Commission also explains that if the market mechanism functions properly, competition between businesses will ensure the interests of consumers.
In other words, the problem with cartels is not just ``whether or not the company will make a profit.''
The problem is that market price formation is distorted, and consumers and orderers are forced to accept conditions that are less favorable than they otherwise would be.
Main types of cartels
1. Price cartel
A price cartel is an act in which companies decide the prices of goods and services.
For example, there is a case where multiple companies agree to sell this product for 1,000 yen or more.
Investors should note that simply raising prices at the same time does not necessarily mean a cartel exists.
Against the backdrop of rising raw material prices, rising labor costs, a weak yen, rising logistics costs, etc., it is possible for each company to raise prices at its own discretion.
Problems tend to arise when competing companies communicate with each other and jointly decide on prices.
2. Production quantity cartel
A production quantity cartel is an act that attempts to maintain prices by restricting production and supply.
Reducing supply may tighten supply and demand, making it difficult for prices to fall.
However, in reality, judgment is not simple. Production volumes may change for legitimate business reasons, such as equipment outages, decreased demand, inventory adjustments, and resource constraints.
Investors should not assume that the term "production adjustment" is illegal, but rather check to see if there was an agreement between the companies and what kind of criticism has been received from public institutions.
3. Sales region/customer division
The act of dividing sales areas and customers between companies also becomes a problem.
For example, companies can avoid competition by saying, `Company A is in eastern Japan, and company B is in western Japan.'' `This major customer is company A, and another customer is company B.''
At first glance, it may appear that the industry is in order.
However, from the customer's perspective, there is less room for price negotiation and fewer options. This also weakens market competition.
4. Bid rigging
Bid rigging is the act of deciding in advance who will be the successful bidder and the bid price in bidding for public works projects, business outsourcing, etc.
Bidding is originally a system in which multiple businesses compete on price and proposal content.
However, if the winning bidder is determined in advance, the orderer is less likely to be affected by price reductions or quality improvements due to competition.
Bid rigging often gets a lot of attention when it comes to antitrust violations that are reported in Japan. This can be a problem in a variety of fields, including public works, advertising, systems, equipment, and medical care.
Why investors should be careful
Cartels and bid rigging can directly impact a company's value.
In the short term, avoiding competition may make profit margins appear higher. This is where the danger lies for investors.
Even if a company appears to have good profit margins, if a portion of that profit is supported by unfair trade practices, that assumption will immediately collapse after the company is exposed.
The main risks are:
| Risk | Impact on the company |
|---|---|
| Surcharge | Temporary expense recording, pressure on profits |
| Criminal charges/criminal punishment | Decreased trust in management and the company |
| Claim for damages | Possibility of receiving a claim from the orderer or business partner |
| Suspension of nomination/suspension of transactions | Possibility of losing the opportunity to receive orders for public projects and large transactions |
| Brand damage | Customer loss, recruitment difficulties, deterioration of transaction conditions |
| Distrust in governance | Impact on stock valuation and cost of capital |
The Fair Trade Commission may issue a surcharge payment order for violations such as cartels and bid rigging.
From an investor's perspective, it is necessary to look not only at the exposure itself, but also at subsequent orders, profit margins, litigation costs, and the cost of improving internal systems.
Points that beginners tend to misunderstand
It's not necessarily a cartel if the entire industry raises prices.
Price increases can occur at similar times across industries.
For example, raw material prices will rise, electricity costs will rise, labor costs will rise, and import costs will increase due to the weaker yen. If these common factors exist, multiple companies may revise their prices in the same direction.
The question is whether the companies had discussed in advance and jointly decided on prices and quantities.
“Stable high profit margin” is not necessarily a good thing
High profit margins in themselves are not a bad thing.
Some companies maintain high profits through brand power, technological strength, patents, efficient production, and strong sales networks.
However, if prices are unnaturally rigid throughout the industry, competition with other companies in the same industry is difficult to see, or there has been a past violation of antitrust laws, it is necessary to check the governance aspect.
It's not always the case that "if you're caught, it's over once and for all."
The issue does not necessarily end with a fine or punishment.
This may be followed by a review of business partners, claims for damages from the ordering party, suspension of nominations, internal investigations, measures to prevent recurrence, and strengthening of the audit system.
The impact on business results may not be fully understood by the one-time costs on the day the disposition is announced.
Checkpoints to see in company analysis
When investors research a company, they want to check not only sales and profits, but also the compliance system.
| Check items | Reasons to watch |
|---|---|
| Past violations of antitrust laws | Check the risk of recurrence and company culture |
| Surcharges and litigation-related costs | Separately look at one-time costs and ongoing costs |
| Dependency on public projects | Check the impact of suspension of nomination |
| Price trends with other companies in the same industry | Check for unnatural price maintenance |
| Integrated report/securities report | Check compliance, internal controls, and risk descriptions |
| Measures to prevent recurrence | Check the effectiveness of training, audits, reporting systems, and board supervision |
Particularly in industries that involve a lot of bidding and large-scale contracts, such as public construction, advertising, logistics, equipment, materials, medical care, and information systems, not only price competition but also compliance risk becomes a factor in investment decisions.
When it comes to long-term investing, it is not just the size of the profits that is important, but also how healthy those profits are.
How to read cartel reports
When reports of cartels or bid rigging come out, investors first look at the facts separately.
| Things to check | How to view |
|---|---|
| Is it at the investigation stage or the disciplinary stage? | Determine whether it's just a report or a disciplinary action by the JFTC |
| Period covered | When is the transaction in question |
| Target business | Entire company or part of the business |
| Amount of levy | Is it large relative to net income and cash |
| Risk of order suspension | Will it affect future sales |
| Company description | Deny, dispute, accept, take measures to prevent recurrence, etc. |
Stock prices do not necessarily move solely based on the amount of the levy.
What the market is more concerned about is `Is the quality of this company's profits OK?'' Will it affect future orders?'' and `Is management's control effective?''
In some cases, the loss of trust is seen as more important than the loss of numbers.
summary
A cartel is an arrangement between companies to limit competition.
By jointly determining prices, production volumes, sales areas, bidding conditions, etc., it puts consumers and orderers at a disadvantage and distorts fair competition in the market.
For investors, cartels and bid rigging are more than just legal news.
Profits, cash flows, and stock valuations may be affected through fines, damages, suspension of nominations, suspension of trading, and brand damage.
When analyzing a company, it is important to look not only at sales and profits, but also in what kind of competitive environment these profits are generated.
The longer you invest, the harder compliance and governance weaknesses become to ignore. Whether a company is good or not is not determined solely by whether it is profitable. I would like to see if they are making good money in a fair market.
Source/Reference materials
- Fair Trade Commission “Summary of the Antimonopoly Act”
- Fair Trade Commission “[Regulatory content of the Antimonopoly Act] (https://www.jftc.go.jp/dk/dkgaiyo/kisei.html)”
- Fair Trade Commission "[Frequently Asked Questions Corner (Antitrust Law)]" (https://www.jftc.go.jp/dk/dk_qa.html)
- Fair Trade Commission “Surcharge system”
- Fair Trade Commission "[When something like this happens, our lives are in danger! Corporate violations] (https://www.jftc.go.jp/ippan/part2/act_04.html)";
- Confirmation date: 2026-06-02