Which of the following involves agreements between retailers that are in direct competition with each other to set the same prices?

It is illegal for competitors to work together to fix prices rather than compete against each other. This conduct restricts competition, and can force prices up and reduce choices for consumers and other businesses.

Price fixing occurs when competitors agree on pricing rather than competing against each other. In relation to price fixing, the Competition and Consumer Act refers to the ‘fixing, controlling or maintaining’ of prices. A price fixing cartel occurs when competitors make written, informal or verbal agreements or understandings on:

• prices for selling or buying goods or services
• minimum prices
• a formula for pricing or discounting goods and services
• rebates, allowances or credit terms.

Price fixing agreements do not have to be formal; they can be a 'wink and a nod', made over a drink in the local pub, at an association meeting or at a social occasion. The important point is not how the agreement or understanding was made or even how effective it is, but that competitors are working out their prices collectively and not individually.

Sometimes competing businesses will sell goods or services at the same or similar price levels so that the price fluctuations of one are matched by equivalent fluctuations by the others. Although this may seem like price fixing behaviour, it is not necessarily the result of collusive behaviour between companies.

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’).

When businesses get together to fix, control or maintain prices, it can affect consumers, as well as small businesses that rely on those suppliers for their livelihood.

Take freight for example. 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, and result in higher prices for all sorts of goods and services.

Signs of price fixing may include:

• tenders or quotes that are much higher than expected. This may indicate collusive pricing, or it may just be overpricing (not illegal in itself). It may simply reveal that your estimates are inaccurate. It is in your commercial interest to make enquiries and determine whether your price expectations are reasonable
• all suppliers raise prices simultaneously and beyond what seems to be justified by changes in input costs. You can ask suppliers why this is so. You might also consider surveying suppliers so you are better equipped to recognise suspicious pricing movements
• prices submitted are much higher than previous tenders or published price lists
• tenders are missing detailed ‘workings’ to show how the tender price was calculated, where this was requested (this may indicate cover pricing)
• a new supplier’s price is lower than the usual businesses tendering. This may indicate there has been collusion among the incumbent businesses tendering
• prices drop markedly after a new supplier tenders. This may indicate that the existing suppliers have been colluding and the new supplier has forced them to compete.

Exceptions to the prohibitions on price fixing exist for certain joint production or supply of goods or services and for certain agreements for the collective acquisition of goods or services. Agreements between related companies are also exempted. The joint venture exception is complex, and legal advice should be sought by anyone considering a joint venture that may otherwise breach the cartel provisions.

Anti-competitive behaviour

Cartels case studies & legal cases

What are anti-competitive agreements and why are they bad?

Anti-competitive agreements are agreements among competitors to prevent, restrict or distort competition. Section 34 of the Competition Act prohibits agreements, decisions and practices that are anti-competitive.

A particularly serious type of anti-competitive agreement would be those made by cartels. Cartel agreements are usually to fix prices, to rig competitive tendering process, to divide up markets or to limit production. As a result, the cartelists have little or no incentive to lower prices or provide better quality goods or services. Based on economic studies, cartels overcharge by 30 per cent on average. There are four main types of cartel agreements:

• Price Fixing
  Price fixing involves competitors agreeing to fix, control or maintain the prices of goods or services. It can be ‘direct’ fixing of prices, where there is an agreement to increase or maintain actual prices. Price fixing activities can also take the form of ‘indirect’ fixing of prices, for example, where competitors agree to offer the same discounts or credit terms. Price fixing agreements do not have to be in writing, a verbal understanding at, for instance a trade association meeting or at a social event, may be sufficient to show that there was a price fixing agreement. It does not matter how the agreement was reached or whether it has been carried out. What matters is that the competitors have agreed to collude.

• Bid Rigging
  Bid rigging occurs when competitors agree on who should win a tender. To support the cartel member that has been designated to ‘win’ the tender bid, other cartel members may refrain from bidding, withdraw their bid, or submit bids with higher prices or unacceptable terms. The cartel members may agree amongst themselves to take turns to be the designated ‘winner’ or to reward ‘supporters’ of the winning bid, for example, by giving sub-contracts to them. As a result of bid rigging, the party inviting the tender is likely to pay more than it would if the tender was competitive. 

• Market Sharing
  In a market sharing agreement competitors divide up markets in various ways, such as geographical area or size or type of customer (e.g. business/non-business) and agree to sell only to their allotted segment of the market. As a result they do not compete for each other’s allotted market. Customers are affected as they would not be able to shop around for the best deals. 
• Production Control
  Production control involves an agreement between competitors to limit the quantity of goods or services available in the market. By controlling the supply or production of goods or services, the cartel is able to, indirectly, increase prices to maximise their profits.

Competition in a market can be restricted in various other ways other than those set out above. For instance, there may be other types of agreements among competitors such as price guidelines or recommendations, joint purchasing or selling, setting technical or design standards, and agreement to share business information. CCCS will take action in cases where there is an appreciable adverse effect on competition, that is, where competition is harmed considerably. In the case of price guidelines or recommendations, CCCS has found price recommendations and fee guidelines, mandatory or voluntary, to be generally harmful to competition, and encourages all businesses to set their prices independently.