Price fixing – traps for the unwary

Competition law protects businesses and their customers from practices that prevent, restrict or distort competition, helping to ensure a level playing field for businesses on the one hand, and value for customers on the other.

A cartel involves two or more entities agreeing not to compete with one another. Cartel behaviour is high priority for the UK’s competition watchdog, the Competition & Markets Authority (CMA).

Why should I be concerned about competition law?

All businesses large and small are required to comply with competition law. Failing to do so can lead to severe consequences, with fines for breaching UK competition law reaching up to 10% of worldwide turnover for the previous business year, as well as damages claims from third parties and reputational harm. Individuals involved also risk significant sanctions: directors face disqualification from managing a company for up to 15 years, while anyone involved in cartel behaviour risks up to five years in prison and/or a fine.

Price fixing

One of the most egregious forms of cartel behaviour – and anti-competitive behaviour more generally – is price fixing, where competitors agree the price at which they will sell their respective products to consumers so that they do not undercut one another. It is considered so serious because of the effect it is presumed to have on consumers and the wider market.

It is important to remember that cartel behaviour does not require there to be a formal written agreement in place – it often arises more informally when businesses speak to one another, whether directly or perhaps through an intermediary, such as a trade body or association.

Most businesses will be able to spot and steer clear of the most obvious issues. However, things are not always clear cut, and sometimes businesses can find themselves inadvertently in breach of competition law. Ignorance is not a defence, so it is important to recognise how problems can arise.

Horizontal relationships between competitors

Simple price fixing

The most straightforward form of price-fixing is where two or more competitors agree to keep their prices above a certain level. There have been plenty of examples of this happening, especially in sectors where market players bid for work (and therefore overlaps with the related concept of ‘bid rigging’). In our experience, it is those who are involved in negotiations and are incentivised to achieve a good margin that are most likely to stumble into a price fixing agreement with a competitor.

Information sharing

Businesses can sometimes stray into cartel behaviour in less obvious ways, particularly when exchanging information with one another.

Conversations may start out innocently enough, with competitors discussing rising input costs, but alarm bells should start ringing if the conversation turns towards sensitive issues such as how these costs may affect future pricing intentions. The key questions will be whether the information shared is commercially sensitive and whether its exchange reduces uncertainty in the market. For example, competitors knowing each other’s intentions concerning their future pricing practices reduces the need to compete on price.

Members of a trade associations should be wary of going along with any price recommendation or decision of the association which may affect its ability to determine its own conduct independently. Trade associations that operate as a conduit for the exchange of sensitive information or agreement on future conduct can be guilty of competition law breaches, as can the members of that association. For example, even if a trade association’s recommendations to members are not strictly binding, the association and its members could be in breach of competition law if in reality the recommendations do determine future conduct.  

Once a business has been drawn into a situation where it may have imparted or received commercially sensitive information, it can be very difficult to resolve. For example, if representatives of a business attend a meeting that involves cartel behaviour, then even if they refuse to join the cartel, they are likely to be implicated in the cartel if they do not publicly distance themselves by immediately rejecting the approach, leaving the meeting and making clear that they will not take part in illegal activity. Businesses have been found guilty of cartel behaviour having inadvertently attended cartel meetings even where they did not provide any sensitive information of their own and where they refused to join the cartel. The mere fact that a business attends the meeting and receives commercially sensitive information can be sufficient.     

Vertical relationships between suppliers and distributors

Often a supplier will itself compete with its distributors or retailers (e.g. a brand that both sells through retailers and itself sells direct to consumers), but that does not have to be the case for competition law to bite. Price fixing can also occur in vertical relationships, i.e. between a supplier of products or services at the upstream level and a distributor/retailer (the ‘buyer’) downstream.

The basic principle is that a buyer must be free to set its own prices for onward sale. If the supplier dictates the price at which the buyer can sell the products, this will amount to what is known as Resale Price Maintenance (or ‘RPM’) and, except in very limited circumstances, is illegal.   

RPM comes in different forms. For example, it may be that a supplier tells the buyer the specific price at which it must sell. Or it may be that the supplier sets a minimum price below which the buyer cannot sell. Sometimes the same result is achieved by a supplier telling its buyers that they cannot apply discounts over and above a specific level, or by rewarding the buyer for its compliance with a certain pricing level.

RRPs

Suppliers may propose a recommended retail price (‘RRP’). This can be a helpful tool for retailers, but on the other hand an RRP can also be abused. An RRP may purport to be indicative only but if, in practice, it is adopted by the buyer, and enforced by the supplier (perhaps through price monitoring and the imposition of sanctions on non-compliant buyers), it can fall foul of competition law.

Although price monitoring is itself not RPM, if the monitoring triggers intervention by the supplier, it may be considered part of an overall RPM strategy. Distributors should be wary of suppliers putting pressure on them to adhere to the RRP, whether through price monitoring, incentives, sanctions or otherwise.

MAPs

Another, indirect form of RPM is where the supplier prevents or limits a distributor’s ability to advertise lower prices online, i.e. through a so-called minimum advertised price policy (‘MAP policy’). A MAP policy prohibits a distributor from advertising prices below a level set by the supplier, but it places no restriction on the distributor’s pricing practices in bricks and mortar stores. MAP policies are nevertheless considered a form of RPM. It is important for a distributor to remember that even if a pricing policy is informal and not part of the written contract with the supplier, the distributor could still find itself in breach of competition law if it can be shown that it tacitly accepted the policy and cooperated with the supplier.

The key principle to remember is that all businesses must determine their own selling prices. Competitors must not directly or indirectly agree the prices at which they will sell their competing products, while upstream suppliers must not directly or indirectly dictate the prices at which their distributors can sell the products downstream. It sounds simple, but as history shows, there are plenty of traps for the unwary!

I’m in a cartel… GET ME OUT OF HERE!

Whether a business finds itself in a cartel, or has infringed competition law in a ‘less’ serious manner, it is in its interests to gather the key information together and work to remedy the situation. Competition law enforcement encourages participants to blow the whistle by giving them immunity from fines, creating a race to own up. That may not be necessary in every situation though.

A stitch in time…

One of the best ways of both reducing the chances of finding oneself in the unhappy position of infringing competition law, and of reducing the level of fines issued, is to train employees on competition law. This does not need to be formal or expensive; the CMA offers various helpful resources on its website.