Price fixing and anti-competitive pricing |
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| Introduction |
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| If you are in business, especially if you are just starting, do read this article as it will give you an overview of how you are allowed to act with other businesses. |
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| The law aims to fulfil the laws of economics – that of supply and demand, so promotes healthy competition. It does however, ban anti-competitive pricing strategies such as price fixing, businesses agreeing not to compete with other businesses, and monopolies because they prevent the market from reaching its true equilibrium. |
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| The law even provides extra powers to protect competition – positive discrimination if you like. Mergers between businesses can be prevented, for example, if they reduce competition. Uncompetitive markets can be investigated and referred to the Competition Commission. |
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| The law on anti-competitive pricing |
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| There are two major UK laws protecting competition - the Competition Act 1998 and the Enterprise Act 2002. These are supported by Articles 81 and 82 of the EC Treaty and therefore similar Acts operate Europe wide. |
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| The Competition Act prohibits anti-competitive agreements between businesses. Therefore you must not: |
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- Agree to fix prices or terms of trade, for example, agreeing price rises with your competitors;
- Limit production in order to reduce competition;
- Share out markets or suppliers, for example, agreeing with a competitor that you'll bid for one contract and they'll take another.
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| Any agreement that restricts or distorts competition is covered. The law mainly applies to agreements between businesses with a significant combined market share. But even the smallest business needs to avoid anti-competitive agreements like price fixing. Further, all businesses have responsibilities under the Act to report anti-competitive behaviour, even when they are not actively involved. |
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| The Competition Act also prohibits abuse of a dominant market position. This mainly applies to businesses that have a large market share, otherwise called monopolies. For example they must not impose unfair prices on either customers or suppliers. |
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| The Enterprise Act covers mergers between businesses that reduce competition. This usually applies if the businesses have a significant market share. |
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| In addition, the Consumer Protection from Unfair Trading Regulations 2008, which came into force on 26 May 2008, bans unfair treatment of consumers by all trading sectors, in particular the misleading of consumers by omission, and aggressive selling techniques. |
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| Penalties for anti-competitive pricing |
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| The law gives the Office of Fair Trading (OFT) extensive powers to investigate and take action. Penalties can include large fines, disqualification of directors and even imprisonment. In addition, customers and competitors may be able to sue you. |
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| The law on price fixing |
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| Competition law prohibits almost any attempt to fix prices - for example, you cannot: |
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- Agree prices with your competitors;
- Share markets or limit production to raise prices, for example, if two contracts are put out to tender you can't agree that you'll bid for one and let your competitor bid for the other;
- Impose minimum prices on different distributors;
- Agree with your competitors what purchase price you will offer your suppliers;
- Cut prices below cost in order to force a smaller or weaker competitor out of the market.
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| The law doesn't just cover formal agreements. It also includes other activities with a price-fixing effect. For example, you shouldn't discuss your pricing plans with your competitors. If you then all "happen" to raise your prices, you are fixing prices. |
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| Penalties for price fixing |
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| The law is enforced by the Office of Fair Trading. The OFT can impose a fine of up to 10 per cent of your turnover. Company directors can be disqualified. |
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| The law on mergers and competition law |
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| When two businesses merge, or when they create a joint venture, it may reduce competition. Mergers that substantially lessen competition can be prohibited or have certain conditions imposed, especially where they run the risk of forming a monopoly. The Office of Fair Trading (OFT) is responsible for investigating mergers in the first instance, referring cases to the Competition Commission for an in-depth inquiry if they believe the merger may be expected to result in a substantial lessening of competition. |
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| To qualify for an investigation by the OFT: |
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- Two or more enterprises must cease to be distinct;
- The merger must not have taken place already, or must have taken place not more than four months ago.
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- The business being taken over has a turnover in the UK of at least £70 million;
- The combined businesses have significant market presence.
- This applies if together they supply (or acquire) at least 25 per cent of a particular product or service in the UK (or in a substantial part of the UK), and the merger results in an increase in the share of supply or consumption.
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| Smaller mergers therefore, often do not qualify for investigation. |
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| The law on cartels |
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| A cartel is an agreement between businesses not to compete with each other. This is often done by fixing the prices they charge or the prices they offer to suppliers. It can also include: |
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- Fixing bids for contracts rather than competing honestly;
- Agreeing on other contract terms, such as credit periods or discounts;
- Agreements to share our customers between the members of the cartel;
- Limiting overall production so that prices rise.
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| Penalties for being part of a cartel |
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| Cartels are prohibited by law. If you are found to be a member of a cartel, you could be fined up to 10 per cent of your turnover for up to three years. In some cases, you could receive an unlimited fine or a prison sentence of up to five years. |
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| The Office of Fair Trading (OFT) views cartels as the most serious form of anti-competitive agreement and is keen to uncover them. As part of its leniency programme, the OFT actively encourages businesses who are involved in anti-competitive behaviour to report such activities. Businesses that do this could be offered a reduced fine or immunity from prosecution. |
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