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Keeping It Competitive

08 October 2012

You might think of oil or petrol when you hear the term ‘cartel’ or ‘price fixing’ but anti-competitive behaviour isn’t limited to any particular industry. Recent research conducted for the Commerce Commission by Research New Zealand reveals price fixing may be common practice in some New Zealand industries. Although some cartel practices are considered ‘industry standard’, the Commerce (Cartels and Other Matters) Amendment Bill introduced to Parliament last year is progressing towards introducing prison terms for cartel conduct. With steps being made towards making cartel conduct a criminal offence, now is time to understand what is - and isn’t - cartel behaviour.

Where competitors make any agreement that sets the price of goods or services, or even just interferes with how that price is reached, it may be considered price fixing and therefore it’s illegal. This behaviour includes any agreement to rig a bid or provide cover pricing, agreeing to divide a market by customer or area, and arranging to restrict output or supply.

Arranging a meeting with competitors to set the price of your common products is clearly not within the law. Price fixing and some of the other forms of anti-competitive behaviour, which will also become criminal behavior when the Bill is passed, are not so obvious. Examples of this include market sharing, bid rigging and cover pricing.

Market sharing occurs when competitors agree to divide markets up between themselves. For example, a North Island business might agree not to actively seek customers in the South Island if a South Island competitor agrees to do the same in respect of the North Island. Alternatively businesses might agree not to produce each other’s products or services, divide contracts up into geographical regions or agree not to pursue certain key customers. Although these ‘gentlemen’s agreements’ may seem like good business to some, they do reduce the competition in markets and are a form of cartel behaviour.

Bid rigging is an agreement between competitors about which one of them should win a bid. The construction sector is known to be at risk of its participants engaging in anti-competitive practices such as bid rigging and cover pricing. Practices such as bid rigging may even be viewed by some as standard industry procedure.

Common bid rigging tactics include bid rotation, where the competitors agree to take turns at winning the business; bid withdrawal, where the winning bidder withdraws its bid so that the competitor will be successful; and non-conforming bids, where a company includes terms and conditions that will be unacceptable to the purchaser, thus ensuring it will not win the bid. The customer thinks the bidders are competing against each other to offer the lowest price, when really they are pushing the price up with their fake bids.

Cover pricing is where businesses work together to create the illusion that market prices are higher than they actually are. A contractor who wants a particular job might contact another who genuinely doesn’t want the job and ask that they put in a bid at a higher price. The submission of a higher price makes the genuine bid appear cheaper and the contractor is more likely to get the work and to be paid more for the job than if the situation was genuinely competitive.

When engaging with competitors it’s obviously important for you not to agree prices, discounts or any matters relating to price with your competitors. It’s also vital to make sure that you are familiar with other non-competitive practices and identify them as illegal, rather than simply going along with something that appears to be a standard industry practice.

Similarly, it’s essential to know what to do if your business has been affected by a cartel, or you suspect it has been so. The Commerce Commission provides useful resources about cartel conduct and your lawyer can provide you with specific advice.

Dan Moore is a partner of Norris Ward McKinnon. Information in this article should not be a substitute for legal advice. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.