Cartels are (usually secret) agreements not to compete, through price-fixing or in other ways. Secret cartels are regarded as very serious crimes in the UK as well as in many other countries. But the law also, for instance, prohibits supermarkets from agreeing a minimum selling price for alcohol, even though this would support the Government's alcohol policy. Cartels are prohibited because they lead to customers paying more (and often much more) than they should for their products. Companies can be fined very large amounts (up to 10% of annual turnover for each year of the cartel) and individual company executives can in serious cases be sent to jail for up to 5 years and/or made to pay unlimited fines. In addition, customers can - at least in theory - seek compensation via 'private actions' in the civil courts - to get back the money they overpaid as a result of the actions of the cartel.
The main cartel offences are:
- agreements to limit supply or production
- agreements not to compete in each other's markets,
- 'pay and delay':- payments by one company to another in return for promises not to enter a market, and
It is important to distinguish cartels from tacit collusion which happens when firms fail to reduce prices because they reckon that this would only cause their competitors to reduce their prices, so they would all be worse off. This important subject is discussed on the Market Studies and Investigations webpage.
Anonymised sharing of cost and other information, for instance via a trade association, is generally OK. But cross-company collaboration, for instance to increase alcohol prices, is not allowed - click here to read a note about alcohol pricing.
And if there is only a small number of companies active in the market, even the announcement of future prices (or price rises/reductions) can be problematic as they can facilitate price coordination because they reduce each player's uncertainty about the activities of its supposed rivals.
Franchising (i.e. exclusivity within the franchised area) is also generally often OK where there seems to be an associated public interest. For instance, no-one would invest in a new franchised restaurant or luxury goods retailer if a competitor could next day open up a similar business just down the road.
Manufacturers used to be able to set retail prices, and withhold stock from any retailer who tried to compete with another retailer by selling at a lower price. But this retail price maintenance, which clearly prevented price competition, has now been illegal for many years. However, limited RPM is still allowed where thought necessary to deter price cutting achieved by making lower quality products - such as pharmaceuticals. It has also been allowed where thought necessary to stop small shops etc. being competed out of business by large rivals. However, the hard-fought abolition of RPM in the book trade does not seem to have destroyed that market. And, although RPM is still alive in pharmacies and pharmaceuticals, it is frequently criticised, not least for the damage it does to the finances of the National Health Service.
Cartel investigations into the behaviour of UK companies are carried out under Chapter I of the Competition Act 1998 which closely mirrors what is now Article 101 of the Treaty on the Functioning of the European Union (TFEU). Criminal prosecutions are brought under Section 188 of the Enterprise Act 2002.
Chapter I investigations
It can be hard to prove that a secret cartel exists. There will be little if any written evidence, and all the members of the cartel have a vested interest in maintaining the secret. Competition Authorities (such as the CMA in the UK) therefore generally offer leniency to the first cartel member to confess. Such whistle-blowing is a powerful weapon because one cartel member can never be sure that other members will remain silent, so the more nervous may quickly confess - see for instance the Estate Agents case below.
Another example of such whistle-blowing led to British Airways being fined £121.5m by the OFT for fixing long-haul fuel surcharges, followed by a $300m (£148m) fine from the US Department of Justice for colluding over cargo and long-haul surcharges. BA was brought before the authorities after Virgin Atlantic blew the whistle on conversations between senior figures at both airlines over the surcharges - a levy added to tickets to cover the rising cost of oil. Virgin escaped penalties because they broke the cartel by going to the authorities. It is interesting to note, however, that both Virgin and BA may be required to pay damages to customers as a result of class action law suits. It is also interesting that this led to the first contested cartel prosecution - see further below.
Somewhat ironically, Virgin Atlantic themselves became subject to an OFT investigation in April 2010 when Cathay Pacific sought leniency in connection with alleged price fixing discussions on the London-Hong Kong route.
But another major investigation was only a limited success. The OFT in 2009 imposed fines totaling £130m on 103 construction companies for bid-rigging and cover pricing, and £40m on six recruitment firms supplying the construction industry, for price-fixing and a collective boycott of an intermediary firm. The investigation into the construction industry was triggered by an eagle-eyed auditor at Nottingham University Hospital NHS Trust whilst, in the recruitment companies' case, two of the companies blew the whistle on what was going on. (Cover pricing involves a company that (a) was invited to bid for a contract, but (b) did not want to win it and (c) wanted to remain on the client's tender list. This company then asks a real bidder to tell them what high ('cover') price would ensure that they did not win the contract - and then bidding at this high price.)
But a number of the companies charged with cover pricing appealed to the Competition Appeal Tribunal (CAT) and had their fines greatly reduced - in one case from £17.9m to £1.7m. The companies successfully argued that their cover pricing was long-standing in the industry, had done little harm, and that the OFT's methodology for calculating the fines was unfair. I do not know, but I suspect, that the OFT thought that the apparently innocent cover pricing was itself a cover for taking turns at bidding for contracts. Once a pattern had been established, so all the likely bidders had worked out whose turn it was without needing to communicate with each other, it would then make sense for the other companies to put in apparently innocent cover prices so as to leave the field clear for the chosen winner, who need not, of course, submit a particularly competitive bid. But there is little point in having these suspicions if you can't prove them in front of the CAT.
Another high profile cartel involved around 50 UK independent schools, including Eton College, Harrow and Westminster, who shared information about their costs and so about their likely fee increases. This cartel was hardly secret and ceased as soon as the schools realised that their behaviour was illegal. They each then paid fines averaging £70,000 each. The schools also undertook to make separate voluntary contributions totaling £3m into a new charitable educational fund, in what the head teachers acknowledged was an "imaginative solution to a trying inquiry".
The successful construction industry appeals to the CAT and the somewhat odd school fees investigation did seem to suggest that the OFT's judgement and/or choice of cases had been somewhat flawed. This impression was also encouraged by the failure of the BA prosecution, summarised below.
It is interesting to note that pricing intentions do not have to be communicated direct from one party to another. A number of UK supermarkets were brought before the courts after they had sought, in/around 2002/2003, to co-ordinate increases in their retail cheese prices by telling their cheese suppliers about their intentions. They did this with the apparently unselfish intention of paying more for the cheese they bought, so that the cheese suppliers could in turn pay more for their milk, so helping hard-pressed dairy farmers. Again, one is forced to wonder whether there might not have been a more gentle (and less expensive) way of bringing this 'cartel' to an end, once it had been spotted.
Much more seriously, the American competition regulator, the Department of Justice, sued Apple and a number of book publishers in April 2012, alleging that they colluded to increase the price of e-books, including by refusing to let Amazon set its own prices for Kindle books. Again, the cartel had not been a secret, and some of the publishers immediately settled with the DoJ, but Apple and others said they would fight the case.
It was reported in January 2015 that Oscar Pistorius' family firm had been charged with fixing South African agricultural prices since 1995. As so often, another company had claimed leniency as a reward for whistle-blowing.
The CMA fined a number of UK pharmaceutical companies £50m in early 2016 for entering into 'pay and delay' agreements under which GlaxoSmithKline paid a number of smaller companies to delay introducing generic competition for its anti-depressant drug paroxetine. The companies may appeal as they saw the payments as a way of avoiding litigation over the validity of GSK's patents.
And a refrigerator supplier was fined over £2m in 2016 for having imposed 'minimum advertised prices' on its its retailers - otherwise knows as resale price maintenance.
The CMA, in the same year, accused top model agencies of "agreeing a common approach to pricing" and so driving appearance fees up to £500,000 a day for work on a major campaign - and giving the newspapers a rare opportunity to publish a lengthy competition policy story as an excuse for also featuring some very attractive models.
And this CMA press release neatly describes the operation of an Estate Agents cartel - and the CMA's whistle-blowing/leniency policy:
A group of estate agents – all based in the Burnham-on-Sea area in Somerset – had a meeting and agreed to fix their minimum commission rates at 1.5% with the aim of making the agents involved more money, so denying local home owners the chance of getting a better deal when selling their property. “With a bit of talking and cooperation between us, we all win!” was their rationale.
Email evidence also explained how “the aim of the meeting…will be to drive the fee level up to 1.5%” and “…it’s really important we all give it the priority it deserves (making as much profit as possible!)”. At the meeting they agreed to form what is known as an illegal ‘cartel’ – when two or more businesses agree not to compete with each other. The estate agents took steps to ensure the minimum fee agreement was kept to by emailing each other when a specific issue arose, such as accusations of “cheating” on their agreement. Each business also took it in turn to “police” the cartel to make sure everyone was sticking to the agreement - parties were to report any issues “to the policeman immediately and get the matter resolved rather than let it fester and risk the agreement falling apart!!!!”.
The CMA imposed fines totalling £370,084 on 5 of the 6 estate agents involved in this cartel. The sixth business involved was not fined as it was the first to confess its participation in the cartel under the CMA’s leniency policy and cooperated with the CMA’s investigation.
There has yet to be a successful contested prosecution in the UK. One problem was that individuals cannot be prosecuted successfully unless it can be shown that the person acted 'dishonestly'. The Government accordingly announced in March 2012 that it will no longer be necessary to prove dishonesty (although it will still be necessary to demonstrate an intention to enter into a price-fixing etc. agreement) and that cartel arrangements would not be prosecuted if the details were published (most likely in the London Gazette) before they are implemented.
The previous dishonesty test required the accused's actions to have been dishonest according to the ordinary standards of reasonable and honest people, and the accused to have realised that his/her actions were, according to those standards, dishonest. This is quite a stiff test because the offence is relatively new - and one of over 3,000 new criminal offences introduced in the UK between 1997 and 2006 - that a defendant might well argue that most people would not regard the discussion of prices with competitors to have been dishonest. Given that some cartels involve only informal communication, and that others are motivated by crisis or avoiding bankruptcy, the issue of dishonesty is clearly central to any prosecution. A YouGov survey, commissioned by the University of East Anglia's Centre for Competition Policy in 2007, showed that only 6 in every 10 Britons felt price fixing was dishonest, and only 1 in 10 felt imprisonment was an appropriate sanction. The issue raised enough concern in Australia for dishonesty to be dropped from the design of its criminal offence altogether. Some expert observers therefore wonder whether imprisonment can be a workable sanction at all, outside the context of US Anti-trust enforcement. Plea Bargains negotiated by US authorities, under the shadow of a full trial, play an instrumental role in regularly securing custodial sentences for antitrust violations. But a US-style system of plea bargaining does not exist in the UK.
It was originally hoped that the criminal offence, introduced in the UK by the Enterprise Act 2002, would lead to around six to ten prosecutions a year (Penrose Report, 2001 at 3.6). But only three executives have been convicted so far - and this was in the Marine Hoses case where the investigation and plea bargaining had taken place in the US. Indeed, the first contested prosecution - of BA executives (see above) - did not reach the courts until April 2010 and then collapsed before the prosecution had even begun to offer any evidence, mainly because Virgin found a large number of relevant emails only as the trial was starting, and it was not possible to analyse them properly without unacceptable further delay. The OFT's investigation and prosecution cost the taxpayer more than £1.5m, not including their contribution (if any) to the defence costs.
It was striking that the OFT did not even attempt to prosecute individuals involved in the Construction Bid Rigging case which involved practices between a minority of firms more akin to a hardcore cartel, at huge cost to financially stretched local taxpayers
UEA's Andreas Stephan analysed the issues rather well in his 2010 blog:
OFT continues to pursue individuals, but is there a credible threat to price fixers?: News that the Office of Fair Trading made an arrest last week in connection with a cartel investigation shows the authority's determination to press on with criminal sanctions in cartel cases. However, following the collapse of the British Airways trial in May of this year, does the criminal offence really have a future in its current form?
The latest arrest came in connection with an alleged cartel between major international lorry (truck) manufacturers operating in the UK. Both criminal and civil investigations have been launched and a senior executive at Mercedes-Benz's UK operation was apparently arrested and released on bail. According to the Financial Times, the individual has 40 years experience in the commercial vehicles industry and sits on the board of the Freight Transport Association. He had also previously worked for a number of Mercedes-Benz's competitors. All the companies under investigation say they have agreed to cooperate, and the OFT has stressed that their investigations are at an early stage.
Following the collapsed trial of four British Airways employees, the OFT faces three challenges in trying to breathe new life in the failing cartel offence, in its current form:
Evidence Gathering - the British Airways trial revealed a seemingly blind over-reliance on evidence gathering by the cooperating party's lawyers through the leniency programme. This leaves prosecutors particularly vulnerable in a case where there is only one cooperating party. In order to ensure this does not happen again, the OFT must do more good old fashioned police work.
Dishonesty and Credibility - in order to secure convictions, the OFT must convince a jury that the defendants behaved dishonestly. This hurdle requires 'hardcore' evidence that the individuals knew what they were doing was wrong, such as efforts to conceal cartel arrangements. The BA trial seriously damaged the credibility of the criminal offence, and of the OFT, not least because the alleged evidence primarily consisted of e-mails rather than physical meetings. Juries may initially be unwilling to convict individuals on the basis of such evidence, especially when faced with defendants who are otherwise presented as upstanding members of society. While there is a general understanding that cartel practices are bad, the British public and business communities are yet to be convinced that they should be treated as criminal.
Case Selection - The only convictions under the criminal offence (Marine Hoses) were seriously criticised for arising out of duress following a US plea bargain, and for concerning an obscure (upstream) industry with little popular appeal or recognition. The OFT keenly pressed forward with British Airways in response to those criticisms, but overlooked fundamental weaknesses in the case. Unless the Trucks investigation uncovers evidence with more teeth, it risks going the same way as British Airways.
Many will argue that these challenges are irreconcilable and that the current law should be repealed. Those advocating imprisonment as being of central importance to effective cartel enforcement (this author included) would prefer a new offence not based on dishonesty, managed by an agency with greater criminal prosecutorial expertise. The danger is that the failures of the current offence will be seized upon by those preferring a purely civil approach to cartel enforcement in the UK. Meanwhile, the OFT has two further investigations open into car electrical equipment suppliers and the manufacture of polythene film, bags and sacks. On the one hand, we should hope that, if an offence is found and a case is brought to court, it is backed by robust evidence and palpable dishonesty. On the other, this may simply prolong the life of a criminal offence that many see as ineffective and unfit for purpose.
Oxera published an interesting report in 2017 on algorithmic pricing and its effect on consumers and markets. They noted that the digital revolution had led to a significant growth in companies' ability to capture, store and analyse data about their customers, competitors and the wider world, through faster processors, cloud storage, and advances in machine learning. Increasingly, companies are using this information to develop algorithms that set prices for them, leading to different consumers being charged different amounts for the same good or service. But there had been extensive recent press coverage of the risk that price-setting algorithms, using artificial intelligence (AI), have the potential to collude among themselves, to the detriment of consumers.
At the same time, others suggest that the use of algorithms can be efficient and pro-competitive, leading to outcomes that benefit consumers through faster adjustments to prevailing market circumstances.
Oxera explored these two contrasting positions, noting that:
- while the impact of algorithms that use simple rules or formulae to set prices can be assessed in a relatively straightforward way,
- it is more difficult to judge the more advanced algorithms. These increasingly use AI to adapt and learn as they experience new situations.
- The way in which AI-driven algorithms learn is highly complex, and, typically, you can't ask them why they did something. It is not possible for an outsider to reverse engineer the algorithm.
Click here to read about how customers who are damaged by cartel activity can take private actions in the courts in order to gain compensation for their losses.