Businesses may decide to work together instead of competing against each other. The purpose of their agreement is to increase their profits, but making it appear to consumers as though they are still in competition. Essentially, businesses in a cartel will have control over the market and drive out companies who can’t compete. This illusion of competition means that genuine innovation is stifled and inefficiently functioning businesses remain unidentified.
The Competition and Consumer Act 2010 (CCA) prohibits cartels, both under civil law and as a criminal offence. The CCA prohibits businesses entering into an agreement that includes a cartel provision.
Section 44ZZRA of the CCA describes a cartel provision as relating to any of the following conduct:
- Price-fixing
- Output restrictions
- Allocating customers, supplier or territories
- Bid-rigging
“Agreement” doesn’t necessarily require a written contract. A simple ‘understanding’ is enough if it is evident that businesses are not making decisions independently but as a result of pre-agreed tactics.
Price-Fixing
Price-fixing is where businesses agree on pricing instead of competing. This drives prices up as opposed to a competitive market where businesses attract customers by offering lower prices than their competitors. Agreements could include:
- Setting a minimum price;
- Having a fixed price for goods or services;
- Deciding on a discount process; or
- Rebates or credit terms.
There are situations where it may appear that the businesses are colluding because prices are the same. However, equivalent prices do not prove the existence of a cartel provision as businesses often change their prices so as to match competitors’ pricing.
Output Restrictions
An output restriction is an agreement to limit the production or supply of goods or services by the businesses. Limited supply increases prices or stops prices from falling.
Similarly to changes in prices, sometimes a business may decide to limit the supply of certain products due to market demand. It is only illegal when one business enters into an agreement with another.
Allocating Customers, Suppliers or Territories
This is known as market sharing, where businesses allocate customers, suppliers or territories to each other, overriding the natural competitive market process.
The market may be shared either by geographic location or by the value of certain areas. Businesses can also agree not to compete for the customers of other businesses in the cartel, or not to offer the same or similar products.
Manipulating the Market Through Bid-Rigging
Bid-rigging occurs when businesses agree to manipulate the outcome of bids or tenders by agreeing only one participates in the bid, or they work together on each other’s bids.
Cover bidding takes place if competitors choose a winner and everyone but the winner purposely bids above the agreed amount, establishing the illusion that the winner’s quote is competitive.
If the cartel chooses one business to win the tender and all other businesses don’t tender, it is called bid suppression.
Bid withdrawal occurs when a business pulls out of the winning bid so a competitor can win.
Often competitors may agree to take turns at winning bids to make sure it is fair. This is called bid rotation.
Businesses may agree to participate in the bid to create the illusion of competition, but may include terms and conditions that they know the client would not accept. These are non-conforming bids.
All of these tactics of manipulating the bids are illegal under the CCA.
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