What are anti-competitive agreements and why are they bad?
Anti-competitive agreements are agreements among competitors to prevent, restrict or distort competition. Section 34 of the Competition Act prohibits agreements, decisions and practices that are anti-competitive.
A particularly serious type of anti-competitive agreement would be those made by cartels. Cartel agreements are usually to fix prices, to rig competitive tendering process, to divide up markets or to limit production. As a result, the cartelists have little or no incentive to lower prices or provide better quality goods or services. Based on economic studies, cartels overcharge by 30 per cent on average. There are four main types of cartel agreements:
- Price Fixing
Price fixing involves competitors agreeing to fix, control or maintain the prices of goods or services. It can be ‘direct’ fixing of prices, where there is an agreement to increase or maintain actual prices. Price fixing activities can also take the form of ‘indirect’ fixing of prices, for example, where competitors agree to offer the same discounts or credit terms. Price fixing agreements do not have to be in writing, a verbal understanding at, for instance a trade association meeting or at a social event, may be sufficient to show that there was a price fixing agreement. It does not matter how the agreement was reached or whether it has been carried out. What matters is that the competitors have agreed to collude.
- Bid Rigging
Bid rigging occurs when competitors agree on who should win a tender. To support the cartel member that has been designated to ‘win’ the tender bid, other cartel members may refrain from bidding, withdraw their bid, or submit bids with higher prices or unacceptable terms. The cartel members may agree amongst themselves to take turns to be the designated ‘winner’ or to reward ‘supporters’ of the winning bid, for example, by giving sub-contracts to them. As a result of bid rigging, the party inviting the tender is likely to pay more than it would if the tender was competitive.
Find out more on how you can detect bid-rigging.
- Market Sharing
In a market sharing agreement competitors divide up markets in various ways, such as geographical area or size or type of customer (e.g. business/non-business) and agree to sell only to their allotted segment of the market. As a result they do not compete for each other’s allotted market. Customers are affected as they would not be able to shop around for the best deals.
- Production Control
Production control involves an agreement between competitors to limit the quantity of goods or services available in the market. By controlling the supply or production of goods or services, the cartel is able to, indirectly, increase prices to maximise their profits.
Competition in a market can be restricted in various other ways other than those set out above. For instance, there may be other types of agreements among competitors such as price guidelines or recommendations, joint purchasing or selling, setting technical or design standards, and agreement to share business information. CCCS will take action in cases where there is an appreciable adverse effect on competition, that is, where competition is harmed considerably. In the case of price guidelines or recommendations, CCCS has found price recommendations and fee guidelines, mandatory or voluntary, to be generally harmful to competition, and encourages all businesses to set their prices independently.