Cartels
When competitors agree to co-operate to inflate prices and/or co-ordinate their actions regarding product development and/or focus:
- Prices increase;
- Quality decreases; and
- Choice is reduced.
In effect, there may as well be only one competitor (or a monopoly).
If detected, huge penalties are levied. These can be up to 10% of annual turnover.
There are 3 categories of cartel offences :
- Price fixing and fixing trading terms;
- Dividing markets; and
- Bid rigging
These sorts of agreements, arrangements or understandings need not be lawful, can be written or oral and may never be acted upon, but will still be an offence. They are often secret or hidden but need not be.
Price fixing
In December 2006, middle managers at the 3 major bread manufacturers met in Cape Town and communicated that they would all take an increase in their bread prices on the same date just before Christmas in 2006. They also, simultaneously, agreed that distributors of their bread were being overpaid and that they would reduce the amount of commissions being paid to them.
A distributor wrote to the Competition Commission complaining that all the bread manufacturers had, at the same time, reduced his commissions and increased bread prices. The Commission investigated the matter urgently.
Premier was the first to admit guilt and agreed to help the Commission with its prosecution of the other companies. It got off without a fine.
Tiger Brands was fined approximately R98 million after it admitted guilt.
Pioneer fought the prosecution and eventually, for a number of offences, including the price fixing in Cape Town, was fined in excess of R1 billion.
The Lesson
Do not discuss prices with your competitors.
Do not discuss:
- Absolute prices;
- Calculations;
- Increase in prices;
- Specials and launches of specials;
- Decrease in prices;
- Timing for price increases or decreases.
Fixing Trading Terms
Imagine the following (not real events):
A major cola manufacturer decides to make more profits by decreasing the size of its cans of cola from 340ml to 330ml whilst keeping prices the same. The manufacturer knows consumers would soon realise what it has done and switch to its rivals’ 340ml packs and so approaches the competitor to do likewise. The competitor agrees to follow suit.
This is another form of price fixing and is absolutely prohibited. Because it aligns conduct it enables competitors to unlawfully inflate prices or worsen trading conditions for customers.
The Lesson
Do not engage with competitors regarding any aspect of your trading terms, in particular anything to do with price, quality or quantity.
Dividing Markets
These events have not actually happened and for good reason:
Company A is a major retailer of building suppliers and DIY products; and Company B sells competing products but only in Gauteng and the Western Cape
- Company A can’t agree to exit the Gauteng market in exchange for company B exiting the Western Cape
(as this would be unlawful division of the market by territory)
- Company A can’t agree to sell only building supplies in exchange for Company B agreeing to sell only DIY products
(as this would be unlawful division of the market by product)
- Company A can’t agree to sell only to contractors in exchange for Company B agreeing to sell only to individuals
(as this would be unlawful division of the market by customer)
The Lesson
Don’t discuss or agree with a competitor to divide markets by allocating customers, products/services or territories between you.
Bid Rigging
During June 2013, the Competition Commission announced that it had settled approximately 300 investigations/prosecutions relating to the construction sector. These arose from the construction of stadiums for the FIFA World Cup 2010 and other major construction projects. 15 construction companies admitted to colluding with one another to increase the prices at which such projects were concluded. In total, R1, 5 billion in penalties was paid by the 15 contravening firms.
Tenders must be independently formulated and submitted and cannot be co-ordinated with competitors.
The lesson
Do not collude or co-ordinate when submitting bids except with specific legal advice.
What have we learnt?
Don’t agree to:
- Fix prices;
- Fix trading terms;
- Divide markets by :
- Customer ;
- Product;
- Territory
- Co-ordinate tenders,
even if the agreement, arrangement or understanding is never acted upon;
Except for companies within a group, and then only after receiving specific legal advice.
Criminal Liability
Since 1 May 2016, individuals can be personally criminally liable for cartel conduct. It is now an offence for directors or persons with management authority to participate in price fixing, market division and collusive tendering, or to be aware that such conduct has occurred and to take no steps to stop the conduct. The penalties for these offences could be a personal fine up to R500 000 and/or 10 years in jail