The dangers of colluding on pricing

The dangers of colluding on pricing

Last year I told you about a record $3.6 million penalty for price fixing and other cartel behaviour in the market for wood preservatives. The moral of the story was that you never talk to your competitors about your prices. Never! End of story. Even an informal discussion about prices over a cup of coffee can breach the Commerce Act and result in hefty penalties for companies and individuals involved.

You may have read about an international cartel investigation under way at present by competition authorities in Europe, Britain, the US, Australia and other countries. This cartel involved price fixing of fuel surcharges that are added to the cost of airline tickets and airfreight charges.

Anyone who has bought an airline ticket in recent years is only too aware that internationally most airlines now charge a fuel surcharge on top of the ticket price. However, as if adding this extra charge wasn’t enough, executives from a number of airlines, including British Airways, Virgin Atlantic and Korean Airlines agreed to raise or maintain higher fuel surcharges. This type of agreement to maintain artificially high prices is called cartel behaviour, or more specifically, price fixing.

For example, in 2004 British Airway’s fuel surcharge was about US$10 on a transatlantic ticket. However, by the time the cartel was cracked in 2006 the surcharge had risen to US$ 110. Competition law authorities around the world cooperated and coordinated their investigations of fuel surcharges. Dawn-raid searches were executed in Europe and European authorities used the fruits of those searches to help UK and American investigations.

The cartel behaviour was brought to the attention of the authorities by Richard Branson. As he tells it, as soon as he found out Virgin Atlantic was involved in cartel behaviour, he and Virgin Atlantic told British and American competition law enforcement agencies about the existence of the cartel, and asked for immunity from action by competition law enforcement agencies in Britain and the US.

Immunity (called leniency in this country) helps enforcement agencies (like the Commerce Commission) to bust cartels. The first cartel member to break ranks and tell the authorities about the cartel can be given immunity from enforcement action by the authorities in that country. Immunity applicants must cooperate fully with the investigation. So Virgin Atlantic was granted immunity in the US and the UK.

What happened to the other airlines? British Airways was fined £121.5 million in the UK plus US$300 million in the US (all up around NZ$750 million). Korean Airlines was fined in the US. Internationally, investigations of fuel surcharges continue against a number of airlines in many countries (including Australia and New Zealand).

So, learn from the airlines’ mistakes.

Never talk to your competitors about prices… but I have told you that already.

Understand that you can never make a cartel work, because immunity policies give participants a financial incentive to inform on you.

Remember that competition law enforcement authorities around the world work really well together.

Finally, remember that nothing can prevent members of the public from suing you for losses caused by your breach of competition laws. Regardless of whether you have been granted immunity, or paid zillions of dollars in penalties, you can still get sued by private individuals. A class action for recovery of unreasonable surcharges is being brought against seven airlines (including Air New Zealand) by freight forwarders in Australia. You and your business need to be on top of these issues, so that if (like Richard Branson) you identify price fixing behaviour, you can deal with the problem right away. This is definitely a case of first up, best dressed.

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