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Price-Fixing as ‘the Supreme Evil of Anti-Trust’: is Justice Scalia Right?

N.N. Mosunova, Master of Private Law, Head of Legal Department, Adecco Group Russia, Moscow, Russia

“…on both a moral and practical level, there is not a great

deal of difference between price fixing and theft…”

Professor Richard Whish

 

Competition is vital for keeping an economic system healthy and efficient; it also guarantees consumers a particular price, quality and quantity of goods which are provided by uncontrolled changes in competitive demand and supply. This free movement in the economy is limited when the companies enter into cartels (here the issue of price-fixing comes up). A price-fixing agreement is considered an offense in all developed countries as it is aimed to restrict competition. Although some studies show that the cartels may be positive for economy, citing as an example the economies of scale (e.g., the ability to redistribute income for industry development, to expand into new markets, to produce products of better quality, etc.), I totally agree with Justice Scalia’s opinion, for there is nothing as harmful for normal community development as restraining competition. With insignificant exceptions, price fixing is always inefficient for economy.

Price-fixing is usually an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions, e.g., that the price is kept at a certain level by controlling supply and demand. The intent of price-fixing may be to push the price of a product as high as possible, leading to profits for all sellers, but the goal may also be to fix, peg, discount, or stabilise prices. Thus, a price-fixing agreement is[1]:

• any agreement regarding price, whether expressed or implied;

• a conspiracy between sellers or buyers;

• an agreement aimed to coordinate pricing for mutual benefit of the traders.

 Competitors’ agreements “affect prices, price formulas, margins, discounts, or wages. They can also allocate customers or sales volume across competitors without explicit discussion of prices”[2]. The tricks are numerous: selling at a common “retail” price; setting a common minimum sales price, buying the product from a supplier at a specified maximum price, etc. Sometimes businesses develop a code of practice and monitor each other. The impact is that consumers cannot ‘shop around’ to obtain the best prices. International studies find a median price mark-up from cartels of approximately 15%. So when producers agree to fix prices above the market price, their anti-competitive behaviour transfers some of the consumer surplus to those producers and leads to a deadweight loss.

The US antitrust law, being the most intolerant of price-fixing, names it among the most dangerous offences[3], since its purpose is to prevent competition by making a single monopolist out of many competitors, so that they can raise prices, reduce output and receive monopoly profits. The simple legal principle of “joint pricing is lawful itself” that is used in the US is one of the basic ideas of the Russian antimonopoly legislation as well.

Not all agreements of such nature are considered dangerous for competition. European Union law says that horizontal agreements cannot restrict competition between the parties whose aggregate market share is below 10%[4]. This limit is reduced to 5% for agreements in markets where the number of such agreements is already high, and the conclusion of another one may result in adverse effects to the market. Under EU law, such an agreement may be permitted if it provides consumers with a fair share of benefits resulting from this agreement. In some countries, agreements between entities may be allowed by authorized state agencies (Germany, Russia).

Price-fixing can be of different kinds. Overcharge pricing is setting up too high a price for goods, which is not justified by economic reasons. Predatory pricing (defined in common law countries - USA, Australia, Canada, etc.) is selling a product or service at a very low price long enough to drive competitors out of the market, or create barriers to entry for potential competitors[5]. For instance, in Canada, a pharmaceutical company which supplied medicine to hospitals free of charge throughout a year has been found to have violated antitrust laws[6]. The company aimed to eliminate competition, since it made it impossible for other companies to sell the medicine. Free supply of medicine without profit is unreasonable in terms of trade, that is why the suspicion on restricting competition came up.

A cartel is the most common form of price manipulation. A cartel is an “agreement” among competing firms to fix prices, marketing, and production. If the companies agree to establish the same price, which is higher than the competitive price, consumers will be damaged by higher prices and lower quality. This usually happens in the case of goods with inelastic demand. In such cases, price fixing is expressed in maintaining a certain price level, its consistent increase, setting a minimum price, the discounts percentage, or a calculation formula. The main features of price-fixing are equal prices, their synchronous change and increase in the same range. The best example is the case of violation of the antimonopoly legislation in the oil market in Russia. The rise in prices for diesel from October 2010 to the end of January 2011 totalled 53%. Prices for jet fuel during the same period increased by more than 30%. Such actions of the companies were recognised by the anti-monopoly committee as the setting of monopolistically high prices[7]. In another similar case, the wholesale selling prices for buckwheat rose synchronously, significantly exceeding the increase in purchase price. All these examples clearly show how detrimental cartels are because of their tendency to form an unnatural state of the economy and society. They can interfere in bidding, using collusive tendering when firms agree in advance as to who will submit the winning bid or tender. Other forms include bid suppression, complementary bidding and bid rotation and are often accompanied by sub-contracting. Such an approach is often found in the engineering and construction sectors where State tenders and other very large contracts are on offer.

Negative effects of price-fixing are numerous. In my opinion, they are:

• inefficient distribution of resources for the society (artificial increase / decrease in prices with controlled supply);

• restricting competition in the market;

• lack of interest in the technological progress. The rate of return may affect the motivation in the development of the industry;

• income inequality because of high hurdles and pricing manipulation leads to reducing of standards of living of the most vulnerable segments of the population;

• corruption is amplified;

• political risks (disbalance in the economy always affects the balance of public regulation).

In developing countries the negative effect of price-fixing seems to be the most dramatic[8]. Inflated prices for socially important products (vitamins, medicines, products for the new plants construction, etc.) in these countries are estimated in billions of dollars. For example, in 2011–2012, the Antimonopoly Committee of Russia in cooperation with the Russian Ministry of Internal Affairs disclosed large cartels in the markets of chlorine, thermal coal, insurance services and in the bidding for the medicines. The Head of Federal Antimonopoly Service of Russia Mr. Artemyev states that without clearing the economy of cartels, there is no chance for its effective development[9]. Globally, the negative impact of a cartel is most clearly manifested in the health and social security sectors. Even implementation the reproductive and child health programme of the World Bank included cases of fraud and corruption in the procurement of medicines. Price-fixing also affects the health of ordinary people, as it has been noted in various studies that poor people with fatal diseases benefit more from their treatment if they have the necessary nutrition to support the medication they receive.

Another field that suffers from price-fixing is food industry. For instance, among major cartels uncovered in South Africa was the bread price fixing cartel where main producers had agreed[10]:

  • to increase the price of bread to customers;
  • to fix their prices to distributors;
  • not to poach each other’s independent distributors.

The bread case is a living example of how an unjust economy can further impoverish poor consumers and destroy opportunities for small businesses (especially those that serve the poor) to help citizens regain full and free participation in the economy. I believe the most dramatic question of antitrust lawyers everywhere is: how many loafs of bread has this cartel activity taken away from the mouths of children who are dependent on a school feeding scheme for a daily meal? How many households had to stay hungry for days because there was not enough money to afford basic foodstuffs as a result of this activity? These examples show how damaging cartels are to communities. What they do is basically stop any positive development of society. They prevent individual attempts at creating honest business as well as undermine efforts of government to provide comprehensive social security and a stable society with balanced wealth distribution and employment opportunities.

Some forms of price-fixing lead to increased corruption. A high-profile example is the case of charges of collusion in the auction of American-Romanian businessman Philip H. Bloom, who offered bribes to government officials to obtain contracts for reconstruction in Iraq[11]. The officials facilitated collusion at the auction and received cash gifts, jewellery and real estate. Similar schemes are also used in Russia and other CIS countries.

In my opinion, resale price maintenance (RPM) should be separated from price-fixing in order to prevent attempts to minimise cartel harm. RPM bears no relation to price fixing[12].

As Paul Gift put it:

“Classic price fixing is typically referred to as horizontal price fixing in supply chain terminology. Horizontal arrangements are those between competitors operating at the same level of distribution, and vertical arrangements are those between businesses operating at distinct levels of distribution. Horizontal price fixing is an agreement among competitors to restrain price competition in some way…Minimum RPM is a vertical price restriction imposed by an upstream manufacturer on downstream distributors, dealers, or retailers (henceforth, all will be referred to as “retailers”). Typically, a manufacturer specifies a minimum price above which its retailers must sell its product(s). The manufacturer monitors the retailers or employs a monitoring agent to ensure their performance. If retailers are discovered pricing below the specified minimum price, they are terminated or threatened with termination. Minimum RPM is frequently referred to by politicians, members of the media, and sometimes lawyers as vertical price fixing; but in my opinion, such terminology is inaccurate and misleading, as it imparts the negative connotation of horizontal price fixing conspiracies on a non-conspiratorial practice that often has legitimate business purposes and consumer benefits. While use of minimum RPM is sometimes alleged in the operation of price-fixing conspiracies, in and of itself no other competitors are involved in the decision. Minimum RPM is a vertical price restriction, not a price-fixing arrangement”[13].

Many socially responsible companies have minimum RPM strategies.

I believe minimum RPM arrangements can prevent consumers from “free-riding”[14] on retailers’ provision of special services. For example, a producer supplies consumer electronics to a full-service retailer providing “well-trained sales personnel, well-staffed sales floors, product demonstrations, and other promotional services”[15]. This retailer is unlikely to be able to compete on price with discount retailer who provides few or no services. If the price difference is large enough, consumers are stimulated to obtain services at a full-service retailer before going to a discount retailer. Over time, full-service retailers are discouraged to provide special services, and consequently, this situation harms the manufacturer via lost incremental sales and competitive disadvantage: “Minimum RPM can prevent this type of consumer free-riding by restricting the ability of discount retailers to undercut full-service retailers”[16].

I agree that “minimum RPM can mitigate other problems between manufacturers as well.... For example, when retailers decide on the level and types of services and sales effort to provide for a product, they consider their own markup, not the manufacturer’s”[17]. Using Paul Gift’s approach, suppose that a beverage manufacturer has a 65 cents wholesale markup on a bottle while its retailer has a 15 cents retail markup. The retailer would not spend 20 cents on promotional displays or extra sales efforts that would motivate one additional consumer to buy; however, a beverage manufacturer profits would increase, so it is in the manufacturer interest to motivate the retailer to invest and compete for incremental sales. This example shows that the private interests of retailers and manufacturers can be misaligned. In contrast to price-fixing, promotional, brand image, or sales-effort investments are competitive and geared towards incremental sales:

“To address the incentive problem, minimum RPM arrangements would offer larger discount-restricted markups to retailers; convey the types of services, effort, and brand image desired; monitor retail prices, and terminate retailers who do not comply. They serve as a “premium-termination” contract enforcement mechanism by restricting price at the retail level in order to enhance other forms of non-price competition…In price-fixing conspiracies, the initiators are competitors who realise that they will be better off if they minimise group competition. With minimum RPM, a single manufacturer influences downstream retailers’ behaviour through an increased markup, so they will compete more aggressively on non-price dimensions; meanwhile, competition amongst manufacturers is not affected”[18].

That is why it is improper to associate minimum RPM with the term “price fixing”.

As there is no dispute that cartels destroy competition and are causing serious harm to the economy and consumers, combating cartels is among the top priorities of any competition law enforcement agency in any country. In my opinion, the greatest deterrent to cartels should be the likelihood that offenders at company and individual level will be apprehended, penalised and even punished through heavy fines, loss of future state tenders and tax incentives.

It should be noted that sanctions for cartel agreements are similar in legal systems. First, the agreements are not subject to legal protection because such agreements are contrary to the civil law of the state and are recognised as null and void. Thus, the establishment of a cartel will cause the risks that mutual agreements may not be enforced. Moreover, public law measure will be applied to the parties: criminal or administrative sanctions are applied to violators, depending on the type of the offence. Usually “rule of reason” does not apply to price-fixing agreements and no need to figure out whether a particular price is reasonable or not. There is only one mitigating factor for the price-fixing parties: a mitigation program or the “First through the door” principle. This method means that the first company that “provides the antitrust government agency with information and subsequently fully cooperates with and assists the agency receives a conditional immunity followed by a full immunity”[19] This has proved to be a very successful tool as ”cartels are very secretive and are very difficult to penetrate”[20]. Some countries even offer rewards to the cartel member of the cartel who notify antimonopoly agency the first about the collusion.

Turnover-based fine is the most often used in relation to violators of antitrust laws. This sanction does not have the upper limitation; it is calculated according to the economic consequences of the violation and the benefit received by the offender. The system of linear and proportional penalties is an effective control mechanism in this case because it makes the violator’s responsibility proportional to the damage to other businesses.

Severe criminal penalties, especially imprisonment, could be a strong deterrent for white-collar violators who are considering joining the cartel. However, cartel conduct is a crime punishable by imprisonment and/or criminal penalties only in some countries (USA, Brazil, the EU, UK, Australia, Russia, etc.). Some countries (e.g. South Africa) do not take such positions.

I find the initiative of the Norwegian competition authority to remove a company convicted for violating competitive principles from the lists of indices and funds of socially responsible investing to be an uncommon but effective idea. With the growing importance of such indices and investor awareness of socially responsible investing, such black lists may send a signal about the unacceptability of anticompetitive actions.

To conclude, the idea of price-fixing is relatively simple. In a quest for enhanced profits, conspirators agree to “set prices above levels obtained in a competitive environment, thereby minimising competition and reducing output”[21]. There are no consumer or social benefits from price fixing. The cartels enormously damage the economy, in particular, in such sensitive social sectors like healthcare and educational systems, “…the damage done and the detrimental impact on communities are significant… When companies form cartels, market dominance is achieved and often maintained for lengthy periods resulting in the smaller businessman being eliminated”[22].

Entrance into the market by new role players is therefore more difficult and innovations are limited because the creation of competing companies is discouraged. Consumers do not have access to goods and services they desire and cannot freely select their quality and variety. Local communities have to pay more for products and services because the price is artificially manipulated. The fixing of a price of a product causes prejudice to broader society and, sadly, it is most often the poorest of the poor who suffer most. The damage is much stronger in developing countries than in developed countries due to the fact that the developing countries usually have no effective mode of competition. All governments recognise that price-fixing is extremely dangerous and resist it by administrative and criminal legislation. Nowadays, price-fixing is one of the most dangerous threats to modern society as illustrated by all the examples I have mentioned above.



[1] Commerce Commission. New Zealand. available at: http://www.comcom.govt.nz/price-fixing-and-cartels.

[2] Paul Gift, PhD. Price Fixing and Minimum Resale Price Restrictions Are Two Different Animals. available at: http://gbr.pepperdine.edu/2010/08/price-fixing- -minimum-resale-price-restrictions-are-two-different-animals.

[3] V.I. Eremenko. Antimonopol'noe zakonodatel'stvo zarubezhnykh stran [Antimonopoly Laws of Foreign Countries]// Gosudarstvo i pravo [State and Law]. No 9, 1995, p. 102.

[4] Rukovodstvo po vertikal'nym ogranicheniyam [Guidelines on Vertical Restraints]// Yevropeiskaya komissiya [European Commission]. SEC(2010) 411.

[5] T.I. Shaykheev. Individual'naya i kollektivnaya monopolisticheskaya deyatel'nost’ hozyaistvuyushchikh sub"yektov v konkurentnom (antimonopol'nom) prave Rossii i zarubezhnykh stran [Individual and Collective Monopoly Activity of Economic Entities in the Competitive (Antimonopoly) Law of Russia and Foreign Countries]// Mezhdunarodnoe publichnoe i chastnoe pravo [International Public and Private Law]. No 4, 2012, pp. 35 – 41.

[6] M.A. Bokareva, L.A. Cooper, V.Y. Vasilyev. Monopoliya i antimonopol'noe regulirovanie : opyt, problemy, resheniya [Monopoly and Antimonopoly Regulation: Experience, Problems, Solutions]. Moscow, 1991, p. 20.

[7] N.V. Gurin. Karteli i ikh vliyanie na ekonomiku gosudarstva : analiz zakonodatel'stva Rossii [Cartels and Their Impact on the Economy of the State: an Analysis of the Russian Legislation]// Konkurentnoe Pravo [Competition Law]. No 2, 2011, pp. 23 – 28.

[8] N.V. Gurin. Karteli i ikh vliyanie na ekonomiku gosudarstva : analiz zakonodatel'stva Rossii [Cartels and Their Impact on the Economy of the State: an Analysis of the Russian Legislation]// Konkurentnoe Pravo [Competition Law]. No 2, pp. 23 – 28.

[9] N.V. Gurin. Formirovanie kartelya i riski predprinimatelya na tovarnom rynke [The Formation of the Cartel and the Risks Entrepreneur in the Commodity Market]// Konkurentnoe Pravo [Competition Law]. No 3, 2012, pp. 24 – 29.

[10] Report on proceedings of the Third Anti-Corruption Summit. available at: http://www.nacf.org.za/anti-corruption summits/third_summit/UnitedNationsReport_summit3_Chapter7.pdf.

[11] A. Roston. Massive Bid-Rigging Scam Alleged In Iraq, available at: http://www.nbcnews.com/id/10074995/ns/world_news-mideast_n_africa/t/massive-bid-rigging-scam-alleged-iraq

[12] P. Gift, PhD.Price Fixing and Minimum Resale Price Restrictions Are Two Different Animals, available at:

http://gbr.pepperdine.edu/2010/08/price-fixing-and-minimum-resale-price-restrictions-are-two-different-animals/

[13] Ibid.

[14] Ibid.

[15] Ibid.

[16] Ibid.

[17] Ibid.

[18] Ibid.

[19] Report on proceedings of the Third Anti-Corruption Summit. available at: http://www.nacf.org.za/anti-corruption-summits/third_summit/UnitedNationsReport_summit3_Chapter7.pdf

[20] Ibid.

[21] Paul Gift, PhD. Price Fixing and Minimum Resale Price Restrictions Are Two Different Animals. available at: http://gbr.pepperdine.edu/2010/08/price-fixing- -minimum-resale-price-restrictions-are-two-different-animals.

[22] Report on proceedings of the THIRD ANTI-CORRUPTION SUMMIT; available at: http://www.nacf.org.za/anti-corruption-summits/third_summit/UnitedNationsReport_summit3_Chapter7.pdf.

Bibliography:

  1. M.A. Bokareva, L.A. Cooper, V.Y. Vasilyev. Monopoliya i antimonopol'noe regulirovanie : opyt, problemy, resheniya [Monopoly and Antimonopoly Regulation: Experience, Problems, Solutions]. Moscow, 1991. p. 20.
  2. N.V. Gurin. Formirovanie kartelya i riski predprinimatelya na tovarnom rynke [The Formation of the Cartel and the Risks Entrepreneur in the Commodity Market] // Konkurentnoe Pravo [Competition Law]. 2012. № 3. pp. 24–29.
  3. N.V. Gurin. Karteli i ikh vliyanie na ekonomiku gosudarstva : analiz zakonodatel'stva Rossii [Cartels and Their Impact on the Economy of the State: an Analysis of the Russian Legislation] // Konkurentnoe Pravo [Competition Law]. 2011. № 2. pp. 23–28.
  4. T.I. Shaykheev. Individual'naya i kollektivnaya monopolisticheskaya deyatel'nost’ hozyaistvuyushchikh sub"yektov v konkurentnom (antimonopol'nom) prave Rossii i zarubezhnykh stran [Individual and Collective Monopoly Activity of Economic Entities in the Competitive (Antimonopoly) Law of Russia and Foreign Countries] // Mezhdunarodnoe publichnoe i chastnoe pravo [International Public and Private Law]. 2012. № 4. pp. 35–41.
  5. V.I. Eremenko. Antimonopol'noe zakonodatel'stvo zarubezhnykh stran [Antimonopoly Laws of Foreign Countries] // Gosudarstvo i pravo [State and Law]. 1995. № 9. p. 102.