Introduction to Economics                                 Lesson 17 /07



This month saw Australia’s third richest man, Richard Pratt, admit in the Federal Court that his cardboard box manufacturing company Visy had agreed in 2000 to enter into a price fixing cartel with its major competitor Amcor.  The 2 companies had thereafter colluded until 2004.   Pratt, aged 73, and no stranger to controversy, expressed profound regret and remorse.

The prosecutor suggested that an appropriate penalty was a fine of approximately $36 million.  Estimate of the alleged excess profit generated by and for the participants was $700 million.  Prices were allegedly approximately 15-20 % higher because of the collusion than they should have been, although this particular allegation was strongly disputed.  

Apart from a personal fortune, estimated at $5.4 billion, Pratt obviously has a lot going for him.  A stellar list of people spoke up for him including the P M, John Howard and Premier John Brumby.  His philanthropic record, including donations to the 2 major political parties, [apparently running 3 to 1in favour of the Liberal Party] is equally impressive.

The Australian Competition & Consumer Commission [“ACCC”], the relevant regulatory body that conducted the prosecution, did not proceed against Amcor, since it was Amcor apparently that had blown the whistle on the deal.  Perhaps this was because Amcor belatedly realized that Pratt was not keeping it anyway.

Pratt has stated that in entering the deal he had his fingers crossed behind his back.  Somewhat akin to the Nazi- Soviet non -agression pact of 1939, his purpose was to end a damaging price war then going on between the 2 companies, thereby enabling Visy to engage in other forms of more advantageous, competitive actions against its rival.  In this he seems to have been successful since thereafter market share, which had been approximately equal, swung markedly in favour of Visy.

Apart from fines, and regulatory constraints, such as having to appoint former ACCC chief Allan Fels to head its Trade Practices Compliance Committee, it is apparently unlikely that the court will impose any other penalties.  In particular there will be no prison sentences.  Despite indicating an intention to do so about 4 years ago, the Federal government has not yet enacted legislation enabling this to occur.  Given the storm of criticism that has now arisen, and the Labor Party’s pledge to do so if elected, this may well change in the near future.

Regardless of the final outcome of the present Federal Court proceedings, the troubles of the 2 companies involved are far from over.  Amcor is apparently facing a class action seeking damages of hundreds of millions of dollars, launched by law firm  Maurice Blackburn Cashman.  It is likely now that Visy will soon face the same.


What is Price Fixing ?.

The relevant legislation is the Commonwealth Trade Practices Act SS 45,45A, 45B and 45C.  The ACCC website contains a definition and an explanation.  It suggests that in essence, price fixing is about businesses colluding rather than competing.  It requires the following elements;

·         A contract, arrangement or understanding between businesses

·         Which businesses are in competition with each other

·         A provision of which has the purpose or likely effect of fixing, controlling or maintaining prices.

It is the requirement of consensus that is crucial.  Parties acting in parallel, [referred to as parallel conduct], are not necessarily colluding.  A business setting a price, which is then matched by its competitors, will in the absence of collusion, not constitute price fixing.

Price fixing can occur in various ways, including, for example, suppliers colluding to fix a price to sell to the public generally, to fix a price to supply a particular person or group of persons, or a geographic area or areas, or buyers agreeing to buy only at a fixed price .  Again various suppliers can agree to submit the same price in purported compliance with an invitation to provide competitive tenders.

Until WW2, anti price fixing laws were largely a preserve of the USA.  Since then the number of countries with laws against such activities have grown significantly, and today such legislation exists in more than 70 countries, including Canada, Australia, various countries of the EU, and some of the more industrialized nations of East Asia.   While most economists probably support laws prohibiting price fixing, or even criminalizing it, a significant number, to the contrary, support legalization.


Some Arguments for Prohibiting Price Fixing

Price fixing is fraud.  As opponents point out, this does not necessarily follow.  If price fixing was legal then parties could declare that their prices were fixed and allow purchasers to make up their own mind whether to purchase. Of course this would not apply to competitive tender bids where the bids are otherwise required by the rules of the tender to be competitive bids.

Price fixing creates increased market power in the suppliers and enables them to charge a higher price than would otherwise prevail in the market to the damage of consumers.


Some Arguments for Permitting Price Fixing

The real world is dynamic, not static.  It is not possible to calculate what a market price would be other than through the operation of the market itself.  Price fixing agreements can be socially beneficial, and cost effective for the participants creating stability, predicability and efficiency.  As long as entry into a market is free, excess profits will be competed away by new participants.

In the absence of government enforcement, price fixing agreements invariably tend to fall apart.  Arguably however, if such agreements are illegal or at least not enforceable in a court they are more likely to do so, and more quickly

The cost of regulating and enforcing anti price fixing laws are major.  In so far as penalties are initially imposed on the producers, they are ultimately passed on to the community generally.  It is suggested that one way around this dilemma is to impose prison sentences rather than fines.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.”  Adam Smith   The Wealth of Nations    1776



                                    David Sharp

                                       22 October 2007






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