Introduction to
Economics
Lesson 17 /07
PRICE
FIXING
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