It is illegal for competitors to work together to fix prices rather than compete against each other. This conduct restricts competition, and can force prices up and reduce choices for consumers and other businesses.
Price fixing occurs when competitors agree on pricing rather than competing against each other. In relation to price fixing, the Competition and Consumer Act refers to the ‘fixing, controlling or maintaining’ of prices. A price fixing cartel occurs when competitors make written, informal or verbal agreements or understandings on:
- prices for selling or buying goods or services
- minimum prices
- a formula for pricing or discounting goods and services
- rebates, allowances or credit terms.
Price fixing agreements do not have to be formal; they can be a 'wink and a nod', made over a drink in the local pub, at an association meeting or at a social occasion. The important point is not how the agreement or understanding was made or even how effective it is, but that competitors are working out their prices collectively and not individually.
Sometimes competing businesses will sell goods or services at the same or similar price levels so that the price fluctuations of one are matched by equivalent fluctuations by the others. Although this may seem like price fixing behaviour, it is not necessarily the result of collusive behaviour between companies.
Legitimate commercial reasons for why a business may adjust its prices to match a competitor include responding to highly visible prices displayed by competitors (e.g. petrol price boards) or competitors quickly adjusting their prices to match price movements (known as ‘parallel pricing’).
When businesses get together to fix, control or maintain prices, it can affect consumers, as well as small businesses that rely on those suppliers for their livelihood.
Take freight for example. A lot of consumer goods are transported by freight. If the price of freight is artificially maintained or inflated by a cartel, it can affect the whole supply chain, and result in higher prices for all sorts of goods and services.
Signs of price fixing may include:
- tenders or quotes that are much higher than expected. This may indicate collusive pricing, or it may just be overpricing (not illegal in itself). It may simply reveal that your estimates are inaccurate. It is in your commercial interest to make enquiries and determine whether your price expectations are reasonable
- all suppliers raise prices simultaneously and beyond what seems to be justified by changes in input costs. You can ask suppliers why this is so. You might also consider surveying suppliers so you are better equipped to recognise suspicious pricing movements
- prices submitted are much higher than previous tenders or published price lists
- tenders are missing detailed ‘workings’ to show how the tender price was calculated, where this was requested (this may indicate cover pricing)
- a new supplier’s price is lower than the usual businesses tendering. This may indicate there has been collusion among the incumbent businesses tendering
- prices drop markedly after a new supplier tenders. This may indicate that the existing suppliers have been colluding and the new supplier has forced them to compete.
Exceptions to the prohibitions on price fixing exist for certain joint production or supply of goods or services and for certain agreements for the collective acquisition of goods or services. Agreements between related companies are also exempted. The joint venture exception is complex, and legal advice should be sought by anyone considering a joint venture that may otherwise breach the cartel provisions.