As the Coronavirus pandemic continues to escalate in the UK, the government has been forced to introduce a range of drastic measures, including severe restrictions on movement of people to ensure social distancing. Supermarkets have also been forced to act as they experienced panic buying and struggled to keep up with supply. They responded by starting to impose limits on the number of certain items an individual consumer could purchase and by reducing the range of products they made available. In addition, supermarkets contacted the government to suggest that competition law should be relaxed to allow the rival chains to coordinate their response to the ongoing situation.
WM Morrison, the forth largest supermarket retailer in the UK, was one of the key players lobbying for this change. Their chief executive, David Potts, argued that “There will be legislation that works perfectly in peacetime and not so well in wartime.”
The supermarket industry is in fact a market where the UK competition authorities have expressed considerable concerns in the past regarding a lack of competition (see for example the 2008 market investigation and the recent decision to block the merger between Sainsbury’s and Asda). The supermarkets also previously made similar demands for a relaxation of competition law in the event of a no-deal Brexit.
Despite this, the government has agreed to temporarily relax elements of competition law to help supermarkets respond to the Coronavirus crisis with the Environment Secretary, George Eustice, stating that:
By relaxing elements of competition laws temporarily, our retailers can work together on their contingency plans and share the resources they need with each other during these unprecedented circumstances.
In moves supported by the Competition and Markets Authority, laws enabling them to do so will soon be passed through Parliament. Supermarkets will be allowed to:
- share data with each other on stock levels
- cooperate to keep shops open
- share distribution depots and delivery vans
- pool staff with one another to help meet demand.
It is also expected that the Groceries Code Adjudicator will take a pragmatic approach to rules previously in place to prevent the big supermarket chains abusing their power over suppliers. These rules previously prevented supermarkets from stopping orders from a given supplier without reasonable warning. However, it is now accepted that they may need to do so in order to focus on supplying a restricted range of essential products.
Such relaxation of competition laws has been rare, with previous examples being measures taken in 2006 for the maintenance and repair of warships and in 2012 during the fuel crisis. In contrast, typically competition law is extremely hot on preventing agreements between firms. This is due to the fact that they distort competition and prevent the considerable benefits that can arise for consumers when firms compete to offer the best deals.
In the extreme situation the UK is currently in, the government’s stance appears to be that there are sufficient other benefits from restricting competition between supermarkets and allowing some degree of cooperation. It is then important that the form of cooperation between the supermarkets is restricted to narrow areas that will help to ensure the continuity of supply. In particular, it would be worrying if the supermarkets started discussing the prices they charge. Already food prices may rise due to increased demand and a potential shortage of supply. Furthermore, many consumers will see their income reduced. Therefore, it is important that coordination between supermarkets doesn’t result in further increases in prices.
It is therefore reassuring that the Government made clear that the relaxation of competition law:
will be a specific, temporary relaxation to enable retailers to work together for the sole purpose of feeding the nation during these unprecedented circumstances. It will not allow any activity that does not meet this requirement.
The Competition and Markets Authority has also stressed that they will not:
tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion. This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.
Once the current crisis is over, it will also be important that the competition authority closely monitors the supermarket sector to ensure that cooperation between the supermarkets ends and normal competitive conduct is resumed.
- Outline the effects agreements between firms to raiser prices have on economic welfare.
- What are the pros and cons of allowing cooperation between the supermarkets in response to the Coronavirus crisis?
The car industry has featured heavily in the news in recent weeks with the announcement of plans to ban the sale of new petrol and diesel cars in the UK from 2040. Around the same time, news broke that the European Commission had commenced an investigation into potential collusive behaviour between German car makers.
Since the investigation is ongoing, it is not yet clear exactly what the firms are accused of. However, allegations first published in German magazine Der Spiegel claim that since at least the mid 1990s Volkswagen (and subsidiaries Porsche and Audi), Daimler (owner of Mercedes-Benz) and BMW met several times a year. Furthermore, it is alleged the meetings aimed to give the firms an advantage over overseas rivals by:
co-ordinating the development of their vehicles, costs, suppliers and markets for many years, at least since the Nineties, to the present day.
In particular, Der Spiegel claims that the cartel limited the size of the tanks that manufacturers install in cars to hold chemicals that reduce diesel emissions. Smaller tanks then left more room for the car’s sound system.
Limiting the size of these tanks should be seen in the context of the 2015 emissions scandal where it became clear that Volkswagen had programmed its cars to limit the use of these chemicals and cheated in emissions tests. This meant that 11 million cars worldwide produced excess emissions. Whilst other manufacturers have suggested that the cars they produced may also produce excess emissions, Volkswagen has so far been the only firm to admit to breaking the rules so explicitly. However, if the allegations in Der Spiegel turn out to be true, there will be clear evidence that the harm caused was widespread and that illegal communication between firms played a key role in facilitating this. If found guilty, substantial fines will be imposed by the European Commission and several of the firms have already announced plans to put in place measures to reduce emissions.
It is not clear how the competition authorities discovered the cartel. However, it has been suggested that incriminating documents were uncovered during a raid of Volkswagen’s offices as part of an investigation into a separate steel cartel. It seems that Volkswagen and Daimler are now cooperating with the investigation, presumably hoping to reduce the penalties they could face. It has also been reported that Daimler’s role in the investigation will have serious implications for future cooperation with BMW, including a project to develop charging sites for electric cars. It will be extremely interesting to see what the investigation uncovers and what the future ramifications for the car industry are.
European officials probe claims of huge German car cartel CNN Money, Mark Thompson (23/7/17)
Automotive corruption: German manufacturer collusion could spell bankruptcy Shout out UK, Christopher Sharp (4/8/17)
Germany’s auto industry is built on collusion Bloomberg, Leonid Bershidsky (31/7/17)
BMW reassured top staff about cartel allegations: sources Reuters, Edward Taylor (4/8/17)
- What are the consequences of the coordination between German car makers likely to have been for consumers? What about for rival car manufacturers?
- Are there circumstances in which coordination between car makers might be beneficial for society?
- How do you think the German car industry will be affected by these allegations going forward?
Price fixing agreements between firms are one of the most serious breaches of competition law. Therefore, if detected, the firms involved face substantial fines (see here for an example), plus there is also the potential for jail sentences and director disqualification for participants. However, due to their secretive nature and the need for hard evidence of communication between firms, it is difficult for competition authorities to detect cartel activity.
In order to assist detection, competition authorities offer leniency programmes that guarantee full immunity from fines to the first participant to come forward and blow the whistle on the cartel. This has become a key way in which competition authorities detect cartels. Recently, competition authorities have introduced a number of new tools to try to enhance cartel detection.
First, the European Commission launched an online tool to make it easier for cartels to be reported to them. This tool allows anonymous two-way communication in the form of text messages between a whistle blower and the Commission. The Commissioner in charge of competition policy, Margrethe Vestager, stated that:
If people are concerned by business practices that they think are wrong, they can help put things right. Inside knowledge can be a powerful tool to help the Commission uncover cartels and other anti-competitive practices. With our new tool it is possible to provide information, while maintaining anonymity. Information can contribute to the success of our investigations quickly and more efficiently to the benefit of consumers and the EU’s economy as a whole.
Second, the UK Competition and Markets Authority (CMA) has launched an online and social media campaign to raise awareness of what is illegal under competition law and to encourage illegal activity to be reported to them. The CMA stated that:
Cartels are both harmful and illegal, and the consequences of breaking the law are extremely serious. That is why we are launching this campaign – to help people understand what cartel activity looks like and how to report it so we can take action.
This campaign is on the back of the CMA’s own research which found that less that 25% of the businesses they surveyed believed that they knew competition law well. Furthermore, the CMA is now offering a reward of up to £100,000 and guaranteed anonymity to individuals who provide them with information.
It will be fascinating to see the extent to which these new tools are used and whether they aid the competition authorities in detecting and prosecuting cartel behaviour.
CMA launches crackdown on cartels as illegal activity rises The Telegraph, Bradley Gerrard (20/03/17)
European Commission launches new anonymous whistleblower tool, but who would use it? Competition Policy Blog, Andreas Stephan (21/03/17)
CMA launches campaign to crackdown on cartels Insider Media Limited, Karishma Patel (21/03/17)
- Why do you think leniency programmes are a key way in which competition authorities detect cartels?
- Who do you think is most likely to blow the whistle on a cartel (see the article above by A.Stephan)?
- Why is it worrying that so few businesses appear to know competition law well?
- Which of the two tools do you think is most likely to enhance cartel detection? Explain why.
Record fines have been imposed by the European Commission for the operation of a cartel. Truck makers, Volvo/Renault, Daimler, Iveco and DAF have been fined a total of €2.93bn. The fines were considerably higher than the previous record fine of €1.7bn on banks for rigging the LIBOR rate.
Along with MAN, they were found to have colluded for 14 years over pricing. They also colluded in passing on to customers the costs of compliance with stricter emissions rules. Together these five manufacturers account for some 90% of medium and heavy lorries produced in Europe.
The companies have admitted their involvement in the cartel. If they had not, the fines might have been higher. MAN escaped a fine of €1.2bn as it had revealed the existence of the cartel to the Commission.
A sixth company, Scania, is still in dispute with the Commission over its involvement. Thus the final total of fines could be higher when Scania’s case is settled.
In addition, any person or firm adversely affected by the cartel can seek damages from any of the companies in the national courts of member states. They do not have to prove that there was a cartel.
The Commission hopes that the size of the fine will act as a disincentive for other firms to form a cartel. ‘We have, today, put down a marker by imposing record fines for a serious infringement,’ said Margrethe Vestager, the EU’s competition commissioner.
Also, by being able to exempt a cartel member (MAN in this case) from a fine if it ‘blows the whistle’ to the authorities, it will help to break existing cartels.
There are some other major possible cartels and cases of abuse of market power currently being considered by the Commission. These include Google and whether unfair tax breaks were given to Apple and Amazon by Ireland and Luxembourg respectively.
Price-Fixing Truck Makers Get Record E.U. Fine: $3.2 Billion New York Times, James Kanter (19/7/16)
Truckmakers Get Record $3.23 Billion EU Fine for Cartel Bloomberg, Aoife White (19/6/16)
EU fines truckmakers a record €2.93bn for running 14-year cartel Financial Times, Peter Campbell, Duncan Robinson and Alex Barker (19/7/16)
Truckmakers fined by Brussels for price collusion The Guardian, Sean Farrell (19/7/16)
Europa Press Release
Antitrust: Commission fines truck producers € 2.93 billion for participating in a cartel European Commission (19/7/16)
Competition DG European Commission
- How have the various stakeholders in the truck manufacturing industry been affected by the operation of the cartel?
- What incentive effects are there, (a) for existing cartel members and (b) for firms thinking of forming a cartel, in the fining system used by the European Commission?
- Unlike the USA, the EU cannot jail managers for oligopolistic collusion. Compare the relative effectiveness of large fines and jail sentences in deterring cartels.
- What determines the profit-maximising price(s) for a cartel?
- Apart from the threat of action by the competition authorities, what determines the likely success of a cartel in being able to fix prices?
- Choose two other cases of possible cartels or the abuse of market power being examined by the European Commission. What is the nature of the suspected abuse?
The European Commission has recently carried out a number of investigations into the various sectors of the industry that supplies parts to car manufacturers. Firms have been found guilty of engaging in anti-competitive practices in the supply of bearings, wire harnesses and the foam used in car seats. The latest completed case relates to firms that supply alternators and starters – both important components in a car engine.
On January 27th the European Commission announced that it was imposing fines on some Japanese manufacturing companies. Melco (Mitsubishi Electric), Hitachi and Denso were found guilty of participating in a cartel between September 2004 and February 2010 that restricted competition in the supply alternators and starters to car manufacturers.
The Commission gathered evidence showing that senior managers in the three businesses held discussions about how to implement various anti-competitive practices. These either took place on the phone or at meetings in offices/restaurants. In particular the firms agreed:
||to co-ordinate their responses to tenders issued by car manufacturers. This involved them agreeing on the price each firm would bid.
||to exchange commercially sensitive information about pricing and marketing strategies.
||which of them would supply each car manufacturer with alternators and starters.
These activities are in breach of Article 101 of the Treaty on the Functioning of the European Union (2009). The European Commissioner for Competition, Margrethe Vestager, stated that:
“Today’s decision sanctions three car part producers whose collusion affected component costs for a number of car manufacturers selling cars in Europe, and ultimately European consumers buying them. If European consumers are affected by a cartel, the Commission will investigate it even if the cartel meetings took place outside of Europe”
The fines imposed on the three businesses were as follows:
– Denso €0
– Hitachi €26 860 000
– Melco €110 929 000
How are these fines calculated? When calculating the size of the fine to impose on a firm the Commission takes into account a number of factors. These include:
|| the size of its annual sales affected by the anti-competitive activities.
|| its market share.
|| the geographical area of its sales.
|| how long it had taken part in the cartel.
|| whether it had previously been found guilty of engaging in anti-competitive practices.
|| if it initiated the cartel in the first place i.e. was it the ring leader?
In this particular case the size of the fine imposed on both Hitachi and Melco was increased because they had both previously been found guilty of breaking EU competition rules.
If a member of the cartel comes forward with information that helps the Commission with its investigation, a reduction in the size of the fine can be applied under a provision called a Leniency Notice (2006). Timing as well as the quality of the information provided influences the size of this reduction. For example, only the first firm to come forward with relevant information can receive a reduction of up to 100% i.e. obtain full immunity. This explains how Denso could be found guilty but not have to pay a fine. (This firm’s initial approach to the Commission actually triggered the investigation.) Any subsequent firms that come forward with information receive smaller fine reductions. Hitachi and Melco received reductions of 30% and 28% respectively.
If a firm accepts the Commission’s decision a further reduction of up to 10% can be applied. This is called a Settlement Notice (2008). All three firms were awarded the full 10% discount in this case.
The European Commission is currently investigating the behaviour of firms that supply car thermal systems, seatbelts and exhaust systems.
Car parts price-fixing fines for Hitachi and Mitsubishi Electric BBC News 27/01/16
EU antitrust regulators to fine Japanese car part makers: sources Tech News 26/01/16
Mitsubishi Electric and Hitachi get $150 EU cartel fine Bloomberg 27/01/16
EU fines Mitsubishi Electric, Hitachi for car part cartel Reuters 27/1/16
- What market conditions would make the formation of a cartel more likely?
- Draw a diagram to illustrate the impact of a profit maximising cartel agreement on the price, output and profit in an industry.
- Draw a diagram to illustrate the incentive that each firm has to cheat on an agreed cartel price and output.
- Why did the European Commission introduce Settlement Notices?