IMPACT OF IMPACT OF PRICE FIXING PRICE FIXING

ON ON COMMUNITIESCOMMUNITIES

NANDI MOKOENA: COMPETITION COMMISSION, SOUTH AFRICA

OUTLINEOUTLINE

WHAT IS PRICE FIXING?

THE COMMISSION’S MANDATE

MAJOR CARTELS UNCOVERED BY

THE COMMISSION

IMPACT OF COMMISSION’S

INVESTIGATIONS

WHAT IS PRICE FIXING?WHAT IS PRICE FIXING?

“…on both a moral and practical

level, there is not a great deal of

difference between price fixing

and theft…”

(Whish, 2001)

WHAT IS PRICE FIXING?WHAT IS PRICE FIXING?

An agreement not to compete on price

Effect is to increase price and/or reduce

output

Purpose is to maximise profits

International studies find a median price

mark-up from cartels of +/- 15%

Variations include market allocation and

collusive tendering

PRICE FIXING PRICE FIXING

An agreement amongst ‘competitors’ to raise,

fix or otherwise maintain the price at which

goods or services are sold

Can occur directly or indirectly

Prohibition applies to both purchase and

selling prices

Frequently includes a policing mechanism

DIVIDING MARKETS DIVIDING MARKETS

An agreement between ‘competitors’ to divide

markets amongst themselves

In such schemes, competitors:

allocate specific customers or suppliers;

allocate territories; and/or

allocate goods or services

Frequently supports price fixing

agreement

COLLUSIVE TENDERINGCOLLUSIVE TENDERING

Firms agree, in advance, who will submit the

winning bid on tender

Forms include bid suppression, complementary

bidding and bid rotation

Often accompanied by sub-contracting

Often found in engineering, construction and State

tenders where firms compete for very large

contracts

THE COMMISSION’S MANDATE THE COMMISSION’S MANDATE

“Combating cartels should be

among the top priorities of

any competition law

enforcement agency”

(International Competition Network, 2005)

THE COMMISSION’S MANDATE THE COMMISSION’S MANDATE

Purpose:

…Provide consumers with competitive

prices and product choices…

Section 4(1)(b) prohibits:

Price fixing - 4(1)(b)(i)

Market allocation – 4(1)(b)(ii)

Collusive tendering – 4(1)(b)(iii)

THE COMMISSION’S MANDATETHE COMMISSION’S MANDATE

Implemented Corporate Leniency Policy (CLP),

2004

Revised in 2008

Pro-active tool, integral to detect and eradicate

cartels

Indemnity to firms providing information of

a cartel

THE COMMISSION’S MANDATETHE COMMISSION’S MANDATE

“First through the door”

Cooperate fully with and assist Commission

Conditional immunity followed by full

immunity

Applications received in the Commission’s

major cartel investigations

Proven successful tool

MAJOR CARTELS UNCOVEREDMAJOR CARTELS UNCOVERED

“The poor and the sick have been hit hardest by the bread,

milk and drug price fixing scandals exposed by the

Competition Commission”

(COSATU, 2008)

MAJOR CARTELS: BREAD

MAJOR CARTELS: BREADMAJOR CARTELS: BREAD

Commission initiated complaint (WC)

Found that Premier (Blue Ribbon) Tiger Brands

(Albany) and Pioneer (Sasko) had agreed:

to increase price of bread to customers;

to fix their to distributors; and

not to poach each others independent

distributors

MAJOR CARTELS: BREADMAJOR CARTELS: BREAD

Effect:

Prices of basic bread increased by +/- 30c

Distributors discounts slashed from 90c to

75c

Distributors were refused alternatives

One week before Christmas (2006)

Ongoing investigation in milling

industry

MAJOR CARTELS: BREADMAJOR CARTELS: BREAD

[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 to regain full and

free participation in the economy.

(National Consumer Forum, 2007)

MAJOR CARTELS: PHARMACEUTICAL

MAJOR CARTELS: PHARMACEUTICALMAJOR CARTELS: PHARMACEUTICAL

Initiated by Commission

Adcock Ingram, Fresenius Kabi, Dismed

and Thusanong had agreed to:

tender collusively for Contract RT299 –

state tender for intravenous solutions;

divide the private hospital market

amongst each other

MAJOR CARTELS: PHARMACEUTICALMAJOR CARTELS: PHARMACEUTICAL

Effect:

State paid 10% - 15% more for IV fluids

Estimates range from R20 million p.a to

R60 million p.a

Private hospitals paid up to 33% more for

IV fluids

Barriers to entry were increased

MAJOR CARTELS: PHARMACEUTICALMAJOR CARTELS: PHARMACEUTICAL

The total expenditure on pharmaceuticals

in the public sector is about R 5 billion

and even a 5% unnecessary increase

impedes us from delivering more

services.

(Dept. of Health, 2008)

MAJOR CARTELS: MILK

MAJOR CARTELS: MILKMAJOR CARTELS: MILK

Initiated by the Commission

Respondents: Clover, Parmalat, Ladismith

Cheese, WoodlandsDairy, Lancewood,

Nestle and Milkwood

Clover received leniency in part

Hearings set for September 2008

MAJOR CARTELS: MILKMAJOR CARTELS: MILK

The Commission found:

Clover, Woodlands and Parmalat fixed prices

indirectly by co-ordinating the removal of

surplus milk from the market;

Woodlands and Milkwood fixed the price of

UHT milk and allocated geographic areas in

which they would not compete in selling UHT

milk

MAJOR CARTELS: MILK MAJOR CARTELS: MILK

The Commission found:

Clover, Parmalat, Ladismith, Woodlands

Lancewood and Nestle exchanged sensitive

information on procurement prices of raw milk

in various ways;

CSA and Woodlands reached an agreement

regarding the selling price of UHT “long life”

milk

MAJOR CARTELS: MILK MAJOR CARTELS: MILK

"The main victims are always the most

vulnerable in society. With bread and

milk price-fixing it is the poor, who

spend a much higher proportion of

their income on such basic foods.”

(COSATU, 2008)

IMPACT OF INVESTIGATIONS IMPACT OF INVESTIGATIONS

PUBLIC AWARENESS:

consumer complaints

CORPORATE GOVERNANCE:

meaningful responsibility of directors

RESPONSIBILITY OF CIVIL SOCIETY:

shareholders, consumers demand accountability

AMENDMENTS TO THE COMPETITION ACT:

strengthen powers of the Commission