Question

Provide a real-world example of two or more companies which engaged in price fixing via collusion. Give a brief summary of what happened, along with a reference link. Would you consider these companies to be oligopolies?

Answer 1

Question No 1

Price fixing

Price fixing is when two entities, usually companies, agree to sell a product at a set price. They do this to maintain profit margins. It's easiest for monopolies to fix prices. They operate without competitors that could offer products at lower prices. Price fixing occurs when companies collude to set the price, discount, or production amount of a good or service, instead of allowing market forces to set it for them. Price fixing is difficult to detect when the product or service is identical, such as corn and air cargo shipping. Price fixing is illegal because it fosters unfair competition and imposes high prices on consumers. Horizontal and vertical price fixing are the two most common types.

Real life Examples

• 1992: The Archer Daniels Midland Company fixed the price of lysine, an additive in corn and other animal feed, with its Japanese and Korean competitors. The whistle-blower, Mark Whitacre was played by Matt Damon in the 2009 film, “The Informant."
• 2006: At least 20 airlines were caught fixing the price of shipping international air cargo. They were fined $3 billion.
• 2010 to 2014: The government fined Bridgestone $425 million for its price fixing in car parts. The four-year investigation found 26 companies that agreed to fix prices. It included a wide array of products, including starter motors, seat belts, and 150 more parts. Companies agreed to $2 billion in fines. The European Commission charged another $1.3 billion on five makers.
• 2012: Banks fixed the world's second-most important interest rate. They included Barclays, UBS, Rabobank and the Royal Bank of Scotland. The Libor rate is the basis for most other interest rates throughout the world. It closely follows the world's most important rate, the fed funds rate. But in 2007, it diverged significantly. That signaled the start of the 2008 financial crisis. As a result of the price fixing, Libor administration was switched over to the InterContinental Exchange in 2014.
• 2013: Apple was found guilty of price fixing e-books with major online publishers.

Collusion

Collusion occurs when rival firms agree to work together – e.g. setting higher prices in order to make greater profits. Collusion is a way for firms to make higher profits at the expense of consumers and reduces the competitiveness of the market. Collusion usually involves some form of agreement to seek higher prices. This may involve: Agreeing to increase prices faced by consumers. Deals between suppliers and retailers. For example, vertical price-fixing e.g. retail price maintenance. (For example, Fixed Book Price (FBP) set the price a book is sold to the public. Monopsony pricing – where retailers collude to reduce the amount paid to suppliers. For example, a retailer with great buying power (Walmart, Amazon) can offer very small profit margins to suppliers as they have little alternative. Collusion between existing firms in an industry to exclude new firms from deals to prevent the market from becoming more competitive. Sticking to output quotas and higher prices. Collusive tendering. For example, ‘cover prices’ for competitive tendering in bidding for public construction contracts. This is when a rival firm agrees to set artificially high price to allow the firm of choice to win with a relatively high contract offer.

Real life Examples

Milk price by supermarkets 2002-03

After a period of low milk, butter and cheese prices, supermarkets such as Asda and Sainsbury’s colluded with Dairy suppliers, Dairy Crest and Wiseman Dairies to increase the price of milk, cheese and other dairy products in supermarkets. After an OFT investigation, supermarkets and suppliers were fined a total of £116m. The OFT found prices set by supermarkets went up by three pence per pint of milk, but the income received by farmers did not go up. Milk collusion at BBC

Bank loans collusion – RBS and Barclays 2008-2010

In 2010 the OFT found RBS and Barclays guilty of collusion in sharing price arrangements for loans to professionals, such as lawyers and accountants. Sharing price information is a way to avoid price competition and keep prices high. RBS was fined £28.59m.

Recruitment agencies forum cartel 2004-06

Between 2004 and 2006 six recruitment companies formed a cartel called the “Construction Recruitment Forum” which met to fix prices for supplying labour to intermediaries and construction companies. They also excluded a new firm Parc from any dealings. Hays was fined £30.4 million for a ‘Serious breach of competition law.’

Collusion in the construction industry – collusion on tender price

In bidding for public sector construction work, construction firms would collude in setting artificially high prices. Firms would decide which contracts they wanted, and rivals would bid purposefully high price. This is a practice known as “Cover pricing”. Successful companies would often reward rivals with a secret payment for avoiding competition.

During the investigation, the OFT found 199 offences where the 103 companies artificially inflated £200m worth of work. Companies were fined a total of £129.5m by the OFT.

Price fixing in air travel – British Airways and Virgin 2004-06

In 2007, British Airways was fined £270m for illegal price-fixing arrangements with Virgin on long haul flights. The two companies met to agree and collude on the extra price of fuel surcharges in response to rising oil prices. Between 2004 and 2006, surcharges on air tickets rose from £5 to £60 per ticket. The £270m fine compares to an annual profit of £611m for BA.