Watchdog warns: do not talk price with competitors

By Brian Fallow

WELLINGTON - Hefty penalties imposed by the High Court recently in a case of price-fixing in the animal remedies industry carry a strong warning about how seriously the courts treat such anti-competitive behaviour, says Commerce Commission acting chairman Mark Berry.

Elanco was fined $500,000 and Chemstock $200,000 after the two companies admitted a price-fixing and market carve-up agreement over cattle growth promotants and anti-bloat treatments.

Elanco, the trading name of Eli Lilly & Co's animal remedies business, is a manufacturer and wholesaler and Chemstock Animal Health a wholesaler.

Mr Berry said they had agreed they would not compete for customers, Elanco keeping the larger veterinary practices and Chemstock the smaller. The agreement involved both companies knowing the minimum prices Elanco would offer smaller vets.

Elanco also tried to involve two other wholesalers in similar arrangements, but they refused, Mr Berry said.

The commission's Commerce Act manager, Geoff Thorn, said one aspect of the case that may have caused confusion was that Chemstock bought the product from Elanco.

"The agreement on prices may have been confused by the fact that Elanco was dealing with a customer and may have thought they could do that. The fact that Chemstock was also competing with them brought them within the price-fixing part of the act."

The $700,000 penalty was the second highest imposed by the courts in a price-fixing case, after the $5.5 million imposed against nine North Island meat companies, including $1.5 million each against Affco, Richmond and Lowe Walker.

Other notable penalties included $400,000 against Christchurch Transport and its chief executive for attempting to rig bids for contracts, and $150,000 each against Country Fare Bakeries and Quality Bakers over an arrangement on discounts.

It reflected a trend towards higher penalties by the courts, Mr Berry said, and with the statutory maximum $5 million, there was plenty of room for that trend to continue.

Setting penalties was an area in which the courts had wide discretion, but they were guided by such factors as the level of the illegal gain, the size of the companies concerned, and the importance of the markets and, thus, the magnitude of the wider economic effects. In the Elanco case the effects flowed through - via vets - to the dairy industry, New Zealand's single largest export industry.

"What is concerning to the commission is that this [price-fixing] is still happening with some degree of regularity," Mr Berry said.

"Many of the companies involved are significant companies who frankly should have a better grasp of the act than their conduct might suggest."

Rule number one, he said, was: "Don't talk to your competitors about price."

Mr Thorn said price-fixing often occurred at industry meetings. "While there are good reasons for an industry to get together to talk about generic industry issues, as soon as they start talking about prices, people should leave."

Price-fixing could be difficult to prove. In the Elanco case the execution of search warrants found documents bearing out what an informant had told the commission.

Mr Thorn said the sort of thing that aroused the commission's suspicions were cases where prices appeared to move at the same time, by the same margin and not in circumstances where one could easily argue it was price-following.

"Those sorts of circumstances naturally arouse our interest. But, on occasions, it proves very difficult to show that there has been an arrangement or a meeting of minds." Much painstaking work was required.

Price-fixing was more likely to occur in industries where market shares were highly concentrated in the hands of a few companies.

Such industries also lent themselves to "tacit collusion" where there was no direct communication between competitors which could constitute an anti-competitive arrangement, but rather a situation where a firm unilaterally raised its price in the expectation that its competitor was more likely to follow suit than to chase a larger market share by undercutting it.

The problem of tacit collusion was raised by a recent consultation document on the Commerce Act competition thresholds issued by the Ministry of Commence. It did not, however, propose any change to the behavioural provisions of the act, only to the structural ones: suggesting that in considering whether to permit a merger or acquisition the Commerce Commission should consider whether the resulting industry structure would be conducive to collusion, either explicit or tacit.