IMPACT OF PRICE FIXING ONCOMMUNITIES NANDI MOKOENA: COMPETITION COMMISSION, SOUTH AFRICA

OUTLINE  WHAT IS PRICE FIXING?  THE COMMISSION’S MANDATE  MAJOR CARTELS UNCOVERED BY THE COMMISSION  IMPACT OF COMMISSION’S INVESTIGATIONS

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?  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 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 MANDATE THE 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 MANDATE THE 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 UNCOVERED MAJOR 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: BREAD MAJOR 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: BREAD MAJOR 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: BREAD MAJOR 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

 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: 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: 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

 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: 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 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  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