A cartel exists when businesses agree to act together instead of competing with each other.
Cartels cheat consumers and other businesses. They restrict healthy economic growth, drive up prices and reduce innovation and investment.
- is made up of independent businesses
- attempts to increase members’ profits while maintaining the illusion of competition
- can involve businesses of any size, from small, local businesses to large corporations
- can be local, national or international.
Cartel conduct is illegal and is strictly prohibited. The laws about cartel conduct are in the Competition and Consumer Act 2010, which applies to all corporations in Australia, as well as individuals involved in the conduct.
If the businesses acting together are owned by the same company, this is not a cartel.
Types of cartel activity
There are 4 types of cartel activity.
Cartel activity is when 2 or more competitors agree to:
- fix prices - when competitors agree on pricing instead of competing against each other
- market share - when competitors agree to divide a market between themselves so they don’t have to compete
- control output - when competitors agree to limit the amount or type of goods and services available
- rig bids - when suppliers discuss and agree among themselves who should win a tender, and at what price.
Price fixing happens when competitors agree on pricing instead of competing against each other.
The agreement or understanding can be about:
- prices for selling or buying goods or services
- minimum prices
- a formula for pricing or discounting goods and services
- rebates, allowances or credit terms.
A common misconception
Sometimes, businesses independently change their prices to match their competitors’ prices.
This can create price changes that may look like price fixing. However, this is unlikely to be illegal as long as each business is making independent decisions about its prices.
Price fixing agreements may be formal or informal. They may be written, verbal, or just a signal, like a ‘wink and a nod’.
Signs of possible price fixing include:
- tenders or quotes are all much higher than expected
- all suppliers raise prices at the same time and by more than what seems reasonable or can be explained by changes in the cost of inputs
- prices submitted are much higher than previous tenders for similar products or services
- prices drop markedly after a new supplier tenders. This may indicate that the existing suppliers have been colluding and the new supplier has forced them to compete.
Example of price fixing
A group of local builders decides to start meeting regularly at the pub. At their first meeting, they agree to increase their hourly rates to a certain amount for a trial period.
This is price fixing.
Market sharing happens when competitors agree to divide a
market between themselves so they don’t have to compete. They may agree to:
- avoid producing each others’ goods or services
- serve different geographical areas
- divide contracts by value
- assign customers to each competitor, with an understanding not to win each other’s customers.
Bid rigging, also known as collusive tendering, happens when suppliers discuss and agree among themselves who should win a tender, and at what price.
They may decide to take turns at winning tenders, giving each cartel member an agreed share of business. They may agree on a reward for the losing businesses, such as a guaranteed subcontracting role or a compensation payment.
To make sure that the agreed bidder wins, other cartel members may:
- not bid at all
- bid above an agreed amount
- include terms and conditions that they know the client won’t accept
- withdraw a winning bid.
Signs of possible bid rigging include:
- regular suppliers decline to tender, for no obvious reason
- bidders include unacceptable terms in their tenders
- bidders sometimes bid low and sometimes bid high on the same type of product or service
- the winning firm regularly subcontracts to competitors that submitted higher bids
- one firm of professional advisers represents several of the businesses submitting tenders.
Example of bid rigging
Four foreign companies that supply rubber hosing agree to create a committee to allocate contracts in Australia. Each company appoints a member to the committee, which coordinates bidding and quoting. To hide its activity, the cartel uses codes, such as referring to the chosen winner as the ‘champion’.
This is bid rigging and market sharing. Even though the cartel is made up of foreign companies meeting overseas, it can be prosecuted in Australia.
Output restrictions happen when competitors agree to limit the amount or type of goods and services available. They do this to increase prices or stop them falling.
Businesses can independently reduce their output in response to demand, but it is illegal for competitors to agree to restrict output.
Protect your business from cartel activity
Businesses should take care to protect themselves from cartel activity among suppliers.
Businesses should also be careful not to be drawn into a cartel.
- Avoid speaking to your competitors about customers and pricing, including bids for projects.
- Never agree or even try to agree with a competing business on the prices you or they will charge or what discounts will be offered including in tenders or quotes for jobs.
- Never limit the goods or services you or they supply or allocate customers or geographic areas.
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