The law restricts how business can work together
Competition relies on businesses making independent decisions. When businesses communicate and cooperate, this can weaken competition. For this reason, the law restricts how businesses can work together.
It is illegal for competitors to form a cartel by agreeing to:
- fix prices
- rig bids
- divide up markets
- restrict output.
The law also bans some other kinds of communication and cooperation between businesses. This is only when the activity
substantially lessens competition. This ban applies to:
Such contracts, arrangements, understandings and concerted practices often involve competitors. However, they can involve other parties such as:
- trade or professional associations.
Contracts, arrangements and understandings
contract, arrangement or understanding is formed when 2 or more businesses develop a shared plan of action. Reaching an understanding or making an arrangement doesn't need to be written down. These agreements are often not put down in writing and a ‘nod and wink’ can be enough.
When determining whether a contract, arrangement or understanding was formed, a court may look at the ‘meeting of minds’. This can include evidence of:
- joint action
- similar pricing structures, or
- communications between the parties to reach an understanding.
A concerted practice is communication or cooperation between 2 or more businesses. It is not quite a contract, arrangement or understanding. But it goes beyond businesses independently responding to market conditions.
A concerted practice involves sharing strategic commercial information. The businesses involved may, but won't always, have the same aim or behave in the same way.
See the Guidelines on concerted practices.
Example of a concerted practice
At an industry event, a bank gives its competitors early notice that it will be increasing its home loan interest rates by 0.25%. The bank’s competitors each decide to make similar changes to their home loan interest rates.
Noticing its competitors’ reactions, the bank continues sharing information about its interest rate intentions at industry events.
The behaviour of the bank and its competitors is a concerted practice.
Cooperation can be illegal
Contracts, arrangements, understandings and concerted practices that have the purpose, effect or likely effect of substantially lessening competition in a market are banned under the Competition and Consumer Act 2010. This is the case even if the behaviour doesn’t meet the stricter definition of a cartel.
Competition is more likely to be affected when competitors:
- exchange commercially sensitive information
- act, or plan to act, on that information.
Example of a concerted practice substantially lessening competition
An association of electricity meter manufacturers publishes a quarterly report on industry trends. The report uses data from a member survey. The data includes forecast sales, input costs and pricing intentions. Members use the report’s pricing forecast charts to plan and make pricing decisions.
This concerted practice could substantially lessen competition, breaking the law.
Similar behaviour isn’t always cooperation
Businesses can follow industry trends, observe what competitors do, and react in line with this. Businesses must make decisions independently, rather than in consultation or cooperation with competitors.
This is called parallel behaviour. It is not illegal if competitors are responding independently to market conditions. For example, a business may match a competitor’s lowered price to avoid losing customers.
Example of independent action by businesses
During a promotional period, an airline offers discounted flights on popular routes. These flights have strict change and cancellation policies.
The airline’s competitors notice this promotion. They independently respond with similar offers of their own.
This is not a concerted practice. This is the result of independent action by each airline rather than collaboration.