Let's talk law: Price fixing – should we care?

Individuals could face prison sentences of up to seven years for price fixing

Brought to you by Treadwell Gordon

You've got a sneaking suspicion that the two corner stores on your street have conspired to sell soft drink cans for a whopping $5 bucks a pop. It's extortionate - daylight robbery – but a price you ultimately pay on a sweltering summer's day. If you're thirsty, what choice have you got?

Is this price fixing? - an illegal activity in New Zealand. Potentially. It might also just be a coincidence. Or maybe it's a case of price leading and following, where one store matches a price set by another.

If it's a matter of price leading and following, no problem. Just because prices are the same doesn't mean competitors have reached an unlawful agreement. But, if the stores have agreed the price between themselves in advance, they could be in for trouble. That sort of price-fixing agreement is a form of strictly prohibited cartel conduct, subject to significant regulatory oversight.

This might not look like what you or most people think of as a "cartel". Where are the drug lords, heavy weapons, and piles of cash in smoke-filled rooms?
Though it may seem mundane, cartel behaviour - such as when businesses fix prices - can attract significant penalties.

Companies may be fined up to $10 million, and individuals $500,000. In April 2021 things are set to get even more risky for budding cartelists. Individuals could face prison sentences of up to seven years, the same penalty faced by those convicted of kidnapping, threatening to kill, and other unsavoury crimes.

At first thought, that may seem a bit severe. It's not as if someone has held a gun to your head and forced you to purchase that price-fixed product, nor has anyone kidnapped you and demanded you buy their soft drink.

But soda cans aside, price-fixing and other illegal cartel behaviour has a far-reaching and negative impact on all of our lives, especially when it comes to the sale and consumption of must-have goods and services, such as healthcare, pharmaceutical products and essential infrastructure.

It gets complicated, because in many cases it is not an end product or service per se that has been affected by pricing agreements. Rather, price-fixing usually occurs further up a manufacturing or supply chain, and the cost of this cartel activity to consumers isn't borne out until the goods or services are ultimately sold.

You can't build a house without timber, and you can't make a washing machine without washers. If the cost of wood or hardware that manufacturers need has been corrupted by price-fixing suppliers, the end-consumer will ultimately pay an unfair price.

In both of these instances, the initial sting of price-fixing is first felt by the middleman – like a building contractor or appliance retailer. In most cases the increased price of supply is passed down to consumers.

It may only manifest as a small portion of the total price paid for the end product; but, the ill-gotten gains accrued incrementally over time by cartelists can be immense, though inevitably hard to quantify.

Cartels are characteristically clandestine, difficult to find and root out. That's why cartels face such heavy penalties; to deter illegal conduct from occurring in the first place.

For companies and individuals engaged in cartels, the Commerce Commission offers leniency on a "first in, first served" basis. Cartels are destablised and illegal activities deterred by encouraging colluders to defect, in exchange for significantly reduced if not entirely waived penalties.

Sure, it can be tempting for business owners to collude, seeking out an easier lifestyle - free from fierce competition, or hoping to plump their margins for greater profits. But experience suggests that price fixing is not worth it.

The Commerce Commission has a relentless track record of securing penalties against New Zealand businesses. This includes livestock companies, regional and national real-estate agencies, and timber distributors, to name just a few.

We probably all agree that the hapless corner store owners do not deserve prison time for their Coke can conspiracy. But, for sophisticated businesses in cahoots with their competitors, intentionally lining their pockets with consumers' hard-earned cash – look out, the Commerce Commission will be watching you.

And, while it may take a long time before New Zealand's new criminal sanctions are put to use – in Australia it took more than eight years – the deterrent and destablising effect of potential imprisonment should rightly cause concern for would-be white-collar criminals.