COLLUSION
COLLUSION
What Is Collusion
Collusion refers to an agreement or a concerted practice between two or more competitors to achieve a supracompetitive outcome. Acts of collusion include price fixing, market sharing, output restrictions, synchronized advertising and sharing insider information. The agreement or concerted practice can be explicit and well-organised structure where main decisions are taken at a central office (written or verbal communication between the competitors on the terms and conditions). It can be tacit, where firms never meet to set prices or exchange sensitive information (agreements formed by conduct or non-explicit verbalised communications between competitors), an example being price leadership, where competitors, without meeting, raise prices without justification to follow prices set by the market leader.
Prohibition of Collusive Arrangements Between Competitors
Paragraph 7 (1) of the First Schedule of the Competition Act [Chapter 14:28] (the Act) defines collusive arrangements between competitors as follows: –
“(1) Being a producer or distributor of any class or type of commodity or service, entering into or giving effect to any agreement, arrangement or understanding, whether enforceable or not, with another person who produces or distributes a commodity or service of the same or a similar class or type—
(a) to distribute the commodity or service at a particular price or within a particular range of prices; or
(b) to share the market for the commodity or service, whether the market shares are divided according to geographical area, class of consumer or otherwise; or
(c) to limit, by number or quantity, the commodities or services produced or distributed”.
The provision does not however apply where the agreement, arrangement or understanding is between companies which are all part of a single group of companies; or intended solely to improve standards of quality or service regarding the production or distribution of the commodity or service concerned. In terms of Section 42(3) of the Act, collusion is a criminal offence and any person who enters into, engages in or otherwise gives effect to such conduct, shall be guilty of an offence and shall be liable to a fine or imprisonment or to both such fine and imprisonment in the case of an individual, and to a fine not exceeding level fourteen in any other case.
Market Conditions That Can Facilitate Collusion
Collusion is generally highly secretive and evidence of its existence is not easy to find. Competition
authorities are always on the lookout for collusion where the following market conditions exist: –
· high market concentration levels – other things being equal, collusion is more likely with a smaller number of firms in the industry;
· high entry barriers – the easier it is to enter into an industry is (lower entry barriers) the more difficult it becomes to sustain collusive prices because new entrants into the industry tend to disrupt the collusive outcomes;
· where there is cross-ownership and other links among competitors such as cross-directorship, the scope for coodinating prices and marketing policies is enhanced; and
· buyer power – ability to sustain collusive prices in a given industry depends on the degree of concentration of the buyers. A strong buyer can use its bargaining power to stimulate competition among sellers by either threatening to withdraw orders from the current supplier and give to others, or threatening to start upstream production for itself.
Anti-competitive Effects of Collusion
Competition leads to lower prices and more choice for consumers. It inspires better quality products and services. A conspiracy meant to eliminate or reduce rivalry by manipulating prices, quantities, product features, innovation, or other market conditions, thus benefits the colluders at the expense of consumer welfare. The general effects of collusion are given below: –
· it artificially restricts competition and increases prices of goods and services, thereby reducing consumer welfare,
· collusion reduces competitors’ incentives to provide new or better products and services at competitive prices,
· consumers or other businesses end up paying more for less quality,
· collusion can act as a barrier to entry into a market by new firms,
· easy profits from collusion can make firms reluctant and avoid innovation and efforts to increase productivity which affects the consumer’s freedom of choice,
· industry bears disadvantages of monopolies (higher prices) but less of the advantages (e.g. economies of scale), and
· collusive practices allow firms to gain and exert market power they would not otherwise have and leads to gaining of unfair market advantage at the expense of consumers and other competitors.
For more information, guidance or to report unfair trade practice or surge in imports, Zimbabwean industries can contact the undersigned:
The Director
Competition and Tariff Commission
23 Broadlands Road
Emerald Hill
Tel +263 864413 7945, +263 242 853127-31
Website: www.competition.co.zw