Summary
- UK businesses are free to set their own prices and reduce them in response to competitors, but the Competition Act prohibits price-fixing agreements between competing businesses, including agreements to match prices, avoid undercutting, or coordinate future pricing decisions.
- A cartel occurs when supposedly independent companies secretly act together to set higher prices, restrict competition, and harm consumers, and the CMA has demonstrated its willingness to impose fines of hundreds of thousands to millions of pounds and publicise findings against businesses found guilty of cartel activity.
- Businesses must exercise particular caution in trade association settings, as discussions about pricing strategies or industry standard pricing at meetings or networking events can constitute illegal price-fixing even without a formal written agreement.
- This article is a guide to competition law and pricing practices for businesses in the UK, explaining the difference between lawful competitive pricing and unlawful price-fixing or cartel behaviour under the Competition Act.
- LegalVision is a commercial law firm that specialises in advising clients on competition law and commercial regulatory compliance.
Tips for Businesses
Train staff to immediately leave any meeting where competitors begin discussing specific prices, pricing strategies, or future pricing intentions, and document that they did so. Ensure any data shared through trade associations is historical and aggregated rather than company-specific or forward-looking. Review your pricing practices and any industry body participation regularly to ensure they do not inadvertently cross into unlawful collusion under the Competition Act.
One of the most critical tasks for UK businesses is pricing their goods and services correctly. You will struggle to sell enough units if your price is too high. Conversely, if your price is too low, it will be challenging to profit. This struggle has led some UK businesses to conspire together concerning the price of their respective products and services. This article will explore the difference between competitive pricing practices and unlawful collusion within business cartels. This will allow your business to understand the line between setting profitable prices and falling foul of the UK Competition Act and the Competition and Markets Authority (CMA).
What is Safe to Do?
As per most free market economies, businesses have relatively free rein in setting prices for their goods and services. For example, one bookseller can sell a particular book for £9 whilst another sells it for £13. Both are absolutely fine. There can be various business reasons why different companies will sell the same thing for different amounts, such as:
- one bookstore may have much more stock of the book and wish to sell them quickly at a lower price;
- the other bookshop may only sell books below their Recommended Retail Price (RRP) after three months on the shelf; and
- one of the bookstores may set more competitive prices on their website than their physical retail premises (to encourage online sales).
Reducing Prices in Response to a Rival
Your business can reduce prices to be competitive with rival companies. Let us consider an example below.
There are two sandwich shops in a small town. They share equal business at lunchtime, and both make a decent profit.
However, one of the shops suddenly offers half-price sandwiches for the entire month of March. As a result, their business booms and the other sandwich store struggles to get enough customers. Accordingly, the struggling sandwich business may reduce its price in response.
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Limits On Pricing Methods
Whilst UK law allows businesses a good amount of flexibility in pricing, it draws the line at business cartels making price-fixing agreements.
Let us consider this by continuing our sandwich shop example from above. Both sandwich stores now offer half-price sandwiches and are struggling to make enough profit in the face of rising food prices.
They can raise their prices in response to the rising food prices independently of each other as long as they do not collude. The following events taken together could constitute collusion in the eyes of the Competition Markets Authority:
- the owners of the two sandwich shops in the town meet for lunch and discuss their struggles to make a decent profit since the sandwich price drop;
- they agree that both businesses will cancel the half-price sandwich offer and agree to match their prices for sandwiches, cakes and drinks by the following week; and
- they mutually agree to avoid future price deductions without consulting with the other first.
This is known as collusion or illegal price-fixing by the Competition and Markets Authority. This is because it means that the consumers in the town have no choice but to suffer the price increases and cannot rely on each shop to compete against each other effectively.
Example
Let us consider an example in the Competition and Markets Authority (CMA) case. In 2016, the CMA fined four water tank suppliers over £2.6m for breaches of UK competition law. In short, they found that the companies involved agreed to charge the same price for their boilers and not to undercut each other. This was alongside bid rigging amongst the cartel members (where they decided to submit pre-approved prices within the bidding processes).
The CMA correctly deemed this to be a cartel. A cartel is a group of supposedly independent companies who decide to secretly act like group companies by setting higher prices to benefit them all. UK law deems this unlawful as it is anti-consumer due to cartel practices limiting effective competition and keeping prices high through minimum prices.
This case demonstrates that the CMA is not shy about fining UK businesses hundreds of thousands or millions of pounds for cartel activity and publicising findings on its website. Naturally, each of the companies concerned suffered a huge reputational hit. In fact, one of the companies entered administration with the cartel investigation given as a reason for their swift demise.
The Risk of Inadvertent Price-Fixing Through Trade Associations
UK businesses must exercise caution when participating in trade associations and industry bodies, as seemingly innocent interactions can inadvertently cross into unlawful territory. Trade associations serve valuable purposes, such as lobbying for industry interests and sharing best practices. However, these gatherings create environments where competitors interact regularly, potentially leading to inappropriate discussions about pricing strategies.
The CMA has investigated numerous cases where trade association meetings became forums for price coordination. Even casual conversations about “industry standard pricing” or “recommended price ranges” during conferences, networking events, or committee meetings can constitute illegal price-fixing if they influence member companies’ pricing decisions. Minutes from trade association meetings are often scrutinised during CMA investigations, and businesses have faced penalties based on discussions recorded in seemingly routine meeting documentation. Your staff should be instructed to immediately leave any meeting where competitors begin discussing specific prices, pricing strategies, or future pricing intentions.
Furthermore, ensure that any benchmarking data or market research shared through trade associations is historical and aggregated. Particular pricing information or company-specific data shared amongst competitors can attract CMA scrutiny and potential enforcement action.
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Key Takeaways
The main takeaway from this article is that your business can set prices that reflect its interests and profitability. However, UK companies may be in trouble if they discuss their pricing strategies with other companies or secretly agree not to undercut the prices of competitor businesses. The CMA has demonstrated that they will thoroughly investigate apparent collusion or business cartels and, upon finding companies guilty of tacit collusion, will pursue hefty fines against them.
If you need help ensuring your business has a practical and lawful pricing strategy, LegalVision provides ongoing legal support for all businesses through our fixed-fee legal membership. Our experienced e-commerce and online business lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
UK law punishes this behaviour because it acknowledges that a free market economy gives certain companies (such as those in an industry with limited competition) an opportunity to rig bids and limit price changes.
There is rarely much in the way of written documentation or note-taking, as, naturally, business owners tend to try to meet discreetly. However, evidence may arise in telephone records, digital diary entries, or one of the individuals involved confessing to the relevant competition authorities.
A cartel is a group of supposedly independent companies secretly acting together by fixing higher prices to benefit themselves. UK law deems this unlawful as it limits effective competition and forces consumers to pay artificially inflated prices.
Yes, businesses can independently reduce prices to remain competitive. The key distinction is that price changes must be made independently, without any agreement, coordination, or communication with competing businesses about pricing strategies.
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