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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.
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, our experienced e-commerce and online business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 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 and meet discreetly. However, evidence may arise in telephone records, digital diary entries, or one of the individuals involved confessing to the relevant competition authorities.
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