Evidence of Oligopolistic Collusion

Case 7.5

Rip-off Britain

Evidence of oligopolistic collusion?

In recent years there have been repeated allegations that British consumers are paying much higher prices than their European counterparts on a wide range of goods. The car industry, the large supermarket chains and the banks have all been charged with 'ripping-off' the consumer. Such has been the level of concern, that all three industries were referred to the Competition Commission (see section 12.3) at the turn of the 21st century. In this case study we consider what has happened since then.

Car Industry

The clearest evidence of anti-competitive pricing behaviour in the UK car industry came with the admission by Volvo in July 1999 that it had entered secret agreements to keep British car prices high. This appeared to be just the tip of an iceberg, with car manufacturers fixing prices through the system of selective and exclusive distribution (SED). In other words, manufacturers would only supply through 'official' dealers who would sell at the list price (or at small agreed 'discounts').

When we consider the difference in price between identical models in Britain and mainland Europe the discrepancies were huge. The Competition Commission report published in April 2000, found that car buyers in Britain were paying on average some 10 to 12 per cent more than those in France, Germany and Italy for the same models For 58 of the 71 models analysed by the Commission, the UK price was at least 20 per cent higher than in the cheapest country. The Commission concluded that British car buyers were paying around 10 per cent too much for new cars, or some £1100 for an average car.

The price discrepancies between Britain and Europe were maintained by car manufacturers blocking cheaper European cars coming into the UK. Manufacturers were accused of adopting a number of anti-competitive practices. These include threatening mainland European car dealers with losing their dealership if they sell to British buyers, and delaying the delivery date of right-hand drive models to mainland European dealers in the hope that British buyers changes their mind and go back to a British dealership.

As the problem involved more than one EU country, the European Commission (EC) also examined the issue. It concluded that the motor vehicle manufacturers had agreements with distributors that were too restrictive. In 2002, the EC changed the 'Block Exemption' regulations governing the sector to allow distributors to set up in different countries and to sell multiple brands of car within their showrooms. Furthermore, distributors who are offered an exclusive 'sales territory' distribution agreement by car manufacturers are now allowed to resell cars to other distributors who are not part of the manufacturer's network. This should help to develop other sales outlets such as car supermarkets and Internet retailers. In addition, the regulation has opened up the repair and spare parts sector to more firms.

Changes in the regulations, and the addition of ten new member states in 2004 and another two in 2007, have made the car market more competitive by increasing the sources of supply. Slowly, prices of new car prices have been converging across the EU towards the lower-price markets.

But what about the UK? Since 2003 new car prices have fallen. In August 2005 new car prices fell by 0.5 per cent over the year, while general price inflation over the same period was 2 per cent. There is still scope for shopping around outside of the UK, however - 17 out of 81 models listed by the EC in August 2005 were at least 20 per cent higher than the average EU price.

Supermarkets

The Competition Commission enquiry into supermarkets, which began in April 1999, followed a nine-month investigation by the Office of Fair Trading into the major supermarket chains' business activities. The OFT identified three major areas of concern: the use of barriers to entry, the lack of effective price competition, and the relationship between the large supermarket chains and their suppliers.

The main issue concerns the major supermarket chains' huge buying and selling power. They have been able to drive costs down by forcing suppliers to offer discounts. Many suppliers, such as growers, have found their profit margins cut to the bone. However, these cost savings have not been passed on from supplier to shopper. The supermarket chains have adopted a system of 'shadow pricing', a form of tacit collusion whereby they all observe each other's prices and ensure that they remain at similar levels: often similarly high levels rather than similarly low levels! This has limited the extent of true price competition, and the resulting high prices have seen profits grow as costs have been driven ever downwards.

Since the OFT referral, the £6.7 billion take-over of Asda by Wal-Mart, the world's largest retailer, with a reputation of being a ruthless price cutter, promised to change the whole issue of pricing in the supermarket sector. Of the supermarket chains, Asda has always been one of the cheapest. With the Wal-Mart take-over, the drive to cut prices gained fresh momentum. Asda planned to slash prices on hundreds of products, with most seeing some price reduction.

Tesco in response, striving to maintain its position as the UK's number one supermarket retailer, launched its own price-cutting campaign. It was determined not to get left behind in the price cutting war.

Despite these apparent price wars, the Competition Commission was still concerned that competition was being restricted. It sought to answer a number of questions. Is price competition is limited to a relatively small number of frequently