Price signalling and the Competition and Consumer Act

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I have been involved in a couple of workshops on the ‘price signalling’ amendments to the Competition and Consumer Act (CCA). The Bill is available here. My comments are below.

Who is subject to the amendments?

The new provisions will initially apply only to the banking industry. As the second reading speech notes:

Today I introduce amendments to the Competition and Consumer Act 2010 to crack down on anti-competitive price signalling and to get a better deal for consumers in the banking system.

So it appears that concerns about the banking sector are driving the reforms.

But the amendments are quite general. They refer to a type of behaviour which is considered undesirable. The laws can be extended to other sectors and in my opinion, it would have been better if they started as general laws rather than sector specific laws. After all, either ‘price signalling’ is the type of behaviour that we want to make unlawful in our economy or it isn’t. It makes no sense to say it is ‘bad’ in banking but not ‘bad’ elsewhere. Nor is it obvious that there is more price signalling in banking at present than elsewhere in the economy.

So the first problem with the amendments is that they apply to only one part of our economy. They either should apply to all markets or not at all.

But is there an economic problem that needs addressing?

In concentrated industries where businesses interact repeatedly with each other over time, tacit collusion is a possibility. Tacit collusion can lead to higher prices and a reduction in economic welfare. It can arise in a myriad of ways. For example, it can arise simply by firms ‘signalling’ each other through public statements or through a pattern of pricing. It is likely to be easier to tacitly collude if businesses can privately communicate with each other.

It is called tacit collusion because the conduct falls short of the contract, arrangement or understanding that is required under our current laws against collusion.

So are our current laws so narrow that there is a big problem of tacit collusion that needs to be addressed? Clearly those who drafted the price signalling amendments think so. Both the Explanatory Memorandum and the Regulation Impact Statement refer to the current laws and highlight the deficiency in the need to show a ‘mutual’ arrangement or understanding.  The new laws focus on ‘disclosure’ that can be unilateral. As the Explanatory memorandum notes:

‘Disclosure’ is defined as a unilateral communication; no degree of reciprocity or mutuality is required for there to be a disclosure.

I agree that the current laws, as interpreted by the Courts, do not cover a lot of tacit collusion. Personally, I would have liked to see our laws tested further – but that is easy to say when I am not the regulator taking these matters to court. Also, if there is a problem with the current legal interpretation of ‘contract, arrangement or understanding’ I would have liked to see that tackled directly. However, I am happy to agree that there is a gap that might need fixing.

Is the gap in the current law a problem?

Is there wide evidence of tacit collusion being a problem in the Australian economy? I am not sure that the evidence is there – particularly in banking. The ACCC inquiries into petrol and groceries found some issues in the former but few problems in the latter (I was a Commissioner on both of these inquiries). But there has not been an inquiry into tacit collusion in banking – and the law is written for banking.

So the second problem with the amendments – they risk being a solution in search of a problem.

Private price disclosure

Let’s assume that there is a problem with tacit collusion and we would like it fixed by a new amendment to the CCA. How do the current amendments stack up?

The amendments consider two distinct and different forms of behaviour: private disclosure of price information and ‘general’ disclosure. Let’s look at these in turn.

Private disclosure to competitors (either direct or via an intermediary) of price related information is per se illegal. It is illegal even if the information is otherwise available.

So if businesses communicate price information to each other in a way that is not also available to the public, they have committed an offence. Now this is pretty strong, but over all I think this bit of the Bill is well worded and focuses on a potential problem.

Tacit collusion is easier if businesses can exchange price information and respond to each other through direct communication. For example, suppose two businesses, A and B, are competing and business A wants to push prices up. To do this, A starts by raising his price. A wants B to follow. But A doesn’t know if B has seen the price rise. If B does not follow A’s price up immediately, is it because B is not ‘playing along’ or that B has not noticed the price rise? Should A cut his price, perhaps to below the initial level, to ‘punish’ B for not following the price rise or not? It is easier for A to interpret B’s actions if business A knows that business B has seen the price change – for example, because A has directly told B of the price change.

The rules against private price disclosure tackle this issue directly. A per se offence is strong, but the amendments allow for legitimate exceptions to be ‘notified’ or ‘authorised’.

Overall, in many industries, banning private price disclosure is unlikely to raise problems. For example, in petrol retailing, I cannot see any legitimate reason why retailers should privately disclose their prices to each other in a way that is not also available to the public. The same would hold in grocery retailing – and indeed in most areas of retailing. Part of the reason is that the retailers generally don’t need to ‘work together’ and prices are not customer specific.

But the laws only apply to banking. And bank prices (e.g. terms and conditions of contracts) are often customer specific and banks do work together, particularly for large loans underwriting major projects. These activities may or may not be exempt as ‘joint ventures’. But it is not clear.

So the third problem with the amendments: The private price disclosure provisions have a sensible economic base, but it is far from clear that banking is the place for them to start.

General disclosures

General disclosures are broader and are not a per se offence. Under s.44ZZX.1 of the amendments:

A corporation must not make a disclosure of information if:

(a) the information relates to one or more of the following (whether or not it also relates to other matters):

(i) a price for, or a discount, allowance, rebate or credit in relation to, Division 1A goods or services supplied or likely to be supplied, or acquired or likely to be acquired, by the corporation;

(ii) the capacity, or likely capacity, of the corporation to supply or acquire Division 1A goods or services;

(iii) any aspect of the commercial strategy of the corporation that relates to Division 1A goods or services; and

(b) the corporation makes the disclosure for the purpose of substantially lessening competition in a market.

The actions caught here are much broader. Indeed, pretty much anything could relate to ‘commercial strategy’ and be caught by the provision. However, to successfully prosecute the ACCC would need to show that the disclosure is for the purpose of substantially lessening competition.

That is a big hurdle.

That is a really, really big hurdle.

Indeed, in the absence of a ‘smoking gun document’ or a degree of interaction between competitors that is so obvious that it is probably a ‘contract, arrangement or understanding’, it is unclear that it will ever be possible to prove purpose.

Of course, the hurdle needs to be large. Public disclosures are the very nature of competition. There is no point discounting if I can’t tell my customers. There is no point putting on a new range of products if I can’t announce this strategy to my customers.

But this is the problem with the general disclosure rules. They want to stop ‘bad’ disclosures while not hurting ‘good’ disclosures. But it is often impossible to tell the difference. For example, business A announces a price rise. Is this an illegal disclosure aimed at getting business B to raise her prices or is it simply informing customers? Business B follows by announcing that she will raise her prices as well. Is this simply unilateral profit maximizing behaviour (if my rival’s price goes up then of course it pays me to also raise my price) or ‘something more’ such as tacit collusion?

A ‘substantial lessening of competition’ requirement is needed to avoid the laws becoming anti-competitive. But it also sets a hurdle for prosecution that will rarely be jumped.

So the fourth problem with the amendments: the general disclosure laws are not well thought out and have not isolated anti-competitive behaviour. At best they will be ineffective. At worst, they could prevent legitimate competition and be harmful.

Overall

In summary, the new amendments are a mix of good (private disclosure ban) and unworkable (general disclosures). They apply only to banking – and that makes no sense at all.

One Response to "Price signalling and the Competition and Consumer Act"
  1. Perhaps the general disclosure rules should apply only to price rises.  It may apply where there is a pattern of attempts to lead the market to a higher price level.  For example, publicly announcing a price rise, then quietly dropping the price if no one follows; try again, and again. 

    That said, I agree it is hard to prove.  Then again, if I were giving competition law advise, I would tell a firm wanting to be prudent to increase its price only if it is sure the price increase can be sustained if no one else follows the price rise.  I’ll let the economist debate whether following this rule would be socially beneficial.

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