Informed Cooperation Fuels Consumer Harm?

ACCC v Informed Sources (Australia) Pty Ltd & Ors VID450/2014

In August this year the ACCC launched Federal Court proceedings against retail petrol suppliers. The case is an important test of the application of Australia’s competition laws to ‘tacit collusion’. The ACCC has to date had minimal success in this area.

The proceedings

On 19 August 2014 the ACCC launched proceedings in the Federal Court against a small Queensland company alleging the sin of supplying information to its customers. That company is Informed Sources (Australia) Pty Ltd. Informed Sources sells real-time retail petrol price information for any region of Australia. In this era of fast computing, ‘real-time’ price information means exactly that. Informed Sources’ main customers are Australia’s handful of petrol suppliers (BP, Caltex, etc.) and large petrol retailers (7-Eleven, Woolworths, etc.). These customers are additional respondents to the proceedings.

The ACCC’s action is based on s 45 of the Competition and Consumer Act 2010, which prohibits a corporation from making or giving effect to an ‘arrangement’ that contains a provision that has the purpose or would likely have the effect of substantially lessening competition in a market. The ACCC’s case focuses on the Melbourne region.

The ACCC’s case boils down to this: Informed Sources are supplying real-time market data to ‘oligopolistic’ firms in a repeated interaction scenario, enabling them to monitor and self-enforce a (tacit) collusive market outcome.

Oligopoly and tacit collusion

‘Oligopoly’ is the economist’s term for a market with only a few firms as suppliers. The fewer the firms supplying a market, the easier it is for them to ‘collude’; that is, to agree to coordinate the restriction of their respective firm’s output in order to keep the market price high (because market supply is reduced). The secret to successful collusion is the binding of all participating firms to the agreed coordination regime. Binding all firms via contract is prohibited under general law and the Competition and Consumer Act 2010. Binding via self-enforcement is difficult because, while all firms benefit from the higher (collusive) market price, any one firm benefits even more by ‘cheating’ on the coordination regime. Cheating means not sticking to the deal to restrict a firm’s output. Something more is needed to bind participating firms and so maintain a (tacit) collusive price: repeated interaction combined with information exchange.

Repeated interaction

Repeated interaction enables other firms to ‘punish’ the cheating firm. Punishment means a ‘price war’ – if a firm cheats by increasing its output, then the remaining participating firms can increase their respective outputs also for a period of time. This leads to the market price collapsing, wiping out everyone’s profits (and possibly even causing losses). Eventually, all firms – including the cheater – realize that it is better to return to the coordination regime.

In economics this is known as ‘tacit’ collusion – tacit, because it does not require management secretly to meet in ‘smoke-filled rooms’ in order to maintain the coordination regime.

Information exchange

Information exchange enables punishment – if other firms are not able to tell when a firm is cheating, the collusive outcome is not maintainable.

Repeated game theory

 ‘Repeated game theory’ is used to model tacit collusion in economics. This theory took off in the 1980s and is now sophisticated. That theory tells us that, the harder it is for firms to be able to detect cheating, the more often you should see price wars in that market. If the data show a stable market price over time, with only rare outbreaks of price wars, then only one of two conclusions is permissible – either the market price is the (oligopolistic) competitive price (since stable parallel pricing is wholly compatible with firms independently pricing: ACCC v Leahy [2007] FCA 794), or else the market price is the collusive price (and somehow, participating firms in the market have access to a near-perfect means of detecting cheating).

Tacit collusion and ‘arrangements’ at law

The ‘gap’ between the decades-long economists’ understanding of the competitive harm of tacit collusion and the law’s requirement that even an ‘arrangement or understanding’ involve a ‘meeting of minds’ has led competition authorities to focus on the ‘facilitating practice’ of information sharing as the sin, rather than that which information sharing facilitates, namely, the real sin of (tacit) collusive pricing. Recent legal literature in the US now urges a more direct focus in litigation: Louis Kaplow – Competition Policy and Price Fixing (2013), Princeton University Press. The ACCC’s test case is not so bold. It focuses on the ‘arrangement’ of the network of contracts, with Informed Sources as the ‘hub’, and the petrol suppliers and retailers as the ‘spokes’.

Tacit collusion and a substantial lessening of competition

The ACCC must show that this ‘arrangement’ contains a provision which has the purpose or likely effect of substantially lessening competition. But in this context substantially lessening competition must mean tacit collusive pricing. Informed Sources is just the wax that holds the collusive threads together.

Given that Informed Sources has been supplying its service for many years, either there have been periods in the past of tacit collusion, or there have not been. Whilst it is possible that the case will revolve entirely around lay evidence (the ‘smoking gun’), expert evidence for either side which shows either a period of sustained tacit collusion in the past or else its complete absence in the past could be decisive. Various empirical techniques can be employed by experts to determine whether the actual market price in Melbourne in any past period was sustainably higher than the competitive oligopolistic market price. As often happens in competition cases, a ‘battle of the experts’ could play an important role in the trial.

The trial is expected to take place sometime in 2015 before Murphy J.

Richard Scheelings – CommBar profile

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