Metropol

http://news.bbc.co.uk/1/hi/business/7366348.stm

The Office of Fair Trading has alleged tobacco firms and supermarkets have been engaged in unlawful practices linked to retail prices for tobacco. The OFT names 11 retailers, including Asda, Sainsbury and Tesco, and tobacco firms Imperial Tobacco and Gallaher.

One allegation is that retailers and tobacco groups arranged to swap information on future pricing. A separate allegation is that there was an understanding that the price of some brands would be linked to rival brands.

The OFT said understandings between cigarette companies and retailers between 2000 and 2003 limited the retailers' ability "to determine its selling price independently". In the case of Gallaher, Imperial Tobacco, Asda, Sainsbury, Shell, Somerfield and Tesco, there was an indirect exchange of proposed future retail prices between competitors, it adds, allegedly between 2001 and 2003.

"This is not about price fixing," an OFT spokeswoman said. "This is about retail price co-ordination, which is also illegal". "We have information that manufacturers and retailers were indirectly exchanging information about future prices."

In a statement, Imperial Tobacco said it "takes compliance with competition law very seriously and rejects any suggestion that it has acted in any way contrary to the interests of consumers".

The OFT has been building up its case in secret for five years and refuses to say whether it has been helped by a whistleblower, the BBC's business editor Robert Peston said.

Even now, the OFT says there should be no assumption that any of the named companies have broken the law. But if they are found to have done so, they could be fined up to 10% of annual turnover - or tens of millions of pounds.

"For markets to work well for consumers, it is a fundamental principle that pricing decisions should be made independently," said OFT chief executive John Fingleton. "If we find evidence of anti-competitive activity, we are prepared to use the appropriate powers to punish the companies involved and to deter other businesses from taking part in such behaviour," he added.

"If proven, the alleged practices would amount to a serious breach of the law."

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So - a cigarette Cartel, eh?

It will be interesting to see how this is carried in the media. Unhealthy/socially unpleasant or not, no-one should be held to ransom over price - ESPECIALLY on a product known to be highly addictive. I know I need to give up, but I'm really, really struggling. The cost of 20 is eye-watering (before the smoke even gets in your eye).

This is possibly the most outrageous story I've read in a long time.

Ooooh. Fascinating. It'll be interesting to see what evidence the OFT has. Issues of collusion are generally difficult to prove, because simply observing prices of competing products moving in line with one another does not conclusively indicate price fixing. More specific to this case, the OFT seems to be arguing 'retail price co-ordination' rather than direct price fixing. Now, I'm not sure how British law actually specifies this particular term - it's not one I'm familiar with in terms of Australian trade practices. My understanding here is that there is nothing illegal per se in companies sharing proposed future prices with one another - that isn't considered anti-competitive, even if it is highly suspect behaviour (after all, why would rivals be willing to tell one another about what prices they intend to charge?). In any event, I suspect that in order to prove some form of collusion, there would need to be some evidence that the information being shared was being used to co-ordinate prices, with all parties operating on that understanding, with the intent of lessening price competition.

If these allegations are true, what is interesting here is that the cartel is not just at one level (ie. retail only), but in fact involves retailers and manufacturers. At first glance, it's not clear to me how such an arrangement would have been beneficial to the cigarette producers. Furthermore, the fact that there are so many players involved - 11 separate retailers in particular - is surprising. Normally we tend to assume cartels are inherently unstable. Firms might agree to set prices, but in doing so, they will likely fix their market shares as well. However, if firms see a way to increase their market share, their natural tendency will be to take it. Thus the more firms involved, the more unstable the cartel is likely to be. The fact that the OFT has been secretly investigating this for 5 years suggests that any cartel here is very stable.

That having been said, obviously cigarettes are just one product sold by those retailers, and they also tend to be an item that consumers will buy where it is most convenient at any given time. After all, smokers won't always go to, say, Morrisons to buy their cigarettes. If they run out and they're near a Sainsbury's, they'll pop in there instead (all else being equal). To this end, retailers are unlikely to gain much by competing on price, unless the price difference in substantial. Given that we are talking about 11 different retailers involved in this action specifically, competing with a bunch of other smaller retailers in addition, it's unlikely that such significant price differences would emerge anyway. To this end, collusion might be more sustainable.

The one thing that I can't escape is the idea that if 11 different retailers can collude on cigarette prices (assuming this is in fact what has happened - we'll have to wait and see), what else might they be able to co-ordinate prices on? This could have wide-reaching ramifications, and give food for thought for competition regulators around the world.

It does seem as though the OFT are starting to show promising signs of being an effective regulator, with the probe into price fixing of dairy products and now fags.

But I really, honestly believe it's the tip of the iceberg. I think the "Big 4" supermarkets have conspired for years to fix prices on masses of products. Look at the way all the prices are pegged right across the board on everything in the Value/Basics/Smartprice ranges (with the occasional exception of Morrisons who sometimes charge a few pence more for theirs). And when these prices fluctuate, they do so by exactly the same amount on exactly the same day across all the supermarkets.

Look at the way the litre bricks of cheapo pure orange juice suddenly leapt from 35p to 57p. I'm not denying that there was a rise in the wholesale price of oranges which caused this, but it was the way they implemented the rise which was so suspicious. It wasn't a case of 1 of the Big 4 putting up their price and the other 3 following suit - it was a case of all 4 doing it in perfect unison on the same day. This could only have been achieved by all 4 speaking to each other in advance, and agreeing to the same rise on the same day.

Same goes for hundreds of other products.

I do often think that BOGOF special offers and incentives like Clubcard are just "window dressing" to create an illusion that the Big 4 supermarkets are very different to each other, when in reality there's very little to separate them on price.

It's a massive job now for the OFT to take on the combined legal weight of the 4 giants, and that's why they're picking such narrow remits for their probes - e.g. cigarette sales within a specified three-year period - because even with the best will in the world, they just don't have the resources to look at the more general issue of price fixing right across the board.

The big main supermarkets have been grown into such powerful monsters that even the government finds it a daunting struggle to take them on.

I don't understand: a) why it matters, and b) how it is beneficial to the supermarkets to do this.

all new Phil wrote:I don't understand: a) why it matters, and b) how it is beneficial to the supermarkets to do this.

Oh - easy. It matters because it should be expected that price co-ordination should lead to consumers paying more. This, of course, is why it is notionally beneficial to the supermarkets.

When firms operate in a competitive market, they drive prices down (all else being equal). Yet firms don't actually like lower prices. They would much rather face less competition so they can charge higher prices and make profits. If they exist in a market with a few different competitors, they might seek to 'collude' - that is, the firms co-ordinate their offerings in some way, usually with respect of price. Assuming each firm plays by the rules established in the collusion (which won't always happen as there are often incentives to cheat), consumers end up paying more. Hence many countries have competition laws which prohibit such conduct.

Don't you just love Game Theory!

Ever heard of contraband. I get about 200 for about 30 squid. Oh how i hate living a spit away from the continent.

Lorns wrote:Ever heard of contraband. I get about 200 for about 30 squid. Oh how i hate living a spit away from the continent.

I think it's shocking how blackmarket prices have gone up. Why don't they include that in the RPI?

StuartPlymouth wrote:

Lorns wrote:Ever heard of contraband. I get about 200 for about 30 squid. Oh how i hate living a spit away from the continent.

I think it's shocking how blackmarket prices have gone up. Why don't they include that in the RPI?

Well, this isn't Italy - the black market doesn't normally get included in key economic indicators!

Mr Q wrote:Well, this isn't Italy - the black market doesn't normally get included in key economic indicators!

...and in the UK neither do normal food items, mortage/rent rates or energy supplies (currently 10-70%). Of course, they don't count.

Apparently the cost of strawberries used to be on the list - a must for every family each week!

StuartPlymouth wrote:

Mr Q wrote:Well, this isn't Italy - the black market doesn't normally get included in key economic indicators!

...and in the UK neither do normal food items, mortage/rent rates or energy supplies (currently 10-70%). Of course, they don't count.

Apparently the cost of strawberries used to be on the list - a must for every family each week!

Well that's somewhat different. Any index focussing on the price faced by end-users (that is, consumers) should avoid including intermediate inputs. The problem, for instance, with energy costs is that they feed directly into production and transportation costs. If the direct effects of changes in oil prices were fully weighted in the index then you would inevitably see double counting.

The other issue is that the 'basket of goods' that is measured for the index is taken to represent the average household. This means that it doesn't take into account distributional implications. Of course, the mix of goods and services being consumed by high income households is likely to be quite different from low income households. Thus different people experience 'inflation' in different ways. Currently we're observing high energy costs and food prices - these are likely to impact low income earners more, as they will be spending a greater proportion of their income on these essentially non-discretionary items.