Will new stricter 'cartel' laws undermine buying groups and franchising territories, adding to NZ's struggles to deliver savings to consumers? Or as Duncan Webb says, deter deceptive, immoral behaviour

Will new stricter 'cartel' laws undermine buying groups and franchising territories, adding to NZ's struggles to deliver savings to consumers? Or as Duncan Webb says, deter deceptive, immoral behaviour

By Duncan Webb*

Cartels are a conundrum.

At one extreme they can amount to an outright fraud. At the other they appear to be a sensible co-operative arrangement between people in the same industry. A cartel is simply a particular arrangement between competitors with an intention of increasing profits. This could be by allocating parts of a market, restricting outputs, or simply agreeing prices. 

If we see an agreement between big business to move prices upwards together, or to divide up the country and not compete with each other it is deeply wrong.  It’s not just some cheeky business shenanigans, it is defrauding the ordinary folk of wealth.  The fact that many millions of dollars is stolen a penny at a time does not reduce the size and seriousness of the wrong.

Acceptable collusion?

However there will be cases where a degree of collusion does not have the same moral taint.  A bunch of small-time builders clubbing together to jointly negotiate the lowest price at which they buy timber from sawmills seems intuitively acceptable; a drape franchise that divides up a city into exclusive areas for their van-based sellers seems sensible.

There is a gulf of difference between a cabal of billionaires in a smoke-filled room calculating how to strip profits from the public and a group of hardworking businesspeople looking for efficiencies so they can each make a decent living. However distinctions need to be made between a crime on one hand and a mere regulatory wrong.

The challenge for the legislator is to devise a rule which singles out and deters morally shocking conduct, while not chilling the innocent and innovative co-operative arrangements that exist.

No-one would suggest that there should not be criminal sanction for the most egregious conduct - where the wrongdoer knows the rules, and intentionally breaches them.  If there is a clear intent to dishonestly collaborate to create a market which is unfair and which directs funds illegitimately to the business owners and away for the consumer this should be criminal.  Indeed a community consensus on the moral obliquity of this conduct is important to have the social license to impose criminal sanctions.

The present situation

The current regulatory penalties can indeed be significant – however alone they are not sufficient for a number of reasons.  An effective cartel can be an economically justifiable business decision even though a penalty would be large – especially where the chance of detection is low and the profits high.  A penalty (including a fine) can be seen as little more than a contingent tax on the activity.

Where the conduct is criminalised the “costs” can be non-financial (such as imprisonment). Even a fine in the criminal context must be borne personally (rather than by the company) and therefore the deterrence is far more effective.  While financial penalties can be indemnified (whether overtly or covertly) imprisonment is personal. The stigma attached to individual criminal liability (and the taint on future opportunities it causes) is also relevant.  Perhaps unsurprisingly therefore a cost-benefit-analysis tends to break down for so-called respectable business people when the cost is a stint inside.

Why then are some parties crying foul at the proposal to make such conduct criminal under the Commerce (Criminalisation of Cartels) Bill currently being considered by Parliament?  I want to address some of those reasons and respond to them.

Over-deterrance

The most common objection is that criminalising cartels will have a “chilling effect” on pro-competitive conduct – especially given the small and isolated nature of the New Zealand economy.

This is sometimes referred to as over-deterrence. It is important to get the setting right to ensure there is enough clarity in the law so innovation is not stifled, and permitted co-operation is encouraged. However the fact that there are definitional challenges to be worked through should not allow genuine wrongdoers to go unpunished. A further difficulty for this objection is that there is little reliable evidence in favour of it.

Ironically another oft-cited objection is that any such steps would not be effective in changing behaviour, suggesting that in those situations where cartels exist the rules would be ignored in any event (that is, under-deterrence).  Again, there is no evidence of this, and in any event I am not sure that the law being flouted is a legitimate reason for not making good law.

Making it a crime

It is also objected that prosecutions are rarely successful and therefore why both with the reform?  I want to mention just two features of the criminal law which mean that the lack of successful prosecutions is not a valid criticism.

First, a criminal finding is a serious indictment on the character of the accused and for that reason alone it should not be lightly made.  The law reflects this in many ways, most obviously the heavy onus of proof of “beyond reasonable doubt”. Second, a further feature of the criminal law that distinguishes from the rest of the vast regulatory regime is that of intentionality.  The criminal law is interested in knowledge and motive in a way which is foreign to mere regulation.  The law seeks to peer into the mind of the accused.  The net of the criminal law therefore catches only the biggest (and perhaps slowest) fish. So in light of this it is appropriate that only the clearest cases are prosecuted and lead to conviction.

Caution is needed to ensure genuine efficiencies are not stifled by criminalising cartels. Certainly it is true that New Zealand is a small and isolated economy – and that raises special challenges for competition law, because the scale needed for efficiencies in many industries is rarely achieved. This is one reason why it is accepted that legitimate collaborative arrangements which drive generation of wealth are exempted from cartel conduct. However there is a huge difference between cooperative arrangements that are aimed at driving prices for consumers down, and arrangements which are intended simply to illegitimately transfer wealth (whether from buyer or seller) to a member of a closed group who have a common anti-competitive intention.

It is also important to remember that we don’t criminalise things only to effect economic and social change.  It is also to mark out the behaviour as wrong and transgressing in a serious way from accepted norms.  To date the proposed changes to the Commerce Act have been largely considered from the standpoint of economics, however they also need to be considered from the standpoint of criminology and sociology.  The law should respond in a punitive way to morally shocking wrongdoing – and that is exactly what the proposed reforms do. 

The policy issue for legislators is how to ensure that the words of a statute book effectively distinguish between a cartel which is criminal and one which is not. One of the hallmarks of all serious criminal offences is intentionality. 

No objection can be made to criminal liability following conduct where a person intentionally enters into an arrangement and knows it breaches the criminal law.  However the challenge for cartels is that some arrangements, though illegal, do not necessarily appear invidious at first blush. It might be suggested that in this special case the accused should have some degree of knowledge (or at least recklessness) as to the criminal nature of the conduct. However the proposition that the wrongdoer must know his or her conduct is criminal for culpability flies in the face of the axiom that ignorance of the law is no excuse - it would make a virtue of ignorance.

The Bill in its current form seeks to strike a balance by creating the offence of cartels in a relatively broad way and then providing for certain defences. The offence is created if a person enters into or gives effect to an arrangement that is a cartel and intends to engage in cartel conduct (price fixing, restricting output, or market allocating).  It is important to note that it is the conduct that must be intended – not the unlawfulness.  If this was the end of the matter there would be a real risk that people could unknowingly enter into arrangements which were criminal. However there are a number of defences – which themselves have a knowledge-based component.

Exceptions

Collaborative activities are carved out of the cartel provisions of the Commerce Act.  A collaborative activity is (somewhat vaguely) defined as one which does not have as its dominant purpose the lessening of competition – even though it may involve a cartel-like activity such as restricting output or allocating markets.   The intention is clearly to permit activities such as joint buying and franchise arrangements which when properly used lower consumer price, or improve consumer quality.

The alarm arises because of the risk of innocently breaching this rule and having an “accidental” cartel when all that was intended was a more efficient arrangement between players in the same market.  The Bill does provide a defence in situations where a “collaborative activity” turns out to be a criminal cartel.  In such a situation it will be a defence if the defendant actually believed that the cartel provision was “reasonably necessary for the collaborative activity”. 

Given the fact that under the criminal law the prosecution has to establish that the facts do not give rise to a defence, this offers considerable protection.  The courts will no doubt give short shrift to fanciful claims that blatant cartels were intended only to be innocent collaborative arrangements. However where a tenable argument can be made that the arrangement, though illegal, was honestly and reasonably believed to be legal and not anticompetitive, any prosecution would fail. This would seem to ensure that innocent business people who do not have a detailed understanding of the Commerce Act could go about their business without fear of criminal liability.

Economists might argue whether this reform will have too much deterrent effect, or not enough.  However for lawyers the question is much simpler.  Cartels are dishonest and take wealth illegitimately.  At heart they are deceptive and illegitimate. The law has an important role to play in marking such behaviour out as immoral.  For that reason alone criminalisation of cartels is appropriate.


Duncan Webb is a former insurance lawyer, Lane Neave partner and Professor of Law. He is now the Labour Party MP for Christchurch Central.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

12 Comments

Comment Filter

Highlight new comments in the last hr(s).

It is nice to see my local MP talking about these issues. One of the most famous cartels was the half a dozen or so light bulb manufacturers fixing the useful lifetime of their products.

If 6 players can collude like this it's almost certainly happening here with insurance (2 big players), supermarkets (2 big players), banks (4 big players), building materials (3 big players for any product) and so on. Calculate the Herfindahl-Hirschman Index on any of these industries and it's shockingly high. It's very difficult to find any hard evidence of this like the leaked light bulb contract. So our best bet is to allow in competition.

One of the biggest local monopolies people have to contend with is actually their local council's misspending money on useless stuff like statues.

There are some obvious easy wins to bring in more competition:

  • BRANZ need to go - they're not helpful they're just a barrier to competition.
  • Importing goods shouldn't imply ridiculous customs handling fees and tax collection burdens. Labour have caved to the retail lobby so I'm rather angry about this one Duncan. Your party are not making life any easier!
    The reason people import goods is because the prices in NZ are so terrible (if the product is even stocked) that people are actually prepared to wait 3 weeks.
  • Councils shouldn't be free to gouge rate payers by steal taxes like fuel tax.
  • Councils are broken - they need to cut the fat like white elephant stadiums. Some have suggested a Swiss Canton model would be better.
  • Councils shouldn't be able to charge $150/hr for building consents, inspections and so on, all while deliberately blowing out their hours. It's an outright joke.
  • You could stop giving cartels our tax money. How much money does ABC child care make off govt subsidies every year without passing on the benefit to their customers? What about all the Fletchers materials in Kiwibuild? Winter energy payment are you kidding me.

Thus far Labour are very much National-lite. Business as usual. I would love it if the MP I voted for could pick one of the above issues and put forth a bill to tackle the problem head on.
Duncan, I can see you've got the know-how and skills to make changes. Don't be like Judith Collins and kick up another fake investigation in to fuel or whatever. I want you to take action.

10
up

If I recall correctly a recent estimate for local govt imposed cost on new house builds in Auckland was $160k (in consents, 'contributions' and fees). That is added straight onto the price of a new house, which also sets the price of all other houses. It's not a cartel, its a monopoly', and it needs to be shut down by the only people with the power to do so - central govt. It's a relatively simple change - to revert to the regulatory regime of 20-30 years back, and make housing affordable again.

Friends of mine in architecture detest Fletchers because of what they see as their exploitation of market power. In their accounts of experience, if project builders are considering products sourced from overseas because they're good and economical products, they've been effectively stopped from using by Fletchers telling them "If you want to use that product you better source all your other products from there too, because you won't get any from us."

Just what they report...may be that they're getting it from multiple NZ suppliers, don't know. I do know that they really do not like Fletchers because of the extra cost they say they add to projects.

Re your post, I would also like to see NZ stop socialising the cost of dodgy builds ("sue the council because they didn't stop us from building a leaky building") and hold producers responsible for the quality of their goods, and reduce the cost of consents thus. The current situation is completely ineffective.

Fletchers companies can be very good at bundling. I don’t believe it’s a breach of antitrust laws here but reputation is another story.

I’ve heard of contractors putting on a “f**k Fletchers tax” on their bids for work.

Agree with your comments Bilbo.

There is not enough pressure on local government spending. It should all go through business case assessment.

Local government should be forced to fund the "needs" first (water, waste, roading etc) & the "wants" get put item by item to the ratepayers for feedback at annual plan time.

Also the ComCom needs much greater powers to break up monopolies, duopolies & oligopolies. It should be directed to put much more weight on the HHI in making its decisions.

"If 6 players can collude like this it's almost certainly happening here with insurance (2 big players), supermarkets (2 big players), banks (4 big players), building materials (3 big players for any product) and so on."

Exactly - Petrol Companies, Communications providers, Dairy, Pay TV, etc......

Lets face it, NZ is so small and isolated that pretty much everything here is operating as some form of cartel.

Pay TV is not really a monopoly with Netflix and you shouldn't be watching sportsball anyway it rots your brain.

It's easy to see why there are two supermarkets. They need big sites and the level of land banking here makes it difficult for a company like Kaufland or Aldi to setup here - and then the big two drop their prices to put the new boys out of business there will be no anti-trust charges bought against them.

Petrol companies - perhaps Labour could start their own distribution network and call it KiwiFuel - oh wait they already burnt that bridge by banning oil exploration.

Sorry Bilbo, but because it's hard to do is also a great reason the government should. I can hear the screaming already, but there is no real practical barrier to having twelve supermarket groups. And for sure to get there will require will require the government to wave a big stick.
I'm going to suggest that having the big chains is in fact inefficient. They thrive because of their market control, not because of any inherent efficiency.
Further, it's not just consumers the chains screw. They screw producers and suppliers as well, and shut out the newbies. As a food producing country it's nuts we allow two chains to throttle any innovation or start ups in the food area.
With twelve groups, you would be able find a local buyer for your new nifty product. And you need local first before you can expand internationally.

I actually agree.

But our Governments (National or Labour led) have never really been the hero with the big stick defending the average voter.

As a nation we are apathetic towards everything, why expect the Govt to be any different.

Another ridiculous tactic we see in NZ is all the shady marketing gimmicks like loyalty cards, fuel discounts, fake sales etc designed to confuse consumers and collect their personal data. They're probably selling all your data to health insurance companies. They know who's been eating naughty snacks or nice greens.
These gimmicks should be banned to drive clear pricing signals.
PakNSave and N/W should be forced to put all their prices online so I can shop around easily.

This is just crazy talk

Next you will be suggesting that payday lenders have limited interest rates, that the money you put in the bank is actually yours, and that murderers should be in prison.

That sort of thinking will just not be tolerated here ;-)

Is it Corruption or ineptitude? I find it hard to tell sometimes, probably doesn't really matter. End result for the average person on the street is that they get rorted.