Cartels and other horizontal restrictions on competition
Cartels are the most serious restrictions on competition. Cartels cause financial damage to their customers, to markets and to society as a whole. Cartels can take on different forms, the most typical of which are price cartels and bid rigging.
In a cartel, companies competing with each other agree, for example, on the prices of products or services, price increases or market sharing. Usually the objective is to conceal the cartel agreement from customers and the public. Cartels are prohibited by the Competition Act, because cartels typically increase the price level of products and services and limit the choice of customers. Studies have estimated that cartels increase the price level of products and services by 10%–30% above the normal price level.
Competition between companies benefits society because competition typically leads to better products and services at a lower price. Competition is also a key incentive to develop and market entirely new goods. A cartel violates the rules of competition. In a cartel, companies eliminate competition by jointly agreeing on prices, price increases or allocation of customers.
A cartel agreement does not only refer to a binding written agreement but also widely different forms of consensus and cooperation. A cartel can be based on an oral agreement or even tacit collusion.
Cartels can take on different forms. The most typical types of cartel are:
- price cartels
- sharing markets or customers
- bid rigging
- limitation of production or technical development
- buyer cartels
- exchange of information
However, not all collaboration between mutually competitive companies is illegal. Cooperation is prohibited only if its purpose is to restrict competition or if, as a result, competition is restricted. In addition, even cooperation that restricts competition is permitted when the efficiency gains achieved by the cooperation outweigh the harm to competition.
Examples of various cartels
In a price cartel, companies competing with each other agree on prices or price increases for products or services. In addition to sales prices, a price cartel may include agreeing on, for example:
- delivery fees or prices for other additional services
- minimum or recommended prices
- discount percentages or maximum discounts
- warranty terms, payment periods or other non-monetary terms
In addition to agreeing, the mere exchange of information on the future prices of businesses is prohibited.
In a market sharing cartel, the companies agree on how market areas or customers are shared between the participants in the cartel. The agreement may concern, for example, the allocation of geographical areas, times of day or customer groups. As a result of market sharing, prices will rise because the sellers participating in the cartel face less competition. In addition, fewer options are available for customers.
The Supreme Administrative Court considered that Matkahuolto, bus companies and the Bus and Coach Association had reached an agreement at the turn of September 2010 with the aim of excluding route traffic permits granted after 23 June 2010 from Matkahuolto’s schedule and ticket sales services and package services. The purpose of the harmonised approach was to maintain the market with the bus and coach companies operating mainly under transitional agreements, by preventing or hindering new scheduled services from entering the market. The Supreme Administrative Court considered that this was a restriction of competition aimed at market allocation on the basis of the case law of the EU Court of Justice. The Supreme Administrative Court ordered the parties to pay a total of approximately €9 million in penalty payments.
Bid rigging refers to a cartel targeting municipalities, agencies and other procurement units purchasing goods and services as public procurements. In a rigged bid, the procurement unit expects companies to submit independent tenders, but the members of the cartel agree on the winner of the tender or the prices to be offered. Bid rigging increases the prices of products and services procured with public funds and are thus harmful to society as a whole.
Bid rigging often contains characteristics of both price cartels and market sharing. The FCCA and the competition authorities in different countries have drafted guidance on how contracting entities can identify and prevent bid cartels.
The Supreme Administrative Court considered that a national asphalt cartel took place in Finland between 1994 and 2002, involving all the largest and key actors in the field. The companies were found guilty of serious, long-term and extensive market allocation and bidding cooperation in violation of the Act on Competition Restrictions. It was a single and continuous cartel consisting of a number of separate elements with the aim of eliminating competition on the asphalt market. The companies had agreed in advance on the regional and quantitative allocation of asphalt work commissioned by the state, municipalities and private entities. This allocation was maintained by agreeing in advance on the prices offered in the tenders and by monitoring compliance with the agreed pricing. The Supreme Administrative Court ordered the parties to pay a total of approximately €83 million in penalty payments.
Competing companies must not agree with each other on, for example, production volumes, investments or the introduction of new technologies. However, cooperation between competitors on production and technology may be permitted.
Truck manufacturers participating in a truck cartel, which was processed by the European Commission, were considered to have discussed, among other things, the timing at which technologies that comply with the stricter emission standards would be introduced. The discussions between the companies aimed at delaying the introduction of new, more environmentally friendly technologies and transferring costs to customers. The Commission fined the companies a total of almost €3 billion.
In addition to selling prices, it is also prohibited to agree on purchase prices between competitors. Also in buyer cartels, merely discussing purchase prices or terms or factors affecting prices may be prohibited.
The Market Court considered that in 1997–2004 Metsäliitto Cooperative, Stora Enso Oyj and UPM-Kymmene Oyj had engaged in prohibited nationwide price cooperation and exchange of information in the procurement of raw wood. For example, the forest managers of forest companies had met each other on a regular basis to discuss issues affecting the availability and price of raw wood. In the meetings, the development of the purchase price of raw wood by forest area and timber type had been examined with the help of statistics. The company’s price had been compared to the average price or the price of other companies. No specific decisions were made in the discussions, but they were intended to influence future pricing. The Market Court imposed sanctions on the parties totalling €51 million. UPM-Kymmene Oyj was exempted from the penalty payment because it revealed the cartel to the Finnish Competition Authority.
Horizontal restriction of competition refers to the practice of undertakings operating on the same level of production or distribution, the purpose or result of which is competition restriction. In practice, companies involved in horizontal restrictions of competition are each other’s competitors or potential competitors in the production of a product or service. A cartel is the most serious form of horizontal restrictions on competition.
When the issue is not a cartel but other cooperation between competitors, whereby the harm to competition is less obvious, the competition law assessment of the cooperation requires a thorough weighing between the benefits and harm arising from the cooperation. The company itself is responsible for the legality of its conduct. In matters concerning competition restrictions, the FCCA’s powers are limited to the ex post supervision of companies’ operations, and the FCCA cannot give companies an ex ante decision on the legality of their activities.
Companies competing with each other may share a wide range of information in different contexts. The exchange of information may involve, for example, statistics on production volumes or price developments in the sector.
The exchange of information can have both positive and negative effects on competition between companies. Assessing the acceptability of the exchange of information is based on examining the market concerned and the nature and form of the information exchanged. The company should carefully assess the legality of its activities before the exchange takes place, when competing companies are involved.
The evaluation of the exchange of information examines the characteristics of the market, including:
- concentration rate: the fewer undertakings there are, the more likely the exchange of information is to restrict competition
- transparency: restricting competition is more likely when companies are better able to monitor each other
- stability: restricting competition is more likely when demand and supply remain stable
- symmetry: restricting competition is more likely when companies’ costs, demand, market shares, product range and capacities are similar
- complexity of products or services: restricting competition is more likely when products or services on the market are simple and comparable
The evaluation of the exchange of information examines the nature and form of the information exchanged, including:
- the age of the information: the more recent the information exchanged, the more likely the exchange restricts competition . The most harmful to competition is an exchange of information regarding the future
- information identifiability: restriction of competition is more likely when the information exchanged can be used to view company-specific data, instead of having aggregated data with information on individual companies concealed
- publicity of information: competition is unlikely to be restricted if the information to be exchanged is publicly available to all
- frequency of information exchange: repeated exchange of information increases the risk of restricted competition
- publicity of information exchange: restriction of competition is more likely to occur when information is only exchanged between competing companies rather than being available to customers and potential competitors
- coverage of the exchange of information: restriction of competition is more likely when all undertakings operating on the same market participate in the exchange of information.
When companies competing with each other share, for example, non-public information about their future prices, the FCCA in practice interprets the procedure as a cartel.
Companies may sometimes consider bidding in public procurement together with one or more companies instead of submitting independent bids. For example, it may be attractive to submit a joint bid because of the large scope of the item being offered in comparison to the resources of the companies or the financial risks associated with the object offered. From the perspective of the competition law, there are risks associated with joint bids, when companies offering together are competitors.
In principle, a joint bid is prohibited if the companies participating in the joint offer would have been able to bid independently. In this case, the number of tenderers decreases due to the joint bid, which usually means less competition and fewer alternatives for the buyer. However, the companies participating in the joint bid may indicate why and how the joint bidding benefits the procurement unit.
If none of the companies participating in the joint bid could have bid on its own, the joint bid is generally allowed. In addition to the existing capacity of companies, the assessment takes into account a reasonable opportunity to expand capacity after a successful tendering process. The lawfulness of a joint bid should be carefully assessed before submitting the tender.
Cooperation between companies can bring significant economic benefits, such as saving costs, increasing investments, improving product quality, expanding product portfolio and bringing innovations to the market faster. In the application of the Competition Act, an efficiency defence refers to an assessment on the basis of which cooperation that restricts competition between companies can be deemed permissible on a case-by-case basis. The purpose of an efficiency defence is to weigh the positive effects of cooperation against the restrictive effects on competition.
The fulfilment of an efficiency defence requires the fulfilment of four conditions
- the cooperation will enhance production or product distribution or promote technical or economic development
- consumers retain a reasonable share of the benefits achieved through the cooperation
- no restrictions are imposed on the companies involved that are not indispensable for achieving the benefits sought
- the cooperation does not eliminate competition in respect of a substantial part of the commodities in question
A company relying on an efficiency defence must always prove that the prerequisites for an efficiency defence are met. The assessment of an efficiency defence should reasonably be carried out before starting cooperation.
What does FCCA do in cartel investigations?
Cartel investigations begin on the basis of tips received by the FCCA, the agency’s own-initiative investigations or a report by a company participating in a cartel. Since the members of a cartel almost always try to conceal their illegal activities, the collection and evaluation of evidence repeatedly requires several years of FCCA investigation. Tips and leniency applications submitted to the agency are valuable sources of information.
Under certain conditions, a company that has participated in a cartel can receive immunity from its penalty payment in its full or in part. Only the company that first revealed the cartel may be exempted entirely from the penalty payment.
Leniency refers to a procedure whereby a company participating in a cartel reveals the cartel to the competition authority and applies for exemption from the penalty payment. [OR: A company participating in a cartel may disclose the cartel to the competition authority and at the same time apply for exemption from penalty payments (the so-called leniency procedure).] Applications for leniency may be submitted either:
- before the cartel is known to the authority or
- afterwards, when the competition authority has carried out inspections regarding the cartel at the premises of the suspected companies.
Leniency can only be applied for by a company participating in the cartel. Individuals and non-cartel companies may report their suspicions of a cartel to the FCCA as tip-offs. Every year, the FCCA receives hundreds of tip-offs that are useful for market monitoring. In cartel cases, valuable tip-offs come particularly from cartel customers, company employees and procurement authorities.
The FCCA hopes to receive tip-offs primarily through the tip-off form. You can also send an anonymous message. Providing contact information in connection with a tip-off significantly improves the possibility of a tip-offs leading to an investigation. Any tip-offs received are treated as confidential.
Based on the tip-offs or a leniency application, the FCCA will start investigating a suspected cartel. In the case of suspected cartels, the FCCA’s first investigative measure is typically inspections at the premises of the companies suspected of a cartel. The FCCA carries out unannounced inspections to prevent the suspected companies from destroying evidence.
During inspections, FCCA officials are empowered to:
- request access to all business premises
- examine all business material related to a cartel suspicion, regardless of its format or medium
- make copies of material that may be relevant to investigating a suspected cartel
- ask the employees of the company for oral accounts and record the answers received
- seal business premises or materials for the duration of the inspection
- ask the police for executive assistance
Since June 2019, the FCCA has had the right to examine the company’s data in electronic form at its own premises. The inspected company always has the right to monitor the FCCA investigation and invite their legal counsel to be present.
In addition to inspections, the FCCA’s other means of investigating include:
- written requests for information to the companies or authorities under investigation or otherwise relevant
- determining market conditions through surveys
- oral hearings of key persons
During a cartel investigation, the FCCA reviews the evidence collected through inspections and acquires additional clarifications based on it. During the investigation, the parties will be given an opportunity to present their views on all material collected by the Authority. An extensive cartel investigation typically takes 2–3 years.
In cartel cases, the FCCA usually proposes to the Market Court that penalties be imposed on the companies participating in the cartel. The penalties may not exceed 10% of the turnover of each company.
An investigation of restrictions on competition may also end with the confirmation of commitments submitted by the companies or a prohibition decision issued by the FCCA. In cartel cases, however, the FCCA almost always proposes penalty payments, because cartels are the most serious restrictions on competition.
If there is no evidence of a cartel, the FCCA will close the case with a decision or memorandum.