Consuming Issues: The cartels that keep cashing in on consumers
Saturday 15 May 2010
A gambler would not back a horse in a race that has been nobbled by someone else, and the same is true of shoppers. One wouldn't knowingly buy goods whose price had been covertly fixed. Yet in recent years UK consumers have been scammed by several cartels – and we may only know the half of it.
One such price-fixing arrangement hit the headlines this week. Between 2004 and 2006, Virgin and British Airways secretly discussed the imposition of fuel surcharges on transatlantic routes. Over the two years, these charges rose from £5 to £60 per flight, adding £35m to fares. We know this because Virgin blew the whistle on the arrangement, in exchange for immunity from further action. There was no such exemption for BA, which was fined £121m by the Office of Fair Trading and £149m by the US Justice Department.
Such was the severity of the cartel that the OFT believed there was a criminal case to answer and, last month, it put four BA executives on trial accused of price-fixing. On Monday the four walked free from court with their "reputations unsullied", in the words of the trial judge, after the OFT said it would not have time to review 70,000 previously undisclosed emails sent by Virgin.
Why did the OFT bring this mishandled prosecution? Despite heavy criticism from the trial judge, the OFT insisted the case "was merited on both an assessment of the evidence and provided a realistic prospect of conviction". It also stated the outcome would not affect its previous civil case, unless it subsequently emerged that Virgin had withheld evidence, though it did not say this was so.
Aside from the scale of the BA- Virgin price-fixing, what was interesting about it was that it had been happening in a sector where there was said to be fierce competition. And there was an irony in the identity of one of the fixers, Virgin. Richard Branson, a public favourite, founded Virgin Atlantic in 1984 in a direct challenge to the dominance of BA and US carriers, who controlled the Atlantic routes. As a plucky underdog, Virgin had championed "open skies", successfully demanding access to Heathrow landing slots, whose granting led to a BA "dirty tricks" campaign in the early 1990s.
Yet here were BA and Virgin, supposedly the bitterest of rivals, discussing price rises just a decade later. (By coincidence, the OFT announced last month it was investigating whether Virgin had been colluding "over a number of years" with Cathay Pacific to fix fares between London and Hong Kong. The OFT has said that it was tipped off by Cathay, a commercial partner of BA.)
So, how common are cartels? How often are we, the public, cheated when we hand over money to companies? We have only fragmentary evidence. We know that the OFT has found several businesses entering covert price deals. In the past five years it has fined Asda, the tobacco giant Gallaher and others £173m for fixing the price of cigarettes, and Sainsbury, Asda and dairies £116m for fixing the price of milk. A current investigation involves the price of about 100 leading household product brands. Other cases have involved recruitment agencies and builders, including Mansell, a subsidiary of Balfour Beatty, which was fined £5.2m last year for rigging tenders for building contracts.
Julian Joshua, a lawyer at Howrey in Brussels, formerly a top cartel-buster at the European Commission, says price-fixing often involves manufacturing industries selling to other producers, who pass on the extra costs to their own customers. He told me that whatever the outcome of the OFT's criminal case "price-fixing does appear to be widespread" in spite of stronger enforcement, immunity programmes and heavy fines.
"Some cartel regulators think that for every cartel that's uncovered there are another five out there," he said. "So they believe that ideally you have to have to overpunish the ones you find in order to deter the others."
Heroes & villians
Some Direct action for ash cloud sufferers
No need to read the leaked internal document on commission rates for staff, one of whom complained to a national newspaper about "a very high pressure environment." Instead read Barclays response: "Our staff are not incentivised to sell riskier, more expensive products.... 'Conquest' is a long-standing generic term for new business."
Hero: Direct Travel
A letter pops onto the doormat: Direct Travel is paying out to air passengers stranded by volcanic ash. Hats off to similarly generous Columbus Direct, Direct Line, HSBC/First Direct, Marks & Spencer, and Saga. Insurers who won't be paying out: AXA, Aviva, Endsleigh, Europ Assistance, and Swinton.
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