07 Feb 2011

Price signalling reforms might not solve the problem

by Michael Corrigan

Last year the Government released draft legislation on price signalling prohibitions, the Competition and Consumer Amendment Bill (No.1) 2011, to introduce quite strict laws prohibiting the practice of price signalling between competitors. This Bill is currently the subject of Senate Economics Committee hearings.

The package was partly prompted by Graeme Samuels' suggestion that certain public comments by the CEO of a major Australian bank about intentions to lift its mortgage rates above the increase in official Reserve Bank rates could be considered a form of price signalling.

These proposed reforms would initially apply only within the banking industry but they may be extended to other industry sectors by regulation, and the ACCC is already pressing to extend the Bill to cover petrol retailing.

Whether the Bill (or indeed any bill) can, or should, address price signalling sensibly is another question.

So what is price signalling?

"Price signalling" refers to a practice engaged in by some competitors, which falls short of collusion but involves communicating or signalling a company's price rises or other strategies to its rivals, for the purpose of having them follow.

For some years the Australian Competition and Consumer Commission has been pressing for a general price signalling reform, usually in reference to petrol prices and claiming difficulties in proving collusion between competitors in some cases.

It is more likely to be a problem in concentrated markets where there are only a few competitors and one company signals its intentions, so as to increase the chance that others will follow and it will not be isolated and risk losing sales.

Are new laws really needed?

Currently, under our law, the concept of collusion requires proof not only that competitors communicated with each other about their intended prices, but they have reached some informal commitment or understanding between them to adopt that pricing.

For example, in one petrol case a company regularly rang one of its competitors and said "I am going to put my price up this afternoon".

Our law would recognise an illegal understanding, if the competitor receiving the call gave an indication that it agreed or would follow that price rise.

But in that case, the ACCC failed. In these phone calls, the competitor did not give any indication of how it would react to the price rise. Sometimes it did increase its price in response, sometimes it did not. The Court found that there was no implied commitment reached between these operators sufficient to establish an "understanding".

The ACCC is frustrated by this need to prove a commitment between competitors. This lobbying has led to the Government Bill which focuses on the mere communication of pricing and other information to competitors, not their response.

So how will the new Bill work?

Under the Bill there will be two separate prohibitions covering:

  • private disclosures between competitors; and
  • general public announcements.

All private disclosures of pricing information between competitors will be strictly prohibited, subject to a few exceptions.

A company's public announcements or disclosures about future pricing or capacity to supply, or the company's commercial strategies will be prohibited, if they are made for a purpose of substantially affecting or reducing competition.

What are the exceptions?

The proposed "permitted exceptions" are fairly narrow, that is, communications will not be illegal if:

  • they are made to a competitor who also happens to be a customer or a supplier who needs to know the pricing information; or
  • the communication is authorised by law, for example a continuous disclosure requirement for a stock exchange listed company; or
  • a private communication to a competitor is accidental or beyond the company's control; or
  • communications between parties to a joint venture or in relation to the sale or purchase of a business.

What would happen if a company engaged in forbidden price signalling?

These new offences will attract heavy penalties under the Act of up to $10M or 10 percent of turnover but not criminal prosecutions. Companies in breach can also face class actions for damages for any losses inflicted on customers.

What are the problems with the Bill?

This is a very unusual way of amending the Competition and Consumer Act, which otherwise generally applies uniform rules across the economy.

Many believe the ACCC has not fully tested the scope of the existing law before asking for new laws to tackle these kinds of practices.

Our law already covers attempts to collude by companies deliberately passing on pricing information to competitors to try and reach an understanding. If the ACCC took actions for attempts to collude in these petrol cases, it could address much of the concerns.

There is no doubt that proving collusion can be difficult in some cases. This Bill however works from the other end of the spectrum, by banning many communications that are likely to be harmless.

There would also be a very large compliance burden on many legitimate forms of communication by companies, including investor and ASX announcements.

At the same time there is considerable scepticism whether this Bill will do anything to benefit consumers in the banking industry

Next there are claims by the ACCC and others that this Bill will bring Australian law "into line" with that in the United States and Europe.

That claim is open to challenge. Both Europe and United States law require some collective actions still to be proven, namely some effect on or response from the competitors who receive the information or some evidence that the "signalling" actually facilitates practices that reduce competition.

This Bill however will prohibit mere communications only irrespective of their effect.

It is a much stricter prohibition and will push Australia's laws well beyond these other jurisdictions.

Is there a better way to address the ACCC's concerns?

The ACCC's issues seem to be largely around the need to prove some commitment by a competitor which receives the information to "go along with" the suggested pricing.

That concern could be addressed directly by removing the need to show that kind of commitment in the definition of collusion. This would avoid many of the problems associated with this bill.


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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.