Fear of inflation-driven price fixing spurs antitrust watchdogs to test boundaries

Antitrust authorities are facing unprecedented pressure from governments and the public to come down hard on companies riding the inflation wave to sneak through unfair price rises that exacerbate cost-of-living pressures.

From the US to the Netherlands, watchdogs are calling for powers beyond their traditional toolbox to catch anticompetitive activities, including mechanisms such as market investigations and rules on unilateral conduct.

Sectors where prices are spiraling — from fuel to groceries — are being closely watched, but a lack of evidence of collusion despite steep price hikes has left many regulators feeling impotent. That has shone a spotlight on countries such as the UK or Greece that have other ways to combat would-be cartelists.

Although enforcers often stress that bringing down inflation isn't their job — that's for central banks and national governments — they have an important role to play by ensuring that it isn't compounded by companies colluding to increase prices.

There are concerns about companies aligning to use the inflationary cycle as a convenient excuse to increase their profit margin. At the sight of price hikes, consumers and governments turn to competition authorities to see their suspicions confirmed.

But uncovering any anticompetitive behavior is increasingly hard as companies find more sophisticated ways to collude. The old stereotype of executives shaking hands on their price-fixing plans in smoke-filled backrooms has given way to algorithms and discreet means of communication.

So how do enforcers face these challenges now that they seem more pressing than ever?

Market investigations

Instead of targeting one or more companies in particular, some antitrust watchdogs can put an entire sector under the microscope to check the health of competition there.

In the UK, the Competition and Markets Authority can conduct market investigations if it identifies that there are features of a market that have an “adverse effect" on competition. It then has a broad range of options to address that, including structural remedies, measures to reduce market entry barriers, policy recommendations and even price controls.

For example, the regulator obliged all hospitals treating private patients to publish information about the quality of their service and, in a separate probe, it ensured that new entrants to a local bus market would have access to bus stations under fair conditions.

Greece has similar rules. Its watchdog is currently scrutinizing the fuel industry, under heavy fire recently for price increases, over asymmetric changes in fuel prices compared to costs.

The advantage of a market investigation is that it can identify larger harmful trends across, say, supply chains, and act to correct them. There is no need to catch a company in the act, which gives a watchdog greater discretion to intervene, and no need to limit the range of response to a few bad apples, which increases the potential sphere of influence of a decision to tackle inflation-driven issues.

But market interventions need to be grounded in identified competition issues, and the remedies to tackle them need to be “proportionate,” a standard that can be hard to meet.

Despite the flexibility that this tool provides, only a few enforcers have it in their arsenal. The European Commission decided not to implement it following a consultation in 2020, and calls to revive the idea by EU lawmakers and the Dutch competition authority have so far fallen on deaf ears.

Tacit collusion

The question of how to catch companies that coordinate strategies without explicitly exchanging information or communicating has tormented antitrust enforcers for years, but it has been brought into sharp focus by widespread price rises.

Traditionally, it takes two or more firms to collude, but there are enforcers trying to tackle unilateral conduct under rules against anticompetitive agreements instead of through the abuse of dominance textbook.

What if a CEO flags in an interview that his company will increase prices by 5 percent and suggests that competitors should do the same if the sector wants to survive the energy crisis? It is a message that only goes one way, but it could be seen as an invitation to collude.

Last year, Greece amended its competition law to prohibit companies from “in any way” inviting another company to take part in an agreement to fix prices, share markets or control supply chains.

Greece has also prohibited “price signaling,” defined as communicating on prices, discounts, offers or credits if this action distorts competition and is not a “standard commercial practice.”

US enforcers can also pursue these cases under Section 5 of the Federal Trade Commission Act, which prohibits “unfair methods of competition” and has already been used to tackle invitations to collude.

The FTC stated in November its intention to use Section 5 to ensure companies with market power can't “exploit the current inflationary environment to further raise prices”.

March of the algorithms

Rapid advances in computing have added dangers to the antitrust world, notably in the form of algorithmic pricing. This refers to the shift from manual price setting to the increasing reliance on sophisticated software and even AI applications to automatically identify pricing patterns in the market and adapt to them.

Especially in times of inflation, this can translate into a spiral of price increases as algorithms replicate upward trends in the market, which pushes other competitors to also raise prices, which feeds back into the algorithm to keep prices going up.

Two weeks ago, US senators urged the Department of Justice to investigate YieldStar, a platform using algorithms to recommend rental prices to landlords, for “de-facto price setting and driving rapid inflation”.

Algorithmic pricing erases the need for competitors to explicitly agree on pricing policies, which makes these practices hard to pursue.

One challenge here is a lack of coordination between countries to address the problem. For example, the Portuguese competition authority is trying to scrutinize the sector, but many of the algorithm developers contacted by the watchdog are based in the US, China or the UK, so they fall outside of its jurisdiction.

Inflation always presents a challenge for antitrust watchdogs tasked with weeding out illicit drivers of price rises. But in the current bout, with its sharp focus on widespread cost-of-living pain, the need for out-of-the-box initiatives has been highlighted.

It remains to be seen how or where this might lead to significant change with competition enforcers handed powers they see being exercised in other jurisdictions, but as long as the inflation charts keep making headlines, the pressure will be there.