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What is competition law?

Competition law aims to ensure that businesses and their customers enjoy the benefits of open and competitive markets. Here’s what you need to know about how competition law affects your business.

What is a cartel?

A cartel is formed when several businesses come together to carry out certain types of uncompetitive practice. 

Prevention of fair competition

The effect of a cartel is that two or more businesses agree not compete with each other. This type of arrangement is illegal because it prevents consumers and other businesses enjoying the benefits of fair competition.

Activities involved in a cartel agreement

A cartel can develop from what at first may seem to be harmless, informal, conversations with competitors. Businesses can then drift into a cartel situation without properly realising it. Cartel agreements can involve activities such as price fixing, bid rigging and sharing or dividing markets.

Creation of a cartel

A cartel can be deemed to have been created even when there is no formal written agreement – all it takes is a conversation. 
Prevention of fair competition

The effect of a cartel is that two or more businesses agree not compete with each other. This type of arrangement is illegal because it prevents consumers and other businesses enjoying the benefits of fair competition.

Activities involved in a cartel agreement

A cartel can develop from what at first may seem to be harmless, informal, conversations with competitors. Businesses can then drift into a cartel situation without properly realising it. Cartel agreements can involve activities such as price fixing, bid rigging and sharing or dividing markets.

Creation of a cartel

A cartel can be deemed to have been created even when there is no formal written agreement – all it takes is a conversation. 

What is price fixing?

This is where two or more similar businesses come together and agree what prices to charge. This means there’s less incentive for them to bring their prices down, so customers end up not getting a fair deal. For example:

  • Vets in the same area come to an arrangement to charge the same rate for common treatments such as sterilisation and inoculation
  • Sports shop owners in the same town agree a price for selling replica kits of the local football team.

Bid-rigging and discussing tenders with competitors is a form of cartel arrangement and therefore illegal. Here’s how bid rigging works in practice. 

Bid-rigging and discussing tenders with competitors is a form of cartel arrangement and therefore illegal. Here's how bid rigging works in practice. 

Pricing a job

A bid is rigged when different businesses – who on the face of it are competing to win a tender – secretly agree between themselves how they will price it in order to give one of them a greater advantage. 

For example, three building contractors have been invited to bid for the construction of a small health centre.

Two of them realise they won’t really have the time to do the job if they win the tender so they arrange to put in higher bids in order that the third builder – who does have the time to do the job – can quote a price that seems much more competitive.

Future contracts

The business which quotes the lowest wins the bid and pays an agreed sum to each of the other two as ‘compensation’.

They all agree that in future when they compete for a similar tenders they will rig their bids again so that each of them will take turns to submit the lowest quote and therefore stand the best chance of winning.

The result of all this is that the customer ends up paying more than they would if there was genuine competition among the bidders.

What is market dividing and sharing?

This is where two businesses who would normally be competitors, agree to split the market and so avoid the problem of competing with each other. They might divide the market in the following ways:

  • Types of customers: e.g. Company ‘A’ agrees to sell to retail customers while Company ‘B’ agrees to sell to consumers
  • Geographically: e.g. Company ‘A’ agrees to sell in the north and east of a region while Company ‘B’ agrees to sell in the south and west
  • Product or service types: e.g. Company ‘A’ agrees to sell higher priced items while Company ‘B’ agrees to sell lower priced items.

In all these cases customers are disadvantaged though lack of choice.

This practice sometimes goes hand-in-hand with price fixing, resulting in customers being doubly disadvantaged!

What other types of uncompetitive activities are illegal?

Here are other types of behaviours to avoid.

  • Sharing commercially sensitive information – this could lead to informal price fixing or market sharing. 
  • Abusing a dominant market position – an example would be lowering prices for a period of time to squeeze competitors out of business, and then raising prices once the threat of competition has been removed.
  • Forcing retailers to sell at a specific price – If you’re a supplier, it’s okay for you to recommend a retail price to retailers, but it’s unlawful for you to try to prevent retailers selling your items at a lower price, for example by making threats or offering illegal financial incentives.

What should I do if I think that competition law is being broken?

If you suspect any business or individual of breaking competition law you must contact Competition and Markets Authority (CMA).

If you think that you may have broken the completion law, the authorities strongly encourage you to come forward as you may be granted leniency. If you admit your involvement, stop such behaviours, and fully co-operate with any investigations, financial penalties may be reduced or avoided altogether. Individuals who come forward may be granted immunity from persecution, and directors may avoid disqualification.

What can happen if I break competition law?

  • Businesses can be fined up to 10 per cent of their turnover
  • Individuals can be sentenced to up to five years in prison and fined
  • Company directors can be disqualified for up to 15 years
  • Businesses and individuals may bring claims if they’ve suffered losses because of infringements of competition law
  • There can be long lasting damage to a business’s reputation

To report suspected violations of competition law, contact the Competition and Markets Authority:

 

Checklist: What steps should I take to avoid breaking competition law?

The Competition and Markets Authority recommends fours steps to complying with competition law. Login to save this checklist to your profile for future use - as you work through the list, any checkboxes that are ticked or unticked will be automatically saved to your profile. (To register to join and enjoy the benefits of membership click on the link at the top right of the page. It will only take a few minutes to create your profile).

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