OFT investigating price-fixing in British supermarkets

The UK's Office of Fair Trading has launched an investigation of British supermarket chains and leading suppliers over allegations of price-fixing.

The OFT is understood to have made visits to the head offices of Tesco, Asda, Sainsbury's and Morrisons and to some of their suppliers. The supermarkets are understood to be co-operating with the investigation.

Tesco said in a statement: "We understand that the OFT has asked for information from a wide range of suppliers and retailers. We are working with them to provide what they require. At Tesco we are confident that we always act in the interest of consumers."

The move comes just days after the OFT announced it was looking into allegations that 11 retailers, including Asda, Sainsbury's and Tesco, and manufacturers were working together to fix cigarette prices.

I will update this post later because The Economist has an excellent article that I read on the plane today, and I want to add some of its info (but at the moment I don't have the time).

Update: The Economist adds the names of several suppliers who have been asked to provide pricing info: Britvic, Coca-Cola, Mars, Nestlé, Procter & Gamble, Reckitt Benckiser and Unilever. They also refer to it as rather a big deal:

(This) may turn out to be one of the world's biggest and most widespread investigations into the possibility of price-fixing. The investigation involves thousands of products, from soap to cola, and some of the world's largest consumer-goods companies.

They also make two interesting points. One is that the American antitrust tactic of encouraging whistle-blowing by offering immunity seems to be spreading to Europe, a point partially confirmed by an article in today's Daily Telegraph, which names Asda/Wal-Mart as the whistle-blower:

In blowing the whistle, Wal-Mart, which owns the Asda chain, has guaranteed itself immunity from a fine should the OFT discover any cartel activity. Any company found guilty could be fined up to 10 per cent of its annual worldwide sales, which in Wal-Mart's case would be $37bn (£18.7bn).

The move is likely to make the US retailer deeply unpopular with the companies involved, many of whom are its largest suppliers.

The other interesting point is that what is alleged is price-fixing on brands, rather than the more classsic commodity pricing:

Every economics student learns that cartels are most likely to crop up when firms have least protection from cut-throat price competition. The typical cartel product—vitamins, paper, petrol, glass, bulk chemicals—is a commodity offering scant opportunity for the branding that might create some pricing power. The industry is usually mature, with stable market shares and little innovation. This dullness has a virtue for a would-be cartel: it makes it easy to check if rival firms are sticking to the market-rigging plan.

They point out that the UK supermarket category appears to compete aggressively on price (although this is the third major probe of price-fixing, a dairy products investigation resulted in over 100 million pounds in fines recently, and only a few weeks ago OFT announced an investigation of tobacco price-fixing).

What they failed to bring up is that a highly-concentrated retail sector increases the likelihood of price-fixing. The four big UK chains have a combined 75% share of market -- coordinating among four is much easier than if a market has many significant players.

They do mention that buyers may have a motivation to fix prices even if their employer doesn't: "Often they are free to set selling prices and are paid bonuses linked to targets on sales and profits relating to the products they manage."

This will be interesting to follow, and I'll try to post additional info as it becomes available.