Paying the price for our regulatory zeal

The Australian Competition and Consumer Commission has prosecuted companies it says have formed cartels and colluded to fix prices.  These have included cardboard box suppliers and Ballarat petrol station operators.

After reviewing cartel cases in Australia and across the world, we found that regulatory authorities' legal actions have seldom had the intended effect of bringing down prices.

This is because cartels self-destruct.  They are inherently unstable in free markets.

Participants in a cartel have different costs and market prospects.  Because of this they tend to cheat on price agreements with hidden discounts.  High prices also attract new competitors.  Either development undermines a cartel.

Cartels can persist where they have government backing.

For years Australian airline passengers suffered under the duopoly of Ansett and Qantas.

This brought excessive prices set by the government, which also prevented other airlines from competing.

Nowadays, even though we still have only two dominant airlines, others are actual or potential challengers and airfares are cheap.

Our analysis of Australia's suspected cartels covering cardboard boxes and regional petroleum marketing found no evidence of excessive prices.

With cardboard boxes, prices rose more rapidly after the alleged conspiracy was terminated than during its supposed period of operation.

Ostensibly the agreement was to share the business equally between the two participants, Visy and Amcor.

But while it was in operation Visy undercut its rival's prices to gain market share.  Clearly, to Visy the agreement was simply a veil to hide its real strategy.

The ACCC case against Ballarat petroleum retailers which it alleged were colluding eventually collapsed.  But the action imposed considerable legal costs on the retailers, causing several to exit the market.

It is unclear whether prices then rose, but reduced levels of rivalry would surely not have been an objective of the ACCC.

Over many years, the ACCC has been unable to satisfy courts of law that adverse outcomes have resulted from cartels it alleged were operating.

Frustrated by this, it now wants the law changed.  It wants the onus of proof on cartels reversed so that its own suspicions will determine when businesses have a collusive understanding.

Such a measure sits poorly with proper standards of evidence.  It would undercut cornerstone elements of the rule of law on which liberty from government coercion rests.

Excessive powers would be conferred on the ACCC -- an agency with a reputation for acting in misleading ways in seeking prosecutions.

Just because companies change their price simultaneously does not mean they are colluding, either openly or surreptitiously.

Victoria Market fruiterers shift prices frequently and often simultaneously.  Yet they are plainly not in cahoots.

The High Court's former chief justice, Murray Gleeson, ridiculed the ACCC's view in pointing out:  "If you open the door of a cage and all the mice leap it and head for the cheese, that does not mean they have an understanding."

Not only should the Government reject the ACCC's proposals to distort legal principles, it should take steps to reduce costs to businesses caused by excessive ACCC zeal.

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