Construction Site

It takes less time to do things right
than to explain why you did it wrong.

Henry Wadsworth Longfellow

What you need to know about competition
and consumer law

A short guide to competition law

In this guide:

Introduction to the Commerce Act

Price fixing agreements

What about joint ventures?

Who are your competitors?

What should you do if you think you’ve reached a price fixing agreement with your competitors?

Agreements that substantially lessen competition

Taking advantage of market power

Mergers that substantially lessen competition in a market

What are the consequences if you get it wrong?

 

Introduction to the Commerce Act

This guide outlines some of the key elements of New Zealand’s competition law. It's designed to help you protect yourself, your employees and your business. We also have a range of user-friendly fact sheets which explain more on each of these key elements.

The following things are illegal.

  • Any agreement between competitors that sets the price of goods or services or interferes with how the price of goods or services is set. This is known as price fixing.
  • Any agreement between businesses that substantially lessens competition in a market.
  • Any business taking advantage of market power for an anti-competitive purpose.
  • Any merger between businesses that substantially lessens competition in a market.

These rules help ensure that businesses and consumers benefit from effective competition, which drives more innovation, lower prices, greater choice or better quality.

 

Price fixing agreements

Any agreement between competing businesses that fixes a price or interferes with how the price of goods or services is set — including market sharing, bid rigging, allocating customers, and restricting output — is illegal. These sorts of agreements are sometimes known as cartels. Price fixing includes fixing any component of a price, like rebates or discounts.

It is still illegal if there is no formal written agreement — an understanding between two competitors about how one (or both) of them will act is enough. Even a 'nod and a wink' between parties can be evidence of an understanding.

Examples of illegal agreements

Three painters agree to set their hourly labour rate at $60. This is price fixing.

Local building supply merchants agree that they will not sell bathroom fittings at a discounted rate. This is price fixing as they are agreeing not to offer discounts.

Two large building contractors agree that one will tender for commercial construction contracts, while the other will tender for residential construction contracts. This is called market allocation and we consider this price fixing.

 

Example of price fixing

In March 2014, the High Court fined Carter Holt Harvey $1.85 million for price fixing in the Auckland commercial timber market.

In late 2012, Carter Holt Harvey entered into an understanding with Fletcher Distribution Limited to fix prices for the supply of structural timber to commercial customers in Auckland. The understanding was that both parties would price MSG8 timber at cost plus an 8% margin. The cartel ran for six months before breaking down.

The Commission became aware of the understanding in January 2013 through its cartel leniency programme when Fletcher Distribution, operating as Placemakers, applied for leniency.

 
You can read more in our Price fixing and cartels fact sheet.

What about joint ventures?

Joint ventures that meet certain conditions are exempt from the price fixing rule. Businesses should seek legal advice if they believe an agreement may be exempt. Even if joint ventures are exempt from the price fixing rule, they are still subject to the rule against agreements that substantially lessen competition. However, in some circumstances, a joint venture arrangement where competitors have agreed to fix prices may actually have a positive effect on competition.

Example of a joint venture

Two construction firms, which are individually too small to tender for a large building project, pool their resources and form a joint venture to submit a joint bid for the project. This makes the market more competitive, as without the joint venture the firms would not have been in a position to tender.

 

You can read more in our Exemptions under the Commerce Act fact sheet.

Who are your competitors?

Think carefully about who you are, or may be, in competition with.

Competitors include any potential competitors — businesses that could choose to compete in a market even if they are not currently doing so. For example, a residential building company that currently only operates in the North Island could choose to compete in the Christchurch or wider South island markets; any South Island residential building companies should consider this business to be a potential competitor.

What should you do if you think you’ve reached a price fixing agreement with your competitors?

If you or one of your employees has been involved in a price fixing agreement with a competitor, you can apply to us under our leniency policy for immunity from legal action.

You can read more in our leniency policy.

 

Agreements that substantially lessen competition

Agreements between businesses are a normal and essential part of how markets work. But some agreements harm competition, which can mean higher prices, less choice and lower quality for customers.

Agreements between businesses that have the purpose, effect or likely effect of substantially lessening competition in a market are illegal. This includes formal and informal agreements, agreements between competitors, and agreements between suppliers and customers.

It is illegal both to reach an anti-competitive agreement and to put such an agreement into effect. Even attempting to come to such an agreement can break the law.

A lessening of competition often results in higher prices or reduced quality in a market. When assessing whether an agreement might substantially lessen competition, we look at whether the agreement has increased the ability of market participants to raise prices above competitive levels. A substantial lessening of competition is likely to have occurred if the parties to the agreement are able to maintain these price levels for a sustained period of time, and still remain profitable.

The decrease in the level of competition resulting from the agreement must be substantial, meaning it must be real or of substance, and not just a slight decrease. A cartel or price-fixing agreement is automatically assumed to result in a substantial lessening of competition.

It doesn't matter whether an agreement is deliberately anti-competitive or not; if it substantially lessens competition in a market, it will be illegal.

Example of a substantial lessening of competition

Following an investigation into the markets for wood preservatives, we took legal action against several companies (including their executives) for anti-competitive conduct that took place from mid-1998 to mid-2002. At the time, there were two major suppliers of wood preservatives in New Zealand. These were Koppers Arch Wood Protection NZ and Osmose NZ. Both companies were part of large, worldwide chemical manufacturing groups that manufacture and/or distribute wood preservatives and associated raw or input chemicals.

The Court found that the Koppers Arch and Osmose Groups, together with senior executives of each, had an “overarching understanding” that they would maintain market share, avoid competing with each other, and keep prices above their true competitive level. They also reached an understanding that they would attempt to exclude TimTech Chemicals Limited, which entered the market in mid-2001.

Arsenic acid is a key component in one of the wood preservatives, so TimTech needed to secure a supply of arsenic acid in order to effectively compete in that market. Osmose and Koppers’ executives agreed to restrict the supply of arsenic acid and blending services to TimTech by exerting commercial pressure on:

  •  overseas suppliers of arsenic acid, so they would not supply TimTech with arsenic acid; and 
  •  a supplier of blending services to deny its services to TimTech

TimTech was subsequently prevented from sourcing sufficient quantities of arsenic acid, either in New Zealand or from overseas. As a result, the level of competition in the market was substantially lessened compared to what it could have been without the agreements between Koppers Arch and Osmose.

Koppers Arch was fined $750,000, and Osmose $725,000 for this exclusionary conduct. This penalty was part of a wider judgement in which the Court found that the companies concerned had also engaged in price fixing conduct, such as simultaneously raising prices, agreeing not to compete on price, and agreeing not to compete for each other’s customers.  In total, the defendants were fined more than $7.5 million.

 

You can read more in our Agreements that substantially lessen competition fact sheet.

 

Taking advantage of market power

Another important element relates to businesses taking advantage of market power. It is illegal for any business with a substantial degree of market power to take advantage of that power for an anti-competitive purpose. A business might take advantage of its substantial market power to drive a competitor out of business, stop a new competitor from starting up, or stop rival businesses from competing effectively.

Example of taking advantage of market power

The Commission recently undertook an investigation into complaints that Winstone Wallboards Limited (Winstone) – a subsidiary of Fletcher Building – had taken advantage of its market power for an anticompetitive purpose.

Winstone is New Zealand’s only manufacturer of plasterboard and produces GIB brand products. Winstone is New Zealand’s largest wholesale supplier of plasterboard and has maintained a market share of over 90% over a number a years.  Other brands of plasterboard are imported into New Zealand.  

Winstone pays rebates to merchants to incentivise them to buy GIB, rather than other brands. This means that merchants end up paying lower prices. Winstone also sometimes reduced the price of its plasterboard when facing a competing quote from another supplier.

We looked at whether Winstone’s use of rebates and the reduction of its prices when facing a competitor’s quote meant that it was using its market power for an anticompetitive purpose. Specifically, we looked at whether these practises were for the purpose of either driving other competitors out of business, stopping a new competitor from starting up or stopping a rival business from competing effectively. Based on the evidence gathered, we did not believe Winstone had breached the Commerce Act 1986.

For more information, read our Winstone investigation closure report and the media release.

 

You can read more in our Taking advantage of market power fact sheet.

 

Mergers that substantially lessen competition in a market

Mergers can bring many benefits to the economy by making it possible for businesses to be more efficient and innovative. But some mergers can harm competition by giving the merged businesses market power, which could result in higher prices and reduced choice or quality for consumers. Under the Commerce Act, we have a role to play in preventing anti-competitive mergers from going ahead.

When considering a proposed merger, we must decide whether the competition that is lost in a market when two businesses merge is substantial. We will give clearance to a proposed merger only if we are satisfied that the merger is unlikely to have the effect of substantially lessening competition in a market.

You can read more in our Mergers and Acquisitions - Merger Assessment fact sheet.

 

What are the consequences if you get it wrong?

There are heavy penalties for breaching the Commerce Act — up to $10 million for companies and up to $500,000 for individuals per breach — as well as the cost of court action and reputational damage. Businesses are also responsible for the conduct of their employees, so it is important to ensure that all key personnel understand their obligations under the Commerce Act.

Example of company liability for the actions of its employees

Several employees of various Australian polyurethane foam manufacturing companies formed agreements to maintain market shares and to refrain from competing for various customers. These agreements were kept secret from the companies’ senior management.

When the cartel came to light, the Australian competition authority successfully took proceedings against both the companies and the relevant employees, resulting in fines of nearly AUD$3 million.

  

 

Please note that the information provided here is guidance only and should not be used instead of legal advice. If you are unsure about what your business needs to do to comply with the Commerce Act, you should seek your own legal advice.