Case 7.

5
Rip-off Britain
Evidence of oligopolistic collusion?

In recent years there have been repeated allegations that British consumers are paying much higher
prices than their European counterparts on a wide range of goods. The car industry, the large
supermarket chains and the banks have all been charged with ‘ripping-off’ the consumer. Such has
been the level of concern, that all three industries were referred to the Competition Commission
(see section 12.3) at the turn of the 21 st century. In this case study we consider what has
happened since then.

Car Industry
The clearest evidence of anti-competitive pricing behaviour in the UK car industry came with the
admission by Volvo in July 1999 that it had entered secret agreements to keep British car prices
high. This appeared to be just the tip of an iceberg, with car manufacturers fixing prices through
the system of selective and exclusive distribution (SED). In other words, manufacturers would
only supply through ‘official’ dealers who would sell at the list price (or at small agreed
‘discounts’).
When we consider the difference in price between identical models in Britain and mainland
Europe the discrepancies were huge. The Competition Commission report published in April
2000, found that car buyers in Britain were paying on average some 10 to 12 per cent more than
those in France, Germany and Italy for the same models. For 58 of the 71 models analysed by the
Commission, the UK price was at least 20 per cent higher than in the cheapest country. The
Commission concluded that British car buyers were paying around 10 per cent too much for
new cars, or some £1100 for an average car.
The price discrepancies between Britain and Europe were maintained by car manufacturers
blocking cheaper European cars coming into the UK. Manufacturers were accused of adopting a
number of anti-competitive practices. These include threatening mainland European car dealers
with losing their dealership if they sell to British buyers, and delaying the delivery date of right-
hand drive models to mainland European dealers in the hope that British buyers changes their
mind and go back to a British dealership.
As the problem involved more than one EU country, the European Commission (EC) also
examined the issue. It concluded that the motor vehicle manufacturers had agreements with
distributors that were too restrictive. In 2002, the EC changed the ‘Block Exemption’
regulations governing the sector to allow distributors to set up in different countries and to sell
multiple brands of car within their showrooms. Furthermore, distributors who are offered an
exclusive ‘sales territory’ distribution agreement by car manufacturers are now allowed to resell
cars to other distributors who are not part of the manufacturer’s network. This should help to
develop other sales outlets such as car supermarkets and Internet retailers. In addition, the
regulation has opened up the repair and spare parts sector to more firms.
Changes in the regulations, and the addition of ten new member states in 2004 and another
two in 2007, have made the car market more competitive by increasing the sources of supply.
Slowly, prices of new car prices have been converging across the EU towards the lower-price
markets.
 But what about the UK? Since 2003 new car prices have fallen. In August 2005 new car
prices fell by 0.5 per cent over the year, while general price inflation over the same period was 2
per cent. There is still scope for shopping around outside of the UK, however – 17 out of 81
models listed by the EC in August 2005 were at least 20 per cent higher than the average EU
price.

Supermarkets
The Competition Commission enquiry into supermarkets, which began in April 1999, followed
a nine-month investigation by the Office of Fair Trading into the major supermarket chains’
business activities. The OFT identified three major areas of concern: the use of barriers to entry,
the lack of effective price competition, and the relationship between the large supermarket
chains and their suppliers.
The main issue concerns the major supermarket chains’ huge buying and selling power.
They have been able to drive costs down by forcing suppliers to offer discounts. Many
suppliers, such as growers, have found their profit margins cut to the bone. However, these cost
savings have not been passed on from supplier to shopper. The supermarket chains have adopted
a system of ‘shadow pricing’, a form of tacit collusion whereby they all observe each other’s
prices and ensure that they remain at similar levels: often similarly high levels rather than
similarly low levels! This has limited the extent of true price competition, and the resulting high
prices have seen profits grow as costs have been driven ever downwards.
Since the OFT referral, the £6.7 billion take-over of Asda by Wal-Mart, the world’s largest
retailer, with a reputation of being a ruthless price cutter, promised to change the whole issue of
pricing in the supermarket sector. Of the supermarket chains, Asda has always been one of the
cheapest. With the Wal-Mart take-over, the drive to cut prices gained fresh momentum. Asda
planned to slash prices on hundreds of products, with most seeing some price reduction.
Tesco in response, striving to maintain its position as the UK’s number one supermarket
retailer, launched its own price-cutting campaign. It was determined not to get left behind in the
price cutting war.
Despite these apparent price wars, the Competition Commission was still concerned that
competition was being restricted. It sought to answer a number of questions. Is price competition
limited to a relatively small number of frequently purchased items, and at stores which face the
most local competition? Are cost reductions ‘being rapidly and fully passed through to
consumers’? Is ‘the pattern of prices and margins across different types of product, including
branded and own label products, related to costs to the extent that would be expected in a fully
competitive market? This would include products persistently sold at a loss, which may benefit
consumers in the short term but which may distort competition and consumer choice, and may
adversely affect the supply or availability of such products in the longer term.’ 1
One solution suggested by the Competition Commission would be to force supermarkets to
publish their prices on the Internet, thereby allowing consumers or consumers’ organisations to
make easy comparisons of the prices charged by different supermarkets.
By March 2006 the OFT had uncovered more substantive evidence of the potential abuse of
market power in the grocery sector by the supermarkets2. Specifically it noted four issues.
 Supermarkets have acquired many plots of land near their own stores to prevent rivals
from buying the sites. The rivals are often unable to find alternative sites in the area
because of planning restrictions.
 The power to drive down the prices paid to suppliers has increased since 2000. This
makes it more difficult for convenience stores to compete, given that their wholesalers
often do not have equivalent power to drive down prices from suppliers.
  A possible distortion of competition by charging high prices where there is little or no
competition and charging lower prices, often below cost, where competition is more
intense.
 Entry into the convenience store sector. With brands such as ‘Tesco Metro’ and
‘Sainsbury’s Local’, supermarkets have been successful in driving out many small stores
from the market. So far, the result has tended to be lower prices, ‘but this may have been
at the expense of choice of store at the local level’.

Banks
According to a Treasury report, chaired by Don Cruickshank3, UK banks are making excessive
profits of some £3 billion to £5 billion per year, with bank customers paying up to £400 a year
too much in charges and interest rates. The report found that current accounts were the least
competitive product. They pay little or no interest to customers in credit and charge exorbitant
amounts if you go overdrawn. But it was not just current accounts: mortgages, savings accounts,
credit cards and personal loans were all identified as often being poor products.
Banks have tight control over money transmission systems, cheque clearing and cash
machines. This makes it difficult for new competitors to enter the market. For example, a new
bank without an extensive network of cash machines, would find it difficult to attract customers,
given the hefty charges for using other bank’s machines. In addition, bank customers are often
unwilling to consider changing accounts, fearing that this will involve a lot of time and expense.
Small businesses were found to be facing even more excessive charges. The government
thus asked the Competition Commission to inquire into this particular aspect of the provision of
banking services.
In 2002, the Competition Commission reported that the ‘Big Four’ UK banks (Barclays,
HSBC, Lloyds-TSB, RBSG) charged excessive prices to small and medium-sized enterprises
(SMEs) in England and Wales. This resulted in excessive profits of some £725 million per
year3.
It found that each of the four banks pursued similar pricing practices. These included no
interest on current accounts; free banking offered only to some categories of SMEs, usually start
ups; the use of negotiation to reduce charges for those considering switching to other banks;
lower charges or free banking to those switching from other banks. Switching to another bank,
however, requires considerable time and effort for most SMEs. They are therefore locked into a
particular bank for a long time. The result is very little competition between the Big Four for the
majority of small business customers.
The Competition Commission also found significant barriers to entry to the banking market,
and especially to the market for ‘liquidity management’ services (i.e. the management of current
accounts and overdraft facilities) and for general-purpose business loans.
It recommended a reduction in barriers to entry to permit more competition within the industry.
This could best be achieved by requiring banks to permit fast and error-free switching by SMEs
to other banks (to enable SMEs to shop around for the best value in banking services) and either
to pay interest on current account holdings or offer free banking services.
In May 2005 the OFT referred the supply of current account banking services in Northern
Ireland to the Competition Commission. This market is tightly concentrated and the OFT found
that the banks impose a number of charges when customers are overdrawn, or in credit, that are
not found in the rest of the UK. Furthermore, it found that there is limited switching by
customers to other accounts and that firms do not actively compete on price. Indeed, the OFT
indicated that there may be price leadership behaviour.
To look at recent cases the Competition Commission has considered, see the Competition
Commission website.

Questions
1 Identify the main barriers to entry in the supermarket and banking sectors.
2 In what forms of tacit collusion are firms in the three industries likely to engage?
1
‘Supply of Groceries from Multiple Stores Monopoly Inquiry: Annex 2 To Issues Letter’ (Competition Commission,
2000)
2
‘The supply of banking services by clearing banks to small and medium-sized enterprises: A report on the supply of
banking services by clearing banks to small and medium-sized enterprises within the UK’, (Cm 5319, March)
3
‘Competition in UK Banking: a Report to the Chancellor of the Exchequer’ (TSO, 2000)