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The (illegal) competitive advantage
by Catriona Munro, Partner, Maclay Murray & Spens
Competition authorities in the UK and around Europe have recently been coming down hard on cartels in sectors where anti-competitive behaviour has traditionally been commonplace, such as construction and chemicals. Now, they may well have the hospitality industry in their sights after a group of French hotels was fined a total of €709,000 last year for operating a price-fixing cartel. Catriona Munro explains…
In November 2005, the French Competition Council found the cream of Parisian hotels - the so-called Palaces of Paris, including the Ritz - had shared price information and agreed average room prices and occupancy rates. This meant that prices could be kept artificially high, with guests paying too much for their luxury accommodation. As a result of relatively low sensitivity on prices among customers, the hotel and catering sectors lend themselves well to price collusion among competitors. Where luxury establishments are involved, customers tend to be prepared to pay a little extra, making price fixing harder to detect.
The UK Office of Fair Trading and the European Commission have the power to impose huge penalties - up to 10 per cent of worldwide group turnover - on businesses for breaches of competition law. Furthermore, in the UK, it is a criminal offence to engage in the worst types of cartel activity. With aggrieved parties, such as purchasers or consumer bodies, able to raise damages claims in the courts, the risks for companies involved in anti-competitive behaviour are very high. It is very probable that the reputation of the business will be severely damaged and the company's share price may also be hit.
Investigators are also able to conduct unannounced inspections - so-called 'dawn raids' at premises of suspected businesses. The increased use of leniency programmes, which give businesses amnesty from fines if they inform on others, also means cartels are more likely to be detected and punished. A business which is or has been involved in activity which may be considered anti-competitive has a lot to gain from being first to blow the whistle on cartel activity with the relevant competition authority.
While most businesses know it is illegal to fix prices or share markets with competitors, the range of potentially anti-competitive behaviour is much wider than that. Sharing commercial information or even just receiving it from competitors can be regarded as illegal by competition authorities. Contact through trade associations increase the risk of anti-competitive discussions taking place.
Hotels and caterers may often be the victims of anti-competitive practices without realising it. If their suppliers use their strong position in one market to 'tie' their customers into buying other products or impose unreasonable exclusivity agreements, then that too could be unlawful. If challenged, the exclusivity imposed by such agreements may not be enforceable.
Businesses of all sizes operating within the hospitality sector now need to have at least a basic understanding of competition law if they are to avoid getting caught for doing something they did not even realise was unlawful. Although until recently the hospitality sector has largely escaped scrutiny, hoteliers, caterers and others within the industry would be prudent to look out for signs of price-fixing and anti-competitive behaviour within their own business as well as in others.
Email: Catriona.Munro@mms.co.uk
This article has been edited from the original. To view the feature in full, please see Catering in Scotland magazine. To join our database, go to Media Pack on this website and click on Subscribe.
