Monday, 13 November 2017

...and then the wheels came off

It was all going so well.

The Commerce Commission had pinged a whole series of real estate agencies for price fixing. The claim was that, after Trade Me tried a big jack-up of its house listing rates, the real estate companies had colluded to stop absorbing the previous, lower cost and to collectively pass on the new charges to house vendors.

Seemed straightforward. As the judge put it at [19] in the Online case, for example
Prior to the agreement, the status quo was that the cost of standard Trade Me listings was commonly absorbed by the real estate agents. In the normal course, any move to a vendor-funded listing arrangement against that background would most likely have resulted in some real estate agents electing to negotiate, thereby retaining competition in the market. Although Trade Me did not ultimately implement the per-price listing arrangement initially proposed, as a result of the Hamilton agreement the majority of Hamilton real estate agents implemented a vendor-funded model. This has been retained despite the implementation of the revised subscription model. The Hamilton agreement has brought a significant and lasting change to the market.
Sure enough one agency after another rolled over, conceded they'd contravened s30 of the Commerce Act, and agreed on penalties with the Commission, which were later ratified by the High Court.

They weren't small penalties, either: in the context of small to medium provincial businesses, even to my unsympathetic eye they were looking down the severe end. Alternatively, you could argue that the Commerce Commission was finally getting the courts to take price fixing more seriously. In any event, the Commission was enjoying a string of wins.

And then along came Justice Jagose in what I'll call Lodge & Monarch, the case where two Hamilton real estate agencies (and their principals) defended the charges. And they won.

The judge stepped through all the bits needed to prove a contravention of s27/s30.

Was there a "contract, arrangement or understanding"? Yes there was. It wasn't a cold, clear-eyed sit around a table process - the key meeting on September 30 2013 was actually a disorganised, talk-over-each-other general bitch and moan about Trade Me - but the judge found at [193] that
the defendants were part of a consensus giving rise to expectations each would not absorb the cost of Trade Me’s proposed per listing fees, and each (other than Success) would withdraw their standard listings from Trade Me by January 2014, subsequent Trade Me listings to be vendor funded. For the purposes of s27, the defendants entered into an arrangement, or arrived at an understanding, to those ends.
Did they "give effect" to it. Yes they did, as the judge found at [200]. The judge did not make a big thing of it, but the coordinated withdrawal of listings from Trade Me was highly suggestive.

Were the agencies "in competition with each other". Clearly yes. There was a little bit of argy bargy from the Commission about market definition, but nothing was going to affect  the obvious.

And then we got to the knobbly bit, "Fixing, controlling, or maintaining, of the price". Here are the key paras (my emphases):
[231] The defendants’ refusal to absorb the cost of Trade Me’s new fees says nothing about the price of their services to vendors. Nothing in the arrangement or understanding reached between the defendants constrains any freedom to charge any price to any individual vendor on any individual transaction, including by absorbing part or all of the cost of the residential property’s standard listing on Trade Me.
[232] Neither does anything in the arrangement or understanding ‘provide for’ such constraint: the only relevant constraint on an agency’s price-setting is the degree to which it is prepared to absorb, rather than to pass on, the expenses it incurs in the delivery of the service. Even if the comfort any agency drew from knowing of its competitors’ intentions made it less likely any proportion of those expenses would be absorbed, that does not ‘provide for’ price-fixing in s 30’s sense. “Providing for” means steps taken in advance of the direct fixing, controlling, or maintaining of the price as well as alternative means of achieving that result. But agencies retained their full pricing discretion, despite the arrangement or understanding.
End of story: it can't have been a price fix.

Lessons for the future, assuming the Commission doesn't appeal* and get it overturned?

The obvious one: despite the acquittal on the facts of this case, it remains highly dangerous to go near any discussion of price or pricing models with your competitors. The Commission may have been worsted on the battlefield on this occasion, but it was no accident that it ran a panel on 'The anti-competitive potential of industry groups' at its big conference this year.

And while it's tempting for people stuck in a Trade Me jack-up fix to argue, "Look, all of us going over to charging the customer for the new fee was always going to happen anyway, where's the beef?" - there were economists lined up in the background of Lodge & Monarch to argue along those lines - it won't do you any good. As Justice Jagose put it at [238]
Constraints on price-setting are deemed in breach of s 27. That the same price may have arisen in the counterfactual (ie, absent constraint) does not respond to the presence of constraint in the factual.
In the well-known air cargo cases, airlines were similarly hit with new, higher costs for the likes of airport security. Their shipper customers may also have ended up wearing the bill come what may. But it's not on (as the airlines did) to collude on a standard tariff. How much of a cost to absorb, and how much to pass on, needs to be your own independent decision.

*Update November 24 - the Commission announced it will indeed file a notice of appeal in the Court of Appeal because of "significant legal issues" arising from the case.

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