Understanding Hub-and-Spoke Cartel Infringements

1. Atypical Cartels: ‘Hub and Spoke’ Infringements Speaker: Andrew Groves Director, Markets and Projects Office of Fair Trading (OFT) Views expressed are personal and not necessarily those of the OFT

2. Overview • Background to Hub and Spoke infringements? • Test for assessing Hub and Spoke infringements (1) – Overview • Test for assessing Hub and Spoke infringements (2) - Detail • Challenges to investigation • What is acceptable information disclosure? • What is the harm caused by Hub and Spoke?

3. Background to “Hub and Spoke” (1): Direct Contacts • Direct agreements between competitors which fix the prices they charge on the market are illegal • Discussions between competitors about current and future prices (i.e. absent an agreement to fix prices) are also illegal. • No need for reciprocity – the unilateral disclosure of information from one competitor to another is sufficient [T-Mobile] • Anic presumption

4. Background to Hub and Spoke (2): Extending the Principles for Direct Disclosures to Indirect Disclosures • Hub and Spoke infringements can arise where competitors indirectly exchange business sensitive information through an intermediary (such as a retailers exchanging via a common supplier – as in Dairy) • Where established, infringements arising from indirect disclosures are of the same gravity as direct disclosures: ‘A concerted practice consisting of indirect contact between competitors via their common supplier is no different in substance from two competing retailers sitting across a table and telling each other what their prices will be next week’; CAT in Tesco (Dairy)

5. The test for establishing Hub and Spoke infringements (1) • Hub and spoke information exchanges involve three key elements, all of which are essential to establishing an infringement: • The transmission of future pricing information from one retailer (A) to another retailer (C) via an intermediary (B) – the horizontal element is key to this type of infringement • An intention on the part of the disclosing retailer (A) that the information will be passed on to a competitor (i.e. C) – it is this intent that distinguishes potentially legitimate from illegitimate disclosures • An understanding on the part of the receiving retailer (C) of the circumstances in which the information was disclosed NB: Unilateral disclosure sufficient – no need for reciprocity. Infringements stronger where that occurs

6. The test for establishing Hub and Spoke (2) COMMON SUPPLIER B Intermediary/”hub” COMMON SUPPLIER B Intermediary/”hub” Supplier B C understands reasons for B’s disclosure to C. Future pricing information Future pricing information Future pricing information Future pricing information Disclosure may be reciprocal A intended or foresaw disclosure COMPETITOR RETAILER A Disclosing retailer COMPETITOR RETAILER A Disclosing retailer COMPETITOR RETAILER C Receiving retailer(s) COMPETITOR RETAILER C Receiving retailer(s) Future pricing information is passed from A-B-C. Evidence of the exchange may be more cogent where there is a reciprocal disclosure of future pricing information from C-B-A.

7. The test for establishing hub and spoke(3): C’s involvement and the Anicpresumption • A’s involvement (and B’s) can be elementary to show • Key to note in C’s role is that the Anic presumption does apply – • Rebuttable presumption that knowledge of competitors’ future conduct will influence behaviour if recipient remains “active on the market in question” • Recipient “cannot normally fail to take that information into account when formulating its policy” (CAT in Argos) • To rebut, C needs to provide evidence showing information had “no influence whatsoever” on its conduct • The key is assessing the disclosure in its context.

8. Challenges to investigation (1): Intro • Suspected Hub and Spoke infringements present a number of challenges to an investigator • Need to demonstrate two disclosures of information • A disclosing its information to B • B passing on A’s information to C • Need to also demonstrate that the disclosures had an anti-competitive purpose (i.e. that A intended that B would use its pricing intentions to influence the market place by passing it on to competitors) • Need to also demonstrate C’s state of mind (i.e. that C understood the circumstances of the disclosure by A to B)

9. Challenges to investigation (2) – Demonstrating two disclosures • Exchanges rarely fully documented • Discussions often occur over the telephone • Where documents do exist they are rarely unambiguous • Extent of the problem depends on where the gap is • If there is an A to B but no B to C – hard to progress without further evidence (hard to infer what would have happened to the information) • If there is a B to C but no A to B – there is a possibility of inferring an A to B but this will depend on context. • Witness evidence can be important in plugging gaps – esp. if they are the mutual intermediary • Harder for a retailer to say what happened to information it disclosed to, or vouch for origin of what it received, from B

10. Challenges to investigation (3) – Demonstrating Intent • Rarely demonstrated by documentary evidence • Unlikely to get a clear statement from retailer A that its information should be passed on • Rely heavily on witness and inferences drawn from circumstantial evidence • Following provide credible grounds for inference: • “A” discloses its pricing information to “B” having made some form of conditional commitment to move its prices provided competitors follow • “A” discloses its pricing information to “B” having previously received information from “B” regarding “C’s” pricing intentions

11. Challenges to investigation (4) – Need to show some form of anti-competitive purpose • Important to be commercially aware and not mistake aggressive behaviour for an infringement • A number of commercially legitimate reasons why a retailer might disclose its pricing intentions to a supplier

12. What is acceptable information disclosure? • Not all exchanges of future pricing information between retailers and suppliers on prices are illegal. Examples of potentially legitimate exchanges: • Discussion of retail pricing during a promotion which the supplier is funding • Discussion of a price decrease that might mean more stock is required • Discussion of a retail pricing point for a new product • Passing on pricing information that will be printed on a pack • However, such exchanges may not be acceptable: • where there is intent or foresight that the information on pricing intentions will be passed on to a competing retailer • Retailers can avoid any misunderstanding by: • making it clear, when passing information on future pricing intentions to a supplier, that the information is to be treated confidentially • rejecting information on their competitor’s future pricing intentions

13. Observations on theory of harm • Jurisprudence is clear – where hub and spoke disclosures occur and all elements of the test are met – indirect disclosures will have the same impact as direct disclosures in terms of the reduction in horizontal competition • Competitors know each others’ future pricing intentions • Both suppliers and retailers face reduced competitive pressures • Consumers pay more and sooner