Competition Commission: Example 3

The Competition Commission

An Example of How it Works

Virgin Atlantic and Cathway Pacific Airline are currently under investigation by the Office of Fair Trading after allegations were made of price fixing.

The reason for OFT’s involvement has been said to be that Cathay Pacific came forward with evidence of the alleged wrongdoing, in return, the OFT has said that Cathay will be immune from any future financial penalty. The OFT's leniency programme is designed to encourage companies to come forward with evidence of possible infringement of the Competition Act. Personally, I feel if Cathway Pacific have in fact provided evidence to suggest they were involved in price fixing with Virigin Atlantic then this gives sufficient motive for the OFT to investigate.

The same leniency rule allowed Virgin to avoid a fine over its role in a price-fixing cartel with British Airways. Virgin said it intended to "robustly defend itself" against the allegations. The OFT alleged that employees at the two companies exchanged commercially sensitive information between 2002 and 2006, which allowed the companies to coordinate their respective pricing strategies. In the statement of objections, the regulator said both airlines would have a chance to respond to the allegations. "For a market economy to work effectively, it is vital that competing companies determine their pricing strategies independently of each other and do not seek to avoid the rigours of competition through unlawful coordination. The parties will now have an opportunity to respond to our proposed findings before we decide whether competition law has in fact been infringed," said Ali Nikpay, senior director of cartels and criminal enforcement at the OFT.

To an extent such price fixing, does act against the interests of the consumer. The consumer surplus will be lower for those who depend on flights from London to Hong Kong because the price levels have increased. This makes it harder for consumers to buy these tickets especially if there is little increase in the real disposable income levels. However, it can be said that consumers may not be severely affected because there are plenty other airlines who may be offering cheaper fares. Taking this into consideration, consumers who switch to alternate airlines may get a far better deal, at the expense of the exclusive benefits that Virgin/Cathay Pacific offer.

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By Kingsley & Samuel