3. HoustonKemp.com
Consider concerted practice and lessening of
competition separately
3
“A person shall not engage in a concerted practice with one or
more other persons if the concerted practice has the purpose,
or has or is likely to have the effect, of substantially lessening
competition.”
4. HoustonKemp.com
Need a coherent theory of harm
• Facilitate collusion
› Collusion more likely/stable
• Soften competition
› Less uncertainty reduces competition (sometimes)
• Foreclosure
› Firms without information cannot compete
4
How often usedPotential theories
• Consistent with
› economic theory
› facts of the case
5. HoustonKemp.com
Three conditions required for collusion
Condition Potential effects of information exchange
Firms able to
reach
agreement
• Help firms reach agreed price
Cartel is internally
stable
• Help firms to monitor collusion and
determine who has cheated on an
agreement
Cartel is
externally stable
• Help identify who has entered and what
prices they are setting
5
All
conditions
must hold
6. HoustonKemp.com
Conditions required for there to be an SLC
Condition Counterfactual Factual Change due to
conduct
Firms able to
reach
agreement
Cartel is
internally stable
Cartel is
externally stable
6
Both conditions need to
hold
Required for SLC All conditions
hold
At least one
condition more
likely to hold
7. HoustonKemp.com
Soften competition
• Information changes firm behaviour if it alters
expectations about demand or costs
• Effect on competition depends on
› Type of uncertainty, eg idiosyncratic or market
› Firms’ expectations
› Type of competition
7
8. HoustonKemp.com
Effect of uncertainty depends upon expectations
8
1
2
Cost
$5
Price
$8
Case A: Expect price of firm 2 is $10
Case B: Expect price of firms 2 is $6
Optimal
price is $9
Reduce price
to $7
Share price
information
Optimal
price is $5
Increase
price to $7
Share price
information
9. HoustonKemp.com
Example: Informed Sources
• Softening competition
“…the Informed Sources Service increased the cost,
and reduced the benefit, to each Subscriber of
engaging in retail price competition and rivalry”
• Collusion
The agreements to exchange information “were likely
to increase retail price coordination and cooperation”
9
12. HoustonKemp.com
Calculation of insurance premiums
12
Cost of
Underlying Risk
or Expected
Claims Costs
Insurer’s rating model
Expense
Recovery
Commercial
Strategy
Insurance premiums
13. HoustonKemp.com
Information flows
13
In order for brokers to be able to quote insurance prices to their customers,
Insurance
company A
Insurance
company B
Insurance
company C
IT service
providers
IT service
providers
IT service
providers
Broker A Broker B
Premium
software
calculation
Premium
software
calculation
Quotation
exchanges
Rating
model
Rating
model
14. HoustonKemp.com
Exchanged information
• Insurers have access to other insurers' pricing
information for any risk profile
• Insurers can undertake batch processing to
determine the detailed structure of their rivals' pricing
strategies/models
› Eg input 1000’s of similar risks, changing only the age of the
driver
14
15. HoustonKemp.com
Is this conduct illegal under Australian law?
• Current law
› No contract, arrangement or understanding between insurers
› Contract between IT service providers and insurers
• Harper amended section 45
› Arguably a concerted practice. Each firm
knows that their information is being shared
receives price information from all other firms
› Does it substantially lessen competition?
15
17. HoustonKemp.com
Effect of information exchange on competition
17
Net effect of information exchange
Benefits of information
exchange
Increased
likelihood of
collusion
Market
characteristics
Market
coverage
Characteristics of
information
exchanged
18. HoustonKemp.com
Is this type of information likely to aide collusion?
More likely to aide collusion Assessment
Future prices
Commercially sensitive
Non-public
Individualised
Exchanged frequently
18
Market coverage Assessment
Large part of the market
Exchange of individualised future prices is a restriction of competition
by object under Article 101 TFEU
19. HoustonKemp.com
Is the market susceptible to collusion?
More likely to aide collusion Assessment
Transparent prices/outputs
Concentrated market
Simple market environment ?
Stable demand and supply
Symmetric ?
19
20. HoustonKemp.com
When is there an SLC?
Condition Counterfactual
(no price
sharing)
Factual (prices
shared)
Change due to
conduct
Firms able to
reach
agreement
?
Cartel is
internally stable
Cartel is
externally stable
?
Required for SLC All conditions do
not hold
Conditions more
conducive to
collusion
20
Condition Counterfactual
(no price
sharing)
Factual (prices
shared)
Change due to
conduct
Firms able to
reach
agreement
Cartel is
internally stable
Cartel is
externally stable
Required for SLC Conditions more
conducive to
collusion
Condition Counterfactual
(no price
sharing)
Factual (prices
shared)
Change due to
conduct
Firms able to
reach
agreement
?
Cartel is
internally stable
Cartel is
externally stable
?
Required for SLC All conditions do
not hold
Conditions more
conducive to
collusion
21. HoustonKemp.com
Efficiency gains from information exchange
• Efficiency gains
› Benchmark performance
› Allocate production to high demand markets
› Track data on consumers, eg history of accidents
› Market shares can signal quality
› Public information exchange can inform consumers
• Indispensability
• Pass-on to consumers
• In this case
› Assist entry by small firms
21
23. HoustonKemp.com
Should the conduct be prosecuted?
23
More likely to accept undertakings Assessment
Identifiable competition concerns
Competition concerns fully addressed by
undertakings
Undertakings are capable of being
quickly implemented
Conduct is not ‘serious’
Undertakings do not undermine
deterrence
24. HoustonKemp.com
What undertakings should be accepted?
• Purpose:
› reduce risk that information exchange would assist collusion
› retain benefit for small insurers
• Principles:
› must not be able to access individualised future data
› must not be able to access data unless this is
anonymous, and
averaged across at least five UK Insurers.
24
25. HoustonKemp.com
Key points
• Must have theory of harm that is consistent with facts
and economics
› Most commonly used theory is increased risk of collusion
• Sharing information (even privately) will not always
lead to a collusive outcome
• EU concerted practices law is broader
› EU: Sharing of future price intensions is prohibited (by object)
› Australia: All conduct subject to SLC test
• But, privately sharing future price intensions is
greatest compliance risk
• Undertakings are often accepted
25
