Price-Fixing (Inquiry #1)

Backgrounder

November 30, 2002

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Complaint

In the Spring of 1996, following a sequence of gasoline price increases, the Director¹ received a six-resident application alleging a national, price-fixing conspiracy. Statements used to support this allegation included:

• the claim of the Canadian Petroleum Products Institute that the March price increases of retail gasoline were a result of a 30% increase in international crude oil prices "contradicts the Par Crude Postings at Edmonton and the West Texas Intermediate price figures, both of which reflect an increase of much less than 30%";
• retail gasoline prices had reacted much more quickly to increases in crude oil prices than to decreases in crude oil prices; and
• retail gasoline prices "consistently move up overnight."

This module first discusses relevant provisions of the Competition Act and then addresses each allegation separately.

Competition Act (Conspiracy)

Section 45 of the Act makes it an offence for anyone to agree or arrange with another person to prevent, or lessen unduly, competition in the sale or supply of a product. This could include, for example, price fixing or market allocation schemes (dividing markets or customers among competitors). Direct or inferential proof of an agreement among competitors is needed. In addition, the Crown is required to prove beyond a reasonable doubt that the parties to an agreement have unduly lessened competition. Penalties for conspiracy include a fine of as much as $10 million, or up to five years imprisonment, or both.

The existence of identical prices or the fact that competitors match each other's price movements is not, by itself, evidence of an agreement, particularly when there are plausible alternative explanations. In gasoline retail markets, the visibility of posted prices, and the predominant consumer perception that gasoline sold by different companies is essentially the same product, could logically produce similar or identical prices without an agreement. Gasoline retailers cannot realistically sell at higher prices than nearby competitors without quickly losing significant business.

Spring 1996 Price Increases and Relationship to Crude Oil Prices

The following table lists the Par Crude Postings at Edmonton and for West Texas Intermediate for the period March 1 to April 15 (the date at which crude prices began to fall).

Benchmark	March 1st Price (Cdn$ / Barrel)	April 15th Price (Cdn$ / Barrel)	% Change
Cdn Par Edmonton	$16.14	$20.89	29.4%
WTI	$17.28	$21.89	26.7%

^{Source: Natural Resources Canada}

Contrary to the allegations, therefore, these postings indicate an increase in crude oil prices of approximately 27% to 30% consistent with the report of the Canadian Petroleum Products Institute.

Nevertheless, it is recognized that comparisons of price increases are highly sensitive to the dates selected. For example, the percentage increase in the Par Crude Posting at Edmonton from February 27, 1996 to May 3, 1996 was 3%. If the dates chosen were February 6, 1996 to April 16, 1996, the percentage increase was 48%. Further insight into the Spring 1996 price increases, in relation to allegations contained in the first six-resident application, is provided by the following quote from one of the independent experts retained by the Competition Bureau:

"In virtually all cities, a short spike in gasoline retail prices in April 1996 comes after a long period of increasing crude oil prices. Crude prices rose by almost 50% between mid January and mid April, 1996. Retail prices in some cities appeared to rise unusually because in mid January several short but intense price wars drove retail prices down to unrealistically low levels. An analysis of mark-ups and margins indicates that there was no systematic increase in mark-ups or margins, and indeed, the 1996 level of the gasoline mark-up over the crude price and over the rack price was typically lower than in previous years."

Report of Dr. George Lermer, Faculty of Management, University of Lethbridge:

"Retail Prices React More Quickly to Increases in Crude Oil Prices than Decreases"

Two economic experts retained by the Director conducted separate empirical analyses to determine whether this price "asymmetry" is present in Canadian wholesale or retail prices. (Dr. Ken Hendricks of the Department of Economics, University of British Columbia, and Dr. George Lermer, Faculty of Management, University of Lethbridge. These reports are available on request.)

Dr. Hendricks found no price asymmetry. Dr. Lermer found a modest degree of asymmetry but concluded that the speeds of adjustment were so quick that any asymmetry which may exist has a negligible effect on consumers. He also noted that his data indicated that the measured asymmetry was inconsequential when compared to the effect on consumers of the downward trend in wholesale and retail prices."

"Gasoline Prices At The Pump Move Up All At Once Overnight"

Gasoline markets possess characteristics which are, in theory, conducive to conscious parallelism. Conscious parallelism essentially involves firms in an industry acting in a similar but independent fashion. Each local gasoline market consists of a number of sellers, all selling a similar if not homogeneous product. Any one of these sellers in a given market can affect market prices by independently changing its price. Furthermore, rivals can easily get information about their competitors' price changes; react to them quickly; and the reactions of rivals to these price changes are readily available to all market participants at little cost.

Provided that conscious parallelism is not the result of an unlawful agreement, it is not an offence under section 45 of the Act. The Director will closely investigate parallel conduct among competitors to determine whether an inference can be drawn that parallelism is the result of an unlawful agreement. If this inference is drawn, the Director will not hesitate to pursue the conduct under section 45. However, if the presence of an agreement cannot be inferred from the evidence, by itself, and where market factors make parallel but independent behaviour probable, systematic pricing or similarities in other key competition variables are unlikely to justify a conclusion on the part of the Director that the Act has been breached.

No evidence of a conspiracy or agreement was found. Rather, the evidence obtained indicated that the retail gasoline industry is acutely price sensitive. Retailers, for example, continuously monitor each others' prices independently and adjust their own prices to remain competitive.

Conclusions

In summary, the inquiries have not uncovered any evidence of an illegal agreement nor could the Director infer an illegal agreement from evidence obtained.

First, there was nothing unusual about Spring 1996 pricing patterns in light of historical data which indicates that gasoline retail prices generally rise each spring as a result of changes in demand for petroleum products. Second, while gasoline prices may arguably respond quicker to crude oil price increases than decreases, the response is so quick that any cost to consumers was negligible. Third, there are competitive reasons for similar pricing in local markets and evidence gathered in these inquiries suggest that gasoline markets are competitive.

Footnotes

¹ Pursuant to revisions to the Competition Act in March 1999, the Director's title was changed to Commissioner of Competition.