Commerce Commission alleges cartel activity involving significant players in Chr…
The Commerce Commission has today begun civil proceedings alleging cartel conduct in the Christchurch real estate market.
The alleged conduct involves Harcourts franchisees Four Seasons Realty 2017 Limited, Gold Real Estate Group Limited, Grenadier Real Estate Limited, and Holmwood Real Estate Limited as well as the businesses’ franchisor, Harcourts Group Limited.
Commerce Commission Chair Dr John Small says because the franchisees competed with each other for customers, entering into agreements that affected the prices they charged customers – including commission rates – constitutes alleged cartel conduct under the Commerce Act. The franchisor, Harcourts Group, was a party to those agreements.
“The Commission alleges this conduct was damaging because, between them, the franchisees had a significant share of the Christchurch real estate market,” Dr Small says.
“For most Kiwis, buying and selling a house is a major transaction. People should be able to trust the process is free of collusion.”
Dr Small stresses the Commission is not looking to challenge the franchise model generally.
“The franchise model is tried and tested and can work really well for Kiwis. Typically, franchises are organised so that franchisees don’t compete with each other,” he says.
However, Dr Small says where franchisees are in competition, the law that prevents cartel conduct applies to them, just like any other business.
“In this specific case, it just so happens that the cartel conduct we are alleging took place in the context of a franchise relationship,” Dr Small says.
“Franchisees need to be aware of when and where they compete with one another and ensure that they do not engage in cartel conduct, which carries significant risks such as criminal sanctions and potential penalties under the Commerce Act.”
Background
What is a cartel?
A cartel is where two or more businesses agree not to compete with each other. Cartel conduct can take many forms, including price fixing, sharing markets, rigging bids or restricting output of goods and services.
Because cartel members make more profit than they would if they competed fairly, goods and services become more expensive, consumers end up with fewer choices, and quality and service levels are likely to deteriorate. Tackling cartels is one of the Commission’s enforcement priorities.
What is a franchise?
Generally speaking, a franchise is an arrangement under which the owner of a business that provides goods or services (the franchisor) allows a person (the franchisee) to deal in those goods or services and use the franchisor’s intellectual property under license, in return for a fee. This intellectual property could include, for example, the franchisor’s business model, practices, and brand. As part of the arrangement, franchisees are typically required to comply with a franchise agreement with the franchisor, which will often set distinct territories so that franchisees do not compete with one another.
The Commerce Act
Section 30 of the Commerce Act prohibits any person entering into a contract or arrangement, or arriving at an understanding, that contains a cartel provision. A cartel provision is any provision in an agreement between competitors that has the purpose, effect, or likely effect of fixing prices, restricting output or allocating markets. An agreement to restrict output or allocate markets is illegal regardless of whether the agreement actually affects price. These types of agreements (in addition to price fixing) are deemed to substantially lessen competition and therefore are illegal.