Adam Smith (1723–90) was a Scottish philosopher and one of the most famous economists who ever lived. His work is often cited today as the place where many of the ideas of modern economics were first clearly and comprehensively explained. Many important concepts to which we pay great attention in this book, such as the concept of exchange value, and the principles of supply and demand that underlie pricing decisions, were developed in the book for which Smith is best remembered – An Inquiry into the Nature and Causes of the Wealth of Nations – usually shortened simply to The Wealth of Nations (1776). In the very same book, Smith warned against the ever-present danger in market economies that producers would strive to avoid full and fair competition in order to load the dice against consumers, or, as Smith himself more elegantly put it:

‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices’ (Butler, 2007: 7).

The evidence is that the tendency of producer groups to use ‘contrivances’ to raise prices has not diminished since Smith’s day, and governments around the world put in place laws and regulations to dissuade producers from any ‘conspiracy against the public’ and to ensure that competition is fair. A prominent case from the UK illustrates why such laws and regulations are necessary. In September 2009, after a five-year investigation, the UK’s competition watchdog, the Office of Fair Trading

(OFT), announced that it had imposed fines totalling £129.5 million on 103 construction firms in England, which had been found guilty of colluding with competitors on building contracts. Technically, the nature of the offence was considered to be cover pricing, but the news media (and even the OFT itself) used a variety of different and more colourful terms for the practice: illegal bid rigging, price rigging, price fixing and scam. The Times newspaper proclaimed that ‘the scale of the offences is breathtaking

… all the signs are that bid-rigging was endemic across the industry’ (Wighton, 2009), while the Daily Mail identified the UK’s favourite entrepreneur, Lord Alan Sugar, as a victim of the ‘price-rigging scam’ (Poulter, 2009). In many cases, it was public-sector bodies, such as local authorities, which were the victims of cover pricing by construction firms, leading to the inevitable accusation that taxpayers’ money had been ripped off. In total, 199 infringements were included in the OFT’s final decision. So, everything seems quite straightforward: Adam Smith warned of the dangers of contrivances to raise prices centuries ago; laws were put in place to prevent such practices; but many firms in the British building industry flouted those laws, were found out and subsequently fined. What exactly were those firms found guilty of? Cover pricing, which, according to the OFT’s decision on the case, involves the following: ‘In each case involving cover pricing, the party named first supplied a “cover price” to the other party or parties named. This cover price was an artificially high bid, which was submitted by the latter party(ies) to give the appearance of competition, rather than with the aim of winning the contract’ (OFT, 2009). This is considered to be an anti-competitive practice because one or more of the suppliers bidding for the work has submitted an unrealistically high price with no expectation of being successful. In other words, one or more of the firms that appear to be bidding for a contract (that is, submitting a price at which they are prepared to deliver the work) submit unreasonably high prices with no genuine intention of winning the business (OFT, 2009). Firms may collude to do this on a rota basis (so that each firm in turn submits the winning bid), while, in some cases, the firm winning a bid under such collusive circumstances actually makes a compensatory payment to the firm that submitted a cover price.

QUESTIONS

1. What is the fundamental purpose of legislation designed to prohibit anti-
competitive behaviour by businesses? What are the wider benefits to society that are expected from such legislation?
2. On the one hand, some commentators were appalled at the extent of cover pricing in the UK building industry, and, on the other hand, Tony Bingham suggested that cover pricing could be a reasonable business practice. In your opinion, is there a dividing line between acceptable and unacceptable forms of cover pricing? Would it be possible to distinguish between them in practice?