Argos and Littlewoods Price Fixing Arrangement Industry and Firm Background 1. The global toy industry is one dominated by three global players: Mattel, Hasbro and Leapfrog Enterprises. The three firms have further distinguished themselves in niche categories such that Leapfrog is the brand leader of electronic learning products, Mattel the Barbie doll range and Hasbro the board games market[1]. It is an increasingly competitive market whereby firms are fighting just to maintain current market share amidst adverse demographic trends as evidenced through falling birth rates in the target market of Western economies. Against this background consolidation is on the rise through mergers and acquisitions to gain valuable assets. 2. The EU toy market environment reflects similar challenges to that of the global context as indicated through the market's stagnation in 2003 relative to 2002 whereby total production remained at 4,700 billion. The US retains its position as the leading customer accounting for 18.1 per cent of all exports. In contrast to trends in the traditional toy market video games represent a growing share of the market accounting for 27.5 per cent of a total consumer market valued at 18.231 billion[2] . 3. The UK toy and games industry in 2000 was valued at 1,840 million and by 2003 was the largest toy market within the EU accounting for some 22.6 per cent of total output. According to a recent Mintel report[3] whilst toy specialists, such as Toys `R' Us dominate distribution, catalogue retailers, such as Argos and Index, take second position. In 2000, whilst toy specialists accounted for 870 million in retail sales, representing 47.3 per cent, mail order/catalogue and internet sales accounted for a further 410 million and 22.3 per cent of total market share. 4. The UK firm Argos Limited (hereafter referred to as Argos) was established in 1973 and by the end of 1999 had approximately 450 retail stores with sales in excess of 1,812 million. In 1998 it was acquired by Great Universal Stores and with more than 4 million home shopping customers in the UK and a twice yearly issue, was one of two catalogue retailers which dominated the UK market[4]. Within the toy sector alone Argos offered a range of over 500 product lines and was generally perceived as "good value for money". 5. In 1985 the UK firm Littlewoods launched the home shopping catalogue Index. During the period under consideration Index had approximately 160 stores and a twice yearly catalogue selling branded and own-brand products of a similar range to Argos. The twice-yearly issue meant that prices were agreed and set a considerable time period in advance of actual sales. There was relative inflexibility on prices, save for a few selective special offers published in a much smaller supplementary issue. Prices therefore occupied a central strategic role, with a high degree of confidentiality. 6. The third firm involved in the price fixing agreement was the US firm Hasbro, a subsidiary of Hasbro Inc which was a leading global manufacturer of toys and games, especially board games. It was one of the largest suppliers of toys and games within the UK market. In 2001 Hasbro's turnover within the UK market was 123.8 million. Price Fixing Arrangements 7. During the January to May 2003 period Hasbro was the subject of an Office of Fair Trading (OFT) investigation involving an allegation of discriminatory pricing between its distributors and retailers. During the course of that investigation the OFT uncovered the Argos, Littlewoods and Hasbro price fixing arrangement. Hasbro was the first of the three firms to apply for leniency, and having satisfied the requisite conditions as indicated through the OFT guidelines under the relevant legislation of the Competition Act 1998 avoided having to pay any penalty. 8. The OFT decision identified three agreements and/or concerted practice as having informed the pricing of a limited range of products in the Spring/Summer 2000 Argos and Littlewoods catalogues. This extended to an increasingly larger range of Hasbro products as time evolved to Autumn/Winter 2000 and Spring/Summer 2001[5]. In effect there were two bilateral agreements between Hasbro and Argos and Hasbro and Littlewoods and one trilateral agreement, which enabled the exchange of confidential pricing information between all three, Hasbro, Argos and Littlewoods. Argos' buyers indicated to Hasbro the range of products they were interested in and also a likely price, likewise Littlewoods adopted a similar posture with their opposite number at Hasbro. Argos' and Littlewoods' account managers at Hasbro are thought to have communicated some information to each other, who in turn alerted their opposite numbers at Argos and Littlewoods respectively. 9. Prices were fixed to recommended retail prices (RRPs) and introduced certainty regarding the actions of a rival competitor. Their actions contravened regulatory guidelines that prescribe firms' obligations in particular "...the OFT found that Argos and Littlewoods with Hasbro infringed the Chapter One prohibition contained in section 2 of the Competition Act 1998 by entering into agreements and/or concerted practices which fixed prices at which toys and games manufactured by Hasbro would be retailed by Argos and Littlewoods." 10. The penalty for infringement of the Competition Act 1998 is based on OFT guidance laid out in the Director General of Fair Trading's Guidance as to the Appropriate Amount of Penalty (2000). The penalty is set at an upper limit of 10 per cent of company turnover. Price fixing agreements are likely to attract the upper limit as they are perceived as the most harmful forms of anti-competitive behaviour. The penalty is applied to the company's turnover value in the year preceding the date when the infringement ended, with proportional adjustments to reflect duration in excess of a year, and applied to the corresponding relevant UK market. Adjustments can be made by the OFT to lessen/increase the penalty, though not beyond the 10 per cent threshold, to reflect the relative magnitude of the infraction. In the case of Argos the full effect of the 10 per cent penalty would imply fines of 18.11 million, based on turnover values at the time. In the case of Littlewoods, the monetary equivalent was 5.63 million. What happened next 11. The events which began sometime towards the end of 1999, and which ended no later than 14th September 2001 produced a surprising twist. In April 2005, following the purchase of Index catalogues by the Barclay Brothers in 2002, the decision to sell ended a 20 year spiral of losses. All 126 sites were to close, save for a further 33, which, with OFT approval, are to be sold to Argos. 12. The OFT defended its decision on the basis of a changed competitive landscape which includes the increasing importance of supermarkets in toy retailing and the growing significance of the internet in enabling price comparisons, all of which has reduced the benchmark status of catalogue prices[8] Meanwhile, by the end of December 2004, the price of a monopoly board game had decreased from 17.99 in 2001 to 13.99 and 13.49 with respect to Argos and Littlewoods. 13. Both Argos and Littlewoods subsequently took the case further to the Court of Appeal. The Court of Appeal, in handing down judgment on the 19th October 2006, backed the original OFT decision. Both Argos and Littlewoods therefore remain liable for the marginally reduced penalty (by the Competition Appeal Tribunal) of 15.0 million and 4.5 million respectively. Argos has sought leave to appeal to the House of Lords. Case Questions 1. With reference to the case identify the oligopolistic features of the toy market and suggest how the toy market might differ if this had been a (perfectly) competitive environment. 2. What evidence is provided in the case of collusive behaviour? More generally what are the symptoms and tests of collusive behaviour behaviour? 3. What conditions within an oligopolistic market structure make it possible for dominant firms to collude? Is such collusion "cheat-proof"? 4. Evaluate the incentive(s) of each of the parties, Argos, Littlewoods and Hasbro towards collusive conduct. 5. Assess the welfare consequences arising from their actions. 6. Identify the direct and indirect costs of government regulation as applied through competition policy