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Cover pricing is collusive in nature

7 Nov 2014

Cover pricing is a practice in terms of which a firm, in response to an invitation to tender, submits a fictitious, higher bid by agreement with its competitor to deliberately lose a tender, thereby ensuring that the competitor with whom the agreement is struck is the successful bidder.

These arrangements were found to be a widespread form of anti-competitive conduct that characterised tendering for projects in the construction industry. This form of collusive tendering has formed the basis of a number of recently concluded consent agreements between construction firms and the Competition Commission, in terms of which firms furnished admissions of their involvement in such arrangements.

As indicated by the Competition Commissioner, cover pricing provides 'a false impression of a fair competitive bidding process' and is collusive in nature.

Contravention of Act

In a recent settlement with the Commission, which was made an order of the Competition Tribunal on 8 October 2014, certain furniture removal companies admitted to engaging in cover pricing arrangements in contravention of the Competition Act, No 89 of 1998. In terms of the arrangement, a furniture removal company that was first contacted to provide a quotation would offer to source additional quotations on behalf of the customer and would thereafter request its competitors to submit quotes as cover prices.

Put differently, the firms would agree on the intended outcome of the tender and would seek to manipulate the outcome accordingly (by way of the submission of fictitious cover bids). The Commission's investigation revealed that this constituted collusive tendering, in contravention of the Competition Act, specifically, s4(1)(b)(iii). The firms concerned agreed to pay a penalty of 10% of its annual turnover for the relevant financial year.

This case (as with previous settlement agreements concluded with construction firms) suggests that cover pricing (which requires broad co-operation among market participants to succeed) may often be a pervasive practice that characterises industry-wide commercial dealings in certain markets. This case serves to emphasise that cover pricing ought to be steadfastly guarded against as the competition authorities regard the conduct to be egregious.