Did Somebody Put a Cartel in My Coffee?

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The statements made by the owners and senior managers of coffee shop chains in Israel about recent accusations of price-fixing simply defy belief. The testimonies gathered for the investigative report in TheMarker give the strong impression that the owners of Israel’s major coffee shop chains might perhaps be operating a cartel. If that is the case, we are talking about alleged criminal violations of the Antitrust Law. The Israel Antitrust Authority must launch an investigation into this matter.

As defined by the Antitrust Law, a “restrictive arrangement” is an “arrangement existing between the managers of business enterprises, according to which at least one of the parties limits itself in such a way as to prevent or reduce business competition between that party and the other parties to this arrangement.” Even a party that was not a side in such an agreement but knew about it and acted in accordance with it is in violation of the law. The maximum penalty for being party to a restrictive arrangement is three years in prison; if the offense is particularly serious – i.e., the party was a key player in the cartel and made huge profits from it – the sentence could go as high as five years in prison. In addition to imprisonment, the offender generally pays a stiff fine as well.

According to the investigative report in TheMarker, the owners of competing coffee shop chains in Israel exchanged information on coffee prices and on marketing measures, such as special deals for customers. Exchanging information to maintain price levels can be considered an act of illegal coordination. It is possible that one of the coffee shop chains would have lowered its prices after the entry into the market of Cofix, a Tel Aviv takeaway where coffee and everything else on the menu cost just five shekels. If that had happened and if the other coffee chains had simply followed suit, customers would have benefited from the lower prices. However, the exchange of information between the owners of the leading coffee shop chains allegedly preempted a price war.

In general, information sharing between competitors is forbidden, especially if it has not been authorized by the director of the Antitrust Authority. For instance, prior to 2000, Dr. David Tadmor, who was the director of the Antitrust Authority at the time, issued a policy statement in the wake of requests from competing companies for permission to exchange information in connection with preparations for the Y2K bug, a computerized coding problem they perceived as a serious threat to computer networks resulting from entry into the new millennium. Tadmor ruled that the “exchange of information between competitors could – and, under normal circumstances, would always – be defined as a restrictive arrangement.” Since then the prohibition has not lessened; in fact, it has become more severe.

The present director of the Antitrust Authority, Professor David Gilo, this year published a guideline upholding the prohibition because the “disclosure of commercial information to competitors reduces the uncertainty in which competitors operate and could thus reduce their efforts to compete in the marketplace.” What kind of information is so sensitive that its exchange could prove problematic? According to Gilo, it is problematic to exchange “detailed, up-to-date information about prices and pricing formulas, as well as about production costs and profit margins because such information pertains to the very nerve center of the competitive process – the mechanism for setting prices.”

A similar problem arises in connection with what Gilo terms “information about future strategic moves planned by the party releasing this information” and “detailed information that is known to existing and potential customers and suppliers.” To the best of my knowledge, there has been no precedent in Israel of a criminal indictment being filed simply for the exchange of commercial information, although this definition likely would fit Gilo’s interpretation of the term “restrictive arrangement.”

The explanations offered by the owners of the nation’s leading coffee shop chains do not lessen the gravity of the picture that is emerging; in fact, some of the explanations are baseless. One of those interviewed by TheMarker for the investigative report claimed that the coffee shop chains have not broken the law because none of them is a monopoly. That is incorrect. The moment that even some competitors in a given market fix prices, they are operating as a monopoly. Take, for example, the indictment that the Antitrust Authority filed against Israel’s leading bakeries; at the time, 12 bakeries and 19 individuals were indicted. Although none of the bakeries was in itself a monopoly, they were all charged with having fixed prices and having divided up the market among themselves. In this trial, a plea bargain was obtained. According to its terms, one of the managers of Berman’s Bakery pleaded guilty to some of the offenses in the indictment sheet and was sentenced to six months of community work; he was also ordered by the court to pay a fine of NIS 50,000.

Incidentally, price-fixing is not the only way in which the prohibition on restrictive arrangements can be violated. The bakeries were indicted on charges of having reached a collective agreement whereby they would not compete for the clients of a rival bakery. Such an agreement is also prohibited. Similarly, the referral of competitors to the same supplier is also problematic.

The argument, “We’re friends, so what is so wrong with exchanging information?” is fallacious. It is perfectly alright for two friends to have a cup of coffee together. If they want to talk about business matters, they must exercise utmost caution. However, if the two people in question are the owners of competing business establishments or retail/coffee shop/restaurant chains, etc., the exchange of information on upcoming deals is prohibited. That point is obvious, is it not?

The courts are beginning to take a very dim view of cartel-like behavior. An obvious case of such behavior was that of the cartel of floor tile manufacturing companies, which had fixed prices and had divided the market among themselves. The trial ended less than ten years ago with prison sentences for the heads of the cartel. Since then, the penalties have become tougher. Such affairs inspire the initiation of class-action suits against the members of cartels who rake in huge monopolistic profits at the expense of their customers. These law suits could constitute a high price tag that might deter businesses from thinking about forming cartels.

Customers lining up at Cofix in Tel Aviv. Credit: Ofer Vaknin

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