Price increases and competition

Rising prices, all else being equal, reduce purchasing power, diminish the public's standard of living and disrupt the economic foundations of household finances. These views have been reflected, among other things, in wage negotiations. Inflation, all else being equal, also creates uncertainty for businesses and reduces the dynamism of the economy.

There are various reasons for the high inflation that has raged in recent months. These include the conduct of the war, global supply chain disruptions, government responses to COVID-19 (including significant interest rate cuts), high volatility in commodity markets and climate change.

In times of high inflation, it is natural to ask whether competition is sufficiently effective and supports the interests of the public and the business community. These issues are currently under discussion in most countries around the world.

On the market
Where competition is weak, there is a risk that companies will find it easier to pass on price increases to customers and consumers. It is also less likely that price increases will be reversed in a monopolistic environment when external conditions improve. The danger is therefore that the public and the economy as a whole will be left to deal with the damage in the long term, with a consequent breakdown of assumptions, for example, in collective agreements, household budgeting or business operations. There is also a risk that the price increases will extend to goods and services that are not subject to the deteriorating external conditions.

The vast majority of economic theory strongly supports the view that competition in markets is highly desirable, as it increases consumer welfare and promotes efficiency in business. (The Competition and Markets Authority (2019)). In countries where active competition exists, productivity, economic growth and innovation are generally higher, product prices are lower and the range of products is greater. Competition also promotes a faster recovery after economic hardship, reduces inequality and boosts employment levels. Due to the economic difficulties that countries around the world have faced in recent quarters, such as supply chain disruptions, there is also discussion about how effective competition can strengthen the resilience of economies and make them better equipped to tackle inflation.

In the current circumstances, it is therefore important to keep a watchful eye on any form of barrier to competition, which can take the form of the conduct of companies, the organisation of markets, or the framework that governments provide for markets.

In this regard, it should be borne in mind that the Competition Authority does not undertake proper price control. Rather, its oversight is aimed at detecting potential breaches of competition law and other barriers to competition which, among other things, affect prices.

In order to better analyse the impact of adverse external factors on price developments and to identify potential competition failures, the Competition Authority has collected information on revenue and cost developments in three key markets, namely the grocery market, the fuel market and the construction materials market. The data collection covered the period from 2017 to 2022. The data collection was described in more detail on the authority's website, see. News on 29 April.

Discussion paper no. 3/2022 on the results of the information gathering is available here.

The presentation provides further information on, amongst other things, the following:

Grocery market:

• Grocery margins increased by 291 basis points in constant prices between 2017 and 2021, while the margin ratio (margin as a percentage of operating revenue) rose by 0.8 percentage points over the same period. The profit margin of Icelandic grocers was around 3 percentage points higher than the average for companies in Western Europe registered in the database of Damodar the years 2018-2021.
• Looking at the first four months of each year, profit increased by 10.7% in 2020 from the previous year, by 5% in 2021 and by 1.8% in 2022. The profit margin for the first four months of the year increased by 0.41 percentage points in 2020, 0.21 percentage points in 2021 and 0.81 percentage points in 2022.
• The profit margin of the grocery chains on foreign goods (24.7-33.7%) is up to twice as high as their profit margin on domestic goods (16.9%). There is also a considerable difference in the profit margins of the retail chains for foreign goods that they import themselves (33.7%) and for foreign goods that they purchase from domestic wholesalers (24.7%), but it should be noted that the profit margin of domestic wholesalers on imported goods (29.8%) is not included in the latter case.
• Wholesalers' profit margin on imported goods fell by 3.2 percentage points from 2018 to 2021, while it rose by 0.4 percentage points for retailers over the same period.

Building materials market:

• Margins on general building materials and aggregates have been growing since the beginning of 2020, but margin ratios have remained fairly stable.
• The profit margin for timber increased by 4.2 percentage points between the first quarters of 2021 and 2022, while the profit margins for insulation and plasterboard remained much more stable.
• Profit on timber increased significantly after the COVID-19 pandemic began, while profit on insulation and plasterboard remained stable.
• The profit margin of Icelandic building material suppliers was about 4 percentage points lower than the average for companies in Western Europe registered in the database. of Damodar the years 2018-2021.

Fuel market:

• The calculated retail margin (pump price minus purchase price and taxes) on petrol has been decreasing since mid-2018 in the capital region and since mid-2020 in Akureyri. The retail mark-up in other geographical markets has remained much more stable.
• The calculated retail margin on diesel remained fairly stable over the period, but fell in Akureyri in mid-2020.
• According to The Core's Petrol Watch The oil companies' share doubled from May to September, fell until November but doubled again between November and December, from around 50 kr/ltr to 70 kr/ltr.
• Then FÍB has Critical pricing here in the country, but the association believes that retail prices are not changing in line with world market prices and has called for government intervention.

The analysis does not reveal clear indications of a breach of competition law that needs to be remedied. However, in the opinion of the Competition Authority, the following conclusions can be drawn from the above findings:

• Pricing and mark-ups in the grocery and fuel markets are high by international standards, which raises questions about whether competitive restraint in those markets is sufficient.

There is clear evidence that increased competition with the arrival of Costco, and the subsequent response from Atlantsolur and other oil companies, has had a downward effect on the markup on petrol. However, the countryside, with the exception of Akureyri, appears to have been left behind, and the minimal changes in the markup on diesel sales raise questions about whether there is a lack of competition there. It is also noteworthy that profit margins in the grocery market have increased by almost a third between 2017 and 2021, and that profit margins in the building materials market have also risen in several key product categories in recent years. The Competition Authority calls for a discussion on the causes of this.

Before the Competition Authority draws further conclusions from the aforementioned information on the development of margins, companies in the relevant markets, consumer advocates and other interested parties are given the opportunity to submit their views and, if applicable, further information. Parties are specifically invited to submit views on the above matters, and in particular whether the changes in margins and margin ratios can be attributed to a lack of effective competition. For further details, see Chapter 9 below.

In recent quarters, interest rates have risen worldwide in response to rising inflation. This, and inflation itself, has a significant impact on the cost of borrowing for households and businesses. However, effective competition between financial institutions should mitigate the impact on individuals and businesses, as a competitive environment is expected to result in a lower interest rate margin than would otherwise be the case. In this regard, from a competition perspective, it is significant that pension funds compete in the mortgage market alongside banks and
thus creating increased competitive pressure in that market.

In its investigations into the financial market, the Competition Authority has striven to reduce barriers to competition, and the banks have, among other things, committed to taking measures that reduce switching costs, thereby making it easier for customers to exert pressure on them. However, more can be done. Thus, the banks continue to be criticised for
Service charges for customers are still very opaque, and it is difficult for consumers to access information that would enable them to exercise consumer protection.

The performance of the four insurance companies was generally good during the 2015-2021 period. The return on the companies' securities portfolio, which consists of both bonds and shares, was exceptionally good, as a boom in the securities markets lasted for most of the period. During the period, the companies' combined ratio also improved, which indicates how well their core operations are performing.

In public debate, criticism has been raised about the high cost to individuals of insurance premiums and the alleged limited competition between insurance companies, which many believe has resulted in a growing convergence in insurance quotes for households. Among other things, criticism has been raised about the procedures in the interaction between insurance companies and potential customers, for example, that insurance companies request a statement of existing insurance policies and premiums from individuals who seek quotes from the company in question.

With the recent decision of the Competition Authority, No. 7/2022, Breach by the Association of Financial Institutions of Article 12 of the Competition Act and the provisions of Decision No. 17/2004, the association was fined for mounting a collective defence of insurance companies' pricing policy following criticism from the FÍB. SFF thus acted as a public front regarding the pricing and services of its member companies, which prevented them from individually defending their pricing policies.

Seeking perspectives

The Competition Authority invites views and comments on the state of competition in the banking and insurance markets, which may assist in the investigation and prioritisation of investigations and other tasks in the supervision of competition in this area.

When difficulties arise in a company's operations, it can be expected that trade associations in their sector will take an interest in the matter. Competition law, however, places important restrictions on the exchange of information and discussion of price increases among business associations. Otherwise, there is a risk, for example, that price increases will also affect goods and services that are not subject to worsening external conditions. These restrictions are reflected in section 12 of the Competition Act, which prohibits business associations from agreeing on restrictions of competition or encouraging anti-competitive behaviour.

In light of discussions by interest groups about expected price increases in autumn 2021, the Competition Authority publicly pointed out the dangers associated with such discussions, see. notification on the supervisory authority's website, dated 22 October, and Article, dated 15 October 2021. The Competition Authority then opened a special Guidance page on trade associations and competition rules.

The Competition Authority also investigated the participation of the Association of Financial Institutions in discussions regarding the pricing of motor insurance premiums by insurance companies. The Association subsequently entered into a settlement with the Authority in March 2022, in which it acknowledged infringements of Article 12 of the Competition Act and earlier Decision No. 17/2004, paid fines and implemented measures to prevent further infringements. The case is further detailed in Decision no. 7/2022.

Price increases in recent quarters have had a significant impact on the basis of collective agreements. It is therefore inevitable that collective agreements address how to protect the interests of wage-earners against rising prices.

It is recognised that effective competition is crucial for the wages and conditions of workers. This was the subject of a conference organised by the Competition Authority on 31 August. The keynote speaker was Fiona Scott Morton, a professor of economics at Yale University in the United States, and she spoke about the impact of competition on economic growth and wages.

In her presentation, Fiona discussed research on the positive effects of competition and competition law on the labour market, including staff pay and conditions. The findings suggested that companies with market power used it in negotiations with their staff. It was noted that the government had various ways to respond to anti-competitive behaviour by companies towards their staff, and that active enforcement of competition law in this regard was necessary.

A recording of the conference is available. here.

The above-mentioned viewpoints are well-known in this country. In her article in Vísbending, on 19 August 2022, Katrín Ólafsdóttir, an associate professor of economics at HR, discusses, among other things, the importance for wage-earners of strengthening competition oversight.

Guidance provided in connection with the conclusion of collective agreements

In recent weeks, the Competition Authority has been in discussions with the parties to the labour market about possible ways to counter further price increases in key markets. In the current circumstances, it is therefore natural for collective bargaining agreements to address how to curb further price increases.

Various options may be considered, including the following:

i. Promote increased consumer engagement

Comparable information on prices and commercial terms enables customers and consumers to make informed decisions about where to direct their business, thereby creating increased incentives for competitors in the relevant markets to bid more aggressively to attract more business or defend their position.na.

In various markets, such as the grocery and financial markets, there are therefore opportunities to enhance consumer choice by making information on prices and terms of trade more accessible. This is in line with the Competition Authority's previous priorities. For example, the Competition Authority has long called for banks to make information on service charges more accessible. In decisions no. 22, 24 and 25/2017, Measures to enhance competition in general banking services, The three commercial banks committed to reducing transaction costs and promoting more effective competitive pressure from their customers.

Further measures by the banks in this direction, e.g. as an incentive for the parties to the labour market, are positive in this respect. Furthermore, harmonised information on the prices of groceries can also be beneficial.

Although transparency in markets usually facilitates oversight by customers and consumers, the same transparency in some cases can give companies increased opportunities to coordinate prices and commercial terms, thereby contributing to tacit coordination among themselves, to the detriment of consumers and customers. This must be considered when governments, interest groups or trade union organisations develop ways to increase transparency.

ii. Agreements between competitors to keep prices low

It may be considered that companies in important consumer markets commit to not raising prices in accordance with specified conditions. In this context, care must be taken that such agreements do not hinder competition to the detriment of the public and businesses. Thus, any agreements between competitors on pricing are unlawful, unless they satisfy the exception in Article 15 of the Competition Act.

Among other things, it must be borne in mind that agreements not to raise prices can have detrimental long-term effects, for example, if they in any way curtail the independence of companies and their initiative to improve their service to their customers. Thus, agreements not to raise prices can in effect amount to agreeing a maximum price, which soon leads to price-fixing. For this reason, such practices should generally be approached with caution.

In this matter, the issue is whether the derogation provision of Article 15 of the Competition Act applies. This includes, among other things, a discussion of how to ensure that cooperation between companies in this area provides greater benefits for customers and consumers than the general prohibition on cooperation.

The Competition Authority has issued detailed guidance on the application of the exemption provision of Article 15, which is available. here.

iii. The government's responsibility to work against price rises

In discussions with the parties to the labour market, the Competition Authority has also pointed out that, in the current circumstances, the government should consider the framework it provides for important consumer markets, such as through legislation, regulations and public charges.

See chapter 8 below for more details on this.

Due to the current global economic situation, the interplay between competition and inflation is widely discussed by competition authorities and other government bodies. On 13 June, the Competition Authority held an open conference on the interplay between competition, inflation and purchasing power. The conference was held in conjunction with a meeting of the chief economists of competition authorities in Europe. In addition, Lilja Dögg Alfreðsdóttir, Minister of Culture and Commerce, Ásgeir Jónsson, Governor of the Central Bank, and domestic and international academics took part in the meeting. A recording of the meeting can be found here.

It emerged at the meeting that, in general, competition had a limited effect on inflation in the long term. Thus, numerous other economic forces have a greater impact on the development of inflation. Furthermore, it would be unrealistic to expect that the actions of competition authorities could serve as a tool to suppress inflation in the short term.

However, it was also pointed out that in markets where firms had market power, price increases could be greater than would otherwise be the case in the event of a demand shock. Healthy markets in the business sector, where active competition is allowed to flourish, would provide a firmer foundation for the economies of nations. It was noted, for example, that a turning point had been reached in the Icelandic economy's battle against inflation when markets were opened and competition rules were introduced with the entry into force of the EEA Agreement.

It was also pointed out that in times of inflation, there is a risk that the price sensitivity of consumers and other customers becomes dulled. This, in turn, creates fertile ground for increased barriers to competition, such as illegal collusion or the abuse of a dominant market position. It is therefore important to keep a vigilant eye on any such barriers to competition in the current economic climate.

Following the aforementioned morning meeting, the Competition Authority addressed this topic at the annual cooperation meeting of the Nordic competition authorities, which was held in Iceland this autumn. Furthermore, the interaction between competition and inflation has been discussed in the context of cooperation between European competition authorities and at the OECD.

A discussion document, which is available, formed the basis for the discussion on this at the OECD Competition Committee meeting on 30 November. here. Essentially, the same conclusions are drawn as at the aforementioned conference of the Competition Authority. The findings state, among other things:

„There are several contributing factors to the current inflationary trends, including the ongoing supply and demand effects of the COVID-19 pandemic and the Russian invasion of Ukraine. That competition is also being mentioned in such conversations is worth competition authorities taking note of, regardless of how much of the effect can be attributed to it.

Ultimately, the dynamics of inflation are complicated and competition authorities do not need to fully understand how competition contributes to it. There are good reasons to consider competition an important contributor to a long-term low-inflationary environment, both in terms of reducing the exacerbating effects of market power on rising costs and in overall better market functioning.

Despite this, competition policy should not be seen as a prominent short-term anti-inflation tool. Competition interventions take time, both to assess and implement, and rushing them could create procedural unfairness and undermine the rule of law. Furthermore, despite having the potential to significantly reduce prices, competition enforcement is unlikely to be capable of reducing prices substantially enough on its own. Interventions typically focus on a few markets, meaning that even strong price reductions will have a limited impact on the overall price level.

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Competition authorities should then consider how best they can play their important, but lower-key, role in restoring inflation to normal times. This includes being aware of how inflation may affect competition itself. Given that inflation affects pricing, it could increase the risk of coordinated price announcements from firms, as well as undermining competition by raising consumer search costs.

Furthermore, while for the most part it may be business as usual for the authorities, it is worth considering how their mix of work might best contribute to lowering inflation, provided this does not undermine their longer-term effectiveness. For example, there may be merit in minor changes to how different potential sets of action are prioritised. As noted in the discussion above, this should not be seen as a significant departure from usual practice, but authorities may wish to consider placing more emphasis on actions that induce faster pricing effects, have spill-over effects in as many markets as possible and seek to deter conduct that appears to exacerbate inflation.

Advocacy and enforcement activity by the authorities may also need a revised focus. This includes being aware of risks to competition from government interventions, such as price controls, as well as being wary of certain kinds of conduct, such as coordinated price announcements. It is also worth considering how pressure on competition authorities to act on inflation may provide an opportunity to pitch the benefits of competition to a wide audience. This could include a suitably cautious note about the importance of competition policy in fighting inflation over the longer term.“

The role of the Competition Authority is to identify and respond to potential barriers to competition that may arise in the current economic circumstances.

Barriers to competition that can lead to or cause price increases can take various forms. The main competition barriers and provisions of competition law to bear in mind are set out below:

1. 1. Illegal consultation, pursuant to Article 10 of the Competition Act and Article 53 of the EEA Agreement. A description of the main infringements under the provision can be accessed here.
   2. Restrictive business practices by associations of undertakings, pursuant to Article 12 of the Competition Act. A description of the provision and guidance for trade associations and undertakings can be found on a dedicated information page on the website of the Competition Authority.
   3. Abuse of a dominant position, pursuant to Article 11 of the Competition Act and Article 54 of the EEA Agreement. A description of the main infringements under the provision can be accessed here.
   4. Anticompetitive mergers, pursuant to Articles 17 and 17a-e of the Competition Act. The provisions and possible competition restrictions are described. here.
   5. Public restrictions on competition, in particular points 4 and 18 of Article 8(1), Article 16(1)(b) and Article 14 of the Competition Act. The government significantly influences the conditions of competition in markets through legislation, regulations and other decisions on matters of economic activity. The Competition Authority has for a long time advocated that the government adopts and embraces the methodology of so-called competition assessment, which aims to identify competitive barriers in legislation, regulations and other government directives and choose those measures that support competition, rather than hinder it. See, for example,. Opinion No. 2/2009, Government Competitiveness Assessment. Also, it may be noted that OECD report on competition assessment on laws and regulations in the travel and construction industries, from November 2020, which proposes various measures to facilitate competition. The Competition Authority has also recently published information page on competition indicators, which includes information on various measures of barriers to entry in Iceland. For more on the role of the Competition Authority in this area, see here.
   6. Market investigations, cf. c-item of paragraph 1(c) of Article 16 of the Competition Act. The provision authorises the Competition Authority to take action to avert or counteract impediments to competition that do not arise from breaches of competition law by undertakings, but arise from market failures that prevent the public and business life from enjoying the benefits of competition in the relevant market. See more on this here.

In times of rising prices and the current economic climate, it is important for the government to consider, on a broad basis, how to combat rising prices and, thereby, inflation. Among such measures is the strengthening of competition in as many areas as possible. A wide range of ministries and institutions, as well as the legislature, have a role to play in this. The following can be mentioned in this regard.

• • That the government develops and adopts the methodology of competitive assessment more extensively when formulating and reviewing laws and regulations in various areas.
  • That proposals and recommendations for strengthening competition through a review of laws and regulations will be implemented. These include, for example, the proposals currently under consideration in OECD report on the competitive assessment of laws and regulations in the tourism and construction industries. Reference may also be made to various previous opinions and recommendations of the Competition Authority.
  • Particular attention must be paid to various obstacles in laws, regulations and public charges which are liable to increase prices in Iceland. For example, it is important to consider the implementation of various tariffs aimed at protecting domestic production, which consequently leads to higher prices. In this regard, the previous cost-benefit analysis needs to be reviewed on a case-by-case basis, for example, in light of any changes that may have occurred in domestic protectionist interests.

It must be borne in mind that tariffs on imported goods, exemptions from competition law and other barriers to entry are unequivocally intended to increase the price of the goods in question.

In November last year, the Competition Authority's priorities for 2023–2025 were revised. The priorities are available here.

The priorities address, among other things, economic prospects and forthcoming challenges. They state, among other things, the following:

„8. The war in Ukraine has significantly weakened the world's economies. The OECD forecasts 3.1% economic growth this year but that the global economy will grow by only 2.25% in 2023. Inflation is likely to be around 8% in the world's major industrialised countries in 2022, but could be around 6.5% the following year. However, these forecasts are subject to significant uncertainty. The energy shortage in Europe could slow economic growth further and worsen the inflation outlook.

9. A turbulent period in the Icelandic economy better. In the summer forecast of Statistics Iceland, it is forecast that economic growth will be 5.1% in years and 2.9% in 2023. Inflationary prospects have worsened domestically as elsewhere, and Statistics Iceland forecasts that inflation will rise by 7.51% in 2022, but that Inflation will be 4.91% in 2023 and 3.31% in 2024. Rising house prices, foreign price increases and increased economic tension are the main contributing factors.

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11. Wage negotiations and agreements on the general and public sectors are forthcoming, which could affect the country's economic development and the competitiveness of businesses. However, the behaviour and collusion of businesses can no less shape the position of wage-earners, as academics have demonstrated.

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22. In these circumstances, it is important that the government and the business community work against any barriers to competition that could further harm the public interest and the economy. This is particularly true for markets characterised by oligopoly and of great public importance, such as the grocery and financial services markets. The Competition Authority has, in recent months, initiated discussions and gathered data that can shed light on barriers to competition in the current circumstances. This work will be continued. However, it is for other institutions to monitor price developments, as this division of labour is appropriate, given the importance of the Competition Authority focusing solely on the role assigned to it by law.“

The Competition Authority invites submissions, information and comments on the above from companies in the relevant markets, consumer advocates, government bodies and other interested parties. In particular, it requests information, views or comments on the following:

1. 1. Submissions and views are sought on barriers to competition for businesses in key markets of the Icelandic economy, which may have manifested in a rise in the price of goods or services in recent months.
   2. Views and information are requested from the relevant companies in the grocery, fuel and building materials markets to shed further light on the developments in margins and margin ratios in these markets, as described in Chapter 2 (+) above.
   3. Comments and information are requested from consumer representatives on the grocery, fuel and construction materials markets in connection with the analysis of the development of margins and margin ratios in the relevant markets, as described in Chapter 2 (+) above.
   4. The Competition Authority invites views and comments on the state of competition in the banking and insurance markets, which may assist in the investigation and prioritisation of investigations and other tasks in the supervision of competition in this area.
   5. Views and information are sought from company directors in key markets on the impact that competitive pressure in their respective market has on dividend policy and decisions.
   6. Information and views are sought from owners of companies in key markets who hold a significant stake in more than one company in the same market, on how their ownership stewardship supports competition and counteracts price increases.
   7. Submissions and viewpoints are sought on government-imposed barriers to competition, such as those in legislation or regulations, which are urgently in need of consideration in light of the recent increases in the prices of goods and services.
   8. Views are sought on the priorities and focus for the Competition Authority's work in the coming quarters, in light of the current economic situation.

Following the publication of a discussion paper No. 3/2022, Margin development 2017-2022 in key markets, The Competition Authority called for views from businesses, trade unions and consumer organisations, and held meetings with numerous parties. Subsequently, the Authority summarised several conclusions which were presented at a meeting. National Economic Council
9 February 2023.

The presentation to the National Economic Council includes, among other things, an overview of the views that had been received. It also sets out Recommendations to the government on ways to strengthen competition and thus counter further price rises. The presentation is available here.