The Office of Fair Trading (OFT) has accused the UK's big four supermarkets of collusion with dairy suppliers to keep prices of dairy goods artificially high.
An OFT investigation uncovered the sharing of "highly commercially sensitive information, including details of the levels of price increases, over a two year period of 2002 and 2003", it said.
The alleged price-fixing meant that consumers have paid an estimated £270 million over the odds for milk, cheese and butter, said the OFT.
Tesco, Asda, Sainsbury’s and Morrisons, along with suppliers including Dairy Crest and Arla are implicated, said a report by the watchdog.
"This is a very serious case," said OFT executive director Sean Williams. "This kind of collusion on price is a very serious breach of the law."
The OFT has written to Asda, Morrisons, Sainsbury's and Tesco, as well as dairy processors Arla, Dairy Crest, Lactalis McLelland, The Cheese Company and Wiseman to set out its findings. It awaits their responses, and any objections.
Williams hinted at severe punishment for any offences that are eventually proven, pledging that the watchdog will exercise its powers to punish bad behaviour and "deter other businesses from taking such actions".
A decision on the case will be made by the end of 2008, if not sooner, said the OFT.
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