Anticompetitive Agreements - PowerPoint Presentation

1. Anticompetitive AgreementsAlice Pham31 October 2014

2. Main prohibitions of competition lawsCompetition law generally prohibits three main practices: (i) anti-competitive agreements; (ii) abuse of a dominant position or a monopoly; (iii) anti-competitive mergers. It can also have provisions related to unfair commercial practices.(Handbook on Competition Policy and Law in ASEAN for Business, P.8)

3. Firms compete and cooperate…CompeteTo gain a larger clientele, larger share of the market, to gain greater profits by:Offering lowest prices possible with the best quality possibleOffering good services and customer careInnovating and bringing new/improved goods and services to the marketEtcCooperateTo achieve economies of scale and scopeTo improve planning of production and distributionTo gain advantages in marketing and distributionTo undertake R&DTo reduce risksBy entering into Agreements

4. AgreementsMay be alright (e.g. an agreement to collaborate on vital research which will produce new products)May be in violation of the law (e.g. an agreement to fix price)Businesses need to know what the types of agreement would be in breach of the competition law , why so, and what would be the impending sanctions for violation ‘Any agreement between undertakings might be said to restrict the freedom of action of the parties. That does not, however, necessary mean that the agreement is anti-competitive... ASEAN Member States may decide that an agreement infringes the law only if it has as its object or effect the appreciable prevention, distortion or restriction of competition’. (ASEAN Regional Guidelines, §3.2.2) ‘Agreement means any concordance of wills, arrangement, understanding, or promise between independent Undertakings, whether express or implied, written or oral, through any means of communications, including exchanges of commercially sensitive information, and whether or not enforceable or intended to be enforceable by legal proceedings.’ (Draft Competition Law of Myanmar, §2(k))

5. Vertical and horizontal agreementsVertical – at different levels of production (producer – wholesaler – retailer – customer); cooperation amongst those firms essential and efficient in most casesHorizontal – at the same level of production (producer – producer – producer); what is the justification for this? Not necessarily bad, but needs more consideration by competition authorities than vertical agreement

6. Raw materialproducerManufacturerManufacturerManufacturerWholesaledistributorRetailerRetailerRetailer

7. Horizontal agreementsGeneral three types of agreements – [current or potential] competitors agree to:Fix prices, restrict output, market sharing/customer allocation (A can only purchase from X), bid rigging  ‘hard-core’ restrictions (‘CARTELS’)Take joint action to harm rivals who are not party to the agreement, eg collective boycottOnly illegal if has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or servicesManipulate the rules of competition in a manner that will lessen forms of competition other than price competition E.g. restrict advertising, anticompetitive licensing (eg grant-back, ever-greening patent, patent pooling, etc

8. Cartels“Price fixing” involves fixing either the price itself or the components of a price such as a discount, establishing the amount or percentage by which prices are to be increased, or establishing a range outside which prices are not to move.“Bid-rigging” includes cover bidding to assist an undertaking in winning the tender. An essential feature of the tender system is that tenderers prepare and submit bids independently.“Market sharing” involves agreements to share markets, whether by territory, type or size of customer, or in some other ways.“Limiting or controlling production or investment” involves agreements which limit output or control production, by fixing production levels or setting quotas, or agreements which deal with structural overcapacity or coordinate future investment plans. (ASEAN Regional Guidelines on Competition Policy, §3.2.2.1-4)

9. Archer Daniels MidlandMajor US case which also involved EC, Japan, Australia and KoreaMajor producers of lysine (a chemical food additive)Secret cartel to divide the international markets and set pricesUS investigationMassive fines, jail terms, and then damages to private parties

10. The Vitamins cartel - Biggest cartel in history Lasting more than 10 years (1985/1988-1999), consisting of 21 companies from 7 countries, trading in 16 different types of vitamins, with a global revenue of more than US$30 billion Total fines in the US: close to US$1 billion, in Europe: €855 million, not inclusive of individual fines on CEOs and other claims

11. How cartels are dealt with?Per se Prohibitions + Severe penalties + LeniencyPer se prohibitions: Only proving the agreement existsEvidence of explicit agreement between membersEvidence of parallel conductEvidence of facilitating/concerted practices such as information exchange, repeated interactions, etc Severe penalties: 10% of turnover of the preceding FYfines increase the longer a cartel exists, imprisonment of CEOsLeniency: In EC and US a member of a cartel which confesses to the authorities may be given immunity from punishmentMembers of that cartel may seek to reduce damages by in turn confessing to other cartels

12. Other horizontal agreementsExamplesInformation sharingRestrictions on advertisingStandardisation agreementsR&D joint venturesCompetition authorities would normally apply Rule of Reason analysis in these cases

13. ‘Rule of reason’ approach1. Considering facts that are particular to caseEg market power of the parties, competitive relationship between parties, economic conditions2. Considering nature and scope of the restraintWhat does the restraint actually do, how far does it extendReasons for its entry and adoptionBusiness purpose?Is the restraint ancillary to the main and lawful purpose of the agreement3. Considering anticompetitive effects of the restraintsCompare the condition of the market before and after the restraint4. Considering any pro-competitive justificationsEg efficiencies, economy of scale, non-economic benefits5. Is the restraint reasonably necessary to achieve those justifications, is it the least restrictive means6. Weigh up

14. Example: Joint venturesPotential pro-competitive effectsEconomies of scaleSpreading the risks and costs of R&DIncreasing incentives for R&DAcquiring new technologies or skillsSynergies from pooling of complementary resources or capabilitiesPotential anticompetitive effectsSpillover into collusionCollateral restraintsBuild or secure monopoly power by erecting barriers to entry and eliminating competitionDenying access to essential resources or facilitiesDecreased economic efficiency:Reduction of competitive pressure leasing to less incentive to engage in R&DReduction in diversity of research paths

15. Another example

16. Vertical agreementsPrice and non-price restraintsGenerally less a concern than horizontal agreements from an economic perspective and treated more lenientlyIf banned by the law, the Competition Authority would analyse these agreements using the Rule of Reason approach

17. Vertical price restraintsResale price maintenanceMaximum resale priceMinimum resale priceRecommended retail priceExamples:PerfumesSporting goodsElectronicsshoes

18. Vertical price restraintsPotential pro-competitive effectsEnhances interbrand competitionEncourages non-price competition between retailersProtects investment in brand imagePrevents free-ridingAttracts retailers by ensuring a certain level of profitPreserves small business from national chains or discount operationsAvoids double marginalisation – to the benefits of consumersPotential anticompetitive effectsAids collusion at both the manufacturer and retailer levelsReduces intra-brand competition

19. Vertical non-price restraintsNon-price restraints:Geographic restrictionsCustomer restrictionsExclusive contractsRequirement contractsExclusive distributorshipTying conduct

20. Vertical non-price restraintsExamples:A will only supply B on the condition that B does not acquire any of its stock from C (a competitor of A)A will only supply B on condition that B not sell to customers who live in YangonA will only supply B on the condition that B also acquire washing power from AB agrees to acquire stock from A on the condition that A does not supply to other retailer in a certain geographic area or of a certain kindEtc

21. Vertical non-price restraintsPotential pro-competitive effectsEnhancing interbrand competitionPreventing free-ridingAvoiding double marginalisationReducing distribution costsRationalising productionMaintaining control over standards and servicesPotential anticompetitive effectsConsumers suffering from less choice and potentially higher pricesMarket foreclosureIncreasing barriers to entry at manufacturers’ levelLimiting intra-brand competition

22. How CA judge vertical agreements? – Rule of ReasonConsider the impact of the restraint at both levels of the market affectedIn particular, consider:Impact on inter-brand and intra-brand competitionLength of the restraintImpact on structural and strategic barriers to entryMarket sharing and price-fixing agreements as a consequence?

23. The Draft Competition Law of Myanmar (1)Horizontal agreements:§14. Two or more currently or potentially competing Undertakings shall not enter into any monopolistic agreement that has the object or effect of: (a) agreeing or coordinating buying price, selling price or service charges; (b) fixing, discontinuing, destroying, reducing, or limiting the production, purchase, sales, distribution, transfer, export or import of, Goods and Services including any such action likely to affect their quantity, level or quality; (c) fixing, limiting, or restricting other Undertaking’s rights in buying or selling Goods and Services, or directly or indirectly determining the rules that other Undertakings should follow for buying or selling Goods and Services; (d) destroying Goods or causing Goods and Services to be damaged or impaired by downgrading their quality; (e) interfering in another Undertaking.

24. The Draft Competition Law of Myanmar (2)Vertical agreements§15. Two or more Undertakings which are not active in the same level of production or trade shall not enter into any monopolistic agreements that have the object or effect of imposing a Fixed or Minimum Resale Price amongst them

25. §16. Exemptions – Weighing pro- and anti-competitive effectsPro-competitive effectsPromoting technology advancement to improve qualityAchieving uniformed technical standards or quality requirementsRationalising production or distributionEnhancing SMEs’ competitivenessEnhancing international competitivenessProvided that a fair share of the benefits will be shared with the consumers (benefits to consumers to be proved)Anticompetitive effectsNot imposing restrictions on relevant parties which are not indispensable to the attainment of these objectives (The necessity test) Not affording the relevant parties the possibility of eliminating effective competition in the relevant market

26. Thank you for your attention!ap@cuts.org