Allan Fels Professor of Government The Australia and New Zealand School of Government ANZSOG Overview Horizontal agreements Cooperation collusion and cartels Per se prohibitions Other anticompetitive agreements ID: 525042
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Slide1
Anti-competitive Agreements
Allan
Fels
, Professor of Government, The Australia and New Zealand School of Government (ANZSOG)Slide2
Overview
Horizontal agreements
Cooperation, collusion, and cartels
Per se prohibitions
Other anti-competitive agreements
Joint ventures
Vertical agreements
Price restraints
Non-price restraints
Case studies
2010 South African bread cartel
2007 Dutch beer cartel
Other IssuesSlide3
Agreements under Malaysian Competition Law
Per se illegal – horizontal agreements
Fix price or any other trading conditions
Market sharing or share sources of supply
Limit or control production, market outlets or market access, technical or technological development, or investment
Bid rigging
Other anti-competitive agreements – horizontal or vertical agreements
Object or effect of significantly preventing, restricting or distorting competition in any market for goods or services
Individual exemptions and block exemptionsSlide4
Cooperation vs
Non-Cooperation
Firms face a choice between cooperation and non-cooperation
Firms
recognise
the possibility of higher profits if they coordinate their activities
But there is a strong private incentive to not cooperate
Certain forms of cooperation are per se illegal as 99% of the time they are harmful and should be banned
Other forms of cooperation should be assessed on a rule of reason basis
Cooperation, collusion, cartelsSlide5
Economics of Cooperation
Potential anti-competitive effects
Higher prices
Reduced production
Welfare transfer from consumer to producers
Deadweight loss
Costs of forming and enforcing cooperation/collusion/cartel
Protects inefficient firms
Increased consumer search costs
Lower quality and variety of products
Decrease productive efficiency or innovationSlide6
Economics of Cooperation
Potential pro-competitive effects
Economies of scale and scope
Improve planning of production and distribution
Advantages in marketing and distribution
Research and development
Reduces riskSlide7
Collusion
Collusion will be successful if:
Potential for monopoly power, given the characteristics of the market
Expected high gains
Organisational
problems can be overcome
Unsuccessful cartels
Cartels that are caught are the unsuccessful cartels
Sometimes easier to catchSlide8
Collusion
Generally 3 types of collusion – agree to:
Fix prices, restrict output, market sharing, divide markets, bid rigging
Prohibited per se under Malaysian Competition Law
Take joint action to harm rivals who are not party to the collusion,
eg
collective boycotts
Only illegal if object or effect of significantly preventing, restricting or distorting competition in any market for goods or services
Manipulate the rules of competition in a manner that will lessen forms of competition other than price competition,
eg
restrict advertising Slide9
Collusion
Market characteristics for successful collusion
Inelastic demand at competitive price
Absence of large and sophisticated buyers
Homogenous products
Stable/predictable demand
Mature markets
Seller concentration
Lack of competitive fringe with elastic supply
Difficult to enter market
Similar cost structures
Eg
cement, coffee, fruit and vegetables, mobile phonesSlide10
Collusion
Conditions for successful, stable collusion
Competitors reach an understanding on price, output or another factor of competition
Detect deviations
Punish deviationsSlide11
Collusion
Reaching agreement
What is an agreement?
Firms might find it difficult to agree on a particular outcome as their interests are not perfectly aligned
Non-price variables and changing market conditions complicate matters
Common strategies
Cheap talk and focal points
Basing point pricing
Use trade associationsSlide12
Collusion
Detecting deviations – requires monitoring
Likelihood of successfully imposing/maintaining a cartel depends on
Short term benefits of non-cooperation
vs
Longer term loss of non-cooperation
Likelihood that cheating will be discovered and punished
Devices for detecting deviations
Information sharing
Meeting competition clauses
Repeated interactionSlide13
Collusion
Punishing deviations – examples
Quota reduction
Side payments
Non-cheating members to revert to the non-collusive prices by raising output for some time
Most
favoured
customer clause
Multi-market contacts
Increasing cross-ownership among rivals interests
Threat of a price warSlide14
Per Se Prohibitions
Proving the agreement
Evidence of explicit agreement between members
Evidence of parallel conduct
Mere parallelism?
Conscious parallelism/oligopolistic interdependence?
Evidence of facilitating/concerted practices
Information exchange?Slide15
Per Se Prohibitions
US approach
Contract, combination, or conspiracy
Parallel conduct + “plus factors” (typically circumstantial evidence that tends to exclude the possibility that the parties acted independently)
EU approach
Agreements, decision of associated undertakings, or concerted practices
Concurrence of wills
Parallel conduct is not proof of
concertation
unless
concertation
is the only plausible explanation for such conductSlide16
Per Se Prohibitions
Australian approach
Contract, arrangement, or understanding
Requires communication, consensus, and commitment
Price
signalling
and information disclosure re: banking sectorSlide17
Leniency Programs
Increases the probability of detection and punishment by placing cartel members in a prisoners’ dilemma
Interest in keeping cartel unproven
vs
Incentive to confess
Leniency increases the incentive to cheat and confess => increases cartel instability
Increases the probability of detection and punishment by placing cartel members in a prisoners’ dilemma
Lowers the cost of detection
Provides informationSlide18
Leniency Programs
Factors that increase the effectiveness of leniency programs
Threat of firm sanctions
Firms perceive a significant risk of detection
TransparencySlide19
Other Horizontal Agreements
Examples
Information sharing
Restrictions on advertising
Standardisation
agreements
R&D joint ventures
Apply rule of reason analysisSlide20
Rule of Reason Analysis
Facts peculiar to case
Eg
market power of the parties, competitive relationship between parties, economic conditions
Nature and scope of the restraint
What does the restraint actually do, how far does it extend
Reasons for its entry and adoption
Business purpose?
Is the restraint ancillary to the main and lawful purpose of the arrangementSlide21
Rule of Reason Analysis
Anticompetitive effects of the restraint
Compare the condition of the market before and after the restraint
Pro-competitive justifications
Eg
efficiencies, economies of scale, non-economic benefits
Is the restraint reasonably necessary to achieve those justifications, is it the least restrictive means
Weigh upSlide22
Example: Joint Ventures
Generally treated like other general anti-competitive horizontal agreements
Potential pro-competitive effects
Economies of scale
Spreading the risks and costs of research and development
Increasing incentives for research and development
Acquiring new technologies or skills
Synergies from pooling of complementary resources or capabilitiesSlide23
Example: Joint Ventures
Potential anti-competitive effects
Spillover collusion
Collateral restraints
Build or secure monopoly power by erecting barriers to entry and eliminating competition
Denying access to essential resources or facilities
Decreased dynamic efficiency
Reduction of competitive pressure leading to less incentive to engage in research and development
Reduction in diversity of research pathsSlide24
Horizontal Mergers
Normally dealt with under merger law
A merger maybe anti-competitive but there are greater chances of achieving efficiency gains
In the absence of a merger law, a cartel prohibition may generate mergers between competitorsSlide25
Vertical Agreements
Price and non-price restraints
Generally less of a concern than horizontal agreements from an economic perspective and treated more leniently
There is no economic reason to distinguish between price and non-price restraints
The nature of the restraint on its own does not allow prediction of whether will have positive/negative welfare effects
Cf
position taken by
MyCC
in its guidelines
Analysed
using Rule of ReasonSlide26
Vertical Price Restraints
Resale price maintenance
Maximum resale price
Minimum resale price
Recommended retail price
Examples
Perfumes
Sporting goods
Electronics
ShoesSlide27
Vertical Price Restraints
Potential pro-competitive effects
Enhances
interbrand
competition
Encourages non-price competition between retailers
Protects investment in brand image
Prevents free riding
Prevents loss leader selling
Attracts retailers by ensuring a certain level of profit
Preserves small business from national chains or discount operations
Avoids double
marginalisation
Potential anti-competitive effects
Aids collusion at both the manufacturer and retailer levels
Reduces
intrabrand
competitionSlide28
Vertical Non-Price Restraints
Non-price restraints
Geographic restrictions
Customer restrictions
Exclusive contracts
Requirements contracts
Exclusive distributorship
Tying conductSlide29
Vertical Non-Price Restraints
Examples
A will only supply B on condition that B 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 the Eastern region
A will only supply B on condition that B also acquire washing powder from A
B agrees to acquire stock from A on the condition that A not supply to any another retailer in a certain area or of a certain kind Slide30
Vertical Non-Price Restraints
Potential pro-competitive effects
Enhances
interbrand
competition
Prevents free riding
Avoid double
marginalisation
Reduces distribution costs
Rationalises
production
Greater control over standards and services
Potential anti-competitive effects
Less choice and potentially higher prices
Market foreclosure
Increases barriers to entry at manufacturers’ level
Limits
intrabrand
competitionSlide31
Rule of Reason
Need to consider the impact of the restraint
both
levels of the market affected
In particular, note
Impact on inter- and intra-brand competition
Length of restraint
Impact on structural and strategic barriers to entry
Promotion of market sharing and price sharingSlide32
Vertical Agreements
Proving vertical agreements
Evidence of express vertical agreement
Circumstantial evidence?
Manufacturer announces in advance the circumstances under which it will refuse to sell, and then refuse to deal with those who do not comply
Distributing lists showing uniform prices to be charged
Termination following complaints
Other unilateral conduct/policies? Tacit acquiescence?Slide33
Vertical Agreements
US approach
Contract, combination, or conspiracy
Evidence that tends to exclude the possibility that the parties were acting independently
Reasonable tendency to prove that the parties had a conscious commitment to a common scheme designed to achieve an unlawful objectiveSlide34
Vertical Agreements
EU approach
Agreement or concerted practice
Concurrence of wills
Tacit acquiescence can be inferred
Where one party requires the cooperation of the other party to implement its unilateral policy and the other party complies with that requirement by implementing that unilateral policy in practice
Level of coercion exerted by a party to impose its unilateral policy on the other parties, together with the number of parties who implement that unilateral policy in practiceSlide35
Case Study: 2010 South African Bread Cartel
Entry barriers
Demand substitutes
Elasticity
Vertical relationshipsSlide36
Case Study: 2007 Dutch Beer Cartel
Entry barriers
Demand substitutes
Elasticity
Vertical relationshipsSlide37
Other Issues
International cartels and cooperation between
NCAs
Information sharing and leniency