Anti-competitive Agreements

Report
Anti-competitive
Agreements
Allan Fels, Professor of Government, The Australia and New
Zealand School of Government (ANZSOG)
Overview
 Horizontal agreements
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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 Issues
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 exemptions
Cooperation vs Non-Cooperation
 Firms face a choice between cooperation and noncooperation
 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, cartels
Economics of Cooperation
 Potential anti-competitive effects
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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 innovation
Economics of Cooperation
 Potential pro-competitive effects
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Economies of scale and scope
Improve planning of production and distribution
Advantages in marketing and distribution
Research and development
Reduces risk
Collusion
 Collusion will be successful if:
1. Potential for monopoly power, given the characteristics of
the market
2. Expected high gains
3. Organisational problems can be overcome
 Unsuccessful cartels
 Cartels that are caught are the unsuccessful cartels
 Sometimes easier to catch
Collusion
 Generally 3 types of collusion – agree to:
1. Fix prices, restrict output, market sharing, divide
markets, bid rigging
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Prohibited per se under Malaysian Competition Law
2. 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
3. Manipulate the rules of competition in a manner that will
lessen forms of competition other than price competition,
eg restrict advertising
Collusion
 Market characteristics for successful collusion
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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 phones
Collusion
 Conditions for successful, stable collusion
1. Competitors reach an understanding on price, output or
another factor of competition
2. Detect deviations
3. Punish deviations
Collusion
1. 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
1. Cheap talk and focal points
2. Basing point pricing
3. Use trade associations
Collusion
2. Detecting deviations – requires monitoring
Likelihood of successfully imposing/maintaining a cartel
depends on
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Short term benefits of non-cooperation vs Longer term loss of
non-cooperation
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Likelihood that cheating will be discovered and punished
Devices for detecting deviations
1.
Information sharing
2.
Meeting competition clauses
3.
Repeated interaction
Collusion
3. Punishing deviations – examples
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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 war
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?
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
conduct
Per Se Prohibitions
 Australian approach
 Contract, arrangement, or understanding
 Requires communication, consensus, and commitment
 Price signalling and information disclosure re: banking
sector
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 information
Leniency Programs
 Factors that increase the effectiveness of leniency
programs
 Threat of firm sanctions
 Firms perceive a significant risk of detection
 Transparency
Other Horizontal Agreements
 Examples
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Information sharing
Restrictions on advertising
Standardisation agreements
R&D joint ventures
 Apply rule of reason analysis
Rule of Reason Analysis
1. Facts peculiar to case
 Eg market power of the parties, competitive relationship
between parties, economic conditions
2. Nature and scope of the restraint
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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 arrangement
Rule of Reason Analysis
3. Anticompetitive effects of the restraint
 Compare the condition of the market before and after the
restraint
4. Pro-competitive justifications
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Eg efficiencies, economies of scale, non-economic
benefits
5. Is the restraint reasonably necessary to achieve those
justifications, is it the least restrictive means
6. Weigh up
Example: Joint Ventures
 Generally treated like other general anti-competitive
horizontal agreements
 Potential pro-competitive effects
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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
capabilities
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 paths
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 competitors
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 Reason
Vertical Price Restraints
 Resale price maintenance
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Maximum resale price
Minimum resale price
Recommended retail price
Examples
 Perfumes
 Sporting goods
 Electronics
 Shoes
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
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 Potential anti-competitive effects
 Aids collusion at both the manufacturer and retailer levels
 Reduces intrabrand competition
Vertical Non-Price Restraints
 Non-price restraints
 Geographic restrictions
 Customer restrictions
 Exclusive contracts
 Requirements contracts
 Exclusive distributorship
 Tying conduct
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
Vertical Non-Price Restraints
 Potential pro-competitive effects
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Enhances interbrand competition
Prevents free riding
Avoid double marginalisation
Reduces distribution costs
Rationalises production
Greater control over standards and services
 Potential anti-competitive effects
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Less choice and potentially higher prices
Market foreclosure
Increases barriers to entry at manufacturers’ level
Limits intrabrand competition
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 sharing
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?
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 objective
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 practice
Case Study: 2010 South African
Bread Cartel
 Entry barriers
 Demand substitutes
 Elasticity
 Vertical relationships
Case Study: 2007 Dutch Beer
Cartel
 Entry barriers
 Demand substitutes
 Elasticity
 Vertical relationships
Other Issues
 International cartels and cooperation between NCAs
 Information sharing and leniency

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