Anti-competitive Agreements

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 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 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, cartels

Economics of Cooperation

Potential anti-competitive effectsHigher pricesReduced productionWelfare transfer from consumer to producersDeadweight lossCosts of forming and enforcing

cooperation/collusion/cartelProtects inefficient firms Increased consumer search costsLower quality and variety of productsDecrease productive efficiency or innovation

Economics of Cooperation

Potential pro-competitive effectsEconomies of scale and scope Improve planning of production and distributionAdvantages in marketing and distributionResearch and developmentReduces 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 cartelsCartels that are caught are the unsuccessful cartelsSometimes easier to catch

Collusion

Generally 3 types of collusion – agree to:1. Fix prices, restrict output, market sharing, divide

markets, bid rigging• 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 Inelastic demand at competitive priceAbsence of large and sophisticated buyersHomogenous productsStable/predictable demandMature marketsSeller concentrationLack of competitive fringe with elastic supplyDifficult to enter marketSimilar cost structuresEg cement, coffee, fruit and vegetables, mobile phones

Collusion

Conditions for successful, stable collusion1. Competitors reach an understanding on price,

output or another factor of competition

2. Detect deviations

3. Punish deviations

Collusion

1. Reaching agreementWhat is an agreement?Firms might find it difficult to agree on a particular

outcome as their interests are not perfectly alignedNon-price variables and changing market conditions

complicate mattersCommon 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• Short term benefits of non-cooperation vs Longer term

loss of non-cooperation

• Likelihood that cheating will be discovered and punished

• Devices for detecting deviations1. Information sharing

2. Meeting competition clauses

3. Repeated interaction

Collusion

3. 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 war

Per Se Prohibitions

Proving the agreementEvidence of explicit agreement between membersEvidence of parallel conduct

Mere parallelism? Conscious parallelism/oligopolistic interdependence?

Evidence of facilitating/concerted practices Information exchange?

Per Se Prohibitions

US approachContract, combination, or conspiracyParallel conduct + “plus factors” (typically

circumstantial evidence that tends to exclude the possibility that the parties acted independently)

EU approachAgreements, decision of associated undertakings, or

concerted practicesConcurrence of willsParallel conduct is not proof of concertation unless

concertation is the only plausible explanation for such conduct

Per Se Prohibitions

Australian approachContract, arrangement, or understandingRequires communication, consensus, and

commitmentPrice 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

confessLeniency 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 programsThreat of firm sanctionsFirms perceive a significant risk of detectionTransparency

Other Horizontal Agreements

Examples Information sharingRestrictions on advertisingStandardisation agreementsR&D joint ventures

Apply rule of reason analysis

Rule of Reason Analysis

1. Facts peculiar to caseEg market power of the parties, competitive

relationship between parties, economic conditions

2. 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 arrangement

Rule of Reason Analysis

3. Anticompetitive effects of the restraintCompare the condition of the market before and

after the restraint

4. Pro-competitive justifications• 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 effectsEconomies of scaleSpreading the risks and costs of research and

development Increasing incentives for research and developmentAcquiring new technologies or skillsSynergies from pooling of complementary resources

or capabilities

Example: Joint Ventures

Potential anti-competitive effectsSpillover collusionCollateral restraintsBuild or secure monopoly power by erecting barriers

to entry and eliminating competitionDenying access to essential resources or facilitiesDecreased 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 maintenanceMaximum resale priceMinimum resale priceRecommended retail priceExamples

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

Potential anti-competitive effects Aids collusion at both the manufacturer and retailer levels Reduces intrabrand competition

Vertical Non-Price Restraints

Non-price restraintsGeographic restrictionsCustomer restrictionsExclusive contracts

Requirements contracts Exclusive distributorship Tying conduct

Vertical Non-Price Restraints

ExamplesA 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 regionA will only supply B on condition that B also acquire

washing powder from AB 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 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 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 agreementsEvidence of express vertical agreementCircumstantial 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