Anti-competitive Agreements

1. Anti-competitive Agreements Allan Fels, Professor of Government, The Australia and New Zealand School of Government (ANZSOG)

2. 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

3. 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

4. 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

5. 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 innovation

6. 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 risk

7. 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 catch

8. 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

9. 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 phones

10. Collusion • Conditions for successful, stable collusion • Competitors reach an understanding on price, output or another factor of competition • Detect deviations • Punish deviations

11. 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 associations

12. 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 interaction

13. 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 war

14. 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?

15. 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

16. Per Se Prohibitions • Australian approach • Contract, arrangement, or understanding • Requires communication, consensus, and commitment • Price signalling and information disclosure re: banking sector

17. 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

18. Leniency Programs • Factors that increase the effectiveness of leniency programs • Threat of firm sanctions • Firms perceive a significant risk of detection • Transparency

19. Other Horizontal Agreements • Examples • Information sharing • Restrictions on advertising • Standardisation agreements • R&D joint ventures • Apply rule of reason analysis

20. 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 arrangement

21. 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 up

22. 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 capabilities

23. 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

24. 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

25. 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

26. Vertical Price Restraints • Resale price maintenance • Maximum resale price • Minimum resale price • Recommended retail price • Examples • Perfumes • Sporting goods • Electronics • Shoes

27. 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

28. Vertical Non-Price Restraints • Non-price restraints • Geographic restrictions • Customer restrictions • Exclusive contracts • Requirements contracts • Exclusive distributorship • Tying conduct

29. 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

30. 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

31. 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

32. 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?

33. 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

34. 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

35. Case Study: 2010 South African Bread Cartel • Entry barriers • Demand substitutes • Elasticity • Vertical relationships

36. Case Study: 2007 Dutch Beer Cartel • Entry barriers • Demand substitutes • Elasticity • Vertical relationships

37. Other Issues • International cartels and cooperation between NCAs • Information sharing and leniency