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: 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

8. 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

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 1.Competitors reach an understanding on price, output or another factor of competition 2.Detect deviations 3.Punish deviations

11. 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

12. 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 deviations 1.Information sharing 2.Meeting competition clauses 3.Repeated interaction

13. 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

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 1.Facts peculiar to case Eg 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

21. 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 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

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