This week’s article focuses on anti competitive conduct. It higlights the importances of understandings, agreements on certain business practices that limits competition in market.

What are Anti-Competitive Conducts?

Anti-Competitive Conducts are certain business practices that limit or prevent competition in market and are deemed illegal under Competition Law. It refers to a wide range of business practices in which a firm or group of firms may engage in an understanding, agreements or covenants in order to restrict inter-firm competition to maintain or increase their relative market position and profits without necessarily providing goods and services at a lower cost or of higher quality.

These understandings, agreements or covenants do not necessarily have to be in writing. Nothing need, even be expressed—a ‘nod and wink’ is sufficient.

Such conducts includes but is not limited to:

directly or indirectly fix purchase or selling price or any other trading conditions

limit or control production, markets, investment or development

provide for the artificial dividing up of markets or sources of supply

affect tenders to be submitted in response to bids

apply different conditions to equivalent transactions with other parties engaged in the same trade (competitors) hence, putting them at a competitive disadvantage

make the conclusion of contracts subject to parties other than the offering party accepting supplementary obligations which have no connection with the subject of such contracts.

Anti Competitive Conduct under CCD 2010

Anti Competitive Conduct is covered in Section 67 of the Commerce Commission Decree 2010 (“CCD2010”) and is per se a Restrictive Trade Practice. Section 67 of the CCD 2010 restricts a person or a trader from engaging in an anti-competitive conduct.  A person engages in an anti-competitive conduct if the person has substantial degree of power in a market and takes advantage of that power with the effect or likely effect of substantially lessening competition in that or another market.

• Common Forms of Anti-Competitive Conduct

Anti-competitive practices are sometimes known as restrictive practices. They are methods used by firms in a market to restrict competition.

This prohibited conduct includes, but not limited to:

    Refusal to Supply

Incumbent firms often control access to facilities that are essential inputs in the supply of services at the retail level. Competing retailers depend on the incumbent for access to the essential facility. Incumbent firms may attempt to prevent competitors from entering the market by refusing to provide access to an essential facility, withhold information or imposition of excessive pricing regime.

To encourage competition, many jurisdictions require firms with control over essential facilities to provide access to competitors. Rules may also determine the way in which access prices will be agreed, and procedures for resolving any disputes.

Vertical Price Squeeze

A vertically integrated firm is one that controls the supply chain at various functional levels. For example, a manufacturer of timber also operates a hardware and timber yard and supplies the timber to its competitors as well.

A firm which is vertically integrated and controls an essential input to the retail service implements a price squeeze if:

ρ The price the firm demands makes it impossible for an equally-efficient retail-stage competitor to operate profitably or even survive, given the level of retail prices;

ρ The firm does not charge its own downstream operation this high price; or

ρ Engages in a discriminatory price practices between its own downstream operation and the competitors to the extent of lessening competition.

• Exclusionary or Predatory Pricing

It is a pricing strategy used by an established firm to eliminate competition from equally efficient firms, and secure a dominant position in a previously competitive market. A firm practicing predatory pricing lowers its price below cost and maintains it there until equally efficient competitors are forced to incur unsustainable losses and exit the market. The firm then raises its price to a monopoly level in order to recoup its lost profits.

Predatory pricing is a risky strategy. The firm involved incurs high up-front losses, with no guarantee of future gains from monopolization. The strategy will only be profitable if, once all competitors have been forced out of the market, the incumbent is able to raise its prices to a monopoly level and keep them there. If the firm is subject to either direct price regulation or some other form of control, predatory pricing is unlikely to succeed. Predatory pricing requires high barriers to entry. If firms are able to enter the market easily, then each time the incumbent increases its price this will attract new entrants into the market, forcing the incumbent to drop its price again.

•           Tying and Bundling

Tying of services occur where a service provider makes the purchase of one product or service over which it has market power (the “tying good”) conditional on the purchase of a second, competitively supplied, product or service (the “tied good”). By tying services, a service provider can try to use market power in one market to give itself an advantage in another competitive market. Customers who opt to buy the tied good from a competitor cannot find a feasible substitute for the service provider’s tying good.

Tying is primarily a strategy to maximize profits. It can be profitable:

ρ where the demands for the two products are complementary, such that end users consume both products together; or

ρ If the tying product is regulated and the regulated price is below the service provider’s profit maximizing level. In this case, a successful tying strategy would enable the service provider to increase its overall profitability by increasing the price of the tied good.

Service Bundling occurs where a service provider offers two or more services separately, but gives a discount to customers who purchase the services as a combined bundle. Bundling is common especially in telecommunications and other multiproduct industries, reflecting both cost savings from producing services jointly, and consumer preferences for service bundles.

• Cartels

A cartel exists when businesses agree to act together instead of competing with each other. This agreement is designed to drive up the profits of cartel members while maintaining the illusion of competition.

There are certain forms of anti-competitive conduct that are known as cartel conduct. They include:

ρ price fixing, when competitors agree on a pricing structure rather than competing against each other

ρ sharing markets, when competitors agree to divide a market so participants are sheltered from competition

ρ rigging bids, when suppliers communicate before lodging their bids and agree among themselves who will win and at what price

ρ Controlling the output or limiting the amount of goods and services available to buyers.

Cartels can be local, national or international. Established cartel members know that they are doing the wrong thing and will go to great lengths to avoid getting caught.

• Minimum resale prices or Resale Price Maintenance

Suppliers must not put pressure on businesses to charge at a recommended retail price or any other set price and threaten to stop supplying re-sellers. Suppliers also cannot pressure re-sellers to stop advertising, displaying or selling goods supplied by the supplier below a specified price.

For example, a Supplier of Good A may decide to mark the Recommended Retail Price as $2.50 a unit. What the Supplier cannot do is to refuse to supply if a trader decides to sell at a price lower than $2.50.

• Impact of Anti-Competitive Conduct

Anti-Competitive Conduct by business affects the economy at large in the following ways:

ρ creates  inefficiency and declined output due to artificial forces of the market

ρ decreasing investment by building barriers to entry and competition

ρ increasing unemployment by restricting competing firms from expanding

ρ weaken the incentive for cost control

ρ restrict consumer choice

ρ unduly limit product variety profit.

Next Week: Vertical Restraints

For more information/details on Fiji Commerce Commission and Commerce Commission Decree 2010, visit our website on www.commcomm.gov.fj or join us on Face book as Fiji Commerce Commission.