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Competition Law and the Regulation of Buyer Power and Buyer Cartels in China and Hong Kong

Published online by Cambridge University Press:  29 May 2015

Ariel Ezrachi
Affiliation:
The University of Oxford Centre for Competition Law and Policy, University of Oxford, Oxford, UK, E-mail: ariel.ezrachi@law.ox.ac.uk
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Abstract

The paper focuses on the application of competition law in HK and China to buying alliances and buyer cartels in intermediate markets. The discussion set to clarify the legality, under the competition provisions, of purchase price fixing agreements between buyers.

Type
Articles
Copyright
Copyright © Faculty of Law, National University of Singapore 2014

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References

1 See, for example, Renton, Alex, “British Farmers Forced to Pay the Cost of Supermarket Price Wars”, The Guardian (2 July 2011)Google Scholar, online: The Guardian <http://www.theguardian.com/environment/2011/jul/02/british-farmers-supermarket-price-wars> (last accessed 30 September 2013); “Q&A: milk prices row and how the system works”, BBC News (23 July 2012) online: BBC News <http://www.bbc.co.uk/news/business-18951422> (last accessed 30 September 2013); ICN, Special Program for Kyoto Annual Conference: Report on Abuse of Superior Bargaining Position (2008); See also Nihoul, Paul & Luebbig, Thomas, “The Next Big Question in Competition Law: How Do We Treat Buyer Power?” (2011) 2 J. Eur. C. L. & P. 107.Google Scholar

2 See OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 19-20.

3 Case COMP/C.38.238/B.2, Raw Tobacco Italy; Case 123/83, Bureau national interprofessionnel du cognac v Guy Clair [1985] ECR 391. On these cases see below text to n. 52.

4 See, for example, ECN, Activities in the Food Sector (May 2012), (Report on Competition Law Enforcement and Market Monitoring Activities by European Competition Authorities in the Food Sector); Commission (EC), “A Better Functioning Food Supply Chain in Europe” COM(2009) 591. For the situation in the U.S., see Stucke, M., “Looking at Monopsony in the Mirror” (2013) 62 Emory L.J. 1509 Google Scholar (forthcoming). See also <http://www.justice.gov/atr/public/division-update/2011/ag-workshops.html> (last accessed 30 September 2013); For the situation in the U.K. and Australia see Competition Commission, Market investigation into the supply of groceries in the UK (2008)Google Scholar; Australian Competition & Consumer Commission, Report of the ACCC Inquiry into the Competitiveness of Retail Prices for Standard Groceries (2008)Google Scholar.

5 Blair, Roger D. & Harrison, Jeffrey L., Monopsony in Law and Economics (Cambridge: Cambridge University Press, 2010) at 45 CrossRefGoogle Scholar; Manning, Alan, “The Real Thin Theory: Monopsony in Modern Labour Markets” (2003) 10/2 Lab. Econ. 105131 CrossRefGoogle Scholar; Also see: Manning, Alan, Monopsony in Motion (Princeton University Press, 2003)Google Scholar.

6 Tirole, Jean, The Theory of Industrial Organisation (MIT Press, 1988) at 65 Google Scholar, 66-92.

7 Output levels will reduce below “non-monopsony levels”. Blair, Roger D. & Harrison, Jeffrey L., Monopsony in Law and Economics (Cambridge, 2010) at 46 CrossRefGoogle Scholar; Jacobson, Jonathan M. & Dorman, Gary J., “Joint Purchasing, Monopsony and Antitrust” (1991) 36 Antitrust Bull 1.CrossRefGoogle Scholar

8 Oligopsony represents another form of distorted competition and a demand-side mirror image of an oligopolistic market. Each purchaser is powerful enough to influence the market, but cannot act independently to the extent that it can ignore the reaction of other competitors to its actions. Coordination between buyers would maximise collective buyer profit. On the condition for successful coordination between oligopsonists, see: Dowd, James Murphy, “Oligopsony Power: Antitrust Injury and Collusive Buyer Practices in Input Markets” (1996) 76 B.U.L. Rev. 1075 Google Scholar; OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38Google Scholar, at 31.

9 Absent price discrimination, monopsony and oligopsony will result in quantity distortion and loss of efficiencies. This is aggravated when the monopsonist benefits from market power downstream. See: OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38 Google Scholar, Background Note.

10 Bhaskar, V., Manning, A. & To, T., “Oligopsony and Monopsonistic Competition in Labor Markets” (2002) 16 J. Econ. Perspectives 155174 CrossRefGoogle Scholar; Noll, Roger G., “Buyer Power and Economic Policy” (2005) 72 Antitrust L.J. 589.Google Scholar

11 On this point, see Office of Fair Trading, The Competitive Effects of Buyer Groups, Economic Discussion Paper, A Report prepared for the OFT by RBB Economics (OFT 863, 2007).

12 Coddington, Alan, Theories of the Bargaining Process (Chicago: Aldine Pub Co, 1968) at 4.Google Scholar

13 The overall goal of the negotiation is to lower the input price and increase the quantities purchased.

14 Office of Fair Trading, The Competitive Effects of Buyer Groups, Economic Discussion Paper, A Report Prepared for the OFT by RBB Economics (OFT 863, 2007) at 5-6; OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 22-24.

15 This represents the ability of one of the parties to the negotiation to find another trading partner. On the role of outside options in negotiations, see Muthoo, Abhinay, Bargaining Theory with Application (Cambridge: Cambridge University Press, 1999), c. 5.CrossRefGoogle Scholar

16 The larger the buyer, the greater its outside options. OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 40, referring to Katz, , “The Welfare Effects of Third Degree Price Discrimination in Intermediate Goods Markets” (1987) 77 Am. Econ. Rev. 154.Google Scholar

17 Contrast with outside option which would lead to terminating the negotiations.

18 Muthoo, Abhinay, Bargaining Theory with Application (Cambridge, 1999), c. 4.CrossRefGoogle Scholar

19 OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 43.

20 For a detailed account on the consequences of the exercise of buyer power, see OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 42-53.

21 The lower price negotiated by the buyer group and the supplier results in higher price to non-members. For a detailed analysis of these points see: OECD, , “Monopsony and Buyer Power” [2008] DAF/COMP (2008) 38 Google Scholar; Office of Fair Trading, The Competitive Effects of Buyer Groups, Economic Discussion Paper, A report prepared for the OFT by RBB Economics (OFT 863, 2007), at 17-18; also see Bundeskartellamt, Buyer Power in Competition Law – Status and Perspectives (2008), submission by Germany to the OECD, online: <http://www.bundeskartellamt.de/wEnglisch/download/pdf/2008_ProfTagung_E.pdf> (last accessed 30 September 2013). The U.K. Competition Commission has addressed waterbed effects as part of its 2008 grocery sector inquiry. See OECD, “Monopsony and Buyer Power” [2008] DAF/COMP (2008) 38 Google ScholarPubMed, at 69, 236-237.

22 Waterbed effects may be the result of changes in the supply market (e.g. reduction in number of suppliers) which were triggered by the buyer power, increase in barriers to entry, or market share shifting. For a detailed review of these three theories, see OECD, “Monopsony and Buyer Power” [2008] DAF/COMP (2008) 38 Google ScholarPubMed, at 50-54.

23 Note that intervention in this case is problematic, as it requires foregoing welfare gains to consumers who benefit from lower prices due to a speculative fear of future exit by competitors from the market and increased concentration. See OECD, “Monopsony and Buyer Power” [2008] DAF/COMP (2008)38 Google ScholarPubMed, Background Note.

24 When competition upstream is high, suppliers’ margins will be limited. When faced with concentrated downstream market and buyer power, both incentive and capacity to invest upstream would be limited.

25 On the limited instances in which quality erosion may take place – see: Ezrachi, Ariel & Jong, Koen de, “Buyer Power, Private Labels and the Welfare Consequences of Quality Erosion” (2012) 5 ECLR 257.Google Scholar

26 Ibid., at paras. 97, 102.

27 Ibid., at para. 101.

28 The top six members of the SSNRA occupied around 75% market share in the Shanghai city region, that had at the time a population of over 20 million consumers, due to the high quality and good reputation of the products.

29 Hao Wang, “Slotting Allowances and Retail Market Power”, China Center for Economic Research, Peking University.

30 Chen Yali, “Slotting fees push commodity prices higher” Shanghaibao (19 October 2011), online: Shanghaibao <http://www.shanghbao.net.cn> (last accessed 29 February 2012).

31 Guang, Wu Xiong & Ling, Li, “Financial Survival in the Electrical Retail MarketXin Cai Fu (September 2005), at 4359.Google Scholar

32 Lisa Hui, “Poor Logistics Prop Up Slotting Fees” (19 October 2011), online: <http://cib.shangbao.net.cn/c/59664.html> (last accessed 30 September 2013).

33 Lisa Hui, “To Collect or Not?” Shanghaibao (14 December 2011), online: Shanghaibao <http://www.shanghbao.net.cn> (last accessed 29 February 2012).

34 Measurers for the Administration of Fair Dealing Between Retailers and Suppliers, Order no. 17 of 2006, Ministry of Commerce, National Reform and Development Commission, Ministry of Public Security, State Administration of Taxation and State Administration of Industry and Commerce.

35 See David Web, “Hong Kong Needs a Competition Law” (13 July 2001), online: <http://www.webb-site.com/articles/noncompete.asp> (last accessed 30 March 2012). See also “Disposal of Hong Kong Stores” Carrefour Press Release (18 December 2000), online: Carrefour Press Release <http://www.carrefour.com/cdc/press/press-release/financial-news-releases/disposal-hong-kong.html> (last accessed 30 March 2012). See also “Small Store Causes Stir by Selling Cheaper Noodles” The Standard (3 November 2011).

36 Lin Wen Qiao, “Why Do Cheap Drug Stores Fail?” Southern Metropolis Daily (21 May 2004).

37 See The Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (1990), specially Arts. 12, 17, 18 and 19.

38 The Anti-Monopoly Law of the People’s Republic of China was enacted on 30 August 2007 and entered force on 1 August 2008.

39 State Administration of Industry and Commerce “Rules on the Prohibition of Monopoly Agreement Behavior”, Order No. 53 of 2010 dated 31 December 2010 effective 1 February 2011.

40 The Competition Ordinance was gazetted on 22 June 2012 (Ordinance No. 14 of 2012). Whilst it is being gazetted, it will be put into force in stages of over one to two years due to the appointment and setting up of a Commission.

41 The Anti-Price Monopoly Provisions promulgated by the National Development and Reform Commission on 29 December 2010 and effective on 1 February 2011.

42 See the Weyerhaeuser case in the U.S., where the U.S. Supreme Court requested the same standard in predatory bidding and predatory pricing cases. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069, 1077 (2007).

43 Case C-501/06, “GlaxoSmithKline Services Unlimited v Commission” [2010] 4 CMLR 2 (ECJ), at para. 63.

44 OECD, “Monopsony and Buyer Power” [2008] DAF/COMP (2008) 38 Google ScholarPubMed, at 43.

45 Ezrachi, Ariel & Jong, Koen de, “Buyer Power, Private Labels and the Welfare Consequences of Quality Erosion” (2012) 5 ECLR 257.Google Scholar

46 Case No CA98/09/2003, BetterCare Group Ltd/North & West Belfast Health & Social Services Trust, at para. 58. See OECD, “Monopsony and Buyer Power” [2008] DAF/COMP (2008) 38 Google ScholarPubMed, at 235.

47 OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 213.

48 OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 213. For similar examples from the health care sector in the Netherlands, see OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 209-211. For relevant cases on the abuse of a dominant bargaining position by large-scale retailers in Japan, see OECD, “Monopsony and Buyer Power” [2008] DAF/COMP(2008)38, at 197-199. For other reported cases of abuse of dominance by buyers, see ICN, Special Program for Kyoto Annual Conference: Report on Abuse of Superior Bargaining Position (2008), at 3132.Google Scholar

49 An example of this type of conduct has been recently observed in the Hong Kong grocery market where one of the incumbent supermarket duopolists allegedly applied pressure to a manufacturer of a popular variety of noodles to enforce a standard resale price level when another grocer had discounted the resale price of the product. See Alice So, “Small Store Causes Stir by Selling Cheaper Noodles” The Standard (3 November 2011).

50 Case COMP/C.38.238/B.2, Raw Tobacco Italy.

51 Ibid., at para. 280.

52 Case 123/83, Bureau national interprofessionnel du cognac v Guy Clair [1985] ECR 391.

53 Ibid., at para. 22.

54 Opinion of Advocate General Jacobs in Joined Cases C-264/01, C-306/01, C-354/01 and C-355/01, AOK Bundesverband and others v Ichthyol-Gesellschaft Cordes and others [2004] ECR I-2493.

55 Ezrachi, A., “Buying Alliances and Input Price Fixing – In Search of a European Enforcement Standard” (2012) J. Compet. L. Econ. 8(1), 47.Google Scholar

56 Case C-501/06, GlaxoSmithKline Services Unlimited v Commission, at para. 63 noted in Ezrachi, A., “Buying Alliances and Input Price Fixing – In Search of a European Enforcement Standard” (2012) J. Compet. L. Econ. 57.Google Scholar

57 European Commission First Report on Competition Policy, para. 40.

58 80/917/EEC, Commission Decision of 9 July 1980 (IV/27.958 National Sulphuric Acid Association) [1980] O.J. (L 260) (paras. 31-36); Case 61/80, Coöperatieve Stremsel – en Kleurselfabriek v Commission [1984] ECR 0851 (para. 22).

59 Rule 5, State Administration of Industry and Commerce “Rules on the Prohibition of Monopoly Agreement Behavior”, Order No. 53 of 2010 dated 31 December 2010 effective 1 February 2011.

60 It should be explained that under China’s complex enforcement regime, three agencies have differing and, to some extent, overlapping enforcement responsibilities. NRDC is charged with dealing with “price monopoly” cases whether they involve unilateral conduct or collusion between competitors. Non-price monopoly cases are under the purview of the SAIC. The ability to distinguish in any meaningful way between cases where price is or is not a factor will be exceptionally difficult. This matter is an issue of bureaucratic jurisdiction, not of substance. But it explains why two bodies both issue implementing regulations on these issues. A co-operation mechanism is apparently in place to resolve turf wars and the higher level Anti-monopoly Commission of the State Council is charged with resolving any intractable disputes between the agencies.

61 The Anti-Price Monopoly Provisions Promulgated by the National Development and Reform Commission on 29 December 2010 and effective on 1 February 2011.

62 In August 2013, fines amounting to US$110 million were imposed by the NRDC on five foreign milk power suppliers for price fixing and announcements were made that a number of other investigations were underway. See “Tough-Talking China Pricing Regulator Sought Confessions from Foreign Firms” Reuters (21 August 2013).