Chapter 2

1. Chapter 2 Anti-competitive Behaviours & Competition Policy

2. Anti-competitive Behaviours & Competition Policy What are anti-competitive practices? Impacts of anti-competitive practices & competition policy

3. 2.1 What are anti-competitive practices? A. Monopoly & anti- competition B. Different forms of anti-competitive practice

4. A. Monopoly & anti-competition To analyze the relationship between monopoly & anti-competition To understand the definition of anti-competitive practice

5. Monopoly = Anti-competition? Elimination of weaker competitors through competition Not necessarily anti-competition + Monopoly Economies of scale

6. Why is monopoly often seen as being anti-competitive? Engage in anti-competitive practices Monopoly Abuse market dominance

7. What is anti-competition? Anti-competition: Enterprises use unfair or inappropriate ways to reduce or restrict market competition.

8. B. Different forms of anti-competitive practice To learn about the forms of anti-competitive practice To examine some anti-competitive practices in Hong Kong

9. Anti-competitive practices: All behaviours that distortor restrict market competition. Mergers Horizontal agreements Vertical agreements

10. Mergers Horizontal mergers The merging of firms producing the same type of goods. The merging of KCR and MTR The merging of restaurants

11. Price The potential competitor is removed. Mergers Potential competition mergers The merging of a firm and another firm that plans to enter the market and compete with it.

12. Mergers Vertical mergers The merging of firms which are in different production stages & have a buyer-seller relationship. Competitors lose raw material supply or retail outlets. A flour company merges with a bread shop. The newly merged enterprise has more control of the market prices.

13. Horizontal agreements Competitors in the same industry work together to reach an agreement on price & output so that they can jointly control prices. Competitors in the same industry may work together to control prices.

14. Horizontal agreements Price-fixing An agreement between firms to fix or raise the price to restrict price competition and increase profits. Price-fixing distorts the normal operation of the market Suspected of price-fixing Increases buyer’s costs

15. Horizontal agreements Sales & production quotas An agreement among producers or suppliers tofix a sales or production quotaso that their joint reduction in output can raise the product price. The Organization of the Petroleum Exporting Countries (OPEC) influences the oil price through controlling their output.

16. Horizontal agreements Clip: ICAC New Year Fair stalls bidding & the construction of the gates for public housing units have been suspected of bid rigging. Bid rigging Firms agreeing to submit common bids. Firms agreeing to submit the lowest bid to win the contract by rotation. The price for the project will be much higher than the market price. Share the profits & eliminate competition.

17. Most housing estates in Hong Kong have only one supermarket. Horizontal agreements Market division: in products & locations An agreement among producers or suppliers on the scope of operation. Each firm in the agreement sells only the specified products or operates only at the specified locations and will not enter others’ scope of operation.

18. Horizontal agreements Customer allocation An agreement among market participants on the source of customers. With different sources of customers, there is no competition. Colluding firms can charge higher prices.

19. Horizontal agreements An agreement among competitors not to trade with certain suppliers or customers. Joint boycotts The joint effort of competitors to force suppliers or customers not to trade with another competitor. Colluding competitors Let’s not buy from this supplier so that it will leave the market.

20. Horizontal agreements Unfair or discriminatory standards Standards agreed upon among members of a trade union or professional body, which deny newcomers the change to enter or compete in the market. Let’s draw up some standards to prevent newcomers from entering the market. Trade union

21. Vertical agreements An agreement on purchasing or sales conditions made between firms in different stages in the production or sales chain. Cement production companies, building construction companies & property agents may enter vertical agreements.

22. Vertical agreements Exclusive dealing The agreement made between a supplier and its distributors so that the distributors cannot sell products of the same kind provided by other suppliers. Supplier A Supplier B You can only sell what I provide you. My sales channel is blocked. I may have to close down. The distributor only sells Supplier A’s products.

23. Vertical agreements Sole distributor The arrangement that the producer only assigns one distributor for its products in a specified sales territory. Ng Fung Hong is the sole distributor of live cows imported from the mainland.

24. Vertical agreements Tie-in sales & bundling Tie-in sales The buyer can buy the desired good or services (i.e., the tying good) only if he agrees also to buy a different good or service (i.e., the tied good) from the seller. Bundling of services The sale of a package of several services (or products) and buyers cannot buy only one item. The sale of Windows products is bundled with browsers.

25. Vertical agreements Resale price maintenance A supplier specifying the minimum or maximum price at which a product must be re-sold to customers by downstream firms. The prices of football T-shirts have once been said to be specified by the supplier.

26. Other anti-competitive practices Retail price minimum Predatory pricing Abuse of dominance Price discrimination Tie-in sales

27. 2.2 Impacts of anti-competitive practices & competition policy To analyze the impacts of anti-competitive practices on consumers & the economy as a whole To examine the justifications & concerns for competition policy in Hong Kong To examine the debate on competition law

28. What impact does anti-competitive practices have? Hindering the development of the industry Unfavourable to consumers Harmful to economic efficiency

29. Major justification for competition policy To provide a legal basis for the investigation & sanctioning of anti-competitive conduct. To strengthen the competition regulatory framework in order to promote market discipline. To improve the business environment & provide a level playing-field for business.

30. Major justification for competition policy To improve transparency through delineating what constitutes anti-competitive conduct so that firms & the public are fully aware of them and can prevent their occurrence in society. Without such regulation through legislation, in the long run there might be an adverse effect on the relative competitiveness of Hong Kong, especially in those sectors with high entry barriers. The newspaper industry and the rail industry have very high entry barriers.

31. Concerns for competition policy Needed? Interference with the market structure Increase in the cost of doing business Effects on the development of small- & medium-sized enterprises Use of alternative ways to enhance market competition

32. To tackle cross-sector ‘bundling of services’ effectively and to avoid discrimination against certain business sectors or consumers, the Competition Policy Review Committee (CPRC) suggests that competition law should apply to all. Concerns for competition policy Cross-sector? Sector-specific? Competition Policy Advisory Group

33. Concerns for competition policy Practices covered? The practices are not illegal unless they are found: To have been carried out with the intent to distort the market. To have the effect of distorting normal market operations & lessening competition.

34. Concerns for competition policy Exemptions? CPRC recommended that the new legislation should allow the government to exempt certain specified situations from the application of the law on public policy or economic grounds. The new law does not point against the rail merger. A group opposed the exemption of government departments from the competition law.

35. Concerns for competition policy Civil offence? Criminal offence? The CPRC suggests civil penalties. Clip: Competition Policy Press Conference

36. End of Chapter 2