Lecture

1. 6 Lecture Marketing, Advertising and Product Safety IBBA361 Business Ethics and Corporate Governance Department of Business AdministrationS.Chan Reference: Competition Commission http://www.compcomm.hk/tc/usefulresources_competition_2.html Consumer Council website

2. Marketing Ethics Ethical framework for marketing in American society (bill of rights for consumer): Fairness: The right to be provided with adequate information about products Freedom: The right to have a voice in the marketing of major marketing decision; Well-being:The right to be protected from harmful products Freedom & well-being: The right to be offered a choice that includes the products that consumers truly want.

3. Marketing Ethics in Hong Kong I Consumer rights in Hong Kong: The right to satisfaction of basic needs; The right to safety The right to be informed The right to choose The right to be heard The right to redress The right to consumer education The right to a healthy and sustainable environment

4. Marketing Ethics in Hong Kong II http://www.consumer.org.hk/website/ws_en/competition_issues/model_code/2006100401.pdf Trade Practice Rules Complaint Handling Rules Fair Competition Rules

5. Marketing Ethics in Hong Kong II I) Trade Practice Rules false trade descriptions (虛假或誤導性商品說明) misleading omissions (誤導性遺漏), aggressive commercial practices (具威嚇性的營業行為), bait advertising (餌誘式廣告宣傳), bait-and-switch (先誘後轉銷售行為), and wrongly accepting payment (不當地接受付款)

6. False Trade Descriptions(虛假或誤導性商品說明) • It is an offence if traders supply or offer to supply any goods or services to which a false trade description is applied, or apply a false trade description to any goods or services that are supplied or offered to be supplied to consumers.

7. Misleading omissions (誤導性遺漏) • It omits or hides material information, or provides material information in a manner that is unclear, unintelligible, ambiguous, or untimely, or fails to identify its commercial intent (unless this is already apparent from the context); and as a result, it causes or is likely to cause, the average consumer to make a transactional decision that he would not have made otherwise.

8. Aggressive commercial practices (具威嚇性的營業行為) • A commercial practice engaged by a trader in relation to a consumer is aggressive if, in its factual context, it significantly impairs or is likely significantly to impair the average consumer’s freedom of choice or conduct in relation to the product concerned through the use of harassment, coercion or undue influence; and it therefore causes or is likely to cause the consumer to make a transaction decision that consumer would not have made otherwise. • E.g. “We will not let you go unless you have paid for them!”

9. Bait advertising (餌誘式廣告宣傳)http://www.legislation.gov.hk/blis_ind.nsf/CurChinOrd/54A907FC21D1E1F048257BAC002A556F?OpenDocument • Advertising by a trader of products for supply at a specified price is bait advertising if (having regard to the nature of the market in which the trader carries on business and the nature of the advertisement) there are no reasonable grounds for believing that the trader will be able to offer for supply those products at that price in reasonable quantities and for a reasonable period; or the trader fails to offer those products for supply at that price, for a reasonable period, and in reasonable quantities. • E.g. advertisement on the display window stating, “Huge sale on plane tickets, HK$999 direct flight to Hokkaido, for today only.” “We want to purchase the HK$999 direct flight ticket to Hokkaido.” The staff replied, “We’re sorry, the ticket was sold out.” “The travel agency has just opened for business for 5 minutes, the tickets run out this quickly?” The staff responded, “Well, that’s the case. We only offer 1 ticket at each outlet.”

10. Bait-and-switch (先誘後轉銷售行為) • The making by a trader of an invitation to purchase a product at a specified price is a bait and switch if, having made the invitation, the trader then, with the intention of promoting a different product, refuses to show or demonstrate the product; refuses to take orders for the product or deliver it within a reasonable time; or shows or demonstrates a defective sample of the product.

11. Wrongly accepting payment (不當地接受付款) • A trader wrongly accepts payment if at the time of accepting payment for the product, he intends not to supply the product or intends to supply a product that is materially different from the product, or there are no reasonable grounds for believing that the trader would be able to supply the product within the specified period or a reasonable period.

12. Marketing Ethics in Hong Kong II II ) Handling Consumer Complaints Independency and Impartiality Transparency Visibility Affordability Speed and Timeless Competence of Appropriate Officers Accessibility/ Ease of use Security

13. Marketing Ethics in Hong Kong II III ) Fair Competition Rules 甚麼是競爭法？ 競爭法的主要目的為禁止妨礙、限制或扭曲在香港的競爭的行為；提高經濟效益和促進自由貿易為目的，從而保障消費者利益。在2014年，競爭法草擬指引出現，指引主要針對行業協會的反競爭行為，包括組織的章程及決議，甚至無約束力建議。當中提到專業機構和行業協會等組織，如果提出影響會員市場行為，例如價格的決定，即使不是強制性，亦有機會違反《競爭法》。而在2012年通過的競爭法中，則主要禁止三大類反競爭行為，禁止業務實體之間直接或通過行業協會或貿易協會作出任何具有妨礙、限制或扭曲競爭的目的或效果的協議及其他經協調做法，濫用市場權勢，以及只適用於電訊行業的反競爭行為。

14. Reference • Competition Commission http://www.compcomm.hk/en/index2.html 概覽 • 立法會在2012年6月14日通過《競爭條例》（《條例》）。 • 《條例》旨在禁止和阻遏各行業的業務實體作出其目的或效果是妨礙、限制或扭曲在香港的競爭的反競爭行為。《條例》訂有概括條文，禁止三大類反競爭行為，《條例》稱之為第一行為守則、第二行為守則和合併守則，三者統稱為「競爭守則」。 • 第一行為守則禁止業務實體之間訂立或執行其目的或效果是妨礙、限制或扭曲在香港的競爭的協議、決定或經協調做法。 • 第二行為守則禁止在市場中具有相當程度市場權勢的業務實體，藉從事目的或效果是妨礙、限制或扭曲在香港的競爭的行為，而濫用該權勢。

15. Fair Competition Rules • First Conduct Rule (Conduct substantially lessening Competition) • Second Conduct Rule (Abuse of Dominant Position)

16. First Conduct Rule(第一行為守則) • An undertaking (業務實體) must not: • Make or give effect to an agreement; • Engage in a concerted practice (經協調做法); or • As a member of an association of undertakings, make or give effect to a decision of the association, If the object or effect is to prevent (妨礙), restrict (限制) or distort (扭曲) competition in HK

17. First Conduct Rule Object restrictions • The four types of serious anti-competitive conduct • Resale Price Maintenance (RPM) • Supplier sets fixed or minimum resale price charged by reseller • “You must charge HK$100” • “You must charge at least HK$100” • Information exchange – future price and quantities • Group boycotts

18. General Categorisation of Anti-Competitionhttp://www.compcomm.hk/en/pdf/consultations/Draft%20Guideline_First%20Conduct%20Rule_e.pdf

19. First Conduct Rule – 4 Cardinal Sins – Serious Anti-Competitive Conducts 嚴重反競爭的行為

20. Serious Anti-Competitive Conducts 1) Price Fixinghttp://www.compcomm.hk/tc/usefulresources_competition_1.html • Price fixing is when competitors agree on pricing rather than competing against each other. This includes agreeing to prices, a formula to calculate prices / margin or elements of a price such as  discounts, rebates, promotions or credit terms. • Price fixing can occur verbally or in writing – agreement can be by a 'wink and a nod', made over a drink, price fixing can occur at an association meeting or at a social occasion. • In a competitive market, each competitor should make price decisions independently. Anything that removes price uncertainty between competitors risks being a form of price fixing which hurts consumers and other businesses. • Price fixing increases prices and reduce quality of the products sold.  Under the Competition Ordinance, it is a serious anti-competitive conduct.

21. Example of Fix Pricinghttp://www.compcomm.hk/en/pdf/consultations/Draft%20Guideline_First%20Conduct%20Rule_e.pdf • A number of new car dealers in Hong Kong meet to discuss how to avoid supposed consumer confusion on the range of car-financing options available in the market. The dealers agree to minimum interest rates on car finance packages. They also note that many dealers regularly offer heavy discounts from the list price prior to Chinese New Year. To prevent “too much” undercutting in the market, they agree to a discount of no more than 5% off the list price. These agreements relating to the elements of price would be viewed by the Commission as having the object of harming competition. By collectively setting a minimum interest rate and fixing the maximum discount, key elements of price competition have been agreed by the competitors when these matters should be determined independently.

22. Serious Anti-Competitive Conducts 2) Market Sharing http://www.compcomm.hk/en/usefulresources_competition_2.html • Market sharing is when competitors agree to divide or allocate customers, suppliers or geographic areas among themselves rather than making independent decisions as to where to operate, who to source from and which customers to pursue. • Market sharing includes allocating customers by geographic area, agreeing not to compete for each other’s customers (non-poaching agreements) and agreeing not to enter or expand into a competitor’s market. • Market sharing keeps prices artificially high, reduces choice on price, product/service and quality – hurting consumers and other businesses. Under the Competition Ordinance, it is a serious anti-competitive conduct.

23. Example of Marketing Sharinghttp://www.compcomm.hk/en/pdf/consultations/Draft%20Guideline_First%20Conduct%20Rule_e.pdf • A group of residential coach companies meet to discuss how they operate their services across Hong Kong. To enable them all to make what they consider to be a reasonable profit, they decide to allocate between themselves a number of routes based on the total projected number of passengers. They agree not to provide services or to pursue customers on routes which have been allocated to another company. They also agree not to launch new routes without consulting each other. This agreement not to compete with one another in defined geographic areas has as its object the restriction of competition. The agreement removes from consumers a choice of supplier with the likely result of higher prices for the services concerned. Moreover, an agreement of this kind is unlikely to satisfy the conditions of section 1, Schedule 1 to the Ordinance. While the agreement may appear to have the merit of rationalising and avoiding overlapping services on the routes affected, it is unlikely that consumers would derive any benefit from an arrangement which seeks to eliminate all competition between the parites.

24. Serious Anti-Competitive Conducts 3) Output Restrictionhttp://www.compcomm.hk/en/output_restriction_1.html • Output restriction is when competitors agree to prevent or restrict the volume or type of particular goods or services available on the market. Competitors should make their own independent decisions as to their product output. • Competitors who agree to restrict output often do so to increase prices or stop prices from falling. This can damage the interests of consumers and other businesses. Under the Competition Ordinance, it is a serious anti-competitive conduct.

25. Example of Output Limitationhttp://www.compcomm.hk/en/pdf/consultations/Draft%20Guideline_First%20Conduct%20Rule_e.pdf • Local salted fish producers have faced financial difficulty for a number of years as supply in Hong Kong has increasingly outstripped demand. Given this “crisis” affecting the industry, the main producers meet to discuss how to restructure the sector with a view to rationalising what they consider to be a situation of overcapacity”. • A scheme is agreed which encourages certain producers to withdraw from the production of salted fish for a period and to refocus their commercial activities on other areas of business. Those producers who continue to operate their salted fish businesses make certain compensation payments to the producers leaving the market and, as a further expression of solidarity, agree to cover the costs of decommissioning relevant production lines. The Commission would view this scheme as having the object of harming competition. In a competitive market, the producers would be expected to make production and capacity decisions independently. It is not for the market participants in a particular market collectively to agree what the market outcome should be.

26. Serious Anti-Competitive Conducts 4) Bid Rigginghttp://www.compcomm.hk/en/bid_rigging_1.html • Bid rigging occurs when, without the knowledge of the person calling for bids or requesting a tender, two or more competitors agree they will not compete with each other for tenders, allowing one of the cartel members to “win” the tender. • The most common form of bid-rigging is when competitors agree on who should win a tender. To support the designated winner, the other bidders may agree to refrain from bidding, withdraw their bid, or submit bids with higher prices or on unacceptable terms. • An essential feature of a healthy competitive tender system is that suppliers prepare and submit bids independently. Bid rigging results in higher prices and potentially lower quality goods and services. Under the Competition Ordinance, it is a serious anti-competitive conduct.

27. Example of Big Ridding • A large company with a number of offices across Hong Kong decides to outsource its catering services. The company invites four competing caterers to bid for the new contract. The sales representatives of the four caterers meet, by chance, at a charity football match and discuss the tender. The sales representatives agree as follows: the first caterer will decline to submit a bid while the second will withdraw a previously-submitted bid; the third caterer will submit a higher priced “cover bid”. The tendering company was not aware of these arrangements and proceeded to award the contract to the fourth caterer which, on the face of it, submitted the most “competitive” bid. The Commission will consider this arrangement as having the object of harming competition. The caterers have sought to artificially pre-determine the outcome of the tender. In addition to reducing customer choice, the bid-rigging results in inflated prices for the outsourced catering services.

28. First Conduct Rule - RPM • Resale price maintenance (RPM) is illegal in nearly all countries • General rule is that resellers must be free to set their own resale prices • Recommended resale prices are usually allowed BUT: • Must not be binding; and • No pressure or incentive or “penalty” on reseller to comply • Monitoring a distributor’s prices legitimate: but cannot be used to implement indirect RPM

29. First Conduct Rule Example : Fixing resale prices • NailCo, a manufacturer of nails and screws sells its products in HK through independent retail stores • It requires each of the stores to sell its products at a price stipulated by NailCo • Reason: this ensures an orderly market and avoids customer confusion as a result of differing prices across HK. • NailCo claims the arrangement affords retailers a healthy profit margin

30. First Conduct Rule Information exchange • A trade association for junk owners collects and circulates information to its members on their respective proposed future prices. • This includes information as to the proposed prices for specific journeys. • The information is not made available to the public and is circulated in advance of a seasonal price review by the association members.

31. First Conduct Rule Assessment • The Commission would consider this arrangement as either an agreement or concerted practice with the object of harming competition. • The information exchange allows the junk owners to adjust their future pricing to reflect the proposed pricing of competitors and thus reduces price competition in the market. • The information exchange arrangement is an indirect form of price fixing.

32. First Conduct Rule EU example: Bananas • Bilateral weekly calls between importers on current market conditions • Forward looking information including quotation prices, weather conditions, and stocks • Dole - €45.6M fine; Del Monte - €14.6M fine • Appeal rejected (arguing this was merely market gossip, not part of broader price-fixing cartel and not serious restriction of competition) UK example: RBS/Barclays • RBS unilaterally disclosed generic/specific future pricing information (relating to loan pricing) to Barclays employees over 6 month period • Barclays ‘blew the whistle’ • £28.59M fine for RBS

33. First Conduct Rule Practical tips on information exchange • Confidential and commercially sensitive information should not be revealed to a competitor • Pricing and volume data (future particularly sensitive) • Capacity • Costs • Commercial strategy • You can gather publicly available data • Certain types of information considered less sensitive: • Historic, aggregated or anonymized data • Issues of general industry interest • Information on lobbying

34. First Conduct Rule Group Boycott • A group boycott is a type of secondary boycott in which two or more competitors in a relevant market refuse to conduct business with a firm unless the firm agrees to cease doing business with another competitor. • It is a form of refusal to deal, and can be a method of shutting a competitor out of a market, or preventing entry of a new firm into a market. • Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power. • E.g. rumours among Coca Cola, Park’n, 759 Shop

35. First Conduct Rule Practical tips on trade associations • Trade associations should have a well-defined items in the agenda • Consider the agenda before attending • Make sure minutes are kept • Do not volunteer any information regarding your likely future conduct to a competitor • If a competitor reveals competitively sensitive information to you: • Stop the meeting and note your concerns • If the conversation continues, leave and ask that your absence be noted • Inform the company secretary/legal team of your concerns

36. Second Conduct Rule(第二行為守則) An undertaking (業務實體) that: • Has a substantial degree of market power (具有相當程度市場權勢) • In a market Must not • Abuse (濫用) that power • By engaging in conduct That has as its object or effect the prevention (妨礙), restriction (限制) or distortion (扭曲) of competition in HK. • Market definition: each market has a product and geographic dimension

37. Second Conduct Rule - Assessment of SMP • A substantial degree of market power (SMP) arises where an undertaking does not face sufficiently effective competitive constraints in the relevant market. • Substantial market power may also be the ability profitably to charge prices above competitive levels, or to restrict output or quality below competitive levels, for a sustained period of time (2 years).

38. Second Conduct Rule - Assessment of SMP • The definition of a substantial degree of market power does not exclude the possibility of more than one undertaking having a substantial degree of market power in a relevant market, particularly if the market is highly concentrated with only a few large market participants.

39. Second Conduct Rule - Assessment of SMP • An undertaking in a competitive market may be able temporarily to raise its price above the competitive level, but it will be unable to sustain such a price increase because customers will switch to cheaper suppliers or additional suppliers will enter the market. • If an undertaking can profitably charge prices above competitive levels over a sustained period (i.e. 2 years), it can be considered to have a substantial degree of market power.

40. Second Conduct Rule – Assessment of SMP • Market power is a matter of degree. • The degree of market power possessed by an undertaking will be assessed based on the circumstances of the case. • An undertaking does not need to be a monopolist (壟斷者) to have a substantial degree of market power. • When assessing whether an undertaking has a substantial degree of market power, the Commission will consider the extent to which that undertaking faces constraints on its ability profitably to sustain prices above competitive levels.

41. Second Conduct Rule – Assessment of SMP • The Ordinance considers the following non-exhaustive list in determining whether an undertaking has a substantial degree of market power: • The market share of the undertaking; • The undertaking’s power to make pricing and other decisions; • Any barriers to entry to competitors into the relevant market; and • Any other relevant matters.

42. Second Conduct Rule – Market Share • Turnover or sales value data. • Sales volume data. • Capacity. Market shares may be determined by measuring an undertaking’s capacity to supply the relevant market. • Other indicators. Market share might also be calculated by reference to, for example, product reserves held, customer base or share of new customers.

43. Second Conduct Rule – Potential Entry or Expansion • Regulatory and legal barriers (such as licensing requirements); • Structural barriers (such as significant economies of scale and/or scope, or network effects); and • Strategic barriers intentionally created or enhanced by incumbent undertakings in the market.

44. Second Conduct Rule • Competition rules apply to unilateral conduct by an undertaking with substantial market power (SMP) • No need for agreement with another party • Companies in a strong market position may be regarded as having substantial market power if they have the ability profitably: • To charge prices above competitive levels; or • To restrict output or quality below competitive levels for a sustained period of time (normally 2 years) • In EU, a company is unlikely to have SMP if their market share is below 40% (no indicative thresholds in HK) • Have SMP is not itself unlawful but imposes special responsibilities

45. Second Conduct Rule Exploitative abuses • Cause direct harm to the consumers/customers • For example, excessive pricing, i.e. charging customers a higher then normal price for a product or service which bears little or no relation to the economic value of the product/service provided Exclusionary abuses • Seen as most harmful • This is conduct that aims at excluding actual competitors from expanding or deterring would-be entrants (e.g. anti-dumping)

46. Second Conduct Rule Examples of exclusionary abuses • Predatory pricing  掠奪性訂價 • Tying and bundling • Margin squeeze • Refusal to supply (arises only in limited circumstances) • Exclusive dealing

47. Predatory Pricing  掠奪性訂價 • Pricing strategy where a product or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors, e.g. free to use IE10.0, free shipping for amazon.com • The Commission will consider whether there is pricing below average variable cost and pricing below average total cost

48. Tying and Bundling • Tying occurs when a supplier makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product) from the supplier (i.e. the tying product is not sold separately) • Bundling refers to situations where a package of two or more products is offered at a discount (Each one sold at $10; while a package of 3 sold at $21)

49. Margin Squeeze • In order for a margin squeeze case to arise, three elements must be present • First, an upstream firm must produce an essential or bottleneck input with no substitutes and no scope for other firms to provide the essential input themselves • Second, that firm must sell that essential input to one or more downstream firms which seek to use that input in the provision of some downstream product or service • Third, the upstream firm must itself use its own input to compete against those downstream firms in the market for that downstream product or service (with very thin margin)

50. Refusal to Supply • As a general matter, an undertaking, whether or not it has a substantial degree of market power, is free to decide with whom it will or will not do business • The term “refusal to deal” describes a situation where an undertaking with a substantial degree of market power refuses to supply an input to another undertaking, or is willing to supply that input only on objectively unreasonable terms – known as a constructive refusal to deal • Constructive refusal could, for example, consist of unduly delaying or otherwise degrading the supply of the relevant input, or imposing a price for the input that is excessive