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Competition and Anti-competitive Practices

Vertical price restrictions

Vertical price restrictions are restrictions imposed or recommended by an undertaking which affect the prices at which another undertaking operating at a different level of the production or distribution chain sells products.

Resale price maintenance

Resale price maintenance (RPM) occurs whenever a supplier establishes a fixed or minimum resale price to be observed by the distributor when it resells the product affected by the RPM obligation.

RPM can be achieved indirectly by, for instance, fixing the distributor’s margin or the maximum level of discount the distributor can grant from a prescribed price level. The supplier might also make the grant of rebates or the reimbursement of promotional costs subject to the observance of a given price level by the distributor, or link the prescribed resale price to the resale price of competitors. The supplier might equally use threats, intimidation, warnings, penalties, delays in, or the outright suspension of, deliveries to achieve RPM.

The Commission takes the view that the arrangement may have the object of harming competition. However, whether this is in fact the case turns on a consideration of the content of the agreement establishing the RPM, the way the arrangement is implemented by the parties and the relevant context.

For further information, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.71 to 6.77)..

Hypothetical example

NailCo, a leading manufacturer of nails and screws for DIY and construction purposes sells its products in Hong Kong through independent retail stores. NailCo requires each of the stores to sell its products at a price stipulated by NailCo. NailCo justifies its pricing policy as a means of ensuring an orderly market and to avoid customer confusion as a result of differing prices for NailCo products acrossHong Kong. NailCo also claims the arrangement affords retailers a healthy profit margin. The Commission would view this arrangement as having the object of harming competition.

NailCo's justifications for the RPM practice will not be likely to satisfy the terms of the general exclusion for agreements enhancing overall economic efficiency in section 1 of Schedule 1 to the Ordinance. These justifications appear merely to suggest that RPM is a good way of keeping prices high. The argument that RPM avoids confusing customers amounts to an assertion that price competition is harmful for consumers. Price is the key parameter of competition and price competition is central to the regime established by the Ordinance.

Recommended or maximum prices

Where a supplier merely recommends a resale price to a distributor or requires a reseller to respect a maximum resale price, the agreement will not be considered by the Commission to have the object of harming competition.

Instead, an agreement which entails recommended or maximum resale prices will be subject to an analysis of its competitive effects.

For further information, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.78 to 6.83).

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