What is Anti-competitive Conduct?
Two main types of anti-competitive conduct:
2. Abuse of substantial market power
Cartels: It occurs when competing businesses collude to fix prices, allocate markets or rig bids instead of competing with each other to win business, thus harming competition.
Four main types of cartels:
Bid-rigging generally involves two or more bidders agreeing that they will not compete with one another in tenders for particular projects.
Bid-rigging may be achieved in many ways, including:
- Bid suppression: one or more competitors agree not to bid, or withdraw a bid submitted previously
- Cover bidding: competitors agree to submit bids with higher prices or less attractive (or unacceptable) terms than the bid of the designated winner
- Bid rotation: competitors agree to take turns at being the winning bidder on a series of contracts
- Others: competitors agree on a minimum bidding prices or agree that the winning bidder will reimburse other bidders' bid costs
- Similarities in bids – same irregularities (e.g. typos, miscalculations), handwriting, typeface, or identical pricing etc.
- Bids that are suddenly withdrawn without good reason
- A bidder submits both its own and a competitor's bid
- A bidder that never wins but keeps on bidding or rarely bids but always wins when it does
- The winning bidder repeatedly subcontracts work to unsuccessful bidders
- Sudden and identical increases in price by most bidders without explanation
- A bidder that bids relatively high in some tenders but relatively low in other similar tenders
- Suspicious statements indicating that bidders may have reached an agreement, e.g. bidders justifying their prices by referring to "industry suggested prices"
Price fixing is when competitors agree to increase, fix, maintain or otherwise control the price at which their goods or services are sold. It is not necessary that competitors agree to charge exactly the same price for a given item. Price fixing can take many forms, and 'price' in this context includes any elements of price (e.g. discount, rebate, surcharge, margin or credit terms).
Examples of price fixing include agreements between competitors to:
- adhere to a specified price or a price range
- fix a certain amount / percentage of price increase
- adopt a standard formula to calculate prices / margins
- fix elements of price such as discounts, rebates, promotions or credit terms
- eliminate or reduce discounts
- maintain floor prices, a certain profit margin or a price schedule
- maintain certain price differentials between different sizes, quantities or types of products or services
- Quotes are much higher than expected
- Prices from different suppliers change in the same amount or percentage at the same time, without relation to underlying costs
- A new supplier's price is much lower than the usual suppliers
- Prices from different suppliers stay identical for long periods of time, especially when they were previously differentiated
- Discounts are eliminated, especially in a market where discounts were previously available
Market sharing is when competitors agree to divide the market(s) among themselves, for example by agreeing not to compete for each other's customers, or not to enter or expand into a competitor's market or territory.
In a market sharing cartel, competitors might agree NOT to:
- compete in the production or sale of certain products or services
- sell in each other's agreed territories / geographical areas
- sell to each other's customers
- enter or expand into a market where another party to the agreement is already active
- Competitors suddenly stop selling in a territory or to a customer
- Competitor refers customers to other competitors
- A salesperson or bidder says that a particular customer or contract "belongs" to a certain competitor
- Lists or maps of the allocation of customers or territories are kept by sales or marketing employees
- Prospective bidders may make references about territories or areas that may indicate market sharing arrangements
Output limitation is when competitors agree to fix, maintain, control, prevent, limit or eliminate the production or supply of particular goods or services. Such agreements, which reduce the output of a product, result in price increases.
Output limitation agreements may involve the following:
- Production or sales quota arrangements limiting the volume or type of products available in the market
- Agreements to limit or coordinate investment plans
- Agreements to control supply capacity
- Where a certain product is scarce on the market even though the technology and resources exist for suppliers to meet demand, this may suggest the existence of an output limitation agreement.
(However, some commercial arrangements that involve parties agreeing on output may be legitimate. For example, in the case of a joint venture, parties to the joint venture may agree on a particular level of output for the joint venture.)
Other arrangements / agreements between businesses that may harm competition:
Resale price maintenance (RPM) occurs when a business (e.g. a manufacturer / supplier) tries to set the price, or impose a minimum price, at which its customer (e.g. a retailer) can sell an item. Such arrangements can undermine resellers' pricing freedom and restrict competition.
- RPM can be initiated by a supplier who may use threats, warnings, penalties, or suspension of supplies to achieve RPM.
- RPM can be implemented by a supplier in response to the pressure from its customer (e.g. a retailer) who seeks to limit the competition they face at the resale level.
- It is common for suppliers to "suggest" or "recommend" retail prices. So long as they are merely recommendations, and retailers can freely adjust their prices upwards or downwards to compete with each other, they are unlikely to raise competition concerns.
- However, where a so-called "recommended retail price" is combined with measures that effectively require the retailers to follow the recommendation, it may be assessed as RPM.
- Examples of such measures include the use of a price monitoring system or an obligation on the retailers to report those who deviate from the "recommended retail price", and those who depart from it might suffer some form of penalty or adverse consequences.
- A fixed retail price for a short introductory promotional period may allow a new product to establish itself in the market. This is unlikely to harm competition.
Exchange of information between businesses can in some circumstances also raise concerns under the Ordinance. In particular, businesses that are competitors should avoid exchanging competitively sensitive information. Generally, information relating to price, quantities and future conduct on the market is considered to be the most competitively sensitive.
- directly among competitors, or
- indirectly through a trade association or a third party
- price, elements of price or price strategies
- production costs
- sales capacity
- product quality
- marketing plans
- risks and investments
- technology and innovations
Abuse of substantial market power: when a business with substantial market power uses that power to exclude competitors from the market or exploit consumers.
Common types of abusive conduct:
Anti-competitive tying and bundling
- Tying occurs when a supplier makes the sale of one product (tying product) conditional upon the purchase of another separate product (tied product) from the supplier. Bundling refers to situations where a package of two or more products is offered at a discount.
- Tying and bundling are common commercial arrangements that often promote competition as they may result in reduced production, transaction and information costs as well as increased convenience and variety for consumers.
- A business with substantial market power in the "tying market" may leverage this market power to foreclose competition in the "tied market" through tying. Similarly, a business with substantial market power in the market for one of the products that forms part of the bundle may use bundling to prevent competitors in the markets for other products from being able to find customers. These may raise concern under the Ordinance.
- Exclusive dealing is commonly used in commercial arrangements and in most cases will not harm competition.
- However, a business with substantial market power may seek to foreclose competition through exclusive dealing arrangements with customers. For example, a dominant supplier may require a customer to purchase all, or a substantial proportion of the products it requires, only from this particular supplier.
- Competition concern may also arise when a business with substantial market power includes arrangements in supply agreements to match any preferential terms offered by competing suppliers (known as 'English clauses').
Refusals to deal
- Generally speaking, a business (big or small) is free to decide with whom it will or will not do business.
- Competition concerns are more likely to arise when a vertically integrated business with substantial market power (Company A) refuses to supply (or only supply on unreasonable terms such as an excessively high price) an important input to businesses operating in a downstream market where it also operates (Company B).
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