1. Cartels

1. Cartels

What are cartels?

Cartels are agreements between competitors to cooperate rather than compete to win customers by means such as price fixing, restricting output, bid rigging and market sharing.

In which market conditions are cartels susceptible to appear?

Some markets are particularly vulnerable to cartels especially where:

1. The competitors are few in number, making it easy for them to collude;
2. The relevant products/services are homogeneous in nature;
3. There are considerable barriers to entry for potential competitors to overcome; and
4. There is excess capacity on the supply side of a market.

How might cartels harm competition in the market?

Cartels would increase prices while lowering quality and innovation incentives – harming both consumers and the economy.

[Source: Competition Commission’s website – Competition and Anti-competitive Practices > Cartels]

What are the main types of cartel agreements that competitors should not enter into?

• Fixing the price: Competitors should not agree with one another to fix prices, either directly, for example by agreeing upon a specified price, the amount or percentage by which prices are to be increased or a price range, or indirectly by agreeing not to charge less than any other price in the market or agreeing not to quote a price without consulting other competitors. An agreement concerning price may still amount to price fixing even if it does not entirely eliminate all price competition. [Hypothetical example 1]
• Sharing the market: Competitors should not agree to divide up a market in order to be sheltered from competition in their allotted portion of the market. For example, competitors should not allocate the production of certain products, sales territories or customer groups, or otherwise agree not to expand into a market where another party to the agreement is already active. [Hypothetical example 2]
• Restricting output: Competitors should not agree to fix, maintain, control, prevent, limit or eliminate the production or supply of products, for example with the use of production or sales quota limiting the volume or type of products available in the market. [Hypothetical example 3]
• Bid-rigging: In the context of tenders actual and potential competitors should not manipulate the tender results by agreeing not to compete with one another, for example through allocating who is to bid or not to bid, or coordinating on each other’s bidding terms with a view to influencing who the winner would be. [Hypothetical example 4]

[Source: Commission’s Guideline on the First Conduct Rule Paras 6.11-6.13, 6.17, 6.21-6.28]

Hypothetical example 1

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, particular elements of price competition have been agreed by the competitors when these matters should be determined independently.

As the conduct has the object of harming competition, it is not necessary for the Commission to consider whether the conduct has or is likely to cause harmful effects on competition in the relevant market.

The Commission would also consider the conduct in the example to be Serious Anti-competitive Conduct under the Ordinance.

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 5]

Hypothetical example 2

A group of coach companies supplying services to residents at particular residential buildings 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 buildings based on the total projected number of passengers. They agree not to provide services or to pursue customers which have been allocated to another company. They also agree not to launch new services without consulting each other.

This agreement not to compete with one another for defined customers has the object of harming competition. The agreement removes a choice of supplier with the likely result of higher prices for the services concerned.

Having concluded that the agreement has the object of harming competition, the Commission is not required to show that the conduct has or is likely to have harmful effects in the market.

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 6]

Hypothetical example 3

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.

The Commission would also regard the conduct as Serious Anti-competitive Conduct within the meaning of the Ordinance.

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 7]

Hypothetical example 4

A large company with a number of offices across Hong Kong decides to outsource its catering services. The company invites four major 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 company calling for the bids 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.

The Commission would also regard the conduct in the example to be Serious Anticompetitive Conduct under the Ordinance.

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 8]