UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

The effects of anti-competitive business practices on

developing countries and their development
prospects

HASSAN QAQAYA
GEORGE LIPIMILE
Editors

UNITED NATIONS
New York and Geneva, 2008
 NOTE

The views expressed in this volume are those of the authors

and do not necessarily reflect the views of the UNCTAD secretariat.

The designations employed and the presentation of the material

do not imply the expression of any opinion whatsoever on the part of the
United Nations secretariat concerning the legal status of any country,
territory, city or area, or of its authorities, or concerning the delimitation
of its frontiers or boundaries.

Material in this publication may be freely quoted or reprinted,

but acknowledgement is requested, together with a reference to the
document number. A copy of the publication containing the quotation or
reprint should be sent to the UNCTAD Secretariat.

UNCTAD/DITC/CLP/2008/2

ii
 FOREWORD

During the last decade, many developing countries have

adopted or are in the process of enacting competition laws. There is
growing awareness among developing countries of the adverse effects
of anti-competitive practices on their economies as well as their
populations. The effects of such practices are not easily quantifiable and
may therefore not be obvious. Nevertheless, developing countries have
come to recognize the potential benefits that can be derived from
competition law enforcement. The drive to establish legal and
institutional frameworks in order to fight anti-competitive practices has
intensified in recent decades.

In over three decades working with many developing countries

across the globe, UNCTAD has accumulated a wealth of knowledge and
expertise in making competition law and policy work for development.
The Accra Accord (paragraph 104) recognizes that "UNCTAD is the
focal point for the work on competition policy and related consumer
welfare within the United Nations system. It provides to its Member
States a forum for intergovernmental policy dialogue and consensus
building in the area of competition laws and policies. … a forum to
discuss competition issues on the multilateral level, … . UNCTAD's work
in this area should promote competition law regimes that take into
account the prevailing conditions in the developing countries." Within
this framework, the current publication brings together studies by
practitioners and academics focussed on identifying the effects of anti-
competitive practices on developing countries and their development
prospects.

The various sections of this publication cover a wide range of

cross-cutting competition issues. The publication highlights the
synergies between competition and consumer laws and policies. It
emphasizes the role of competition law and policy as a complementary
policy tool in poverty alleviation. It also draws attention to competition
concerns in commodity markets, which are of crucial importance to
developing and least developed countries. Moreover, it provides lessons
from a broad range of experiences from developed as well as
developing countries, including economies in transition. The contribution

iii
of competition enforcement can often be indistinguishable from that of
other economic policies in increasing efficiency and competition.
Nonetheless, this publication upholds the view that competition law and
policy are supportive of the overall process of economic development by
curbing anti-competitive practices that negatively impact consumers and
increase costs to business.

It is my hope that this publication, which is being launched at

the ninth session of the Intergovernmental Group of Experts on
Competition Law and Policy in Geneva, in July 2008, will contribute to
the enhanced understanding among government officials, private-sector
stakeholders, consumer organizations and civil society of the necessity
of competition law and policy and raise awareness on the damage
caused by anti-competitive practices on the economies of developing
countries.

I would like to reiterate that UNCTAD will continue to support

developing countries in their efforts in adopting competition and
consumer laws and establishing and strengthening the capacities of
their competition authorities through technical assistance and capacity-
building programmes.

Supachai Panitchpakdi
Secretary-General of UNCTAD

iv
 EXECUTIVE SUMMARY

During the 1990s, many studies were undertaken to

demonstrate the effects of anti-competitive practices on consumers and
producers both in developing and developed countries. Damages
caused by such practices to developing countries have implications for
the purchasing power of consumers through increased prices.
Producers in the developing world are also affected by anti-competitive
practices through increased barriers to entry by restriction of information
1
on technology. A World Bank study shows that, in 1997, developing
countries imported US$81.1 billion worth of goods from industries where
companies were involved in price-fixing arrangements in the 1990s.
These goods represented 6.7 per cent of imports and 1.2 per cent of
GDP in developing countries. These figures reveal the significance of
the economic impact of the damages of anti-competitive practices on
developing economies. It is worth mentioning that the quantitative
effects of anti-competitive business practices are not easy to
demonstrate. The most obvious effect of such practices is seen in the
form of price increases in markets involving output-restricting or price-
fixing cartels and dominant firms abusing their market power. In such
cases, consumers are the ones who suffer directly from restricted
competition.

One of the policy options available to governments to prevent or

eliminate anti-competitive practices is the introduction and enforcement
of competition law. The interrelationships between competition law and
other government policies, such as consumer protection,
macroeconomic policies and poverty alleviation, are an important
catalyst to economic development and better livelihoods. Among these
policies the synergies accruing between competition and consumer
protection law enforcement to protect consumer interest and welfare are
worth noting.

This publication is a compilation of studies done by competition

practitioners and academics. It brings together studies quantifying the

1
Margaret Levenstein and Valerie Suslow (2001), Private International Cartels
and their Effect on Developing Countries, Background Paper for World Bank’s
World Development Report 2001, available at
http://www.worldbank.org/wdr/2001/bkgroundpapers/levenstein.pdf.
v
effects of anti-competitive practices, on the one hand, and, on the other,
studies demonstrating/emphasizing the benefits of competition law and
policy, through establishing links between competition and other cross-
cutting issues. Part A deals with the interaction between competition
and consumer policies. Part B focuses on competition law and policy
and on poverty eradication. Part C discusses competition issues in
commodity markets. Part D is devoted to lessons learnt from
competition policy and law enforcement; experiences of developing as
well as developed countries from both national and regional
implementation perspectives. Lastly, Part E deals with specific anti-
competitive practices, such as cartels, abuse of dominance and patent
policy, which have a bearing on competition in the market.

The Interface between Competition and Consumer Policies

Competition and consumer protection law and policy areas form

part of the development perspective of UNCTAD's work. Considering
the needs of consumers, especially in developing countries, and the
imbalances they face in economic terms, educational levels and
bargaining power, UNCTAD published the Guidelines for Consumer
2
Protection. The objectives stated in the Guidelines include, among
others, assisting countries in controlling abusive business practices by
all enterprises, which practices adversely affect consumers, and
encouraging the development of market conditions, which provide
consumers with greater choice at lower prices. These objectives point to
the close relationship between consumer protection and competition
policies.

Competition law and consumer protection policies are

complementary and mutually reinforcing. Competition in the market
increases efficiencies and encourages innovation. Competition also
creates incentives for product differentiation and improves the quality of
goods and services provided. In that sense, competition enhances
consumer welfare by providing consumers with a wider choice at
competitive prices. Consumer protection strengthens competition in the
markets. Consumers make informed decisions in their preference for
goods and services in respective markets when they are well informed.

2
UN Guidelines for Consumer Protection, United Nations, New York and
Geneva, 2001, available at: http://www.unctad.org/en/docs/poditcclpm21.en.pdf.
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This increases competition between firms and results in efficiency
and/or quality improvement, which in turn benefits consumers. In this
publication there are studies that quantify benefits to consumers from
competition in different sectors of the economy as well as those that
quantify the adverse effects of anti-competitive practices on consumers
(Sections 1, 2 and 3). These studies illustrate the strong link between
competition and consumer protection. Other studies use econometric
models to demonstrate the contribution of competition law to alleviate
the costs of cartels incurred by consumers. Some competition
authorities have even estimated the rate of return in terms of consumer
welfare on each dollar spent on competition law enforcement (Section
2).

In some cases, total damages caused by the violation of

competition law are found to be significant while the damage per
consumer is relatively low, especially with respect to the price of the
product and the household budget. These are some of the factors
hindering or discouraging consumers from initiating private damage
actions. There are particular cases in which the market where violation
takes place is different from the market where the damage occurs.
Therefore damages are not visible to individual consumers. In such
cases, consumers may not be aware of the costs they incur. Market
assessment can be a useful tool to give visibility to damages caused by
anti-competitive practices. Such studies would strengthen the
competition advocacy work of competition authorities, by analysing the
level of competition in the market as well as the causes and possible
consequences of all factors restricting competition. The outcomes of
these studies may be used by policy makers in decision and policy
making (Section 13). It is interesting to note that one of the tasks of the
US Federal Trade Commission's Bureau of Competition is to provide
information for consumers, businesses and policy makers on
competition issues and market analysis (Section 1).

With respect to the interface between competition and

consumer interest, there are trade-offs between the two. Competition
law works to achieve efficiencies in the market. These can be
categorized as productive, allocative and dynamic efficiencies. It is
unlikely to achieve all these efficiencies at the same time. Therefore, the
competition authorities have to make an assessment as to which
efficiency shall be given more weight in each competition case. This
creates a trade-off between different types of efficiencies. One trade-off
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is between static and dynamic efficiency while another occurs between
productive and allocative efficiencies. For instance, although consumers
would not gain from dynamic efficiencies resulting from innovation in the
short term, they may benefit significantly in the long term (Section 1).

Tensions between competition and consumer interest arise in

situations where competition results in outcomes not favourable to
consumers, such as high switching costs, trade-offs between price and
quality. Additionally, consumers may have difficulties in price
calculations due to complex pricing schedules offered by companies.
This problem is prevalent in recently liberalized sectors, such as utilities
and professional services, where there could be need for regulations to
protect consumers and ensure that an adequate quality of services is
provided. However, such regulations may reduce competition in these
markets and in the extreme cases may even result in anti-competitive
practices (Section 1). Furthermore, competition in the market may lead
to negative effects on the environment and may not fully address the
social benefits of public good. In these areas, there is need to impose
regulatory rules to balance the long-term costs and benefits in terms of
social welfare. Health and safety issues also require attention by
consumer protection authorities since information asymmetries impede
the functioning of competitive markets, such as in the restaurant food
and used car markets (Section 2).

In jurisdictions such as India, the EU and the US, competition

law includes promotion and protection of consumer interest and welfare
among its goals. In these cases, there is a direct reference to consumer
welfare and interest. In the case law of many jurisdictions, relevant
courts or competition authorities consider consumer interest in their
decisions. Although consumer interest is one important element of
competition law, not all aspects of consumer interest, such as safety,
health, environment and privacy, can be addressed by competition law
enforcement. These additional aspects of consumer interest require
specialized laws, which also protect consumers against unfair business
practices (Section 1).

However, Section 3 provides examples of how effective

enforcement of competition law in developing countries can inherently
enhance consumer welfare. Case examples exemplify how merger
evaluation accords the competition authority with an opportunity to
approve mergers with conditions geared towards enhancing consumer
viii
welfare. Such conditions may include continued availability of goods and
services in the domestic market and a better quality and wider range of
products.

The synergies between competition laws and consumer

protection laws should be exploited to promote competition and
consumer welfare. These two policies use different tools but reinforce
one another to correct market failures. Competition law facilitates the
work needed by consumer policy by ensuring effective competition in
markets, while consumer policy contributes to strengthening of fair
competition, that is, competition on merits rather than through fraud and
deception, between firms by enhancing the ability of consumers to make
informed decisions and exercise choice (Section 1).

Government support is crucial in providing the necessary

infrastructure to develop and implement consumer protection policies
and in ensuring consumer participation in developing countries.
Competition laws that are not complemented by consumer protection
provisions or separate consumer laws risk failure to protect consumers
against anti-competitive practices (Section 2).

Competition and Poverty Eradication

We live in an era of market-driven globalization, in a world

increasingly interdependent and with unprecedented openness in the
global economy, a world in which the volume of trade and economic
growth has no precedent in history. This is an era, which, though largely
beneficial, has also brought about poverty and inequalities in wealth and
opportunities for the people and small and medium economic actors in
the markets. It is also an age that needs to translate these positive
aspects into gains for developing countries and particularly their people.

Poverty is one of the greatest challenges facing developing

countries today. The phrase "living on less than a dollar a day" has crept
into modern literature, news items, journals and other media to describe
the dire hopelessness of the poor within world populations. In this
context, the Millennium Development Goals, and in particular poverty
alleviation/reduction and/or eradication, comprise a subject that has
been elevated in profile. It features among the top priorities of all
international organizations and governments for policy implementation.
ix
Poverty has become a subject of study by research institutions and
individuals. It has also been identified as one of the most important
areas for ensuring coherence and aligning global and domestic policies.

Poverty is a reality in almost all countries at various dimensions

and magnitudes and the denial of it in any context negatively affects the
efforts made in dealing with it. The existence of poverty is associated
with many causes including government policies, poor planning and
non-motivation. Nonetheless, the cause of poverty not withstanding, its
alleviation is perceived to emanate from some policy interventions
(Section 5 and 6). Therefore, it is necessary for governments to identify
the poor, what they need and where they are located.

Certain factors have been identified as causes of poverty in

developing countries. They include lack of progressive economic growth
due to other factors, for instance prevalence of diseases such as
HIV/AIDS, high population growth rates, lack of infrastructure support,
etc. Debt burden perpetuates poverty in many developing countries
where a large percentage of GDP goes to debt servicing, leaving limited
resources to tackle poverty-related issues (Section 5). Other possible
factors could be associated with high inequality in income between the
rich and the poor, or between those who are able to exploit the available
opportunities and those who are not. Disparities could be based on
rural-urban, inter-racial and/or inter-social factors, climatic conditions,
access to markets and historical factors.

In connection with this, many authors have studied the pro-

growth and pro-poor benefits of competition in the markets, finding
indications that economies with competitive domestic markets generally
tend to have higher growth rates and per capita income.

International competition has seen a period of intensification,

now that interdependence of national economies has increased to a
point where all economies are exposed to the influence of events and
policies originating in other parts of the globe. The widely accepted
economic notion that barriers to competition impede innovation, growth
and prosperity is supported to some extent by the proliferation of policy
and law initiatives dealing with competition at both national and regional
levels. Bearing this in mind, in a spirit of continuous coherence, the
United Nations took the step of adopting in 1980 the UN Set of
Multilaterally Agreed Equitable Principles and Rules for the Control of
x
Restrictive Business Practices. The adoption of the UN Set has been
widely received as a key effort in articulation at a global level, since it is
the only multilateral instrument on competition policy providing a set of
rules for the control of anti-competitive practices. Crucially, these rules
also recognize the development dimension of competition law and policy
and provide a framework for international cooperation and exchange of
best practice. It is important to recall that UNCTAD is the focal point on
all capacity building and technical assistance work related to
competition policy and consumer protection within the United Nations
system.

In this regard, assessing the actual contributions and potential

implications of competition in poverty alleviation is a complex exercise,
particularly because the implications of competition on poverty
alleviation, on welfare and on the overall development prospects of
developing countries remain an open debate. Within this context, the
authors have endeavoured to take on these multifaceted issues and
challenges giving us their useful insights, from the perspective of legal
economic theory and policy (Section 4), and also from the point of view
of the practice of competition on the ground (Section 5 and 6).

Section 4 describes the two classical visions on a desirable

competition law: (1) that of developed countries, which often insists that
antitrust is only for aggregate efficiency and consumer welfare, believing
that any broader focus will lead to the protection of small competitors
undermining the overall efficiency of the economy; and (2) the reply
given by developing countries, which argue that their antitrust laws and
policies must also address issues of distribution and power.

Elaborating on the broad question of how to obtain gains from

competition, Section 4 advances the notion that antitrust should not be
used to protect inefficient small economic actors against big actors. It
should be used to empower small economic actors against big actors by
facilitating mobility and market access, which in turn produce
efficiencies in the society.

Competition law and policy intervention have been advocated

as policy tools to deal with poverty in developing countries. These
instruments should take deliberate measures aimed at expanding the
entrepreneurial base, through the prohibition of anti-competitive
arrangements and the control of mergers/acquisitions, and at promoting
xi
effective competition in infrastructure industries. Energy,
telecommunications, and financial markets are important pillars of
economic growth and also contribute to the creation of direct and
indirect employment, which is an essential tool for alleviating poverty
(Section 6).

Experiences from developing countries have shown that

prudent competition policy and law enforcement can assist specific key
sectors to accommodate/include more players. Many rural communities
in developing countries, who totally depend on the agricultural sector,
are classified as poor. Therefore, a competition authority would pay
attention to these sectors in order to tackle anti-competitive practices
affecting them. Such intervention can directly and/or indirectly contribute
to wealth maintenance and creation, which is key to poverty alleviation.
Section 5 gives examples of some agricultural sub-sectors that can be
identified for intervention by competition policy and law. The analysis
illustrates the contribution of competition law enforcement efforts in
alleviating poverty, in the cotton, horticulture, floriculture, poultry and
beef sectors and points to the fact that intervention has yielded positive
results.

Competition Issues in Commodity Markets

Given the importance of commodities as a source of income

and livelihoods in many developing countries, it is inevitable that they
form part of any poverty reduction strategy. According to the Common
Fund for Commodities, there are more than 55 developing countries for
which 50 per cent or more of all merchandise exports are comprised of
non-oil commodities, the majority of which are located in Africa, where
approximately half of the countries are commodity dependent. In many
cases only one or two commodities are the main exports of many
countries. Further, commodities account for 70 per cent of the
merchandise exports of the least developed countries and more than 70
per cent of the world's poor live in rural areas and directly or indirectly
3
depend on commodities for their livelihood . These statistics emphasize

3
Common Fund for Commodities: Basic Facts 2007. 2007 available at:
http://www.common-fund.org/download/content/CFC_BF_English.pdf.
xii
that developments in commodity sectors have implications for poverty
reduction.

There are certain competition problems in commodity markets,

which are usually characterized by a high degree of concentration as
well as vertical integration between various stages of the value chain.
Section 7 provides the developments and problems encountered in the
cocoa market in the Ivory Coast, which supplies 40 per cent of the world
demand for cocoa. The analysis of the value chain from Ivorian farm
gate to a bar of dark chocolate on the shelves of French supermarkets
reveals that chocolate makers and/or distributors have been gaining
more and more from a bar of dark chocolate between 1992 and 2001
(Section 7).

The trend following the liberalization of cocoa markets has been

the elimination of small local traders through tough competition with
large multinational firms. Over time, the remaining local exporting and
processing companies became subsidiaries of large multinational firms.
On the other hand, cocoa markets have been experiencing increased
horizontal concentration through mergers of large multinational
companies, such as those between large chocolate companies and
cocoa processing firms, or through takeovers by large international
companies of smaller companies operating at the national market. As a
result of these developments, small local cocoa producers have to
contend with a strong purchasing power held by several large
multinational companies.

The existence of an oligopolistic market structure with high

concentration and market power points to competition law enforcement
as a potential instrument to curb anti-competitive practices.
Nonetheless, it is difficult to gather evidence on anti-competitive
behaviour, such as collusive agreements and other concerted practices,
in oligopolistic markets. Another policy option is merger control, which
ensures that mergers and acquisitions likely to increase market
concentration and reduce potential competition are either prevented or
approved with conditions. As for abuse of market power in commodity
markets local farmers do not have enough bargaining power and are in
a disadvantaged position to negotiate fair prices for their products vis-à-
vis large international cocoa traders. The approach to competition law
implementation in commodity markets should be on how to protect
producers from the purchasing power of international traders and
xiii
processors rather than how to protect consumers from market power.
There are also other policies to exploit, such as price stabilization, which
were dismantled during the liberalization process (Section 7).

Another important issue that concerns consumers as well as

producers in developing countries is voluntary product standards
imposed by industry associations, which are sometimes composed of
dominant firms. While product standards may seem to aim at improving
consumer welfare via increased quality and safety, or encourage
environment-friendly production processes, they can also be used by
dominant firms as entry barriers against competing firms (Section 8).
This is where competition authorities may step in to curb the anti-
competitive effects of such practices. Examples show mposition of
voluntary product standards has implications especially for small and
medium-sized enterprises in developing countries. Product standards
increase the cost of production and export for these small
producers/exporters thereby restricting their access to the markets of
developed countries.

Lessons from Competition Policy and Law Enforcement

Developing countries and economies in transition tend to be

more vulnerable to anti-competitive practices. This scenario may be
attributed to high entry barriers, less diversified and smaller markets,
rather asymmetric firms, and in general conditions that allow dominant
firms to abuse their position. Some developing countries do not have
competition laws in place and, in those that have laws, their competition
authorities have limited experience and resources for effective
enforcement. For these countries, it is especially beneficial to learn from
other countries’ experiences.

As national economies integrate into the world economy

through liberalization and with each other through regional trade
agreements, barriers to trade are normally eliminated. In such an open
international economy, no country can escape the effects of anti-
competitive practices originating outside their national borders, such as
international cartels or mergers and acquisitions, which may restrict
competition. Also, there are difficulties faced by small and medium-sized
firms in developing economies, such as business networks providing
support for the ‘insiders’ and making it more difficult for ‘outsiders’ to
xiv
enter particular activities or markets. Such practices restrict the
development of entrepreneurial capabilities due to lack of competition.
For these reasons, it is becoming particularly important to tackle these
problems both at regional and national levels. This can be achieved by
including competition provisions in regional trade agreements,
especially between developing countries.

In this regard, Section 9 discusses competition law and policy at

regional level in the context of the Economic Community of West African
States (ECOWAS) and explores the usefulness of an effective
competition law and policy in this region. The authors identify two major
considerations in the design of an effective competition policy in this
regional grouping. One concern is whether or not there should be a
regional competition law, together with the mechanisms by which this
law would be made effective within members' national legal frameworks.
The other concern is whether the region should establish a separate
competition authority that will treat individual cases either alone or in
cooperation with national competition authorities and courts. This
Section recommends the promotion of a regional competition policy,
which will improve gains at all levels and tackle cross-border anti-
competitive practices, which are negatively affecting the development
prospects of countries in this region. It makes a general call for
coherence at all levels, including both at policy and law making. It is
essential for competition authorities around the globe to learn and
borrow from each other’s experiences, especially from the history of
good practice and reform.

Competition law and policy have become crucial in transition

economies due to privatization policies, where there is always the risk of
replacing state monopolies with private ones. Section 10 presents the
experience of Romania and provides an assessment of the
effectiveness of its competition policy implementation. Competition
policy plays an important role in the liberalization of certain sensitive
sectors of the economy. Privatization and development of a competition
policy represented a real challenge for Romania in its process of
transition to a market economy. This challenge also entailed reforms to
economic regulations and the adoption of other necessary legislations
besides competition law. Romania's experience with competition law
enforcement demonstrates the importance of competition policy in the
context of transition towards a market economy and emphasizes the

xv
need to develop an operational competition regime in developing
countries.

Competition law and policy together with effectively functioning

markets are conducive for enhancing productive capacity, trade and
investment as well as improving the use of knowledge in favour of
development. In this regard, Section 11 describes the experience of
Australia, a country with a stable economy and a well-developed
competition law. This Section elaborates on the significant limitations of
the Trade Practices Act 1974 prior to the 1995 amendments. It also
describes the broader reforms of Australian competition policy and the
quantifiable benefits of these reforms for the economy and consumers.
It is worth noting that, in Australia, broad investigative powers of the
competition authority have been particularly important for effective
enforcement, which brought about outcomes benefiting a large number
of consumers. The Australian experience is useful to demonstrate that
competition law may require amendments over time so as to respond to
the needs of the changing economic conditions at both national and
global level.

Section 12 takes us back to the developing world and provides

the experiences of China in anti-monopoly practice from 1993 to 2007
and the reforms undertaken to ensure the coherent and consistent
application and enforcement of the anti-monopoly law. The author
provides his critical approach to past as well as recent developments on
competition law and policy in China, with a focus on aspects to be
reinforced and revised in the application of the new law. After a long
legislative history of about twenty years, the new integrating
Antimonopoly Law was passed on 30 August 2007, and will take effect
on 1 August 2008.

This Section provides recommendations to adopt an approach

that is consistent with international standards and to make necessary
institutional arrangements to solve the past problems in future practice.
The Chinese experience is one from which timely lessons of competition
policy and law enforcement can be drawn.

This Part of the publication provides some insights and

examples from various countries' practices, from which important
lessons of policy integration, legal and institutional design, action on

xvi
specific sectors, legal certainty, enforcement enhancement and reform
could be learnt.

Addressing Specific Anti-Competitive Practices

Anti-competitive practices have implications for the economic

growth and development of nations. Such practices restrict competition
and deteriorate consumer welfare by creating entry barriers and price
increases, which lead to efficiency and innovation concerns.

Cartels are one of the most harmful anti-competitive practices

and cause significant damage to the economy as well as to consumers.
Section 13 provides a case example of the Turkish yeast cartel, which
was detected and investigated by the Turkish Competition Authority.
This Section quantifies the damages caused by this price-fixing cartel in
the yeast market in Turkey. Using the optimal deterrence theory, the
authors define the optimal fine, which would ideally deter anti-
competitive practices, to be equal to the net harm to persons other than
the violator. In some cases, even if the fines imposed are at the optimal
level, it is not sufficient to deter anti-competitive practices. To ensure
that consumers benefit from competition law, private damage actions
may also be encouraged by raising awareness among consumers on
the adverse impacts of anti-competitive practices (Section 13).

Abuse of a dominant position is another type of anti-competitive

conduct, which can be exercised by large firms, both multinationals and
state-created monopolies, such as utilities, transport and
telecommunications, in relatively smaller markets. Rules on abuse of
dominance aim to ensure free competition in markets, which creates
incentives for firms to become more efficient and innovative. Such rules
are also used to contribute to the equal distribution of wealth among
different parts of the society. However, the level of economic
development of countries and the size of their economies may create
contradicting situations or factors from a competition’s perspective.
Firstly, developing economies often have smaller markets and, hence, a
small number of firms that can benefit from economies of scale and
operate efficiently. That is why markets in developing countries are
more likely to be concentrated. Second, the established large firms in
developing countries play an important role in increasing investment.
Therefore, these economies are likely to benefit from relatively lax rules
xvii
on abuse of dominance. Thirdly, in countries where the priority is on
equal income distribution, policies may be designed to support small
firms representing poorer parts of the society vis-à-vis large and
dominant companies (Section 14). These factors should be considered
carefully by developing countries in designing their competition law and
policy, in particular the rules on abuse of dominance. Economic
efficiency concerns should be weighed against public interest concerns
in the best way. The objectives of the competition law should be clearly
reflected in the law. Further, there are different approaches to abuse of
dominance in developed countries, such as the EU and US, arising from
different assumptions as to which types of conduct are harmful and how
difficult it is to distinguish harmful types of conduct from others.
Regardless of the type of approach to abuse of dominance, the
assumptions made and the economic factors dominant in a country
should be analysed and grounded on economic reality (Section 14).

Competition law and policy cross-cut many areas, one of which

is intellectual property rights (IPR). IPR protection may endow
companies with significant market power. While IPR policies increase
incentives to innovate in an economy, they may cause efficiency losses
due to abuse of market power by companies protected by IPR rules. In
this respect, there is a trade-off between competition law and patent
policy. This is even more so for developing countries considering the
fact that innovating companies are usually situated in developed
countries. Developing countries need to strike the right balance between
competition and IPR policies, particularly patent policies, depending on
their productive, imitative and innovative capacities as well as their
openness to attract foreign direct investment from developed countries
(Section 15).

Avenues for Future Research

This publication illustrates the adverse effects of anti-

competitive practices on developing countries, and touches upon many
cross-cutting competition issues. Future studies focusing on the effects
on the economy of important decisions taken by competition authorities
in the past, particularly in developing countries, may be very useful
(Section 14). In this respect, it would be wise to support developing
countries to undertake studies to analyse the impact of their decisions

xviii
on various actors in the economy, such as consumers and small and
medium enterprises, as well as on their development prospects.

Another area of research could be quantitative analysis of the

impact of anti-competitive practices and the lack of effective competition
regimes, particularly in developing countries, on national economies, in
general, and on consumers, in particular (Section 3).

This publication contributes to the illustration of the adverse

effects of anti-competitive practices on developing countries and their
development prospects as well as to emphasize the benefits of
competition law enforcement. Considering that many developing
countries have been making efforts to adopt and implement competition
law, this field of research will not saturate any sooner and has the
potential to absorb further research.

xix
 NOTES ON CONTRIBUTORS

Michael Adam is Associate Expert at the Competition and

Consumer Policies Branch, Division on Trade in Goods and Services,
and Commodities, UNCTAD.
Simon Alder is Economics Student at the University of Zurich,
Switzerland.
Maria Alexandru is Director of Research-Analysis of the
Romanian Competition Council, and PhD candidate at the Academy of
Economic Studies of Bucharest.
Thomas K. Cheng is Assistant Professor at the Faculty of Law
of the University of Hong Kong.
Kamala Dawar is an expert in international trade law and
development. She is also trainer in consumer affairs, competition, and
international trade policy; she works with various international
organisations and universities.
Vinod Dhall is Member and Acting Chairman of Competition
Commission of India.
Bruno Dorin is Economist at the Centre for International
Cooperation in Agronomic Research for Development, Montpellier,
France.
Cornelius Dube is Policy Analyst at CUTS International’s
Centre for Competition, Investment and Economic Regulation, India.
Daniela Eleodor is Competition Inspector at the International
Affairs Directorate of the Romanian Competition Council, and PhD
candidate at the Academy of Economic Studies of Bucharest.
Eleanor Fox is the Walter J. Derenberg Professor of Trade
Regulation at New York University School of Law, USA.
Deborah Healey is Senior Lecturer at the Faculty of Law of the
University of New South Wales, and Solicitor in Australia.
Thulasoni Kaira is the Acting Executive Director of the
Competition Commission of Zambia. He is also Chairman of the
Southern and East African Competition Forum.

xx
 Alper Karakurt is Case Officer at the Turkish Competition
Authority, and PhD student in Public Administration at Ankara
University, Turkey.
Alexander J. Kububa is Director and Chief Executive Officer of
the Competition and Tariff Commission of Zimbabwe. He is also a
member of the Board of Commissioners of the COMESA Regional
Competition Commission.
James H. Mathis is Academic coordinator of the LL.M. in
International Trade and Investment Law, and also lecturer of the
Department of International Law of the University of Amsterdam, The
Netherlands.
Pradeep S. Mehta is the founder Secretary General of the
Jaipur-based Consumer Unity & Trust Society (CUTS International),
India.
Siddhartha Mitra is the Director of Research at CUTS
International, India.
Gheorghe Oprescu is President of the Romanian Competition
Council.
Ussal Şahbaz is Case Officer at the Turkish Competition
Authority, and PhD student in Economics at the Middle East Technical
University, Turkey.
Joseph Wilson is Member of the Competition Commission of
Pakistan.
Mao Xiaofei is a Research Fellow in International Law at the
Chinese Academy of Social Sciences.

xxi
 ACKNOWLEDGEMENTS

This UNCTAD publication was directed by Mr. Hassan Qaqaya

and coordinated by Mr. George Lipimile.

The editors are grateful to Mr. Marco Avendaño-Nava, Mrs.

Elizabeth Gachuiri, Ms. Ebru Gökçe, Mrs. Matfobhi Riba and Mr. Sang
Min Song for their support and inputs on the overall structure of the
book. Thanks to Ms. Natalia Meramo and Mr. Vitor Novaes Fonseca for
the formatting of this publication.

Special thanks are due to all the authors for their generous
contributions to this book.

xxii
Table of Contents

PART A:
The Interface between Competition and Consumer Policies

COMPETITION LAW AND CONSUMER PROTECTION —

INSIGHTS INTO THEIR INTERRELATIONSHIP ............................... 3
1. Introduction ..................................................................................... 3
2. The economics of competition law.................................................. 4
3. Anti-competitive practices ............................................................. 10
4. Consumer interest as a goal of competition law ........................... 11
5. Trade-offs...................................................................................... 15
6. Consumer interest in the application of competition law .............. 17
7. Growth of consumer protection law .............................................. 22
8. The interface between competition law and consumer protection 28
9. Coordination between competition law and consumer protection 33
10. Conclusions................................................................................. 40

COMPETITION POLICY AND CONSUMER POLICY:

COMPLEMENTARITIES AND CONFLICTS IN THE PROMOTION
OF CONSUMER WELFARE ............................................................ 43
1. Introduction ................................................................................... 43
2. Overview of competition policy and law ........................................ 44
3. Basic tenets of consumer policies................................................. 47
4. Interface between competition and consumer laws ....................50
5. Conflicts between competitive markets and consumer interest
objectives ...................................................................................54
6. Costs of anti-competitive practices to consumers ......................56
7. Consumer participation in developing countries ........................... 67
8. Conclusion .................................................................................... 68
References........................................................................................ 71

ANTI-COMPETITIVE PRACTICES AND THEIR ADVERSE

EFFECTS ON CONSUMER WELFARE: THE ZIMBABWEAN
EXPERIENCE ................................................................................... 73
1. Introduction ................................................................................... 73
2. Competition and its socio-economic effects ................................. 75

xxiii
 3. Restrictive business practices....................................................... 82
4. Interface between competition and consumer laws and policies.. 85
5. Anti-competitive practices and their adverse effects on
consumer welfare........................................................................91
6. The Zimbabwean experience........................................................ 97
7. Conclusion .................................................................................. 128

PART B:
Contribution of Competition to Poverty Eradication

THE ROLE OF COMPETITION LAW AND POLICY IN

ALLEVIATING POVERTY – THE CASE OF ZAMBIA .................. 133
1. Introduction ................................................................................. 133
2. Literature review on interface between competition policy and law
and poverty alleviation .................................................................... 136
3. The poverty levels in Zambia ...................................................... 139
4. Why there is still extreme poverty in Zambia .............................. 142
5. What needs to be done to address poverty in Zambia? ............. 146
6. Using the competition law and policy to deal with poverty ......... 147
7. Conclusions................................................................................. 175
Appendix 1 ...................................................................................... 177

ANTITRUST, ECONOMIC DEVELOPMENT AND POVERTY: THE

OTHER PATH................................................................................. 179
Abstract ........................................................................................... 179
1. Introduction ................................................................................. 180
2. The choice................................................................................... 184
3. The competition challenge .......................................................... 185
4. Observations on the design of appropriate law .......................... 196
5. Correlatives ................................................................................. 200
6. The developed country’s duty of cooperation ............................. 202
7. Networks ..................................................................................... 204
8. Conclusion .................................................................................. 205

COMPETITION POLICY AND POVERTY ALLEVIATION: THE

CASE OF PAKISTAN..................................................................... 207
1.Introduction .................................................................................. 208
2. Poverty and competition policy ................................................... 210
3. The competition regime in Pakistan............................................ 219
4. Conclusion .................................................................................. 233
xxiv
PART C:
Competition Issues in Commodity Markets

FROM IVORIAN COCOA BEAN TO FRENCH DARK CHOCOLATE

TABLET: PRICE TRANSMISSION, VALUE SHARING AND
NORTH/SOUTH COMPETITION POLICY ..................................... 237
1. Introduction ................................................................................. 237
2. Cocoa basics............................................................................... 241
3. From stabilization to liberalization............................................... 260
4. Price transmission and value sharing ......................................... 271
5. Call for a less restrictive competition policy ................................ 300
6. Concluding summary .................................................................. 318
Bibliography .................................................................................... 324

PRODUCT STANDARDS, COMPETITIVENESS AND

DEVELOPMENT............................................................................. 331
1. Introduction ................................................................................. 331
2. Product standards, developing countries and competitiveness.. 331
3. The GATT/WTO legal framework governing product standards 337
4. Private voluntary standards ........................................................ 348
5. The Informal Market .................................................................... 354
6. Conclusions................................................................................. 356

PART D:
Lessons from Competition Policy and Law Enforcement

IS THERE POTENTIAL FOR COMPETITION POLICY IN THE

ECOWAS?...................................................................................... 365
Abstract ........................................................................................... 365
Executive summary......................................................................... 366
1. Introduction: the elements of a competition law.......................... 369
2. Minimum requirements: establishing a regional law ................... 378
3. Minimum requirements – Application of community law............. 388
4. Regional bodies and institutional control .................................... 394
5. Conclusions................................................................................. 405

xxv
 BENEFITS OF INTRODUCING AND APPLYING COMPETITION
POLICY IN EMERGING ECONOMIES
- CASE STUDY – ROMANIA ......................................................... 409
Abstract ........................................................................................... 409
1. Do we really need competition policy? ....................................... 410
2. Role of competition policy and law in the regulatory reform ....... 437
3. Conclusions................................................................................. 459

COMPETITION LAW AND ENFORCEMENT: THE AUSTRALIAN

EXPERIENCE ................................................................................. 463
1. Introduction ................................................................................. 463
2. The breadth of Australian competition law and policy ................ 464
3. Enforcement of the TPA by the ACCC........................................ 480

AN OVERVIEW OF THE ANTI-MONOPOLY PRACTICE IN THE

PEOPLE’S REPUBLIC OF CHINA ................................................ 497
1. Introduction ................................................................................. 497
2. Restrictive agreements ............................................................... 498
3. Abusive practices ........................................................................ 511
4. Merger control ............................................................................. 523
5. Abuse of administrative power.................................................... 541
6. Conclusion .................................................................................. 542

PART E:
Dealing with Specific Anti-competitive Practices

ESTIMATION OF ANTITRUST DAMAGES AND ITS EFFECTS ON

ANTITRUST POLICY IN DEVELOPING COUNTRIES: A CASE
STUDY OF A TURKISH YEAST CARTEL..................................... 545
1. Introduction ................................................................................. 545
2. Optimal deterrence theory and importance of damages............. 546
3. Legal framework in Turkey.......................................................... 550
4. Yeast case .................................................................................. 550
5. Damage estimation ..................................................................... 552
6. Market assessment ..................................................................... 559
7. Elements of market assessment................................................. 563
8. Concluding remarks .................................................................... 568
Appendix 1. Price prediction for infringement period ...................... 569

xxvi
ABUSE OF DOMINANCE AND ITS EFFECTS ON ECONOMIC
DEVELOPMENT............................................................................. 571
Abstract ........................................................................................... 571
1. Introduction ................................................................................. 572
2. The scope of the prohibition of abuse of a dominant position .... 574
3. Why should developing countries and countries in transition
consider abuse of dominance? ....................................................... 587
4. Cross-country differences and their implications for developing
countries.......................................................................................... 594
5. Best practices from the US–EU discussion regarding abuse of
dominance....................................................................................... 617
6. Recommendations ...................................................................... 624
References...................................................................................... 629

STRIKING A BALANCE BETWEEN COMPETITION LAW

ENFORCEMENT AND PATENT POLICY: A DEVELOPING
COUNTRY’S PERSPECTIVE......................................................... 633
1. Introduction ................................................................................. 633
2. The balance between competition law enforcement and patent
policy in developed countries.......................................................... 636
3. The balance between competition law enforcement and patent
policy in developing countries ......................................................... 645
4. Practical implementation of Kaplow’s framework to developing
countries.......................................................................................... 657
5. Conclusion .................................................................................. 659

xxvii
xxviii
THE EFFECTS OF ANTI-COMPETITIVE BUSINESS PRACTICES ON
DEVELOPING COUNTRIES AND THEIR DEVELOPMENT
PROSPECTS

PART A:

The Interface between

Competition and Consumer Policies

1
2
 COMPETITION LAW AND CONSUMER PROTECTION —
INSIGHTS INTO THEIR INTERRELATIONSHIP

Vinod Dhall*

1. Introduction

Competition law and consumer protection are intricately

connected. It is impossible to talk of one without dealing with the other.
At a fundamental level, these two are complementary and mutually
reinforcing, both being elements of a broader framework of social
welfare. Competition law by maintaining and preserving competition
enhances consumer interest. On the other hand, consumer policy
strengthens competition between firms. Yet the two are not identical
areas and their boundaries do not coincide. Nevertheless, they overlap
or intersect at various points, reflecting both synergies and tensions.
The challenge before authorities is to maximize the synergies and
minimize the tensions thereby smoothing the interface between the two
disciplines.

This article explores the complex but interesting

interrelationship between the two disciplines and offers insights into how
the synergies and tensions might be better understood by competition
and consumer protection authorities and by law or policy makers.

*
The author is Member and Acting Chairman of the Competition Commission of
India. These are his personal views. E-mail: dhall.vinod1@gmail.com.
3
2. The economics of competition law4

Competition law is an economic law; it is about the behaviour of

economic agents. Economics provides a theoretical basis for the law; it
also provides the tools with which to analyse markets and competition
5
within them . As J. Brandeis once said “A lawyer who has not studied
6
economics…. is very apt to become a public enemy” . Therefore, for a
proper appreciation of competition law it is important to have an
understanding of the economic concepts inherent in the law.

Competition in the economic sphere denotes the process of

rivalry between firms for the patronage of customers. The European
Commission defines competition as a situation in which firms or sellers
“independently strive for buyers’ patronage in order to achieve a
particular business objective, for example, profits, sales, or market
7
share” . Richard Whish refers to competition in the commercial world as
8
“a striving for the custom and business of people in the market place” .
In this sense, competition is the equivalent of rivalry between firms; this
rivalry may be in different forms such as for price, service, or a
combination thereof, or other factors.

Competition is at the heart of the market-based economy. The

debate about the relative merits of a market-based economy versus a
state-controlled, planned economy that raged for decades seems to
have been broadly settled in favour of the former. Countries across the
globe are reforming their economies, and undertaking privatization and

4
This section is based on the chapter “Overview: Key Concepts in Competition
Law” by Vinod Dhall in Dhall, Vinod (ed.) Competition Law Today: Concepts,
Issues and the Law in Practice, (2007), Oxford University Press, New Delhi.
5
See Doern. G. Bruce and Stephen Wilks (2001): Comparative Competition
Policy – National Institutions in a Global Market, Oxford University Press.
6
Quoted in Whish, Richard (2005): Competition Law, Oxford University Press,
th
5 Edition, p. 1.
7
Glossary of Terms used in EU Competition Policy, Director General for
Competition, Italy. (2002), available at
http://europa.eu.int/comm./competition/general_info/glossary_en.html
8 th
See Whish, Richard (2005), Competition Law, Oxford University Press, 5
Edition. For another definition, see: Consumer International (2003): The
Consumer Guide to Competition: A Practical Notebook, March 2003.
4
deregulation. As they do so, the forces of competition come increasingly
onto the centre stage of the economy.

A perfectly competitive market requires that there should be a

large number of sellers and buyers, each seller, therefore, having only a
small share of the market. Further, the product should be
homogeneous, there should be no entry or exit barriers or information
asymmetries and both the seller and buyer should have access to the
market. In such a market, sellers are price takers, not price makers, and
the price of a product equals its marginal cost; each supplier makes only
a normal profit.

A perfectly competitive market is said to achieve both allocative

efficiency and productive efficiency. The combined effect of allocative
and productive efficiencies is that society’s welfare overall is maximized.
Consumer welfare is also maximized in such a situation. Allocative
efficiency is achieved when the goods are produced in the quantities
desired by society, and it is not possible to make anyone better off
without making someone else worse off. Productive efficiency is
achieved when goods are produced at the lowest possible cost, that is,
as little of society’s wealth is expended in the production process as is
necessary. Competition also enhances dynamic efficiency in that it
spurs innovation, development of new products and technological
growth.

If perfect competition is at one end of the spectrum, at the other

end is monopoly. Here, there are many buyers but only one seller, who
is a monopolist and who is in a position therefore, to increase prices and
reduce the volume of supply. In this situation there is allocative
inefficiency, which is also referred to as deadweight loss. In economic
theory, however, the objection to monopoly is not only that the
monopolist is able to charge excessively and reduce production, but
also that monopoly is inefficient. The inefficiency arises out of higher
costs, for example, through higher remuneration and excessive staff. A
monopolist may also waste resources by maintaining excess capacity or
indulging in excessive product differentiation. This situation is also
9
referred to as X-inefficiency, the term first used by Liebenstein .

9
Liebenstein (1966): Allocative Efficiency vs. X-Efficiency (1966) 56 American
Economic Review 392–415 quoted at p. 5, Whish, Richard (2005) ibid. at note
64.
5
 A weakness of the competition theory, however, is that in the
real world neither perfect competition nor a perfect monopoly exists.
Perfect competition is based on assumptions (mentioned above) that
are unlikely, if not impossible, to be found in real life, where the situation
is likely to be somewhere between these two poles of perfect
competition and a monopoly. Nevertheless, perfect competition is a
model that is still useful to demonstrate the concept of productive and
allocative efficiency and as a benchmark against which to measure the
actual situation in the market. Short of perfect competition, therefore,
other more realistic concepts have evolved over the years. For example,
some economists have settled for the concept of “workable
10
competition”, evolved by Clark in 1940 . This concept considers it
worthwhile to aim to produce the best competitive arrangements that are
practically attainable. Some economists have advanced the theory of
“contestable market” according to which firms are constrained by
competitive forces, provided entering into the market is free and exit is
costless; that is, the incumbent enterprise must be wary of a ‘hit-and-
run’ entry by competitors. The EC competition law uses the expression
“effective competition” though what is meant by effective competition
does not appear to have been spelt out.

Another weakness in the competition theory is that in certain

situations, competition may in fact not yield the best result in terms of
efficiencies, as for example, where the economies of scale support the
existence of only one enterprise. Further, in the case of certain
industries, there exists what is called the “network effect”, that is, the
utility of a product or service increases with the increase in the number
of consumers, e.g. in telecommunications or personal computer
operating systems. Thus, the network effect could, in certain situations,
indicate that it is more beneficial to have only one or a few producers of
products or providers of services.

In the United States, two important economic schools of thought

have greatly influenced competition law and policy. In the 1950s, the
structure-conduct-performance concept was developed by what has
come to be known as the ‘Harvard school’ of thought, attributed to E.S.

10
Clark (1940): Towards a Concept of Workable Competition (1940) 30
American Economic Review 241–256 quoted at p. 14, Whish (2005) ibid. at note
64.
6
Mason and J.S. Bain. According to this school, the market structure
influences conduct, which, in turn, influences performance.
Concentrated markets are regarded as quite susceptible to economic
power and its exercise. Antitrust law is regarded as an important tool to
protect the market. This school gives to competition law a more
interventionist role and places less confidence in the markets. According
to this view, competition policy should be mainly concerned with
structural remedies rather than with behavioural remedies.

In the 1970s and 1980s, the ascendancy of the ‘Chicago school’

of thought produced a revolution in antitrust thinking. The ‘Chicago
school’ focuses on the pursuit of efficiency as the sole goal of antitrust,
efficiency consisting of allocative efficiency and productive efficiency.
According to this view, most markets are competitive, and entry barriers
are more imagined than real; a monopolist’s position is quickly eroded
and firms are rational in their pursuit of profit maximization. The Chicago
school believes that antitrust policy should be less interventionist than
demanded by the structure-conduct-performance paradigm. The
Harvard school saw concentration as the evil. The Chicago school does
not worry about concentration so much, and thinks government
intervention is usually clumsy and inefficient. Therefore the foundation is
not concentration but non-intervention unless the plaintiff can show
price-raising outcomes from specific conduct or transactions. But the
Chicago school itself spans a spectrum, with some applying more robust
market premises than others.

Both the ‘Harvard’ and ‘Chicago’ schools have left their stamp
on antitrust thinking. However, recent years seem to have witnessed a
rapprochement between the two. It is being increasingly recognized that
while economics may provide the tools for analysis and it may also
indicate what questions to ask, it does not always yield definitive
answers, and it does not provide space for society’s values to be taken
into consideration.

The European tradition of competition law owes a lot to the

German ordoliberal school of thought, also referred to as the Freiburg
school. This sees competition law almost as part of an ‘economic
constitution’. It believes that competition is necessary for economic
welfare and that economic freedom is necessary for political freedom. It
stresses the necessity of dispersing private economic power so as not
to influence political power. The ordoliberal school had a profound
7
influence on the early decisions in European competition law and could
account for its greater concern in protecting the freedom of competitors
to compete on merits.

Competition law employs a number of economic tools in

analysing individual cases; for example, an important starting point in
analysing a case is to determine the relevant market, the purpose of
which is to identify the products and services that are such close
substitutes for one another that they operate as a competitive constraint
on the conduct of the supplier of those products and services. The
relevant market comprises the relevant product market and the relevant
geographic market. An economic tool usually employed in determining
the relevant product market is the SSNIP test (Small but Significant
Non-transitory Increase in Price, also called the hypothetical
monopolistic test) to assess primarily the demand side substitutability of
the product. Also, economic tools are used for determining the entry
barriers, which may include determining the economies of scale, extent
of product differentiation, extent of capital requirement, and predatory
behaviour.

Some empirical studies have tried to measure the gains from

competition in the markets. In the United States, in a contemporaneous
review of the deregulation of natural gas, long-distance
telecommunications, airlines, trucking and rail, it was reported that real
prices dropped at least 25 per cent and sometimes close to 50 per cent
11
within ten years of deregulation in those industries . The annual value
of consumer benefit from such deregulation was estimated to be
approximately US$5bn in the long-distance telecommunications
industry, US$19.40bn in the airline industry, US$19.60bn in the trucking
industry, and US$9.10bn in the rail industry. At the same time, there
were improvements in the quality of service. A study by the Australian
Productivity Commission, quoted by the OECD, estimates that
Australian household “annual incomes are, on average, around A$7,000
12
higher as a result of competition policy” . The same OECD document

11
Robert Luke, J. (1997): Economic Deregulation and Customers Choice:
Lessons for the Electricity Industry, George Messing University Centre for
Market Process”, quoted in Crampton , Paul (2003) Competition and Efficiency
as Organizing Principles for all Economic and Regulatory Policy Making, OECD-
IADB, April 2003.
12
OECD (2005): The Relationship between Competition Authorities and
Sectoral Regulators, Document No. DAF/COMP/GF (2005) 2 for Global Forum
8
also quotes a study that estimates that pro-competition policy
developments in New Zealand and the United Kingdom have added
around 2.5 percentage points to their employment rate over the 1978–
1998 period; countries with more modest reforms, such as Greece, Italy
13
and Spain added only 0.5–1 per cent to the employment rate . Another
study finds that “reforms promoting private governance (i.e.
privatization) and competition tend to boost productivity. In
manufacturing, gains to be expected from lower entry barriers are
14
greater the farther a given country is from the technology leader” .

In India, economic reforms comprising, inter alia, of

liberalization, privatization and pro-competition policies, were introduced
since the early 1990s. As these reforms took effect, economic growth
surged, and consumer sovereignty has asserted itself. The market-
based economy that has emerged is offering to the Indian consumer
competitive prices, a wider range of goods and a better quality of
products and services.

Two elements are required to maintain competition in the

economy: a competition policy and a competition law. Competition
policy refers generally to a set of government measures that enhance
competition, give primacy to market forces, facilitate entry and exit,
reduce administrative controls, and minimize regulations. Competition
law refers to a statute to prohibit and penalize anti-competitive practices
and regulate potentially anti-competitive mergers. Competition policy
and law are mutually complementary, one trying to promote a market-
based economy as opposed to a controlled or regulated economy, the
other trying to remove impediments that may be placed by private
players in the functioning of the market economy, and thereby maintain
and preserve competition in the markets.

on Competition, OECD February, 2005 at p. 3. available at

http://www.oecd.org/dataoecd/8/61/237607.pdf.
13
Nicoletti, Guiseppe and Stefano Scarpetta (2001): Interaction between
product and labour market regulations: do they affect employment? Evidence
from OECD Countries OECD Economics Working Papers, quoted in OECD
(2005) ibid.
14
Nicoletti, Guiseppe and Stefano Scarpetta (2003): Regulations, Productivity
and Growth: OECD Evidence, World Bank Policy Research Working Paper No.
2944, January 2003 quoted in OECD (2005), ibid.
9
3. Anti-competitive practices

Unfortunately, competition in the market can be suppressed or

negated through anti-competitive practices by enterprises; these are
often referred to as market failures. If competition is to be maintained
and its benefits are to be reaped by society, including the consumers,
such anti-competitive practices must be restrained, and to do so is the
primary purpose of competition law and its justification. Anti-competitive
practices are generally considered in three categories: cartels and other
anti-competitive agreements, abuse of dominant position
(monopolization) by an enterprise, and anti-competitive mergers. These
cause harm to consumers and society in varying degrees.

The harm could be even greater in developing countries,

because there the markets are generally more fragile as concentration
levels are higher, dominant position is more prevalent, entry barriers are
higher (regulatory restrictions, capital scarcity, etc.) and competition
authorities are relatively less resourced or skilled in disciplining anti-
15
competitive practices. A World Trade Organization (WTO) report
observes:

“There are reasons to believe that developing economies tend

to be more vulnerable to anti-competitive practices than
developed countries. The reasons include: high ‘natural’ entry
barriers due to inadequate business infrastructure, including
distribution channels, and (sometimes) intrusive regulatory
regimes; asymmetries of information in both product and credit
markets; and a greater proportion of local (non-tradeable)
markets. Thus it may be particularly important to protect,
consumers in developing countries against cartels, monopoly
abuses, and the creation of new monopolies through mergers.
Bid rigging in public procurement markets (i.e. collusive
tendering) is also pervasive in many developing economies, and
merits vigorous enforcement initiatives”.

Cartels are the most pernicious form of anti-competitive activity.

A World Bank Background Paper shows that in 1997 developing
countries imported US$81.1 billion worth of goods from industries that

15
WTO, Trade Policy Review – Report by the Secretariat: INDIA[2007], WTO
Document No. WT/TPR/S/182. p. 96.
10
 16
had seen a price-fixing conspiracy during the 1990s . Those imports
represented 6.7 per cent of the imports and 1.2 per cent of the GDP in
the developing countries and an even larger proportion of trade in the
poorest developing countries for whom the 16 products in question
17
represented 8.8 per cent of the imports . The OECD’s Global Forum on
Competition, 2001, contains a list of 26 cartel and bid rigging cases
18
reported by 12 developing countries . However, there are only a few
examples of global cartels being successfully penalized in developing
countries; the reasons for this are well known, such as limited capacity
of the domestic competition agencies to investigate and unearth
evidence, difficulty in securing cooperation of the corresponding
agencies in industrialized countries, and limitations in the law.

4. Consumer interest as a goal of competition law

Competition law, through the promotion and preservation of

competition in markets, enhances consumer welfare. This is, therefore,
one of the justifications for competition law and also gives to it wider
acceptability in the public eye. Frequently, consumer interest may
feature explicitly as one of the goals of competition law.
19
In the Indian competition law , protection of the ‘interests of
consumers’ figures specifically both in the preamble to the Act as well
as in the duties of the Commission. The preamble states as follows: “An
Act to provide, keeping in view the economic development of the
country, for the establishment of a Commission to prevent practices
having adverse effect on competition, to promote and sustain
competition in markets, to protect the interests of consumers and to
ensure freedom of trade carried on by other participants in markets, in

16
Levenstein, Margaret and Valerie Suslow (2001): Private International Cartels
and their Effect on Developing Countries, Background Paper for World Bank’s
World Development Report 2001, available at
http://www.worldbank.org/wdr/2001/bkgroundpapers/levenstein.pdf.
17
Ibid.
18
OECD (2001): Global Forum on Competition: Summary of Cartel cases
described by invitees, available at
http://www.oecd.org/dataoecd/41/30/2491386.pdf.
19
The Competition Act, 2002, later amended by the Competition (Amendment)
Act, 2007. May be found on the website of the Competition Commission of India:
www.competitioncommission.gov.in
11
India, and for matters connected therewith or incidental thereto”. Section
18 of the Act further states that: “It shall be the duty of the Commission
to eliminate practices having adverse effect on competition, promote
and sustain competition, protect the interests of consumers and ensure
freedom of trade carried on by other participants, in markets, in India.”.

Box 1
Competition advocacy

Competition advocacy is increasingly recognized as an integral and

important component of competition law and policy. In many
jurisdictions, the competition authority undertakes competition advocacy
with a view to promoting more competition-friendly policies and
regulations. In some countries, such a rule is mandated by the
competition law itself.

India’s Competition Act, 2002 provides a statutory base for the

Commission to undertake competition advocacy with the government,
regulations and other statutory bodies. Section 49 of the Act provides
that the government, central or state, may refer a competition policy
matter to the Commission for its opinion on its possible effect on
competition. The Commission is required to give its opinion within 60
days, which will be considered by the government, but the opinion is not
binding on the government. However, the Act also provides that “the
Commission shall take suitable measures for the promotion of
competition advocacy, creating awareness and imparting training about
competition issues”. This provision, therefore, allows the Commission to
undertake advocacy even where a reference is not received from the
central or state government. Accordingly, the Commission has offered
its opinion about the possible adverse effect on competition of a number
of proposed government laws or policies. Some examples are given
below:

(i) The Department of Posts proposed to introduce a law giving a

monopoly to India Posts over delivery of mail below 300 g (later reduced
to 150 g), providing for mandatory registration of private service
providers, introducing a USO contribution by private service providers to
India Posts, and setting up a mail regulation to regulate the private
service providers. In the view of the Commission, certain aspects of the
proposal could likely adversely affect competition in the markets and
12
create an uneven playing field between private and public service
providers. The Commission also pointed out that this sector had no
features justifying economic regulation.

(ii) The Commission interacted with the Department of

Telecommunications and the telecom regulation to advocate ‘number
portability’ with the view to reduce consumer switching costs and
thereby enhance the level of competition in the telecom market. It also
advocated a more competition-based policy for the allocation of
spectrum.

(iii) The Commission, through a high-level working group constituted by

the National Planning Commission, has recommended the
pronouncement of an overarching competition policy by the government.
Similar advocacy-based proposals have been made by the Commission
in other cases. There is reason to believe that the Commission’s
recommendations have had a positive effect and the outcomes in a
number of cases have coincided with the Commission’s views.

There has been a feeling that trade associations in certain

industries are being used as a platform for concerted action in respect of
prices. Though the Commission’s enforcement has not yet commenced,
it has, as an advocacy measure, interacted with several associations to
draw their attention to the new law and the serious consequences that
could follow from a violation of the law once its enforcement begins. The
Commission has emphasized the benefits from competition for
consumers and the industry and the adverse effect on both from anti-
competitive practices. Trade associations and chambers are being
urged to adopt a compliance code at their level, for example by
excluding certain types of subjects from discussion in association
meetings such as prices, tenders and profit margins. These
interventions by the Commission have substantially increased the
awareness of the associations in respect of the competition law.

Prof. Timothy Muris, while he was Chairman of the US Federal

Trade Commission (FTC), has stated: “Policies that we traditionally
identify separately as ‘antitrust’ and ‘consumer protection’ serve the

13
common aim of improving consumer welfare and naturally complement
20 21
each other” . The FTC’s statement of purpose declares :

“The Federal Trade Commission’s Bureau of Competition

champions the rights of American consumers by promoting and
protecting free and vigorous competition. The Bureau:

- reviews mergers and acquisitions, and challenges those

that would likely lead to higher prices, fewer choices, or less
innovation;
- seeks out and challenges anti-competitive conduct in the
market place, including monopolization and agreements
between competitors;
- promotes competition in industries where consumer impact
is high, such as health care, real estate, oil & gas,
technology, and consumer goods;
- provides information, and holds conferences and
workshops, for consumers, businesses, and policy makers
on competition issues and market analysis.”.

Similarly, in the United Kingdom, the Office of Fair Trading

(OFT) states as its responsibility: “The OFT is responsible for
making markets work well for consumers. We achieve this by
promoting and protecting consumer interests throughout the UK,
22
while ensuring that businesses are fair and competitive” .

The European Commission in its XXXIInd Report on

Competition Policy 2002 defines the goal of European competition
law: “One of the main purposes of European competition policy is to
promote the interests of consumers, that is, to ensure that
consumers benefit from the wealth generated by the European
economy. This objective is horizontal in nature: the Commission
thus takes the interest of consumers into account in all aspects of its
competition policy, namely in countering anti-competitive

20
The Interface of Competition and Consumer Protection, prepared remarks of
Timothy J. Muris, Chairman, Federal Trade Commission, at The Fordham
Corporate Law Institute’s Twenty-Ninth Annual Conference on International
Antitrust Law and Policy, New York City, October 31, 2002.
21
http://www.ftc.gov/bc/index.shtml
22
http://www.gov.uk
14
 agreements, in particular hard-core cartels and abuses of dominant
positions, but also in the control of concentrations and state aid
23
granted by Member States” .

It is interesting to see that this definition became more refined in

the recently published Guidelines on the application of Article 81(3)
EC. Point 13 of the Guidelines declares the goals of European
competition law in very explicit terms: “The objective of Article 81(1)
is to protect competition on the market as a means of enhancing
consumer welfare and of ensuring an efficient allocation of
resources. Competition and market integration serve these ends
since the creation and preservation of an open single market
promotes an efficient allocation of resources throughout the
24
community for the benefit of consumers” .

5. Trade-offs

Pursuit of efficiencies being a strong feature of competition law,

the extent to which the consumer interest is served by competition law
depends very much on the efficiency standard that is pursued in its
application. In general, it is highly unlikely that the three kinds of
efficiencies, i.e. productive, allocative and dynamic, can be achieved
simultaneously and, therefore, there have to be trade-offs in assessing
25
the efficiency gains, as pointed out by Cseres .

One trade-off is between static and dynamic efficiencies. In

today’s knowledge-based economy, technological growth and
innovation play an increasing role by bringing new products and
services continuously to consumers. Knowledge-based assets may
constitute a huge proportion of an enterprise’s assets, even when these
are not reflected in its balance sheet. Accordingly, competition in
product or process innovation may be more important than mere price
competition. Thus, dynamic efficiency brought about by innovation can
be in the long-term interest of the consumer even if in the short term the

23
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 324.
24
Ibid.
25
For a treatment of the efficiency trade-offs, see ibid. pp. 311–313.
15
consumers may not gain anything. Competition authorities, therefore,
have to be increasingly aware of the welfare-maximizing gains from
dynamic efficiency vis-à-vis static efficiency.

Similarly, there is a trade-off between allocative and productive

efficiencies. This may happen when a more efficient and, therefore, a
lower cost firm tries to enhance its market power by increasing its
market share. This may lead, on the one hand, to higher productive
efficiency as the average cost of production in the industry would
decline; on the other hand, it could lead to lower allocative efficiency
due to higher prices in the market. Such a trade-off may be particularly
compelling in the case of a merger. The merger, through economies of
scale or scope or otherwise, may reduce production costs leading to
productive efficiency. On the other hand, the merger may increase the
enterprise’s market power and thereby enable the enterprise to increase
prices. If the competition authority gives greater weight to productive
efficiency it may lead to the transfer of income from consumers to
producers and the opposite would be true if the competition authority
gave greater weight to allocative efficiency.

Similarly, as Cseres further explains, the extent to which

consumer interest is served depends upon the welfare standard
pursued by a competition authority. Some authorities adopt the
consumer welfare model, according to which the ultimate goal of
competition law should be to prevent increases in consumer prices due
to the exercise of market power by dominant firms. The consumer
welfare standard is tilted in favour of consumers and considers wealth
transfers from consumers to producers as being harmful. Consequently,
it assigns less weight to efficiencies unless these directly benefit the
consumers through, for example, lower prices or better products. This
approach also runs the risk of focusing on short-term consumer welfare
and relatively ignoring the long-term benefits to consumers from higher
efficiencies.

The other welfare model is based on the concept of total

welfare. This looks at the gains to society as a whole, irrespective of
whether the gains are to producers or to consumers and whether there
is a transfer of wealth from consumers to producers. Efficiencies
therefore are desirable, even if the gains from them are not directly
passed on to consumers. This approach values the long-term consumer
welfare by accepting that higher levels of efficiency today, even if they
16
directly increase producer welfare, would benefit consumers in the long
run, possibly with a lag in time. This approach further acknowledges that
a higher level of producer surplus may be necessary for investment in
innovation, which in turn would lead to dynamic efficiency and would
benefit consumers in the long run.

6. Consumer interest in the application of competition law

According to the theory of competition, consumer welfare is

enhanced in competitive markets. Consumer interest also figures
frequently as one of the important goals of competition law. However, in
the practical implementation of competition law, consumer interest is
generally a ‘concealed aspect’ of competition law, being indirectly
served by its application, but not always figuring explicitly or up-front in
the analysis of competition law cases. Explicit reference to the
consumer is relatively rare and participation of consumers in decision
26
making in competition law is rarer still . Nevertheless, consumer
interest remains integral to the theory of competition law, and its
presence does surface in different forms in the application of the law.

Box –2
Anti-cartel enforcement

In India, the cement industry, which had been under price and
distribution control for many years, was de-controlled in early 1989.
Some time thereafter there were allegations that the industry was
manipulating prices and indulging in cartelization and that this was being
done through the involvement of the trade association, the Cement
Manufacturers Association of India. An enquiry was initiated by the
Monopolistic and Restrictive Trade Practices Commission (MRTPC)
under the Monopoly and Restrictive Trade Practices Act, 1969.

The MRTPC found direct as well as indirect evidence of

concerted price fixing and noted the existence of a common platform in
the form of the Cement Manufacturers Association of India; the

26
Howells, Geraint and Stephen Weatherill, Consumer Protection Law, (second
ed.), [2005], Ashgate, Hants, p. 568.

17
Association had a role in determining prices during the control regime
and the same apparatus continued after the de-control. The
Commission concluded that all the respondents, except three, were
indulging in restrictive trade practices and acting in concert. The
Commission issued a “cease-and-desist order” and directed the
respondents not to indulge in any arrangement directly or indirectly
through the instrumentality of the Association, or otherwise, in fixing
prices.

The Commission’s order was pronounced in December 2007 at

a time when the cement prices had been ruling at high levels causing
dissatisfaction amongst consumers and others; hence, the order was
generally welcomed. However, there was also dissatisfaction over the
fact that the order was passed almost 17 years after the proceedings
were initiated thereby greatly diluting its remedial effect for consumers.

The MRTP Act suffered from the weakness that it did not give
the MRTPC the power to impose penalties and thereby lacked
effectiveness. On the other hand, the new Competition Act, 2002
contains more effective provisions, particularly against cartels. It
provides for a high penalty up to 10 per cent of the turnover or three
times the profit for each year of the cartel activity. It also has a leniency
provision providing for lenient treatment to a party to a cartel that
discloses the cartel activity, provides full, true and vital evidence and
cooperates with the Commission in the proceedings against the cartel.
The Competition Commission is also vested with sufficient powers of
investigation and collection of evidence. It is expected that the
Competition Act 2002, will thereby provide a more effective framework
for action against cartels.

Perhaps the protection of the consumer is most pointedly present in

provisions against abuse of dominance. For example, the Indian
Competition Act, 2002, in Section 4 thereof, states that there shall be an
abuse of dominant position if an enterprise or a group:
“ (b) limits or restricts
(i) ……
(ii) technical or scientific development relating to goods or
services to the prejudice of consumers;”.

18
 Further, in the definition of dominant position itself, consumer
interest figures prominently; it is defined as a:
“position of strength, enjoyed by an enterprise, in the relevant
market, in India, which enables it to:-
(i) ---
(ii) affect its competitors or consumers or the relevant market in its
favour.”.

In the factors for the determination of dominant position in

Section 19(4) of the Act, amongst other factors, the following, which
make specific reference to the consumer, have been included:
“(f) dependence of consumers on the enterprise;
(h) entry barriers including barriers such as regulatory barriers,
financial risk, high capital cost of entry, marketing entry
barriers, technical barriers, economies of scale, high cost of
substitutable goods or service for consumers.”.

In Sections 19(6) and 19(7) of the Act, the relevant geographic

market and the relevant product market are each to be determined on
the basis of a number of factors. “Consumer preferences” specifically
features amongst the factors for determining both the relevant
geographic market and the relevant product market.

Similar references to the consumer are to be found in the

definition of abuse of dominant position in Article 82 of the EC Treaty as
well as in the definition of dominance itself. Article 82 which prohibits
abuse of dominant position states that “such abuse may, in particular,
consist in: (b) limiting production, markets or technical development to
the prejudice of consumers”. Howells notes that: “Indirectly, Article 82 is
a consumer policy instrument in its capacity to suppress inefficient
practices such as high prices which are not adequately controlled by the
27
market in the absence of effective competition” . He further notes that
Article 82 contains one of the Treaty’s rare explicit references to the
consumer and the prohibition contained therein has been judicially
described as motivated by “the concern not to cause harm to
28
consumers” .

27
Howells, Geraint and Stephen Weatherill, Consumer Protection Law, (second
ed.), [2005], Ashgate Hants, pp. 549, 550.
28
Ibid. p. 550.
19
 For the determination of dominant position, the test laid down by
29
the European Court of Justice in United Brands v Commission has
served as the standard ever since and it makes a specific reference to
consumers:

“65 The dominant position thus referred to by Article [82] relates

to a position of economic strength enjoyed by an undertaking
which enables it to prevent effective competition being
maintained on the relevant market by affording it the power to
behave to an appreciable extent independently of its
competitors, customers and ultimately of its consumers”.

Determination of the relevant market is one of the essential

steps in the investigation of a case. In determining the relevant market
an important analytical tool often used by competition authorities is the
30
SSNIP test. Howells notes that this test is based on inspection of
consumer behaviour. If a non-transitory increase in price, say by 5 to 10
per cent, does not lead to the switching of a substantial number of
consumers to a second product, then the second product is not part of
the same market as the first product. For example, in 1998 Football
31
World Cup the Commission applied this test and found that consumers
of tickets for the Finals of the Football World Cup did not treat that
product as interchangeable with tickets for other football or sports
events or other forms of entertainment. The World Cup tickets therefore
constitute a separate market, and the organizers enjoyed a dominant
position, even a monopoly, in this market. The determination of the
relevant market is primarily an exercise on the demand side to
determine whether for the consumer a particular product is substitutable
by another product or not, in economics referred to as elasticity of
demand.

A dominant firm carries a “special responsibility” not to abuse its

market power to set unfair prices or act to segregate the market.
Howells notes that a most strikingly interventionist feature of Article 82 is
that “it may be applied in order to require a reluctant dominant firm to

29
Case 27/76 United Brands v Commission [1978] ECR 207, [1978] I
CMLR.429.
30
Howells, Geraint and Stephen Weatherill, Consumer Protection Law, (second
ed.), [2005], Ashgate Hants, p. 550.
31
Decision 2000/12/EC [2000] 0J.L5/55, referred to in Ibid. p. 550.
20
respond to consumer demand”. For example in RTE, BBC, ITP three
television companies printed separate guides to future programmes,
using copyrights which they held over their own listings to prevent the
32
appearance of a single, integrated publication . A consumer was thus
forced to buy three separate guides. The firms were obliged by the
courts to make their listings available to third parties, subject to payment
of a reasonable fee. The protection of the consumer interest is explicit in
this decision, which imposes consumer choice on unwilling firms. The
courts observed that the companies had abused the economic power
they enjoyed under their copyright by unjustifiably preventing the
appearance of a new product for which there was potential consumer
demand. The same principle has been reiterated by the European Court
33
of Justice in the Magill case and recently reconfirmed in the IMS
34
Health case by stating that a new product must not be denied to
consumers because of the refusal to license by the dominant enterprise.

Many competition laws include consumers among the entities

that can file complaints against an anti-competitive practice or a merger.
The UK law in fact has the concept of ‘super complaints’ that can be
brought by recognized consumer associations. Good examples of
35
consumer complaints resulting in major decisions are the Kawasaki
36
case and the BEUC v Commission case . In Kawasaki, a complaint by
a frustrated consumer led to a finding that an arrangement that
prevented export of motorcycles to Belgium from Britain, where the
37
prices were relatively low, violated Article 81 . In BEUC, the Court of
First Instance annulled the Commission’s decision rejecting the
complaint of BEUC, a consumer representative organization, as being
inadequately reasoned, thus demonstrating that the consumer complaint

32
Cases T-69, T-70, T-76/89 [1991] ECR II-485,535,575 referred to in Howells,
nd
Geraint and Stephen Weatherill, Consumer Protection Law (2 ed.) [2005],
Ashgate Hants, p. 551.
33
See European Court of Justice Joined cases C-241/91 P and C-242/91 P
Radio Telefís Éireann (RTE) and Independent Television Publications Ltd (ITP)
v. Commission (Magill) [1995] ECR 743.
34
See European Court of Justice Case C-418/01, IMS Health GmbH & Co.
OHG v. NDG Health GmbH & Co. KG, [2004] ECR I-5039.
35
Decision 79/68 OJ 1979 L16/9, [1979] 1 CMLR 448.
36
Case T-37/92 [1994] ECR II-285.
37
Howells, Geraint and Stephen Weatherill, Consumer Protection Law, (second
ed.), [2005] Ashgate Hants. p. 535.
21
 38
should have been taken seriously . A consumer group may also be
permitted to intervene in proceedings before the court. In Fordwerke AG
39
and Ford of Europe Inc v Commission , BEUC had complained to the
Commission about Ford’s practices which involved suppression of
imports into the UK, and the court upheld the right of BEUC to intervene
in support of the Commission’s case.

Competition laws in most jurisdictions permit claims for

compensation or damages and there are cases where large amounts
have been allowed by the courts or authorities as compensation to
consumers. In the Indian law (Section 53N), a claim for compensation
by the injured party may be filed before the Competition Appellate
Tribunal, based on the finding by the Commission or by the Appellate
Tribunal itself in an appeal case, and the Appellate Tribunal may pass
an order for the recovery of compensation from any enterprise for any
loss or damage shown to have been suffered as a result of any
contravention of the Act having been committed by the enterprise.

In the United States, private action for enforcement of the

antitrust law is common and in fact constitutes the vast majority of the
cases in the courts. Many of these cases of private action constitute
consumer-driven complaints. Over 90 per cent of all competition cases
in the United States remain private treble damage actions that can be
brought under either state or federal law or combined into a single case
40
in federal court . (The US has the principle of treble damages whereby
compensation can be claimed up to three times the cost of the injury
caused.)

7. Growth of consumer protection law

In sum, it would be seen above that competition law has the

indirect effect of protecting consumer interest, even where there is no
explicit reference to consumer protection. However, a direct and explicit
reference to the consumer interest occurs in specific provisions of the

38
Ibid.
39
Case 229 and 288/82R [1982] ECR 3091.
40
Waller, Spencer Weber, In Search of Economic Justice: Considering
Competition and Consumer Protection Law, (Vol. 36), [2005], Loyola University
Chicago Journal, Chicago, p. 636.
22
competition law, and is also reflected in several orders passed by the
courts or the competition authorities. But competition law is neither
designed to, nor can it, protect all aspects of consumer interest. The
main thrust of the competition law is to protect and maintain the process
of competition in markets so as to make markets work better and
thereby result in the benefits of higher efficiencies, innovation and
increase in consumer welfare. Competition law has a broader role and is
part of the institutional framework for the management of the economy.
It is therefore part of the economic reforms process in many economies
that are liberalizing and migrating to market-based economies.
Competition law may be designed to serve various objectives apart from
protecting and maintaining the process of competition. These could be
gains in economic efficiencies (productive efficiency, allocative
efficiency and dynamic efficiency), preventing a high level of
concentration of economic power and its consequent abuse for
economic or even for political purposes, maintaining the freedom of
trade or occupation and protection of small and medium enterprises. In
the EU, an important aim is to protect the common market. In the midst
of these various objectives, consumer interest features as one of the
elements, albeit an important one, and therefore it would be unrealistic
to expect that competition law can protect consumer interest in its
entirety.

There are certain aspects of consumer interest where

competition law cannot reach at all. These are, for example, aspects
relating to safety (for instance in electrical gadgets and toys), health (for
instance, in the case of drugs and food items), environment (for
instance, air pollution and pollution of drinking water sources), and
privacy (which can be breached, for instance, through leakage of credit
or other data). For the protection of consumer interest in these areas
specialized laws have been enacted in various countries.

In India, for example, consumer protection laws comprise a

wide spectrum with specific dimensions and parameters, ranging from
the country’s constitution to the general or specific consumer-centric
41
laws . In the constitution, there are many provisions that have a direct
bearing on the consumer interest particularly in the provisions contained
in the ‘Directive Principles of State Policy’. The state is required, inter

41
Verma S.K., M. Afzal Wani, A Treatise on Consumer Protection Laws, 2004,
Indian Law Institute, New Delhi, 2004, pp. 18–21.
23
alia, to direct its policy towards securing that the ownership and the
control of the material resources of the community are so distributed as
best to subserve the common good, and the operation of the economic
system should not result in the concentration of wealth and means of
production to the common detriment. The state is also obligated to
secure for all workers, work, a living usage, and conditions of work
ensuring a decent standard of life in the same way as the ILO is
promoting the interests of workers as consumers. Regarding public
health, the State is required to take steps to raise the level of nutrition
and the standard of living to improve public health and to prohibit the
consumption of intoxicating drugs or drugs that are injurious to health.
As part of the fundamental rights, the constitution guarantees freedom
of profession, trade or business, thereby ensuring that a citizen cannot
be restrained from carrying on a business except by a law imposing a
reasonable restriction in the interest of the general public. For example,
restrictions can be placed on a harmful trade or a dangerous trade.

Specific enactments in India dealing with consumer protection

include, for example: the Prevention of Food Adulteration Act, 1954;
Essential Commodities Act, 1955; Prevention of Blackmarketing Act,
1980; the Standards of Weights and Measures Act, 1976; the Standards
of Weights and Measures (Enforcement) Act, 1985; the Bureau of Indian
Standards Act, 1986; the Sugar (Regulation of Production) Act, 1961;
the Infant Milk Substitutes, Feeding Bottles and Infant Food (Regulation,
Supply and Distribution) Act, 1992; Drugs and Cosmetics Act, 1940; the
Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954;
the Indian Medicine Central Council Act, 1970; Indian Telegraph Act,
1858; the Jute Packaging Material (Compulsory Use in Packing
Commodities) Act, 1987; Sale of Goods Act, 1930; the Competition Act,
2002; the Electricity Act, 2003, and the Consumer Protection Act,
42
1986 .

Worldwide, as societies progressed and markets grew, so too

did the growth of unfair trade practices by producers or suppliers. On
the other hand, the economic position of consumers was weak in
comparison with that of producers and suppliers. The consumers had to
seek redressal under the common law including the law of torts. But the
process of redressal was long and tedious, as well as expensive, and
the unequal resources available to the consumer vis-à-vis the producers

42
Ibid.
24
or suppliers ensured that the balance of advantage continued to lie with
the latter.
43
According to Cseres , “market failures were manifold. Freedom
of contract resulted in a weak or inexistent bargaining position for
consumers, freedom of competition made price fixing, restrictions of
competition and misleading trade practices possible and equality of
rights and duties meant that there was no place for special consumer
rights or any form of positive discrimination. The asymmetrical and
unilateral structure of communication, namely the knowledge and
information advantage held by the producer disadvantaged or even
damaged consumers. Further, the lack of safety, barriers to access to
justice and representation called for some kind of interference to help
consumers. The measures which tried to correct and remedy these
market failures form an important part of the active consumer protection
rules.”.

This weakness in the position of the consumer and the need to

protect consumer interest has, in most countries, given rise to not only
the specific laws for protection of health, safety, and environment and
other similar specific regulations but also to the evolution of generic
44
consumer protection law. Cseres , further states “The aim of the
interventionist measures was to re-establish consumers’ market power
through granting them an equal bargaining power and through
safeguarding their sovereignty. The welfare state took over certain
duties of economic development in order to create greater economic
security and guarantee certain social rights for every citizen. The
welfare state modified the classical principles of freedom of contract,
freedom of competition and fault liability as these allegedly treated
consumers unfairly. It was contended that the state could adjust the
effects of externalities, provide the market with information and contest
monopolies. The state was seen as being able to distribute welfare in a
just way and to guarantee allocative efficiency. State intervention was
justified by its task to correct and remedy market failures. Consumer law
was actually brought into being because of the presence of market
failures. The state was believed to be able to prevent loss or damage

43
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 153.
44
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, pp. 154–155.
25
caused by market failures and to provide remedies. This was realized
through granting consumers certain basic rights”.

In consumer law, the focus is on the consumer and on

protecting consumer interest. Consumer law consists, first of all, of
mandatory rules that guarantee that parties will not depart from the
legislative rules to the detriment of the consumer. It further comprises an
obligation to disclose information as information plays a significant role
in consumers’ lives. Only well-informed market parties can exercise their
buying power and activate competition. Consumer law measures
address the safety and quality controls of consumer goods and services,
and consumer’ ability and willingness to exercise choice. Generic
consumer law is aimed at the improvement of existing substantive law,
45
such as liability, standard form contracts, competition or advertising .

The manner in which the generic consumer protection law

protects consumer interest depends very much on the perception of the
consumer’s position as an economic actor. There are broadly two
approaches to consumer protection: the paternalistic approach and the
46
liberal approach. Cseres explains that the paternalistic approach
regards the market as being non-transparent through product
differentiation and multiplicity of package and distribution methods and
that the competitive market is unable to transport the necessary
information to the consumers. Furthermore, consumers are believed to
decide in an irrational way and are uninformed because of non-
transparency on the market. This approach relies heavily on state
intervention in order to realize its policy goals: disclosure and provision
of information in understandable ways, regulation of the substance of
transactions, statutorily mandated contract terms or standard form
consumer transactions in order to strengthen the market to adjust the
environment of consumers.

45
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 320.
46
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 321.

26
 47
An OECD paper points out that recent advances in
“behavioural economics” have argued that even when markets are
reasonably competitive and search and information costs are not
especially high, the consumer is not always able to make a rational
choice suggesting that increased competition to the extent to which it
leads to a proliferation of choices available to consumers, could yield
48
only small, or in some instances even negative, welfare gains .
“Behavioural economics” argues for an even more “paternalist”
approach in respect of consumer protection policy. The OECD paper,
however, argues against this approach and in favour of primary reliance
on competitive markets as the means of empowering consumers, further
stating that a more interventionist approach to consumer policy could
involve substantial costs including the costs of regulatory errors that are
inevitable under a paternalistic approach. Thus, competition and market
forces may be important ways of addressing concerns about the efficacy
with which consumers make complex choices, because firms in
competitive markets have incentives to offer consumers “solutions” that
allow potential gains from trade to be more fully realized.

The other approach to consumer protection law is the liberal

approach. This approach is less interventionist and has greater faith in
the disciplining effects of competitive markets and the ability of the
consumers to take rational decisions. Furthermore, it believes that
competition law itself is able to rectify market failures and it strengthens
the position of the consumer. Competition law, coupled with providing
greater information to consumers and consumer education and
counselling, could ensure that those goods and services most wanted
by consumers would be provided to them at affordable prices. The
liberal model sees less need for direct intervention by the state on
behalf of the consumers, and therefore finds a patronizing approach
unnecessary.

47
Background Note for Global Forum on Competition 2008, Round Table on the
Interface between Competition and Consumer Policies, OECD document No.
DAF/COMP/GF(2008) 4.

27
8. The interface between competition law and consumer
protection

8.1. Synergies

As a general proposition, competition law and consumer law are

complementary and even mutually reinforcing, though their perspectives
may differ and they may apply different tools to correct market failures.
Competition law functions primarily at the interface between firms – in a
sense on a horizontal plane – preventing structural or behavioural
patterns that would damage competition, and it tries to restore effective
competition in the market. On the other hand, consumer law generally
functions at the interface between the enterprises and consumers – in a
sense on a vertical plane – trying to address the unequal relationship
between the two and ensure that conditions prevail in this relationship
49
that will enable consumer choice to be effectively exercised. Cseres
observes that

“Although the two legal disciplines focus on different

market failures and offer different solutions and apply different
techniques to correct market failures they are both aimed at
keeping the market competitive and try to bring market
performance close to the model of perfect competition……
These are actually two different approaches to achieve the
same goal: a competitive market where consumer sovereignty
is safeguarded and welfare is maximized. Competition law and
consumer protection are thus mutually reinforcing disciplines.”.

Competition in the market brings for firms the risk of losing

customers to rival firms. There is therefore pressure on them to provide
the best ‘value for money’ to the consumer in the products or services
offered by the firms. A satisfied consumer will bring repeat business and
will reduce the marketing costs. Thus, effective competition, when
present in the markets, will compel firms to address consumer problems
50
and find market solutions to the same. The OECD paper cites several

49
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 326.
50
Background Note for Global Forum on Competition 2008, Round Table on the
Interface between Competition and Consumer Policies, OECD document No.
DAF/COMP/GF [2008] 4.
28
examples to support this argument. It refers to the case of “confusopoly”
– apparently deliberate attempts by firms to offer consumers choices
that are confusing, for example by offering prices that are difficult to
compare. But other firms may compete by cutting through the maze and
offering price packages that are simple and easy to understand. The
telecommunications and airlines industries are examples where
“confusopoly” abound. In the telecommunications industry, firms have
been announcing pricing plans that are both difficult to understand and
to compare with each other. In the airlines industry, firms offer low fares,
but these may be bounded by restrictions on days of use or minimum
stay restrictions. But recent trends demonstrate the incentive for
competing firms to announce simpler, easier to understand price
packages.
51
According to the OECD paper “This reduces the burden that
would otherwise fall on consumer policy in terms of enforcing product
and service standards, as firms will have incentives of their own to meet
and exceed customer expectations. In that sense, ensuring that a
market is effectively competitive can help one of the central concerns of
consumer policy”. It further states that firms that operate in effectively
competitive markets, and hence can hope to attract the customer away
from rivals, will have incentives to reduce those customers’ switching
costs, both by informing them of the gains from shifting and by helping
them to bear the one-off costs that shifting involves. The result of firms
investing in reducing the switching costs incurred by each other’s
customers can be both to make competition more vigorous and to
diminish the need for consumer policy interventions aimed at reducing
switching costs.

Just as competition law can benefit consumers and can reduce

the need for direct consumer policy interventions, consumer policy can
also strengthen competition in markets. Policies that ensure that
advertising and product descriptions are honest and informative, that
contract terms and the obligations they involve are understandable and
not disproportionate, and that consumers can reasonably expect
products to be safe and fit-for-purpose, will both make consumer choice

51
Background Note for Global Forum on Competition 2008, Round Table on the
Interface between Competition and Consumer Policies, OECD document No.
DAF/COMP/GF [2008] 4.
29
a more effective discipline (thus directly strengthening competition) and
will force firms to compete on their merits (rather than on the basis of
52
fraudulent or misleading claims or of unfair contract terms) . Equally,
product standards, by facilitating comparisons between products,
increasing the ease with which products from one supplier can be
replaced by products from another, and concentrating competition on
performance rather than on features that are inessential to it, can
directly improve both consumer choice and the competitive process.

In short, each of these two policy instruments can be used to

advance the goals also pursued by the other; competition policy, by
keeping markets effectively competitive, can reduce the work that needs
to be done by consumer policy, and consumer policy, by enhancing the
ability of consumers to exercise choice, can help make markets more
effectively competitive and force firms to compete on their merits,
thereby supporting the ends of competition policy. Averett and Lande
have observed very insightfully that competition law provides consumers
with a choice of competing products and services and consumer
protection law allows consumers to exercise that choice free from fraud,
53
coercion, deception, or demonstrably false information .

Since consumer policy protects and strengthens the position of

the consumer, the consumer has greater confidence in the markets and
is encouraged to participate therein. Being better informed, the
consumer will be able to make rational choices amongst the available
products and services. In this way, consumer protection will facilitate
greater competition between firms. Cseres makes the interesting

52
European Commission (2004), Identifying and tackling dysfunctional markets,
Note submitted to OECD for discussion at the joint meeting of the Competition
Committee and the Committee on Consumer Policy, 13 October 2004, at pp. 2–
3. referred to in Background Note Background Note for Global Forum on
Competition 2008, Round Table on the Interface between Competition and
Consumer Policies, OECD document No. DAF/COMP/GF [2008] 4. p. 5.
53
Neil W. Averett & Robert H. Lande Consumer Sovereignty: A Unified Theory
of Antitrust and Consumer Protection Law, 65 ANTITRUST L.J.713 [1997],
referred to in Waller, Spencer Weber, In Search of Economic Justice:
Considering Competition and Consumer Protection Law, (Vol. 36), [2005],
Loyola University Chicago Journal, Chicago, p. 632.

30
 54
observation that “Many consumer problems are actually micro-
competition problems. A poorly informed consumer who is not aware of
alternative choices and who might be subject to the seller’s
discrimination is in fact subject to monopoly power. Or a consumer
entering a contract with unfair contract terms is subject to the
55
exploitation of market power” . Deceit by one group of sellers may lead
consumers to doubt the integrity of an entire industry or to distrust
markets generally. Therefore, competition is not simply fundamental to
consumer policy but, as the chairman of the OFT remarked, “much
56
consumer policy is competition policy” . Thus competition and
consumer policy seem to be truly complementary.

8.2. Tensions

While competition law and consumer protection are

complementary in many ways, their interface also creates various
challenges due to the tensions that arise between the two disciplines.
The above analysis demonstrated that in the implementation of
competition law certain trade-offs are involved and this may determine
the extent to which competition law serves consumer interest. If the
competition agency gives greater weight to total welfare as against
consumer welfare or if it gives greater weight to productive efficiency as
against allocative efficiency, to that extent it would provide less
satisfaction to consumer interest. Similarly, if it gives greater weight to
dynamic efficiency as against static efficiency, to that extent it would
provide less satisfaction to short-term consumer interest.
57
According to Cseres “The economic arguments of competition
may lead to outcomes which are not always acceptable to consumers,
like high switching costs. More competition might result in the restriction
of outlets and, therefore, more difficult access for consumers. Lower

54
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, pp. 326–327.
55
Vickers, J. Economics for Consumer Policy, British Academy Keynes Lecture,
29 October 2003, pp. 7, 16.
56
Ibid. p. 17.
57
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 327.
31
prices might be realized at the expense of quality or creating information
problems”. Cseres cites the examples of telecommunications and
energy markets where deregulation and liberalization have increased
competition and lowered prices for consumers, but have also led to
additional costs, for example, the difficulty in coping with the complex
calculations involved in making product choices. In electricity, while it
has provided better prices and choices for large users, it has raised
difficulties for consumers to exercise their choices.

The opening of previously highly regulated markets to

58
competition may well raise new issues for consumer protection , for
example following the liberalization and introduction of greater
competition in financial markets, utility markets and professional
services. In financial markets, this has exposed consumers to new risks
and difficulties in making complex choices; in utility markets (such as
electricity and telecommunications) it has created challenges in respect
of service, quality, management of customer complaints and of
disconnection for non-payment, as well as consumer choice in the face
of complex pricing schemes. In professional services, it has raised
complex issues of balancing competitive pressures (for example, in
terms of pricing and marketing, including advertising) with consumer
protection in situations characterized by potentially large information
asymmetries and substantial error costs. When a market becomes more
exposed to competition than it was previously, the incentives of market
participants may change in ways that raise consumer protection
concerns. For instance, it may attract “fly-by-night” operators whose
unscrupulous practices undermine consumer confidence in the market
as a whole or incumbent firms may seek ways of locking customers in
59
and taking advantage of them .

In the case of the professions, such as legal, medical,

accounting, engineering and health, regulatory restraints are placed on
these occupations with a view to protect consumers in the face of
information asymmetries. These services are complex and it is generally
difficult for an ordinary consumer to assess their quality, more

58
See Background Note for Global Forum on Competition 2008, Round Table
on the Interface between Competition and Consumer Policies, OECD document
No. DAF/COMP/GF(2008) 4. p. 14
59
See Ibid.
32
particularly to assess the quality before the service has been delivered.
For the consumer, the result of making a wrong selection can be serious
damage in certain cases, for example in selecting a wrong surgeon for a
brain surgery or selecting a wrong architect or engineer for a complex
bridge. Thus, regulatory rules are imposed to assure consumers of
adequate quality of service, such as by prescribing minimum
qualifications for surgeons who can perform brain surgery or for
architects and engineers who can provide architectural or engineering
designs for complex bridges. These regulatory rules substitute the need
for information gathering and assessing by consumers themselves.
However, such regulations also reduce competition within the
professional services. This may be even more true in the case of
restrictions such as those placed on advertising, restrictions on the
number of professionals who shall be allowed to qualify each year,
restrictions on professionals having foreign degrees who will be allowed
to practise and so on. In some cases, these restrictions may actually
extend into areas such as price fixing and collective boycott, which are
patently anti-competitive.

9. Coordination between competition law and consumer

protection

Considering that the aims of competition law and consumer

protection law are mutually complementary and reinforcing, but that they
have different approaches to similar problems and there are clearly
areas of tension between them, the question arises as to how best to
maximize the synergies and minimize the tensions.

An economics-based approach could smooth the interface

between the two disciplines. Competition law is an economic law, with
economics providing the theoretical underpinning for the law as well as
the analytical tools used in the application of the law. Over the last
several decades, the economics of competition law has expanded
immensely with enormous research and study enriching the field. On the
other hand, the role of economics in the field of consumer law has been
much less obvious. Nevertheless, economic insight would facilitate a
better analysis of the problems arising from market failures and would
also provide a better understanding as to which problems can be
addressed by the market itself and which cannot be so addressed and

33
therefore, require the specific tools provided by consumer protection
law. This would provide for a more cost-effective approach towards the
solution of problems and would avoid unnecessary or excessive
intervention in the market through the medium of the consumer law. The
60
OECD paper recommends a tightly coordinated combination of the two
disciplines: consumer policy tools while seeking approaches that
effectively protect consumers should not unduly or unnecessarily restrict
competition, and competition policy should be brought to bear to ensure
that, subject to appropriate consumer protection safeguards being in
place, competition should be allowed to work where it can, including by
the elimination of any unjustified restriction on entry and on competitive
conduct.

Another issue that arises is about the implications of the

interface between the two disciplines on the institutional design for their
implementation. Specifically, a practical question that arises is whether
the two disciplines are better located in the same institution or in
separate institutions. There is no uniform pattern in this regard.

While in most countries, separate agencies handle competition

law and the generic consumer protection law, in a few countries the
same institution is responsible for both laws. For example, in the United
States, the responsibility for enforcement of competition law lies with
two agencies, the United States Department of Justice (DOJ) and the
United States FTC. While the DOJ enforces only competition law, the
FTC enforces both competition law and the consumer protection laws
through Section 5 of the Federal Trade Commission Act, which prohibits
both unfair methods of competition and unfair or deceptive acts and
practices. Though the FTC was set up in 1914 under the Federal Trade
Commission Act, the responsibility for consumer protection was added
subsequently in 1938. The FTC has a Bureau of Competition and a
separate Bureau of Consumer Protection. Its regional field offices
originally handled both competition and consumer protection cases but
over time most regional offices have come to specialize entirely in
consumer protection matters with competition cases being only a small

60
Background Note for Global Forum on Competition 2008, Round Table on the
Interface between Competition and Consumer Policies, OECD document No.
DAF/COMP/GF(2008) 4. p. 14

34
part of their agenda. Waller has observed that, though the FTC has a
dual responsibility, it is organized in a way that tends to emphasize the
61
separateness of the two fields rather than their common elements .

In the UK, the OFT and in Australia the Australian Competition

and Consumer Commission (ACCC) have responsibility for enforcement
of both the laws. In India, the MRTPC has responsibility against both
anti-competitive practices (“restrictive trade practices”) and anti-
consumer practices (“unfair trade practices”) both of which are
prohibited under the Monopolistic and Restrictive Trade Practices Act,
1969. In fact, although the MRTP Act was enacted in 1969, the
provisions against unfair trade practices were added only several years
later in 1984. Since then the unfair trade practices have tended to
account for the larger number of cases before the Commission, to that
extent distracting it from restrictive trade practices. However, given the
seriousness of the issues of consumer protection, India enacted a
dedicated consumer protection law, the Consumer Protection Act, 1986.
Under this Act a separate mechanism altogether was set up for
redressal of consumer disputes. This mechanism consists of District
Forums in each district of the country, State Commissions in each state
of the country and a National Commission at the apex level. The
jurisdiction for hearing consumer disputes has been divided between the
three levels of redressal agencies according to the value of the goods or
services and compensation claimed, if any, the bigger cases going to
the higher-level agencies. The State-level Commissions also hear
appeals against the orders of the District Forums and the National
Commission hears the appeals against the orders of the State
Commissions. Appeals against the orders of the National Commission
are heard by the Supreme Court. This extensive machinery, having a
network spread all over the country was found to be necessary in view
of the large size and population of the country and to provide easy
access to the redressal forums for individual consumers and consumer
organizations. The Supreme Court of India has observed that “…the
regulation is a milestone in the history of socio-economic regulation and
62
is directed towards achieving public benefit…” . In case of competition-

61
Waller, Spencer Weber, In Search of Economic Justice: Considering
Competition and Consumer Protection Law, (Vol. 36), [2005], Loyola University
Chicago Journal, Chicago, p. 634.
62
Case Lucknow Development Authority v M.K. Gupta, (1994) 1 Supreme Court
Cases 243.
35
related cases it is neither necessary nor possible to replicate a
mechanism of this size and reach.

Box –3
Consumer Protection Act, 1986 in India

The Supreme Court of India in its judgement under the

Consumer Protection Act, 1986 described the Act as a milestone. The
Consumer Protection Act, 1986 is a dedicated consumer protection law
with a comprehensive mechanism for receiving and deciding consumer
complaints. This Act does not address competition-related issues. In a
far-reaching judgement Lucknow Development Authority v. M.K. Gupta,
the Supreme Court observed that even government bodies or
development authorities that develop/allot land and/or construct houses
for the common man in discharge of their statutory functions render a
‘service’ and, hence, are subject to the provisions of the Consumer
Protection Act. Therefore, any defect or deficiency in such services
would be an unfair trade practice and would amount to denial of service.
The court observed that a complaint regarding use of sub-standard
material or delay in the delivery of a house could not be rejected as
being not maintainable under the Act. The court went on to observe that
the Commission under the Consumer Protection Act had the power to
award compensation not only for the loss or damage suffered but also
for injustice, harassment and distress suffered by the consumer. Where
the suffering is due to proven mala fide, an oppressive or capricious act
of a public servant, the Commission is obliged to direct the Department
concerned to pay the amount of compensation from the public fund
immediately and later recover the same from the public servant
responsible for such act. In such cases, the state or its instrumentality is
duty-bound to later recover the amount of compensation so paid from
the public servant concerned.

The new Competition Act, 2002 in India provides that the MRTP
Act, 1969 would be repealed and the MRTPC would be dissolved. It
would continue for two years to dispose of pending cases but no new
cases under that Act would be entertained as once the enforcement
provisions of the Competition Act, 2002 were brought into force, new
competition-related cases would be entertained only by the Competition
Commission of India, and new consumer complaints would be heard
36
only by the redressal agencies set up under the Consumer Protection
Act, 1986, thus effectively separating the two institutional bodies.

In the EU, the DG Competition is responsible for the application

of the competition law and has been a very vigorous and proactive
competition agency. There has been a perception that consumer
protection issues have not figured sufficiently in actual practice in the
enforcement of the EC competition law. Some observers have felt that it
seemed as if consumer protection is still the little sister and competition
law the big brother in the overall EC policy making and while both legal
areas have their own DGs within the Commission, there seems be little
63
cooperation and discussion between the two . To handle better the
integration of the two disciplines, in December 2003 the Commission
announced the appointment to a new post called the Consumer Liaison
Officer designed to raise the profile of the consumer interest in the
administration of the competition law. The Consumer Liaison Officer has
the task of liaising between the DG Competition and consumer
organizations at the national and EC levels as well as between the DG
64
Competition and other DGs in the Commission .

There are both pros and cons of integrating the two disciplines
into one authority. The obvious advantage of the integration is that the
knowledge of both domains can be jointly brought to bear in dealing with
a particular case. A broader range of tools would be available to the
authority and it could select the application of that particular tool that is
the least costly and most effective. Thus, if in a particular case the
economics-based approach indicates that the issue can be resolved by
the markets themselves, no intervention may be necessary. If the issue
can be addressed through the remedies provided by the competition law
then a remedy can be found under that discipline. But if the issue is
such that it could be remedied only through the application of the
consumer law then the agency could do so.

As a general rule, competition policy, other than by prohibiting

anti-competitive conduct, has relatively little scope to make markets

63
Cseres, Katalin Judit, Competition Law and Consumer Protection, 2005,
Kluwer Law International, The Hague, p. 343.
64
Howells, Geraint and Stephen Weatherill, Consumer Protection Law, (second
ed.), [2005], Ashgate, Hants, p. 534.

37
more structurally competitive than they would otherwise be; moreover,
policies that seek to “de-concentrate” oligopolistic markets, either
through forced divestments or by subsidizing or otherwise assisting
entry, are often contentious and seem likely to impose costs that are
considerably greater than the benefits. In that sense, competition
authorities may have few means to alter the supply side of markets so
as to make rivalry a more effective discipline. However, in those cases,
action on the demand side of the market may provide an effective
alternative: for example, if better consumer information, or reduced
switching costs, make the demand each firm faces more elastic, that will
usually create incentives for each firm to price more aggressively for any
65
given market structure . Thus, by making available a broader range of
remedies to the integrated authority responsible for both laws, this
institutional arrangement will enable a more cost-effective choice of
remedy.
66
According to the OECD paper , there may also be benefits of
integration in terms of public support and public accountability. By
linking the authority’s competition policy activities to its consumer
protection agenda and extending the linkages between its competition
policy decisions and the promotion of consumer interest, the authority
can enhance public acceptance of competition policy. This may be
especially important in countries where competition law is a recent
development and its importance, role and substance have not yet been
fully understood. In respect of accountability, it notes that competition
policy is economy-wide in its reach and the individual actions and
decisions of the competition authority are of broad interest to the
business, legal and academic communities, as they are seen as
precedents that may extend beyond the firms and industries directly at
issue. Hence, the decisions of the competition authority are subject to
greater outside scrutiny. On the other hand, consumer law is seen as
more industry specific and involves decisions that individually have low
stakes in absolute, economy-wide terms. This results in lower public
interest and less monitoring of consumer law authorities. The absence
of close monitoring could lead to regulatory failure, with the agency

65
See Background Note for Global Forum on Competition 2008, Round Table
on the Interface between Competition and Consumer Policies, OECD document
No. DAF/COMP/GF(2008) 4. p. 17.
66
Ibid.
38
being captured either by the ideology of consumer protection without a
proper appreciation of the costs regulation can impose or by the
regulated firms or entities, which have an interest in using consumer
protection to create barriers to the entry and expansion of new players.
These risks are likely to be less if the consumer protection authority
were integrated with the competition law authority which is subject to
greater scrutiny.

Equally, there are also negative aspects to the integration of the

two disciplines into one authority. The two disciplines rely on different
sets of instruments in the pursuit of their work and the contexts in which
the instruments are applied also differ. Competition law is steeped in
economics whereas consumer law could be more ideology driven. The
casework of competition law would generally consist of a smaller
number of cases, but with each case being large in absolute terms. On
the other hand consumer law casework would generally consist of a
large number of smaller cases. Geographical reach may be of critical
importance for consumer protection agencies with a view to providing
early access to complainants but in the case of competition law a
multiplicity of benches or offices of the competition authority could give
rise to the problem of inconsistencies in the orders placed or
approaches adopted in similar cases; considering the economy-wide
reach of competition law cases, such inconsistencies could lead to
considerable uncertainties in the eyes of enterprises. In this respect,
therefore, there is a mismatch between the nature of the work involved
in the two disciplines and this may not be conducive to their integration
into a single agency. On balance, there appears to be little overall
advantage in integrating the two agencies, particularly in countries large
in terms of size or population.
67
The OECD paper notes that while there are both upsides and
downsides in integrating the two agencies, in practical terms what is
most important is that the competition authority should have in-house
access to the skills involved in the formulation of consumer policy and
that it should have the ability to watch and intervene in the consumer

67
Background Note for Global Forum on Competition 2008, Round Table on the
Interface between Competition and Consumer Policies, OECD document No.
DAF/COMP/GF [2008] 4. p. 22.

39
policy developments that have material competition implications, and
within the government there should be an entity that has a
comprehensive oversight of consumer protection.

10. Conclusions

Competition in the markets brings various benefits by enhancing

efficiencies, incentivizing innovation and increasing consumer welfare.
The consumer also benefits through wider choice, better products and
services and more competitive prices. Competition law through
promotion and preservation of competition in markets thereby enhances
consumer welfare. This is, therefore, one of the aims and justifications
for competition law. Accordingly, consumer interest may feature
explicitly as one of the goals of competition law, examples of which may
be seen in the laws of various jurisdictions. However, the extent to
which competition law can serve consumer interest depends upon the
efficiency and the welfare standards pursued in its application, and there
are certain trade-offs that cannot be avoided.

In the application of the competition law, consumer interest is

generally a concealed aspect and it may not figure explicitly in the
analysis of individual competition law cases. But its presence does
surface in different forms in the application of the law.

However, competition law is neither designed to, nor can it,

protect all aspects of consumer interest. Competition law has a broader
remit and it is part of the institutional framework for the management of
the economy. Consumer interest features as just one of the elements in
competition law, albeit an important one. Therefore, it would be
unrealistic to expect that competition law can protect consumer interest
in its entirety. Certain aspects of consumer interest cannot be reached
at all by competition law such as safety, health, environment and
privacy; there are, therefore, specialized laws in various countries for
the protection of these aspects of consumer interest. In addition, to
protect consumers against unfair trade practices by producers or
suppliers, generic consumer protection laws have come into existence
in various countries.

40
 Generic competition law may be based on one of two
approaches: (i) the paternalistic approach that considers the consumer
as a relatively helpless entity requiring an interventionist approach from
the state for protecting his interest; or (ii) the liberal approach which is
less interventionist and has greater faith in the ability of well-informed
consumers to protect their own interest. The competition law and the
generic consumer protection law, each serves consumer interest but in
different ways and through different instruments. Generally, the two laws
are complementary and even mutually reinforcing. Competition law
creates a pro-consumer environment and provides consumers with a
choice of competing products and services, while consumer protection
law enables the consumers to exercise that choice effectively free from
inhibiting factors such as fraud, coercion, deception or false information.

Competition, when present in the markets, will compel firms to

address consumer problems and find market solutions to the same.
Thus, if competition policy is allowed to fully operate, firms would be
under pressure to find market-based solutions to consumer problems
and to that extent intervention through the instrument of consumer
policy would be less necessary. On the other hand, consumer policy, by
protecting and strengthening the position of the consumers and better
informing them, enables them to make rational choices and thus
strengthen competition in markets.

On the other hand, there are tensions in the interface between

the two laws. Competition can sometimes lead to outcomes that are not
always acceptable to consumers such as high switching costs, trade-
offs between price and quality and difficulties in coping with complex
calculations in making choices. These tensions are more particularly
visible in recently liberalized areas such as the utilities and the
professions.

By adopting an economics-based approach, the interface

between the two disciplines can be better smoothed out. Economic
insight would provide a better understanding as to which consumer
problems can be addressed by the markets themselves and which
problems require specific tools provided by the consumer protection law.

In respect of the institutional machineries for the implementation of the

two laws, there are both advantages and disadvantages in integrating
them into a single institution. Both kinds of systems seem to exist in
41
different countries; however, more countries appear to have separate
institutional machineries. Whatever be the institutional design, a more
tightly coordinated approach in the application of the two laws would be
beneficial. Competition law authorities should remain alert to
developments in consumer protection policies that impact competition,
and as part of their competition advocacy role should suggest changes
that will have minimal adverse impact on competition. On the other
hand, consumer protection authorities need to have a better
appreciation of how competition itself can resolve many consumer
problems, thereby reducing the burden on competition policy to make
direct interventions on behalf of the consumer, which can sometimes be
quite costly.

42
 COMPETITION POLICY AND CONSUMER POLICY:
COMPLEMENTARITIES AND CONFLICTS IN THE
PROMOTION OF CONSUMER WELFARE

Pradeep S. Mehta68, Siddhartha Mitra69 and Cornelius Dube70

1. Introduction

The adverse impact of anti-competitive practices on consumer

welfare is widely acknowledged. Thus, more and more countries are
adopting competition laws and policies aimed at controlling such
adverse impact. Consumer policies and laws are also being adopted in
many developing countries, with consumer movements becoming
increasingly more visible, advocating for the protection of consumers
against anti-competitive practices and other sources of harm. The
ultimate objective behind having both a competition policy and a
consumer policy is maximization of consumer welfare in the face of anti-
competitive practices in both developed and developing countries.
However, competition policy also has the additional objective of
providing a level playing field for all producers.

Given that both competition policy and consumer protection

policies share a common ultimate objective of promotion of consumer
welfare, are the two policies perfectly complementary? The question is a
complex one as competition policy simultaneously addresses the needs
of both producers and consumers. It results in marginal cost pricing
which implies that producers are not wiped out through predatory pricing
and consumers are not hurt through collusive price setting. Consumer
policies on the other hand may also not be quite as effective in assisting
the competitive process, particularly if the emphasis is to get the lowest
possible prices for the consumer. Given the imperfect complementarities
between the two types of policies, the interface between competition

68
Secretary General, CUTS International (psm@cuts.org and
www.pradeepsmehta.com).
69
Director (Research), CUTS International (sm2@cuts.org).
70
Policy Analyst, CUTS Centre for Competition, Investment and Economic
Regulation (cd@cuts.org).
43
and consumer protection policies is explored from a developing country
perspective. It analyses areas of potential conflict and
complementarities between the two, discusses methods for
measurement of costs to the consumers from anti-competitive practices
and the impact of competition policies on such costs.
Section 2 presents a brief discussion on the basics of
competition law and policy, while an overview of consumer policy is
provided in Section 3. The interface between the two policies is
discussed in Section 4. Section 5 discusses the conflicts between the
attainment of competitive markets and consumer interests. Costs of
anti-competitive practices, possible methods that can be used to
quantify the damage to consumers and the estimation of benefits
conferred by competition laws are discussed in Section 6. Section 7
looks at the efforts by consumers in developing countries to further their
interests. Concluding remarks and observations are reserved for
Section 8.

2. Overview of competition policy and law

Competition policy can be briefly defined as those government

measures that directly affect the behaviour of enterprises and the
structure of industry. Competition policy basically covers two elements.
The first involves putting in place a set of policies that promotes
competition in local and national markets, such as a relaxed industrial
policy, a liberalized trade policy, easy exit and entry conditions, reduced
controls, curbing unnecessary government interventions and greater
reliance on market forces. The second, known as competition law, is the
more critical component and comprises legislations, judicial decisions
and regulations specifically aimed at preventing anti-competitive
business practices, and the concentration and abuse of market power. It
generally focuses on three measures: control of mergers and
acquisitions, control of restrictive business practices and control of
unfair trade practices. All of these measures result in benefits to the
consumer.

The ultimate objective of competition policy has generally been

identified as the promotion of efficiency and maximization of welfare,
defined as the sum of consumer and producer surpluses.

44
2.1. Merger control

Firms may use mergers and acquisition as a means of engaging

in anti-competitive practices, especially if the merger results in firms
acquiring market power. Competition law is aimed at establishing
whether a merger or acquisition results in a substantial reduction in
competition in the market. Mergers that have such an outcome are
normally prohibited, or approved subject to conditions that ensure
minimization of damage if there are some benefits to the public
generated by such mergers.

2.2. Restrictive business practices

Restrictive Business Practices (RBPs) are of two types: anti-

competitive agreements and abuses of dominance. Anti-competitive
agreements can be further classified into horizontal agreements and
vertical agreements; similarly abuse of dominance practices can be
classified into exploitative abuses and exclusionary abuses. Conduct
under RBPs is sometimes subjected to a cost-benefit analysis before
being prohibited; in other cases proof of occurrence is enough for
ensuring illegality.

Horizontal agreements or cartels have traditionally been

considered the most damaging of all anti-competitive practices and
therefore are most susceptible to punitive action. Cartels are
arrangements among firms that produce and sell the same product for
the purpose of exacting and sharing monopolistic rents. Most
commonly, they accomplish this by agreeing on a relatively high
benchmark price for their product that none of the member firms are
permitted to underbid (i.e. price-fixing cartels), by dividing the market by
geographic territory or customer segments and granting each other
monopoly power in separate localities/segments (i.e. market-allocating
or customer-sharing cartels), agreeing to restrict output (output-
restriction cartels) or by conniving on tendering bids (bid rigging), etc.

Vertical agreements, which also come under competitive

scrutiny, are usually contractual arrangements between suppliers
(manufacturers) and distributors (retailers), which extend beyond simple
arms-length pricing. They are usually motivated by the desire for vertical
control within a principal–agent relationship, where the principal (the

45
manufacturer) imposes contractual obligations on its agent (the retailer)
71
when delegating responsibility for selling its goods . This includes
resale price maintenance (where a manufacturer and its distributors
agree that the latter will sell products of the former at certain prices at or
above/below a price floor/ceiling) and exclusive dealing (where a retailer
or wholesaler is ‘tied’ to purchasing from a supplier).

The term ‘abuse of dominance’ refers to anti-competitive

business practices that a dominant firm may engage in to maintain or
increase its market power. “Exploitative conduct” under abuse of
dominance covers certain practices in which the dominant firm uses its
market power to exploit other market participants without directly
affecting the structure of the market, i.e. through price discrimination,
and by paying low prices to suppliers. “Exclusionary conduct” is aimed
directly at preserving or exacerbating anti-competitive aspects of the
structure of the market, i.e. the firm creates or maintains monopoly
power by refusing to deal with a competitor, through predatory pricing,
or by engineering an increase in the costs faced by rivals. Both
exploitative and exclusionary conducts are regarded as anti-competitive
practices and are regulated by competition law.

2.3. Unfair trade practices (UTPs)

UTPs are practices that directly disadvantage the consumer

such as misleading claims and advertising, conditional selling,
excessive pricing, discriminatory pricing and other misrepresentations.
These are per se illegal under most competition laws, and only proof of
occurrence is required to justify punitive action. However, many
countries with consumer laws do not have competition laws dealing with
UTPs. The competition law of many countries, such as the USA,
Australia, Canada, Zambia, Tanzania and Korea covers UTPs. In India,
these have existed under both the consumer law and the competition
law. However, under a new competition law which came into effect in
2007, UTP provisions have been deleted, and are dealt with forthwith
under the consumer law.

71
For further reading, see Verouden (2005).
46
3. Basic tenets of consumer policies

Consumer policy refers to actions taken by the government to

provide and ensure the attainment of consumer rights. This may be in
the form of a comprehensive consumer law, or various sector-specific
rules and regulations that govern the conduct and standards of firms so
that consumers are protected. It takes into account consumer concerns,
ranging from product quality and safety issues, weights and measures,
availability of choices in the market to fair prices of products. Consumer
protection policy aims to provide for protection to consumers from
defective, dangerous or inferior goods, fraudulent and other unfair
selling practices and to ensure quality and safety, fair pricing and
advertising, availability of credit, etc.
Consumer policies for all countries are generally constructed in
terms of the 1985 United Nations Guidelines for Consumer Protection
72
(as expanded in 1999) . The Guidelines call upon governments to
develop, strengthen and maintain a strong consumer policy and provide
for enhanced protection of consumers around eight themes, namely:

(i) physical safety;

(ii) promotion and protection of consumers’ economic interests;
(iii) standards for the safety and quality of consumer goods and
services;
(iv) distribution facilities for essential goods and services;
(v) measures enabling consumers to obtain redress;
(vi) education and information programmes;
(vii) promotion of sustainable consumption; and
(viii) specific areas concerning health.

Salient features under the themes include the following issues

that form the basis upon which consumer interest can be maximized:

(i) Appropriate policies should ensure that goods produced by

manufacturers are safe for intended use, with distributors
ensuring their proper handling and storage. Consumers
should also be informed about the proper use of goods and
the risks involved in their use, with the government adopting

72
See United Nations Guidelines for Consumer Protection (as expanded in
1999) at http://www.un.org/esa/sustdev/publications/consumption_en.pdf.
47
 policies through which manufacturers recall defective and
hazardous products for replacement or modification, as well
as provide for adequate compensation to the consumer.
(ii) Government policies should seek to enable consumers to
obtain optimum benefit from their economic resources by
resulting in adherence to satisfactory production and
performance standards and the use of adequate distribution
methods, fair business practices, informative marketing and
effective protection against practices that adversely affect
consumer welfare and freedom of choice in the market place.
(iii) Governments should encourage and ensure the availability of
facilities to test and certify the safety, quality and performance
of essential consumer goods and services.
(iv) Governments should consider adopting specific policies to
ensure the distribution of essential goods and services where
this distribution is endangered, as could be the case in rural
areas. Such policies could include assistance for the creation
of adequate storage and retail facilities in rural centres,
incentives for consumer self-help and better control of the
conditions under which essential goods and services are
provided in rural areas;
(v) Governments should undertake legal and/or administrative
measures to enable consumers to obtain redress through
formal or informal procedures that are expeditious, fair,
inexpensive and accessible. Enterprises should be
encouraged to resolve consumer disputes in a fair,
expeditious and informal manner and to make information on
redress and other dispute-resolving procedures available to
consumers.
(vi) Governments should develop or encourage the development
of general consumer education and information programmes,
including information on the environmental impact of
consumer choices and behaviour and the possible benefits
and costs of changes in consumption. In this exercise the
government should take into account the cultural traditions of
the people concerned. The aim of such programmes should
be to enable consumers to be capable of making an informed
choice of goods and services, and become conscious of their
rights and responsibilities.
(vii) Governments, in partnership with business and relevant
organizations of civil society, should develop and implement
48
 strategies that promote sustainable consumption through a
mix of policies that could include regulations, economic and
social instruments, sectoral policies with regard to land use,
transport, energy and housing, information programmes to
raise awareness of the impact of consumption patterns,
removal of subsidies that promote unsustainable patterns of
consumption and production, and promotion of sector-specific
environmental management best practices.

The Guidelines have implicitly recognized eight consumer rights

that were made explicit in the Consumers International’s Consumer
Charter for Global Business:

(i) right to basic needs;

(ii) right to safety;
(iii) right to choice;
(iv) right to redress;
(v) right to information;
(vi) right to consumer education;
(vii) right to representation; and
(viii) right to a healthy environment.

These eight rights by and large cover the framework of what a

consumer needs for optimal protection and satisfaction, but in relation to
a market where the consumer has buying power and is an economic
participant. In countries, poor ones particularly, where the consumer
does not have purchasing power, opportunities to be able to acquire
goods must be made available. This has been covered somewhat in the
right to basic needs, but the manner in which this right is defined under
the above charter is more in terms of access, rather than ability. Quite
often access too can be thwarted by anti-competitive practices or policy
distortions. Therefore the Consumer Unity and Trust Society (CUTS)
has added the Right to Opportunities as the ninth right.

On another one, CUTS has also added the Right to Boycott as

the tenth right as an explicit declaration of something that is recognized
implicitly under the right to choice, but is not proactive in putting meat on
sinews of what a consumer needs. The consumer does practice the
right to boycott in situations when legal redress is not forthcoming or the
opposing party does not accede easily (see Section 6.1 below). In many
reported cases of anti-competitive practices, boycott by customers has
49
often been used successfully, when redress was either not forthcoming
or was protracted.

4. Interface between competition and consumer laws

The interface between competition and consumer policies can

best be understood by looking at how competition policy, in addition to
ensuring a level playing field for all participants, can also help achieve
consumer objectives and how consumer policies can assist in achieving
competitive markets.

4.1. How does competition law protect the consumer?

As discussed in Section 2, competition law basically covers

control of mergers and acquisitions, control of restrictive business
practices and control of unfair trade practices, all of which can lead to an
adverse impact on the consumer through higher prices or suboptimal
quality. However, it is only the control of UTPs (misleading advertising,
conditional selling, excessive pricing, discriminatory pricing, etc) that
has a direct impact on consumer welfare whereas the impact of
restrictions on other practices is more indirect. Thus, often actions by
competition authorities on UTPs get better publicity and public buy-in.

Although following an indirect route, merger control and taking

action on restrictive practices also aim at serving the interest of the
consumer by ensuring competitive markets. Merger control is
undertaken to ensure that firms do not attempt to use mergers to
enhance concentration in the industry and gain market power, which
could result in them being able to get away with practices that oppose
the interest of the consumer, such as excessive pricing, restricting
availability of products in the market and poor quality.

By controlling restrictive business practices, competition law

ensures that firms in dominant positions do not engage in practices
aimed at consolidating their market positions by eliminating competition
through conduct that is incidentally also contrary to the interest of the
public, such as the maintenance of reasonable prices and consumer
freedom. Thus competition law is generally designed to promote the
welfare of the consumer, albeit indirectly through the generation of
competition in markets.

50
 Competition law can also help consumers to attain most of their
basic rights. With the aim of ensuring fair competition, competition law
ensures lower prices than those obtained under unregulated conduct.
This implies that competition can make basic needs more accessible to
73
the poor . Moreover, it also ensures the right to choice. In pure and
simple terms, the right to choose means there should be a range of
varieties available to consumers, which is precisely what competition
law aims at through the removal of behavioural and structural barriers to
entry.

4.2. Can a consumer policy ensure competitive markets?

Just as an effective competition policy can be used as a tool to

ensure the existence of competitive markets, an effective consumer
policy can also assist in both the creation and maintenance of the
competitive process. An effective consumer policy for any country is not
only one that has a comprehensive consumer law enacted in terms of
the UN Guidelines and Consumer International’s Consumer Charter for
Global Business, but one that also has sector-specific consumer laws
and standards structured to suit the social, economic and political milieu
in that particular country. Such an effective consumer policy will assist in
the competition process in several ways, and these include the
following.

First, by ensuring that measures are put in place that facilitate

consumer safety in the use, distribution and handling of goods, ensure
replacement and compensation to the consumer in the case of defective
products and facilitate provision of information to the consumer about
product availability, consumer policies in many cases not only facilitate
the attainment of competitive prices but also competitive quality.

Second, by advocating for an extensive consumer awareness

programme with regard to their rights as well as best buying practices,
consumer policies ensure that all consumers make informed purchases.
With consumers making such informed decisions, firms would have to
ensure that their products have the necessary attributes to attract
consumers. One way of doing this is through price competition, where
each firm tries to work on the lowest possible profit margins to gain an

73
See Mehta (2005).
51
advantage over rivals. This is a major characteristic of a competitive
market, which consumer policy can help to attain.

Third, an effective consumer policy that aims for the

achievement of the right to access essential goods and services
(adequate food, clothing, shelter, health care, education, public utilities,
water and sanitation) and the right to choose (to be able to select from a
range of products and services, offered at competitive prices with an
assurance of satisfactory quality) should also provide means through
which consumers can seek these rights. This implies that the policy
should inter alia try to ensure a contestable market, where there are
more producers of a given class of products so that product variety is
enhanced. This also leads to an increase in market supply and
stimulates competitive prices.

Fourth, by instituting a process that tries to prevent anti-

consumer practices by manufacturers, distributors and others and
empowers consumer organizations to self-monitor adverse practices
(such as false or misleading claims in marketing as well as other
abusive business practices) consumer policy gives rise to the
generation of information that facilitates the implementation of
competition policy.

Thus, we can conclude that consumer policy is in many ways

complementary to competition policy: in trying to protect consumers
equally from producers’ malpractices it ensures a level playing field for
all producers. Similarly, competition policy in trying to ensure a level
playing field for producers has to ensure that no producer attains an
advantage through anti-consumer practices.

4.3 What are the sources of conflict between the two

policies?

However, even though the two policies may be complementary,

there may also be areas where these may be in conflict. Although cases
of conflicts between competition authorities and institutions that oversee
the implementation of consumer protection may be few, it is not too
difficult to understand in theory the sources of potential conflict between
the two policies. As has already been pointed out, competition policy
aims at ensuring that both producer and consumer surpluses are
maximized, while consumer protection policy generally focuses on
52
consumers. Competition policy is concerned with the supply-side
structure of markets and the behaviour of firms, while consumer policy
focuses on a well-informed understanding of what’s happening on the
demand side (Sylvan, 2006). Producer surplus in isolation can be
maximized through the minimization of consumer surplus, while the
reverse is equally true for the maximization of consumer surplus. Thus,
competition laws have to be flexible to allow for a balance between the
two objectives, which can work at variance with the expectations of
consumers.

The other source of conflict stems from the fact that competition
also caters for a market that is not normally a focus under consumer
laws – the market for intermediate goods. In addition to considering the
market for final goods, competition law also deals with intermediate
markets that have little direct relationship to the final consumer. In such
markets, the customer is often a firm or retailer who has to further add
value to the product before it is made available to the consumer. Testing
competition law objectives against consumer welfare as a deciding
factor for the benefit of the law may not be appropriate in this case.

The third area of conflict is when competition interest is weighed

against public interest, i.e. when competition law adjudication needs to
take into consideration social objectives such as the environment,
employment, small industries, etc., when arriving at a conclusive
position. For example, small and medium enterprises get preferential
treatment under various competition laws, which is mainly to give them
an advantage over larger enterprises and pure application of the
competition law may not be undertaken. Employment gains and losses
may also override efficiency considerations (consumer/economic
interest) in adjudicating a case on a merger, as under the South African
competition law. Affirmative action, i.e. preferential treatment to
historically disadvantaged persons, under the South African competition
law may also override efficiency considerations.

Broadly speaking, while competition policy is more of a

proactive policy for ensuring efficient production and resulting consumer
benefits, consumer protection policy puts forward mainly a reactive
74
agenda to protect the interests of consumers . Interventions by

74
Sahebdin (2006).

53
consumer protection authorities often result in anti-competitive
outcomes as compliance may result in significant operation costs
affecting the viability of firms. This is particularly true for interventions on
prices; although based on the noble realization that allowing market
forces to determine prices in most developing countries often results in
monopolistic prices due to the high incidence of market failure. Most
price control structures unfortunately have a huge bias against
producers in favour of consumers. Prices are often controlled to levels
that are below the competitive level, thereby reducing incentives for
expansions and entrance into the industries. This may be at variance
with the objectives of competition policy.

5. Conflicts between competitive markets and consumer

interest objectives

The discussion in this section deals mainly with the impact of

naturally competitive markets (those in which there is no intervention by
the government or any quasi-governmental agency in the free play of
market forces) on consumer interest. In this context, it is important to
distinguish between naturally competitive markets and those for which
we need a competition regime. Competition policy and law provide for
artificial interventions if impediments to free and fair competition among
firms prevail in markets. Naturally competitive markets are characterized
by minimal or non-interference by government or regulatory authorities
as the interaction of the forces of supply and demand is expected to
result in an efficient allocation of resources. However, competition law
and policy can simulate a naturally competitive market (referred to as
just “competitive market” from here on in this section) provided
government interference does nothing other than remove the barriers to
the free play of market forces.

There can be cases where competitive markets do not promote

consumer interest. Some such prominent cases are those of
externalities, common property resources and public goods.

An externality occurs when one party's actions impose

uncompensated benefits or costs on another party. Environmental
problems are a classic case of externality. For example, even though a
manufacturer may operate in a competitive market, the smoke from a
factory may adversely affect the health of local residents while soiling
the property in nearby neighbourhoods. If bargaining was costless and
54
all property rights were well defined, people would eliminate externalities
through bargaining without the need for government regulation. From
this perspective, externalities arise from high transactions costs and/or
poorly defined property rights that prevent people from reaching efficient
75
outcomes through market transactions . Thus, competitive markets
may not necessarily result in promotion of consumer interests.

Second, competitive markets might not result in due care of

common property resources. Resources that may become congested or
overused, such as fisheries or the broadcast spectrum, represent
common property resources that may not be serviced under competitive
markets despite being critical for the welfare of consumers Thus,
intervention in the competitive market system for the achievement of
consumer interest objectives is required.

Third, consider a public good, such as defence, basic scientific

research or roads, the provision of which to an individual cannot occur
without providing the same level of benefits free of charge to other
individuals. For example the use of pavements in cities cannot be
limited to pedestrians who pay municipal taxes. In competitive markets,
the amount a private consumer is willing to pay for an extra unit of the
good is only a fraction of the total benefits derived by society, the latter
being equal to the sum of individual benefits. If the production of an
extra unit of the good costs more than an individual’s private willingness
to pay for it but less than what society benefits from it, no individual will
be willing to pay a price in the market that covers the cost. Thus, the
extra unit will not be produced. Therefore, in competitive markets these
goods are not produced in quantities that are required for the
maximization of consumer welfare. This implies that there is a limit to
the extent to which competitive markets may promote the interest of
consumers. Consequently, consumer interest movements may resist the
allocation of resources through competitive markets and call for
government provision of such goods funded by subsidies and other
means.

Fourth, inadequate or asymmetric information might hinder the

working of competitive markets to the detriment of consumers. This
refers to a state in which producers know much more about the

75
See Organisation for Competitive Markets newsletter, March 2005 at
http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
55
characteristics of the product than consumers. Examples are restaurant
food or used cars. Because information is costly to produce and
disseminate it is difficult to safeguard consumer interests under such
conditions in competitive markets, particularly in the case of developing
countries. Given that it is time consuming or costly for consumers to
evaluate complex information about products or services (e.g. medical
therapies) they expect the government to intervene and regulate to
ensure that minimum quality standards are met. As a result, competitive
markets are not highly regarded as far as consumer interest issues are
concerned.

Thus, we have seen that in some cases naturally competitive

markets or competition policy/law, which stimulates such markets, do
not result in outcomes consistent with maximization of consumer
welfare.

6. Costs of anti-competitive practices to consumers

6.1. Estimated costs of anti-competitive practices to

consumers

It is a generally accepted that anti-competitive practices are

costly to consumers, largely in terms of the increase in prices faced by
them. The most prevalent of the practices is conduct relating to collusion
among competitors (often referred to as 'hard-core' cartels) which
results in price fixing, output restrictions, market sharing and bid rigging.
Cartels harm consumers and have pernicious effects on economic
efficiency. A successful cartel raises prices above the competitive level
and reduces output. Consumers (which may also include businesses
and governments) choose either not to pay the higher price for the
cartelized product, thus foregoing the product, or pay the cartel price
and thereby unknowingly transfer income to the cartel operators.
Further, a cartel shelters its members from full exposure to market
forces, reducing pressures on them to control costs and to innovate. All
of these effects harm efficiency in a market economy.

Although it is not easy to impute monetary value to the costs,

there is a general prevalence of anti-competitive practices, particularly in
developing countries. Most of these practices may continue to prevail
undetected due to various constraints faced by competition authorities.

56
By drawing on some empirical studies however, various estimates can
be made regarding the costs of cartels to consumers. Recent research
has indicated that the harm caused by cartels, particularly international
76
cartels amounts to billions of dollars annually . For example, the
median cartel overcharge was 17-19 per cent for domestic cartels, and
30-33 per cent for international cartels. For most types of cartels there
have been modest downtrends in cartel mark-ups over time. In
particular, it should be emphasized that since 1990 the average
overcharges of discovered cartels has fallen to 25 per cent for
international cartels. However, anti-competitive practices discovered in
different countries around the world have reaffirmed the significant
damage caused by them to consumers.

Through a study combining trade data with a sample of US and

European prosecutions of international cartels in the 1990s, Levenstein
et al. (2003) quantified the effects of international cartels on developing
countries. They found that in 1997, developing countries imported
US$54.7 billion of goods from a subsample of 19 industries with
previous cartel experience during the 1990s. These imports were 5.2
per cent of the total imports and 1.2 per cent of the gross domestic
product (GDP) in developing countries, which in turn implies that the
damage to consumers through importing cartelized products could be
significant.

An early study by Eckbo (1976) also proved the profitability of

cartels at the expense of consumers. Using international data of 51
cartel agreements in 18 industries, Eckbo found that about the 30 per
cent of the agreements analysed (19 of the 51 cartel agreements) were
able to raise the price 200 per cent above the unit cost of production
and distribution. Another international cartel impact study was done by
Yu (2003). Using import data based on the Harmonized System (HS),
Yu calculated overcharges in the vitamins cartel (1990–1999), the citric
acid cartel (1991–1995), the bromine cartel (1995–1998), the seamless
steel tubes cartel (1990–1995), the graphite electrodes cartel (1992–
1997), and the lysine cartel (1992–1995). The results indicate that the
overcharges to developing countries generated through collusion by
these cartels are large: US$1.71 billion, US$67 million, US$8 million,
US$1.19 billion, US$975 million and US$43 million, respectively. There
are many other examples that can be found in the literature to give

76
Sweeney (2006).
57
estimated costs of cartels for consumers, with the conclusion that
consumers spread across the globe have lost billions of dollars as a
result of cartel activities.

Without quantifying the costs, it is also possible to demonstrate

the costs of cartels for consumers by focusing on their prevalence in the
domestic economies of many developing countries in Africa, Asia and
Latin America. The following examples are going to demonstrate not
only the existence of cartels in developing countries, but also their
77
prominence as a source of economic harm to consumers .

To begin with, concentration of market power in the trade of a

number of agricultural products and price-fixing agreements often limit
the income of small farmers in developing countries. Such concentration
confronts coffee producers in Kenya and Latin America, cotton farmers,
and tea and tobacco growers in Malawi, fish processors and exporters
in the Lake Victoria region, and milk processors in Chile. Price fixing in
the production or the distribution of basic food products is prevalent in
many developing countries. For example, in Peru poultry firms and their
associations engaged in what amounted to price fixing by agreeing to
prevent new entry, exclude some existing competitors, and limit the
availability of live poultry for sale in order to raise or maintain prices. It
was also the case in Zambia where the dominant producer of day-old
chicks (60 per cent market share), Hybrid Poultry Farm (HPF) and
Galaunia Holdings Limited (GH), the largest buyer in the poultry sector,
entered into sales and purchase agreements which included provisions
foreclosing competition on day-old chicks, table birds (broilers) and
frozen chickens as well as an agreement that GH could not begin to sell
day-old chicks in competition with HPF.

The milling industry is also frequently cartelized, resulting in

high prices for basic staples, which consumers can hardly afford to
boycott. For example, in Peru, Indecopi's (Instituto Nacional de Defensa
de la Competencia y de la Protección de la Propiedad Intelectual) first
important cartel case was the 1996 "Bread Case" against wheat flour

77
Unless otherwise specified, the examples have been extracted from Jenny
(2006). The report had also extracted the cases from databases dealing with
African countries, Asian countries and Latin American countries, prepared by
Fredric Jenny, Simon Evenett and Julian Clark.

58
producers and their association. Eleven producers were found to have
ended a price war through a price-fixing agreement and the association
had made recommendations about the price of bread. In Malawi, where
the industry consists of a few giants (notably Press Bakeries and
Portuguese Bakeries) and many small baking firms, the Master Bakers
Association fixed prices, and hence there was no competition until
consumer organizations started a boycott and the Minister of Trade
intervened to prohibit price collusion among the bakeries. In Turkey,
several price-fixing cases among bakers were investigated by the
General Directorate of Consumer and Competition Protection before
1997 and since then by the Competition Authority.

The transport sector is also known for cartelized behaviour.

Examples include Kenya, where in November 2003 two members of the
Matatu Owners Association (MOA) gave an insight into the operations of
the cartel. According to them, "the cartel comprises a group of city
matatu owners who want monopoly over lucrative routes”. Along the
same lines, a report from South Africa in 2001 indicates that in the Cape
Town area taxi associations are organized into territories and taxi
associations have come to "own" the routes they serve. Huge profits are
being made with passengers left with no choice. In Turkey, the
competition authorities prosecuted offenders involved in cartel cases
against bus companies. In India, in only about 2-3 per cent of cases do
customers directly access truck owners and book their goods for transit.
The cargo operators cartelize and decide the freight, and there is no
competition at their level. Instances of cartelized operations of the
truckers’ unions around major production sites and factories are also
78
rampant . In Nepal, bus syndicates operate as cartels and ironically the
Government created a provision in the Transportation Act for
79
syndicates . In the air transport sector, the Brazilian competition
watchdog, CADE (Conselho Administrativo de Defesa Economica),
ruled that carriers Varig, TAM, Vasp and the now-defunct Transbrasil
had formed an illegal cartel in the mid-1990s covering the Sao Paulo–
Rio de Janeiro market, the country's busiest sector.

78
Jain, Sunil (2005) in chapter on “Competition Issues in Transportation
Sectors” in Towards a functional competition policy for India, CUTS and
Academic Foundation, Mehta, P.S. (Ed.).
79
Adhikari, Ratnakar and Dhrubesh Regmi (2001) in “Anticompetitive Practices
in Nepal”, CUTS and SAWTEE referred to in the Chapter on Nepal by Navin
Dahal (2006) in Competition Regimes in the World – A Civil Society Report,
CUTS and INCSOC, Mehta, Pradeep S. (Ed.).
59
 The oil sector is also not spared from cartelization. In Zambia, in
1999, nine oil-marketing companies were prosecuted for participating in
a price-fixing conspiracy involving the supply of refined petroleum
products. The companies had acted collectively in making price
adjustments since 1997, after holding regular meetings where
exchanges of information regarding sales volumes and prices took
place. The cartel leaders also forced other companies to comply with
standard behaviour on prices. In Malawi, when the government
eliminated price controls on petroleum products, all or most of the oil
companies concerned formed a joint company called Petroleum
Importers Limited, through which they jointly monopolized the
importation of all oil products into Malawi, and colluded on prices. When
a new petroleum importer emerged on the market and introduced new
fuel prices different from (and lower than) those of the cartel it was
persuaded to join the cartel.

Finally, the cement industry, which provides a major input into

low-cost housing, has also witnessed an incidence of cartels in
developing economies. In Egypt, in December 2002, Al Arham
newspaper reported that representatives of almost all local cement
producers had met and set a price range for cement between LE167
and LE176 per ton. Just hours before the meeting, the price had been
as low as LE125 per ton. According to the press report, the cement
manufacturers involved had considered the possibility of entering into a
market-sharing agreement if the price-fixing agreement did not succeed
in keeping the prices up. In South Africa, the largest cement companies
at the time (PPC, Anglo-Alpha and Blue Circle) operated as an officially
sanctioned cartel until 1996, when the Competition Board forced the
companies to discontinue the practice. In Turkey, between 1997 and
2002, the Competition Board announced decisions against anti-
competitive agreements among cement producers, including a 1999
case in which five cement companies were fined nearly 900 billion
Turkish Lira (TRL) (US$603,000) for a price-fixing and market-division
agreement in the Aegean region.

The above examples demonstrate that consumers indeed

continue to be subjected to an extra cost in terms of cartel activities,
particularly price-fixing agreements in critical sectors of the economy.
The estimated costs for end consumers in such instances will amount to

60
a very significant portion of their budget, given the multiplier effect on
the production and value chains

6.2. Methods of measuring costs of cartelization

Although the damage caused by cartels may be indisputable,

the procedure for measurement of costs inflicted by them on consumers
may be a source of debate. Moreover, the measures may tend to
underestimate the damage, as there are undiscovered cases. Most of
the methodologies used to determine the impact of cartels use cases
that have been discovered, and the discovery rate is highly dependent
on the competencies of regulatory authorities, as well as on the
competition laws being used. The most common method used is the
one that tries to provide an estimate of the value of the damage caused
by a cartel by determining the overcharge that resulted from it.

Overcharge is an economic term that refers to the difference

between an observed market price and a price that would have been
observed in the absence of collusion. The latter is often called a "but-for
price" or a competitive "benchmark price". Overcharge is therefore the
difference between the price charged by cartel members and the prices
that they could have charged “if the cartel was not present”. Given that
the price that should have been paid is not observable, it has to be
estimated. Estimating total overcharge involves using this estimated
price to calculate total damages caused by the cartel. This can be done
by using the following approaches:

6.2.1. Direct proof of damages

In some cases, direct proof of damages may be available. This

could, for example, include evidence of side-payments or scorecards in
bid-rigging cases where cartel members make side-payments or keep
records of obligations to each other. However, this type of evidence may
potentially understate damages incurred by customers of the cartel. This
is because cartel behaviour often increases costs that are avoidable
(and competed away) in the absence of coordination.

Another method of calculating overcharge is to simply observe

the price decreases that result in the market of a cartelized product

61
following a price-fixing cartel’s demise on being discovered by the
regulatory authorities. This reveals the price increases that can be
attributed to the cartel by simply subtracting the new price after the
demise from the price before detection of the cartel. Estimation of the
total damage caused by international cartels in developing countries
involves determination of the total value of exports of the cartel to
developing countries. The total overcharge can be calculated by
following the approach used by Yu (2003):

Cartelprice − Actualprice
Total Overcharge = Imports *
Cartelprice

where Cartelprice is the actual price paid with the cartel being present,
Actualprice is the estimated price that should have been obtained in the
absence of a cartel, and Imports refer to the total value of imports from
the cartelized industry.

The same formula can also be used to calculate the overcharge

from the domestic cartels but one would need to substitute local sales or
turnover by the cartel for imports in the formula. This would give us an
estimate of damage to consumers.

Consider the following demonstration of Yu’s procedure. Let us

consider a country where a cartel has existed since 1990. While
calculating the overcharge for 1994 it is necessary to adjust for the
secular trend in competitive prices while defining the Actualprice in
1994. Let us assume that the price in 1990 before a cartel came into
existence was $100 and the price in 1994, after a cartel arrived, is $140.
The overcharge per unit should not be calculated as 140–100= $40.
This would be an overestimate of overcharge per unit (for rising price)
because, even in the absence of cartel formation, prices would have
increased at their long-run rate. Thus, if we find that the long-run secular
trend for the product price is an increase of four per cent per annum
then for the four-year period from 1990 to 1994 we can conclude that
prices would have risen by 17 per cent in the absence of the cartel to
$117. Thus, the per unit overcharge is $23 instead of $40 as we had
calculated earlier. Let us assume that the value of the imports of the
developing country from the cartelized industry is $1,000,000. In this
case we have

62
 23
1,000,000 * =
Total Overcharge= 140 $ 164,000

Direct proof of damages can also be used in a different context

in determining the damages from bid-rigging cartels. What is required
here is to identify two similar contracts that are made from a cartelized
bid and a non-cartelized bid, and then make a cost/price analysis of the
two bids. The bids must be similar enough to allow for comparison. The
difference in the bids would constitute the damage to the consumers.
The method can also be extended to other types of cartel behaviour and
anti-competitive practices.

6.2.2. Statistical evaluation of damages

Two approaches can also be used under this method. The first
involves taking the price as an independent variable and regressing it
using ordinary least squares and a dummy variable, which indicates the
presence of a cartel. Thus, if we have time series data for a country we
can run the econometric model
ln Pt = α + β t + λDt + u t (1)
D
where the variable “t” denotes the time period and t equals 1 for any
year in which a cartel exists and 0 for others. The coefficient
β gives
the long-run secular rate of change of prices without the effect of cartels
λ
and e denotes the “overcharge per unit”. These two coefficients can
be estimated by the ordinary least squares method. If we have a panel
data set (multiple countries and multiple time periods) then we can use
a fixed effects model which can be presented as follows:
ln Pit = α i + β t + λDit + u it (2)
where the notation is the same as that before except that the subscript i
is used to depict data pertaining to country i. By permitting a different
intercept for each country we are allowing for the fact that the starting
competitive price (i.e. price at t=0) is different for each country. Such
panel regressions enable the use of data across countries. This results
in an increase in the number of observations used. Such an increase in
the data used greatly enhances the reliability of regression results.

63
 In both cases the researcher needs to check for the statistical
significance and positive sign of λ in order to establish that cartels do
give a significant upward push to prices. It is only then that the
λ
magnitude of e can be considered to be a measure of the “overcharge
per unit”. Of course, it must be kept in mind that the reliability of any
statistical method is conditional on the use of a sufficient number of
observations. In this case we require at least 20 observations on prices.

Instead of looking at the secular trends of prices the alternative

would be to do a joint estimation of the demand and supply functions
using data from time periods in which competition had existed. From the
demand and supply functions reduced form equations providing price
and quantity demanded in terms of independent variables (such as input
prices, income) can be calculated. In any year in which there is a cartel
the corresponding competitive price can be calculated by substituting
that year’s value for input price and income. The rest of the method is
the same as that explained previously

The more direct method of calculating loss in consumer welfare

due to cartelization comes from the measurement of consumer surplus
which is defined as the maximum that consumers are willing to pay for
the marketed quantity of a product less the amount they actually pay.
Cartelization leads to an increase in the price and a reduction in quantity
– there is not only an increase in the price but also a reduction in
quantity transacted which is a positive determinant of consumer surplus.
−

In Figure 1
p̂ is the competitive price and p is the cartelized price.
p̂
The triangle defined by the horizontal line from point , the vertical axis
and the demand curve is the consumer surplus under competition
−

whereas the triangle corresponding to

p is the consumer surplus at the
cartelized price. The difference between the two is the shaded area
shown in Figure 1 and is equal to the loss in consumer surplus due to
cartelization.

How do we estimate this loss in consumer surplus? This is

easily done by using the estimates of the demand curve mentioned
earlier and finding the area enclosed by the demand curve (as obtained
64
by substituting the present values of independent variables) between
the competitive and cartelized price. This area gives a measure of the
loss in consumer welfare due to anti-competitive practices.

Figure 1: Loss in consumer surplus due to the presence of a

cartel
Price
Shaded area
shows the loss of
consumer surplus
p due to a cartel

p̂
d it ( Pjt , Yit )

Quantity

In Equations (1) and (2) we can introduce a dummy variable

that equals 1 when there is a cartel constrained by a competition law but
equals 0 otherwise (competition without law and cartel without law) The
coefficient of the dummy can be used to calculate the reduction in
overcharge per unit of output caused by the introduction of competition
80
laws. The product of the quantity transacted and the reduction in
overcharge per unit gives the decrease in total gains from cartelization
(at the expense of the consumer) attributable to the competition law.
When divided by the expenses of the competition commission that
implements the competition law we get the rate of return on expenses
incurred to facilitate competition. This procedure was used by Clarke
and Evenett (2002) for the international vitamin cartel and reveals a
significant rate of return.

80
We might be able to get market data on the quantity transacted.
65
 Alternatively, the estimated reduction in the overcharge and the
given cartel price in the presence of competition law can be used to
predict the cartel price in the absence of competition law. The latter
price is higher and the difference in the consumer surpluses
corresponding to the former and latter price should be an estimable
positive amount that shows the increase in consumer welfare brought
about by the introduction of a competition law. This amount divided by
the expenditure of the competition enforcement agency yields the
consumer surplus saved per unit expenditure on competition facilitation
and is an indication of how useful competition laws and related
expenditures are in promoting consumer welfare.

A similar method of cost–benefit analysis (benefits in terms of

consumer welfare increase weighed against the costs of competition law
enforcement needed to achieve that increase) can be illustrated by the
results of an exercise performed by the Korean Fair Trading
Commission (KFTC) which are shown in Table 1. In 2000, each dollar
spent on competition law enforcement yielded US$20.57 in terms of
consumer welfare gains. In 2001, this number increased to 28.64,
suggesting even better implementation of competition law. The
researcher needs to be aware that such a rosy picture of the efficiency
of competition law enforcement might not emerge if we study countries
that are less developed. Powerful monopolistic business lobbies might
influence a government to sabotage, slow down or render ineffective the
implementation of competition laws. This might result in low benefit/cost
ratios, which symbolize the subordination of economic considerations to
the interests of monopolistic business and their political allies.

Table 1: Costs and benefits of competition law enforcement

(millions of US dollars)
2000 2001
Cost Budget 15.9 18.4
Benefit Consumer 327 527
welfare
increase
Benefit/Cost 20.57 28.64
Ratio
Source: Adapted from Chapter 17 on Korea by Dr Joseph Seon Hur in
Competition Regimes in the World – A Civil Society Report, CUTS
and INCSOC.

66
7. Consumer participation in developing countries

The extent to which consumers also have an influence on the

market outcomes plays a part in determining the extent to which
companies may successfully engage in anti-competitive practices.
However, in developing countries, consumers are an unorganized
group. They usually transact on an individual basis with business
people, and hence have very little bargaining power. They are also not
fully aware of their legitimate rights and obligations, as well as the legal
tools that can be used to promote their interests. The existence of
various market failures and the common information asymmetries make
consumers a vulnerable lot.

Given their very weak countervailing power in the market,

consumers cannot always boycott products that are excessively priced
as a result of cartels. They cannot lobby for an improvement in the
quality of products or successfully complain about practices by the
companies that are harmful to their interest. Most importantly, most
consumers are not even aware that some of the practices by companies
are anti-competitive, due to a lack of awareness initiatives. Consumer
movements are very weak in most developing countries, and the
consumers generally have to be their own representatives. The end
result is that companies take advantage, and production and marketing
decisions are generally one sided, with little regard given to consumer
reactions.

Some developing countries have gone a step further and

enacted some consumer laws to ensure consumer participation in the
market. However, implementation of such laws continues to be a
problem. Most of the laws define general principles rather than provide
for any specific measures, and are generally ineffectual. Sub-standard
and unsafe products have become the order of the day because of
weak mechanisms and tools for policing market behaviour of firms; fake
and imitated goods are quite prevalent.

Consumer regulation of the ills of the market system is crucial,

as it forms a countervailing force against anti-competitive behaviour.
Consumer associations are normally formed to ensure participation of
consumers in activities that oppose anti-consumer and anti-competitive
practices. The initiative for these should start from the government,
which should put in place conducive policies and measures that can
67
ensure the sustained existence of such associations. It has generally
been observed that consumer issues cannot be best handled by
competition authorities alone. A need for a separate consumer body,
enacted in terms of consumer protection laws to safeguard the interest
of consumers, therefore, exists. Consumer movements may be present,
but with no consumer body to attend to grievances, their concerns are
not normally taken care of.

The existence of competition laws but without complementary

consumer laws has failed to protect the consumers against harm by
companies, given that competition laws may not comprehensively cover
consumer issues. This is typically the case in countries such as Zambia,
(consumer issues are not adequately covered under the Competition
and Fair Trading Act, 1994), Zimbabwe (the Competition Act, [Chapter
14:28] is not comprehensive as far as consumer issues are concerned),
Tanzania (the Fair Competition Act, 2003 does not provide for the
adjudication of direct consumer-related issues; these are dealt with by
81
the Civil Courts ), Jordan (the Competition Law No. 33, 2004 has
provisions that try to ensure fairness in the economy, but is very
inadequate as far as consumer protection is concerned), Kazakhstan
(the Anti-monopoly Law, 2001 has provisions for the “protection of the
interest of the consumer”, but the law is hardly sufficient), etc.

8. Conclusion

The conclusion that emerges is that competition and consumer

welfare are symbiotically linked though cases of conflict may persist.
Competition policies promote efficiency in production, which in turn
leads to lower prices for consumers. This is consistent with the
maximization of consumer welfare. On the other hand, consumer laws
while pursuing the objectives of maintaining prices at the lowest
possible level might make it cost-ineffective for producers to undertake
production. This introduces a conflict of objectives.

Also noted is that both market-friendly reforms and market

failures have become common across developing countries. This
implies that efforts should be made to ensure the co-existence of the
two policies, with minimal or no conflicts resulting. In order to do that,

81
Mehta (2006).
68
the first step should be to ensure that the competition and consumer
policies are designed to try and meet the expectations of all
stakeholders rather than being biased towards one particular player, i.e.
business or consumers. Consumer interests should be explicitly
recognized in the designing of competition policy, and advocacy should
be included as a tool for awareness promotion among consumers. At
the same time, however, the promotion of efficient markets as an
objective need not be necessarily compromised.

Creation of a competition culture in the economy with the

simultaneous involvement of consumers in the entire process can
ensure that the advantages of market-based competition are fully
realized. This exercise of ensuring participation of all stakeholders in the
reforms ensures a reconciliation of the perceptions of various players by
taking into account their different characteristics and expectations.
However, it may be difficult to coordinate between the government's
objective of promoting public interest and competition authority's
objective of promoting efficient markets. The government’s commitment
to growth as a political objective and the overall political climate matter
for a competition culture to prevail in the economy. Ensuring that the
adoption of competition laws gets a political buy-in is therefore crucial,
and there is a need to properly align competition policy outcomes with
political incentives for this to succeed. This might not be difficult as
politicians themselves are involved in the law-making process and have
vested interests in keeping prices as low as possible in order to win
cheap popularity and votes. It is through these measures that the
conflicts between competition and consumer policy highlighted might be
82
overcome .

Anti-competitive conduct such as the formation of cartels or

exploitative pricing by dominant firms is seen to inflict a huge loss on
consumers and this makes the enactment of competition laws and their
implementation a must for protecting consumers. The magnitudes of
welfare improvements brought about by these laws have been
measured in the past and found to be extremely significant in many
cases. The quantitative literature cited supports this point and suggests
new estimation procedures in this regard which can make the estimation
more robust. What is of great importance, especially in the case of
developing countries, is the existing diversity in political will to

82
For more information on this, see Mehta et al. (2007).
69
implement competition laws and have successful competition
commissions. Such differences in political will can lead to diversity in
efficiency and welfare outcomes emanating from the same set of
competition laws. Big businesses in developing countries might also
exercise their lobbying powers with political groups to paralyse the
working of competition commissions in some cases, thus contributing to
diversities. Any econometric cross-country exercise carried out
exclusively for developing countries that reports a statistically
insignificant effect of competition laws on consumer welfare should not
be taken at face value, i.e. it should be interpreted as meaning that
there are implementation problems, due to poor political will or political
capture, in most countries.

Finally, gains facilitated by competition laws have to be weighed

against the costs required to implement them. The literature on cost-
benefit analysis is reviewed for this purpose to suggest a methodology
that is both theoretically robust and quantitatively feasible. Here again,
developing country experience might suggest a cost-benefit ratio that is
higher for developing countries than for developed countries because of
poor implementation and large leakages from the system.

70
References
Clarke, Julian L. and Simon J. Evenett (2002), The Deterrent Effects of
National Anti-Cartel Laws: Evidence from the International Vitamins
Cartel, Working Paper 02-13, AEI Brookings Joint Center for Regulatory
Studies.

Eckbo, Paul L. (1976), The Future of World Oil, Cambridge, Ballinger

Publishing.

Jenny, Fredric (2006), Cartels and Collusion in Developing Countries:

Lessons from Empirical Evidence, World Competition Publication.

Levenstein, Margaret, Suslow, Valerie and Oswald, Lynda (2003),

International price-fixing cartels and developing countries: a discussion
of effects and policy remedies, Working Paper no W9511, National
Bureau of Economic Research.

Mehta, Pradeep S. (2005), “Competition Policy and Consumer Welfare”,

in Towards a functional competition policy for India, Academic
Foundation, New Delhi.

Mehta, Pradeep S. (2006), Competition Regimes in the World – A Civil

Society Report, Book LVIII+638, CUTS International, Jaipur, India.

Mehta, Pradeep S., Agarwal, Manish, Singh, V.V. (2007), Politics

Trumps Economics — Lessons and experiences on competition and
regulatory regimes from developing countries, CUTS International,
Jaipur, India.

Sahebdin, Mosadeq (2006), Should the Competition Authority

Coordinate the Activity of Sectoral Regulators? Paper submitted to
UNCTAD's Seventh Session of the Intergovernmental Group of Experts
on Competition Law and Policy, Geneva, 30 October to 2 November
2006.

Sweeney, Brendan (2006), The role of damages in regulating horizontal

price-fixing: comparing the situation in the United States, Europe and
Australia, Melbourne University Law Review
(http://www.austlii.edu.au/au/journals /MULR/2006/26.html).

71
Sylvan, Louise (2006), The Interface between Consumer Policy and
Competition Policy, paper presented at the Consumer Affairs Victoria
Lecture, Melbourne, in honour of Professor Maureen Brunt AO.

United Nations Guidelines for Consumer Protection (as expanded in

1999) at
http://www.un.org/esa/sustdev/publications/consumption_en.pdf.

Verouden, Vincent (2005), “Vertical Agreements: Motivation and

Impacts”, forthcoming in Directions in Competition Law and Policy,
(W.D. Collins, ed.), American Bar Association, 2006, available at
http://ec.europa.eu/dgs/competition/verouden.pdf.

Yu, Yinne (2003), The Impact of Private International Cartels on

Developing Countries at
http://www-econ.stanford.edu/academics/Honors_Theses/Theses_
2003/Yu.pdf.

72
ANTI-COMPETITIVE PRACTICES AND THEIR ADVERSE
EFFECTS ON CONSUMER WELFARE: THE
ZIMBABWEAN EXPERIENCE

Alexander J. Kububa∗

1. Introduction

The socio-economic impact of the implementation of

competition policy and law in developing countries has been most
intense on consumer welfare and protection. This has been because of
the proven adverse effects of restrictive business practices (RBPs) on
the general welfare of consumers, which competition policy and law
aims at preventing or controlling. A recent study undertaken in
Zimbabwe on the impact of the implementation of competition policy and
law in that country clearly showed the positive relationship between
effective competition and consumer welfare. The findings in Zimbabwe
in this regard are representative of the impact of competition policy and
law in most other developing countries.

That there is a symbiotic relationship between the effective

implementation of competition policy and law and consumer welfare and
protection is no longer in doubt from the many empirical studies on the
subject that have been undertaken by various competition
experts/practitioners worldwide. From the studies undertaken, it is now a
generally accepted fact that the ultimate objective of competition policy
and law is consumer welfare. It has also been found that competition
and consumer welfare are mutually enhancing. Consumer satisfaction
that arises and flows from the protection and benefits of competition
leads to increased public appreciation and acceptance of the
implementation of competition policies and laws, which in turn facilitates
the creation of a healthy culture of competition in society.

∗
Mr Kububa is the Director and Chief Executive Officer of the Competition and
Tariff Commission of Zimbabwe. The views expressed in this essay are,
however, solely his own and do not necessarily reflect those of the Commission.
73
 What might still need further study, particularly in developing
countries, is the extent in quantitative terms of the adverse effects on
national economies, in general, and on consumers, in particular, of the
lack of effective competition regimes.

The term ‘consumer’ can be defined in both its narrow and

broad sense. In its narrow sense, the term has been defined as to
“include any person: (a) who purchases goods other than for the
purpose of resale but does not include a person who purchases any
goods for the purpose of using them in the production and manufacture
of any goods or articles for sale; and (b) to whom a service is
rendered”83. Similar definitions of the term are found in the competition
legislations of Kenya, Malawi and Zambia. This narrow definition of a
consumer excludes companies that buy and consume raw materials or
intermediate products in their production processes. In its broad sense,
the term has been defined to include both individuals and organizations
that consume finished goods or raw materials. The Consumer
Protection Act of Nepal defines the term in the following manner: “(a)
Consumer means an individual or institution consuming or using any
consumer good or service. (b) Consumer goods mean goods or
materials made through the admixture of several goods which are
consumed or used by consumers; the term includes raw materials,
colours, flavours or chemicals used in the production of such consumer
84
goods” . The broader definition of the term ‘consumer’ supports the
notion that the term should refer to all categories of consumers and not
only to the ultimate user of goods and services. The meaning of
consumer in this essay will be based on the broader definition of the
term since the consumption of goods and services used in the
production of final products ultimately affects the consumer as defined in
the narrower sense.

83
Definition of ‘consumer’ in terms of Article 1 of the Competition Regulations of
the Common Market for Eastern and Southern Africa (COMESA).
84
Consumer Protection Act, 1998.

74
 85
According to Rachagan (2003) , the term ‘consumer welfare’
refers to the benefits that are derived by individuals from the
consumption of goods and services. Rachagan also noted that
individual consumers are not only concerned with product price, choice
and quality, but also more critical to them are issues of employment,
sustained development and equity. Consumer welfare therefore means
the same as ‘consumer interests’. In this essay therefore, consumer
welfare includes everything that the consumer desires for his/her well-
being.

This study aims at analysing anti-competitive practices and their

adverse effects on consumer welfare. Following this introductory
section, competition and its socio-economic effects are briefly analysed,
and then RBPs are explained. Then, the interface between competition
and consumer laws and policies is discussed before exploring the main
topic of anti-competitive practices and their adverse effects on
consumer welfare. The practical experience of Zimbabwe in using
competition policy and law for consumer welfare and protection
purposes will also be explored in some detail. In conclusion, some
thoughts are expressed on whether or not there are any conflicts
between the attainment of competitive markets and consumer interests.

2. Competition and its socio-economic effects

Competition is the process by which sellers strive to gain the

patronage of buyers in achieving their primary objectives of increased
sales, larger market shares and greater profits. Sellers are more likely to
attract and retain buyers if the quality of their goods or services is higher
and the prices lower than those of their rivals, or if they are innovative in
their production processes and marketing techniques.

The theory of competition is however a difficult and complex

one and has been conceptualized in a number of different ways. It is
therefore no wonder that the term ‘competition’ is rarely defined in
competition legislation of either developing or developed countries.

85
S. Sothi Rachagan, Competition Policy and Law in the Consumer and
Development Interest, a paper presented as a communication from Consumers
International to the Fifth Session of the Intergovernmental Group of Experts
(IGE) on Competition Law and Policy, held in Geneva, Switzerland, on 2–4 July
2003.
75
 86
According to Fourie and Smit (1999) , there are a number of
different uses, definitions and concepts of the term ‘competition’
depending on who one is and for what purpose one wants to use the
definition. The ordinary consumer view of competition is that of rivalry
between contestants, as in sport. Under this view, there is a winner, and
someone “gets the bone”. This view is sometimes referred to as the
intuitive view. The typical business person’s view of competition is
similar to the intuitive view of rivalry, but with more intense challenges of
trying to gain an advantage over other competitors. Competition is taken
as a process whereby firms strive against each other to secure custom
for their products, i.e. it represents the active rivalry of firms for
customers: thus the nature of competition is such that enterprises
87
compete to outsmart their competitors .

Economists have developed different schools of thought on

competition, such as: (i) the structural approach (which defines different
states of competition in terms of structural conditions, i.e. number of
firms, conditions of entry, etc.); (ii) the process approach (which views
competition in terms of behaviour and conduct of the market participants
without much reference to market structure, i.e. how a firm behaves
towards its competitors, or responds to new entrants, in order to protect
its market position); and (iii) the efficiency approach (which refers to
neither market structure nor behaviour of firms, but only considers the
outcome or performance in terms of efficiency: competition under this
approach is seen as any state of affairs that maximizes consumer
welfare, or any efficient state of affairs regardless of market structure or
conduct of firms).

While the above schools of thought on competition were

developed separately and under different conceptual assumptions, a
hybrid concept based on the schools has emerged. This is the structure-
conduct-performance approach. Under this approach, the hypothesized

86
Frederick C.v.N. Fourie and Minette Smit, Industrial Economics for
Competition Policy, lecture delivered at the Competition Policy and Law
Inaugural Southern Africa Course, organized by the Competition Commission of
South Africa and held in Pretoria, South Africa, during the period 14–25 June
1999.
87
CUTS Monograph on Investment and Competition Policy #6, All About
Competition Policy & Law For the Advance Learner, CUTS Centre for
International Trade, Economics & Environment, Jaipur, India, 2000.
76
linkage between the three different concepts of structure, conduct and
performance is that the structure (i.e. the number of players, ease of
entry, etc.) of a market explains or determines to a large degree the
conduct (e.g. pricing policy, advertising, etc.) of the participants in the
market, and the performance (i.e. efficiency, technological progress) of
88
the market is simply an evaluation of the results of the conduct . The
structure-conduct-performance relationship has been further developed
to take into account the reverse effect of conduct on the structure since
it has been found that conduct can sometimes “feedback” to change
structure. For example, a firm can reduce its production costs to a point
where it can profitably price its competitors out of the market. Shepherd
89
(1997) also noted that a firm that is superior in efficiency or innovation
so that it obtains high profits will generally increase its market share,
thus affecting the market structure. A firm can also strategically engage
in exclusionary practices (e.g. predatory pricing) that drive its weaker
competitors out of the market. Decisions by firms in direct competition to
merge also alter market structures. Government policies also can affect
both market structure and conduct. Conduct in a market can also
influence government policies.

Figure 1 shows a schematic representation of the structure-conduct-

performance model as discussed above.

88
W. Kip Viscusi, John M. Vernon and Joseph E. Harrington, Jr., Economics of
Regulation and Antitrust, Second Edition, The MIT Press, Cambridge,
Massachusetts, 1998.
89 th
William G. Shepherd, The Economics of Industrial Organisation, 4 Ed.,
Prentice Hall, Upper Saddle River, New Jersey, 1997.
77
Figure 1: The structure-conduct-performance model

STRUCTURE CONDUCT PERFORMANCE

Concentration, Product Pricing, Advertising, Efficiency,

Differentiation, Entry Research and Technical Progress
Barriers Development

GOVERNMENT POLICY

Competition Regulation

Source: Viscusi et al.90.

The usefulness of the structure-conduct-performance model is

that it brings from the abstract the understanding of the functioning of
real-life markets and firms. While each of the separate concepts of
structure, conduct and performance is conceptually sound, it fails to
appreciate how firms operate as corporate entities. As observed by
Shepherd (1997), “firms are organisations of humans, with much room
for variety, historical change, and contrasting motives”.

The Organisation for Economic Co-operation and Development

(OECD) in its Glossary of Industrial Organisation Economics and
Competition Law provides a comprehensive definition of competition,
which is reproduced in Box 1.

90
W. Kip Viscusi, John M. Vernon and Joseph E. Harrington, Jr., Economics of
Regulation and Antitrust, Second Edition, The MIT Press, Cambridge,
Massachusetts, 1998.
78
 Box 1: OECD definition of competition
Competition is a situation in a market in which firms or sellers
independently strive for the patronage of buyers in order to achieve a
particular business objective, e.g. profits, sales and/or market share.
Competition in this context is often equated with rivalry. Competitive
rivalry between firms can occur when there are two firms or many firms.
This rivalry may take place in terms of price, quality, service or
combinations of these and other factors which customers may value.

Competition is viewed as an important process by which firms are

forced to become efficient and offer a greater choice of products and
services at lower prices. It gives rise to increased consumer welfare and
allocative efficiency. It includes the concept of ‘dynamic efficiency’ by
which firms engage in innovation and foster technological change and
progress.

Source: OECD Glossary of Industrial Organisation Economics and Competition Law.

Vigorous competition between firms is the lifeblood of strong

and effective markets. Competition helps consumers to get a good deal.
It encourages firms to innovate by reducing slack, putting downward
pressure on costs, and providing incentives for the efficient organization
of production. When working effectively, competition involves a process
of rivalry between firms that strive to win customers by achieving the
lowest level of costs and prices, developing new products or services or
exploiting particular strengths, skills or other advantages to meet
customer needs more efficiently and effectively than competitors.

Competition thus forces firms to become efficient and to offer a

greater choice of goods and services at lower prices. In a competitive
market economy, price signals tend to be free of distortions and create
incentives for firms to redeploy resources from lower to higher-valued
uses. The benefits that flow from competition therefore include
increased economic efficiency, innovation, and consumer welfare.
Economic efficiency generated by competition includes both ‘productive’
efficiency (i.e. producing without waste) and ‘allocative’ efficiency (i.e.
producing the goods and services that society values most highly).

79
 It has however been found that firms have natural inclinations to
acquire market power, that is to obtain discretionary control over prices
and other related factors determining business transactions. Such
market power may be gained by limiting competition through: (i) the
erection of barriers to commerce; (ii) the conclusion of collusive
agreements and arrangements to restrict output and increase prices;
and (iii) engagement in other anti-competitive business practices. This
imperfect competition is generally viewed as market failure that results
in inefficient allocation of resources, and adversely affects industry
performance and economic welfare. Such market failures enable sellers
to deliberately reduce output and charge higher prices at the expense of
consumers and society in general, hence the need for regulation in the
form of competition policy and law.

The term competition policy is used to cover policies adopted by

governments to address the anti-competitive behaviour of enterprises,
91
whether private or public , and to influence competition in markets.
Competition policy is therefore a regulatory tool that is employed by
governments to address market failures caused by engagement of firms
in RBPs by maintaining or creating a foundation for effective functioning
of markets. In this connection, the effective implementation of
competition policy requires appropriate legislation that gives the policy
legal force and the establishment of regulatory authorities to enforce the
law and ensure a level playing field for all competing firms in order to
stimulate efficiency and protect consumers. Competition law, on the
other hand, and as implied in the foregoing, is a set of rules that firms
must follow in ensuring that the market does not fail from anti-
competitive practices. The use of competition law reflects a country’s
wish to harness the power and efficiency of the market mechanism. This
power can be blunted or lost if firms can avoid competing with each
other by colluding, or if firms in dominant positions abuse their
dominance by preventing competition. Competition law is therefore a
subset of competition policy since it is the legal framework that gives
effect to that policy.

91
As observed by Vinod Rege in his presentation on Trade and Competition
Policy Issues Facing Commonwealth Developing Countries at the
Commonwealth Working Group Meeting on Trade, Competition Policy and Law,
held in London, United Kingdom, on 25 July 2000.
80
 92
As stated by CUTS International (2000) , the main objective of
competition policy is to preserve and promote competition as a tool to
ensure efficient allocation of resources in an economy. This would result
in the maximization of real income in an economy. Further, from the
consumer perspective, it would result in the best possible choice of
quality, reasonable prices and adequate supplies. The pursuit of these
objectives would lead to controlling the concentration of economic
power, encouraging innovation, protecting and promoting social welfare
and in particular the interests of consumers.
The World Trade Organization (WTO) summarized some socio-
economic objectives of competition law, as listed in Box 2.

Box 2: WTO list of some socio-economic objectives of competition

law

• Protecting consumers from the undue exercise of market power.

• Promoting economic efficiency, in both a static and dynamic sense.
• Promoting trade and integration within an economic union of free
trade.
• Facilitating economic liberalization, including privatization,
deregulation and the reduction of internal trade barriers.
• Preserving and promoting the sound development of a market
economy.
• Promoting democratic values, such as economic pluralism and the
dispersion of socio-economic power.
• Ensuring fairness and equity in marketplace transactions.
• Protecting the ‘public interest’, including considerations relating to
industrial competitiveness and employment.
• Minimizing the need for more intrusive forms of regulation or
political interference in a free market economy.
• Protecting opportunities for small and medium-sized businesses
Source: Annual Report of the WTO Secretariat, 1997.

92
CUTS Monograph on Investment and Competition Policy #6, All About
Competition Policy & Law For the Advanced Learner, CUTS Centre for
International Trade, Economics & Environment, Jaipur, India, 2000.
81
 Competition laws of most countries deal with enterprise
behaviour by prohibiting such RBPs as monopolization and anti-
competitive agreements and mergers.

3. Restrictive business practices

Broadly speaking, there are four main types of business

practices that can have restrictive or anti-competitive effects. These are:
(i) horizontal restraints; (ii) vertical restraints; (iii) abuse of dominant
position; and (iv) anti-competitive mergers and acquisitions.

Horizontal restraints are agreements or arrangements between

competing firms producing identical or similar goods or services to
restrict competition through price-fixing arrangements, collusive
tendering and market or customer allocation agreements. Such
agreements or arrangements are sometimes referred to as ‘hard-core
cartels’ and are considered to be the most serious of anti-competitive
practices because of their harmful effects on economies and
consumers.

Vertical restraints are agreements or concerted practices

entered into between two or more companies each of which operates,
for the purposes of the agreement, at a different level of the production
or distribution chain, and relating to the conditions under which the
parties may purchase, sell or resell certain goods or services. Such
restraints include tie-in arrangements (whereby downstream firms are
required to purchase a certain range of products before being allowed to
purchase a particular product), exclusive dealing arrangements
(whereby distributors are assigned exclusivity within a geographic area,
or over specific products or particular types of customers), and resale
price maintenance (whereby retail price is fixed by the producer or price
floors or ceilings are imposed on the distributors).

Dominance and its abuse is a very interesting subject in

competition policy and law, mainly because this is the area where the
use of the ‘rule of reason’ approach is most justified. According to
Viscusi et al. (1998), “the standard dominant firm model assumes that
there is one big firm and a large number of small price-taking firms,
typically referred to as the ‘competitive fringe’, (and) because of its
position, the dominant firm is modelled as selecting a price that the
82
 93
fringe firms take as given in deciding how much to supply” . A firm is in
a dominant position in a market when it is in a position to exercise a
high degree of market control. A person in a dominant position will be
able to set prices or other market conditions without significant
constraint from competitors or consumer reaction. He/She will thus be
able to initiate and maintain an appreciable increase in price, or
reduction in supply, quality or degree of innovation, without suffering an
adverse impact on profitability in the short or long term.

Dominance therefore comes with market power. Anderson et al.

94
(1999) explained the concept of market power as follows: “the concept
of market power refers to the ability of a firm (or a group of firms acting
jointly) to profitably maintain prices above competitive levels for a
significant period of time. The qualifier ‘profitably’ is important – it
denotes the fact that in order to exercise market power, a firm must be
in a position to raise prices without losing sales so rapidly that the price
increase is unprofitable and must be rescinded, as would be the case in
a competitive market. In addition to higher than competitive prices, the
exercise of market power can be manifested through reduced quality of
product or service or a lack of innovation in the relevant market(s)”.

It has however been generally accepted that dominance per se

is not anti-competitive since firms may legitimately achieve a dominant
position in the market through, for example, innovation, superior
production or distribution methods or greater entrepreneurial efforts, i.e.
conduct that is encouraged under competition. It is its abuse, or the
exercise of the market power that comes with the dominance, that is
cause for competition concern. A firm enjoying a dominant position in
the market may not only exercise its market power by exerting a
significant influence on the market price or restrain the market output of
a specific commodity or service, but may also create barriers thus
restricting entry or the freedom of other enterprises to operate in the
market. Two broad types of business conduct by dominant firms have
traditionally been recognized as abusive under competition law. These

93
W. Kip Viscusi, John M. Vernon and Joseph E. Harrington, Jr., Economics of
nd
Regulation and Antitrust, 2 Ed., The MIT Press, Cambridge, Massachusetts,
1998.
94
Robert Anderson, Timothy Daniel and Alberto Heimler, “Abuse of
Dominance”, in A Framework for the Design and Implementation of Competition
Law and Policy, The World Bank, Washington D.C., and Organisation for
Economic Co-operation and Development (OECD), Paris, 1999.
83
are: (i) exploitative abuses (in which a firm takes advantage of its market
power by charging excessively high prices to its customers,
discriminating among customers, paying low prices to suppliers, or
through related practices); and (ii) exclusionary abuses (in which a firm
attempts to suppress competition, for example by refusing to deal with a
competitor, raising competitors’ costs of entering a market, or charging
95
predatory prices) . Abusive practices also include raising rivals’ costs,
and various forms of vertical restraints.

The abusive practices of a firm in a dominant position, or

monopolization, are particularly anti-competitive because the market
would not offer alternatives for consumers.

Regarding anti-competitive mergers and acquisitions, it has

been found that most mergers pose little or no serious threat to
competition, and may actually be pro-competitive. Such benevolent
mergers have a number of economic advantages such as resultant
economies of scale, reduction in the cost of production and sale, and
gains of horizontal integration, all of which can lead to increased
efficiency and lower prices to the consumer. Other mergers however
seriously harm competition by increasing the probability of exercise of
96
market power . In this regard, concerns about vertical restraints and
abuse of dominance come to the fore. Mergers can also sometimes
produce market structures that are anti-competitive in the sense of
making it easier for a group of firms to cartelize a market, or enabling
the merged entity to act more like a monopolist.

All of the three main types of mergers (i.e. horizontal mergers,

vertical mergers and conglomerate mergers) may have anti-competitive
elements. Horizontal mergers present the greatest danger to
competition by the mere fact that they reduce the number of competing
firms in the relevant market. Such mergers most directly lead to market
concentration, which could in turn create dominant or monopoly
situations that reduce or eliminate competition. Some analysts have
gone as far as viewing horizontal mergers as attempts at legitimizing

95
Ibid.
96
Peter Bamford, David Elliot, Russell Pittman and Margaret Sanderson,
‘Mergers’, in A Framework for the Design and Implementation of Competition
Law and Policy, The World Bank, Washington, D.C., and the Organisation for
Economic Co-operation and Development (OECD), Paris, 1999.
84
collusive and cartel-like behaviour between competing firms. Since
vertical mergers combine firms at different stages in the production and
distribution process, they may also have harmful effects on competition
if they give rise to risk of markets becoming foreclosed to third parties.
Conglomerate mergers present the least danger to competition since in
the case of pure conglomerates there is no functional link whatsoever
97
between the merged firms . Such mergers can however be potentially
anti-competitive if they are considered in the context of the additional
financial strength (or ‘deep pockets’) they give to the parties involved,
which the parties can use against actual or potential competitors in their
combined markets through cross-subsidization.

4. Interface between competition and consumer laws and

policies

It has been demonstrated above that the main goals of

competition policy and law are, or should be, economic efficiency, a
check on concentration of economic power, and consumer welfare. In
most countries that have adopted competition policy and law, therefore,
the objectives of such policies and laws are aimed in one way or
another at enhancing the welfare and/or ensuring the protection of the
consumer through the prevention and control of RBPs.

The common objectives of competition policy and law as

enshrined in competition legislation of many countries include: (i)
prohibiting RBPs; (ii) controlling monopolies and concentrations of
economic power; (iii) regulating mergers and acquisitions; (iv)
strengthening the efficiency of production and distribution of goods and
services; (v) ensuring the best possible conditions for the freedom of
trade; and (vi) encouraging innovation. In protecting the process of
competition, competition law becomes a very important consumer
protection law. The primary objective of competition law is to prohibit
those business practices that unreasonably deprive consumers of the
benefits of competition, resulting in higher prices for inferior products
and services. Some competition laws also prohibit unfair trade practices
that mislead or deceive consumers, and include provisions relating to

97
Richard Whish, Competition Law (Fourth Edition), Butterworths, London, UK,
2001.
85
product safety and product information and unconscionable (or grossly
unfair) conduct.

A number of countries worldwide have hybrid laws that deal with

both competition and consumer protection. The country that has the
most comprehensive law in this regard is probably Australia. Australia’s
Trade Practices Act 1974 is the country’s competition and consumer
law. The Act promotes efficient markets and fair-trading practices which
seek to maximize consumer welfare. Its stated object is “to enhance the
welfare of Australians through the promotion of competition and fair
trading and provision for consumer protection”, which thus recognizes
the Act’s dual role of promoting competition and efficiency together with
consumer protection. The Act has provisions on ‘restrictive trade
practices’, which are defined as “contracts, arrangements or
98
understandings that restrict dealings or affect competition” . Such
practices include price-fixing arrangements (between competitors which
have the purpose or effect of fixing, controlling or maintaining prices for
goods and services supplied or acquired by the parties), exclusionary
provisions (also known as collective boycotts, which are arrangements
between two or more persons who are competitive with one another
where the arrangement has the purpose of restricting the supply of
goods or services to or the acquisition of goods or services from
particular persons or classes of persons, or the supply of goods or
services to or the acquisition of goods and services from particular
persons or classes of persons in particular circumstances or on
particular conditions), and anti-competitive agreements (or
arrangements, which have the purpose or effect of substantially
lessening competition in a market).

The Act also has provisions on the prohibition of

unconscionable conduct, and a whole section on consumer protection,
whose object is to protect the consumer by eliminating unfair trade
practices. Unfair trade practices include misleading or deceptive
conduct (conduct aimed at misleading or deceiving consumers),
unconscionable conduct (conduct that can be seen in accordance with
the ordinary concepts of mankind to be so unfair as to be against
conscience), false or misleading representations (on the quality, value,
condition or grade of goods, etc), bait advertising (advertising for supply

98
Ray Steinwall, Annotated Trade Practices Act 1974, 2002 Edition,
Butterworths, Australia, 2002.
86
of goods and services knowing that the firm would not be able to supply
the goods and services), harassment and coercion (using physical force
or undue harassment or coercion in connection with the supply or
possible supply of goods or services, and pyramid selling (e.g. purchase
of certificates for a particular dollar value, with the newest entrant
starting at the bottom of the pyramid and obliged to sell the certificates
to progress up the pyramid).

In the east and southern African region, an increasing number

of countries are also adopting hybrid laws that deal with both
competition and consumer protection. The situation in some of these
countries is shown in Table 1.

Table 1: Competition-consumer protection laws in selected east

and southern African countries

Kenya The objective of the Restrictive Trade Practices, Monopolies and

Price Control Act, 1988, Chapter 504 is “to encourage
competition in the economy by prohibiting restrictive trade
practices, controlling monopolies, concentrations of economic
power and prices and for connected purposes”.

The Act provides for the appointment of the Monopolies and

Prices Commissioner for its administration.

The Act has provisions on the control of monopolies and

concentrations of economic power, including mergers and
takeovers. Prohibited restrictive trade practices include
agreements or arrangements: (i) hindering or preventing the sale
or supply of goods and services; (ii) restricting the terms and
conditions of sale or supply; (iii) fixing prices; and (iv) limiting or
restricting the output or supply of goods. It also has provisions
relating to the control and display of prices.

Malawi The objective of the Competition and Fair Trading Act, 1998,
(Cap. 48.09) is “to encourage competition in the economy by
prohibiting anti-competitive trade practices; to establish the
Competition and Fair Trading Commission; to regulate and
monitor monopolies and concentrations of economic power; to

87
 protect consumer welfare; to strengthen the efficiency of
production and distribution of goods and services; to secure the
best possible conditions for the freedom of trade; to facilitate the
expansion of the base of entrepreneurship ...”.

The Act prohibits “any category of agreements, decisions and

concerted practices which are likely to result in the prevention,
restriction or distortion of competition to an appreciable extent in
Malawi or in any substantial part of it”.

Abuse of dominance practices prohibited include: (i) predatory

behaviour towards competitors; (ii) discriminatory pricing and
discrimination, in terms and conditions, in the supply or purchase
of goods and services; (iii) making the supply of goods or
services dependent upon the acceptance of restrictions on the
distribution or manufacture of competing or other goods; and (iv)
resale price maintenance.

Trade agreements and arrangements prohibited include: (i)

colluding in settling uniform prices in order to eliminate
competition; (ii) collusive tendering and bid rigging; (iii) market or
customer allocation; (iv) allocation by quota as to sales and
production; (v) collective action to enforce arrangements; (vi)
concerted refusals to supply goods or services to potential
purchasers; and (vii) collective denials of access to an
arrangement or association which is crucial to competition.

The need to enact consumer protection legislation to work hand

in hand with Malawi’s competition legislation under the
administration of the competition authority was recognized early
in Malawi. Accordingly, a Consumer Protection Bill was drafted in
99
2001 to address the specific interests and needs of consumers .
The Bill was sponsored and promoted by the Consumer
Association of Malawi (CAMA), and provided for the
establishment of a Consumer Protection Council whose
functions include the identification of price mechanisms and the
determination of whether the quality and prices of goods and
services are justifiable. The Council would also carry out,
promote or participate in consumer education programmes and
activities and disseminate consumer information to the public.
The Bill also provided for the establishment of Small Claims

99
Why is a Competition Law Necessary in Malawi?, CUTS Centre for
Competition, Investment & Economic Regulation, Jaipur, India, 2003.

88
 Courts.

Tanzania According to a consultants’ report on a competition policy model

for the Southern African Development Community (SADC)
100
region , the Fair Competition Act of Tanzania, 2003, prohibits
anti-competitive agreements that have the effect of preventing,
restricting or distorting competition in Tanzania. It is prohibited
for a business in a dominant position to use its dominance with
the object or effect of preventing, restricting or distorting
competition. A merger that creates or strengthens a dominant
position is prohibited but can be approved if benefits attributable
to it more than offset any adverse effects.

The Act established the Fair Trade Commission as an

independent unitary competition authority. It also established the
National Consumer Advocacy Council to represent the views of
consumers to the Fair Trade Commission (as well as to
Government Ministries and other regulatory authorities).

Zambia The objectives of the Competition and Fair Trading Act, 1994,
Chapter 417 are “to encourage competition in the economy by
prohibiting anti-competitive trade practices; to regulate
monopolies and concentrations of economic power; to protect
consumer welfare; to strengthen the efficiency of production and
distribution of goods and services; to secure the best possible
conditions for the freedom of trade; to expand the base of
entrepreneurship; and to provide for matters connected with or
incidental to the foregoing”. The Act is administered by the
Zambia Competition Commission (ZCC).

The Act has provisions on anti-competitive agreements, abuse of

dominance and anti-competitive mergers. It also has provisions
directly aimed at protecting consumers. In this regard, it
prohibits: (i) withholding or destroying producer or consumer
goods with the aim of bringing about a price increase; (ii)
excluding liability for defective goods; (iii) making false and
misleading representations; and (iv) supplying products that are
likely to cause injury to health or physical harm to consumers.

100
A Competition Policy Model for the Southern African Development
Community, a report by Dr Arthur Pryor and Dr Martin Howe, consultants to the
Commonwealth Secretariat, 2006.
89
Zimbabwe The Competition Act, 1996, [Chapter 14:28] has the objective “to
promote and maintain competition in the economy of Zimbabwe;
to establish an Industry and Trade Competition Commission and
to provide for its functions; to provide for the prevention and
control of restrictive practices, the regulation of mergers, the
prevention and control of monopoly situations and the prohibition
of unfair trade practices; and to provide for matters connected
with or incidental to the foregoing”.

As in most other countries’ competition legislations, anti-

competitive practices prohibited in the Act include restrictive
horizontal and vertical agreements (price-fixing arrangements,
market-sharing agreements, bid rigging, resale price
maintenance, etc.), abuse of dominant position (predatory
pricing, tied and conditional selling, exclusive dealing, etc.), and
anti-competitive mergers (covering horizontal, vertical and
conglomerate mergers).

The Act also has provisions directly aimed at consumer

protection. These provisions prohibit unfair trade practices such
as “misleading advertising, false bargains, and distribution of
commodities or services above advertised price”.

Source: Compiled by the author from indicated sources.

At the regional level, countries that belong to the Common

101
Market for Eastern and Southern Africa (COMESA) have agreed on
the formulation and adoption of a regional competition policy and law to
deal with cross-border competition and consumer protection concerns.

The COMESA competition law prohibits as incompatible with

the Common Market all agreements between undertakings, decisions by
associations and concerted practices that may affect trade between
Member States and which have as their object or effect the prevention,
restriction or distortion of competition within the Common Market.
Collusive agreements such as price-fixing, market-sharing and bid
rigging are prohibited per se. Exploitative and exclusionary abuses of
dominant firms are also prohibited. Merger control is also
comprehensively provided for in the law.

101
COMESA Member States include Angola, Burundi, D.R. Congo, Djibouti,
Egypt, Ethiopia, Kenya, Madagascar, Malawi, Rwanda, Seychelles, Sudan,
Swaziland, Uganda, Zambia and Zimbabwe.
90
 The regional competition law also deals extensively with
consumer protection, since it was recognized that competition law and
consumer protection law are complementary in that they deal with
different kinds of market failure. A variety of practices that can be
detrimental to consumers are prohibited. These include “false or
misleading representation of goods or services, unconscionable conduct
in consumer and business transactions, and supply of unsafe goods”.
Product safety and product information is also of primary concern in the
law.

5. Anti-competitive practices and their adverse effects on

consumer welfare

It is a proven fact that free and open competition benefits

consumers by ensuring lower prices and new and better products.
Competition among enterprises benefits consumers whether it comes in
the form of price competition or non-price competition. Price competition
benefits consumers since it involves an attempt to win customers by
offering them a product at a lower price than the competitors. The
consumer therefore benefits from the resultant lower prices. Non-price
competition benefits the consumer since competitors go for sales
promotion, advertising, quality upgrading, offer after-sales service and
so forth to increase their share of the market. Again, consumers benefit
from better quality products and after-sales service.

In addition to generating consumer benefits, competition policy

and law also directly contributes to consumer protection. In this regard,
it is noted that consumers are the main losers of anti-competitive
activities in a market since they are most vulnerable to the abuses of big
business because of their atomistic nature. Consumers therefore require
the protection of competition law the most since the adverse effects of
anti-competitive practices are disproportionately severe for them.

Firms will often be tempted to ensure increased profits by

restricting the process of competition. When competitors agree to fix
prices, rig bids or allocate customers, or otherwise operate as
monopolies, consumers lose the benefits of competition. Consumers
also lose the advantage of choice of shopping around and freely
choosing the products and businesses that best meet their needs. The
91
prices that result when competitors agree to collude are in most cases
artificially high. Such prices do not accurately reflect the cost of
production and distribution, and therefore distort the allocation of
society’s resources. The result is a loss not only to individual consumers
but also to the economy as a whole.

All types and forms of RBPs that are prohibited or controlled by

competition law have adverse effects on consumer welfare.
102
Evenett and Jenny (2004) assembled a comprehensive
database of allegations of anti-competitive practices made in Sub-
Saharan African publications, principally in newspapers and other
periodicals. They located 120 distinct allegations of anti-competitive
103
practices in 68 lines of business in 12 African countries over a period
of ten years. The most frequent allegation by a large margin concerned
cartels, especially outside of South Africa. Allegations against foreign
firms, some of which were African, ranged between a quarter and two-
fifths of the total number of allegations, suggesting that many domestic
firms were the subject of allegations as well. There were 12 lines of
business where allegations were made in more than one Sub-Saharan
African country. Many of those lines of business directly affected the
well-being of the poor, those employed in the agricultural sector, and
small business.

It should however be noted that virtually all the allegations of

anti-competitive practices in Sub-Saharan Africa that were analysed in
the Evenett and Jenny study were picked from newspapers and other
publications. The actual number of the allegations made and
investigated by the competition authorities in the respective countries is
definitely much higher.

The anti-competitive practices were divided into three

categories: (i) those that hurt consumers directly; (ii) those that hurt

102
Simon J. Evenett and Frederic Jenny, in a presentation titled An Inventory of
Allegations of Anti-Competitive Practices in Sub-Saharan Africa delivered at the
rd
Centre for Regulation and Competition (CRC) 3 International Conference: Pro-
Poor Regulation and Competition: Issues, Policies and Practices, held in Cape
Town, South Africa, 7–9 September 2004.
103
Ghana, Kenya, Madagascar, Malawi, Mozambique, Namibia, Nigeria, South
Africa, Tanzania, Uganda, Zambia and Zimbabwe.
92
farmers; and (iii) those that excluded and hurt other businesses.
Examples of such practices are given in Table 2.

Table 2: Some anti-competitive practices in Sub-Saharan Africa

Anti-competitive • Vertically integrated monopoly in the sugar

practices that hurt industry in Malawi.
consumers directly • Millers’ cartel in Zambia.
• Anti-competitive merger in the beer sector in
Malawi.
• Price fixing in the distribution of oil in Kenya.
• Cartel in the oil sector in Uganda.
• Cement monopoly in Malawi.
• Taxi cartels in South Africa.
• Private monopolies in the rail and transport
sectors in Malawi.

Anti-competitive • Price fixing and market sharing in the fertilizer

practices that hurt industry in Kenya.
farmers • Collusion among tea buyers in Malawi.
• Buyers’ cartel in the cotton industry in
Zimbabwe.
• Price fixing by purchasers of cotton in Malawi.

Anti-competitive • Sugar cartel in South Africa.

practices that excluded • Margin fixing in the banking sector in Uganda.
or hurt other businesses • Exclusionary practices in the cable television
sector in Nigeria.
• Abuse of dominance in the telecommunications
sector in South Africa.
• Price fixing and trade associations in the freight
transport sector in Malawi.
• Franchise arrangements in the soft drinks
industry in Zambia.
• Jet fuel cartel in South Africa.

Source: Compiled from a Simon Evenett and Frederic Jenny

presentation on Anti-competitive Practices in Sub-Saharan Africa:
Myths, Reality and Perspectives.

93
 While it is extremely difficult to accurately quantify the adverse
effects of most anti-competitive practices on the consumer because
other economic factors may simultaneously be involved, considerable
progress has been made in quantifying the effects of cartel behaviour.

A cartel has been defined as a formal agreement among

competing firms in an oligopolistic industry on such matters as total
industry output, market shares, prices, allocation of customers and/or
territories, bid rigging, or a combination of these and other matters. The
mutual benefit of members is the primary aim of cartels. Generally, a
cartel attempts to emulate a monopoly by restricting industry output,
104
raising or fixing prices in order to earn higher profits . A paraphrased
definition of a cartel provided by the OECD is that “a cartel is an
agreement, practice, or arrangement by competitors to collude and fix
105
prices, rig bids, allocate quotas, or divide markets” . Cartels are
considered the most harmful anti-competitive conduct prevalent the
world over, and are outlawed in most countries.

There are different types and kinds of cartels. A private cartel

exists between two or more firms that are not controlled by a
government. The main objective of a private cartel is to raise prices
above competitive levels, thus harming the customers. Within this
category of cartels, there are international private cartels and domestic
private cartels. International private cartels exist when members of a
private cartel are based in different countries, or when the cartel’s
agreement affects the markets of more than one country. Domestic
private cartels, as the name implies, exist between firms in the same
country and whose agreements only affect the market of that country.
Cartels that involve state enterprises, as in the case of the Organization
of the Petroleum Exporting Countries (OPEC), and other commodity
agreements on sugar, coffee, etc., are not covered under competition
enforcement rules. Such cartels are sovereign cartels and therefore
immune from the law.

104
S. Sothi Rachagan, Competition Policy and Law in the Consumer and
Development Interest, a paper presented as communication from Consumers
International to the Fifth Session of the Intergovernmental Group of Experts
(IGE) on Competition Law and Policy, held in Geneva, Switzerland, on 2–4 July
2003.
105
As reported in CUTS Briefing Paper No. 5/2006 on Private International
Cartels – An Overview. CUTS Centre for International Trade, Economics &
Environment, Jaipur, India, 2006.
94
 The term collusion, on the other hand, has been used to refer to
informal agreements, arrangements or conspiracies that seek to achieve
what cartels do. The economic effects of cartels and collusive behaviour
are however the same.

The costs to the consumer of cartelization, particularly from

private international cartels, have been calculated with some degree of
106
accuracy. Evenett (2003) noted that attempts to quantify the impact of
private international cartels have grown in sophistication over the years.
Studies initially focused on the price reductions observed after a cartel
collapsed, and most studies pointed to a 20–40 per cent fall in prices.
Therefore, if total sales of a cartelized product during a particular period
amounted to US$10 billion, it could be calculated that the prejudice to
consumers who bought the product in terms of price overcharges was
US$2–4 billion. More sophisticated empirical techniques have been
used in analysing the effects of certain individual private international
cartels. Evenett observed that an analysis of the international vitamins
cartel, which divided up the world markets for various types of vitamins
from 1989 until 1999, was able to recover estimates of the overcharges
paid by 90 vitamin-importing nations throughout the 1990s. The total
overcharges in India amounted to US$25.71 million. The total
overcharges for ten European Union Member States were estimated to
be US$660.19 million.

Reporting on the effects of the graphite electrodes cartel (1992–

1997), Evenett quoted the OECD as having estimated that the cartel
affected US$5–7 billion in sales worldwide, and that throughout the
world the cartel resulted in price increases from roughly US$2,000 per
metric tonne to US$3,200–3,500 in various markets. In Korea, the
damage incurred by the companies importing graphite electrodes was
estimated by the Korea Fair Trade Commission at approximately
US$139 million. The lysine cartel (1992–1995), under which cartel
members engaged in price fixing, allocation of sales quotas and
monitoring of volume agreements, is estimated to have resulted in
overcharges to customers in the United States as high as US$141
million.

106
Simon J. Evenett, Can Developing Economies Benefit from WTO
Negotiations on Binding Disciplines for Hard Core Cartels?, UNCTAD Series on
Issues in Competition Law and Policy, United Nations, Geneva, 2003.
95
 107
Jenny (2004) reported on how Brazil lost US$500 million to
an international cartel from its privatization of Eletropaulo Metropolitana,
a Government-owned electricity distribution company. The privatization
of the electricity company was done through floating a tender, with the
reserve price that was publicly announced before the bids being
US$1.78 billion. Three bidders were allowed to participate in the
auction: (i) Enron, a US energy trader; (ii) the Light Energy Consortium
(comprising AES, a large US energy group, Electricité de France,
Houston Industries, and CSN, a Brazilian steel company); and (iii) VBC,
a Brazilian group. Just before the auction took place, AES, a member of
the Light Energy Consortium, approached Enron with an offer that for
not bidding for Eletropaulo Metropolitana, Enron would be allowed to
build a power plant with AES to supply Eletropaulo, as well as operate
the plant and provide all the fuel (the Light Energy Consortium had
considered a similar deal with VBC but had decided against it on advice
from its lawyers). At the auction, the Light Energy Consortium came
armed with two bid envelopes: one offering US$1.78 billion and another
offering an extra US$500 million. When it became apparent that Enron
and VBC, who were both at the auction, were not submitting bids, the
Light Energy Consortium submitted the lower bid for US$1.78 billion.

If Enron or VBC had submitted bids, the Light Energy

Consortium would have submitted the higher bid with an extra US$500
million. That was the amount that Brazil directly lost through the rigging
of the bid. It was also estimated that Brazil could have lost up to US$1
billion, being the difference between the bid of US$1.78 billion deposited
by the Light Energy Consortium and the maximum value of Eletropaulo
Metropolitana as estimated by Enron when it was considering bidding.
There were however other indirect costs to Brazilian consumers of
electricity that arose from the bid rigging. Under the bid rigging
agreement between Enron and the Light Energy Consortium, Enron
would be granted a contract for the production of electricity, and part of
the increase in the cost of electricity due to the contract would naturally
be passed on to electricity consumers.

107
Frederic Jenny, Detection and Repression of Anti-competitive Practices in
Developing Countries: A Case Study, a presentation at the Sixth Session of the
Intergovernmental Group of Experts (IGE) on Competition Law and Policy, held
in Geneva, Switzerland, on 8–10 November 2004.
96
 It has also been observed that businesses will have less
incentive to trade fairly when competitors can obtain a short-term
advantage by misleading consumers, supplying unsafe goods or acting
in a grossly unfair way. The costs of such short-term advantages will fall
on both consumers and legitimate traders, often to the long-term
detriment of consumers as the increased risks of doing business
discourages changes to entrenched buying and investing behaviour.

Consumers are indeed the biggest beneficiaries of the effective

implementation of competition policy and law, not only from lower
prices, better quality of goods and services, and greater choice of goods
and services that result from competition-induced economic efficiency
and innovation, but also from the protection that they get from the
prohibition and control of anti-competitive practices.

6. The Zimbabwean experience

As in most other developing countries, the adoption of

competition policy and law in Zimbabwe was a direct result of the
introduction of economic reforms in the country. In 1991, the
Government of Zimbabwe concluded consultations on its “Framework
for Economic Reform”, which led to the adoption of both a stabilization
and structural adjustment programme under the Economic Structural
Adjustment Programme (ESAP). The programme’s central components
were: (i) fiscal deficit reduction combined with prudent monetary policy;
(ii) trade liberalization; (iii) domestic deregulation; (iv) public enterprise
reform; and (v) measures to alleviate the impact of the reforms on
vulnerable groups.

Within the structural adjustment program, the Government was

specifically concerned with competition and monopoly regulation issues.
This was partially derived from the concern to protect consumers, as
well as the need to ensure that exports are effectively promoted, and to
encourage indigenous entrepreneurs. While it was noted that
competitiveness would be greatly enhanced by the economic reforms,
explicit competition policies were still needed in the context of the ESAP
since it was noted that markets are not perfect, business behaviour is
not automatically pro-competition, and public policy measures may be

97
 108
unintentionally inconsistent . Competition policy within the context of
the structural adjustment program should thus be designed to: (i)
provide government and citizens with confidence that the ESAP would
not be manipulated by special interests; (ii) ensure that the benefits of
the ESAP are broadly shared among both businesses and consumers;
and (iii) further promote a switch to production for export markets.
Consequently, the main principles of competition policy were to lower
barriers to entry, and reduce RBPs, particularly monopolistic tendencies.

In a minute to the then Ministry of Finance, Economic Planning

and Development, the then Ministry of Industry and Commerce in May
1991 officially mooted the idea of seriously considering the adoption of
competition policy and the establishment of a competition authority in
Zimbabwe. The submissions made in that minute clearly laid out the
raison d’être and the basic parameters for competition policy in
Zimbabwe, as shown in Box 3.

108
Report on Study of Monopolies and Competition Policy in Zimbabwe,
prepared for the Government of Zimbabwe by Implementing Policy Change
(IPC), September 1992.
98
 Box 3: Initial Government suggestions on the adoption of
competition policy and establishment of a competition authority in
Zimbabwe

Monopolistic conditions in the Zimbabwean market are the result either

of Government granting a parastatal the sole rights to a product,
franchising, or the size of the market which restricts competitors from
entry. In the case of parastatals, Cabinet in essence controls the prices
the monopolies can charge with the stated principle of allowing them to
break even. Until now Government has controlled the potential
monopolistic tendencies of other firms through the price control
mechanism. As price controls are lifted, monopolies will tend to improve
their profit picture. In the absence of a regulatory body, the end result
will probably be lower output levels and higher prices for those products
that enjoy a truly monopolistic market. The following are the issues,
among others, which a study team will have to address:
1. Defining a monopoly
Ground rules of what constitutes a pure monopoly have to be
established. There may be only one producer of a good but it may
be incorrect to describe the company as a monopoly because there
are substitute products. The definition of what a product is and how
far the Government is willing to consider substitutes will be
important in the application of the rules. This should therefore be
explicitly determined.
2. Monopoly power
There are known cases of dominant price leadership in Zimbabwe,
i.e. the largest firm sets a price and the others proceed to agree on
it. An example of that, prior to controls, was petrol. There are other
forms of collusion that result in a monopoly situation even though
there may be more than one producer. There is need for an
appropriate legal framework and practical guidelines to deal with
this issue.
3. Pricing goals
As direct price controls are removed there is a need to establish
guidelines for determining pricing decisions. In the case of
monopolies, the impact of various pricing methods (cost plus mark-
up, average or marginal cost pricing) needs to be examined so that

99
 the Commission has clear directions on how to set prices.
4. Price determination
There is a need to establish a mechanism whereby monopoly prices
are regulated. In some countries the Monopoly Commission would
not act until a monopolist had set prices. The Commission then
reviews those prices (by holding hearings) to decide on their
appropriateness. In still other cases (particularly for public utilities)
the corporation would have to apply to the Commission for any rate
change. Given that the definition of monopoly is yet to be decided, it
is necessary to establish the most appropriate approach to pricing.
Such issues as how costs and the appropriate rate of return on
capital, as well as the capital base to be used in such computations,
have to be fully explored.
5. Any other pertinent issues
The approach envisaged is in two stages. First, there is need for a
team to study the Zimbabwe situation in light of the above issues. Its
report should take, say, four months to complete and should provide
information on what exactly are the current monopoly areas and
how best to deal with them while maintaining efficiency. The
personnel required is a team of three experts in regulation of
industry.
The team’s report, when approved, should be the basis for
constituting the Commission’s terms of reference, scope of work
and operational method as well as preparing the necessary legal
framework. Because of its importance, the Government would retain
the right to ask for a proposal submission from the team put forward
to do the study. It is suggested that the Government moves
expeditiously.
Source: Ministry of Industry and International Trade, Zimbabwe.

The need to protect the consumer against the exploitative

practices of large firms in monopoly or dominant positions was therefore
foremost in the mind of the Ministry of Industry and Commerce when it
mooted the idea of the adoption of competition policy and law in
Zimbabwe. The initial suggestions within Government circles were
therefore that competition policy in Zimbabwe should specifically deal

100
with monopolistic practices, particularly those that lead to high prices of
109
consumer goods .

It was therefore not surprising that one of the strongest lobbyists

for the adoption of competition policy and law in Zimbabwe was the
Consumer Council of Zimbabwe (CCZ). While the CCZ has the mandate
of consumer welfare and protection, it does not have the necessary
legal powers of enforcement since Zimbabwe does not have a
comprehensive consumer law under the administration of that consumer
110
watchdog . The CCZ therefore saw the adoption of competition policy
and law and the establishment of a competition authority in Zimbabwe
as providing the necessary “teeth” in protecting consumers.

Zimbabwe formally adopted competition policy and law in 1996

with the enactment of the Competition Act [Chapter 14:28]. The Act
however only came into force in 1998, the same year that its
implementation authority, the then Industry and Trade Competition
Commission, was established.

The Competition Act of Zimbabwe covers all the four main

forms of RBPs: (i) horizontal restraints; (ii) vertical restraints; (iii) abuse
of dominant position; and (iv) anti-competitive mergers. It prohibits any
business practice that “restricts competition directly or indirectly to a
material degree”. As a general rule, therefore, restrictive practices are
considered under the Act using the ‘rule of reason’ since the materiality
of the practice on competition has to be determined. Certain restrictive
practices that are termed ‘unfair business practices’ in the Act are
however outrightly, or per se, prohibited and are considered to be
criminal offences subject to fines and/or imprisonment. Such practices
include: (i) misleading advertising; (ii) false bargains; (iii) distribution of
commodities or services above advertised price; (iv) undue refusal to
distribute commodities or services; (v) bid rigging; (vi) collusive

109
The idea of having a ‘Monopolies and Prices Commission’ in Zimbabwe
along the lines of the Kenyan model was later dropped for an ‘Industry and
Trade Competition Commission’ with a wider mandate of dealing with all forms
of restrictive business practices at the recommendation of the IPC Study Team
on monopolies and competition policy in Zimbabwe.
110
Zimbabwe however has a number of consumer protection legislations that
address particular concerns, such as the Consumer Contract Act [Chapter 8:03],
and which are not under the direct administration of the CCZ.
101
arrangements between competitors; (vii) predatory pricing; (viii) resale
price maintenance; and (ix) exclusive dealing.

It is worth noting that a number of per se prohibited unfair

business practices under Zimbabwe’s competition law (such as
misleading advertising, false bargains and distribution of commodities or
services above advertised price) are typical unfair trade practices that
are aimed at directly protecting consumers against exploitative practices
of business firms.

The competition authority of Zimbabwe has, since it effectively

commenced its operations in 1999, handled over 450 different
competition cases, involving both restrictive and unfair business
practices and mergers and acquisitions. The impact in Zimbabwe of the
competition cases handled by the authority was recently analysed in a
study on the Socio-Economic Impact of Implementation of Competition
111
Policy and Law in Zimbabwe . The study confirmed for Zimbabwe
what had been proved elsewhere, i.e. that the effective implementation
of competition policy and law positively contributes towards general
economic development. Its revelations on the effects of anti-competitive
practices on consumer welfare in Zimbabwe are discussed below in the
context of mergers and acquisitions and restrictive and unfair business
practices as they are provided for under the Competition Act [Chapter
14:28].

6.1. Mergers and acquisitions

The study found that merger control in Zimbabwe produced

immense benefits to the economy and society. Specific benefits that
accrued, and are still accruing, from the mergers examined by the
competition authority included: (i) generation of economies of scale or
scope, and other synergic efficiencies; (ii) reduction of management
inefficiencies; (iii) facilitation of research and development; (iv) creation
and/or retention of employment; (v) development of export markets and

111
Part I of the study dealt with the impact of the examination of mergers and
acquisitions. The report on that part of the study was released in November
2006. Part II of the study, the report of which is currently at the final stages of
drafting, deals with the impact of the investigation of restrictive and unfair
business practices.
102
generation of increased export earnings; (vi) promotion of foreign direct
investment; (vii) continued availability of goods and services on the
domestic market; and (viii) indigenization or localization of control of
strategic economic activities.

In particular, it was found that the consummation of those

mergers that were approved by the competition authority with certain
conditions aimed at alleviating the identified competition and public
interest concerns, contributed most to the socio-economic benefits
accruing to the consumer. By implication therefore, had the mergers
been allowed to proceed with the identified competition and public
interest concerns, consumer welfare would have been compromised,
and even adversely affected. These findings are outlined in Table 3.

Table 3: Mergers and acquisitions conditionally approved by the

competition authority of Zimbabwe

Merger of This transaction involved the horizontal merger of

Rothmans of Zimbabwe’s then only two cigarette manufacturers,
Pall Mall and Rothmans of Pall Mall (Zimbabwe) and British American
British American Tobacco Zimbabwe Limited to form BAT Zimbabwe, and
Tobacco was necessitated by the global merger of the international
tobacco businesses of British American Tobacco Plc,
Rothmans International, Compagnie Financière Richemont
AG and Rembrandt Group Limited.

It was noted that the merger would create a monopoly

situation in the cigarette making industry of Zimbabwe and
that, as in any other monopoly situation, consumers would
be adversely affected through higher prices and/or reduced
supply of the product, if the monopolist exercises its market
power. It was however also noted that the merger was
necessary to save British American Tobacco Zimbabwe from
collapse since that company was evidently failing. Exit from
the market of that company would have had adverse effects
on the consumer due to the disappearance from the market
of its cigarette brands and reduced choice. Other adverse
effects would have included increased unemployment and
reduced export earnings. The merger was therefore
approved on the following conditions:

103
• that the merged party should dispose of its surplus
cigarette making machinery to third parties interested
and able to enter the cigarette manufacturing industry
within a reasonable period of time; and also
• that the merged party should not increase the prices of
its cigarettes without first justifying the price increases to
the competition authority, as long as the monopoly
situation created in the cigarette manufacturing industry
remained in existence.

The conditions were accepted by the merging parties, who

signed a formal undertaking to that effect with the
competition authority. The disposal of the merged party’s
surplus cigarette making machinery was done within six
months of the signing of the undertaking, and the purchaser
of the machinery started producing cigarettes for both the
domestic and export markets within 12 months. That broke
the monopoly situation created by the merger, and
accordingly released the merged party from the price
surveillance condition.

The Competition Commission’s price monitoring and

surveillance role in the cigarette manufacturing industry,
though short-lived since the monopoly situation created by
the merger was eliminated within two years by new entrants,
helped in ensuring that consumers were not exploited by the
merged party’s excessive pricing of its products. Four
requests for cigarette price increases were submitted to the
Commission for approval during the two-year period and two
were rejected for lack of justification.

The merged party’s surplus cigarette making machinery was

purchased by a company called Cut Rag Processors (Pvt)
Limited, which used the machinery to start producing new
Remington Gold and Oxford cigarette brands for both the
local and export markets in 2001. The brands are in four
variations: the ‘Virginia Blend’, the ‘American Toasted’, the
‘Light’ and the ‘Menthol’ varieties. During the first five years
of its existence, the production capacity of the company
grew by more than 20 times through the procurement of
additional machinery. The company now produces about
120 million cigarettes per month, of which about 10 million
are for the local market. The company also employs 295
permanent employees.

104
 The introduction of the new Remington Gold and Oxford
cigarette brands on the local Zimbabwean market gave
consumers a wider choice of products. It also brought fierce
competition to the dominant BAT Zimbabwe cigarette
brands, which was to the benefit of consumers, such that
BAT Zimbabwe lodged a complaint to the Competition
Commission that its market share was being eroded by Cut
Rag Processors’ engagement in unfair business practices
(see outline of the case in Box 6 below on preliminary
investigation into allegations of restrictive and unfair
business practices in the cigarette distribution industry).

A review of the merger in 2006 also revealed that the

transaction had ensured the continued existence on the
market of the former British American Tobacco Zimbabwe
Limited’s Kingsgate and Berkeley cigarette brands, which
are very popular with the smoking consumers but whose
disappearance from the market was imminent before the
merger. BAT Zimbabwe also confirmed the attainment of
economies of scale in production as a result of the merger
as evidenced by increased production efficiencies and
machine utilization due to the use of one plant for the two
companies. The merger however did not result in the stability
of cigarette prices on the local market as had been
envisaged, but this was mainly because of other
macroeconomic constraints. The merger also directly
resulted in 4,061 job losses (255 managerial employees,
3,643 non-managerial employees, and 163 contract
workers), but that was not unexpected given the horizontal
nature of the transaction.

More importantly for future competition in the relevant

market, and thus increased consumer welfare and
protection, entry barriers into the cigarette making industry
were removed. As a result, another new entrant other than
Cut Rag Processors, a company called Savanna Tobacco
Company, started producing the Pacific brands of cigarettes,
which are becoming increasingly popular with consumers, in
competition with both BAT Zimbabwe and Cut Rag
Processors.

The Coca- This transaction involved the acquisition of Cadbury-

Cola/Cadbury- Schweppes beverage brands by The Coca Cola Company.
Schweppes The Cadbury-Schweppes beverage brands acquired
105
Merger included international brands and local brands such as the
Mazoe and Calypso brands.

It was noted that The Coca Cola Company was only

interested in the Cadbury-Schweppes beverage brands, and
not in the Schweppes’ bottling plant in Zimbabwe, which
would have been allowed to disintegrate after the merger,
resulting in loss of jobs. The future of the local Mazoe and
Calypso beverage brands was also in doubt since the
practice of The Coca Cola Company elsewhere had been to
‘cold store’ the local beverage brands it acquired so as to
remove competition to its international brands. Removal from
the market of the local Mazoe and Calypso brands would not
only have adversely affected the consumer because of the
popularity of the brands but would also have prejudiced the
local suppliers of the raw materials used in the production of
those brands of beverages.

The merger was therefore approved on the following

conditions, which were accepted by The Coca Cola
Company and formalized in an undertaking:

• that The Coca Cola Company also acquire the

Schweppes bottling plant in Zimbabwe as a going
concern, modernize it, and establish an appropriate
local shareholding structure to oversee the operations of
the new company to be formed before disposing of it to
interested indigenous entrepreneurs;
• that The Coca Cola Company maintain the local Mazoe
and Calypso beverage brands on the Zimbabwean
market and develop them into regional brands with
wider distribution; and
• that The Coca Cola Company promote and develop
Zimbabwean suppliers of raw materials required to
produce the local beverages brands.

As per the Competition Commission’s condition, The Coca

Cola Company acquired the Schweppes bottling plant in
Harare and modernized it to state-of-the-art condition, thus
prevented it from imminent closure and loss of employment.
That also not only ensured the continued availability on the
domestic market of the local Mazoe and Calypso beverage
brands, which are immensely popular with the consumers,
but also facilitated the expansion of the market into
neighbouring countries such as Zambia, South Africa,

106
 Botswana and Malawi.

The continued operation of the Schweppes bottling plant

also guaranteed the viability of local raw material suppliers
such as Mazoe Citrus Estates with resultant employment
savings. It has also provided the necessary countervailing
power against the possible exploitative and exclusionary
practices of the dominant players in the beverages industry
such as Delta Beverages.

Acquisition of This transaction involved the acquisition of Portland Holdings

Portland Limited (Porthold), the holding company of Zimbabwe’s
Holdings Limited largest cement manufacturers, by the Pretoria Portland
by Pretoria Cement Company Limited (PCC) of South Africa.
Portland
Cement It was noted that the cement manufacturing industry in
Company Zimbabwe was highly concentrated, with only two other
players, Circle Cement and the Sino-Zimbabwe Cement
Company. Local production of cement was failing to meet
demand, resulting in product shortages and high prices.
There were strong suspicions that the intentions of PCC
after acquiring Porthold were to close down the cement plant
to supply the Zimbabwean market from its operations in
South Africa. That would have exacerbated the cement
supply situation in Zimbabwe with adverse effects on the
consumer. Job losses would also have been substantial.

It was however also noted that the merger had substantial

pro-competitive elements. Circle Cement, the second largest
cement manufacturer in Zimbabwe, had recently been
acquired by Lafarge of France in an offshore deal with the
Blue Circle Group of the United Kingdom. Lafarge had also
acquired cement plants in Zambia and Malawi, and was thus
becoming a dominant player in the regional cement market.
The acquisition of Porthold in Zimbabwe by PCC, also a
strong regional player, was therefore seen as providing the
necessary countervailing check against the exercise by
Lafarge of its market power and any abusive practices on
the Zimbabwean cement market.

The merger was therefore approved on condition that PCC

gave the competition authority an undertaking to honour its
commitment to maintain Porthold’s cement plant as a going
concern and to continue producing cement in Zimbabwe.

107
 The major post-merger benefit of the transaction to the
consumer is that Porthold’s Unicem brand of cement is still
being offered to the Zimbabwean consumers as a
competitive choice to the Lafarge cements. In the five years
from the time of the merger in 2001, Porthold increased its
cement production from about 260,000 metric tonnes to
about 350,000 metric tonnes, of which 70 per cent is for the
domestic market. The employment levels in the company
however decreased from 730 to 620, a direct consequence
of the horizontal nature of the merger and other
macroeconomic constraints facing Zimbabwean companies
as a whole.

The merger did not alter the structure of the Zimbabwean

cement industry since the acquiring party, Pretoria Portland
Cement Company Limited of South Africa, was not a player
in that industry before the merger. Basically, there are still
three major players involved in the production of cement in
Zimbabwe: Porthold, Lafarge Cement (formerly Circle
Cement) and the Sino-Zimbabwe Cement Company. The
merger did not change much in terms of local competition –
Porthold is still the largest player in the market, with Sino-
Zimbabwe being the smallest. Regardless of the highly
concentrated nature of the industry, no complaints of anti-
competitive practices or conduct in the industry, either of a
unilateral or coordinated nature, have been referred to the
Competition Commission for investigation since the
conclusion of the merger.

Acquisition of This transaction involved the acquisition of the operating

Zimtile by PG assets of Gestap (Private) Limited, trading as Zimtile, by PG
Merchandising Merchandising. Zimtile was a concrete roof tile
manufacturing and supply company. PG Merchandising is
part of the PG Group, which is involved in the manufacture
and supply of various building materials, including roofing
timber.

While it was noted that the transaction did not raise serious
competition concerns in the form of substantially lessening
competition in the relevant markets, it was however also
noted that Zimtile had a practice of tying its supply of roof
tiles to the consuming public to the use of its own tile-
mounting enterprise. The consumer was therefore prevented
from using other cheaper tile mounters of his/her choice. It
was therefore felt that if that practice was to be extended
after the merger to include the supply of PG Merchandising’s
108
roof timber, the consumer would be vulnerable to
exploitation.

The merger was therefore approved on condition that the

merging parties give the Competition Commission a formal
undertaking not to engage in tied or conditional selling
involving their products following the merger.

A number of stakeholders that were consulted by the

Commission during its examination of the merger had
expressed serious concerns over the transaction. The
concerns included the possibility of PG Merchandising, a
major manufacturer and distributor of roofing trusses,
controlling and monopolizing the roofing market through its
acquisition of Zimtile, a leading manufacturer and distributor
of concrete roofing tiles, and the merged entity perpetuating
Zimtile’s practice of tied and conditional selling on a wider
scale. Within three years of the implementation of the
merger, however, Turnall Fibre Cement, a competitor of
Zimtile and a major supplier of asbestos roofing sheets to
PG Merchandising, which had expressed major concerns
over the merger, submitted that its earlier fears of
monopolization and conditional selling on the part of the
merged entity had been allayed since no serious competition
concerns had arisen. Costain Zimbabwe (Pvt) Limited, a
construction company that had also expressed concerns
over the dominance to be created by the merger, submitted
that the concerns it had expressed then were largely
mitigated by the entry of new players into the roofing
material industry.

The review of the merger in 2006 also confirmed that most of

the perceived benefits of the merger were realized: (i) Zimtile
was now involved in exporting, selling 10 per cent of its
production of roofing tiles in regional markets, due to PG
leadership and a 30 per cent increase in the production of
the tiles was achieved as a direct result of the merger; (ii)
employment had remained stable; (iii) roofing tiles were now
available on all PG distribution sites nationwide instead of
just from Zimtile’s two distribution centres in the country’s
major towns of Harare and Bulawayo; and (iv) consumers
were now being offered a wider range of roofing materials
and a full roofing package, comprising roofing timber and
trusses and roofing tiles, under one roof. Zimtile’s previous
anti-competitive practice of tied and conditional selling was
also stopped, as confirmed by the Competition
109
 Commission’s undercover monitoring of the practice.

Proposed This transaction involved the proposed merger of Colcom

merger of Holdings Limited, a meat processing company, and Cattle
Colcom Company Holdings Limited, a cattle auctioning and slaughter
Holdings and company, to create a new company called CC Holdings.
Cattle Company
Holdings Colcom Holdings controlled a number of subsidiary
companies in the meat processing industry, which operated
businesses such as pig breeding and rearing, abattoirs,
meat wholesaling and retailing, production of smoked and
canned meat products and manufacture of sausages and
pies. The Cattle Company Holdings also had a number of
subsidiary companies operating in businesses such as cattle
auctioning, cattle slaughter and retailing of beef, and
processing of cattle hides to wet-blue state. Even though the
transaction affected a number of different relevant markets,
only the animal slaughter market and the meat processing
market raised serious competition concerns. Colcom
Holdings was dominant in the slaughter pigs market, with a
60 per cent share of the market, as well as in the processed
pork market, with 90 per cent of the market. Cattle Company
Holdings also dominated the slaughter cattle market.

The issue of joint dominance to be created by the merging

parties in the supply of beasts for slaughter was of particular
concern to both the competition authority and the
stakeholders consulted. Previous attempts by both merging
parties to eliminate effective competition in their respective
markets by acquiring their closest competitors were noted
with concern. The likelihood was therefore high that the
merged entity could engage in anti-competitive practices,
such as: (i) manipulating prices in the meat industry, and
unilaterally raising them to levels not related to market
forces; (ii) foreclosing the supply of cattle to competitors; and
(iii) preventing new entrants or creating barriers to entry into
the relevant markets; all to the detriment of the consumer.

The competition authority therefore made it a condition that

the merging parties should divest from the cattle
auctioneering business if the merger was to be approved.
The merging parties could not accept that condition and
decided not to proceed with the transaction.

110
 It can be assumed that by not accepting the Competition
Commission’s merger approval conditions, which were
aimed at removing the likely anti-competitive practices that
were inherent in the transaction, the merging parties were
bent on increasing their market share through engagement
in such practices. It is therefore highly likely that had the
merger been allowed to proceed without the intervention of
the Competition Commission, its likely competition concerns
could have adversely affected consumer welfare and
protection: (i) the merged entity could have unabatedly
exploited its acquired market power in the vertically
integrated market, from cattle selling to cattle slaughter to
meat processing and retailing, by excessively pricing its
goods and services to the disadvantage of the consumer; (ii)
the merged entity could also have foreclosed supplies of
cattle and processed meats to its competitors, again to the
disadvantage of the consumer; and (iii) the merged entity
could have abused its dominance of the integrated market
by engaging in exclusionary practices aimed at removing or
deterring competition to the disadvantage of the consumer.

Acquisition of This transaction involved the acquisition by Premier Services

Shashi Private Medical Investments (PSMI) of a private hospital in the town
Hospital by of Bindura, the capital of the Mashonaland Central Province
Premier of Zimbabwe. PSMI is the investment arm of the Premier
Services Service Medical Aid Society (PSMAS), Zimbabwe’s largest
Medical medical aid society in terms of members. The target firm,
Investments Shashi Private Hospital, was the only private hospital in
Bindura.

It was found that Shashi Private Hospital was failing, mainly

due to lack of adequate capital and an exodus of qualified
medical personnel from Bindura to Harare, Zimbabwe’s
capital city. The hospital’s exit from the market was therefore
imminent. Its acquisition by the better resourced PSMI would
therefore save it from closure, to the benefit of the
consumers in Bindura.

Serious concerns were however expressed over the vertical

relationship to be created between a health-care provider
and a health insurer, which could be abused by PSMAS to
the detriment of the consumer. PSMAS had a history of
directing its members to health institutions owned by PSMI
at the threat of reduced service provision if the members did
not do so. That had left members of PSMAS with no choice
111
of health-care providers.

The merger was therefore approved on condition that

PSMAS, the parent company of the acquiring firm, give an
undertaking that it would not abuse its dominant position in
the health insurance services sector by engaging in
restrictive practices of an exclusionary and/or exploitative
nature, such as directing its members to Shashi Private
Hospital and favouring Shashi Private Hospital in the
handling of its members’ claims.

The conditions placed by the Competition Commission on

the approval of this merger achieved the desired results of
checking the discriminatory behaviour of PSMAS through the
use of its PSMI-run medical centres. Soon after the
conclusion of the merger, PSMI instructed all its medical
centres throughout the country not to engage in
discriminatory practices against non-PSMAS members. A
competing medical centre in the Bindura area, Ponai Medical
Centre, which had expressed concern over the merger that
there could be delays in the processing by PSMAS of the
Centre’s medical aid claims to discourage the Centre from
accepting PSMAS members so that they would patronize
Shashi Private Hospital, confirmed that neither PSMAS nor
PSMI were engaged in such anti-competitive practices. The
conditional approval of the merger therefore enhanced
consumer choice of medical centres, which choice had been
limited by PSMAS’ anti-competitive practices.

Ponai Medical Centre did submit that the merger resulted in

a noticeable drift of consumer patronage from the Centre to
Shashi Private Hospital of about 50 per cent. That was
however because of the much improved post-merger
services offered by Shashi Private Hospital, which Ponai
Medical Centre had to match in order to remain competitive.
The same sentiments were expressed by Shamva Rural
Hospital and Trojon Mine Clinic, which operate in the same
geographic market as Shashi Private Hospital. The merger
therefore intensified competition in the relevant market,
which resulted in better and improved service to the
consumer by all the market players.

For Shashi Private Hospital, which was failing before its

acquisition by PSMI, the merger resulted in the setting up of
an X-ray facility at the institution, which was the only one in
the entire Mashonaland Central Province. A pharmaceutical
112
 drug dispensing facility was also set up at the institution such
that there is now access to medicinal drugs from within
compared to the period before the merger when patients had
to source the drugs from as far away as Harare, which is
about 90 kilometres from Bindura. Also due to economies of
scale in the production using PSMI facilities, it has been
established that the drugs are relatively cheaper at Shashi
Private Hospital than in other medical centres in the relevant
market. Laboratory services were also put in place at Shashi
Private Hospital with new machinery installed. Unlike the
situation before the merger when blood samples had to be
taken to Harare for analysis, the whole process is now being
conducted at the institution. Blood samples from Ponai
Medical Centre and Trojan Clinic are now also being
analysed at the Shashi Private Hospital laboratory services
centre. In terms of employment, the merger resulted in two
additional doctors being engaged at Shashi Private Hospital
to bring the total number of doctors to three. A number of
jobs of other medical staff were also saved as there was an
imminent retrenchment at the time of the takeover.

All the above benefited the consumer. However, of more

direct benefit to the consumer, the merger helped patients
that are members of the medical aid insurance scheme
under PSMAS in as far as the eradication of the cash up
front practice by health-care providers was concerned.
Patients at Shashi Private Hospital are no longer being
required to pay cash up front for their treatment, and this has
acted as a cost-saving buffer for complicated cases. For
example, a caesarean section would cost a patient a
shortfall of over Z$100 million even on medical aid at some
centres in Harare but at Shashi Private Hospital, where the
doctor and the anaesthetist are employees of PSMI, there is
no need to pay such cash up front.

Acquisition of The transaction involved the disposal by PG Industries

Zimboard by PG (Zimbabwe) Limited of one of its subsidiaries, Zimboard
Bison Products, which made timber products, particularly particle
(Mauritius) board, for the furniture manufacturing industry, to a new
wholly-owned subsidiary and the invitation to PG Bison
(Mauritius) Limited to take up equity in the new subsidiary.

It was noted that the merger would result in the injection by

PG Bison of foreign capital that was critical for the continued
viability of Zimboard’s operations. Discontinuation of those
113
operations would not only result in reduction of competition
in the relevant market, but would also have serious effects
on employment and export earnings.

It was however also noted that PG Bison is linked to

Steinhoff Africa Limited of South Africa, a furniture
manufacturing and distribution company that had recently
entered into a furniture making joint venture in Zimbabwe
with one of Zimbabwe’s major furniture manufacturers. The
vertical relationship to be thus created between the local
furniture manufacturing concern associated with PG Bison
through Steinhoff Africa and PG Industries’ new subsidiary to
take over the operations of Zimboard could be used to
exclude competition in the furniture manufacturing industry
through the discriminatory supply of particle board. This
could lead to higher furniture prices to the consumer.

The merger was therefore approved on condition that the

merging parties gave an undertaking that the merged entity
would not discriminate against local furniture manufacturing
companies and enterprises other than those associated with
PG Bison/Steinhoff Africa in the supply of particle board or
any of its other products used in the furniture manufacturing
industry.

Concerns over the merger that led to the imposition of the

conditions on its approval had been expressed by furniture
manufacturers, notably Bowline Furniture and J W Wilson
(Pvt) Limited. The concerns had stemmed from the fact that
PG Bison was part of the Steinhoff Group of South Africa
that already had an interest in Zimbabwe in the form of
Lifestyle Furnishers, a rising furniture manufacturer, with
fears that competitors in the downstream furniture
manufacturing industry could be denied supplies of essential
particle board and fibreboard from Zimboard in favour of
Lifestyle Furnishers. In the event of that happening,
consumers would be harmed from lack of effective
competition in the market. Two years into the merger, both
Bowline Furniture and J W Wilson confirmed that the market
for particle board and fibreboard was not foreclosed to them,
and that Lifestyle Furnishers is not receiving any unfair
favours from Zimboard in terms of raw material supplies.

The parties to the merger had a natural incentive to give

preferential treatment to companies in their group of
companies to ensure the Group’s viability and profitability.
114
 The Competition Commission’s approval condition of the
merger was therefore effective in ensuring that Zimboard
does not unfairly favour Lifestyle Furnishers, and its
associated company, against its competitors. That
maintained and protected competition in the relevant market
to the benefit of the consumer.

Most of the other perceived benefits of the merger were also

realized. Plant uptime, product quality and capacity
utilization at Zimboard were substantially increased.
Interested stakeholders confirmed that there was a
noticeable improvement in terms of quality of the products
offered by Zimboard following the merger. Production levels
also increased by about 100 per cent, resulting in more
products for both the domestic and export markets. In just a
year, Zimboard’s turnover increased from Z$23 billion to
Z$266 billion. The company’s operating profit also increased
to Z$15 billion, all thanks to its partnership with the PG Bison
Group.

Merger of Total This transaction involved the horizontal merger of Total

Zimbabwe and Zimbabwe and Mobil Oil Zimbabwe through the acquisition
Mobil Oil of Mobil Oil by Total Zimbabwe.
Zimbabwe
It was noted that there were larger players than the merging
parties in the relevant market in the likes of BP&Shell and
Caltex. The merger would therefore not reduce or lessen
substantially the degree of competition in the relevant
market. It was however also noted that stakeholder concerns
had been expressed over the fate of the business
arrangements that Mobil Oil had with other small players in
the industry, such as hospitality/supply/dealership
arrangements, whose termination as a result of the merger
would not only prejudice the affected small players but would
also have adverse effects on the consumers. The fate of
excess depots and service stations to arise from the merger
was also of great concern to stakeholders, who felt that they
should not be scrapped but should be used to maintain
competition in the industry for the benefit of the consumer.

The merger was therefore approved on condition that Total

Zimbabwe gave the competition authority a written
undertaking that: (i) it would honour all current agreements
that Mobil Oil had with other industry players, including
hospitality arrangements, supply arrangements, and
115
 dealership arrangements, to ensure the maintenance of
competition in the relevant market; and (ii) it would dispose
of all excess depots and service stations to arise from the
merger to interested entrepreneurs.

The Commission’s conditions on the approval of the merger

were accepted and executed by Total Zimbabwe. All the
hospitality, etc., agreements and arrangements between
Mobil Oil and other industry players were maintained, thus
preventing the affected players from exiting the market. The
process of disposing of the merged entity’s excess depots
and service stations is still ongoing, but over 20 service
stations countrywide have so far been disposed of to
interested entrepreneurs. The benefit to the consumer is that
the service stations are still offering an essential service to
the motoring public, and distributing a wider choice of
petroleum products than just Total/Mobil products.
Source: Competition and Tariff Commission, Zimbabwe.

6.2. Restrictive and unfair business practices

The report on the second part of the study on the socio-

economic impact of the implementation of competition policy and law in
Zimbabwe, dealing with the impact of restrictive and unfair business
practices, is still to be released but its findings are relevant. The study
found a lot of evidence confirming the adverse effects of anti-
competitive practices on consumer welfare, which are discussed using
case studies on some of the investigations undertaken by the
competition authority into the practices.

The competition authority of Zimbabwe, like most other such

authorities in developing countries, has found it extremely difficult to
prove the existence of private domestic cartels, even when the adverse
effects on consumers of such conduct are evident on the market. The
main reason has been failure by the competition authority to obtain
concrete documentary evidence of the existence and conduct of the
cartels. Zimbabwe also does not have a leniency program in place to
entice cartel members to break rank and supply the requisite evidence.
However, in one case involving unfair business practices in the dry-
cleaning and laundry services sector, the competition authority was

116
lucky in that the relevant association of dry-cleaners, the Dry Cleaning
and Laundry Employers Association of Zimbabwe, actually admitted
during the investigation’s public hearings that it set prices for its
members and periodically circulated to the members detailed price lists
on the various items of clothing and fabric that require dry-cleaning or
laundry. The Association also supplied copies of minutes of its
meetings, which gave details of workings and formulae used in arriving
at the uniform prices. The competition authority was lucky in that case to
have easily obtained the evidence proving the existence of the cartel
from the perpetrators themselves only because the Association thought
112
that what it was doing was normal business , and was not aware, at
that stage, that the practice of price fixing was in serious breach of the
country’s competition law.

The problem of collusive and cartel-like behaviour, rather than

of pure cartelization, is however prevalent in Zimbabwe. The relative
smallness of the economy breeds the creation of oligopolistic structures
113
and facilitates conscious parallelism, or tacit collusion , which lead to
price leadership. The competition authority has dealt with a number of
cases involving collusive and cartel-like behaviour in various areas,
such as the financial services sector, particularly the banking sector, the
cement industry, the legal services sector, and the medical services
sector, with limited success. One such case is outlined in Box 4.

112
That was hardly surprising since during the pre-ESAP times of price controls,
the Government of Zimbabwe actually encouraged industries to form
associations for the purposes of members agreeing on uniform prices for price
control determination.
113
As noted by R.S. Khemani and D.M. Shapiro in Glossary of Industrial
Organisation Economics and Competition Law, compiled for the OECD in 1991,
“Collusion does not necessarily have to involve an explicit agreement or
communication between firms. In oligopolistic industries, firms tend to be
interdependent in their pricing and output decisions so that the actions of each
firm impact on and result in a counter response by the other firm(s). In such
circumstances, oligopolistic firms may take their rivals’ actions into account and
coordinate their actions as if they were a cartel without an explicit or overt
agreement”.
117
 Box 4: Full-scale investigation into complaints of restrictive and
unfair business practices in the cement industry

In March 2000, the Competition Commission concluded a full-scale

investigation into complaints from the trade and the general public that
restrictive and unfair business practices in the cement industry were
leading to shortages and excessive prices of cement in the Zimbabwean
market.
At that time, four companies were involved in the production and
distribution of cement in Zimbabwe: (i) Portland Holdings Limited
(Unicem) of Bulawayo; (ii) Circle Cement Limited of Harare; (iii)
Zimbabwe Cement Company (ZimCement) of Norton; and (iv) Techniks
(Pvt) Limited of Gweru. Only Unicem and Circle Cement were involved
at all stages of cement production, from the quarrying of limestone to
the production of cement clinker to the final product. The other two
companies were more involved in blending operations. The construction
of new cement plant under a joint venture between the Industrial
Development Corporation (IDC) and a Chinese company was nearing
completion in the small Midlands town of Lalapanzi.
The cement industry was highly concentrated, with a Herfindahl-
Hirschman Index (HHI) of 4,602. The combined market share of the two
largest players in the industry, Unicem and Circle Cement, was over 90
per cent, with Unicem controlling 60 per cent of the market and Circle
Cement controlling 31 per cent.
Preliminary investigations into the complaints that had established a
prima facie case for the full-scale investigation had found circumstantial
evidence pointing to the following: (i) that there seemed to be a price-
fixing and market-sharing arrangement between Unicem and Circle
Cement; (ii) that both Unicem and Circle Cement were hindering the
construction of the new Sino/IDC cement plant in Lalapanzi by refusing
to supply cement for the construction; (iii) that Circle Cement insisted on
using its own trucking subsidiary company to transport cement bought
by its customers; (iv) that Circle Cement demanded cash up front from
its customers on placement of orders, yet it took a long time in delivering
the product; (v) that Circle Cement levied its customers to fund its
expansion project; (vi) that Unicem discriminated among its customers
in the supply of cement, a commodity then in short supply on the local
market; and (vi) that while cement was in short supply on the formal
market, large quantities were being sold on the informal market by
backyard cement dealers.
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Stakeholders consulted during the investigation included the Consumer
Council of Zimbabwe. Evidence gathered confirmed that Unicem and/or
Circle Cement were engaged in some of the alleged restrictive
practices, particularly those of an abuse of dominance nature, such as:
(i) distribution of cement in a discriminatory and unfair manner; (ii)
imposing unfair and exploitative payment conditions on their customers;
and (iii) withholding supplies of cement to the formal market in favour of
the informal market. No evidence was however found that the cement
companies were preventing or delaying the entry into the cement
industry of the Sino/IDC joint venture by withholding supplies of cement.
Also, no evidence was found that Unicem and Circle Cement were
colluding in price fixing or market sharing. What was found was that the
homogeneous nature of the product made the costs of its production
more or less similar amongst the different producers. Unicem, the
market leader, also set the price, which was followed by the other
market players without covert agreements. Regarding market sharing, it
was found that the nature of the product was also such that transport
costs effectively restricted its distribution to areas close to its production
points. Unicem operated from Bulawayo, and therefore its natural
geographic market was the Matebeland Province and the nearby
Midlands Province. Likewise, Circle Cement operated from Harare and
its natural geographic market was the Mashonaland Province and the
nearby Manicaland Province. However, during periods of acute cement
shortages in either of the cement company’s natural markets, the other
company’s products were also found to be in short supply in the market.
The Commission issued cease-and-desist orders against Unicem and
Circle Cement on the identified restrictive practices in the cement
industry.

Source: Competition and Tariff Commission, Zimbabwe.

The anti-competitive practices in the cement industry that were

identified by the competition authority’s investigation had been
adversely affecting the consumer by aggravating shortages of cement,
and raising prices of the essential commodity on the market. The
adverse effects were either direct to the consumer or through the use of
cement for industrial purposes, including construction of roads and
bridges under public projects. Cases of abuse of dominance,
monopolization, have also been prevalent in Zimbabwe.

119
 The competition impact study found that abusive practices of
firms in monopoly or dominant positions have had profound adverse
effects on Zimbabwean consumers.

Some of the abuse of dominance cases investigated by the

competition authority that illustrate this point are outlined in Boxes 5–7.

The anti-competitive practices in the coal industry had led to

serious shortages of coal for both industrial and domestic use.
Companies like Hunyani Pulp & Paper Division, in the paper packaging
industry, Zimbabwe Iron and Steel Company, in the steel making
industry, and Delta Corporation, in the beverages industry, all submitted
that the coal shortages that arose from the restrictive practices had
caused them serious loss of production on a number of occasions. The
coal-induced production problems experienced by various industries
impacted negatively on the welfare of the consumers who had to endure
the resultant shortages and high prices of the affected basic
commodities.

The consumer was directly affected by the anti-competitive

practices in the coal industry by being denied normal supplies of coal for
household heating and cooking purposes.

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 Box 5: Full-scale investigation into allegations of restrictive and
unfair business practices in the coal industry

The Commission in November 2001 concluded a full-scale investigation into

allegations of restrictive and unfair trade practices in the distribution of coal on
the Zimbabwean market. The allegations had been referred to the Commission
for investigation by a company called RAE (Pvt) Limited that had complained
that it was being unfairly prevented by Wankie Colliery Company (WCC), the
country’s sole coal producer, from entering the coal distribution industry as a
Coal Merchant.

The allegations that were brought to the attention of the Commission were that:
(i) WCC was putting barriers to entry into the coal distribution industry by not
applying its requirements for appointment as a Coal Merchant in a fair and
transparent manner; (ii) WCC was unfairly allocating coal, particularly the
popular ‘washed peas’ grade, amongst the appointed Coal Merchants; and (iii)
WCC was abusing its monopoly position in the supply of coal on the local
market by arbitrarily imposing exorbitant coal price increases.

The investigation found that WCC was indeed abusing its monopoly position in
the coal supply industry. While the Colliery had clear criteria and guidelines on
the appointment of Coal Merchants, it was allowing the bad blood created
between its management and RAE (Pvt) Limited to influence its treatment and
determination of that company’s application. The requirements placed on RAE’s
applications were more stringent than those in the guidelines and those placed
on the applications of other recently appointed Coal Merchants. WCC had also
incorporated zoning provisions in its Memorandum of Agreement with the
appointed Coal Merchants that divided the Zimbabwean market amongst the
merchants, thus allowing them to effectively operate as monopolists in their
allocated markets. It was also selling its popular ‘washed peas’ coal grade on
condition that buyers also buy the other less popular grades that they did not
want.

On the basis of its findings, the Commission ordered WCC: (i) to resume and
complete within 30 days its consideration of RAE (Pvt) Limited’s application for
appointment as a Coal Merchant on the basis of its Requirements for
Appointment as Coal Merchant already submitted to RAE (Pvt) Limited; (ii) to
remove the anti-competitive zoning provisions in its Memorandum of Agreement
with the appointed Coal Merchants; and (iii) to cease and desist from the
restrictive practice of tied and conditional selling of its coal products.

The Commission also made recommendations to the Ministry of Mines and

Energy to seriously consider establishing a sector regulator in the coal industry
to regulate the monopoly situation in that industry.

Source: Competition and Tariff Commission, Zimbabwe.

121
Box 6: Preliminary investigations into allegations of restrictive and
unfair business practices in the cigarette distribution industry

In October 2001, the Commission received a complaint from British

American Tobacco Zimbabwe (Holding) Limited (BAT Zimbabwe) that a
new entrant into the cigarette manufacturing industry, Cut Rag
Processors, was engaging in restrictive and unfair trade practices in the
distribution of its new Remington Gold cigarette brands by not printing
on its cigarette packs the correct health warning clause that had been
agreed with the Ministry of Health in 1995. The health warning clause
agreed with the Ministry reads “Smoking May Be Hazardous To Health”,
while that on Cut Rag Processors’ cigarette packs reads “Tobacco
Seriously Damages Health: Underage Consumption Prohibited”.

In response to BAT Zimbabwe’s complaint, Cut Rag Processors

counter-complained that BAT Zimbabwe was attempting to drive it from
the market by persuading retailers to remove its products from the
shelves on the strength of a written directive to Cut Rag Processors
from the Minister of Health to stop selling its cigarettes until it printed the
agreed health warning clause on its cigarette packs.

The Commission investigated BAT Zimbabwe’s allegations against Cut

Rag Processors as constituting ‘misleading advertising’, which is a
prohibited unfair business practice under the Competition Act, while Cut
Rag Processors’ allegations against BAT Zimbabwe were investigated
as constituting abuse of dominant position.

The background to the case was that a merger in 2000 of Rothmans of

Pall Mall (Zimbabwe) Limited and British American Tobacco (Zimbabwe)
Limited to form BAT Zimbabwe created a monopoly situation in the
Zimbabwean cigarette manufacturing industry. The otherwise beneficial
merger was therefore conditionally approved by the Commission subject
to the merged party disposing of its surplus cigarette making machinery
to third parties interested in entering the cigarette manufacturing
industry. The merged BAT Zimbabwe fulfilled that condition by
auctioning its surplus machinery to Cut Rag Processors who, in August
2001, used the machinery to start producing its new cigarette brand
called ‘Remington Gold’ for both the local and export markets. The entry
of Cut Rag Processors into the cigarette manufacturing industry broke
BAT Zimbabwe’s monopoly position in that industry. The industry was
122
however still highly concentrated, with an HHI of 9,224. BAT Zimbabwe
still dominated the market, with a market share of 96 per cent, while Cut
Rag Processors’ share of the market was only 2.5 per cent. Imports
accounted for the remaining 1.5 per cent of the market.

The Commission found that the health warning on Cut Rag Processors’
cigarette packs was not misleading, nor did it place Cut Rag Processors
in an unfair competitive position vis-à-vis BAT Zimbabwe. The warning
was stronger than the one agreed in 1995 between BAT Zimbabwe and
the Ministry of Health, and correctly informed the consumer of the health
consequences of smoking cigarettes. It was also noted that BAT
Zimbabwe itself was distributing on the local market imported cigarettes
with a health-warning clause similar to the one being used by Cut Rag
Processors, which had been approved for international use.

On the other hand, the Commission found that BAT Zimbabwe was
using the Ministry of Health’s directive on the health-warning clause,
and abusing its position as the major supplier of cigarettes on the local
market to persuade retailers to remove Cut Rag Processors’ cigarettes
from the shelves. That constituted attempts at predation aimed at driving
Cut Rag Processors out of the market. The predatory actions against
Cut Rag Processors were also seen as BAT Zimbabwe’s subtle
attempts at nullifying the conditions attached to the Commission’s
approval of the BAT/Rothmans merger in 2000. In that regard, it was
noted that BAT Zimbabwe had reluctantly agreed to the condition. At
that time, the Chief Executive Officer of BAT Zimbabwe had been heard
to comment that he should “not be expected to assist in the formation of
a competitor”.

Therefore, while the Commission dismissed BAT Zimbabwe’s

allegations against Cut Rag Processors, it issued a cease-and-desist
order on that company against its predatory actions against Cut Rag
Processors.

Source: Competition and Tariff Commission, Zimbabwe.

BAT Zimbabwe’s anti-competitive practices in the cigarette

distribution industry of Zimbabwe had serious implications for consumer
welfare. Had that company managed to drive Cut Rag Processors out of
the market, the consumer could have been deprived of a cigarette
brand, Remington Gold, which was gaining popularity in the local market

123
for its price and quality, and also a strong foothold in the South African
export market.

The exit of Cut Rag Processors from the market would also
have returned BAT Zimbabwe to the monopoly position it used to hold,
thus depriving the consumer of the benefits of competition.

Kadoma Textiles’ anti-competitive practices had the effect of: (i)

restricting the distribution of textile fabric offcuts to only preferred
customers; (ii) increasing the prices of the offcuts through the creation of
a distribution chain that had multiple profit mark-up levels; (iii)
preventing the distribution of the offcuts by the most economical or
efficient means; and (iv) preventing or restricting entry into the fabric
offcuts industry. The practices not only denied members of fabric-trading
cooperatives a livelihood from loss of business, but also adversely
affected the final consumers. It was submitted that at one time,
Mutinhimira Fabrics, one of Kadoma Textiles’ preferred customers, was
supplied with 3,788 kg of offcuts, including the popular ‘distorted fents’
type, while members of at least three different cooperatives were
supplied with only 14 kg of the less popular strip types. It was also
submitted that while Mutinhimira Fabrics was able to access the offcuts
at Z$260 per kilogram, the material was being sold to the cooperatives
at Z$700 per kilogram.

The final consumers of the fabric offcuts, i.e. poor workers who
buy the material to make clothes, including school uniforms, and
bedding materials for themselves and their children, were therefore
short-changed by the resultant higher prices of the otherwise cheap
waste product.

The competition authority of Zimbabwe has also investigated a

number of cases involving unfair business practices that directly harm
the consumer, such as misleading advertising, false bargains and
distribution of commodities or services above advertised price. These
can also be referred to as ‘unfair competition practices’ to distinguish
them from anti-competitive practices since they may not directly reduce
or lessen competition in a relevant market, nor fall under the strict
categories of abuse of dominance or anti-competitive agreements. Box
8 gives details of such an investigation.

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 Box 7: Full-scale investigation into allegations of restrictive and
unfair business practices in the textile fabric offcuts industry in
the Kadoma area

In September 2006, the Commission concluded a full-scale

investigation into allegations of restrictive and unfair business practices
in the textile fabric offcuts industry in the Kadoma geographic area. The
allegations, which were brought to the attention of the Commission by a
cooperative of fabric merchants through the Ministry of Special Affairs
Responsible for Anti-Corruption and Anti-Monopolies in the Office of
The President and Cabinet, were that there was an exclusive fabric
offcuts supply arrangement between Zimbabwe Spinners and Weavers
Limited, trading as Kadoma Textiles, and a company called Power Mark
(Pvt) Limited, which was owned by the Managing Director of Kadoma
Textiles, under which Power Mark had exclusive access to fabric offcuts
produced by Kadoma Textiles.

Textile fabric offcuts are by-products from the manufacture of fabric and
are regarded as waste material after failing to meet the necessary
quality and specification standards. The offcuts however have
commercial value since some of them are large enough, or can be
sewed together, to make garments or other fabric products.

Kadoma Textiles is the only company that manufactures textile fabric,

and therefore produces the fabric offcuts, in Kadoma, a town situated
about 150 kilometres west of Harare. Offcuts constitute about 0.1 per
cent of the company’s entire production of fabrics. Barriers to entry into
the textile industry are very high. The production process is very capital
intensive, with most of the capital requirements being imported at high
foreign currency cost.

The Commission’s investigation included stakeholder hearings into the

matter. It was confirmed that Kadoma Textiles did have an unwritten
arrangement with Power Mark under which all fabric offcuts produced
by Kadoma Textiles were sold exclusively to Power Mark. In turn,
Power Mark had a written agreement with another company called
Mutinhimira Fabrics under which that company acted as Power Mark’s
exclusive agent in sales to other fabric traders and to the general public
of the fabric offcuts obtained from Kadoma Textiles. That created a
chain of vertical distribution, whereby fabric offcuts would move from
125
Kadoma Textiles to Power Mark and to Mutinhimira Fabrics and finally
to other traders and the public. At each level in the distribution chain
there was a profit mark-up, which resulted in higher prices to traders
and consumers. Power Mark subsequently stopped operations but the
arrangement that it had had with Kadoma Textiles was continued with
Mutinhimira Fabrics.

A consent agreement was negotiated between the Commission and

Kadoma Textiles under which the textile manufacturer agreed to: (i)
stop the practice of selling exclusively to Mutinhimira Fabrics or to have
any other exclusive arrangement with any other enterprise or
organization; and (ii) to ensure that there was equal and unrestricted
access to textile offcuts by all interested parties through its retail shops.
However, while Kadoma Textiles opened up its supply of offcuts to
other fabric traders and the general public through its retail outlet in the
town of Kadoma, it transpired that certain of its favoured customers,
who included Mutinhimira Textiles and some of its senior employees,
continued to get preferential supplies of the offcuts from the factory mill
in terms of quantity and quality, as well as price, of the material.

The Commission therefore ordered Kadoma Textiles to ensure that

there was equal and unrestricted access to textile fabric offcuts by all
interested parties at all stages in the distribution chain from the mill to
the retail shops in a non-discriminatory manner in terms of prices,
quantities and variety.

Source: Competition and Tariff Commission, Zimbabwe.

Box 8: Preliminary investigation into suspected unfair business

practices in the cooking aids industry

In September 2005, the Commission undertook an investigation into

advertisements placed in the national newspapers by Nestlé Zimbabwe
warning the public of the appearance on the market of some relish mix
126
(cooking aids) packaged in packets purportedly originating from Nestlé.
It was indicated in the newspaper advertisements that the fake product
was of a poor quality and not suitable for human consumption. The
packets used for packaging the product, while bearing Nestlé’s Maggi
relish mix trade name, were also of a small 15 g size, instead of Nestlé
Zimbabwe’s normal 75 g packet for that product.

The Commission investigated the complaint as ‘misleading advertising’,

an unfair business practice prohibited under the Competition Act, since
the alleged conduct was aimed at misleading the consumer to believe
that the product was a genuine Nestlé product.

In its investigation, the Commission found that while the packaging in

question was indeed a Nestlé Zimbabwe packaging that was no longer
in use, having been discontinued in 2003, the contents were not a
genuine Nestlé product. It was also found that a woman had actually
been arrested by the police for producing and distributing the fake
product but had been released after paying an Admission of Guilt fine.
The woman had confessed that she produced the product at her house
in one of Harare’s high-density suburbs using her own rudimentary
recipe and ingredients, and packed them for distribution in Nestlé
Zimbabwe’s Maggi relish mix packets that she had bought in reels from
the streets. Soon after her release, the woman was rearrested for the
same offence, and was awaiting trial at the time of the Commission’s
investigation having been charged under the Brands Act.

It was also found that the practice was spreading, with some of the fake
products being distributed in other towns throughout the country.
Another woman was also arrested by the police for the practice, and
again charged under the Brands Act.

Since penalties under the Competition Act for unfair business practices
such as misleading advertising are harsher, and therefore more
deterrent, than those under the Brands Act, the Commission submitted
its findings and the evidence gathered during the investigation to the
Attorney General’s Office to strengthen the cases against the arrested
perpetrators.

Source: Competition and Tariff Commission, Zimbabwe.

127
 The misleading advertising case involving food relish mix that
was investigated by the competition authority of Zimbabwe had serious
implications for consumer protection and welfare. The investigated
practice harmed consumers not only in terms of poor quality product,
but also, more seriously, in terms of threats to human health. The fake
product was produced in an unhygienic environment using unspecified
and untested ingredients. The discarded Nestlé packaging that was
used for packing the product was also picked up from the rubbish
dumpsites.

7. Conclusion

The effects of anti-competitive business practices on developing

countries and their development prospects are serious and can, to some
extent, be quantified. This has been done through analysing the adverse
effects of anti-competitive practices on consumer welfare and
protection. The analysis has largely been based on the practical
experience of Zimbabwe, which is a typical developing country whose
experiences in the matter can be considered as representative of the
situations in most other developing countries.

From Zimbabwe’s experience, conditions placed on the

approval of mergers can effectively be used to address not only
competition concerns but also other public interest concerns, including
consumer concerns, which have long-term implications for competition.
In the case of Zimbabwe, the merger approval conditions have not only
been used to address particular competition concerns in the transaction,
to enable the consummation of otherwise beneficial mergers, but have
also been used to realize other public interest benefits, including: (i)
employment creation and/or maintenance (the Rothmans of Pall
Mall/British American Tobacco merger (to some extent), the Coca-
Cola/Cadbury-Schweppes merger, and the Zimtile/PG Merchandising
merger); (ii) continued availability of goods and services on the domestic
market (the Rothmans of Pall Mall/British American Tobacco merger,
the Coca-Cola/Cadbury-Schweppes merger, the Zimtile/PG
Merchandising merger, the Shashi Private Hospital/PSMI merger and
the Zimboard/PG Bison merger); (iii) promotion of foreign direct
investment (the Coca-Cola/Cadbury-Schweppes merger, the
Porthold/Pretoria Portland Cement merger, and the Zimboard/PG Bison
merger); (iv) indigenization and localization of economic control (the
Rothmans of Pall Mall/British American Tobacco merger, the Coca-
128
Cola/Cadbury-Schweppes merger, and the Total Zimbabwe/Mobil Oil
Zimbabwe merger). Other public interest benefits realized from the
mergers included enhanced consumer welfare through better quality
and a wider range of products (Rothmans of Pall Mall/British American
Tobacco merger, the Zimtile/PG Merchandising merger, the
Zimboard/PG Bison merger and various other mergers that have not
been outlined in this essay, such as the Innscor Appliances/WRS
merger and the Delta Beverages/Mr Juicy merger).

In the area of RBPs, the Competition Commission’s remedial

orders on the identified anti-competitive practices have also addressed
myriad competition and public interest concerns that inhibit
development. The orders have included: (i) cease-and-desist orders on
the RBPs (the Cement Distribution case, the Coal Distribution case, and
the Cigarette Distribution case); (ii) orders on the removal of entry
barriers (both of a behavioural and structural nature) (the Coal
Distribution case and the Kadoma Textiles case); and (iii) orders to
prosecute violators of provisions of the Competition Act that are
specifically aimed at protection of the consumer (the Cooking Aids
case). The Commission has also made recommendations to the
relevant Government authorities on the addressing of particular
competition concerns in other public policies with the aim of promoting
competition, and thus ultimately consumer welfare and protection, for
the facilitation of economic development.

Zimbabwe is one of the few countries in Eastern and Southern

Africa, together with Kenya, Malawi, South Africa, Tanzania and
Zambia, which has a competition law in place, and the authority to
implement the law. It has therefore been able to benefit from the
effective enforcement of competition rules.

Also shown is that there is a positive interface between

competition and consumer welfare and protection, and the analysis
undertaken has not identified any conflicts between the attainment of
competitive markets and consumer interests.

129
THE EFFECTS OF ANTI-COMPETITIVE BUSINESS PRACTICES ON
DEVELOPING COUNTRIES AND THEIR DEVELOPMENT
PROSPECTS

PART B:

Contribution of Competition to
Poverty Eradication

131
 THE ROLE OF COMPETITION LAW AND POLICY IN
ALLEVIATING POVERTY – THE CASE OF ZAMBIA

Thulasoni Kaira*

1. Introduction

Definitions of poverty are normally debatable but have

increasingly taken an economic rationalization approach where a
standard quantifiable figure of “less than a dollar a day” has been used
as the rule of the thumb. Arguments may arise as to the determination
of poverty levels in a country and the variables thereto, more so when
such determination has been done by foreign expertise. Some of the
more developed countries refuse to accept the existence of poverty in
their countries; while the lesser developed countries usually
acknowledge its existence but often tend to argue against higher
statistics thereto. This is because poverty is an embarrassing
phenomenon to acknowledge. A discourse on causes of poverty would
also produce varying answers ranging from wrong Government policies
to “laziness” of the poor. Whichever the case and whatever the answers
to the many more questions that may be posed about poverty, the
presence of some less or extreme levels of poverty is a reality in almost
each country and denial in any context and to any extent would likely
impede the efforts to address the issue. Inevitably, poverty alleviation
and/or eradication is a subject and source of wealth for a lot of other
people who study the phenomenon in less developed countries either
through research organizations or through personal individual
consultancies. For this reason, poverty is big business anywhere, more

*
The author is the Acting Executive Director of the Zambia Competition
Commission. He has worked at the Commission since 1998 and has risen
through the ranks to his current position. The author is gratefully indebted to Mr
John Preston of DFID and Emily Mburu of UNCTAD who made very insightful
and inspiring comments, and Mr George Lipimile of UNCTAD, Chilufya Sampa,
Wesley Kalapula and Kelvin Kamayoyo of the Zambia Competition Commission
for their useful comments (e-mail: zcomp@zamtel.zm (corporate);
Thulasonikaira@yahoo.com (private)).
133
so in Africa. Evidently, the way to a poor man’s mouth is through a rich
man’s hand.

Whatever the causes of poverty, the solution to alleviating them

would ordinarily have to lie in pragmatic policy interventions. Precisely,
there is a need to know who the poor are and where they are to be
found. For example, as far back as 1998, in a report for the Zambia
114
Central Statistical Office (CSO) , it was shown that 84.4 per cent of the
small-scale farmers (who are concentrated in the countryside) were
living in extreme poverty. This was at a time when the overall national
poverty levels were at 84 per cent. According to this same study, the
population living in the high-cost areas experienced a significant
increase in their poverty level between 1996 and 1998, but they
continued to have the second smallest incidence of poverty next to the
large-scale farmers. On the whole, life was good for the large-scale
farmers.

The prevalence of high poverty levels in less developed

countries such as Zambia is not only embarrassing but one that requires
serious attention in terms of feasible or result-oriented policy formulation
as well as realising the intended objectives and/or refocusing the same.
Dealing with poverty in the Third World is a mammoth task that often
appears to dog the most prudent of policies, competition policy
notwithstanding.

A casual observation shows that where there is stable political

leadership, there is likely to be sustainable macro-economic indicators,
which are a prelude to any meaningful poverty eradication efforts. There
would appear to be some indications of such positive strides in countries
within the region such as Namibia, Botswana, Mauritius, and to a
notable extent, Zambia and South Africa.

The road to poverty reduction in Zambia was ably formulated

under the auspices of the Ministry of Finance and National Planning in
the Poverty Reduction Strategy Paper –PRSP (2002). An outline
representation of its implementation is given in Appendix 1. The PRSP
considered poverty in the following ways:

114
Living Conditions in Zambia, Zambia Central Statistical Office, 1998.
134
ƒ Income perspective: A person is poor if his/her income falls below a
defined moneymetric poverty line, e.g. $1 a day.
ƒ Basic needs perspective: A person is poor if he/she falls short of the
material requirements for minimal acceptable fulfilment of human
needs. This concept goes beyond the lack of income.
ƒ Capability perspective: A person is poor if he/she lacks certain basic
capabilities to function. Such ‘functionings’ range from physical ones
such as adequate food, clothing, and shelter to more complex social
achievements such as participation in the life of the community. The
merit of the capability approach lies in its ability to reconcile the
notions of relative and absolute poverty. Relative deprivations in
incomes and material requisites can lead to absolute deprivation in
capabilities.

A truly holistic measure of poverty needs to encompass

elements from all three perspectives. The PRSP recognised that the
traditional measures (such as the headcount index) that capture only
income deficiency are simply not adequate. One such holistic measure
is the Human Poverty Index (HPI), developed by the United Nations
115
Development Programme (UNDP) . The HPI, which intends to gauge
a broader notion of ‘human poverty’ as opposed to just income poverty,
appears to be a composite index that measures deprivation in three
broad dimensions: deprivation of a long and healthy life measured by
the percentage of newborns not expected to survive to 40 years of age;
deprivation of knowledge measured by illiteracy; and deprivation in
economic provisioning measured by the percentage of the population
lacking access to health services and safe water as well as the number
of children who are moderately or severely underweight.

Even the HPI, however, does not measure all aspects of

poverty. It excludes, for instance, lack of political freedom and personal
security and the inability to participate in decision making and in the life
of the community. Notably, the Government acknowledged in the PRSP
that these facets of poverty are of course not easy to measure.

While the PRSP has been implemented in some measure, its

success is a subject of continued debate. In an attempt to contribute to
this debate, this study analyses the causes of poverty in Zambia and its

115
Human Development Report, United Nations Development Programme,
1997.
135
location, what is being done to address poverty, and how competition
law and policy has and/or can be used to address poverty, before
presenting conclusions.

In the context of competition law and policy, it is essential to

hypothesize that any poverty alleviation efforts have to create wealth
(i.e. through efficiencies), create jobs (i.e. through new entry), and/or
reduce prices (through competition). Where competition enforcement
efforts do not lead to these results, then the existence of this law should
be questioned and answers given as to why these results are not self-
evident. There is a public demand that all institutions that depend on the
taxpayer for their existence must be able to demonstrate their benefit to
the general public, more so in terms of facilitating the creation of wealth.
In the conclusion, there is an attempt to explain any observed failures of
competition law and policy to function as an effective tool for poverty
alleviation strategies.

2. Literature review on interface between competition policy

and law and poverty alleviation

It is now common knowledge in the domain of the average

competition student that the primary objective of competition policy is to
enhance consumer welfare by promoting competition. Economic
efficiency is generally enhanced by encouraging competition, and thus
one of the key links between competition policy and development has
been the role that competition policy plays in increasing economic
efficiency. The efficient use of resources is especially important in the
development context where resources are particularly scarce. Less
developed countries such as Zambia would fall into this category.

The main static effects of competition are to reduce the ability of

firms to raise prices above marginal cost and to ensure that firms
produce at the lowest possible costs. The dynamic consequences of
competition can include incentives to innovate, to imitate, and to invest
in the development of new technologies and know-how. Competition
policy reinforces economic efficiency by preventing or providing

136
remedies for market structures and business practices that weaken the
116
degree of inter-firm rivalry in markets .

While the above statements appear quite abstract, there are

some scholars and experts who have attempted to actually directly link
competition policy and law implementation efforts to poverty reduction
117
per se. For instance, Fox (2007) submitted that market tools are a
very important part of the panoply of tools needed to address world
poverty and that they should be used liberally. These market tools
include market-freeing measures that reduce prices. They also include
antitrust priority setting that targets conspiracies that raise the price of
staples, such as milk, bread, transportation and utilities, helping the poor
as well as those who are better off. Perhaps the critical challenge to the
traditional efficiency advocacy for competition law and policy was best
rephrased by Fox when she asked this pertinent question: If you were a
policy maker in a country whose principal economic problem was deep
systemic poverty, aggravated by corruption, cronyism, selective statism,
weak institutions, and often unstable democracy, what is the
foundational perspective on which you would formulate your country’s
antitrust law? In particular, would you choose a foundational principle
that trusts liberalization and free enterprise (“first model”) or would you
choose a foundational principle that centrally takes account of the
opacity, blockage and political capture of your markets, and includes
some measure of helping to empower people economically to help
themselves (“second model”). In the face of the disparities in wealth and
opportunity to the harm of some of the poorest people caused by
globalization, Fox considered the second model to be the other path
through which developing countries can use competition law to ensure
that the free market policies do not disproportionately advantage the
already advantaged in every game played. It is clear than even in the
face of liberalization, developed countries liberalized where convenient

116
OECD Conference, Investment for Development: Making it Happen,
Background Information in Support of the Global Forum on International
Investment Putting the Policy Framework for Investment into Action – a Policy
Framework for Investment: Competition Policy, 25–27 October 2005, Rio de
Janeiro, Brazil, Hosted by the Government of Brazil. Organized by the OECD
Investment Committee in partnership with the World Bank.
117
Prof Eleanor Fox, Economic Development, Poverty and Antitrust: The Other
Path, New York University Public Law and Legal Theory Working Papers, Paper
57, 2007.
137
and resisted liberalization where inconvenient. Fox attempted to link
deep systemic poverty to inequality in world trade.

Freeing the markets has been shown to hold great economic

benefits for developing and transition countries. For this, Fox is
convinced that antitrust can help, although she is mindful of the form
such an antitrust law should take.

Khemani has observed that the World Bank’s Global Economic

Prospects Report (2003) points to the pro-growth and pro-poor benefits
of competitive markets. Research conducted for the report indicates that
economies with competitive domestic markets generally tend to have
higher levels and rates of growth in per capita income. Entry of firms
plays an important role in the competitive process and such economies
also have lower rates of poverty and attract more domestic and foreign
investment. Accordingly, these research findings are considered to be
consistent with the theory that barriers to competition impede
118
innovation, growth and prosperity . While enactment of a competition
law does not necessarily result in competition, Khemani has
acknowledged that with a competition law in place, it signals to firms
and markets that certain business behaviours and commercial practices,
as defined in the law, are illegal. It confers rights and obligations on
transacting parties and provides for due process to resolve disputes and
obtain relief from anti-competitive practices. Findings from the World
Economic Forum’s The Global Competitiveness Report 2006–2007
provides further evidence of the importance of competition, and
competition law and policy, in fostering higher incomes, broad-based
markets (less dominant firms) and global competitiveness.
119
The Department for International Development (DFID) has
recognized that fair competition in markets is crucial for economic and
social development, and for reducing poverty yet anti-competitive
practices diminish the opportunities for innovation and growth, making
consumers worse off. Recognition is made (p. 38) of the contribution

118
R. S. Khemani, Competition Policy and Promotion of Investment, Economic
Growth and Poverty Alleviation in Least Developed Countries, Occasional Paper
19, the World Bank, FIAS, 2007.
119
Competition Assessment Framework – An operational guide for identifying
barriers to competition in developing countries, Department for International
Development, Zambia, January 2008.
138
that competitive markets can make to economic growth and to poverty
reduction.

The development of the micro, small and medium-sized

enterprises (MSMEs) may also appear to be one area where
competition law and policy may facilitate growth and thus reduce
120
poverty. Hallberg has observed that imperfectly competitive markets
for products produced by SMEs are certainly a distortion that creates a
bias against small firms. In addition, imperfect competition in markets for
products and services used by SMEs (for example, financial markets)
can discriminate against them. The first-best solution would be to deal
directly with the market failure (e.g. enforcing competition policy).

Hallberg argued that SME promotion is justified on the grounds

of the greater efficiency of small firms, their contribution to a more
equitable distribution of income, and their role in generating
employment. However, she was sensitive to the fact that empirical
evidence supporting these claims was very mixed. The real reason that
developing country governments should be interested in SMEs was not
because of the benefits of smallness, but because “they are there”, and
account for a large share of employment.

3. The poverty levels in Zambia

According to the latest statistics from the Zambia CSO, Zambia

has a population of about 11 million. Of this population, about 500,000
are formally employed while the rest are either children, retirees, or are
self/informally employed. A walk in the streets of Lusaka, more so in the
unplanned settlements (or “compounds” as they are commonly referred
to), shows a large proportion of the self-employed, notably women.
These are arguably the visible urban poor. Those in rural settlements
121
are considered to be arguably worse off because of the volatile nature

120
Kristin Hallberg, Small and Medium Scale Enterprises: A Framework for
Intervention, Small Enterprise Unit, Private Sector Development Department,
The World Bank, May 21, 1999.
121
On the other hand it may be argued that although materially poorer, those in
rural areas, in the absence of drought and animal disease, are better off in that
they are spared the squalor of urban settlements which are often incubation
spots for disease and societal rot.
139
of their economic lifelines, e.g. crop yield and livestock rearing may be
susceptible to drought and disease.

While poverty levels in Zambia remain unacceptably high, there

has been tremendous progress made in terms of macroeconomic
stability since 2002, which has had positive effects on the
microeconomic variables. While there is a lot to be done in terms of
developing a culture of competition in public procurement and private
business dealings, there is still a lot that has been done in terms of
realigning the economy from a State-controlled economy to a market
economy.

Table 1 shows the relatively commendable growth rates that

have been achieved since 2000, with relatively higher growth rates
registered since 2002 onwards.
Table 1: Key macro-statistics 1996–2006

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Total GDP 3,950.2 5,140.2 6,027.9 7,477.7 10,071.9 13,132.7 16,260.4 20,479.2 25,997.4 32,456.3 38,676.5
at current
prices
(ZK’billion)
Total GDP 2,328.1 2,404.9 2,360.2 2,412.7 2,499.0 2,621.3 2,707.9 2,846.5 2,999.2 3,155.9 3,343.3
at
constant
(1994)
prices
(ZK’billion)
GDP per 444,059 564,127 645,869 782,201 1,028,587 1,301,621 1,562,085 1,906,038 2,344,290 2,836,723 3,278,034
capita at
current
prices
(kwacha)
GDP per 261,707 263,935 252,886 252,384 255,213 259,806 260,138 264,930 270,450 275,830 283,365
capita at
constant
(1994)
prices
(kwacha)
GDP 6.9 3.3 –1.9 2.2 3.6 4.9 3.3 5.1 5.4 5.2 6.2
growth
rate at
constant
(1994)
prices
Source: CSO, National Accounts Statistics.

With the growth rate, the poverty levels appear to have also
diminished, as shown in Table 2:

140
Table 2: Poverty trends 1991–2006
Total/Residence 1991 1993 1996 1998 2004 2006
Zambia 70 74 69 73 68 64
Rural 88 92 82 83 78 80
Urban 49 45 46 56 53 34
Source: CSO, Living Conditions Monitoring Survey V (2006).

Despite the liberalization and commercialization of the economy

from 1991, the biggest challenge to Zambia’s efforts to reduce poverty
have been years of high inflation in the 1990s. It was not until 2002,
122
when the “New Deal” policies of the present Government were
announced, that Zambia appeared to show great strides in this regard,
which culminated in a single-digit figure in 2006. With reduced inflation,
this has seen interest rates decrease and provided affordable finance
capital to business, more so the SME segment that provides critical
supply linkages to the growing mining industry.

Graph 1 shows the inflationary trend from December 2006 to December

2007.

Graph 1: Inflation rate December 2006 to December 2007

While stabilisation of inflation has been a significant success

story of the New Deal policies – and admittedly other macro-economic

122
At his inaugural Presidential speech in January 2002, current President Levy
Mwanawasa, enunciated “New Deal” policies that he promised his government
would follow in order to change the economy and reduce poverty levels.
141
statistics show some good news – the figures would appear to still be far
from the reality on the ground in so far as extreme poverty levels are
concerned. A consideration of those that are poor shows that they are to
be found somewhere in the

- small informal businesses sector (largely street vendors and

market traders), and
- agriculture sector (largely the rural areas, where the poverty
levels are about 80 per cent).

It would be in these areas that competition law should show

itself active in ensuring that any interventions yield efficiencies that
trickle downstream.

4. Why there is still extreme poverty in Zambia

Having identified where the majority of the poor are, it is a

natural consequence to ask the question: Why do we have poverty,
especially extreme poverty? Various reasons have been advanced by
both Government and external development partners on the causes of
extreme poverty levels in Zambia. Whatever the causes, they should be
the primary mischief that competition law and policy should, directly,
and/or indirectly, be engaged actively and otherwise to resolve. Various
writings including those of the CSO and the PRSP (pp. 28–29) have
posited hypotheses as to why there is poverty in Zambia. These have
been considered as follows:

4.1. Lack of economic growth

At the time that the PRSP was being drafted and finalized (in
2002), the economic reality of Zambia was uninspiring in many ways.
This was perhaps true at the time of formulation of the PRSP, when the
economy was marginally growing. The trend has been different since
2002. For now, this has been sustained above 5 per cent and it is hoped
that policy stability shall continue. However, much of the growth is
attributed to the discovery of new mines and the increased copper
prices as a result of the high Chinese demand. Bottlenecks such as

142
HIV/AIDS continue to be a toll on the human capital although there has
been a drastic reduction.

Significant poverty reduction requires a substantial injection of

resources into poverty reduction activities and that is not possible
without growth. In its absence, there can be little increase in domestic
resources either through savings or tax revenues. Fortunately, there has
been a remarkable improvement in macroeconomic statistics from 2002,
with a reducing trend in inflation and an increasing trend in GDP. For
instance, Table 3 shows that international reserves have increased by
almost 50 per cent between 2006 and 2007, which is exceptionally good
for Zambia considering where it is coming from.

Table 3: International reserves 2006–2007

International December December End-period

reserves 2007 2006 exchange rate
(ZK billion) (ZK billion) Dec. 2007:
US$1=ZK3,845
Dec. 2006:
US$1=ZK4,407
Gross official foreign 7,251 5,334
assets
Foreign currency 4,110 3,054
reserves
SDRs holdings 38 59
IMF reserve position 3,086 2,220
Other foreign assets 17 1
Source: adapted from CSO, Zambia National Summary Data Page, External Sector
2007123.
SDRs - Special Drawing Rights; IMF - International Monetary Fund.

4.2. High inequality

Increased economic development inevitably leads to more

wealth for the wealthy and/or more money for those who are able to
exploit the opportunities. The prospects for growth as well as the
subsequent impact of any growth on poverty reduction are thwarted by a

123
Figures on http://www.zamstats.gov.zm/extern.php captured on 3 March
2008.
143
high level of inequality. Rural-urban, interprovincial, and inter-social
strata disparities are already evident from the tables presented so far.
Another crucial conclusion of empirical research has been that a
historically unequal situation might perpetuate itself unless changed by
government policy, such as asset redistribution.

It is possible for competition law and policy to influence or

facilitate measures that would be aimed at expanding the base of
entrepreneurship through modification and/or outright prohibition of anti-
competitive arrangements by dominant firms and trade associations.
The provisions for small business promotion in the Australian Trade
Practices Act 1974 provide a relevant model that countries such as
Zambia may also opt to include in their legislations.

4.3. Debt burden

Another major factor that has reduced resources for poverty

reduction is the heavy debt burden, which has exerted a significant
crowding-out effect on social expenditures. Over the years up to 2003,
debt service has on average accounted for 10 per cent of the GDP,
while all the social sectors together have accounted for only 5 per cent.
With Zambia reaching the “Highly Indebted Poor Countries” (HIPC)
benchmarks set by the International Monetary Fund (IMF), debt relief
has come as a major boost to economic activity as it has freed
resources. Overt evidence of this has been a strengthened local
currency and reduced interest rates due to less Government borrowing
from the domestic financial institutions.

Considering that not more than three years ago the country had
an external debt of over US$6 billion (ZK24 trillion), a reduction to US$1
billion (K4 trillion) lays good ground for using resources for development
rather than for debt serving.

144
Table 4: External debt 2006–2007
External debt December December End-period exchange rate
2007 2006 Dec. 2007: US$1=ZK3,845
(ZK (ZK Dec. 2006: US$1=ZK4,407
billion) billion)
Total debt 3,923 4,350
(stock)
Official debt 3,496 4,077
(stock)
Multilateral 2,392 2,336
Bilateral 1,104 1,741
Private debt, 427 273
incl.
parastatals
(stock)

Source: adapted from CSO, Zambia National Summary Data Page, External Sector
2007124.

4.4. Excessive external dependence

The absence of growth and the huge debt burden have made
external funding a necessity. External funding constituted, for instance,
89 per cent and 84 per cent, respectively, of the total spending in the
water and sanitation sectors in 1995 and 1996, compared to 31 per cent
in 1990. In 2001, 53 per cent of the national budget was expected to be
funded from outside.

By 2007, this was reduced to about 30 per cent, which is a

commendable drop within a period of five years. It is likely that the trend
is going to be downwards although such dependence may easily
fluctuate in higher realms where international factors adversely affect
the balance of payments, e.g. oil prices.

124
Ibid.
145
4.5. Other causes

Other causes include inappropriate prioritization; inadequate

social safety nets; and HIV/AIDS, and rural-urban migration. CSO
statistics show that rural-urban migration has led to congested urban
areas, overburdened social amenities and a pressure on jobs that has in
turn led to a burgeoning informal sector. Migrants formally of an
occupation in agriculture, fisheries and animal husbandry accounted for
the highest percentages in all provinces compared to other occupations.
In Eastern Province they accounted for 46 per cent followed by Luapula
at 39 per cent and Western Province with 36 per cent (CSO, 2003).

5. What needs to be done to address poverty in Zambia?

It is evident that most of the poor in Zambia are in the

agricultural sector. Thus, policy interventions in agro-related industries
would likely have the greatest impact on improving the extreme levels of
poverty. It is already a known fact that agriculture is expected to be a
key sector for the future development of the Zambian economy, together
with mining and tourism. This perhaps is true for most of sub-Saharan
Africa. Infrastructural issues normally come to mind in terms of
accessing the rural with farming implements as well as the rural farmer
accessing markets with his harvest. Transportation of agricultural inputs
and outputs is a major constraint each year, a constraint that the
unscrupulous and opportunistic trader has taken advantage of to abuse
the rural farmer. The condition of rural roads is of key importance to
farmers as is wider agricultural and regional development, especially in
trying to bring subsistence or marginally commercial farmers into the
125
cash economy . The competition law would ordinarily come in handy
to ensure that the bidding process for such critical infrastructure is not
marred by anti-competitive practices such as bid rigging or collusive
126
tendering .

125
United Nations, Zambia Country Profile, Johannesburg Earth Summit, p. 89,
2004.
126
Section 9 of the Competition and Fair Trading Act, CAP 417 of the Laws of
Zambia.
146
 In the 2006 Living Conditions Monitoring Survey (V),
households were asked to indicate which developmental projects they
would like provided or improved in their communities. The results show
that 30 per cent of the respondents desired projects related to road
infrastructure. Provision or improvement of education facilities was the
second preferred project with 18 per cent of the households followed by
health facilities with 13 per cent. The least desired projects were credit
facilities, employment issues, police/security facilities, and sanitation at
one per cent each (CSO, The Monthly, 2007).

Even the rural poor know that infrastructure development will be

a decisive factor in their socio-economic transformation. The role of
competition policy in infrastructural development is critical to its success.
The bid-rigging or collusive tendering instances would be minimized in
the wake of competition for public works. This has actually been a major
problem in capital-intensive projects such as road and bridge
construction where contractors are given a contract to do the same job,
one after the other fails to complete it. The following section shall deal
with how competition has been used in agro-related sectors to stimulate
or sustain wealth creation.

6. Using the competition law and policy to deal with poverty

A competition law has a specific sphere of operation and

objectives that may in many ways contribute to the alleviation of poverty
by ensuring that failing firms are taken over by more vibrant competitors
or new entrants. The competition law may also be used to break cartels
that constrain freedom of trade and business expansion as is shown
later in a poultry case study. Further, this law may also be used to
ensure that there is no exclusive dealing that is anti-competitive and that
leads to the failure of other market actors to penetrate markets and/or
thrive competitively. It is in, inter alia, these areas that a competition
authority would directly and/or indirectly contribute to wealth
maintenance and wealth creation, which are key to any strategy to
alleviate poverty.

The United Nations system in Zambia has recognized the role

of competition law in economic development. The Zambia Country
Profile notes that the Competition and Fair Trading Act regulates the

147
market to ensure fair trading practices and prevent market domination
127
through the Competition Commission .

The report noted that the Ministry of Commerce, Trade and

Industry has come up with initiatives to foster industrial development,
including:

ƒ promoting institutionalized consultative dialogue with the

business community
ƒ regional and multilateral agreements
ƒ bilateral agreements
ƒ competition policies – promote fair trading
ƒ investment promotion
ƒ a privatization programme
ƒ establishing export processing zones.

The PSRP does not mention promotion of competition in any

precise way. However, on its p. 62 there is an outline of Industrial
Development Programmes for Poverty Reduction, of which the basic
principles and goals were adopted from the 1994 Industrial, Commercial
128
and Trade Policy . In order to align manufacturing growth to poverty
reduction, it is necessary to ensure a strategic focus on poverty both in
the medium and long term in the manufacturing growth strategy. In this
regard, the following vision was to guide Zambia’s industrial
129
development over the next 25 years :

“To attain a dynamic, competitive, and environmentally

sustainable industrial sector in both urban and rural areas as a means of
reducing poverty through sustained economic growth and employment
creation.”

In order to attain this vision, the specific objectives for

manufacturing development were presented as to:

127
United Nations, Zambia Country Profile, Johannesburg Earth Summit,
Country Profile Series, CP2002-Zambia, p. 79, 2002.
128
Competition Policy has been given prominence in a revised Draft Industrial,
Commercial and Trade Policy, which is yet to be adopted. At the time of writing
this report, the Ministry of Commerce, Trade and Industry had set up a
committee to draft a distinct and comprehensive national competition policy.
129
Per 2004 Industrial, Commercial and Trade Policy.
148
 ƒ Promote investments in both urban and rural areas that
primarily utilize local raw materials.
ƒ Encourage output and employment expansion in the sector by
promoting growth in manufactured exports especially in areas
where Zambia has comparative advantage.
ƒ Promote growth in small- and medium-scale enterprises.
ƒ Promote an enabling environment and even the playing field
with respect to competing imports, efficient utilities in energy,
transport and telecommunications, skills training, science and
technology development, and a legal and regulatory framework
that is conducive to the growth of manufacturing.

The 2004 Industrial, Commercial and Trade Policy, however,

lacked programmes targeted at poverty reduction and did not give
concrete indications as to how to involve the poor and the
disadvantaged in manufacturing activities aimed at stimulating growth
and reducing poverty. The policy also lacks strategies for encouraging
new investments, establishing competitiveness in industry, and
economic diversification. Efforts to establish strategic export niches also
need strengthening. Cross-cutting issues of gender, the youth,
HIV/AIDS, environment, and energy will form a critical pillar to attaining
130
industrial development .

While competition policy has been tacitly mentioned in various

policy documents in Zambia, the enactment of the Competition and Fair
Trading Act in 1994 was a major milestone in having a comprehensive
law that dealt with improving the “efficiency of production and
131
distribution of goods and services” . It is a general expectation that
one of the key objectives of competition policy and law is to preserve
and promote competition as a means to ensure the efficient allocation of
resources in an economy. This preservation and promotion of
competition should result in tangible (and not hypothetical) growth,
equitable distribution, and lower prices and adequate supplies to
consumers. For a developing economy handicapped by resource

130
An acknowledgment made in the Poverty Reduction Strategy Paper, 2002.
131
One of the statements in the preamble to the Competition and Fair Trading
Act, 1994.
149
constraints, efficient allocation of resources is absolutely essential to
132
enable optimum utilization of limited resources .

Addressing the ills brought about by market power (i.e. control

of abuse of dominant position) is a likely good starting point to ensure
that the benefits of competition accrue to all the market actors. This
would thus maintain business momentum, jobs, and wealth creation,
which are cardinal to poverty alleviation.

To illustrate the contribution of competition law enforcement

efforts in alleviating poverty, the following key areas are identified where
interventions appear to have yielded positive results in Zambia:

ƒ The cotton sector

ƒ The horti- and floricultural sector
ƒ The poultry sector
ƒ The beef sector.

These sectors are deliberately chosen because they are

agricultural based, an area where 80 per cent of the poor find their
socio-economic livelihood. Therefore, efforts aimed at improving
efficiencies, equitable market benefits, grass-root growth in these
sectors are most likely to have the greatest impact in alleviation of
poverty.

6.1. Interventions in the cotton industry

The Commission was moved to intervene in a major case in the

cotton industry after an article that appeared in the Post of Saturday, 28
October 2006 entitled “Katete women farmers call for review of cotton
contract”. The complainants contemplated “to fight unfair trade
133 134
practices” in the Zambian cotton industry . The women alleged that

132
World Bank & OECD, A Framework for the Design and Implementation of
Competition Law and Policy, Washington D.C., 1999.
133
In Competition Assessment Framework – An operational guide for identifying
barriers to competition in developing countries, January 2008, at page 42, DFID
has recognized that contract farming is not necessarily either good or bad for
farmers, or for competition. The system can be mutually beneficial to the farmer
and the company purchasing the output. It can be particularly useful for higher
150
multinational companies stole their money during the 2005/2006 cotton-
marketing season by reducing the price of grade A cotton from the
135
previous ZK1,220 per kilogram to ZK850 .

The ginners through the Zambia Cotton Ginners Association

contended that the low prices were as a result of the strong kwacha
experienced in 2005. The farmers were reported to have claimed that it
was unfair for the ginners to transfer the burden of the kwacha’s
appreciation onto the local farmers, and appealed to the Government
through the Ministry of Agriculture and Cooperatives to investigate such
issues and ensure that there was equity and fairness in the business.
One of the strategies proposed for the following season was that
outgrower agreements should be entered into between farmers and
ginners and the elimination of third parties who previously appeared to
gain more than the farmers.

The Zambia Competition Commission had been closely

monitoring the developments and growth of the cotton industry through
its interventions pertaining to mergers and acquisitions as well as other
industry-related anti-competitive trade practices since 1998. The matter
of cotton contracts has been an issue that has been of concern since
the liberalization of the economy in 1991 and the sale of the then State-
owned enterprise LINTCO to Lonrho Cotton.

After considering the market dynamics, the Commission’s view

was that all economic activity has to translate into economic efficiency
and ultimately enhance the welfare of the citizens. It was observed that
despite growing cotton under contract for some time, the socio-
economic welfare of most of the contract cotton farmers did not appear
to show that the benefits accrued to farmers, whose poverty levels have
remained high.

Since the initiation of major agricultural reforms in the early

1990s, Zambian cotton production and processing has grown rapidly
and now ranks as one of the most important sources of crop income

value crops, and can provide the farmers with access to reasonable terms for
finance, technical information and markets. However, there are sometimes
situations where the terms imposed by the buyer are unnecessarily restrictive.
134
Women are reckoned to account for 51 per cent of the population in Zambia.
135
US$1 = ZK4,000.
151
among small farmers and agribusiness firms in key agricultural
136
production regions of the country . The subsequent report by the Food
Security Research Project (FSRP) under the Ministry of Agriculture,
Food and Fisheries revealed that cotton production in Zambia has
doubled since the dismantling of the cotton parastatal monopoly
LINTCO and the introduction of outgrower programmes supported by
private agribusiness firms in the mid-1990s. In spite of these
achievements, the cotton sector was still faced with the following key
challenges:

ƒ Sustaining and building upon previous success and remaining

competitive in the face of a projected long-term decline in world
cotton prices as well as shorter price cycles;

ƒ Bringing about more transparent practices and less volatility in

prices for farmers;

ƒ Maintaining agribusiness firms' provision of supply inputs and

extension of support to smallholder farmers to achieve
productivity growth while addressing ginners' and other firms'
problems with farmer loan repayment; and

ƒ Financing necessary investments in agricultural research and

extension systems to achieve long-term productivity growth in
an environment where the public sector is not likely to provide
these investments.

The Commission’s findings showed that the outgrower schemes

under the smallholders are a critical strategic link to the
merchants/ginners. Large-scale commercial farms do not necessarily
have all the land they need to meet market demand for their produce in
the rainy season. Neither would it be profitable for them to have large
areas of land lying fallow in seasons when the market demand is low. It
has thus been acknowledged that it is more economic to meet the
expansion/contraction cushion effect by utilizing the services of small-
and medium-scale farmers who have the ability to change crops quickly.
For this reason, it is a matter of course that the ginners invest heavily in

136
Key Challenges and Options Confronting Smallholder, Agribusiness and
Government Leaders in Zambia's Cotton Sector, Food Security Research
Project (FSRP) Team 2000.
152
the crop and do what is in their power to recover their cost. However,
such recoveries do not appear to be effected in an equitable manner.
The ginners ruthlessly attempt to recover all their fixed and variable
costs as well as ensure a profit even where the farmers themselves are
left with nothing. To attain this, the ginners engage court-certified bailiffs
to salvage the little chattels that the farmers may have and/or threaten
137
them with blacklisting them from future financing arrangements .

The outgrower scheme principally creates a monopsony buyer,

who determines the price at the signing of the outgrower contract. In
2006, market share estimates showed a duopolistic market of which
Dunavant held 53.49 per cent and Cargill Cotton held about 30 per cent,
with the rest fragmented amongst five on-and-off players. The two-firm
concentration ratio (CR2) was 83.49 per cent.
During the same period, the cotton farmers found their feet in
the name of the Cotton Association of Zambia (CAZ), which advised all
its member farmers not to collect inputs from ginners for the 2006/7
farming season before the price for the commodity was agreed upon.
With the Commission knocking on its door, Dunavant was reported to
have increased its 2006/7 planting price at ZK1,000/kg for grade ‘A’
seed cotton from the ZK850/kg offered during the 2005/06 marketing
season. The company further reduced the input prices to ZK36,000 per
pack from the ZK40,000 set for the previous farming season and
promised to revise the ZK1,000 price if circumstances changed
138
positively at harvesting time .

In the ensuing unfair pricing complaints in the agricultural

sector, under the headline “Peasant Farmers Call for Better 2007 Crop
Marketing Strategy” the Post reported that the National Association for
Peasant and Small-Scale Farmers of Zambia (NAPSFZ) had called on

137
The world prices for cotton are an important element in the pricing of the
seed cotton at the local level. James Tefft in his paper entitled Building on
Successes in African Agriculture; Mali’s White Revolution: Smallholder Cotton
from 1960 to 2003 has noted thus “subsidies to cotton farmers in the United
States currently depress world prices by about US$0.11 per pound. If these
subsidies were removed and the price increase transmitted to Malian farmers,
the typical farm would increase earnings”.
138
Business Post , Tuesday 14 November 2006, “Dunavant Raises 2006/2007
Pre-Planting Cotton Price”.
153
government to come up with a better crop marketing strategy for the
139
2006/7 farming season .

According to a report that was subsequently produced by the

140
Commission , the outgrower schemes have the potential to greatly
contribute to reducing poverty and contribute to the efforts being made
by Zambia as a country to achieve the Millennium Development Goals
(MDGs) but the current (lower) prices in these outgrower schemes
undermine this potential. The MDGs represent a global partnership that
has grown from the commitments and targets established at the world
summits of the 1990s. Responding to the world’s main development
challenges and to the calls of civil society, the MDGs promote poverty
reduction, education, maternal health, gender, equality, and aim at
141
combating child mortality, AIDS and other diseases .

Table 5: “Dunavant pledges not to reduce prices next year”

Dunavant assured farmers of no reductions in prices next marketing season (2006/7),

regardless of the performance of the local currency and world market situations.

Mr Richard Laurin, the company’s chairman based in Geneva Switzerland,

explained the circumstances to price changes in the previous marketing season and
apologized for a sharp decline in prices after the kwacha appreciated against the
US dollar. During meetings with farmers in Sinazongwe, Mobola and Monze, Mr
Laurin repeatedly assured the farmers that the guaranteed pre-planting price of
ZK1,000 per kilogram of seed cotton would not be reduced as was the case during
the previous marketing season.

Mr. Laurin is reported to have admitted that in 2005 Dunavant had announced that
they would buy a kilogram of seed cotton at ZK1,220 but after the kwacha
appreciated, the price of cotton came down to ZK850. The paper reported that Mr.
Laurin admitted this and said that it was his personal failure. Mr Laurin apologized to
the farmers for the situation.
Source: The Business Post, Tuesday, 12 December 2006.

139
Saturday Post of 18 November 2006.
140
Zambia Competition Commission, Report on Competition & Fair Trading
regarding Outgrower Cotton Farmers, August 2007 (Case Officer – Willard
Mwemba).
141
United Nations Development Programme; Millennium Development Goals.
http://www.undp.org/mdg/
154
 The Commission reviewed the imbalance of power in the
negotiation of prices of cotton in outgrower schemes. Multinational
entities such as Dunavant and Cargill Cotton were actually
disproportionately benefiting, compared to the farmers, whose economic
gains were stagnant against the huge profits that the merchants were
making. Not surprisingly, the cotton association and Dunavant could
well afford to offer ZK 1,120 per kilogram of grade seed cotton this
142
marketing season . The offer price of ZK1,120 included an additional
ZK50 per kilogram premium for deliveries up to 14 July 2007.

In the same period, Cargill Cotton also took steps to correct its
pricing system. The input prices for the 2006 planting season were
reduced by 28 per cent year on year making Cargill’s complete input
package cheaper than that of any other ginner. This dramatic reduction
in input costs was part of a conscious effort by Cargill Cotton to offset
the impact of low global cotton prices on the incomes of small-scale
Zambian farmers. In line with its previously stated strategy to pay a
competitive seed cotton price, Cargill Cotton announced a buying price
for the 2007 crop of ZK1,120/kg, an increase of 32 per cent over the
previous year. Considering the reduced input cost, Cargill Cotton
reported that their farmers were to enjoy the largest increase in net
revenue in comparison to other cotton farmers throughout the country.
This was to give the average farmer an additional net income of 75 per
143
cent compared to the previous year . It was a desirable outcome that
the ginners were finally using higher promised returns to the farmers as
a competitive advantage.

What began as an ordinary newspaper article and an

investigation by the Commission ended up being one of the biggest
poverty alleviation stories in the Zambian agricultural sector, with the
cotton association calling on the farmers it had previously dissuaded to
144
encourage them to grow cotton . Cargill Cotton had become a
founding member of the Zambia Cotton Outgrower Association
(ZCOPA), which aimed to provide an industry-wide forum to promote

142
Post, Friday, 11 May 2007: “CAZ, Dunavant sign agreement”.
143
The Post, 13 June 2007: “Cargill Cotton Information Bulletin”.
144
The Post, Wednesday, 27 June 2007 “Continue growing Cotton, CAZ
appeals to farmers”.

155
cotton production and enforce sanctity of contract with a stated goal to
eradicate the practice of side-marketing.

In its report, the Commission made recommendations that

included continuous monitoring of this very dynamic industry by bringing
to the attention of the relevant stakeholders that include, inter alia, the
Cotton Association of Zambia, the Government, the Ginners Association
of Zambia and the National Association for Peasant and Small-Scale
Farmers of Zambia, the following advisory opinions: the ginners and the
smallholders should come up with a mechanism for sharing the risks
that may arise due to the appreciation of the kwacha, the fall in the
world prices and other production risks involved in the cotton industry.

In addition, better access by farmers to information on market

trends, including the pre-planting price for cotton. Such information
could be provided by the CSO and the Ministry of Agriculture and
Cooperatives, thus making it easily accessible. Efforts are also required
to improve farmers' marketing skills, coupled with the cultivation of long-
term relations between the farmers and the ginners. This could be
achieved by holding seminars, workshops and field days whereby
farmer associations (such as CAZ) and ginners associations will
interact.

Furthermore, it was also recommended that the existing cotton

cooperatives, such as the Cotton Development Trust, be strengthened.
If the objectives of the cooperatives were well formulated, they could
benefit both the farmer and the ginners. The following objectives were
recommended for the cooperatives:

(i) To encourage members to be thrifty and to establish a fund

from which could be given loans for agricultural purposes.
(ii) To encourage farmers to adopt modern farming methods.
(iii) To help farmer members market their produce at lucrative
prices as well as helping them process their produce if
necessary.
(iv) To supply members with agricultural equipment and seeds.

At the time of writing this report, all the parties had reached
what appeared to be a “win-win” arrangement where principally the
ginners were not to pass on their losses to the farmers, notably the
smallholder “peasant” farmers. The Commission has continued to
156
monitor the situation through information links with the cotton
association and the Zambia National Farmers Union. It is likely that with
the formation of distinctive formal associations to represent their
interests, the cotton farmers will have a better platform through which to
express and/or channel their grievances.

6.2. Horticultural sector

At the point of merger and acquisition notification, the mandated

competition authority is given an opportunity to influence the structure of
markets through structural undertakings and/or influence behaviour of
market players through behavioural undertakings aimed at ensuring that
a particular player does not abuse its market power vis-à-vis other
players, notably smaller players. This inherently assists in assuring that
small businesses can exist in their niche markets and that they are not
unduly encumbered when trying to access markets.

On 6 December 2004, Agriflora Limited (Agriflora) and

145
Chalimbana Fresh Produce Limited (Chalimbana) (herewith referred
to as “the parties”) submitted a joint notification to the Zambia
Competition Commission for the transfer of controlling ownership of
Agriflora to Chalimbana. At the time, Agriflora was highly in debt and on
the verge of being declared bankrupt by the creditors. Its expatriate
Chief Executive Officer even fled the country, leaving the company in a
146
serious limbo .

145
At the time, Chalimbana was reported to be a start-up company with the
major shareholder being Plantation and General Investments Plc (UK) (P&G)
and Arthur Gregory Barnes of Khal Amazi Farm of Lusaka as the minority
shareholder. P&G is majority owner of Khal Amazi Limited - a rose-growing farm
in Lusaka. In Malawi, P&G is involved in horticultural, floricultural products, dairy
farming, wheat and maize farming. Chalimbana shall engage in similar activities
in Zambia.
146
Agriflora Limited started operating in 1994. By 2001/2002 it had 22 hectares
of roses and 1,000 hectares of vegetables. Agriflora had processing factories
with 7000 tonnes capacity of fresh produce per year, drip irrigation systems and
a refrigerated transport fleet. It had an outgrower scheme that had over 3,000
workers. There are about 25 players in the market. Agriflora had the largest
market share of 80 per cent while the second was York Farm. The market share
for the other competitors including York Farm was 20 per cent. 60 per cent of
157
 Agriflora was mainly involved in the growing of fresh vegetables
and flowers for the export market. In the case of The Acquisition of the
147
Assets of Agriflora by Chalimbana Fresh Produce Limited , the
Commission authorized the takeover of the assets of Agriflora by
Chalimbana on the basis of assurances from Chalimbana that the
takeover was envisaged to provide the continuity of the viable and
lucrative business of Agriflora, with supply linkages to the small to
medium scale farmers. Agriflora needed to be revitalized in order to
revamp the business and assure the continuity of the outgrower
scheme. Therefore, the takeover was necessary to keep the vibrant
business going, with the assurance that:

“the transaction will create 3000 jobs; contribute to Government

revenue through taxes; contribute to national economic development
through foreign exchange in export earnings; and put Zambia on the
world map through horticultural and floricultural produce from Zambia
selling on the international market”.

The takeover has contributed to a thriving flori- and horticultural

export market that is somehow managing to compete with the regional
market leaders, South Africa and Zimbabwe. The resuscitation of
operations and repositioning of Agriflora after the takeover authorization
by the Commission has seen the enterprise continue to forge linkages
with small-scale farmers in the horti- and floricultural industries.
148
The role of Agriflora in the sector is perhaps exemplified
through the USAID captioned story in Table 6:

the produce for Agriflora was vegetables while flowers accounted for 40 per cent
of Agriflora’s exports.
147
Zambia Competition Commission, Staff Paper No. 211, February 2005.
148
The Multilateral Investment Guarantee Agency (MIGA) of the World Bank
issued a US$3.6 million guarantee to the Industrial Development Corporation of
South Africa Limited (IDC), of South Africa, to cover its US$4 million equity
investment in Zambia's Agriflora, the second largest food production company in
the country, Keith Nuthall, June 2003, http://www.just-
food.com/article.aspx?ID=90513.
158
 Table 6: Irrigation technology: small-scale farmer enters international
export business

On retirement from the Zambian Civil Service in 1988, Mike Phiri settled on his
four-hectare smallholding just 60 kilometres from the capital, Lusaka. Since any
type of pension is negligible in Zambia, Mike cultivated his land during the rainy
season producing enough corn to feed his family. Occasionally, he grew
vegetables for subsistence. He lived simply, well aware that given the low local
maize prices, he would be losing money if he tried to grow maize or other crops
for the local market. In March 2000, everything changed. Under a new loan
scheme, the Zambia Agribusiness Technical Assistance Centre (ZATAC) would
supply irrigation equipment for the production of baby corn, runner beans, and
mangetout peas. The vegetables would be contracted for sale to the
country's largest horticultural exporter, Agriflora Ltd. The firm, near the
Lusaka International Airport, had over the years exported a wide range of
fresh vegetables to Europe. Interested in expanding production beyond its
own farms, Agriflora saw the attractiveness of working with various
smallholders in the vicinity of its pack house located just outside the
airport. This would only be possible if the small producers overcame the
constraint of rain-dependent agriculture and were organized by some
other organization to act as a group. At ZATAC's request, CLUSA, with their
group-mobilizing techniques, began working with the small farmers.

Within three months, Mike's drip irrigation equipment was installed by ZATAC
while Agriflora Ltd. installed a small refrigeration warehouse next to his house.
By September 2000, nine months after his irrigation equipment was installed,
Mike had delivered 1.3 tons of fresh vegetables to Agriflora and received
US$1,500 payment for the produce. Over the next 12 months Mike's net income
target was US$4,000. Mike remarked, "Things have moved very fast. We are
very happy with ZATAC. Both my neighbours and I have been occupying this
land for over a decade. We did not know that we would one day be in the
international export business. The vision of ZATAC and Agriflora in mounting
this project is simply phenomenal. We have now broken clear of the vagaries of
seasonal agriculture. We grow crops all year round for the European market and
we receive an all year round income".

Source: USAID, Human Resources Development Project (HRDP) Newsletter

April/May 2000 – Success Stories
http://www.usaid.gov/regions/afr/success_stories/zambia.html

A further success story with linkages to the horticultural sector

was the Commission authorization of the takeover of the assets of the
previously State-owned and privatized Sunripe Products Limited, whose
159
primary business was food processing and canning. Following
numerous bidders and a blockage by the Commission to have the
assets relocated to South Africa, the Commission eventually authorized
the takeover of the assets by Fresh Pikt Limited, which has since
resuscitated the plant and restored linkages with the smallholder
farmers. The company produces 18 different canned products which
include baked beans, mixed beans, pineapple chunks, tomato puree,
149
tomato and onion mix and whole peeled tomatoes . Table 7 shows the
current economic lifeline role that Fresh Pikt is playing in the economy,
more so as it relates to small-scale farmers:

Table 7: Fresh Pikt out to fight poverty in rural areas

Most rural communities in Zambia are hard-working, a trait honed out of

decades of subsistence existence on the land where survival has been a
function of production from the land…One of the companies that are turning
around this gloomy scenario, at least on the current scale is Fresh Pikt.

In an effort to encourage citrus fruit production, Fresh Pikt Limited has just
signed a contract with farmers in Mwinilunga for the supply of 40 tonnes of
pineapples to its Lusaka plant on a weekly basis. The development would
enable more than 1,000 farmers in the area to expand both the pineapple
production and earnings from their produce.

Choice Nuts Zambia Limited, a sister company to Fresh Pikt, has set up a
network to access the abundant groundnuts from Eastern Province which it
exports after treatment at its Lusaka plant. The company will this season
export over 2,000 tonnes of raw dried groundnuts worth approximately US$2
million.

Both Fresh Pikt and Choice Nuts are companies that have shown a practical
approach to a quick way of tackling poverty in the rural areas.

Source: Times of Zambia, Wednesday, 6 February 2008.

149
Times of Zambia, Monday, 3 March 2008.
160
6.3. Poultry sector

The poultry sector is one of the largest employers in the country

and is highly fragmented downstream, with a large informal sector
thereof. The industry has increased from 16 million birds in 2000 to
about 26 million in 2007, with enquiries and orders for mainly processed
eggs and hatching eggs coming from as far away as the Comoros
Islands, the Democratic Republic of Congo, Angola, Tanzania and
150
Uganda among other countries in the region .

Interventions by the Commission have assisted in creating,

maintaining, and sustaining competition and employment. This has been
done in several ways as explained in the following paragraphs.

During a series of meetings involving management of the then

largest day-old chick supplier in Zambia, Hybrid Poultry Farm Zambia
Limited (Hybrid Poultry), and the Zambia Association of Manufacturers
(ZAM) with the Zambia Competition Commission in the second quarter
of 1999, it was revealed that Hybrid Poultry and Galaunia Holdings
Limited (Galaunia) had earlier agreed to effect a sale of a farm
(Mariandale Farm) and a poultry processing factory thereon to Galaunia,
subject to agreed exclusive dealing clauses and conditions (Galaunia
was the largest customer for Hybrid Poultry and specialised in raising
day-old chicks to table broilers). Upon this discovery, the Commission
advised the parties to notify the said exclusive agreements for
151
assessment under Section 7 of the Competition and Fair Trading Act.
152
In January 2000 Hybrid Poultry notified the said agreements .

Through this agreement Hybrid Poultry was to sell to Galaunia

its Mariandale Farms comprising fixtures and fittings, stock-in-trade

150
Times of Zambia, 14 November 2007, quoting Matthews Ngosa, Chairman of
the Poultry Association of Zambia. See also quoted at
http://www.thepoultrysite.com/poultrynews/13331/zambian-poultry-attracts-
world-market.
151
Which states that: “Any category of agreements, decisions and concerted
practices which have as their object the prevention, restriction or distortion of
competition to an appreciable extent in Zambia or in any substantial part of it are
declared anti-competitive trade practices and are hereby prohibited”.
152
Zambia Competition Commission, Annual Report, 2000.
161
(chickens) and the goodwill of the business and the premises subject to
anti-competitive terms. The Commission was concerned that Hybrid
Poultry required Galaunia to only purchase day-old chicks from itself.
Further, Galaunia was also required to offer Hybrid Poultry right of first
refusal should it intend to resell Mariandale Farm. Galaunia was also not
allowed to raise any type of poultry at the farm, apart from broiler
chickens, including the provision not to go into the business of a chicken
hatchery. The parties also agreed that Galaunia was to be accorded the
right of first refusal in the event that Hybrid Poultry sold some of its
shares. In return, Hybrid Poultry was given the first right of refusal to
participate in an outgrower scheme in the event that Galaunia came up
with one. These are highlighted in Table 8 below:

Table 8: Salient clauses from the sale and purchase agreement between
Hybrid Poultry Farms Limited (HPF) and Galaunia Holdings Limited:
Clause 11: The consideration, selling price, Hybrid Poultry property was
US$250,000 for the goodwill, chattels, chickens and premises, payable on
completion.
Clause 13: That Galaunia would not raise any type of poultry on Mariandale Farm
other than broiler chickens.
Clause 14: That Galaunia and any subsidiary or associate company would not
enter into the business of a chicken hatchery or breeder broiler production in
Zambia.
Clause 15: That Galaunia would only procure its day-old chick requirements
exclusively from Hybrid Poultry.
Clause 16: That Galaunia shall purchase DOC from Hybrid Poultry at short notice.
Clause 17: That Galaunia shall have the exclusive right to collect all chicken
manure from HPF chicken houses located in the Lusaka-Chisamba area at a cost
of US$0.30 per 90-kg bag.
Clause 19: That Galaunia should give Hybrid Poultry the right to first refusal to
purchase, within five years of completion date, should it decide to sell the
business.
Clause 21: Should Galaunia develop and implement an outgrower scheme to
grow broiler chickens, Hybrid Poultry shall be given the first refusal to participate
Source: The Sale and Purchase Agreement between Hybrid Poultry Farms Limited and Galaunia
Farms Limited.

In another agreement pertaining to the formerly Hybrid Poultry

owned Poultry Processing Company Limited that was purchased by
Galaunia, it contained restrictive clauses. Principally, in the sale of the
poultry factory, the parties agreed that they would keep out of each
other’s business, i.e. that Hybrid Poultry would not set up a poultry

162
processing factory and that in the event that Galaunia intended to sell
the factory, Hybrid Poultry was to be accorded the right of first refusal.
The poultry processing factory was viewed as a third-stage downstream
operation after the Hybrid Poultry hatchery and the broiler farms under
Galaunia. This was a vertically integrated and restrictive arrangement
that had been a complete foreclosure of the Zambian poultry market.
These are highlighted in Table 9 below:

Table 9: Restrictive clauses in the sale and purchase agreement of the

poultry processing company

Clause 11: The purchaser agrees that should it within five years of the completion
date wish to dispose of the business then it will give the Vendor right of first refusal
to purchase the Business at cost plus the value of any improvements that the
purchaser has made to the Business such value to be mutually agreed failing which
to be assessed by a registered valuation surveyor mutually appointed by the head
of the Valuation Surveyors Institute of Zambia. Should the Vendor not exercise its
right to purchase the Business within 30 days then the Purchaser will be at liberty
to dispose of the Business to any other person.

Clause 12: In the event that the Management buy-out (MBO) wishes to sell its
shares to the vendor then the Purchaser shall be accorded the right of first refusal
to purchase the shares from the MBO. Should the Purchaser not exercise its rights
to purchase the shares within 30 days then the MBO will be at liberty to sell the
shares to any other party.

Clause 13: The Vendor hereby agrees that it and its subsidiaries and associates
will not at any time in the future in Zambia enter into the business of processing or
selling of frozen chickens of any type except in collaboration with the Purchaser as
mutually agreed in writing.

(Source: The Sale and Purchase Agreement.)

In defence of the agreements, Hybrid Poultry argued before the

Commission that the terms of the agreement did not restrain competition
nor did they have any adverse effect on trade or the economy in
general. The condition for Galaunia to buy day-old chicks exclusively
from Hybrid Poultry was arguably there in order to “protect” the chicken
industry as a whole in the country. According to Hybrid Poultry, the
nature of the product was such that genetically, the day-old chicks of
two or more different breeds could not be put together at the same
chicken run. This was purportedly for fear of an outbreak of disease.
163
While this was scientifically arguable, the exclusive dealing effectively
excluded competition as Galaunia could not buy day-old chicks from
Hybrid Poultry’s only formidable competitor at the time, Tamba Chicks.

At the time, it was evident from the Commission's analysis that

Hybrid Poultry was a dominant firm both in the quantitative and in the
qualitative sense in the relevant product market.

6.3.1. Market shares for day-old chick suppliers

Hybrid Poultry – 60 per cent
Tamba Chicks – 30 per cent
Others – 10 per cent

6.3.2. Major buyers

Table 10 shows the major buyers of day-old chicks in 1999. The

position of Galaunia was significantly higher than that of its nearest rival,
who trailed at 10,000 chicks per week:

Table 10: Major buyers of day-old chicks - 1999

Company Chicks per week %

Galaunia (Diamondale & 42,000 24%
Mariandale)
Eureka 10,000 6%
Jonken 5,000 3%
Mapepe 5,000 3%
Others (11,000 farmers) 115,500 65%
Total 177,200
Source: ZCC Assessment Report on the proposed takeover of Tamba Chicks
by Hybrid Poultry Farms Limited.

164
 Galaunia was by far the most important customer for day-old
chicks in the country. Hybrid Poultry’s exclusive deal was a source of its
dominance to which Galaunia was tied. These agreements led to higher
prices of day-old chicks for Galaunia, and affected the operations of
Tamba Chicks and effectively constrained entry both upstream and
downstream.

6.3.3. Effects of the agreements

The parties seemed to have taken advantage of their dominant

market positions upstream and downstream where either party was
dominant. The parties were, both by motive and concerted practices,
excluding competition both in the day-old chicks, table birds (broiler) and
broiler chickens markets.

The signing of these exclusive supply arrangements adversely

affected the operations of the other only notable day-old chicks supplier
at the time, Tamba Chicks Limited. The problem went so far as to have
Tamba Chicks facing liquidity problems and its owner decided to sell the
company to avert actual liquidation. During the same investigations, the
Commission discovered that Hybrid Poultry had used its economic
power to facilitate a loan for Tamba Chicks, which facilitation compelled
Tamba Chicks to sign a “Right of First Refusal” with Hybrid Poultry in
the event that Tamba Chicks was put up for sale. The Commission
nullified these agreements under Sections 7 and 9 of the Competition
and Fair Trading Act. When Tamba Chicks was finally advertised for
sale, the Commission blocked the bid by Hybrid Poultry and instead
allowed a new entrant, Ross Breeders, who is still around and providing
the relevant market checks and balances in the industry that are
desirous to the Commission.

The result of the competition intervention is that the general

downstream industry has grown to more than ten notable players, with
almost a new entrant every year. Ross Breeders has been able to
sustain and in many ways outcompete Hybrid Poultry in the day-old
chicks segment. Ross Breeders is reckoned to have about 50 per cent
market share now, with Hybrid Poultry trailing at about 40 per cent.

Currently, the poultry industry is the largest livestock industry in

Zambia and is very competitive. The sector has seen an inflow of high
investment and the market players in the industry have benefited from
165
rapid returns on their investments. With barriers to entry such as that
instigated by Hybrid Poultry in the 1990s gone, there are reasonably low
start-up capital costs especially in the broiler segment with production
cycles of 6 to 7 weeks. The numbers of broiler chicks marketed have
increased from 16 million birds in 2000 to about 26 million in 2007. As
for the pullets, 1.7 million pullet layer chicks are marketed per annum
and populations of pullet layers inlay stands at 1.25 million per
153
annum . A phenomenal growth of 30 per cent has been experienced
since liberalization, and growth is envisaged to reach 50 per cent in the
next two years due to increasing demand from international markets.

This segment has seen intensive investment on aggregate and

has allowed for generation of income in the economy standing at
154
Zambian Kwacha 195.7 billion (about US$ 51,578,947) .
Approximately 24.4 million broiler chickens are produced per annum –
15.86 million and 8.54 million in the formal and informal sectors,
respectively. Of the broilers sold at wet markets, 65 per cent are
155
dressed while 35 per cent are live chickens . Large producers of
chickens are promoting broiler contracts in collaboration with small-
scale farmers to meet the demand for processed chickens on the
market and these have helped this sector to grow at an astonishing rate
156
with both formal and informal providers .

Since 1999, the market has seen a number of entrants in the

day-old chicks sector. Hybrid Poultry has repositioned itself over the
years following the entry of a vigorous competitor, Ross Breeders, who
took over the assets of Tamba Chicks. Both entities claim to have a
larger market share than the other. The figures in Table 11 are based on
a survey by the Commission as well as sales figures registered by the
Poultry Association of Zambia:

153
Poultry Association of Zambia, 2008.
154
US$1=ZK3,800.
155
Ibid., 2007.
156
Zambia Competition Commission, A Study of Competition in the beef, poultry
and dairy retail sector in Zambia (financed by the International Development
Research Centre (IDRC) of Canada), January 2007.
166
Table 11: Day-old chicks market shares - 2007

Producer Brand name Market share

Hybrid Cobb/Bovans 40%
Ross Breeders Ross 35%
Bokomo Ross/Lonhman 20%
Panda Hubbarb 5%
Total 100%
Source: Figures estimated from Zambia Competition Commission Survey 2006,PAZ 2007
report as well as findings from survey157.

As regards the processed chicken segment, the competition is as shown

in Table 12:
Table 12: Market shares for processed chicken brands

Producer Brand name Market share

Hybrid Verino 25%
Galaun Holdings Crest 20%
Zambeef Zamchick 15%
Eureka Chickens Eureka 10%
Savannah Chickens Savannah 5%
Zambezi Nkuku Zambezi Nkuku 5%
Informal sector Traditional 20%
Total 100%
Source: Figures estimated from Zambia Competition Commission Survey 2006,PAZ 2007
report as well as findings from survey158.

6.4. Beef sector

Cattle ranching is one of the most lucrative rural businesses and

occupations in most of the countryside, notably in Southern and
Western provinces. It is thus a source of livelihood for most of the rural
dwellers that constitute part of the 80 per cent of the population that falls
into the poverty bracket. Besides the natural hazards of animal disease
outbreaks, most of the traditional cattle owners are vulnerable to
commercial traders, abattoirs, and processors. The market is

157
Ibid.
158
Ibid.
167
predominantly under the control of one dominant firm, Zambeef. As
observed in a recent Commission report, the Zambian beef sector has
large economic potential for the country. Not only has it been a major
source of employment in the formal context, but it has also been a
159
source of income for the informal sector .

The socio-economic role of cattle in the traditional sector dates

back to the pre-colonial days. In this sector cattle has multiple roles.
Cattle ownership has always been regarded as a symbol of family
wealth. It is known from Zambian history that tribes such as Tongas
(Southern Province), Lozis (Western Province), Chewas (Eastern
Province), Namwangas and Mambwes (Northern Province) were
traditional cattle keepers. As far back as 1993, it was estimated that
about 70 per cent of the Zambian cattle is found in this sector, which
160
underlines its importance . The areas where such cattle is found
actually have registered high poverty levels. Table 13 shows the areas.

Table 13: Overall and extreme poverty by residence and province, Zambia, 1998

Residence
Overall poverty Extreme poverty
Rural 83 70
Urban 56 36
Central Province 77 63
Copperbelt Province 65 47
Eastern Province 80 66
Luapula Province 81 69
Lusaka Province 52 34
Northern Province 81 67
North-western Province 76 63
Southern Province 76 60
Western Province 89 78
Source: CSO: Living Conditions in Zambia, 1998.

Table 13 shows that there are higher levels of poverty in the

provinces where traditional cattle ranching is practiced. This is of

159
Ibid.
160
Chindo Hicks, The role of Zambian cattle populations in socio-economic
development, Royal Veterinary and Agricultural University, Department of
Animal Science and Animal Health, Bülowsvej 13, 1870 Frederiksberg C.
Denmark.
168
concern when taking into account that the growth that entities such as
Zambeef have achieved from buying cattle from the same provinces,
notably in Southern Province and Western Province, where poverty
161
levels are relatively higher . Furthermore, the market shares in
processed beef show the imbalance of economic power even amongst
the market players, as shown in Table 14.

Table 14: Market shares in the beef sector

Beef producer Brand name Ownership status

Market
share
Zambeef Zambeef Publicly owned 65%
Galaun Holdings Luscold Privately owned 10%
Northern Zambezi Pama Privately owned 7%
Traders
Dar Farms King Quality Privately owned 3%
Best Beef Company Best Beef Privately owned 3%
Savannah Beef Savannah Privately owned 2%
Others Traditional Privately owned 10%
Total 100%
Source: Figures estimated from Zambia Competition Commission Survey 2006 and from
primary data collected.

As shown in Graph 2, the prices of the various beef products

have actually continued to rocket since 1993, and have made Zambeef
in particular one of the most prosperous enterprises in the Zambian
162
economy . The same cannot be said of the “Others” in the chain.

161
Which posted a 26 per cent growth in turnover in 2006 with US$55 million,
with a net profit of US$8 million (which increased by 78 per cent from 2005). For
Zambian-owned companies, this is in the blue-chip category. Source: Zambeef
Annual Report 2006.
162
Zambeef Products PLC Group is a major agribusiness whose core activity is
the production, processing, distribution and retailing of beef, chickens, eggs and
dairy products through its own retailing network throughout Zambia and Nigeria.
It has since expanded into Ghana (trading under the name “Master Meats”). The
conglomerate controls key abattoirs in major cow-belts. It slaughters 60,000
cattle per annum and produces 12,000 grain-fed cattle per annum from its
feedlots. It had a turnover of US$56 million (ZK223 billion) in 2006 – 2006
Annual Report.
169
 Graph 2: Prices of selected beef products 1993 to 2007

Prices for Selected Beef Products 1993-2007

30000

25000

20000 Beef Sausages

Brisket
Prices

15000 Fillet Steak

Minced Meat
10000 Mixed Cut

5000

0
93

94

95
96

97

98
99

00

01
02

03

04

05
06
07
19

19
19

19

19

19
19

20

20
20

20

20
20

20
20
Years

Source: Central Statistical Office.

Thus, the Commission has been vigilant in its consideration of

matters in the sector driven by Zambeef. In the assessment of The
proposed takeover of Rumcortin Meat Processors by Zambeef Products
163
PLC , the Commission was concerned with allegations that Zambeef’s
strategic objective in taking over the Rumcortin abattoir, which was the
only usable abattoir in the Southern and surrounding Western Province
areas, was to have the abattoir certified as the only one that meets the
national and/or international Sanitary and Phytosanitary (SPS)
standards or other such specifications. In effect, this was feared to lead
to a situation where all the other competing abattoirs in Livingstone and
surrounding areas would be closed, especially during animal disease
outbreaks. Such a situation would lead to entrenching Zambeef’s
monopoly position in the major cattle belt in the country. Similar
allegations were made during cattle disease outbreaks in Mongu
(Western Provincial capital) in the late 1990s and in Namwala (key
cattle area in Southern Province) and surrounding areas in 2004/2005.

163
Zambia Competition Commission, Staff Paper No. 267.
170
Zambeef was alleged then to have monopolized the cattle trade by
insisting that all cattle slaughtered at the only abattoir in the area (which
it controlled) had to be sold to them. The carcasses were then
transported by Zambeef in refrigerated trucks for processing. Other
commercial competitors would also be put in a difficult position to deal
with a vertically integrated operator who had first access to the best
cattle brought for slaughter.

It was with this background in mind that the Commission

required undertakings from Zambeef to address the competition and
unfair trading concerns. While it was understood that Rumcortin was not
operational, the Commission was aware of both the financial, technical
and vertically aligned abilities of the Zambeef conglomerate to turn the
company around and make it viable. The Commission supported efforts
made to resuscitate a failing firm while at the same time it was desirous
to ensure that the resuscitated firm was not used to prevent, restrict or
distort competition leading to the exit of other market players and/or
create a barrier to entry for prospective players. The long-term effects of
the latter scenario were likely to lead to market stagnation and the
desired holistic investment results not being attainable.

Further, through the competition law’s objective of expanding

the base of entrepreneurship and ensuring that no single entity unduly
dominated, through abuse or acquisition of a dominant position of
market power, the Commission has advised the parties to provide
undertakings essentially to guarantee third-party access to the abattoir
in the event that it is the only abattoir permitted to operate. The
Commission was also concerned about the livelihood of the rural poor
whose primary source of wealth was cattle. Zambeef gave undertakings
to the Commission as shown in Table 15.

171
Table 15: Undertakings given by Zambeef Products PLC to the Zambia
Competition Commission

1. In the event of a major disease outbreak and upon formal written

notification by the relevant authority, if Rumcortin Abattoir is declared to be
the only SPS certified abattoir and all other slaughter facilities in the
relevant geographic area/district are closed, Zambeef shall allow third-party
access to the Rumcortin abattoir on an objective criteria and without
discrimination.

2. For third-party access to the abattoir in a period of disease outbreak,

Zambeef will charge an access fee set at a reasonable economic and
competitive rate that takes into account the prevailing rates for similar
services, which rates shall be negotiated entirely between Zambeef and the
third parties.

3. Zambeef shall not insist on third-party cattle slaughtered at the abattoir to

be sold to Zambeef but shall allow the cattle owners/traders to exercise
their freedom of trade.

4. The first priority for slaughter and storage of carcasses in the cold room will
always be for Zambeef cattle. However, Zambeef will make efforts to
consider third-party slaughter and storage as provided above.

5. Zambeef shall appoint a senior management official within its ranks who
shall be the “Trade Practices Compliance Officer” and who shall liaise with
the Commission from time to time on matters of compliance with the
undertakings and/or the Competition and Fair Trading Act, 1994, CAP 417
of the laws of Zambia.
Source: Memorandum of Undertakings given by Zambeef Products PLC to the Zambia
Competition Commission, February 2007.

The Commission has thus continued to monitor the situation

and ensure that Zambeef adheres to the undertakings through regular
contact with the compliance officer. The undertakings afford ease of
access to this key facility in the cattle-belt and principally, guarantee the
freedom of trade of the village level and other small scale farmers. A
good return on their cattle investment is a step in alleviating the levels
and effects of poverty.

172
6.5. Tobacco sector

The tobacco industry is one of the most lucrative sectors in the

Zambian agriculture sector. As in the cotton sector, it is dominated by
multinational merchants who operate outgrower schemes. Competition-
related interventions in this sector are thus necessary in order to ensure
that the rural poor are not exploited in the pricing and distribution of the
tobacco they grow under contract. During the latter months of 2005, the
Commission was handling the merger of Dimon Incorporated (Dimon)
164
and Standard Commercial Corporation (Stancom) into Alliance One .
The Commission raised concerns about the possible anti-competitive
trade practices in the industry that would arise as the two merging firms
were going to create a monopoly undertaking with a likely chance of
abuse. Stancom was at the time the third largest independent leaf
tobacco merchant in the world while Dimon was the world’s second
largest dealer, both of which had operations in more than 30 countries.
The merger was to create the second largest tobacco merchant in the
world, and the largest in Zambia, i.e. actually a monopoly.

The Commission thus demanded undertakings that would

address the competition concerns that had been raised during the
investigations. Alliance One contracted lawyers from America who
responded and disputed the finding of the Commission that Alliance
One was going to be a monopoly undertaking, since there were other
players in the Zambian tobacco industry. The Commission argued in
turn that under the Zambian competition legislation, a monopoly was a
firm with at least 50 per cent market share and since Alliance One was
going to have 55 per cent market share, this raised competition
concerns.

Employing its usual analytical framework, the Commission had

defined the general relevant market as the processing, storage, shipping
and marketing of leaf tobacco, but the actual relevant product market as
made up of flue-cured, burley and oriental tobacco.

The main competition issue of the Commission was that there

appeared to be no effective countervailing power from the leaf tobacco
farmers in the outgrower schemes who were under contractual
arrangements with Stancom and Dimon. The merger into Alliance One

164
Case File ZCC/CO/383.
173
meant that the farmers would have no choice of contract between the
two, despite the presence of other alternative merchants already
existing in the market. The Commission further argued that the merger
of Stancom and Dimon would definitely result in the removal of a
vigorous competitor from the market. Apart from Stancom (40 per cent)
and Dimon (15 per cent), the rest of the market (45 per cent) was made
up of a fragment of small to medium-sized leaf tobacco dealers who
were not likely to offer effective competition to the merged entity.

After being convinced of the monopoly status of Stancom in the

tobacco industry in Zambia and likely competition issues affecting the
outgrower farmers, the parties finally agreed to give the undertakings
outlined in Table 16.

Table 16: Undertakings given by Alliance One on the occasion

of the merger between Stancom and Dimon

1. Alliance One shall continue to use multiple transportation providers and

shall not engage in exclusive dealing in the relevant market without seeking
the express authorization of the Zambia Competition Commission.
2. Alliance One shall continue to promote and develop better tobacco farmers
through the outgrower scheme and encourage local entrepreneurs.
3. After the merger approval, Alliance One shall identify a suitable senior
officer who shall act as a Fair Trade Compliance Officer with the
Commission on competition and fair trading matters.

Source: Undertakings given by Alliance One to the Zambia Competition Commission,

2005

This case demonstrated the use of undertakings or

commitments from the industry as one of the enforcement tools
available to a competition authority to ensure that the gains of market
liberalization are not unduly concentrated in one entity. There would
appear to have been no incidence of complaints on prices since 2005.

174
7. Conclusions

The role that competition law and policy plays in poverty

alleviation cannot be overemphasized. While there is no claim that such
a law and policy would be the “cure-all” in terms of poverty as found in
countries such as Zambia, it is a major step in combating extreme
poverty levels as has been evidenced in the Commission’s interventions
in the cotton, poultry and other sectors.

There is a need to identify areas where poverty levels are high

and to use appropriate interventions in those areas, and perhaps with
more than ordinary vigilance and focus. There is a lot to be done by the
Commission and perhaps said by the public in terms of the contribution
of competition law and policy in their daily lives. While some results may
not be tangible, others are clearly tangible.

The effective implementation of competition law and policy

clearly assists in the attainment of efficiencies in the production of goods
and services as has been demonstrated through the prohibition of
cartels and attempted anti-competitive acquisitions in the poultry sector
in Zambia. There is of course need for in-depth research that would
empirically show whether or not the changes explained in the
horticultural, poultry, beef and tobacco industries in Zambia are solely
due to competition enforcement efforts. It is not likely that competition
law enforcement is the only force behind the resuscitation of some
sectors, but there is a strong correlation shown in the intervention
against the cartel activities of Hybrid Poultry and the opening up of the
day-old chicks market as well as the broiler segment to more entrants,
which have in turn created employment and, through outgrower
schemes, facilitated the continued growth of the micro and small
enterprises.

This is perhaps even more so in the horticultural sector, where a

firm that was almost on the verge of collapse was resuscitated through
an acquisition authorized by the Commission and vertical linkages
created with small-scale farmers (Fresh Pikt and Agriflora).

As a way forward, there would be need to have deliberate

provisions in a competition legislation that support small business
growth and development, as explicitly provided for in the Trade

175
Practices Act 1974 of Australia. For developing countries, the growth of
the micro and small businesses into medium, larger and perhaps even
into more formalized business organizations would provide a better
base for industrial renaissance. Competition law and policy may be
effectively used in this regard, contemporaneously with other pro-
business/pro-consumer policies.

Suffice it to state that it remains a highly debatable though

saleable idea in Zambia that the implementation of competition law and
policy actually does contribute to poverty alleviation. To sale this idea,
there would be need to raise the extremely low levels of competition
law-policy culture that exist at policy formulation stage. The visibility of
the competition authority and its programs and achievements must be
self-evident, even to the “small” citizen striving to sell cotton or cattle in
the rural areas. This is no easy task and Zambia may not be unique in
this regard.

176
Appendix 1

SUMMARY OF THE ZAMBIAN PRSP

177
 Antitrust, Economic Development and POVERTY:
The Other Path

Eleanor M. Fox∗

“Technocrats may be inclined to ignore distributional issues,

but no one else will.”
165
Harvard Institute for International Development, 1991

Abstract

Developed countries often insist that antitrust only exists for

aggregate efficiency and consumer welfare and that any broader focus
will protect small competitors and mire the economy in inefficiencies.
Developing countries retort that their antitrust must also address issues
of distribution and power.

This study argues that developing countries do and must ask a

broader question than whether conduct decreases aggregate consumer
or total wealth. While antitrust should not be used to protect inefficient

∗
Eleanor Fox is the Walter J. Derenberg Professor of Trade Regulation at New
York University School of Law. This chapter is based on Economic
Development, Poverty and Antitrust: The Other Path, first printed in 13
Southwestern Journal of Law & Trade in the Americas 211 (2007). The chapter
is dedicated to, and is in memory of, my dear friend, colleague and co-author,
Lawrence A. Sullivan, a great humanist who always cared about the less
fortunate people on this earth. The author thanks Dennis Davis, John
Fingleton, Frederic Jenny, Wolfgang Kerber and D. Daniel Sokol for their helpful
comments. She thanks the members of the symposium in honour of Lawrence
Sullivan sponsored by Southwestern Law School. She thanks Gauri Chhabra
and Meredith Laitner for their research assistance. Also, she is grateful to the
Filomen D’Agostino and Max E. Greenberg Foundation for its generous
research support.
165
Reforming Economic Systems In Developing Countries 3 (Dwight H. Perkins
& Michael Roemer, eds, 1991).
179
Davids against Goliath, it may and should be used to empower Davids
against Goliath by opening paths of mobility and access. Indeed,
enhanced mobility tends to produce efficiencies in societies in which the
economic opportunity of masses of people has been suppressed. An
antitrust law for developing countries that values mobility, access and
efficient development of the economy, while not protecting small firms at
the expense of consumers, is ‘The Other Path’ of this study, which
articulates principles, factors and strategies that give content to the
other path.

1. Introduction

This study is about competition, antitrust law, poverty and

economic development. It asks: What is the foundational perspective
that should inform competition law in developing countries?
Important scholarship argues that context matters in designing
and applying competition law and its supporting institutions for
166
developing countries . This literature commonly begins with the model
of antitrust law of industrialized countries. It then asks what changes are
warranted by context such as weak institutions, lack of funding, high
barriers, and weak capital markets. This study takes a next step. It
advocates the need for placing a developing country’s antitrust in the
broader context of development economics. In doing so it argues for the
relevance of developing countries’ plight in the storms and bargains of
world trade and competition, which often result in the marginalization of
the weakest economies.

166
Ground-breaking work has been done by William Kovacic. For example,
William Kovacic, Capitalism, Socialism, and Competition Policy in Vietnam, 13
Antitrust 57 (1999); Getting Started: Creating New Competition Policy
Institutions in Transition Economies, 23 Brook. J. Int'l L. 403 (1997); The
Competition Policy Entrepreneur and Law Reform in Formerly Communist and
Socialist Countries, 11 Am. U.J. Int'l L. & Pol'y 437 (1996); Designing and
Implementing Competition and Consumer Protection Reforms in Transitional
Economies: Perspectives from Mongolia, Nepal, Ukraine and Zimbabwe, 44
DePaul L. Rev. 1197 (1995); Competition Policy, Economic Development, and
the Transition to Free Markets in the Third World: The Case of Zimbabwe, 61
Antitrust L. J. 253 (1992); William E. Kovacic & Robert S. Thorpe, “Antitrust and
the Evolution of a Market Economy in Mongolia”, in De-Monopolization and
Competition Policy in Post-Communist Economies 89 (Ben Slay, ed., 1994).
180
 Spokespeople for developing countries often express the need
167
for an antitrust paradigm different from that of the developed world .
Spokespeople for the developed world tend to argue for universal
168
norms . Moreover, they commonly describe antitrust as “for
169
efficiency” , meaning no antitrust enforcement unless the transaction
is, by some measure, inefficient.

This study takes a different starting point. It treats as the central

condition a deep systemic poverty, aggravated by corruption, cronyism,
selective statism and privilege, weak institutions, and often unstable
170
democracy . It asks, for such economies: what is the most congenial

167
See Ajit Singh, U.N. Conf. On Trade & Dev., Competition and Competition
Policy in Emerging Markets: International and Developmental Dimensions
(2002).
168
See, e.g., Makan Delrahim, The Long and Winding Road: Convergence in
the Application of Antitrust to Intellectual Property, Remarks at George Mason
Law Review Symposium (Oct. 6, 2004), in 13 Geo. Mason L. Rev. 259 (2005)
(“consensus-based antitrust enforcement is vital to global business and
consumer welfare”).
169
By one common formulation, antitrust is only for efficiency. One common
formulation of the efficiency standard is that antitrust law should proscribe only
that which does a disservice to consumers and is inefficient, as judged by output
limitation. Business conduct other than hard-core cartels is presumed efficient; it
is argued that, apart from cartels, the law should proscribe only conduct that has
an output-limiting outcome and is not a legitimate business response to
consumers. There are alternative ways to regard efficiency and how to achieve
it. One major alternative focuses on preserving the structure and forces of
competition, positing that the process of competition is most likely to create
incentives to compete and invent. Diversity and openness are thought to
promote knowledge and experimentation and to function as a feedback
mechanism that facilitates adaptation and dynamic change. See Wolfgang
Kerber, Competition, Experimentation, and Legal Rules and Institutional
Framework (Dec. 2, 2006) (unpublished manuscript, on file with author); see
also Eleanor Fox, What is Harm to Competition? Exclusionary Practices and
Anticompetitive Effect, 70 Antitrust L. J. 371 (2002).
170
Mark Dutz and R. Shyam Khemani wrote on the “tyranny of predatory vested
interests”: These factors (high market concentration, high barriers to entry, high
ownership concentration and weak corporate governance) tend to reinforce one
another and give rise to inflexible, inefficient industrial and financial market
structures. They also have adverse implications not only for fostering effective
competition and competitiveness, but also for governance at both the state and
181
foundational perspective on which to formulate antitrust law? In
particular, would this cohort of countries be best served by a
foundational principle that trusts liberalization and free enterprise (“first
model”), or would it be served by a foundational principle that centrally
takes account of the opacity, blockage and political capture of markets,
and includes some measure of helping to empower people economically
to help themselves (“second model”)? There are, of course, other
171
formulations. There are also formulations within the formulations .

There are trade-offs, whatever model is applied. I would be

clear at the outset that protectionism is not a desirable option, whether
in terms of protecting small firms from efficient competition or protecting
domestic firms from foreign competition. The inquiry of this study is how
to make the market work for the good of development, and not to
suppress it. If suppression is politically inevitable, then that is an
obstacle that will tend to defeat the enterprise.

The choice of models is not uncomplicated. Even if the second

model (recognizing empowerment and distributional concerns) might in
the abstract seem more legitimate to a developing economy than the
first (emphasizing the virtues of aggregate efficiency and non-
intervention as the means to produce it), the first model is a path well
travelled, and reinventing a path is difficult and costly. Moreover, the first
model offers some clear and relatively simple rules without risking the

corporate levels – and for the persistence of an anti-competitive nexus mutually

supporting vested interests between incumbent firms and government, with
some of the earned rents used to entrench market power by buying government
favouritism. Since firms tend to be large in size and few in number, they have
organizational and financial advantages in influencing legislation and regulation.
Mark Dutz & R. Shyam Khemani, Competition Law & Policy: Challenges in
South Asia 11 (2007).
171
For example, one mainstream perspective assumes that markets work well
and that government interventions work badly (neo-liberal assumptions). At the
other end of the continuum, analysts may acknowledge that market structures
may be “skewed in favour of entrenched elites with inequitable distributions of
wealth with social stratification drawn along racial or ethnic lines”, a situation
that competition law might exacerbate. Taimoon Stewart, Julian Clarke & Susan
Joekes, Competition Law in Action: Experiences from Developing Countries iv
(2007), available at http://www.idrc.ca/en/ev-111677-201-1-DO_TOPIC.html.
182
costs of error from too much intervention and costs of political forays
inherent in a grant of excessive discretion to officials.

The study concludes by suggesting that reliance on markets is

critical for economic welfare; that extreme neo-liberal principles that
172
animate much of antitrust law in this age of “modernization” are not
necessary for efficiency and could run contrary to it; and that developing
countries are likely to be served by exploring a path that is most
sympathetic to their context.

This study is written at a time when “convergence” is repeatedly

referenced as an imperative objective of antitrust in a globalized world.
Convergence implies universal standards, or at least universal norms
implemented in common ways. The phrase “universal standards”
173
normally refers to the standards of the United States and Europe,
which have become the dominant models for the world. This study
suggests that developing countries should nonetheless consider the
benefits of a perspective of their own before considering the virtues –
which there are – of convergence. It further suggests that substantial
convergence can be achieved and will naturally occur even in the face
of varying perspectives.

172
Both the United States and the European Union have launched commissions
or projects to consider how competition law should be modernized. Moreover, in
the United States, successive Supreme Court opinions have narrowed the
purview of US antitrust law. See, e.g., Leegin Creative Leather Prods., Inc. v.
PSKS, Inc., 2007 WL 1835892 (US June 28, 2007); Weyerhaeuser Co. v. Ross-
Simmons Hardwood Lumber Co., Inc., 127 S. Ct. 1069 (2007); Volvo Trucks N.
Am., Inc. v. Reeder-Simco GMC, Inc., 546 US 164 (2006); Tool Works Inc. v.
Independent Ink, Inc., 547 US 28 (2006).
173
This is the case even while the standards of the United States and Europe
are changing, as institutions in both jurisdictions embark on “modernization”
projects, and as the United States Supreme Court successively narrows the
scope of the law. Yet with the economic rise of China and India, one might
expect the American and Euro-centric centre of gravity to shift, and to do so in
ways not predictable today.
183
2. The choice

Approximately one hundred nations in the world have adopted

antitrust laws. Perhaps a quarter of these nations are developing
countries. Yet other developing countries have not adopted antitrust
laws; some are considering doing so.

By one perspective, all of these nations should adopt antitrust

174
laws , and all of these nations should adopt the developed world’s
framework: free markets and antitrust in the service of unleashing
markets and pursuing aggregate efficiency. Much like the developed
countries, developing economies are often riddled with cartels and other
restraints that obstruct their markets and hurt their people. Many are
peppered with monopolistic abuses, especially by state-owned and
privileged enterprises – more than are developed countries.
Globalization has lowered barriers and paved the way to the efficiency
benefits from markets and, it is argued, liberalization and antitrust
175
should work hand in hand to anchor these benefits .

This study argues that developing countries require a larger

canvas. The canvas includes the dire economic conditions of developing
countries and the treatment they receive from the world community.
Developing countries often see free-market rhetoric and aggregate
wealth or welfare goals as inappropriate to their context because of the

174
Compare A.E. Rodriguez and Mark D. Williams, The Effectiveness of
Proposed Antitrust Programs for Developing Countries, 19 N. C.J.Int’l L. & Com.
Reg. 209 (1994) (arguing that antitrust law is largely inappropriate for
developing countries and that the liberal effects of the law will be overwhelmed
by interest-group politics procuring protection), with Craig W. Conrath and Barry
T. Freeman, A Response to “The Effectiveness of Proposed Antitrust Programs
for Developing Countries,” 19 N.C.J .Int’l L. & Com. Reg. 233 (1994) (arguing
that antitrust law and advocacy will benefit consumers).
175
Efficiency is usually seen as the measure of antitrust benefits. At this point I
do not raise differences between consumer welfare and total welfare in
measuring efficiency. I stress aggregate concepts – whether defined in terms of
all consumers or all consumers and producers: Do the winners win more than
the losers lose? And if so, should we disregard distributional consequences?
184
tendency of free-market policies to disproportionately advantage the
176
already advantaged in every game played .

This does not imply that antitrust for developing countries would
or should look dramatically different from a developed country’s
antitrust. There are reasons why it might look much the same, as I
develop below; but there are also reasons why the perspective might
differ from the neo-liberal one that currently informs many antitrust laws
of developed countries – a perspective that has “relatively little
177
resonance for the great majority of the population that is poor” .

3. The competition challenge

3.1. Introduction

Putting poverty, marginalization, cronyistic control, and dire

economic conditions at the centre of the universe, we ask: First, to what
extent will competition and the market help developing countries
develop efficiently for the good of their people? Second, to what extent
will antitrust law help? Third, if antitrust law is adopted, what form of
antitrust law?

3.2. To what extent will competition and the market help?

Freeing up the market has been shown to produce great

economic benefits for developing and transitional countries. The
converse approach, command and control, so ill served Russia and
178
Eastern Europe that the systems fell of their own weight .

176
See Nancy Birdsall, Inequality Matters: Why Globalization Doesn’t Lift All
Boats, Boston Rev., Mar.–Apr. 2007, at 7; Francis Fukuyama, Keeping Up with
the Chavezes, Wall St. J., Feb. 1, 2007, at A17; Peter Sutherland, The Doha
Development Agenda: Political Challenges to the World Trading System — A
Cosmopolitan Perspective, 8 J. Int’l Econ. L. 363 (2005).
177
Fukuyama, supra note 12.
178
A third option – among others along the continuum – is a combination of
competition and industrial policy. Some commentators argue that industrial
185
 Hernando de Soto, in The Other Path, eloquently demonstrates
the benefits of tearing down barriers to free market participation. He
catalogued and studied the barriers, such as dense licensing
requirements, that excluded the poorest Peruvians from Peru’s market
system, relegating them to their own informal economy. Alienated by the
exclusion and their dismal lives, many joined the terrorist organization
Shining Path. To counter the Shining Path and its destructive forces, de
Soto proposed another path (“el otro sendero”) that would tear down the
barriers to participation in the recognized economy, give people hope
and opportunities, and enable the poor to participate in markets on their
own merits. Regarding matters of government regulation, The Other
179
Path is a blueprint for building the ladder of mobility. It envisions a
society that values mobility; that opens the door to inclusion, from the

policy in Japan and Korea put those nations on a sound footing before they fully
exposed their businesses to the winds of competition. Others observe, however,
that vibrant competition within the borders of both nations co-existed with
government-managed external competition; and these commentators credit the
countries’ successes to the market and not to its suppression. See Working
Group on the Interaction between Trade and Competition Policy, Study of
Issues Relating to a Possible Multilateral Framework on Competition Policy, pp.
168–257, WT/WGTCP/W/228 (May 19, 2003), available at
http://www.jmcti.org/2000round/com/doha/wg/wt_wgtcp_w_228.pdf; see also Ajit
Singh, Multilateral Competition Policy and Economic Development: A
Developing Country Perspective on the European Community Proposals (paper
presented at the fifth session of the Intergovernmental Group of Experts on
Competition Law and Policy, Geneva, July 2–4, 2004, available at
http://www.networkideas.org/feathm/aug2003/MCP.pdf (developing countries
often query whether they should follow the model of Japan and Korea).
Free markets are regarded with some scepticism by the new left in several
South American countries, wherein the populace complains that it has not seen
the benefits of liberalization. The economic, social and political reforms in Latin
America beginning in the 1980s had not delivered their promises of economic
growth and there was resentment among the people because the reforms had
not reduced poverty and inequality. This produced a populist shift towards
socialism, returning more power to the state and rolling back whatever
achievements were made. See Jorge Castañeda, Latin America’s Left Turn,
Foreign Affairs, May–June 2006, at 28.
179
Hernando de Soto, The Other Path: The Invisible Revolution in the Third
World (1989).
186
poorest up; and it proposes to do so for the pragmatic reason of building
a better society.

The counter-viewpoint – embrace of government control and

indifference to the plight of the excluded – blocks the market through
excessive regulation, privilege, and cronyism. The powerful insiders
protect their friends at the expense of the public and often at the
particular expense of the poor. This was the story of Telmex in Mexico.
Owned by a close friend of each successive president, Telmex was
guaranteed a monopoly price for incoming cross-border telecom
connections. The monopoly price was guaranteed at the expense of
poor Mexicans who migrated to the United States for work and whose
180
telephone lifeline was to Mexico . The entrenched system likewise
deprived the aspiring new-entrant Mexican entrepreneurs of the right to
181
price-compete against Telmex for incoming calls . Thus, it exploited, it
excluded, and it stymied opportunity.

Hence, not only does globalization tend to stack the deck

against a critical mass of developing countries and those people who
are least able (least educated, skilled and moneyed, and lacking
182
infrastructure) to ride the wave of globalization’s opportunities , but it

180
Not only do the poor suffer from prices that are too high, but they suffer from
suppressed growth. “[T]he rest of the country suffered from [Telmex’s] favored
position. In a modern age when businesses need low-priced, high-quality
telecommunications to compete in a global economy, Mexican growth has borne
the cost of Mr. Slim’s privilege. Any genuine effort to help the poor necessarily
requires more healthy competition, starting in the telecom market.” See Mary
Anastasia O’Grady, A Telecom Monopoly Cripples Mexico, Wall St. J., Feb. 10,
2006, at A19.
181
See Eleanor Fox, The WTO’s First Antitrust Case – Mexican Telecoms: A
Sleeping Victory for Trade and Competition, 9 J. of Int’l Econ. Law 271 (2006).
182
See Paul Collier, The Bottom Billion: Why the Poorest Countries are Failing
and What Can be Done About It (2007). See also Pascal Lamy, Dir. Gen., WTO,
Making Trade Work for Development: Time for a “Geneva Consensus”, Emil
Noel Lecture, New York University School of Law (Oct. 30, 2006) (transcript
available
http://www.nyulawglobal.com/events/documents/emilenoellecturefall06.pdf).
Pascal Lamy recounts the bias in the prior trade rounds against developing
countries. He notes the persistence of “economic colonization” and the
developing countries’ “bitter” “potion” of intractable adjustment problems.
Developing countries’ problems of adjustment to the onrush of free trade are
187
also allows cronyistic governments to block upward mobility and
entrench the condition of the poor.

3.3. Antitrust: can antitrust help and in what form?

3.3.1. Mobility

Just as de Soto would remove government regulatory barriers in

deprived economies, a contextualized antitrust law can remove the
roadblocks erected by powerful market actors, public and private. Both
liberalization and antitrust can tear down the barriers facing the people
who are the least well off. They can invite these often alienated
individuals into the economic system, giving them hope, dignity and self-
worth.

Antitrust law attacks artificial obstructions that market players

create. But nations disagree about what acts constitute artificial
obstructions. Are they only acts that shrink the size of the pie, decrease
183
aggregate wealth, and are allocatively inefficient ? Or are they also
acts that block the channels of mobility, keeping worthy actors down and
184
moats wide ? If the latter, obstructions can be seen in more human
terms and perhaps antitrust policy and its language can be better
185
aligned with efficient development .

particularly serious “because [trade openings] often hit larger parts of the
population and because the countries have little capacity to handle the much
needed accompanying policies to assist the victims of globalization.” Id. at 6, 7,
10. Moreover, developing countries usually lack safety nets, and the lack of
safety nets means that job loss causes severe hardship. Further, the promised
benefits of market openings are harder to capture: the time and costs to market
(e.g. trucking goods to a port) can overwhelm gains.
183
It is important for an antitrust agency to identify and target anti-competitive
acts that shrink the pie. I do not imply the contrary.
184
See Eleanor Fox, What is Harm to Competition? Exclusionary Practices and
Anticompetitive Effect, 70 Antitrust L. J. 371 (2002).
185
Protecting mobility and opportunity on the merits need not and should not
imply protecting inefficient competitors from competition or handicapping
efficient firms. See Eleanor Fox, We Protect Competition, You Protect
Competitors, 26 World Competition 149 (2003); see also Dutz & Khemani, supra
188
 There are good reasons why mobility factors should play a role
in the antitrust laws of developing countries. The countries look to the
marketplace to give firms, including smaller and younger firms, a fair
chance to compete on the merits of their products and services, free
from artificial and unnecessary foreclosing restraints by powerful firms.
Empowerment to engage in markets free of unnecessary business
restraints by firms with substantial market power is the counterpart to de
Soto’s vision of empowerment to engage in markets free from
unnecessary and unjustified government restraints. Undue market
restraints, whether public or private, retard efficient development. They
also tend to harm allocative efficiency and surely do not advance it. To
the extent that “efficiency” as the goal of antitrust implies disregard of
distributional values, this may be a contradiction in terms in developing
countries, where severe distributional inequities are depriving the
marketplace of the talents and energies of the majority of the population.
Aggregate efficiency, turning its back on maldistribution and severe
economic inequities, is probably not the centrepiece that most
developing countries are likely to choose.

3.3.2. Assessing local problems before adopting law

Law making should come from within, not without. Legislation

should respond to contextual problems that need to be solved. Ideally,
law is not generated by outsiders who proclaim “we have this law and
186
you should, too” . It is important for each country, or regional

note 6. See Michael Boudin, Antitrust Doctrine and the Sway of Metaphor, 75
Geo. L. J. 395 (1986), for a discussion as to the power of metaphor.
186
The two clauses need a link. Does the outsider claim that the law is needed
to solve negative externalities visited on the outsider, as in pollution: “Your
smokestacks are polluting us”? Does the outsider claim that its businesses pay
a cost and to be fair the insider’s businesses should pay the same costs? Does
the outsider claim: “If only you will make your laws like ours, our businesses will
find it easier to make more money in your backyard”? Or is the outsider
altruistic; a paternalistic Good Samaritan: “We know this is good for you; we
“offer” it to you”?
See Daniel Berkowitz, Katharina Pistor & Jean Francois Richard, Economic
Development, Legality, and the Transplant Effect, 47 Eur. L. Rev. 165 (2003),
189
groupings of like countries, to take stock; to assemble the facts: who
within the country is harmed by what practices? How can such harm be
prevented? And at what cost?

Professors Jenny and Evenett, and the Consumers Unity &

Trust Society (CUTS) under the leadership of Pradeep Mehta, have
done noteworthy work to build the databases that may help to answer
these questions. The data show that:

• In many developing countries, seller cartels target basic

necessities of the people, including dietary staples. In Peru,
poultry farms and their trade association conspired to eliminate
competitors and prevent entry. In Zambia, the dominant producer
of day-old chickens required the biggest buyer to stay out of the
production market, and the buyer agreed to the requirement.
• Evidence of buying cartels is rampant. These include cartels that
exploit small farmers and producers such as coffee producers in
Kenya and Latin America, cotton, tea and tobacco growers in
Malawi, milk processors in Chile, and fish processors near Lake
Victoria.
• Cartels, boycotts, and non-compete agreements have been
detected and prosecuted in the milling and baking, milk and
sugar markets. Beer mergers in highly concentrated beer
markets have threatened to exploit buyers in Namibia, Turkey,
Malawi, Kenya and Tanzania.
• In Kenya, owners of minivans garnered monopolies over
lucrative routes. They teamed up with criminal gangs, not only
overcharging for simple and necessary van transportation but
also terrorizing the travellers. Also in Kenya, the fertilizer
manufacturers organized a secret bidding cartel in their tenders
to the government buying authority, impoverishing the farmers
who needed increasing supplies.
• In many countries, vertical agreements tie up scarce inputs and
scarce channels of distribution.
• In Turkey, the two dominant telecommunication firms had sole
control of the infrastructure necessary to provide national
roaming capability for a GSM mobile telephone service and
refused to allow access to would-be new entrants. Typically,

for a discussion of the problems of legal transplants when the law is not adapted
to the country’s conditions.
190
 dominant firms deny small firms access to essential facilities
187
such as telecom and electricity infrastructure .
Press stories add to the data daily. In Mexico, half of the people live on
US$4 or less a day, and many survive on tortillas and beans. From
December 2006 to January 2007, the price of corn soared, and the price
of the tortilla rose by 35 cents a pound. The New York Times reported:
“The crisis has hit hardest for the poorest Mexicans, who may spend
188
more than a quarter of their daily salaries on tortillas” . It has displaced
poor tortilla makers, who have lost up to 40 per cent of their business,
since the people are compelled to buy and eat less. While the price
shock arose first from extraneous causes, the giant Mexican tortilla

187
See Frederic Jenny, Anticompetitive Practices in Developing Countries:
Lessons from Empirical Evidence (May 23–24, 2005) (unpublished paper
presented at First National Competition Seminar, Amman, Jordan) (on file with
author); Frederic Jenny, Anti-Competitive Agreements: Meaning and Examples,
Caribbean Dialogue, July–Sept. 2004, at 1 (anti-competitive practices in Trinidad
and Tobago, Kenya, Lebanon, Indonesia and other smaller economies; Kovacic,
supra note 2; Simon J. Evenett, U.K.’s Dep’t for Int’l Dev., Links between
Development and Competition Law in Developing Countries (2003), available at
http://www.evenett.com/reports/dfidpaper.pdf; Ana Maria Alvarez, Simon J.
Evenett & Laurence Wilse-Samson, “Anti-Competitive Practices and the
Attainment of the Millennium Development Goals: Implications for Competition
Law Enforcement and Inter-Agency Cooperation”, in Implementing Competition-
Related Provisions in Regional Trade Agreements: Is It Possible to Obtain
Development Gains? 60 (2007). The latter chapter documents numerous other
specific restraints in health, education, financial services for low-income earners,
infrastructure and housing, and food. Id. at 65–77. See also Pulling
Up Our Socks (Consumer Unity and Trust Society Centre for Competition,
Investment & Economic Regulation, Rajasthan, India), Feb. 2003 (report based
on the 7-Up Project analysing competition problems in seven developing
countries – Kenya, Tanzania, Zambia, South Africa, Sri Lanka, Pakistan and
India); Pradeep S. Mehta & Nitya Nanda, Competition Policy, Growth and
Poverty Reduction in Developing Countries, http://www.competition-
regulation.org.uk/conferences/southafrica04/mehta&nanda.pdf (last visited June
30, 2007). For examples of abuse of dominance violations in Latin American
countries, see Russell W. Pittman and Maria Coppola Tineo, Abuse of
Dominance Enforcement under Latin American Competition Laws, March 2006,
available at SSRN: http://ssrn.com/abstract=888186.
188
James C. McKinley Jr., Cost of Corn Soars, Forcing Mexico to Set Price
Limits, N.Y. Times, Jan. 19, 2007, at A12.
191
makers took advantage of the situation “hoarding supplies to drive
189
prices up even more”, according to Mexican officials .

Mexico’s monopolies thrive even under the free market regime

of President Calderon. Jorge Castañeda, Mexico’s former foreign
minister, wrote: “The monopolist control of practically every walk of
Mexican life is in place”. Huge monopolies that exclude and exploit
dominate the country – in oil, electricity, fixed line and mobile telephone,
190
television, cement, banks, bread, and tortilla production . The case of
Mexico is not unique to the developing world. It is typical.

In sum, the people of developing countries are seriously

impacted by cartels and monopolistic practices. These practices include
those that raise consumer prices and input prices to their businesses,
which exclude or build hurdles to their outputs, and foreclose domestic
suppliers. They do so by all means: coercive practices such as boycotts,
covenants not to compete, price manipulation, and predation. They
shore up their power to do so by mergers. Anti-competitive practices are
rife in areas of physical and business necessity, such as milk, soft
drinks, beer, chicken, sugar, cotton, paper, aluminium, steel, fertilizer
chemicals, telecommunications, cement and other construction
materials, transportation including trucking, shipping and port access,
industrial gases, banking, insurance, coal and electricity. Many of the
practices are local; many of these are facilitated by the country’s own
government; and many others are offshore, targeting the vulnerable
developing countries. Many of the harmful practices are illegal under the
standards of the industrialized countries. A critical mass is not, or is
unlikely to be proved illegal, under these standards.

3.3.3. A perspective

We are (let us suppose) policy makers who live and work in a

developing country and we have at heart the welfare of our community.
Half of our fellow citizens live in abject poverty. A third of the citizens are
farmers. We have extractive natural resources. We have a slender

189
Id.
190
Jorge Castañeda, Mexico Needs to be Freed from Unhealthy Monopolies,
Fin. Times, Feb. 5, 2007, at 13.
192
manufacturing industry with potential for growth. We have cotton and
lumber. Our citizens are extraordinary craftspeople. Most of our people
do not have enough food to eat. State-owned monopolies dominate our
infrastructure industries. The education system is poor and sometimes
barely existent. Disease and corruption are rampant. A decade ago in
an expanding economy we glimpsed possibilities to move up the ladder
so that at least our children could have a better life. After opening our
markets, the richest two per cent have better lives. A fraction of others
who have had sufficient education and training now fortunately embrace
opportunities opened by globalization, including opportunities from
outsourcing. But the overwhelming majority of our people have seen no
191
gains. They see a bigger wealth gap: no ladder and a wider moat .

What do we want?
Of course we want food, medicine, necessities at lower prices,
education and training, and infrastructure. We want a better chance to
fend for ourselves; to participate in the economic enterprise; to have a
real opportunity to make a living. Do we need and want antitrust? And if
so, what type of antitrust? We want to explore what antitrust can do for
us, assuming that we have enough money and trained people to staff
the office and enforce the law.

We believe that antitrust law can help – if we can obtain

sufficient funding and access the necessary information to find and
prosecute cases; if we can get jurisdiction over the violators, who may
be offshore; if we legally and practically have sufficient enforcement
power; and if reasoned agency decisions will be upheld by the courts,
and within a reasonable period of time. Antitrust can deter the harmful
practices catalogued above, and in doing so it can empower people to
participate in the market on their merits.

Assuming that we want antitrust, what kind of antitrust do we

want?
We have looked at the anti-cartel law of industrialized countries.
We find it strong and attractive in principle although we worry about our
ability to prove cartel agreements even when we are confident they

191
See Lamy, supra note 18. There may be gains but they are not perceptible to
the majority of the poor; and the gains are unequally distributed to the wealthy or
the otherwise (e.g. educationally) advantaged.
193
exist. Moreover, our country’s economy is run by monopolists more than
cartels.

For monopolization and abuse of dominance, we look at the

192
United States’ recent monopolization jurisprudence . We observe that
US law has a narrow scope for dominant-firm violations: It is not
concerned itself with excluded or marginalized competitors. It is
concerned that antitrust law might be overly aggressive and might chill
efficient conduct by dominant firms. It is in theory concerned with
consumers who are overcharged; yet it tends to strike the balance in
favour of freedom for dominant firms on the theory that the incentives of
dominant firms are aligned with consumer interests, and antitrust duties
193
discourage firms from inventing and investing . It does not experience
at all the problem that haunts us the most: abusive conduct, by state-
owned and privileged monopolies, that suppresses competition on the
merits.

Moreover, government policy papers and commissions focus on

whether it is too easy to prove that a firm has dominant power and
whether safe harbours for monopoly-firm conduct are too few and too
194
narrow , rather than mapping out the mine fields of anti-competitive
conduct.
195
Verizon v. Trinko illuminates the perspective that non-
intervention against the dominant firm is the best prescription for
economic welfare. Verizon was the incumbent local telephone service
provider in the north-eastern United States, and it owned elements of
the local telephone loop, which connected long-distance calls to the
local area. When competition among local telephone service providers
became technologically feasible and economical, the United States

192
See Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 127
S. Ct. 1069 (2007); Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko,
LLP, 540 US 398 (2004).
193
See R. Hewitt Pate, “The Common Law Approach and Improving Standards
for Analyzing Single Firm Conduct”, in 2003 International Antitrust Law & Policy:
Fordham Corporate Law Institute, Chap. 12, p. 195 (Barry Hawk, ed. 2004)
(supporting the minimalist approach).
194
See Report and Recommendations of the Antitrust Modernization
Commission (April 2007), especially Chap. 1.C. Exclusionary Conduct.
195
540 US 398 (2004).
194
deregulated the market and invited local competition into each
geographic area. Rivals entered. They needed access to the local loop,
which a federal statute required the incumbent to assure. Verizon,
however, wanted to keep its own customers from defecting to the new
entrants. Therefore it interrupted its rivals’ access to the local loop so
196
that it – by definition – would provide better service . The Supreme
197
Court held that the conduct did not violate the antitrust laws .

Before the Court, plaintiffs had argued that Verizon was guilty of
strategic manipulations accomplished by many “small” acts, such as
disrupting local loop connections, and that in this way Verizon
198
“threatened [the rivals] with ‘death by a thousand cuts’” . This is a
metaphor sometimes used in civil rights cases to describe the
thousands of everyday slights that work synergistically to keep the
marginalized marginalized.
The US Supreme Court embraced the metaphor and turned it
against the plaintiffs:

“[T]he identification of [a thousand cuts] would surely be a

daunting task for a generalist antitrust court. Judicial oversight
under the Sherman Act would seem destined to distort
investment and lead to a new layer of interminable
199
litigation…” .

196
The Court assumed these alleged facts to be true because the case before
the Court arose on Verizon’s motion to dismiss the complaint.
197
The Court would have preferred to leave the problem to the regulatory
agency, and to the regulatory statute that prohibited the conduct, but the statute
declared that antitrust law was not pre-empted. Therefore, by necessity, the
Court’s opinion went beyond the regulated industry context. The Court
expressed a general principle of non-interference with the monopolist’s freedom
of action
198
Brief for the State of New York et al. as Amici Curiae, in Support of
Respondent at 10, Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko,
LLP, 540 US 398 (2004) (No. 02-682).
199
The Court held that a dominant firm’s use of leverage to gain advantages in,
but not to monopolize, the local telephone market was not an antitrust violation.
“Mere” leveraging by a monopolist that will not lead to a new monopoly is not of
US antitrust concern. Trinko, 540 US at 414, n. 4.
195
 Verizon’s everyday abuses were put beyond the reach of
antitrust.
For developing countries, death by a thousand cuts would seem
to be a reason for antitrust accountability, not against it. The concept
describes the perpetuated condition of the powerful against the
powerless.

We want a law against cartels, monopolistic practices, and

abuses of dominance that prevent dominant firms from using their
power and leverage to fence out powerless firms. We want a law
against mergers that create or reinforce the power to exploit and
exclude. Moreover, we want a strong law that tackles restrictive and
market-blocking acts by state-owned enterprises – problems that are
exponentially greater in developing countries than in, for example, the
United States.

We would not want to use the law to undermine efficiency. We

200
would guard against inefficient applications by limiting principles . But
our main problem today is not how to widen the safe harbours for
exclusionary acts of monopolists; it is how to break through blocked and
opaque markets to create competition and competitive opportunity.

4. Observations on the design of appropriate law

Developing countries face countless dilemmas and

opportunities in formulating their substantive principles. Some are
telescoped above. Here are eight:

1. Developing countries face markets that are much less

dynamic and open than markets in developed countries.
Moreover the markets are pockmarked by state intervention

200
For example, we might choose a principle that must not harm consumers
through antitrust enforcement.
Law that protects the openness of markets and access of market players on
merit does not inherently protect inefficiencies, and law that ignores the values
of openness and access can protect the power of the dominant firm. See
Eleanor Fox, Monopolization, Abuse of Dominance, and the Indeterminacy of
Economics: The US/EU Divide, 2006 Utah L. Rev. 799 (2006).
196
 and control. Whether the intervention is through state
measures, state-owned enterprises, or enterprises licensed or
privileged by the state, these enterprises are likely to run on
201
principles of privilege, preference, and cronyism . These
factors have major implications regarding error costs. If the
competition agency is relatively independent, resourced, and
capable, more intervention, especially against market blocking
202
and discriminatory action by state-owned or state-privileged
enterprises, might promise more gains and fewer costs than
203
abuse-of-dominance intervention in developed economies .

2. Most developing countries have insufficient resources to run

their competition offices. They are short of staff, and
especially short of economists. This suggests that bright-line
rules might be needed, whether they tip in the direction of
more or less aggressive enforcement. Much developed
country analysis, such as that suggested by the US Supreme
204
Court in California Dental Association , might be too
complex and of uncertain application. Focused analysis with
205
fewer factors in play is more appropriate .

201
See Dutz & Khemani, supra note 6.
202
I refer to discrimination in favour of cronies and against outsiders.
203
See John Fingleton, “De-Monopolizing Ireland”, in European Competition
Law Annual 2003: What is Abuse of Dominant Position? 53, 65 (Claus Dieter
Ehlermann & Isabela Atanasiu eds, 2006); see also John Vickers, Competition
Law and Economics: A Mid-Atlantic Viewpoint, The 10th Burrell Competition
Lecture (Mar. 19, 2007) (explaining that historically monopolized economy and
weak “self-righting mechanisms” may require more interventionist policies
towards abuse of dominance).
204
Cal. Dental Ass’n v. F.T.C., 526 US 756 (1999) (holding that dentists’ rules
against the advertisement of price discounts and quality do not inevitably lessen
the output of dental services, and that the probability of output limitation must be
the subject of detailed inquiry).
205
See the dissenting opinion of Justice Breyer, relying on experience and
theory to conclude that rules against advertising discounts raise prices. Id. at
782. See also Justice Breyer’s dissent in Leegin Creative Leather Products, Inc.,
v. PSKS, Inc., supra note 8.
197
 3. In view of insufficient resources and expertise, and faced with
putative violators much bigger than their own country, the
agency may be tempted to rely on presumptions in its favour,
e.g. that a certain high market share presumptively proves
dominant or substantial market power. Presumptions that shift
a burden to the putative violator are very helpful and indeed
important when the basis for inference is a good proxy and
when the respondent gets a fair chance to rebut. Thus, if the
market is well defined, the next good constraint is far from the
market boundary, and the respondent has occupied 80 per
cent or more of the market for many years (implying barriers
to entry), a simple presumption and shift of the burden makes
206
sense , and may enable the agency to get on with its project
to prove abuse. However, a much lower share (e.g. less than
40 per cent) does not by itself tend to support an inference of
substantial market power. The agency – to do its job – must
examine other factors, and must listen sympathetically to the
respondent’s story that it has no power.

4. Apart from the observations above, each nation must make

important decisions regarding the degree of antitrust
intervention. It faces conundrums. For example, excessive
pricing, especially after price controls are removed, may be a
pressing problem, especially as to the price of necessities. But
easily triggered antitrust intervention may lead to price control
by another name and undermine the effort to prime markets
and make them work. Low, especially below-cost, pricing
might seriously threaten local firms and undermine their
chance to take root. But intervention against low pricing
deprives the people of one of the most important benefits of
competition. Moreover, whether the low price is truly below
cost might be difficult or impossible to ascertain. The nation
might want to fashion a rule, such as that of the United States

206
This is so even if developed countries’ laws require the agency to engage in
an all-factors economic analysis of market power at the first stage. In fact, in
most jurisdictions these facts would give rise to a presumption and cause a shift
in the burden of proof or burden of production of evidence. See Antitrust Law
Developments, vol. 1, pp. 234–36 especially at note 39 (5th ed. 2002). This
problem – proof of substantial market power – is currently under discussion in
the International Competition Network.
198
 or of the European Union, to avoid intervening against low
pricing.

5. A legitimate abuse-of-dominance law would be copious

enough to prohibit unjustified foreclosing restraints, without
the need of a plaintiff to prove output effects across the whole
market. But as a corollary, law that seriously respects the right
of the underdog to compete on the merits should also
seriously respect the right of an alleged violator to prove: my
conduct responded to consumers and served the market.
Whatever the presumptive rule of violation for foreclosure, the
careful agency will want to listen seriously to a pro-market,
pro-competition defence.

6. While there is high value to a nation in formulating its own law,

nations will also appreciate the benefits of following a
blazoned path. Anchoring new law in existing jurisprudence
promises greater legal certainty and other efficiencies. If one
adopts “dominant” law, one need not reinvent the wheel. One
can take account of international norms while enhancing the
ease of foreign investment. The challenge is to understand
207
when foreign law is appropriate law and when it is not .

207
This is a challenge that South African law explicitly embraces. See Mondi
Ltd. & Kohler Cores and Tubes v. Competition Tribunal, Competition Appeal
Court, 2003 (l) CPLR 25(CAC) (S. Afr.). Gesner Oliveira and
Cinthia Konichi Paulo add the following differences and concerns that
developing countries must take into account when implementing competition
law: 1) the large informal sector, which does not comply with law and may lead
to overestimation of market power; 2) the size of the market, which for Brazil is a
medium-sized economy with many prominent multinationals; 3) the magnitude
of expected efficiency gains, which often are larger for transitional than
developed economies; 4) precariousness of the infrastructure; 5) higher
transaction costs, which can prevent new entrants from contesting quasi-
monopolies; and 6) more severe political market failure. “In sum, developing
countries have more competition problems and fewer resources.” Gesner
Oliveira & Cinthia Konichi Paulo, The Implementation of Competition Policy in
Developing Countries: The Case of Brazil (May 2006) (prepared for the
workshop, The Development Dimension of Competition Law and Policy:
Economic Perspectives in Cape Town, South Africa).
199
 7. Insufficient resources and expert staff are likely to be
complicated by political pressures to refrain from doing what is
right (e.g. sue to enjoin an anti-competitive joint venture that is
half-owned by the government or the president’s friend).
Agencies in all nations face political pressures, but those
faced by agencies in developing countries are likely to be
exponentially more severe, and the independence and ability
of the agency to resist them are likely to be low. The question
here is not one of law by practical politics. The prescription is:
learning how best to deflect the anti-market and harmful
political demands – a subject on which agencies – mature and
208
young – should engage .

8. For efficiency and growth, developing countries must always

adjust to the changing dynamics of markets and competition.
All principles and rules should be consistent with the
imperative of flexibility and adjustment and should avoid the
temptation to try to hold back the tide of change.

5. Correlatives

The perspective suggested above concerns antitrust proper –

the substantive rules and principles of antitrust law. A number of
additional considerations and conditions are necessary to make the law
209
useful and meaningful .

208
See remarks of US FTC Commissioner William Kovacic at DOJ/FTC
hearings on Technical Assistance, Feb. 6, 2008.
209
These considerations and conditions have been well
articulated by others. See, e.g., William Kovacic, Getting Started: Creating New
Competition Policy Institutions in Transition Economies, 23 Brooklyn J. Int’l L.
403 (1997); Designing and Implementing Competition and Consumer Protection
Reforms in Transitional Economies: Perspectives from Mongolia, Nepal, Ukraine
and Zimbabwe, 44 DePaul L. Rev. 1197 (1995); Clive S. Gray, “Antitrust as a
Component of Policy Reform: What Relevance for Economic Development?”, in
Reforming Economic Systems in Developing Countries 404 (Dwight H. Perkins
& Michael Roemer eds, 1991); R. Shyam Khemani, Competition Policy and
Economic Development, Policy Options, Oct. 1997, at 23, available at
http://www.irpp.org/po/archive/oct97/khemani.pdf.
200
 First, exemptions must not be overly broad. Antitrust operates
only within the area carved out for it. Exemptions and immunities,
including untouchable market actors who may be favoured by the state,
can so shrink this area as to lose most of antitrust law’s promised
benefits. In that spirit, including within the coverage of antitrust law
regulated industries and state enterprises that operate in a commercial
capacity can be significantly advantageous to developing countries.
Often the industries most important to the people are regulated and
each is dominated by a state-owned monopolist. These industries
include infrastructure industries such as energy, communications, and
transportation. Exclusion of the market actors in these markets from
210
antitrust is not only a recipe for cronyism and exploitation , but it is
211
also a recipe for a tiny antitrust domain .

Second, the competition agency must be as independent as

possible, free from political interference, lest the government and its
politicians commandeer antitrust and confine it to a not-too-meaningful
realm.
Third, institutions, ideally the competition agency should be well
funded and sufficiently staffed with educated and trained personnel. The
leaders and staff should not be corrupt. Appellate channels should be
provided. Appellate institutions, too, should be staffed by well-qualified
and non-corrupt individuals. Due process should be assured in all
proceedings. The workings of the institutions should be transparent and
their agents accountable. Their decisions and judgements should be
published and accessible. Well-functioning institutions are more
important to trade and competition than is the convergence of the laws
212
of various nations .

210
See Fox, supra note 17.
211
Likewise, antitrust should not be crowded out by protectionist
measures that serve the entrenched interests. See Dennis Davis & Eleanor Fox,
“Industrial Policy and Competition – Developing Countries As Victims and
Users”, in 2006 International Antitrust Law & Policy: Fordham Corporate Law
Institute, Chap. 8, p. 151 (Barry Hawk, ed., 2007).
212
See Roumeen Islam & Ariell Reshef, Trade and
Harmonization: If Your Institutions Are Good, Does it Matter If They Are
Different? (World Bank, Policy Research Working Paper No. 3907, 2006). The
choice in developing countries, however, is often a grim choice. The quality of
institutions cannot be expected to approach the ideal.
201
 Fourth, advocacy is a critical tool. Commonly, the most serious
restraints are government measures, often procured by vested interests.
213
Moreover, “corporate elites . . . [tend to] resist policy reforms…” . The
competition agency can play an important role in calling attention to anti-
competitive and unproductive state measures and their costs to society.
It can be the nation’s “strongest public voice on promoting competition
214
and articulating the competition perspective” .

More generally, education and adequate health care are sina

qua non for effective participation in the economic system.These are
difficult requirements to fulfil. If crucial elements are missing, wise policy
makers might choose not to adopt antitrust at all.

6. The developed country’s duty of cooperation

Developing countries are hurt by international cartels and

practices and are vulnerable to them. The violators know that
developing countries have few resources to devote to antitrust (if any,
after they serve other human priorities). Offshore firms direct exploitative
practices at developing countries, often by acts taken and agreements
215
made on their home shores .

213
Dutz & Khemani, Competition Law & Policy, supra note 6, at
12.
214
Id. at 28. Dutz and Khemani noted: “[E]ffective competition
advocacy can help create an environment where, over time, enforcement
strengthens the role of markets by reducing government interventions and
concomitant regulatory burdens. Thus advocacy may not just be a complement
to enforcement, but an essential first step in expediting full, effective
competition. Given that competition authorities typically lack sufficient political
capital and reputation in their early years, and that policy-generated obstacles to
competition are often maintained by support from powerful vested interests,
initial advocacy efforts should focus on public restraints whose removal is
subject to less debate, or [on projects] that directly benefit entrepreneurs,
exporters, and other stakeholders who can be counted on to provide strong
backing and support. Special attention should be paid to initiatives that directly
or indirectly benefit as broad a base as possible”. Id. at 28–29.
215
See Frederic Jenny, “Globalization, Competition and Trade Policy: Issues
and Challenges”, in Towards WTO Competition Rules 3 (Roger Zäch, ed.,
1999).
202
 These anti-competitive practices launched from distant shores
are likely to be beyond the practical reach of developing countries. To
solve this problem, the European Union has proposed a helpful
216
framework , which could be (or might have been) implemented in the
context of the WTO, but could also be implemented as a stand-alone
project.

In the spirit of the EU proposal, developed countries with mature

antitrust laws can and should help developing countries, especially
when the developed country’s own nationals are the violators of clear
217
and shared principles of antitrust . The developed countries can and
should revise their laws, extending jurisdiction so as to make hard-core
218
export cartels illegal .

An environmental convention provides a model and is a

testament to political possibility. This is the Basel Convention on the
Control of Transboundary Movements of Hazardous Wastes and their
219
Disposal , which the United States has signed. Under the Basel
Convention, if a signatory country prohibits the import of hazardous
wastes, all other signatories must make illegal the shipment of
hazardous wastes to that country. The United States and other
developed countries could and should adopt this model for hard-core
export cartels, which are the hazardous wastes of antitrust.

216
Working Group on the Interaction between Trade and Competition Policy,
World Trade Organization, Communication from the European Community and
Its Member States, WT/WGTCP/W/184 (Apr. 22, 2002).
217
It has been estimated that for 19 selected products, the value of cartel-
affected imports to developing countries in 1997 was US$51.1 billion, and that
the price of these imports by reason of the price-fixed overcharge was elevated
by at least 10 per cent. Margaret Levenstein & Valerie Y. Suslow, Contemporary
International Cartels and Developing Countries: Economic Effects and
Implications for Competition Policy, 71 Antitrust L. J. 801, 813–16 (2004).
218
See Eleanor Fox, Testimony Before the Antitrust Modernization
Commission, Hearing on International Issues in Washington, D.C. (Feb. 15,
2006), available at www.AMC.gov; see also Special Committee on International
Antitrust, ABA Antitrust Section, The Special Committee’s Report 83–90 (Sept.
1, 1991).
219
Mar. 22, 1989, 1673 U.N.T.S. 125.
203
 Failing that, the United States and other developed countries
should amend their antitrust laws to provide jurisdiction for the discovery
of documents and testimony from knowledgeable people regarding
lawsuits against them and other nationals launched abroad. This should
include subpoena power when the developed country’s citizens are the
220
alleged victimizers of the people of developing countries .

In antitrust law and enforcement, in the absence of international

law, the world demands a cosmopolitan vision and a willingness by
221
developed nations to accept responsibility for the harms they cause .

7. Networks
222 223
Networking is a new world order . Antitrust networks exist .
They tend to be dominated by developed nations because developed
nations’ experience is deeper and longer; developed nations are likely to
224
be heavier users of networks ; they have more resources – people
and money – to devote to the project; and the network may provide a
virtual forum to export their law. As a result, the agendas tend
225
predominantly to reflect the interests of developed countries .

220 Fox, supra note 54.

221 The evolving case law of the United States does not demonstrate this vision
and it does not reflect generosity of spirit. Instead it shows a retreat and puts the
United States on a track towards solipsism and Balkanization. See F. Hoffmann-
La Roche Ltd. v. Empagran, 124 S. Ct. 2359 (2004) (holding that foreign buyers
in worldwide conspiracy cannot invoke US antitrust laws unless they are harmed
by the effect in the US); Intel Corp. Microprocessor Antitrust Litigation, 452 F.
Supp. 2d 555 (D. Del. 2007) (holding that US plaintiff complaining about
worldwide anti-competitive strategies of US defendant cannot invoke
defendant’s foreign acts as part of the mosaic).
222 Anne-Marie Slaughter, The Real New World Order, Foreign Affairs 183
(Sept.–Oct. 1997).
223 See D. Daniel Sokol, Monopolists Without Borders: The Institutional
Challenge of International Antitrust in a Global Gilded Age, 4 Berkeley Bus. L. J.
41 (2007), also available as a working paper, Univ. of Wis. Legal Studies
Research Paper No. 1034. See text at notes 178–94, 287–92.
224
Id., text at notes 226–29.
225
For example, the International Competition Network’s first project was
convergence of procedures for pre-merger notification – an issue of concern to
multinational corporations. Subsequent projects have stressed substantive
merger standards and coordination of cartel procedures. Technical assistance
204
Developing nations need their own networks to explore their own
interests more centrally. Regional trade groupings can serve as a
226
platform for this objective . A worldwide developing-country
competition network could supplement the International Competition
227
Network .

Developing nations themselves are diverse. They share certain

characteristics and do not share others. The situation and
228
characteristics of India are not the same as those of Benin .
Communications and cross-fertilizations through the network can begin
to sort out differences as well as to crystallize commonalities.

8. Conclusion

Developing countries deserve an antitrust law that fits the facts

of their markets and responds to their conditions and needs. They
deserve a law so designed and so characterized that their peoples will
embrace it as sympathetic and legitimate, rather than reject it as foreign.
If there is an appropriate symbol for a developing country’s
antitrust, it is not neo-liberalism, which may imply a widening moat. It is
the rising ladder. Antitrust can be seen as the complement to Hernando
de Soto’s The Other Path.

The antitrust law of developing countries is likely to incorporate

the lion’s share of developed countries’ antitrust principles. It is,
however, likely to embody a different set of default presumptions about
how well markets work, while incorporating a mandate and perspective
of inclusiveness. Developing countries have a choice.

for developing countries is, however, also on the agenda. See International
Competition Network Home Page,
http://www.internationalcompetitionnetwork.org (last visited June 30, 2007).
226
See UNCTAD, 2007: Implementing Competition-Related Provisions in
Regional Trade Agreements: is it possible to obtain development gains? United
Nations. New York and Geneva.
227
UNCTAD is one important forum that has specific regard for the interests of
developing countries. Competition law is one of its many missions.
228
See Paul Collier, The Bottom Billion: Why the Poorest Countries are Failing
and What Can be Done About It (2007) (distinguishing the conditions and the
plight of the poorest 20 per cent of the world).
205
 COMPETITION POLICY AND POVERTY ALLEVIATION:
THE CASE OF PAKISTAN

Joseph Wilson229

These “Trusts” (monopolies, in fact)

Must starve the needy;
They from the poor life’s blood exact
With death not speedy,
Bread, iron, coal, [cement, sugar] and such they seize,
For who dare cow them?
And they’ll keep up the price of these–
And other matters if they please,
230
While YOU allow them!

229
Member, Competition Commission of Pakistan. The views expressed in this
study are those of the author and do not necessarily reflect the views of the
Competition Commission of Pakistan or any of its individual members. The
author wishes to thank Ms. Shasita Bano, Ms. Syeda Batool and Ms. Hina
Sarafaraz for their research assistance.
230
http://wakeupfromyourslumber.blogspot.com/2005/12/poverty-amidst-
plenty.html
207
1. Introduction

The relationship between a poor man and a monopolist dates

231
back to time immemorial . However, the first law to control the conduct
232
of a monopolist was only drawn up in 1867 . During the last century,
mankind has made astronomical advances in every aspect of human
endeavour including proliferation of competition laws in the last decade,
yet over 1 billion people in this world live on less than US$1 a day, and
almost half of the world’s population (2.8 billion) lives on less than US$2
233
a day . On the other hand, the three richest people in the world have
more wealth than 600 million people living in the world’s poorest
234
countries . Poverty or income inequality is pervasive in both developed
235
and developing countries . Recognizing poverty as a social problem,
the world leaders met in Copenhagen in 1995 at the United Nations’
World Summit on Social Development and for the first time committed to
236
eradicate poverty in the world . Since Copenhagen, the nations of the
world reiterated their commitment again in 2000 through the Millennium
Declaration to “spare no effort to free ... fellow men, women and children
237
from the abject and dehumanizing conditions of extreme poverty” . In
2002, the World Summit on Sustainable Development again stressed
238
the need to alleviate poverty .

231
See http://www.henciclopedia.org.uy/autores/Laguiadelmundo/Usury.htm
(The practice of usury – lending money and accumulating interest on the loan –
can be traced back 4,000 years. But it has always been despised, condemned,
restricted or banned by moral, ethical, legal or religious entities).
232
Joseph Wilson, Globalization and the Limits of National Merger Control
Laws, at p. 65 (Kluwer Law International, 2003). The first antitrust law was
passed by the State of Maryland. (footnotes omitted).
233
UN HDR, 2003.
234
http://www.christianaid.org.uk/stoppoverty/trade/facts/index.aspx
235
World Summit for Social Development Programme of Action – Chapter 2:
Eradication of Poverty (Para. 19) (accessed 2 March 2008) (also available as a
PDF in report A/CONF.166/9 – Report of the World Summit for Social
Development): ( It occurs in all countries: as mass poverty in many developing
countries, pockets of poverty amid wealth in developed countries).
236
Id.
237
United Nations Millennium Declaration, A/RES/55/2, (18.9.2000)
238

http://daccessdds.un.org/doc/UNDOC/GEN/N02/636/93/PDF/N0263693.pdf?Op
enElement
208
 Since then national governments, both at national and
international levels, international donor agencies, non-governmental
organizations and the private sector have taken initiatives to combat
poverty. Any policy to eradicate poverty, argues Amartya Sen, “must
focus on creating environments in which people have the opportunities
to ‘lead the lives they have reason to value and to enhance the real
239
choices they have’” . Coincidentally, enhancing real choices is also a
core element of “consumer welfare”, which is the rationale (put
240
simplistically) of competition policy and law , and of classical trade
241
theory .

Competition policy forms a part of broader economic policies

that are used as tools to improve and sustain the engines of growth that
preserve the health of a nation; improve the welfare of the people; and
242 243
reduce poverty . The WTO and its 151 member nations agree that
the goal of international trade is to increase standards of living across

239
Mary-Ellen Boyle and Janet Boguslaw, Business, Poverty and Corporate
Citizenship: Naming the Issues and Framing Solutions, 6/22/07 J. Corp.
Citizenship 101; 2007 WLNR 13760904 quoting Amartya Sen, Development as
Freedom at 293 (Anchor Books/Random House, New York, 1999).
240
Robert H. Bork, The Antitrust Paradox, 61 (Basic Books Inc., New York,
1978); (Consumer welfare as defined by Judge Robert Bork, means all things
that are good for consumers, such as low prices, innovation, and choices.)
241
Erik Johansen, I Say Antitrust; You Say Anticompetitive: Why Bridging the
Divide Between U.S. And EU Competition Policy Makes Economic Sense, 24
Penn St. Int’l L. Rev. 331 at 335 ( 2005):
(It is choice. It is access to information. It is the availability of consumption
alternatives; the ability, if one is so inclined, to walk to the corner store and to
choose from among 200 different types of cheese. Quoting: Raj Bhala,
International Trade Law: Theory & Practice 1–6 (2nd ed. 2001); and Economics
Focus: Chasing the Leader, Economist, Feb. 8, 2003, at 70.)
242
Fox, Eleanor M., Economic Development, Poverty, and Antitrust: The Other
Path. Southwestern Journal of Law and Trade in the Americas, Vol. 13, 101 at
108–9, 2007. (Market tools are a very important part of the panoply of tools
needed to address world poverty and should be used liberally. These market
tools include market-freeing measures that reduce prices. They also include
antitrust priority setting that targets conspiracies that raise the price of staples,
such as milk, bread, transportation and utilities, helping the poor as well as
those who are better off.)
243
With the accession of Ukraine on 16 May 2008, the membership of the WTO
will reach 152.
209
 244
the globe . The phenomenon of globalization marked by trade
liberalization and foreign direct investment, among others, can be
harnessed and used efficiently only if there is sound competition policy
and law in place.

Competition policy and law provide a necessary framework that

supports and complements measures aimed at alleviating poverty.
Competition policy, where it exists, hovers over all economic activity
within a country, promotes rivalry among businesses, and keeps a
check on rent-seeking and anti-competitive practices, which could stall
245
any poverty-alleviation programmes .

Section 2 discusses the definition of poverty, reviews the

objectives of international trade, foreign direct investment and
competition policies, and their role in poverty alleviation. Section 3
overviews the competition regime in Pakistan and takes account of the
Competition Commission of Pakistan’s intervention in cases that have a
direct bearing on the poor population of the country. It also reviews the
state of competition in public utility sectors. This study concludes that a
competition regime embodying modern competition law principles and
having the objective of preserving competition in the market, thereby
enhancing consumer welfare and allocative efficiencies, can serve as an
important tool in alleviating poverty in developing countries.

2. Poverty and competition policy

2.1. Poverty defined

Various scholars and organizations have attempted to define

246
poverty . The World Summit for Social Development defines poverty

244
http://www.wto.org./english/thewto_e/whatis_e/inbrief_e/inbr00_e.htm; (The
goal is to improve the welfare of the peoples of the member countries).
245
William E. Kovacic, Institutional Foundations for Economic Legal Reform in
Transition Economies: The Case of Competition Policy and Antitrust
Enforcement, 77 Chi.-Kent L. Rev. 265, 281 (2001).
246
Boyle and Boguslaw, supra note 11, provide an account of definition by
various scholars, e.g. Poverty occurs because of restricted/inadequate access
to the opportunities and resources necessary for health, safety, and well-being
(Shapiro and Wolff 2004). The conditions that characterize the impoverished
status are not limited to insufficient income; also lacking are social and public
210
broadly to include “lack of income and productive resources sufficient to
ensure sustainable livelihoods; hunger and malnutrition; ill health;
limited or lack of access to education and other basic services;
increased morbidity and mortality from illness; homelessness and
inadequate housing; unsafe environments; and social discrimination and
247
exclusion” . It defines “absolute poverty” as a “condition characterized
by severe deprivation of basic human needs, including food, safe
drinking water, sanitation facilities, health, shelter, education and
information. It depends not only on income but also on access to social
248
services” . In 2001, the World Bank in its annual World Development
Report included vulnerability and exposure to risk as well as
249
voicelessness and powerlessness in the concept of poverty .

Poverty can be simply defined as social disadvantage vis-à-vis

various necessities of life. Poverty is usually measured through a
consensus based on the minimum income question, which is used to
250
derive the “Poverty Line” . In Pakistan, the official poverty line is based
on consumption, i.e., the caloric norm of 2,350 calories required by an
adult in a day, and on minimum non-food requirements. The poverty line
was set at Rs.673.54 (US$12.6) per month/per adult in 1998–99, which
rose to Rs.723 (US$11.9) in 2000–01, and to Rs.878 (US$14) in 2004–
251
05 . The current poverty line in Pakistan, which is around US$14 a
month, is below the dollar-a-day standard, which sets the poverty line at
US$30 a month.

services and investments in education, primary health care, water, sanitation,

transportation and energy. Poverty is aggravated by the lack of natural
resources necessary for well-being and often by environmental degradation
(Sen 1999; UN 2000).
247
World Summit for Social Development Programme of Action – Chapter 2:
Eradication of Poverty (Para. 19) (accessed 2 March 2008) (also available as a
PDF in report A/CONF.166/9 – Report of the World Summit for Social
Development); Since 1990, the World Bank’s annual World Development Report
(WDR) identified poverty not only in its income dimension but also in terms of
low achievements in education and health status , World Bank, WDR 1990.
248
Id. See also, Sen supra note 239.
249
World Bank, World Development Report, 2001.
250
Peter Saunders, Defining Poverty and Identifying the Poor, Reflections on
the Australian Experience, SPRC Discussion Paper No. 84 (1998):
http://www.sprc.unsw.edu.au/dp/dp084.pdf
251
Pakistan Poverty Reduction Paper, available at www.finance.gov.pk. The
conversion in US dollars is made using the exchange rate prevalent during the
period in question.
211
 Poverty is intensified by unemployment, labour market
inequalities, an “unequal distribution of power, and by limits on
252
political participation” . From the definitions above, the dimensions of
poverty that competition policy can directly and indirectly address are:
access to social services, unemployment, labour market inequalities,
unequal distribution of power, and vulnerability. A competitive market
demands multiple service providers for the provision of social services
and other sectors hitherto in the exclusive control of the state.
Competition law by ensuring fair market play encourages trade, which in
turn can generate employment, and reduce labour market inequalities.
Competition law also prohibits and penalizes abuse of dominant position
(unequal distribution of power), and it provides a shield to vulnerable
persons against artificial price hikes and other anti-competitive practices
affecting prices.

Poverty may be classified into three different categories:

1. Extreme/absolute/chronic poverty: households cannot meet

basic survival needs.

2. Moderate/transitory poverty: basic needs are barely met;

people must often forgo education and health care. The smallest
misfortune (health issue, job loss, etc.) threatens survival.

3. Relative: household income level is below a given proportion

of average national income; people lack access to quality health care,
253
education and prerequisites for upward mobility .

While the three categories require different types of

254
interventions, the responses often complement one another . Of the
three categories, the moderate or vulnerable poor are directly affected
with the enforcement or lack thereof of competition laws.

252
Boyle and Boguslaw, supra note 239, quoting Nef (1999); Mani (2004); and
Page and Simmons (2000).
253
Id. developing on the model by Jeffrey Sachs, (2005: 20): See also Chronic
Poverty Research Centre:
http://www.chronicpoverty.org/pdfs/PolicyBriefs/CPRC_PB6.pdf.
254
Id.
212
 Reporting on the causes of poverty in Pakistan, an ADB report
255
of 2002 noted that poor governance was the key underlying cause of
256
poverty during the 1990s . Poor governance had contributed to the
“declining competitiveness of the Pakistan economy in the increasingly
257
skill-based global economy” . The report also noted that there are
“strong linkages between pro-poor growth on the one hand, and human
development [and] good governance” on the other. To promote pro-poor
economic growth, it recommended “structural reforms in key sectors
through promoting deregulation, privatization, and the creation of an
258
enabling environment for private sector foreign investments” . While
the deregulation and privatization processes were started in the early
1990s in Pakistan, the enabling environment encouraging foreign
investment requires a sound and well-entrenched competition regime –-
which ensures free entry and exit, and a level playing field for foreign
investors –- came into being only in 2007 through the promulgation of
the Competition Ordinance, 2007.

2.2. Millennium Development Goals and Pakistan’s initiatives

to alleviate poverty

The first goal on the list of the Millennium Development Goals

(MDGs) is to “reduce by half the proportion of the world’s population
259
living on less than US$1 a day between 1990 and 2015” . Pakistan
subscribes to the Millennium Declaration and has taken various
initiatives to alleviate poverty, in addition to addressing other MDGs.

Pursuant to the Millennium Declaration, the government of

Pakistan produced an Interim Poverty Reduction Strategy (IPRS) Paper
in 2000. The IPRS aimed at improving growth, human development,
governance, and reducing the vulnerability of the poor to shocks. In

255
Governance is defined as the manner in which power is exercised in the
management of a country’s social and economic resources in development.
Asian Development Bank, 1995: Governance: Sound Development
Management Policy, Globalization and Poverty.
256
Poverty in Pakistan: Issues, Causes and Institutional Responses, at p. 2
(Asian Development Bank, July 2002; Publication Stock No. 070302).
257
Id. at p. 3.
258
Id. at p. 5.
259
UN 2000.
213
December 2003, the final Poverty Reduction Strategy Paper (PRSP)
260
was completed and published . The PRSP was based on four pillars:
(i) achieving high and broad-based economic growth while maintaining
macroeconomic stability; (ii) improving governance; (iii) investing in
human capital; and (iv) targeting the poor and vulnerable. To implement
the Strategy, the Ministry of Finance set up a PRSP Secretariat, which
is responsible for implementing and monitoring the progress made
under the PRSP. The PRSP Secretariat is assisted by a research centre
called the Centre for Research on Poverty Reduction and Income
Distribution. Additionally, the Planning Commission of Pakistan also
provides support to the Ministry of Finance in meeting the obligations
261
under the PRSP .

The Strategy is part of the Poverty Reduction and Growth

Facility given by the International Monetary Fund (IMF) and the World
Bank to the government. The donor agencies have created a “Pakistan
Poverty Reduction Support Credit (PRSC) Technical Assistance Trust
Fund” under which funding for technical assistance may be granted to
the newly constituted Competition Commission of Pakistan.

The vulnerable or transitory poor (pillar 4 of the PRSP) are a

target of the government’s initiative to reduce poverty. The government
has established two micro-credit banks and a few other institutions
responsible for making direct transfers to the poor. Some of these are:
Khushali Bank; The First Micro Finance Bank Ltd., SME Bank, Pakistan
Poverty Alleviation Fund (PPAF), Social Safety Nets, Food Support
262
Programme, Pakistan Centre for Philanthropy .

Creating access to employment is a sine quo non for alleviating

poverty. The government of Pakistan has encouraged gender-support
programmes in rural areas and in services within the urban centres. As
a result, female unemployment rate has dropped from 12.8 per cent in
2004 to 9.4 per cent in 2006. The steepest decline was recorded in
Balouchistan, where the unemployment figures fell from 29.2 per cent in
2004 to 7.1 per cent in 2006. Females are encouraged to seek
employment in non-traditional sectors, such as police and air force, and

260
Accelerating Economic Growth and Reducing Poverty: The Road Ahead.
Ministry of Finance, Government of Pakistan, December 2003.
261
Id.
262
Id. at p. 138.
214
the financial institutions are directed to offer credit to female
entrepreneurs to encourage small and medium enterprises.

Since the implementation of the PRSP, Pakistan has witnessed

a growth in its gross domestic product (GDP), from 1.8 per cent in
263
2000–01 to more than 7 per cent since 2004 . During 2004–05,
“agriculture, which has the strongest immediate impact on rural poverty,
grew by 7.6 per cent, manufacturing by 12.5 per cent, and services by
264
7.9 per cent” . The fiscal deficit of the country has reduced from 8.8
per cent of the GDP in 1990–91 to 3 per cent in 2003–04, and the
“government intends to keep it around 3.5 per cent until the financial
265
year 2008” .

In 2006–07, the three-year Poverty Reduction Strategy

Programme I (PRSP-I) came to an end. During this period, the pro-poor
expenditure was increased from Rs.167.25 billion in 2002–03 to
Rs.452.4 billion in 2005–06. National initiatives, in addition to global
growth have contributed in the alleviation of poverty in Pakistan. The
percentage of the population living below the poverty line – the
headcount ratio – has declined from 31 per cent in 2002 to 17 per cent
266
in 2006 .

The PRSP II covering the period 2008 to 2010 is being finalized

and is based on the following seven pillars:
i) Drivers of economic growth and macroeconomic
stability;
ii) Crafting a competitive advantage;
iii) Harnessing the potential of people;
iv) Financial deepening and economic development;
v) World-class infrastructure;
vi) Effective governance and management, and
267
vii) Targeting the poor and vulnerable .

263
Pakistan Economic Survey, 2006–07 at p. 53. available at
http://www.finance.gov.pk/survey/survey.htm.
264
Akhtar Mahmood, “Linkages between Trade, Development and Poverty
Reduction: The Case of Pakistan”, at 135 in Trade-Development-Poverty
Linkages Vol. I (Jaipur Printers, Jaipur); CUTS International, 2008.
265
Id. at p. 136.
266
http://www.sbp.org.pk/reports/annual/arfy07/Chp-8.pdf
267
Pakistan Economic Survey, supra note 263, at 53.
215
 The three additional principles added in the PRSP II are i)
crafting a competitive advantage, ii) financial deepening and economic
development, and iii) world-class infrastructure. Effective governance,
among others, is a principle which continues to be part of PRSP I and II.
An important section in the governance structure is the efficient and
well-crafted competition policy and law. Under the PRSP I, the
government of Pakistan designed a new competition policy and
Competition Ordinance, 2007, which was promulgated on 2 October
2007. The Competition Ordinance is discussed more in detail in Section
3.

2.3. International trade, foreign direct investment,

competition policy and poverty

The underlying objectives of promoting international trade,

foreign direct investment (FDI) and competition policy have a common
theme, that is, to “increase world wealth” or alleviate poverty by
268
“opening markets to foreign goods, services, and capital” . Examining

268
Kevin C. Kennedy, Foreign Direct Investment and Competition Policy at the
World Trade Organization, 33 Geo. Wash. Int’L. Rev. 585 (2001); see also
OECD, Trade and Competition Policies: Exploring the Ways Forward (1999);
WTO Secretariat, Synthesis Paper on the Relationship of Trade and
Competition Policy to Development and Economic Growth, WT/WGTCP/W/80
(Sept. 18, 1998); Michael J. Trebilcock, Competition Policy and Trade Policy,
Mediating the Interface, 30 J. World Trade 71 (1996).
Prof. Kennedy has succinctly described the relationships between international
trade, foreign direct investment and competition polices: “These three policies
can be mutually reinforcing when pursued with the common goal of encouraging
cross-border competition. For example, a liberal trade policy has as its goal the
elimination or lowering of barriers to trade in goods, opening foreign markets to
goods from abroad, and bringing competition to bear on domestic producers. A
liberal trade policy thus can have a significant impact on competition and on
markets. To the extent trade liberalization reduces entry barriers to foreign
markets, it gives domestic firms less ability to engage in anti-competitive
behavior. Similarly, to the extent that domestic firms tie up channels of
distribution in local markets and thereby block market access to imports, a
liberal investment policy can eliminate such anti-competitive practices by
permitting foreign firms to own distribution networks in the local market. In
theory, then, trade, investment, and competition policies ought to work in
harmony. Their shared goals and objectives suggest teaming rules against
private anti-competitive behavior with rules on the elimination of government
216
the link between trade and poverty, one study concludes that: “while
there is no simple one-to-one relationship between trade and poverty,
the evidence seems to indicate that trade liberalization is generally a
positive contributor to poverty alleviation — it allows people to exploit
their productive potential, assists economic growth, curtails arbitrary
269
policy interventions and helps to insulate against shocks” .

Competition policy aims to promote business rivalry and

270
allocation of resources in which consumer welfare is maximized . It
provides the basic framework that ensures the success of liberalization
271
processes . It is reported that countries with an effective competition
regime have a “high level of competition in local market”, which in turn
has a direct effect on the “levels and rates of growth in per capita gross
272
domestic product” . The growth in per capita GDP is taken as the
primary indicator of poverty reduction.

However, to ensure that effective competition regime pans out

as it should, there is a need to foster a competition culture in the
developing countries. “A culture of competition in this context refers to
the awareness of the business community, governmental agencies,
non-governmental agencies, the media, the judiciary, and the general
public, of the rules of competition law, and their overall responsibility to
ensure that such rules are observed in the interest of competition and
overall economic development…The lack of such a culture has plagued

barriers to international trade and investment”. Id., at p. 585.

269
WTO, Special Studies, Trade, Income Disparity and Poverty, by DanBen-
David, Håkan Nordström, LAlanWinters (1999) at p. 6.
270
See Harry S. Gerla, Restoring Rivalry as a Central Concept in Antitrust Law,
75 Neb. L. Rev. 209 (1996). Quoting Roland Mach. Co. v. Dresser Indus., 749
F.2d 380, 395 (7th Cir. 1984). See also General Leaseways, Inc. v. National
Truck Rental Leasing Ass’n, 744 F.2d 588, 596 (7th Cir. 1984) (‘the allocation of
resources that maximizes consumer welfare’).
271
Kovacic, supra note 245 at 273. (The massive privatization of assets without
the creation of mechanisms for ensuring competition and effective shareholder
governance may enable company managers during the era of planning to loot
the productive core of the newly private enterprises.); see also R. S. Khemani,
Competition Policy and Promotion of Investment, Economic Growth and Poverty
Alleviation in Least Developed Countries, (World Bank 2007) at p. 8
272
Khemani, Id. at p. 3.
217
 273
practically all young agencies” . Young agencies should make
competition advocacy an integral part of their functions, so that
competition culture may be developed, which will help facilitate the
implementation of the competition policy and law.

A properly designed competition regime embedded in a well-

nurtured competition culture, would make antitrust enforcement
effective, which will prevent and arrest anti-competitive practices
adversely impacting poverty in the following, among others, manner:

i) Collective price fixing – raising prices artificially thereby

harming poor consumers;
ii) Restricting the supply/output of essential commodities in the
market and thereby depriving the consumers of the basic
necessities;
iii) Bid rigging: especially in government contracts for
infrastructure projects. Bid rigging raises the cost of state
projects thus misappropriating public funds, which could be
used for other development and poverty reduction projects.
iv) Tied selling – forcing people to buy items they do not need,
thus depriving them of their scarce funds.
v) Cartels in essential supplies, e.g. wheat, sugar, cooking oil,
cement, etc.

As an illustration of one of the above anti-competitive activities

adversely affecting competition and thereby development processes, a
World Bank Report noted: “Procurement irregularities have been a
significant problem in Pakistan, in large part due to a weak regulatory
framework that discouraged due diligence in contract awards and stifled
open competition. Specific problems have included inadequate bidding
documents, inadequate response time to bidders, prequalification as a
means of restricting competition, price negotiations, lack of independent
complaints handling process, and irregularities in inspections or
274
measurements” .

273
Lessons to be Learnt from the Experiences of Young Competition Agencies,
Competition Policy
Implementation Working Group, International Competition Network, Annual
Conference, Cape town, South Africa, 3–5 May 2006.
274
The World Bank Group, Report No. 35718-PAK, at p. 26
218
 While Pakistan established the Pakistan Procurements
Regulatory Authority (PPRA) to regulate all public sector procurements,
a sound antitrust enforcement is essential to curb the bid rigging and
other above-mentioned anti-competitive practices, which affect
consumers, more so those living close to the poverty line.

3. The competition regime in Pakistan

The Monopolies and Restrictive Trade Practices Ordinance of

275
1970 (MRTPO), was the principal instrument forming the competition
regime in Pakistan until October 2007, when it was repealed and
276
replaced by the Competition Ordinance of 2007(“the Ordinance”) .

3.1. Monopolies and Restrictive Trade Practices Ordinance,

1970

The MRTPO was drafted with the objective of preventing an

undue concentration of economic power in the hands of the few. The
substantive provisions of the MRTPO proscribed i) undue concentration
of economic power; ii) growth of unreasonable monopoly power; and iii)
277
unreasonably restrictive trade practices . The MRTPO did not have
promotion of business rivalry or efficient allocation of resources as its
objective. As such, the MRTPO did not provide the necessary legal
framework that could ensure that the liberalization process, which
started in early 1990s, does not fail. Thus, there was a need to reform
the competition policy and law with a view to effectively harness
international trade, and FDI, and also to bring it in line with the globally
accepted competition policy norms and practices.

3.2. The Competition Ordinance, 2007

In order to strengthen good governance in Pakistan, the Ministry

275
Monopolies and Restrictive Trade Practices (Control and Prevention)
Ordinance, 1970 (Pakistan) (Published in the Gazette of Pakistan,
Extraordinary, Feb. 26, 1970) [hereinafter MRTPO]. For a commentary on the
MRTPO see Joseph Wilson, At The Crossroads: Making Competition Law
Effective in Pakistan, 26 NW. J. Int’l L. & Bus. 565 (2006).
276
Competition Ordinance, 2007 (Pakistan) (Published in the Gazette of
Pakistan, Extraordinary, Oct. 2, 2007) [hereinafter “CO 2007”].
277
Preamble and Section 3 MRTPO supra note 275.
219
of Finance, under the Poverty Reduction Strategy Paper put forward for
legislation a competition Bill, which was promulgated by the President of
Pakistan as the Competition Ordinance on October 2, 2007. The
objective of the Competition Ordinance is “to provide for free
competition in all spheres of commercial and economic activity, to
enhance economic efficiency and to protect consumers from anti-
278 279
competitive behaviour” . While the term competition is not defined in
280
the Ordinance, and rightfully so , it means promoting business rivalry,
as enhancing economic efficiency and protecting consumers are
separately mentioned. The triad mentioned in the preamble holistically
captures the norms and objectives of contemporary competition
regimes.

The Ordinance applies to all undertakings, whether

governmental or private, and to all actions or matters that have the
effect of distorting competition within Pakistan. The Ordinance prohibits
281
abuse of dominant position ; agreements that have the object or effect
282
of preventing or reducing competition within the relevant market ; and

278
Preamble, CO 2007, supra note 276.
279
For definitions of competition, see Webster’s New World Dictionary of the
American Language (College ed. 1968) (defining “competition” as “striving for
the same object, position, prize ... usually in accordance with certain fixed
rules") and Black's Law Dictionary 278–79 (7th ed. 1999) (defining “perfect
competition” as “a completely efficient market situation characterized by
numerous buyers and sellers, a homogeneous product, perfect information for
all parties, and complete freedom to move in and out of the market. Perfect
competition rarely if ever exists, but antitrust scholars often use the theory as a
standard for measuring market performance.”).
280
Defining the term “competition” would have narrowed the scope of the
Ordinance.
281
CO 2007, supra note 276, Section 3.Abuse of dominant position.- (1) No
person shall abuse dominant position. (2) An abuse of dominant position shall
be deemed to have been brought about, maintained or continued if it consists of
practices which prevent, restrict, reduce or distort competition in the relevant
market. (3) . ...
282
Id., Section 4.
4. Prohibited agreements.-(1) No undertaking or association of undertakings
shall enter into any agreement or, in the case of an association of undertakings,
shall make a decision in respect of the production, supply, distribution,
acquisition or control of goods or the provision of services which have the object
or effect of preventing, restricting or reducing competition within the relevant
market unless exempted under Section 5 of this Ordinance. (2) . . . (3) Any
220
 283
deceptive marketing practices . The Ordinance introduced pre-merger
284
notification, and a two-phased merger clearance regime . The
substantive test for merger clearance is the substantial lessening of
competition by creating or strengthening a dominant position in the
285
relevant market .
The Ordinance provides for the establishment of a Competition
286
Commission of Pakistan (CCP) . The CCP is comprised of five
287
members including the Chairperson . Apart from implementing the
substantive provisions of the Ordinance, the functions of the
Commission includes conducting studies of different sectors with a view
to promoting competition, and engaging in competition advocacy for
288
promoting a competition culture .

agreement entered into in contravention of the provision sub-section (1) shall be

void.
283
Id., Section 10.
10. Deceptive marketing practices:- (1) No undertaking shall enter into
deceptive marketing practices.
(2) The deceptive marketing practices shall be deemed to have been
resorted to or continued if an Undertaking resorts to-
(a) the distribution of false or misleading information that is capable of
harming the business interests of another undertaking;
(b) the distribution of false or misleading information to consumers, including
the distribution of information lacking a reasonable basis, related to the
price, character, method or place of production, properties, suitability for
use, or quality of goods;
(c) false or misleading comparison of goods in the process of advertising or
packing;
(d) fraudulent use of another’s trademark, firm name, or product labeling or
packing.
284
Id., Section 11.
285
Id., Section 11(1).
286
Id., Section 12.
287
Id., Section 14.
288
Id., Sections 28 and 29.
29. Competition advocacy – The Commission shall promote competition
through advocacy which, among other, shall include:–
(a) creating awareness and imparting training about competition issues and
taking such other actions as may be necessary for the promotion of competition
culture;
(b) reviewing policy frameworks for fostering competition and making suitable
recommendations for amendments to this Ordinance and any other law that
affect competition in Pakistan to the Federal Government and Provincial
Governments;
221
 All matters under the Ordinance are decided in the first instance
by a single member of the CCP or its authorized officer. Appeal against
the order of a single member, or authorized officer, may be preferred
before a bench comprising of no less than two members of the
Commission. The order of the appellate bench can be appealed against
289
before the Supreme Court of Pakistan .

In case of contravention of any provisions of the Ordinance, the

Commission may impose a penalty of up to Rs.50 million (around
US$850,000) or an amount not exceeding 15 per cent of the annual
290
turnover of the undertaking .

3.2.1. Antitrust enforcement

In a short span of less than four months since the CCP was
constituted, the Commission has initiated suo moto actions, and has
acted on complaints, which have direct impact on consumers.

3.2.1.1. Banks’ cartel: fixing interest rates

The Pakistan Banks’ Association (PBA) advertised on 5

November 2007 in the daily press that “under the auspices of Pakistan
Banks’ Association, all scheduled banks introduced the Enhanced
Saving Account (ESA)” for all saving accounts with a maximum deposit
291
of Rs.20,000 . Under the ESA, small account holders will get a fixed
interest of 4 per cent per annum. The Competition Commission took
notice of the advertisement and issued notices to PBA and 41 banks
under Section 30 of the Competition Ordinance, 2007 requiring them to
explain their position regarding jointly introducing a financial product and

(c) holding open hearings on any matter affecting the state of competition in
Pakistan or affecting the country’s commercial activities and expressing publicly
and opinion with respect to the issue; and
(d) posting on its website all decisions made, inquiries under review and
completed, merger guidelines, educational material and the like.
289
Id., Section 41.
290
Id., Section 38.
291
The NEWS, 5 November 2007.
222
fixing profit rates, which prima facie violates Section 4 of the
292
Ordinance .

The banking sector in Pakistan is still concentrated, despite a

293
large number of banks entering the market in the last decade . The top
294
five local banks enjoy 80 per cent of the market share of the banking
sector. These banks are charging high lending rates, and passing only a
portion of the profits on to their depositors on whose money they make
the profits. The banking spread in Pakistan is among the highest in the
world, and Pakistan’s banking sector has enjoyed the highest profits in
the Asia-Pacific region.

On April 10, 2008, the CCP issued its order against the bank
cartel requiring PBA to desist from collusive price-fixing and imposed a
penalty of Rs. 30 million on it and Rs. 25 million each on seven leading
295
banks . Fixing the interest rates, apart from killing the competition,
directly impacts the account-holder’s potential to save, and thus
enhances his/her vulnerability. Such conduct is clearly adversely
affecting the efforts to alleviate poverty in the country. It is hoped that
the order of the CCP will restore competition in the market for small
depositors, thereby giving them a choice to opt for banks offering high
interest and low lending rates.

3.2.1.2. Bahria University: the tying case

Bahria University, run by Pakistan Navy and having campuses

in Karachi and Islamabad, imported 4,500 laptops in 2006 to sell to
students. However, when the laptops were not sold as expected, the
University administration made it mandatory for all new entrants to
296
purchase the computers . The price of the laptops in the market is

292
See footnote 282, for the text Section 4; Competition Commission Warns
Banks of Heavy Penalties,
http://www.dailytimes.com.pk/default.asp?page=2008%5C02%5C22%5Cstory_
22-2-2008_pg5_1; http://www.thenews.com.pk/daily_detail.asp?id=97538.
293
Banks’ profit up despite odds, http://www.dawn.com/2008/03/04/ebr8.htm.
294
Habib Bank, National Bank, Muslim Commercial Bank, United Bank, and the
Allied Bank.
295
http://www.cc.gov.pk/Downloads/Order_of_Banks.pdf
296
Bahria University Forcing Students to Buy Old Laptops,
http://www.interface.edu.pk/students/Feb-08/Bahria-College.asp
223
around Rs.40,000.00 (US$650.00) whereas the university is charging on
a lump-sum basis Rs.56,000.00 (US$903.00) or in the case of payment
by instalment it costs Rs.17,000.00 (US$275.00) per semester for four
semesters (a total of US$1,100.00) or Rs.10,650/- (US$171.00) per
semester for eight semesters (a total of US$1,374.00). The University
297
intends to continue this practice while the stocks last .

The CCP took notice of this practice, after picking it from the
press, and initiated an inquiry as the practice is violating Section 3(3)c of
the Ordinance, which prohibits “tie-ins”, that is where the sale of goods
or services is made conditional on the purchase of other goods or
services.

The practice of tie-in was putting an unnecessary burden on the

poor students by: i) forcing them to purchase a laptop even if they
already have one; and ii) selling the laptops at a price that is at least 45
per cent more than the market price in the case of a lump-sum purchase
and over 100 per cent more in case of purchase by instalments. This
anti-competitive practice is clearly a tax on students, who wish to
improve the human capital thereby reducing the incidence of poverty. In
response to the CCP’s notice, the University has voluntarily agreed to
stop the practice of mandatory purchase of laptops immediately. It is
hoped that this will send a signal to others to abstain from engaging in
activities that unduly burden the captive, often vulnerable, customers.

3.2.1.3. The colas: exclusive dealing case

Murree Brewery Company Limited (MBCL), a local producer of

alcoholic and non-alcoholic beverages, complained against McDonalds,
Kentucky Fried Chicken (KFC), and Pizza Hut for exclusive dealing with
cola companies and selling only cola drinks at their outlets, thereby
refusing to deal with it and other local beverage manufacturers.

McDonalds, KFC, and Pizza Hut together enjoy the dominant

position in the foreign fast-food restaurants market. Their refusal to deal
with MBCL forecloses a local competitor from the relevant market.
Keeping efficiencies flowing from exclusive dealing aside, such

297
This information is obtained by the Commission in the process of initiating
the inquiry.
224
agreements by restricting competition indirectly restrict an undertaking’s
potential to grow thereby limiting potential employment opportunities, in
addition to limiting choices to consumers. Competition law by prohibiting
agreements restricting competition indirectly ensures that opportunities
for growth and potential employment are not stifled, and thus contributes
towards alleviating poverty.

3.2.2. Intervention in essential commodities sectors

The CCP has made interventions, either at its own behest or at

the request of the government, in certain essential commodities markets
with a view to preventing artificial price hikes and supply shortages.

3.2.2.1. Cement industry: an entrenched cartel!

Cement costs form a significant portion of a country’s

infrastructure development budget. A price hike in the cement sector
may lead to the reallocation of funds for the purchase of cement instead
of some other developmental work. In Pakistan, a sudden upsurge in
298
cement prices by all the cement companies was (again) observed in
February 2007. The prices were increased from Rs.220~230 to
Rs.275~360 per 50-kg bag indicating a cartel-like behaviour.

The government of Pakistan took notice of this sudden rise in

prices and the Cabinet Division instructed the erstwhile Monopoly
Control Authority (MCA) to initiate an enquiry. The MCA established a
committee to conduct an in-depth special enquiry under the provisions
of the MRTPO. The Committee took statements and viewpoints of all
stakeholders including the general public by soliciting information
through newspapers. The MCA was however unable to effectively
investigate the cartel, as the MRTPO did not have provisions for
leniency and inspection of premises.

Continuing the work undertaken by the MCA, the Competition

299
Commission using the powers to forcibly inspect premises inspected

298
The price-fixing behaviour by cement companies first came to the surface in
1998, and keeps recurring time and again.
299
See Sections 34, 35 and 39 of the CO 2007.
225
the offices of All Pakistan Cement Manufacturers Association (APCMA)
in Lahore on 24 April, 2008 and recovered reasonable evidence against
APCMA for its alleged role in price fixing and output restrictions. The
CCP has issued notices the office bearers of APCMA, and the case is
300
now under investigation .

This was the first time that the Commission has forcibly
inspected the offices of an association. The forced inspection has sent a
strong signal to businesses to desist from anti-competitive practices,
which hitherto were considered normal business practice.

3.2.2.2. Liquefied petroleum gas: the supply shortage

Liquefied petroleum gas (LPG) is manufactured during the

refining of crude oil, or extracted from oil or gas streams as they emerge
from the ground. There are ten producers of LPG including five
refineries and other exploration companies in Pakistan. According to an
estimate, 15 million households use LPG for cooking and heating
purposes, as no other source of fuel is available to them. In Azad
Jumma and Kashmir (AJK) and northern areas of Pakistan the only fuel
available to people is LPG. In 2000, the government deregulated the
sector allowing producers to fix wholesale prices. Consequently the
distributors and dealers set their prices for retail sales.

In January 2008, there was a severe shortage of LPG: against

the demand of 4,000 million tons per day there was a supply of only
1,700 million tons per day. Although, demand for LPG is usually high in
the winter season, it was speculated that producers agreed to create a
price hike by limiting supply. It is observed that over the last 18 months
301
the price of LPG has skyrocketed to a 300 per cent increase .

The CCP took notice of this astronomical price hike and

requested the Oil and Gas Regulatory Authority, the sector regulator, to
take cognizance of the matter. Higher prices of LPG directly affect 15
million vulnerable households. In addition to household consumption, a
large proportion of people in the northern or mountain areas are
engaged in the restaurant profession, and use LPG for cooking. The

300
http://www.brecorder.com/index.php?id=731810&currPageNo=1&query=&sea
rch=&term=&supDate=
301
http://www.views.pk/lpg-price-mechanism-completely-deregulated.
226
non-availability of LPG directly affects their source of earning, forcing
them to live on their savings, if any, and thus pushing them towards
poverty.

3.3. Competition in public utilities

The government of Pakistan liberalized and opened up markets

for public utilities such as telecommunication, electric power, oil and gas
in the early 1990s. The liberalization and fostering of competition has
been more successful in the telecommunications sector than in other
industries.

3.3.1. Telecommunications sector

Pakistan started opening up the telecommunications sector in

1991 with the corporatization and then privatization of the state-owned
Pakistan Telegraph and Telephone Department (PTT) into the Pakistan
Telecommunication Corporation. In 1996, the sector was reorganized
through the Pakistan Telecommunications (Re-organization) Act, which
also provides for the establishment of the Pakistan Telecommunication
302
Authority (the “Authority” or PTA) .

Under Sections 4(c) and 6(f) of the 1996 Act, it is the function of
303
the Authority to promote and protect the interest of the consumers .
Pursuant to Section 4, the Protection of Telecom Consumers Regulation
2006 was promulgated with the aim of making efficient use of the
benefits of a competitive environment, where a consumer is free to
choose among operators and their services. Regulation 4 and other
provisions of the Consumer Regulation proscribe the operators from
colluding, engaging in anti-competitive practices and abusing the
dominant power that would undermine consumer interests, thereby
discouraging investment and/or the provision of quality services.

Section 4(d) of the 1996 Act mandates the Authority to “promote

the availability of a wide range of high quality, efficient, cost-effective

302
Section 3 of the Pakistan Telecommunication (Re-organization) Act, 1996
(XXX of 1996) (7 March, 1996, No. F. 2(1)/96 pub.).
303
Section 4, Id.
227
and competitive telecommunication services throughout Pakistan”.
Section 6(e) complements the duty to promote competition by requiring
the Authority to ensure that “fair competition in the telecommunication
sector exists and is maintained”. In 2006, the Act was amended by
giving the Federal Government powers to make rules for “preventing,
prohibiting, and remedying the effects of anti-competitive conduct by
304
licensees” . The rules are, however, yet to be made.

In order to maintain fair competition in the telecommunications

market, the Authority regularly monitors the market to ascertain players
with Significant Market Power (SMP). An operator is presumed to be an
SMP when it has a market share of more than 25 per cent of a particular
305
telecommunication market . Once an SMP is determined, the Authority
incorporates provisions prohibiting anti-competitive practices in their
306
licences .

To encourage market entry further, the Telecom De-regulation

Policy of 2003 (TDC) and the Mobile Cellular Policy of 2004 were
formulated to attract new entrants in the fixed and mobile
telecommunications sectors, respectively. The TDC was formulated
pursuant to the commitment made under the WTO agreement
liberalizing trade in basic telecommunications services, known as the
307
Fourth Protocol to the GATS . The Agreement called for the opening
of “markets to competition for domestic and foreign telecommunications
308
network operators and service providers” . The liberalization of the
telecommunications industry has attracted sizeable FDI in the country.

304
Section 57(2)(ad), Pakistan Telecommunication (Re-organization)
(Amendment) Act, 2006.
305
Rule 17 of the Pakistan Telecommunications Rules, 2000.
306
¶ 5.10, Mobile Cellular Policy, 2004.
307
Agreement on Telecommunications Services (Fourth Protocol to the General
Agreement on Trade in Services), Feb. 15, 1997, 36 I.L.M. 354 (1997).
308
World Trade Organization Concludes Agreement on Telecommunications
Market Liberalization, Satellite Engineer: Online Magazine, Scientific Atlanta
(visited Sept. 9, 1997) <http://www.satengineer.com/wto.html>.
228
 Total Foreign Direct Investment in Telecom Sector
(US$ millions)
4000 60
54.1
3500 50
3000
2500 32.4 40
2000 21.8 30
1500 20
1000
500 1.3 1.7 10
0 0
2001-02 2002-03 2003-04 2004-05 2005-06
Total FDI FDI in Telecom Telecom Share (%)

Post deregulation (2004), the growth of FDI in the telecom

sector has been phenomenal, contributing 54.11 per cent to the total
FDI of US$3521 million in 2005–06. The consistent growth in investment
has resulted in a better infrastructure and generated employment in the
sector.

Total Employment Generated in the Telecom

Sector

500000
400000
417135
300000
200000
100000 183063

0
2004-05 2005-06

229
 In 2005, two new mobile service providers, Telenor and Warid,
launched their operations and investment by them resulted in significant
job creation in the sector. In 2005–06, 183,063 jobs were created which
were in addition to the 417,135 created in 2004–05. The figures indicate
both direct and indirect employment generated each year. The telecom
sector has contributed Rs.77.1 billion to the national exchequer in 2005–
06. This figure is 15 per cent higher than that of the previous year. The
contribution to the government coffers is increased by 100 per cent
since the liberalization took place in 2003–04. The telecom sector is still
attracting large investments and is contributing to the economy through
the creation of employment thereby alleviating poverty.

In addition to attracting FDI, and creating employment, the rates

(tariffs) of mobile telecommunication services in Pakistan are among the
lowest in the world. All these benefits can fairly be attributed to pro-
competitive legislation and its effective implementation by the regulator.

Despite the commendable growth of telecommunications in

Pakistan, it should be mentioned that 70 per cent of Pakistan’s total
population resides in rural areas, where the total teledensity is a little
309
less than 2 per cent . Eighty million people in Pakistan have no access
to telecommunication services. In Punjab, the most densely populated
province, 41 per cent of villages, and in Balochistan, the least densely
populated province, 94 per cent of villages, are without access to
310
telecommunication services . The rapid rise in mobile cellular
penetrations, mostly concentrated in the urban areas, is widening the
rural–urban divide, and the benefits are not reaching the poor masses.

However, in late 2007, the Universal Service Fund Company

awarded contracts to the mobile operators for rolling out networks in
311
remote rural areas . It is hoped that with the funding from Universal
Service Fund, the poor population living in rural areas will now have
access to the telecommunication services and the benefits that comes
with it.

309

http://www.pakistan.gov.pk/ministries/NewsInfo.jsp?MinID=7&cPath=78&div=ita
ndtelecom&file=031006.xml&path=ministries/moit/
310
http://english.people.com.cn/200608/01/eng20060801_288892.html
311
http://www.usf.org.pk/projects.asp
230
3.3.1.1. The jurisdiction of CCP over regulated sectors

The CCP has jurisdiction over competition issues in the

telecommunications and other regulated sectors, in addition to the
powers conferred on the sector-specific regulators.

i. Mobilink: tying case

The CCP is currently reviewing an instance of probable abuse

of dominant position, in the form of tying. Mobilink, the dominant mobile
service provider, is being investigated as possibly tying the purchase of
a BlackBerry handset with its Internet and e-mail services. At the time,
when the matter was initiated, Mobilink was the only service provider
offering BlackBerry services in Pakistan. The issue was that if a
BlackBerry subscriber wished to switch to another service provider for
better voice telephony services he/she would then lose access to
Internet and e-mail services offered by Mobilink.

ii. PTCL: abuse of dominance/deceptive marketing

In another matter affecting poor customers, the CCP has

initiated a suo moto inquiry under abuse of dominance and deceptive
marketing provisions of the Ordinance, against the Pakistan
Telecommunications Corporation Limited (PTCL), the dominant fixed-
line service provider, for activating, without first seeking the consent of
the subscribers, the “Pakistan Package” on all accounts. Under the
Pakistan Package, a fixed fee of Rs.200 is charged on all accounts for
making none to up to 5,000 minutes of long-distance calls. A large
section of the population, mostly the poor, does not want the Pakistan
Package and has considerable difficulty in getting it deactivated by the
PTCL. It is reported that 1.6 million subscribers got the Pakistan
Package deactivated. While Rs.200 (US$3.2) is a negligible amount, it
is equal to 22.8 per cent of the monthly livelihood of someone living on
the poverty line in Pakistan.

231
 The above two instances highlight the role that the CCP is
playing in arresting and preventing anti-competitive activities in the
regulated sectors.

3.3.2. Electric power sector

Pakistan is currently faced with serious electric power crises . The

power crisis has been so severe during the period December 2007 to
February 2008 that every 30 minutes there was a power outage in
almost all parts of the country, including the capital city of Islamabad.
Many areas of certain cities were often without any electricity, gas or
water for an entire day in the extremely cold weather. There is a clear
disparity between the demand and supply of electric power. Pakistan
requires around 11,000 megawatts per day, while supply is around
8,000 megawatts per day. The power shortage is further exacerbated by
power losses, which stood at 22.1 per cent in 2006–07 as against 22.8
per cent in 2005–06. The country is facing a shortfall of around 3,000
megawatts per day, which is expected to increase to 5,000 megawatts
during the upcoming summer. There is a dire need for a quantum leap
in electricity generation to fill the gap between demand and supply.

The power generation sector was liberalized in 1995 with the

formulation of the 1995 Power Policy. The liberalization process
succeeded in attracting considerable FDI and temporarily addressed
Pakistan’s power shortage problems. The 1995 Power Policy was a step
forward in government’s long-standing commitment to reform and
restructure Pakistan’s power sector. As part of the restructuring process,
the state-owned Water and Power Development Authority (WAPDA)
was vertically and horizontally unbundled. The unbundling entailed the
separation of generation, transmission and distribution functions, which
resulted in three state-owned generation companies (GenCos) meant
for privatization at a later stage, a National Transmission and Dispatch
312
Company (NTDC) and eight distribution companies. WAPDA provides
electric power to all of Pakistan, except Karachi, which is catered for by
the Karachi Electric Supply Corporation (KESC). To regulate the

312
In June 2002, the Peshawar Electric Supply Company (PESCO) was
divested to create a new company, Tribal Electric Supply Company Limited
(TESCO), for supply to tribal areas of PESCO. As of now there are nine DisCos.
232
unbundled and corporatized electric power sector, the National Electric
Power Regulatory Authority (NEPRA) was established in 1997.

Pakistan has a long way to go before realizing the goal of providing

“safe, reliable, efficient and affordable electric power to the electricity
313
consumers” throughout the country. The power sector reform and
restructuring is marred by the slow privatization process. As of today,
only KESC has been privatized, while efforts to privatize distribution and
generation companies have not yet materialized. To meet the demand,
supply of electric power is encouraged by waiving the licence
requirement for generation companies, as was done in India. The
monopsony of the NTDC (the sole buyer of electric power in the market)
should be broken, so that the competitive process may get off the
ground.

Electric power is the lifeblood for an economy and its development. The
recent power crisis has affected the whole of the economy, and stalled
the development processes. The poor supply of electricity has adversely
affected the manufacturing industry. The increase in production costs of
electricity has increased the manufacturing costs. Furthermore,
electricity has not reached all parts of Pakistan. There is a considerable
rural area where there is no electricity. The non-availability and/or
expensive electric power have affected the whole range of poverty-
alleviating activities.

The CCP under its mandate to conduct sectoral studies has

commissioned a study on the electric power sector. Once the study is
complete, it is hoped that the CCP will make its recommendations
known to the NEPRA and the government so as to achieve the next
phase of the liberalization process – thus paving the way for introducing
competition in the sector.

4. Conclusion

Poverty in all its shapes, sizes and scope is prevalent all around globe.
314
It “is the worst form of violence” against mankind. The world’s nations
have recognized this evil, and have come together on various occasions

313
http://www.nepra.org.pk/index.htm
314
Quote by Mohandas Karamchand Gandhi,
http://thinkexist.com/quotations/poverty/
233
to form strategies to fight it. The Millennium Declaration’s primary goal is
to eradicate poverty. Pakistan designed its Poverty Reduction Strategy
and is now in its third phase. There has been a considerable increase in
the pro-poor expenditure, and the number of people living below the
poverty line has decreased from one-third of the total population to less
315
than one-fourth . Good governance remains the primary principle
guiding poverty-alleviation programmes. In order to improve
governance, Pakistan reformed its competition regime by enacting a
new law and establishing a new Competition Commission − a
commendable step.

A carefully crafted competition regime embedded in a well-nurtured

competition culture acts as a fertile soil for trade liberalization, foreign
direct investment, and other economic policies which have the objective
of promoting sustainable development, and enhancing the welfare of the
citizenry. The vulnerable poor, who form the major portion of developing
countries’ population, are more susceptible to fall into poverty by price
hikes and other shocks generated by anti-competitive practices.
Competition law proscribes and obstructs those practices. Moreover,
competition fosters economic growth, thereby creating opportunities of
316
employment – the essential tool for alleviating poverty .

With the competition law now in place in Pakistan, and the Competition
Commission becoming active by taking actions against cartels, and
other anti-competitive practices, it is hoped that the new regime will lend
support to the poverty alleviation programmes and activities thereby
enhancing their efficacy in reducing poverty.

315
Pakistan Economic Survey, supra note 263, at p. 53.
316
A Chinese proverb seems fitting here: give a man a fish, you feed him for a
day; teach a man to fish; you feed him for a lifetime. The underlying
presumption, however, is that the person knowing how to fish will actually go
and fish for himself!
234
THE EFFECTS OF ANTI-COMPETITIVE BUSINESS PRACTICES ON
DEVELOPING COUNTRIES AND THEIR DEVELOPMENT
PROSPECTS

PART C:

Competition Issues in
Commodity Markets

235
 FROM IVORIAN COCOA BEAN
TO FRENCH DARK CHOCOLATE TABLET
PRICE TRANSMISSION, VALUE SHARING AND
NORTH/SOUTH COMPETITION POLICY317

Bruno Dorin*

1. Introduction

Faced with the downward trend in agricultural

commodity prices, farmers in the North have acquired
standards and organizations that define, defend and promote
on markets the multiple (health, taste, territory, environment-
related, etc.) qualities with which their food products may be
endowed. And what if farmers in the South were to follow their
example, with just as much public backing? The question is
worth asking, especially by organizations such as the Centre
de Coopération Internationale en Recherche Agronomique
pour le Développement (CIRAD), which is already involved in
characterizing various tropical products, or establishing North–
South production contracts for "organic" or "fair-trade"
products. But should this siphon off the majority of future
development aid, notably to African agriculture? Must, or can,
international bodies be convinced that this is a particularly
effective way of raising agricultural incomes in the South? The
answer is yet to be given, but in order to define it, it was
suggested to us that we focus on a case study, the cocoa-
chocolate commodity chain, analyse value formation and
distribution within it, then simulate the possible benefit that

317
Final report translated from the original version in French.
*
Economist at Centre de coopération internationale en recherche
agronomique pour le développement, Avenue Agropolis, 34398
Montpellier Cedex 5, France. Tel: +33-(0)4-67615800.
http://www.cirad.fr

237
might be derived by African producers from respecting the
standards or specifications that we were to propose.
318
This 7-month study thus set out to analyse price
transmission and value sharing throughout the cocoa-
chocolate commodity chain, beginning here in the Côte
d'Ivoire and ending in France. This first stage, which was novel
in itself since there were no references on which to base it,
was however not followed by the suggested second stage: we
barely touch upon the subject of standards and quality, and
even less so simulate the effect of possible changes in the
matter. Yet, this was not for want of delving into the subject,
but due to three major obstacles that discouraged us from
spending any more time on these issues. The first was
technical: it was impossible in the allotted time to obtain price
differentials (or readiness to pay) depending on various
qualities, a prerequisite for any serious quantitative study on
the subject. Mere acquisition of series of prices for the few
products manufactured along the cocoa-chocolate commodity
chain was already no mean feat. The second obstacle was
more to do with intuition, shared by numerous economists, to
which this study might have finally devoted itself to developing
and demonstrating: a proactive quality policy involves specific
costs (characterization, organization, promotion, certification,
control, etc.) whose importance is often considerably
underestimated, and which restricts it a priori to environments
that are predisposed or clearly limited in size. Lastly, and
especially, the following question: what better quality for a
cocoa from the Côte d'Ivoire, with which western industrialists
and consumers seem to be perfectly happy at the moment,
since it is by far the most imported cocoa bean in the world, to

318
From 19 August 2002 to 18 February 2003, with funding from the
Ecopol programme (CIRAD's AMIS department), and from 10 March
to 9 April 2003, with funds from USDA/ARS for support to the "Global
Cocoa Programme" made available to the CIRAD cocoa programme
(Tree Crops Department) and to IPGRI. It should also be noted that
the armed conflict that broke out in the Côte d'Ivoire on 19 September
2003 ruled out any possibility of local surveys.

238
produce a "generic" chocolate earmarked for mass
consumption? Moreover, without this Ivorian reference, could
other chocolates (and beans) be distinguished between and
fetch a higher price from a minority of consumers ready to pay
for "something else"?

Granted, the Côte d'Ivoire, like the other countries in

the South, will be required in any event to offer a "better-
quality" cocoa, since the technical, technological and
organoleptic demands of importing countries are now being
extended to the health, environmental and even social fields.
The rules of the game are changing, even within the recipe for
chocolate, when they were already having difficulty being
applied by smallholders. These new rules imposed by the
industrialized nations inevitably lead to higher production
costs, often totally at the expense of producers in the South,
since firms and consumers in the North do not pay for such a
difference in quality, or only with great difficulty, or within such
limited frameworks as "organic" and/or "fair" trade. In such a
context, a North–South transfer appears to be warranted, and
therefore deserves to be encouraged. But it will at best, and
we feel, only be able to cover the additional costs incurred in
respecting western quality demands; it will in no way
sustainably raise the income of African cocoa farmers; at
most, it will prevent their being sidelined by rivals from south-
east Asia or elsewhere. Unless the issue at hand is to invent
and somehow impose standards and signs of quality that
enable countries in the South to capture a share of the value
and modify relations between stakeholders. If such is the
case, is the approach focusing on "quality" – very much a
buzzword in France – the most politically adept and the most
economically efficient? Moreover, would it not bring us back to
the attempts at fair trade, in the hope of changing the structure
of world trade by brandishing equity and solidarity as the main
argument? As we feel that this perspective is bound to fail for
the time being (condemned to marginal markets), we have
explored a different avenue, that of competition regulations
and policies, which we feel can more effectively convince and
rally the support of decision makers and donors today, and

239
effectively bolster the incomes of small farmers such as
Ivorian cocoa producers. As we shall also see later, this is
without taking into account the fact that a quality policy in
agriculture can be considerably limited by a competition policy:
another reason to show a keen interest in the latter before
designing and implementing the former.

Section 5 outlines the stakes of a new international

competition policy, an option that we feel it is important to
defend just as energetically as a quality assistance policy. Just
before that (Section 4), we present the results that persuaded
us to follow this avenue (analysis of price transmission and
value sharing within the cocoa-chocolate commodity chain
from 1992 to 2001), after providing a few technical, economic
and political data required for the demonstration and for its
clear understanding (Sections 2 and 3).

240
2. Cocoa basics

2.1. A sequence of processes

The cocoa tree (Theobroma cacao) and its cultivation

encompass a few major particularities:

- varieties divided into three large families: criollo,

forastero and trinitario,
- an ecological requirement: the equatorial zone,
- a favourite location: under forest shade,
- well-known diseases: black pod rot, witches'
broom, swollen shoot virus, etc.,
- labour requirements for setting up and maintaining
the plantation, harvesting, bean fermentation and
drying,
- crop variations between years (depending on the
climate) and also during the year, with the main
crop usually from October to March (and the so-
called "mid-crop" in the other months of the year),
- delicate storage: in a tropical climate, production
cannot be stored for more than 3 months without
damage,
- an economic lifespan of around 40 years
(maximum productivity between 8 and 12 years).

Consequently, cocoa is traditionally sown or planted

after thinning and/or felling of a tropical forest, followed by the
installation of temporary shade from food crops (plantain, taro,
pigeon pea, papaya, cassava, etc.) to protect young cocoa
trees from direct exposure to sunlight. After 3 to 5 years'
growth and upkeep (adjustment of the final shade, pruning,
phytosanitary treatments, etc.), harvesting of the pods (ovoid
cavity containing 30 to 40 seeds in a mucilaginous pulp) can
begin. Once the pods have been opened, the seeds are
cleaned, fermented and dried to give cocoa beans. The dry

241
beans are roasted, then ground and cleaned to give a "liquor"
("mass", "paste"), part of which is used, after pressing and
alkalizing, on the one hand to make chocolate powder (for
breakfast products, ice creams, etc.) from the oilcakes
obtained, and on the other hand to make cocoa butter. Cocoa
butter mixed with cocoa liquor during conching gives – with
sugar or even milk – "couverture" chocolate. When this so-
called "couverture" (dark or milk) is not manufactured by
chocolate makers themselves, they rework it (tempering,
moulding or coating with or without the addition of vanilla,
hazelnuts, raisins, etc.) to make the many chocolate products
now available on the market.

Chocolate manufacturing today is structured around

three major operators (apart from those linked to trade): the
cocoa grower, who produces the bean; the grinder/butter-
maker (between which a greater distinction existed in the
past), who processes the bean into cocoa butter, chocolate
powder and, increasingly, couverture; the chocolate maker
(Figure 1), who virtually no longer handles cocoa beans like
before. Each of these operators uses a cocoa product, whose
volume can be converted into bean equivalent (Table 1).

Table 1: Bean equivalent conversion factors

Sources: Pontillon (1997:24) for Food and Agriculture Organization FAO

Ivorian
FAO authorities
Cocoa liquor 1.25 1.25
Cocoa powder and 1.18 1.25
oilcake
Cocoa butter 1.33 1.25
Chocolate-based - 0.55625
products

242
 Figure 1: The chocolate flow chart

Forest
COCOA GROWER Thinning + Partial burning (family plantation option)
Felling + Plantain or other (modern plantation option)
Planting (sowing, grafting or cutting) under temporary food crop shade
with (option) coconut, areca palm, oil palm, pulses, etc.

Other crops Cocoa tree

Pruning, Weeding, Fertilization (option)

Treatments against parasites
Harvest (main and mid-crop)

Pod

Cortex Pod opening

Cleaning
Fermentation (on leaves or in boxes)
Drying (with sun and/or wood-fired dryer)

TRADER Bean
(middlemen, wholesaler, exporter…)
GRINDER Cleaning
Mixing of origins (option)
Shelling (after roasting for chocolate)
Alcalizing (powder option)
(before or after roasting-grinding)
Roasting
Grinding

TRADER (option) Mass / Liquor / Paste

BUTTER MAKER
Refining (butter option)
Alcalizing (option)
Blending (chocolate option)
Heating, Pressing

TRADER (option) Oilcake Butter

CHOCOLATE MAKER Filtering, Deodorization
Alcalizing (option) Blending/Refining
(and POWDER MAKER) Bolting, Tempering Sugar, Vanilla (option) Conching
Grinding Milk (option) Tempering, Moulding
Almonds, Nuts…(option)
Powder Vegetable fat (option) Chocolate

Breakfasts Tablets
DISTRIBUTOR Ice creams Pharmaceuticals Bars
CONSUMER Flavouring bases Cosmetics Sweets
…/… …/… …/…

2.2. Production in the South, tasting in the North

2.2.1. Supply

The cultivation of cocoa, which originated in Latin

America (grown by the Mayas and sacred beverage of the
Aztecs), really took off in the 1920s in the Portuguese, British
and French colonies of West Africa (Sao Tome, Ghana,

243
Nigeria, Côte d'Ivoire, Cameroon). Today, the entire continent
provides two-thirds of the world supplies (almost 2 out of 3
million tonnes), with the Côte d'Ivoire alone providing over 40
per cent of world supplies (it overtook Ghana as the world's
leading producer in 1977). However, a third major production
zone has been thriving in south-east Asia since 1990, with
estates in Malaysia, but especially Indonesia (Figure 2). The
position of this third major zone could be strengthened in the
coming decades through the development of new plantations
in Vietnam.
319
Over the last 20 years, world supply and demand
have virtually doubled, in a context of highly volatile prices
(Figure 3). With intensified production in the 1980s, particularly
in south-east Asia, there was surplus production in the
commodity chain for some time (22 out of the last 30 years),
320
but the current concern is rather the opposite : farming
systems exploiting new forest zones have reached their
growth limit, the current plantations are tending to age rather
than being renewed, diseases are developing, whilst demand
remains strong in the European Union and the USA (Figure 4)
and new markets, such as those in Eastern Europe and the
Far East, are becoming established.

319
Measured here as the volume of ground beans. It is also possible
to use consumption statistics published by certain organizations
(FAO, CAOBISCO, etc.), but they would not effectively represent
cocoa consumption in its entirety (with biscuit making, dairy products,
etc.). Foreign trade statistics can also be used, but the conversion
coefficients that have to be used in that case are arguable; with those
of the FAO, and with net import volumes for cocoa beans (IC), liquor
(IL), butter (IB), oilcake and powder (IP): Consumption = IC + (1.25 x IL)
+ (1.33 x IB) + (1.18 x IP).
320
According to ED&F Man, in 2002/03 there was apparently a
production shortfall again (of 110,000 t) compared to grindings, for
the third year running.

244
 Figure 2: Bean production by country (1961–2001)
Source: data from FAO (2002).
3500
Others
Malaysia
3000 Indonesia
Ecuador
Brazil
2500 Cameroon
Nigeria
th o u sa n d to n n e s

Ghana
2000
Côte d'Ivoire

1500

1000

500

0
61
63
65
67
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
2.2.2. Demand

Be it in bars, tablets, balls, spreads or powder, plain or

flavoured and/or incorporated in other confectionery, poured or
321
coated over enrobable fillings , chocolate is consumed today
in very diverse forms, multiplied by a range of presentations,
alongside niche products which are also on the rise (aromatic,
organic or fair-trade chocolates). However, clear preferences
for some of these types exist from one country to another
(Table 2), even though bars seem to be increasingly the most

321
"Fillings" which themselves fall into various categories: "fondant"
(mixture of sugar dissolved in a little water and glucose syrup, which
may be coloured or flavoured with vanilla, orange or lemon), "praline"
(mixture of sugar, finely ground roasted almonds or hazelnuts, to
which a small quantity of cocoa and cocoa butter is added),
"ganache" (mixture of melted chocolate, cream, butter and full-fat
milk, flavoured or not with vanilla or alcohols).

245
widely appreciated. For instance, the Spanish are particularly
fond of drinking chocolate, whilst the Germans and Italians are
great consumers of chocolate spreads. In France, where the
preference is (unlike in the USA or the UK) for products
somewhat richer in cocoa than in other ingredients such as
sugar, it is the tablet that reigns supreme: in 2000, chocolate
322
tablets alone generated a turnover of 4.6 billion francs ,
almost half of which was for milk chocolate (Figure 5).
Chocolate consumption is also seasonal, with major peaks at
festive times such as Christmas, Saint Valentine's Day, Easter
323
or Halloween . Lastly, it is not limited to food uses, since
324
chocolate now seems to be used for skincare (Brieu, 2002) .
It is true that cocoa butter is already used to make soaps and
325
cosmetics , and also in traditional medicines such as
remedies for burns, chills, dry lips, fevers, malaria,
rheumatism, snake bites and other wounds (CNUCED, 2003).
For their part, the husks and pulp obtained further upstream in
the process can be used as animal feed, or for fertilizer,
326
alcohol, or pectin production .

322
Household chocolate and sugar confectionery consumption
reached 33.6 billion francs the same year, though no distinction could
be made between the shares of these two sectors, which INSEE
groups under the NAF code 15.8K.
323
The Halloween confectionery market alone apparently amounts to
2 billion dollars in the USA (35 per cent of annual sales).
324
Some Parisian beauty parlours apparently now propose 100%
chocolate treatments for the face and hands. In Hershey,
Pennsylvania, a town entirely devoted to chocolate, a spa centre was
opened in 2001, proposing a range of original treatments: cocoa and
whipped cream baths, coating in chocolate lotion, cocoa butter
massage, etc.
325
1% of cocoa butter production apparently went to the cosmetics
industry at the end of the 1990s
(www.icco.org/questions/cosmetics.htm).
326
See in particular www.icco.org/questions/byproducts.htm.

246
 Figure 3: Bean supply and demand (1950–2001)
Source: data from ED&F (2002) and ICCO (2002b).
3500
Closing Stock
World Crop (Net)
3000
World Grindings
Price (ICCO)
2500
th ou s an d to n n e s

2000

1500

1000

500

0
1950/51 1955/56 1960/61 1965/66 1970/71 1975/76 1980/81 1985/86 1990/91 1995/96 2000/01

Note: 2001/02 and 2002/03: projections ED&F Man.

Figure 4: Domestic cocoa production (1992/93–2000/01)

Source: data from ED&F (2002) and ICCO (2002a).
3000 AFRICA

ASIA
=> Others OCEANIA
=> Japan
2500
=> Others
thousand tonnes (bean equivalent)

=> Brazil
AMERICA

2000
=> USA

1500
=> Others

1000 EUROPE
=> Russia

=> Italia
=> France
500
=> UK

=> Germany

0
1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01

Note: Apparent consumption = Cocoa bean grindings + Net imports, in bean

equivalent,of chocolate, chocolate-based products and other cocoa-based
products.

247
Figure 5: French production of chocolate end products (1999–
2000)
Source: data from XERFI (2001).

Quantity 1999 Turnover 2000 White

Filled chocolate
100% tablets 4%
Chocolate spreads 10%
andothers…
90%
Milk
Cocoapowder
80% chocolate
sweetened
46%
70% Dark
FF4.6 billion
chocolate
60% Tablets 40%

50% "Smarties"
Boxes of and others
chocolates 13%
40%
20%
Eggs with
30% asurprise
Chocolate
FF3.65 billion 9%
20% confectionery
Bars
10% 49% Rochers
9%
0%

248
Table 2: World consumption of chocolate-based products (1998)
Source: based on Aryal (2000:78-79).

TOTAL Unfilled Filled Chocolate White Cocoa- Cocoa Chocolate

(kg/inhab tablets tablets and sweets and chocolate based powder spreads
/year bars confectione candies
ry
Switzerland 10.16 3.99 2.91
Germany 9.81 1.50 1.15
Belgium 9.68 3.52
Denmark 8.94 2.57 2.75
UK 8.65 2.04 3.15
Norway 8.58 0.44 0.42 0.39
Ireland 8.29 1.69 8.92
France 6.94 1.93 1.67
Australia 6.04 1.81 1.83
USA 5.53 2.65
Sweden 4.95 1.58 2.43
Netherlands 4.73
Finland 4.02 1.42 1.58
Spain 3.41 0.85 1.56
Italy 3.33 0.59 0.76 0.57
Brazil 2.05 1.25
Japan 1.92 0.68 0.51

2.3. Small family farms and multinationals

2.3.1. Cocoa producers

At the end of the 1990s, the number of cocoa

producers worldwide was estimated at 14 million, two-thirds

249
 327
concentrated in Africa (10.5 million) , primarily in the Côte
328
d'Ivoire (3.6 million on at least 600,000 farms) . Whilst large
estates can be found in countries such as Malaysia or Brazil,
most producers are smallholders, since 90 per cent of world
production apparently comes from farms of under 5 hectares
(De Lattre-Gasquet et al., 1998): on these small family farms,
labour remuneration (the main cocoa production cost) is much
more flexible than on estates (Hanak Freud et al., 2000), as
Malaysia realized too late when prices slumped at the
329
beginning of the 1990s .

Cocoa growing was introduced into the Côte d'Ivoire

via Ghana in the east and south-east of the country (a pioneer
front where oil palm and rubber development has now taken
over), then spread to the centre-west, where the largest
quantity is now produced (36 per cent); the latest pioneer
330
fronts are located in the south-west and west . The two
driving forces behind this development were the possibility
(nowadays virtually exhausted) of opening up new plantations
in forest zones after slashing and burning, along with available
labour – primarily of Burkinese origin (Baoule in the west) –
which was encouraged to settle through particular ownership
331
rights (now contested).

Despite the vitality of this "foreign" population, and the

relatively young cocoa plantings (almost 70 per cent of them
are under 30 years old), there has been virtually no

327
For a breakdown of this estimate by country, see
http://www.icco.org/questions/smallholders.htm.
328
Which apparently provides a livelihood for 6 million Ivorians, i.e.
40% of the population.
329
The cocoa trees, which were also attacked by pod borers, were
finally pulled up to make way for new rubber and oil-palm plantations.
330
It is consequently on the savannah highlands in the north (where
most of the country's Muslim population is settled) that most of the
Ivorian sorghum and cotton are grown.
331
According to Félix Houphouët-Boigny, Ivorian President from 1960
to 1993, "la terre appartient à celui qui la met en valeur" (land
belongs to the person who develops it).

250
productivity gain, and the increase in Ivorian cocoa production
is primarily down to the incorporation of increasing quantities
of land and labour (Daviron et Losch, 1997). There are various
explanations for these low Ivorian yields (around 500 kg of
beans/ha/year, whereas hybrids can produce at least double
or three times that figure with fertilization and irrigation):
smallness of the farms (84 per cent of production comes from
farms of under 5 ha), ageing producers (80 per cent are over
55 years old), limited adoption of, or training in, new
techniques (for replanting, pest control, post-harvest
processing, etc.), difficult access to cheap credit, volatile
prices from one year to the next, neglect of the plantation
when prices are too low, etc.

These cocoa farmers are represented on a national

level by ANAPROCI (Association Nationale des Producteurs
de Café-Cacao de Côte d'Ivoire) and FIPCC (Fédération
Ivoirienne des Producteurs de Café et de Cacao), and on an
international level by the CPA (the Cocoa Producers Alliance).
The latter, like the ICCO (the International Cocoa
Organization), may be involved in the work undertaken by a
dozen scientific and technical organizations involved to
varying degrees in monitoring or supporting Ivorian cocoa
cultivation (CNRA, CIRAD, ANADER, etc.).

2.3.2. Cooperatives, middlemen, wholesalers

The collection and transportation of beans to

processing units near export ports is an operation that is as
crucial as it is tricky, since the dispersal of smallholders in
remote areas (forests) is combined with poor road
infrastructures (developing country) and the need to bring out
production rapidly (quality deteriorates more rapidly in tropical
countries).

251
 In the Côte d'Ivoire, beans are collected and
332
transported by cooperatives (or GVC), which may export
directly (COOPEX, PMEX, etc.), but particularly, and
increasingly (82 per cent in 2000/01 as opposed to 68 per cent
in 1998/99) by middlemen (pisteurs in French), who are
333
frequently of Lebanese origin , working for wholesalers
(traitants in French) often of the same origin, who provide
them with vans and with cash to pay producers for their crop.

The credit needed by cocoa producers for cultivation,

but also to school their children (the new term begins before
the main crop) also seems to depend increasingly on these
middlemen/wholesalers. The loans granted are then repaid
when yields are delivered, at interest rates that are obviously
higher than those practised by public services (when such
services are available).

Wholesalers, who are based in the main towns of the

south, are independent, or themselves funded by exporters. In
2000/01, 550 were accredited by GPEX (Groupement
334
Professionnel des Exportateurs de Café-Cacao) , which cost
each of them 100,000 CFA francs for that season, alongside
the licence fee of 400,000 CFA francs they have to pay in
each department where they operate (Jacquet, 2001).

2.3.3. Conditioning plants, exporters

Near the export ports (Abidjan or San Pedro),

conditioning plants which are often export units, buy beans
from wholesalers and make them conform to market standards
and requirements: pre-cleaning and stone removal, re-drying

332
Particularly dynamic in the east and centre-south zones, where
their collection share was 48 per cent and 27 per cent, respectively,
in 2000/01.
333
Or Malian, or Burkinese.
334
A dissident organization, UNOCC, was founded in 2000/01.

252
where necessary, etc. If quality proves to be inadequate, such
335
purchases may be subject to discounts .

Beans earmarked for export are then dispatched in

containers once three formalities have been completed: (1)
batch checking, which was contracted out in 2000/01 to
accredited private companies (SGS, Cornelder, Veritas) at a
cost of 1,900 CFA francs/ton; (2) phytosanitary inspections, at
a cost of around 1,000 CFA francs/ton, at the expense of the
exporter; (3) payment of taxes, of which DUS (Droit Unique de
Sortie, export duty) is the main component: 140,000 CFA
francs/tonne of beans in 2000/01 (Jacquet, 2001).

At the beginning of 2000, there were around 40

accredited export companies, which could be classed into
three categories (Jacquet, 2001): (1) traditional local
exporters, whose market share fell from 43 per cent in
1997/98 to 10 per cent in 1999/00; (2) exporters associated
with international trading houses, which, for their part, are
developing their operations (48 per cent of exports in
1999/00); (3) exporters linked to international bean processing
groups (42 per cent), the largest three being ADM, Barry-
Callebaut and Cargill, who are integrating an increasing
amount of upstream collection and conditioning units, whilst
also developing local bean-grinding activities.

2.3.4. Grinders, butter makers

More than half the beans ground today worldwide are

ground in the European Union and the USA (Figure 6), and by
five major grinding companies: ADM (Archer Daniels Midland),
336
Barry-Callebaut, Cargill, Hamester and Blommer .

335
Too high a number of beans per 100 g (i.e. over 100), moisture
content over 8 per cent, lack of fermentation, or too many defective
beans (notably mouldy).
336
Chocolate makers such as Nestlé also grind large volumes of
beans, though they are not specialized in this activity.

253
 In the Côte d'Ivoire, the first processing factories had
been set up, with Government encouragement, to process
"off-standard" beans or small beans (primarily mid-crop). In a
fiscal environment that remains propitious to such local
processing (BNETD, 2001), these capacities (350,000 t at the
end of 2002) have been strengthened with international
337
groups that have embarked upon vertical integration, buying
up trading firms, and buying and installing factories in
producing countries.

All in all, the Côte d'Ivoire today processes almost a

338
quarter of its beans to export semi-finished products with
higher added value, as do Brazil and Malaysia. It nonetheless
remains that such processing can in theory barely be
extended beyond couverture chocolate, since even
manufacture of the latter – if it is to be adapted to the different
tastes of consumer countries – requires blends of origins,
which are less risky and costly to make in the major chocolate-
consuming zones.

337
Bean-processing capacities at the end of 2001, apparently
employing barely more than 900 people (Jacquet, 2001):
100,000 t/year for SACO (Barry-Callebaut), 100,000 t/year for MICAO
(Cargill), 75,000 t/year for UNICAO (controlled by ADM's SIFCA) and
75,000 t/year for CEMOI Côte d’Ivoire.
338
2000/01 exports (April to March) from the Côte d'Ivoire according
to ICCO (2002): 122,924 t of mass, 56,360 t of powder and press
cake, 45,018 t of butter and 3,900 t of chocolate, local production of
the latter being sold more on the domestic market, since it remains
difficult and costly for a bean-producing country to supply chocolate
incorporating various origins to meet the various tastes of the main
consumer countries.

254
 Figure 6: Bean grinding per region (1993–2001)
Source: data from ED&F Man (2002).
3500 ASIA
AFRICA
- Côte d'Ivoire
AMERICA
3000 - USA
EUROPE
- European Union
Asia
2500
Africa
(Côte d'Ivoire
thousand tonnes

& Others)
2000
América
(USA &
1500 Others)

1000
Europe
(EU & Others)
500

0
1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02F

Note: 2001/02: projections ED&F Man.

2.3.5. Chocolate makers, distributors

The move towards concentration and

internationalization is also speeding up among chocolate
makers. A distinction can be made between two markets on
this level: (1) a captive market with groups such as Cadbury,
Kraft Foods (Philip Morris), Mars or Nestlé, which above all
produce chocolate for their own product range; (2) an open
market on which groups such as ADM, Barry-Callebaut or
Cargill sell powdered or couverture chocolate (via traders such
as Euro Distribution Alimentaire in France, or not) to chocolate
makers-confectioners, who do not produce their own
chocolate, or not enough to meet their requirements (with
surpluses on one or other of these markets figuring in
transactions between them). Among food industrialists, there
are also international companies specialized in the production
of fine or "prestige" quality chocolates, the leaders being Lindt,

255
Peter's Chocolate Company (Nestlé group) and Valrhona
(CNUCED, 2001).

With this concentration of the profession, the fabric of

339
the French chocolate and confectionery industry is now
dominated by a few foreign groups owning powerful brands (

339
111 companies employing more than 20 people each and/or with
a turnover of more than 35 million francs in 1999, i.e. 5.2 per cent of
the total turnover of the agrifood industries in France, and 5.6 per
cent of salaries in the branch (XERFI, 2001). Alongside these
companies, there are SMEs that, unable to compete with the major
brands through advertising, capitalize on the good reputation of
French products representative of a certain lifestyle. It remains that
the French chocolate-making industry stands out on the whole
through the increasing share accorded to semi-finished products,
which seem today to account for half the tonnages. Indeed, through
its geographical position, France is a worthwhile production rear base
for foreign groups.

256
 340
Table 3). In fact, colossal advertising budgets are necessary
for their promotion, particularly as supermarket own brands,
such as Carrefour or Auchan, are now coming to the fore
(more than 15 per cent of the French market value for
chocolate tablets in 2000).

With stiff competition between brands, but also the

rising influence of particularly competitive substitute segments
such as biscuits and sugar confectionery, chocolate
industrialists are having to regularly deploy new strategies,
which now follow two major trends. The first is to seek new
market niches by sophisticating chocolate tablets (notably with
biscuit), by offering products in bite-size versions (to adapt to
"nomadism" or "snacking" trends), by umbrella marketing
campaigns at certain key times of the year (Christmas, Easter,
etc.: event marketing, as particularly well achieved by
Ferrero). The second trend is to use distribution circuits other
than the currently all-powerful hyper- and supermarkets
(Figure 7), notably the "long circuit" via bars-tobacconists
(34,000 in France), bakery-cake shops (32,000), petrol
stations (17,000), newspaper kiosks (32,000) or vending
machines (527,000), supplied by wholesalers such as Eda,
SFP or Altadis Distribution, through which manufacturers such
has Haribo have succeeded well (XERFI, 2001).

340
In 2000 for example, Ferrero spent no less than 222 million francs
on communication: a winning strategy since the Italian chocolate
maker's turnover jumped by 10 per cent. Likewise, Nestlé reaped the
benefits of its support for the Lion brand (37 million francs), since
sales increased by 6 per cent on the chocolate snack market in 2000
(XERFI, 2001).

257
 Table 3: Groups dominating the French chocolate and
confectionery industry (2001)
Source: according to XERFI (2001).

Group Country Consolidated Main companies Main brands

turnover 2000 controlled in
(Billions of FF) France
Nestlé Switzerland 343,0 Nestlé France After Eight, Crunch,
Frigor, Galak,
Kit Kat,
Quality Street,
Lanvin, Lion,
Menier, Smarties…
Kraft Foods USA 188,9 Kraft Foods Côte d’Or, Daim,
(Philip Morris) France, Milka, Suchard,
Kraft Foods Toblerone…
Strasburg,
Kraft Jacobs
Suchard Rheims
Mars USA 108,9 Masterfoods Bounty, Mars,
Incorporated Maltesers,
Milky Way, M&M’s,
Snickers Twix…
Cadbury- UK 47,6 Cadbury France Cadbury,
Schweppes Hollywood,
Kiss Cool, Krema,
La Pie qui Chante,
Malabar, Poulain…
Ferrero Italy 25,6 Ferrero France Ferrero Rocher,
Kinder, Mon Cheri,
Nutella, Rafaello…
CSM Netherlands 17,9 Lami Lutty …
France…
Barry Switzerland 10,1 Barry Callebault …
Callebault France
Lindt and Switzerland 6,9 Lindt and Caffarel, Ghirardelli,
Sprungli Sprungli France Lindt…
Cemoi France 2,3 Cantalou, Chocolaterie Aiguebelle,
Chocolaterie d’Aquitaine, Chocolaterie
de L’Abbaye Suisse Normande,
Chocolaterie Moulin d’Or,
Chocolaterie Real, Phoscao

258
Figure 7: Market shares of the chocolate distribution circuits in
France (2000)
Source: data from XERFI (2001),

Tobacconist s
6.7%

Baker ies- cake

Hyper - and
shops
super mar ket s
5.6%
78.5%
Pet rol st at ions and
Kiosks
4.3%
Ot hers
4.9%

2.3.6. Traders

The cocoa-chocolate commodity chain is subject to

multiple transactions, due to the distance between production
and consumption sites, but also because of the various
products and processes required to make the end product. For
beans, the most important trading centres are futures (and
options) markets in London (LIFFE) and New York (NYBOT)
(see Section 3.4), which make cocoa one of the most traded
agricultural commodities in the world. These marketplaces are
the focus of a multitude of dealers, which the
concentration/integration policy implemented by the major
downstream operators is tending to short-circuit today
(integration of trading activities, as is also the case for French
sugar mills and refineries). This trend is not without influencing
price formation, which also depends on public policies.

259
3. From stabilization to liberalization

3.1. National stabilization boards and funds

As Daviron and Losch reminded us (1997), the

general frame of reference for post-war policies up to the
1970s was that of development economics, in which economic
prosperity was built on a Nation-State scale. In substance, in
the Côte d'Ivoire as in other countries, national or international
funding agencies encouraged (1) the improvement of such a
development framework in terms of infrastructures (roads, port
facilities, energy, hydraulics) and legislation (based on a
transfer of regulations largely established during the colonial
period); (2) the creation of productive bases and improvement
of market functioning; (3) the stabilization of farmers' incomes,
the latter being considered as essential for productive
investment and social order (Daviron et Losch, 1997:10-11).

In this context, two major systems of marketing and

commodity chain supervision were adopted in west and
central Africa by cocoa-producing countries: stabilization
boards and funds. Marketing boards were set up in countries
such as Nigeria (up to 1986) or Ghana. They were
characterized by the existence of a parapublic organization
with a monopoly in domestic and international marketing.
When cocoa was bought from a producer, it became the
property of the board, which took charge of it throughout the
commodity chain, after fixing prices at the different stages for
the entire crop year. For their part, stabilization funds (caisses
de stabilisation in French) were adopted in countries such as
Cameroon or the Côte d'Ivoire. Like the boards, they fixed
domestic and export prices. However, physical routing of the
merchandise – from producers to export ports – was ensured
by private operators accredited by the fund (CNUCED, 2003).

260
 The domestic stabilization of prices and internal
securing of purchases/sales that these systems allowed, went
hand in hand – as with CAISTAB in the Côte d'Ivoire – with
systems of territorial equalization, quality control and export
management (futures sales, regulation between exporters and
conditioning units, etc.), along with operating aid and
investment in the commodity chain, be it through credit (to
cooperative structures in particular), the creation and
maintenance of roads or tracks, or the funding of technical
assistance or research organizations (SATMACI, IRCC,
IDEFOR, etc.). These systems also made it possible to apply
sometimes extremely large levies: the Ivorian CAISTAB
supplied up to 30 per cent of the State's special investment
budget up to the end of the 1970s (Daviron et Losch, 1997:14-
15).

These substantial levies, along with their sometimes

highly dubious use, did not argue in favour of maintaining such
stabilization systems, whose inefficiency was also increasingly
criticized (see Section 3.3), even without counting such
unfortunate strategies as the "cocoa war" entered into by
ageing President Félix Houphouët-Boigny at the end of the
1980s. Indeed, rather than raising the bidding by blocking
supplies of Ivorian products to the world market, it became
necessary several months later to inform producers that the
price per kilo had been halved. The Ivorian stabilization
system was completely dismantled by commodity chain
liberalization in August 1999 (see Section 3.3). The "barème"
principle persisted between those two dates; it fixed a
minimum price for producers as well as reference export
prices at each stage of the commodity chain. Consequently,
when a cocoa sale was made, the exporter had to
compensate the stabilization fund for any difference between
the actual sale price and the reference price, if the former was
higher than the latter (the so-called "repayment" operation).
On the other hand, when world prices were lower than the
reference price, CAISTAB compensated exporters by granting
them a payment (known under the generic term of "support")
corresponding to the difference.

261
3.2. International stabilization agreements

Between 1972 and 2001, there were six successive

cocoa agreements. It took no less than 16 years and countless
meetings to establish the first with, one year later, the
International Cocoa Organization (ICCO) to manage it. That
agreement was based on a quota system, combined with a
buffer stock. The quota system granted quotas to each
producing country, which varied in line with prices. However, it
was never necessary to apply the agreement as prices
remained above the fixed target range throughout its duration.
Nevertheless, the contribution of 1 cent per pound helped to
establish a fund of around US$80 million. The second
agreement, concluded in 1975, was based on the same
system, but did not work any better than the previous one, as
the USA (the world's leading consumer) did not agree to take
part. However, the "kitty" rose to US$ 230 million. A third
agreement saw the light of day in 1980, in a very different
context, as the market then had a surplus and prices were
declining. The quota system was abandoned to the benefit of
a buffer stock that could reach 250,000 tonnes. But this
measure was barely more operational: the stock proved to be
less than the surplus, funding resources were inadequate, and
neither the USA nor the Côte d'Ivoire took part. Moreover,
currency exchange fluctuations had not been taken into
account. A fourth agreement was then reached in 1986, after
two years' work under the aegis of UNCTAD. It, too, was
based on a buffer stock of 250,000 tonnes, with the possibility
of withdrawing 120,000 tonnes. But it remained powerless to
stabilize prices above the reference level of 1,600 SDRs per
ton: in January 1990, the ICCO indicator fell to 900 SDRs
(Jouve et Milly, 1990:120-121).

In 1993, when the fifth agreement was concluded, the

decision was taken to liquidate the buffer stock by selling
4,250 tonnes per month until it ran out, which occurred in

262
March 1998 (CCI, 2001:148-154). In reality, that agreement
heralded the one concluded in 2001, to which the European
Union and 40 cocoa-importing or -exporting countries adhered
(except Indonesia): the forsaking of any ambition to intervene
on the market in the short term, in favour of a sort of forum
that monitored market trends, in order to ensure a balance
between supply and demand in the medium and long terms. In
2001, this capitulation led to the announcement of the
following objectives: (1) promote international cooperation in
all sectors of the world cocoa economy; (2) provide an
appropriate forum for the discussion of all issues concerning
all sectors of that economy; (3) help to strengthen the national
economies of member countries; and (4) contribute towards
the balanced development of the world cocoa economy,
notably by promoting a sustainable cocoa economy, research
and application of its results, collection, analysis and
dissemination of relevant statistics, and consumption of
chocolate and cocoa-based products (CNUCED, 2001).

Pending the results of generalizing so-called "modern"

price-risk management tools to developing countries (see
Section 3.4), would not STABEX be the only way left to
compensate for the harmful effects of world commodity market
instability? This unique system of export stabilization (for
agricultural products) was in fact proposed by the European
Commission right from the first Lomé Convention in 1975. It
provides African, Caribbean and Pacific (ACP) countries (now
numbering 77) with substantial resources (13 per cent of the
European Development Fund allotted to the ACP States over
the 1995–2000 period, i.e. 1.8 billion European Currency Units
(ECU)) to fund their agricultural sectors – without directly
intervening on the market – when they are thrown into difficulty
by a decline in their export earnings. In this way, a reference
level is fixed by country, and when losses in export earnings
are seen, STABEX guarantees a transfer of financial
resources to the benefiting country that is equal, at most, to
the difference between the effective value and the reference
level.

263
 Of course, STABEX has evolved since the first Lomé
Convention. It only intervenes today in the form of donations,
with the so-called "principle of reconstitution" by the ACP
States being abandoned in 1990. Moreover, it was in return for
the abrogation of that principle that the European Union
obtained the same year the concession that the way resources
were used would be subject to an agreement with each ACP
Government. This framework of "mutual obligations" also
involves suspensive clauses whose respect by the ACP States
governs the different instalments ("tranches"). This was a
major change signifying the end of direct, undifferentiated,
non-negotiated transfers, which is not without causing
tensions alongside those linked to the inadequate amounts
available in periods of severe price depreciations. In fact,
these frameworks of "mutual obligations" extended not only to
341
supporting agricultural producers , but also the privatization
of commodity chains and the restructuring of national
compensation bodies, in other words the development of the
free-market economy in ACP countries (Simon, 1999).

Be that as it may, it is clearly along those lines that the

Cotonou Agreement signed in June 2000 envisaged a radical
reform of commercial relations between the two regions.
Indeed, it was regretted that the Lomé Conventions did not
prevent the marginalization of ACP countries in world trade, or
enable diversification of their exports that are still too often
concentrated on a small number of agricultural products. It
was also felt necessary, perhaps first and foremost, to comply
with the commitments made at the World Trade Organization
(WTO), since the latter does not authorize trading relations
that are discriminatory and non-reciprocal, a provision that
was extended to agriculture in 1994. Consequently, the
European Union proposes setting in place Economic
Partnership Agreements (EPA) between 2008 and 2020 with
the ACP countries, which would then be grouped in regional

341
In the Côte d'Ivoire, STABEX has thus facilitated access to the
banking system for around a hundred producer organizations, or, in
Cameroon, the distribution of "farmer cheques".

264
blocks (SOLAGRAL, 2002). In other words, it involves setting
up free-trade areas, a new development paradigm that has
been pushed to the fore for the last 20 years or so.

3.3. Market liberalization

The post-war self-centred growth model actually fell

into crisis in the 1970s: the oil shocks forced the industrialized
nations to broaden their market in order to settle the
increasing bill for a raw material that they now largely
depended on, and therefore open up much more to world
trade and its advantages (theory of comparative advantages)
than they had done in the past. This multilateral opening up
led to ever more condemnation and dismantling of direct
public intervention in domestic and international trade for
goods and services (intervention now qualified as "trade
distortion"), the outcome of which was the establishment of the
WTO in 1995. Naturally, for public development aid, it was
then no longer a matter of contributing to the construction of
self-centred national economies, but of promoting the effective
insertion of territories on the international scene, since from
now on, it was on this that improved growth and living
standards depended (Daviron et Losch, 1997:18-19).

The free market has reigned for many years in the

cocoa sector of countries such as Brazil, Indonesia and
Malaysia. However, the international move towards
liberalization led countries such as Nigeria and Cameroon to
completely restructure the organization of their commodity
chain in the 1990s. It was in 1999 for the Côte d'Ivoire a vast
privatization, flanked some time later with new coordinating
bodies: a Coffee and Cocoa Regulation Authority (ARCC,
2001), a Coffee and Cocoa Bourse (BCC, 2001), an Inter-
ministerial Commodities Committee (CIMP, 2001), a
Regulation and Control Fund (FRC, 2002) and a Coffee-
Cocoa Markets Information Programme (PRIMAC).

265
 Nevertheless, the question of projects to secure
agricultural income remained. In 2001, the Ivorian national
coffee and cocoa producers association (ANAPROCI)
suggested the restoration of a stabilization system based on
the calculation of a Mean Forward Sale Price (PVAM – Prix de
342
Vente Anticipé à la Moyenne) , maybe not having completely
realized that forward sales have strongly diminished since
liberalization: by increasingly integrating upstream operators,
the main buyers need less and less to turn to futures markets.
In a document dated 23 July 2002, the Ivorian BCC proposed
for its part a new trading system that is in practice similar to
the one that existed before 1999, except that it does not
include any programme on futures sales made after the main
343
cocoa crop . This system was to be completely in place by

342
"Sales are forward sales (even before the product is available).
Sales are spread over 33 months. For the first 21 months, these are
futures sales, and the final 12 months are given over to spot sales
(depending on the state of the market when the transaction takes
place). In this way, prices are smoothed for producers, whose
remuneration does not vary. However, the BCC could benefit from
any improvements, such as an upturn in world prices, to fund
foregone earnings in the case of a price drop" (Le Jour, N°1946,
13/09/2001).
343
The following was thus proposed (Dow Jones Newsletter,
14/08/2002): (1) a Minimum Farm-gate Price (MFP) fixed by an inter-
professional committee of experts within the BCC (the 2001/02
season was thus marked by the introduction of such a price: see
Section 4.2.1); (2) a Reference CIF Export Price (REP), which is the
MFP incremented by collection and transport costs; (3) a Safety
Reserve, fixed at the beginning of each season by various
representatives of the profession, with a fixed share, and a variable
share provided by exporters when the REP is higher than the MFP
(or even by levying a "variable reserve tax" on production); (4) an
Intervention Mechanism which could take various forms when the
market price tended to fall below the REP: a) introduction of
preventive insurance against the price risk, by using the futures and
options markets, for example, b) adjustment of the level of fixed
reserves, or of variable reserves, c) payment (via exporters) of
compensation or a subsidy to cocoa farmers when the REP falls
below the MFP; (5) a Guarantee Fund intended to improve access to

266
October 2003, but a year earlier, on 19 September 2002, a
344
deep and bloody crisis broke out in the country , which it is
tempting to link to the over-radical liberalization of the Ivorian
economy, notably in the cocoa sector. Whilst the issue is
worth investigating (Losch et al., 2003), one certainty remains:
this liberalization has discouraged rather than encouraged
systems to secure agricultural income, apart from one, the
futures and options markets, to which Ivorian small-scale
cocoa producers do not yet have direct access.

3.4. Futures and options markets

When trade with Europe and the rest of the world

intensified in the 16th century, veritably giving birth to
international trading at a distance, purchases and sales with
deferred deliveries became established and developed, along
with the associated risks. In order to protect oneself from
losses or damage to merchandise in transit, it gradually
became possible to take out insurance, or to receive letters
guaranteeing the execution of the contract. But it was not until
the 20th century that it became possible to (personally) protect
oneself from price fluctuations, which were considerable for
agricultural products (Habert, 2002): the first formally
organized cocoa exchange was created in New York in 1925
in the wake of a stock exchange boom and crash (this
exchange merged in 1978 with that for coffee and sugar, then
in 1998 with that for cotton, to form NYBOT), with London
345
following in 1928 (exchange now forming part of LIFFE) .

credit for small and medium-sized exporters (private or cooperatives),

so that the latter can purchase larger volumes of cocoa.
344
On 19 September 2002, armed conflict broke out in the Côte
d'Ivoire, splitting the country in two, with "rebel' troops of the Ivorian
Patriotic Front (MPCI) in the north, and the forces of President
Laurent Gbagbo in the south.
345
Cocoa exchanges were also created in Amsterdam and Paris, but
the volume of their activities never equalled that of NYBOT and

267
These futures contracts and markets transfer the price risk
(unexpected rise or fall between the order and delivery) from
those who do not accept it ("arbitrage dealers": traders,
processors, chocolate makers, cocoa producers, etc.) to those
who accept it and are called "speculators". The latter in fact
wager on the market in line with the elements at their disposal,
hoping to gain more than they lost in "arbitrage" operations
(purchases and sales on paper that might lead – in 1% of
cases at the most in normal circumstances – to delivering or
346
taking delivery of the product) and "compensation"
operations (payment of the difference between the market
value and the transactional value), which, all in all, means that
to each loss there corresponds a gain (zero sum game).
Purchasing options ("calls") and sales ("puts") completed this
system for cocoa at the end of the 1980s. These are
conditional futures contracts enabling an operator to reserve
the option to request the performance of an agreed operation,
or its cancellation, subject to the immediate payment of a
premium (known as the "option price").

Thus, in modern merchandise trading, there exists

today a clear distinction between the futures market and the
"physical market", with the first shifting ten times more
volumes (on paper) than the second (great liquidity which is
also the guarantee of offering a counterpart at any given time).
The physical market (also called the "real" market, "cash"
market or "spot" market) deals in cocoa beans or cocoa
products of given grades and origins, whose quantities,
delivery times, packaging, prices (usually taking the futures
market for a reference) and payment conditions are mutually

LIFFE, which were virtually comparable for this commodity in the

1980s and 1990s.
346
The term "arbitrage" is also used to mean the settlement of
disputes (e.g. about quality) outside the usual legal system. Such
arbitrage is usually ensured under the aegis of cocoa trading
associations. In extreme cases (refusal by one of the parties to
comply), it becomes enforceable through legal channels (CCI,
2001:93–95).

268
negotiated between the different buyers and sellers, based on
standard contracts or market rules pre-established by
international cocoa trading associations (CAL, CMAA, FCC).
Conversely, the futures market is a restricted market (only the
least attractive cocoas for users are supplied to the
exchange), on which an individual must use the services of a
middleman to buy or sell commodities. This involves a
standard contract that can be bought or sold at a given place
(NYBOT or LIFFE), during predetermined price quotation
times, on the trading floor (NYBOT) or in front of computer
screens (LIFFE since the end of 2000). In the futures contract,
only the price and delivery month (March, May, July,
September or December) are negotiable, as all the other
elements are standardized and not negotiable (quantity by 10-
tonne batch, delivery to the warehouse of the port on the
consumer market, quality in compliance with the classifications
established by each exchange, transactions in US dollars for
NYBOT and pounds sterling for LIFFE, etc.). Moreover,
futures contract trading assumes the availability of sufficient
financial means to honour contractual obligations (obligations
first of all involving payment of a security deposit, an "initial
provision" generally equivalent to 10 per cent of the contract
market value). These means must be made available to a
middleman ("broker" or "commission agent", who is a member
of the clearing office), who takes responsibility for contract
performance (reverse operation or delivery) on behalf of the
operator in respect of the other party (CCI, 2001:73-85).

Jouve and Milly summed up well the advantages and

disadvantages of the futures market (Jouve et Milly, 1990:115-
120) namely, for the advantages: (1) cost reductions
throughout the commodity chain since, by limiting their risk
margin (money gained by speculators is lost by other
speculators), middlemen also limit their commission; (2) more
flexible and more efficient management of market flows insofar
as paper and physical can be dissociated in time; (3)
transparency in operations through the immediate publication
of quotations; and (4) theoretically more difficult price
manipulation by large operators, even if "squeezes", like the

269
 347
one Antony Ward was recently accused of, may still more or
less severely affect the smooth functioning of the markets.
However, this guarantee of efficiency and transparency entails
a certain number of limits or drawbacks: (1) in the short term,
the futures market can increase instability, even though it does
not modify long-term price trends; (2) producers always find
themselves in the role of speculators, since they can choose
at any moment to sell or not to sell: they optimize their
speculation but do not eliminate it all the same; (3) resorting to
arbitrage is not free of charge (registration fees, brokerage,
exchange taxes, etc.); and (4) the options system encourages
traders and industrialists to speculate, which somewhat
amplifies the role of futures markets, increasing its
disadvantages. We are tempted to add a fifth point to this last
list: futures markets do not locally encourage the production,
differentiation and recompense of quality, since in order to
function they rely on the maximum homogenization of batches
(by national origin as this is difficult on a world scale, hence
premiums by batches – positive or negative – depending on
the producing country), which, moreover, is done more to
meet a low rather than a high standard (only the least
attractive cocoas are delivered to the exchange).

Lastly, Jouve and Milly concluded as follows: "In any

event, the futures market remains a relatively neutral

347
Antony Ward, alias "Chocfinger", 42 years old, former director of
Phibro, has run the Armajaro trading company (London) for the last
four years with Richard Gower. He apparently took delivery of large
quantities of cocoa beans over the last two years, at a time when
prices doubled (from £stg600/t to around £stg1,300/t). After his
purchase in the summer of 2002 of at least 150,000 tonnes of cocoa
(over 5 per cent of world production and three-quarters of the
quantities supplied in July 2002 to the London futures market), he
seemingly possessed 15 per cent of world stocks. Suspected of
operating a "squeeze" (forcing prices to rise and selling at the high
price to pocket a gain estimated in this case at US$90 million ), or
even of funding the conflict that broke out in the Côte d'Ivoire on 19
September 2002 to multiply his stake, he is apparently backed by the
American insurer AIG, or the Commodity Arbitrage Fund AIG DKR.

270
instrument, reproducing market facts much like a barometer.
The ideal of price stability can always be dreamt of. As that
ideal is very far off, theoretical and even utopian, price
instability has to be lived with, given the continual instability
between supply and demand. In this context of instability, the
existence of a representative futures market is undeniably a
positive factor. Though it can no doubt seem paradoxical that
the world cocoa price is determined by speculators on markets
in which only paper circulates. Nevertheless, let us not forget
that old traders' saying "physical is always right!".

The "relatively neutral" nature of the futures market in

terms of supply and demand would undoubtedly deserve
348
greater discussion , as would its "undeniably positive" nature
349
faced with price instability . In the meantime, and in a context
now free of public interventions, let us take a look at price
formation and transmission within the commodity chain, and to
which "market facts" they lead.

4. Price transmission and value sharing

Price and income structuring in the cocoa-chocolate

commodity chain is difficult to assess, given the myriad types
of end product (tablets, bars, sweets, creams, ice creams,
drinking chocolate, etc.) and its variable combination of semi-
finished cocoa-based products (liquor, butter, powder), and of
other incorporated raw materials (sugar, milk, vanilla, fat,
hazelnuts, raisins, etc.). There is also the problem of data: (1)

348
We have already begun them by noting that the development of
futures markets is not neutral towards the production and delivery of
quality products. We could continue in another register: a "squeeze",
like the one by Antony Ward – be it real or the figment of a very
extravagant imagination, shows that it cannot be ruled out that such
an operation may – in its extreme limits – lead to the abrupt
destructuring of the economy of a country such as the Côte d'Ivoire,
which is definitely not neutral towards worldwide cocoa supply and
demand, in the short and long terms.
349
See Section 4.4.3 to carry on this discussion.

271
downstream companies – often multinationals (ADM, Barry-
Callebault, Mars, Nestlé, etc.) – conceal rather than divulge
their recipes, costs and marketing prices; (2) upstream
producing countries – primarily developing countries – do not
usually have any sophisticated economic observatories. All
this is combined with the unfortunately well-known fluctuation
in cocoa prices, hence the ambiguity of working on annual
means. In short, the exercise we are attempting here is as
daring as it is novel, and we hope it will provoke reactions and
suggestions likely to come closer to reality than here.

4.1. Hypotheses and methodology

Ours is a rough analysis in more ways than one, even

though certain biases were lessened by carrying it out over
several years (1992–2001). First of all, it in fact stops at a
relatively unsophisticated end product (the dark chocolate
bar), which, it is worth remembering, is a rare chocolate
product to which a VAT rate of 5.5 per cent is applied,
whereas all the others are hit with 19.6 per cent tax in
350
France . Secondly, it is restricted to a transaction area (the
Côte d'Ivoire => northern Europe => France), which
correspondingly reduces the scope of the analysis, even
though this area is in itself not insignificant in the world

350
Under current French legislation, where the normal VAT rate is
19.6 per cent (20.6 per cent from 1 August 1995 to 31 March 2000),
products earmarked for human consumption are subject – as
authorized by the sixth European Directive on VAT – to the reduced
rate which stands in France at 5.5 per cent since 1982 (at least 5 per
cent according to the European Directive). However, this principle
includes exceptions, for 2 per cent of food products (Biron et
Boucher, 2000) which, apart from alcoholic drinks, are chocolate,
confectionery, margarines and caviar. However, for chocolate, there
is an exception to the exception (i.e. the possibility of applying the
reduced rate): (dark) chocolate and household (dark) chocolate, if in
bar or stick form (e.g. the "Napolitain" dark chocolate square is taxed
at 5.5 per cent, but if it is round it is taxed at 19.6 per cent), along with
household milk chocolate, if presented in the same forms.

272
chocolate economy. Lastly, it is based on the following
hypotheses.

(1) The data and calculations given in Table 4 lead to fair

estimates of the prices of the different products, given that:
• the FOB price for exported Ivorian cocoa beans is not
available after 1996 (IMF, 1998), leading this price series to be
ruled out, which is a pity since it would have made it possible
to evaluate the FOB-to-CIF cost which is not provided by
BNETD (BNETD, 2000);
• ED&F Man (2002) supplies series of mean annual prices
(£stg/t) for butter ("Top 4 Dutch") and powder (unspecified
origin), but not for liquor or couverture chocolate, which led us
to opt for estimating the unit price of all these goods using the
same database, i.e. by dividing a sum of annual import values
351
within Europe, supplied by Eurostat (EUROSTAT, 2002) by
the sum of the corresponding volumes. For butter and powder,
the difference between these evaluations (Table 4) and the
prices published by ED&F Man varies considerably from one
year to the next (effect of arbitrage on the futures markets?),
352
and is substantial on average for powder (which by chance
does not enter much into this study).

Table 4: Values used, their source and their estimation method

Variable Source Estimation method

Price paid to producer BNETD, 2000, Weighted average according to

(the Côte d'Ivoire) 2001, 2002 quantities collected by zones (5)
and by operators (middlemen or
cooperatives)
Price, factory entrance BNETD, 2000, Weighted average depending on
(the Côte d'Ivoire]) 2001, 2002 quantities collected by department
(44 dealers or cooperatives

351
More detailed data than UNCTAD's TRAINS data: HS to 8 figures
rather than 6.
352
Between +25% (1992 and 1999) and –11% (1997) for butter
(average of +5% from 1992 to 2001), between +44 per cent (1995)
and –3 per cent (2001) for powder (average of +18 per cent over the
period in question).

273
Variable Source Estimation method

surveyed in all in 1999/00)

Processing and export Calculated Difference between CIF price and
(the Côte d'Ivoire) factory entrance price incremented
by compulsory levies
Compulsory levies BNETD, 2000, Levies for the State, but also
(the Côte d'Ivoire) 2001, 2002 professional (13% of total in
2000/01)
CIF price of imported Calculated with Annual imported Values over
bean EUROSTAT, Quantities. Product code:
(Netherlands, 2002 HS 18010000353. Origin: the Côte
Germany) d'Ivoire. Reporting countries:
Netherlands + Germany (64% of
volumes imported from the Côte
d'Ivoire by the EU from 1992 to
2001). Ivorian beans entering the
EU are not subject to customs
duties.
Price of liquor Calculated with Annual imported Values over
(France, Belgium, EUROSTAT, Quantities. Product code:
Germany) 2002 HS 18031000354. Origin: EU.
Reporting countries: France +
Belgium-Luxembourg + Germany
(66% of within-EU import volumes
from 1992 to 2001).
Price of butter Calculated with Annual imported Values over
(Germany, Belgium, EUROSTAT, Quantities. Product code:
France) 2002 HS 18040000355. Origin: EU.
Reporting countries: Germany +
Belgium-Luxembourg + France
(67% of within-EU import volumes
from 1992 to 2001).
Price of powder Calculated with Annual imported Values over
(Germany, France, EUROSTAT, Quantities. Product code:
Belgium) 2002 HS 18050000356. Origin: EU.
Reporting countries: Germany +
France + Belgium-Luxembourg
(56% of within-EU import volumes
from 1992 to 2001).

353
HS 18010000: cocoa beans, whole or broken, raw or roasted.
354
HS 18031000: cocoa paste (excl. defatted).
355
HS 18040000: cocoa butter, fat and oil.
356
HS 18050000: cocoa powder, not containing added sugar or other
sweetening matter.

274
Variable Source Estimation method

Price of sugar Calculated with Annual imported Values over

(Belgium, Germany, EUROSTAT, Quantities. Product code:
France) 2002 HS 17019910357. Origin: EU.
Reporting countries: Belgium-
Luxembourg + Germany + France
(52% of within-EU import volumes
from 1992 to 2001).
Price of couverture Calculated with Annual imported Values over
(France, Germany, EUROSTAT, Quantities. Product code:
Netherlands, Belgium) 2002 HS 18062010358. Origin: EU.
Reporting countries: France +
Germany + Netherlands + Belgium-
Luxembourg (77% of within-EU
import volumes from 1992 to 2001).
Price of chocolate bars Calculated with Price reconstituted from: (1) the
(France) INSEE, 2002 INSEE annual index (100 = 1998) of
the consumption price of "chocolate
tablet" (product code 011821) for
the whole of France (mainland +
overseas departments), (2) the retail
price, without tax, of a "standard"
tablet of dark chocolate in 2001
VAT CAOBISCO, 2002 5.5% (in France only on dark
(France, Europe) chocolate in bar or stick form, all
other chocolate products being
taxed at 19.6%)

(2) Ivorian average prices and levies expressed by cocoa

season (Pc: October to September) need to be converted into
calendar years (Pn: January to December) in order to be
properly compared with all the other average prices expressed
per calendar year (from CIF bean to chocolate tablet); this
conversion can be done considering that:
• 40 per cent of cocoa volumes produced are bought from
producers and delivered to conditioning factories from October

357
HS 17019910: white sugar, containing in dry state>= 99.5 per cent
sucrose (excl. flavoured or coloured).
358
HS 18062010: chocolate and other food preparations containing
cocoa, in blocks, slabs or bars weighing > 2 kg or in liquid, paste,
powder, granular or other bulk form, in containers or immediate
packings of a content > 2 kg, containing >= 31 per cent, by weight.

275
to December, hence the average price paid by each of these
two operators over the calendar year can be estimated by Pn =
(0.40*Pc) + (0.60*Pc–1);
• levies (taxes) are mostly deducted at the export stage, for
which payments are better distributed throughout the year: Pn
= (0.30*Pc) + (0.70*Pc–1).
It should be noted that this operation backs up another
hypothesis we put forward, and which is fairly conventional in
economics, namely virtually instantaneous price transmission,
which with a time period of one year, and futures and options
markets that are also well developed, is far from being totally
aberrant (thus, it is considered here, for example, that an
increase in bean price in 1999 can lead to an increase in the
price of a tablet of chocolate the same year).

(3) The Côte d'Ivoire does not gain value through local
processing of beans into liquor, butter and powder, which is
not true in reality, since it now processes a quarter of its beans
locally, though primarily via multinationals (see Sections 2.3.3,
2.3.4).
359
(4) A study of chocolate value formation/distribution
requires that the various prices or taxes be expressed in the
360
same unit , and the ECU (now the euro) proves to be a good
361
compromise when compared to practices , as well as for

359
The term "value" used here should be understood to mean
"commercial value", along with values that are incorporated or not in
that commercial value: an old and vast economic debate, for which J.
Généreux provides a few elements in his bestseller (Généreux,
2001).
360
Unfortunately, the lack of data prevents us from applying the
surplus accounts method here (see in particular Dorin et al., 2001:
Formation and distribution of productivity gains in Indian agriculture,
Economie Rurale, 263, May–June), though it would have enabled a
more complete and less limited analysis than what was actually
carried out.
361
Prior to 1999, according to the French trader Touton, French
Ivorian bean purchases were mostly paid for in French francs, and
probably in pounds sterling or US dollars for other European

276
limiting the effect of European currency exchange rates prior
to 1999: when data are not expressed in this unit (particularly
Ivorian data), the conversion rates provided by EUROSTAT
362
(2002) are used to convert them.

(5) Value formation/distribution can be understood in two

main ways, by the commercial value of the products derived
from one tonne of beans (Table 5), or by the value of the
different commercial forms that make up – with taxes and
other levies – the retail price of one tonne of dark chocolate
bar (Table 6).

(6) One tonne of beans provides 800 kg of liquor, or

400 kg butter and 400 kg of powder (at 10–12 per cent fat
content). Thereafter, bean processing results in a loss of
matter throughout the process of (only) 20 per cent (hull and
water), at the grinding stage (Table 5, Table 6).

(7) A dark chocolate tablet is made with couverture

363 364
chocolate containing 50 per cent liquor and 11 per cent

countries; since 1999, the euro has taken over for African cocoa
purchases, except in cocoa-importing countries such as the UK
(which have not been included in the scope of our study for that
reason, among others), and exporting countries such as Ghana
(which apparently receives payment increasingly in US dollars rather
than in pounds sterling).
362
For CFA franc conversion into euro, we used the ECU/French
franc conversion rate, multiplied by 50 up to 1993, then by 100 from
1994 onwards (devaluation in January 1994).
363
Which is not always the case (tablet manufactured directly with
mass, without added cocoa butter, unless it is meant to be "fondant"),
but this assumption makes it possible to enhance the analysis, by
bringing out the value added through couverture manufacture, without
affecting the final price of the chocolate in any way.
364
Itself containing 50 per cent cocoa butter.

277
 365
butter (Table 6), themselves made from beans of
exclusively Ivorian origin.

(8) The cocoa content of a dark chocolate tablet is 61 per

cent (Table 5, Table 6), a percentage considered to most
effectively represent a market where it varies, in France, from
50 to 99 per cent; the remainder (39 per cent) is solely
composed of sugar (which is not always the case).

Table 5: Calculation of the value of products manufactured from

one tonne of beans

Bean, farm gate (the Côte V’Farm = PFarm gate

d'Ivoire):
Bean, factory entrance (the Côte V’Factory = PFactory entrance
d'Ivoire):
Imported bean (Europe): V’Import = PImport
Liquor (Europe): V’Liquor = PLiquor * 0.8
Butter + Powder (Europe): V’Butter&Powder = (PButter * 0.4) + (PPowder * 0.4)
Couverture (Europe): V’Couverture = (PCouverture / 0.61) * 0.8
Tablet (France): V’Tablet = (PTablet / 0.61) * 0.8

Table 6: Breakdown of the value of a tablet of dark chocolate

Bean production (the Côte V’Prod = (PFarm gate / 0.8) * 0.61
d'Ivoire):
Bean collection and export V’Import = ((PImport / 0.8) * 0.61) –
(to Europe): V’Prod – V’Collect – V’FactExp – V’TLevies
- of which coop. & V'Collect = ((PFactory / 0.8) * 0.61) –
middlemen (the Côte ((PFarm gate / 0.8) * 0.61)
d'Ivoire):
- of which factories & V'FactExp = ((PImport / 0.8) * 0.61) –
exporters (incl. transport): V'Prod – V'Collect – V'Levies

365
i.e. a total of 36 per cent cocoa butter, with the legislation allowing
the name "couverture" for products whose cocoa dry matter content
exceeds 35 per cent (ditto for dark chocolate) with more than 31 per
cent butter (18 per cent for dark chocolate).

278
- of which levies (the Côte V’Levies = (VLevies / 0.8) * 0.61
d'Ivoire):
Liquor and butter V’Grinding = ((0.11*PButter) +
production (Europe): (0.50*PLiquor)) – ((PImport / 0.8) *
0.61)
Sugar (Europe) V’Sugar = PSugar * 0.39
Couverture production V’Couverture = PCouverture –
(Europe): ((0.11*PButter) + (0.50*PLiquor) –
V’Sugar)
Tablet manufacture and V’Tablet = PTablet – PCouverture
distribution (France):
VAT: V’VAT = PTablet * 0.055

(9) Cocoa percentage weight (61 per cent) corresponds

to the monetary value of the cocoa in a tablet, which is
ambiguous in several ways: the value of the chocolate is
based more on the cocoa it contains than on the other main
ingredient, namely sugar, and that value itself depends on
other factors (bean selection, industrial know-how, reputation,
etc.).

(10) This 61 per cent dark chocolate tablet was sold in

France for €8/kg exclusive of tax in 2001 (i.e. 5 French francs
366
per 100 g tablet) .

(11) The total VAT deducted throughout the commodity

chain amounts to 5.5 per cent of the value exclusive of tax of
the dark chocolate tablet sold in France; a hypothesis which is
both low, since the VAT applied to cocoa-based products
(liquor, butter, couverture) is 6 or 7 per cent in the other

366
Nielsen’s data, for example, would probably make it possible to
specify this value a little more precisely. In mid-December 2002, in a
hypermarket in Montpellier, tablets at 51–52 per cent cocoa
fluctuated between €6.65 (Meunier) and €8.60 (Lindt Noir) per kg
inclusive of tax, and those at 72 per cent between €8.10 and €12.40,
with Cemoi organic chocolate at 60 per cent cocoa costing €9.40.

279
countries considered (Germany, Belgium, the Netherlands)
(CAOBISCO, 2002:21), and high, since no European tax is
levied on imported beans.

(12) An analysis at constant prices can be carried out on

Ivorian and French values, using as the deflator for the Côte
d'Ivoire the harmonized consumer price index with 1996 as
base year (BCEAO, 2003) and, for France, the household
consumer price index with 1995 as base year (INSEE,
367
2003) ; prior to use, each of these indexes was adjusted to
the 1992 base year to facilitate subsequent comparisons.

367
The INSEE general consumer price index (CPI) could also have
been used, but on the organization’s internet site at least, the CPI
base 100 in 1998 was not calculated prior to that date, and the base
100 for 1990 was not calculated after December 1998.

280
4.2. Results and comments

4.2.1. Exported beans

BNETD reports (BNETD, 2000, 2001, 2002) and data

from 1995/96 to 2001/02, expressed in current CFA francs per
cocoa season (October to September) – hence effectively
incorporating the price surge confirmed in June 2002 (Figure
12) – provide initial information on value formation/distribution
for one kilogram of beans CIF (Figure 8), even though this CIF
368
value was unfortunately derived by BNEDT from the ICCO
monthly index on the London and New York exchanges
(BNETD, 2002:15).

1. In 1999/00, the year the commodity chain was liberalized,

the current farm-gate bean price was virtually halved, then
rose again, slightly exceeding in 2001/02 the level reached
369
3 years earlier (+3.5 per cent compared to 1998/99)
(Figure 8). After abolition of the “barème” and the
indicative price paid to cocoa growers, producer income
instability deteriorated by a much stronger variation in

368
In fact, this CIF price is not specific to the Côte d'Ivoire, even less
so for a delivery to Amsterdam as we subsequently considered
(Section 4.2.2). This CIF value considerably affects the estimation of
the share of conditioning factories and exporters, since that share is
calculated by deducting from the value all the compulsory levies,
along with the factory gate price. For the latter, it should also be
noted that its value fluctuated in the pages of the last two BNEDT
reports for the 2000/01 season: between 415 and 423 CFA francs/kg;
we have opted here for 415.
369
504 CFA francs per kg in 1998/99, 275 in 1999/00, and 522 in
2001/02. A few days after the end of the 2001/02 season, a record
(over the previous 17 years) of US$2,405/t was reached on the New
York futures market on 11 October 2002. However, between 14 and
18 October 2002, the closing price for cocoa fell suddenly from
US$2,338 to US$1,910/t, i.e. a drop of 18.3 per cent in 4 days.

281
 price according to the collection circuit (middlemen or
cooperatives), the harvesting zone and the month of the
year. For instance, in 2000/01, the average farm-gate
price for that season did not exceed 255 CFA francs/kg in
the western zone (middleman price), whereas it rose to
395 in the south-western zone (cooperative price).
Likewise the farm-gate price for beans was 550 CFA
francs/kg in February for cooperatives (all zones
combined), whereas middlemen were only offering 300 in
June. According to BNETD, the coefficient of variation for
prices (over 20 per cent) declined slightly during the
2001/02 season, which was marked by the introduction of
370
a minimum price to producers per three-month period .
However, BNEDT concluded by highlighting the problem
of price labelling and the problem of minimum price
payment by buyers purchasing directly from farms.

2. Over the period in question, bean collection represented

from 5 per cent (1995/96) to 11.5 per cent (1998/99 and
2000/01) of the ICCO CIF price (4 to 9 per cent of the CIF
Amsterdam price – see Section 4.2.2). It is not possible to
see any clear trend here as to the effects of liberalization.
However, it has to be said that liberalization caused
problems for cooperatives, whose collection share
slumped, despite the better prices paid to producers
(average differential with middlemen of +30 CFA francs/kg
in 2000/01): in 1998/99, they handled 32 per cent of the
volumes produced, as opposed to 24 per cent in 1999/00
and only 18 per cent in 2000/01 (though retaining 50 per
cent in the eastern zone). In fact, the new law on
cooperatives and payment outstanding divided their
access to guaranteed bank credits by almost 25 (0.64
billion CFA francs allotted by Fonds de Garantie des
Coopératives Café-Cacao (FGCCC) in 1999/00 as
opposed to 15.46 the previous season). So, in the
absence of bank credit, and faced with the unceasing drop

370
325 CFA francs per kg from October to December 2001, 475 from
January to March 2002, and 600 from April to June.

282
 in prefunding by exporters who sought to limit their
financial risks and costs, cooperatives tended only to pay
producers once they themselves had been paid by the
exporter (70 per cent of payments in 2000/01 as opposed
to 34 per cent in 1999/00). This delay was all the more
regrettable in that the operators who paid at the
warehouse entrance now offered a premium (5 to 7 CFA
francs in 2001) compared to the few dealers who still
granted prefunding against the product (Jacquet, 2001).
Fortunately, during the 2001/02 season, the gradual
resumption of operations by FGCCC (0.95 billion in credits
allotted), and above all the provision of revolving credits by
exporters, enabled the cooperatives to increase their
market share from 18 to 25 per cent, thereby returning to
the 1999/00 level (BNETD, 2002:11-14).

3. Prior to liberalization, the share of compulsory levies was

tending to decrease (36 per cent of the ICCO CIF price in
1996/97 as opposed to 19 per cent in 1998/99), while it
has tended to increase since then (25 per cent in 1999/00
as opposed to 29 per cent in 2001/02). The main element
of these levies is DUS, for which the percentage share has
tended in reality to decrease since liberalization, even
though it has increased in value: in August 2002, it even
broke the record of 220 CFA francs/kg (Reuter), which
was not really a record since, at constant prices, it
remained around 20 per cent below the 200 CFA francs
371
imposed in 1994 (IMF, 1998) . On the other hand,
professional levies have increased considerably (98 CFA
francs/kg in 2001/02, i.e. 10 per cent of the CIF price).
Most of these levies have in fact been multiplied since
liberalization, to ensure services that used to come from
the State. In view of their increases, we can wonder what
the cheapest and most effective solution in the Ivorian
context is.

371
This export tax, levied on beans and on other types of exported
cocoa-based products, was suspended from 1989 to 1993.

283
4. However, the share of conditioning factories (“traitants”)
and exporters – deduced by difference – has clearly
shrunk over the last season: after fluctuating at around 17
per cent of the ICCO CIF price since 1995/96, it suddenly
fell to 10 per cent in 2001/02. The same trend can be seen
using the CIF Amsterdam value adjusted to calendar
years (see Section 4.2.2), which confirms substantial cost
savings at that level, with the major downstream operators
(ADM, Cargill, Barry-Callebault, etc.) increasingly
integrating the upstream operations of the commodity
chain (buying out or sidelining local operators), thereby
achieving major economies of scale (big-bag or bulk
loading, access to international funding that is generally
more advantageous than local credits, better knowledge of
the international market, etc.).

284
Figure 8: Distribution of ICCO bean CIF value (1995/96–2001/02)
1050 Levies
1000 - Profession
- State
950 Factories & Exporters
900 Midllemen & Cooperatives
850 Cocoa growers
CFA francs per kg (current prices)

800
750
700
650
600
550
500
450
400
350
300
250
200
150
100
50
0
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

4.2.2. Couverture chocolate

Dark couverture chocolate, which is obtained by

mixing conching liquor, butter and sugar, is the raw material of
chocolate makers, if the latter do not make their own. It varies
in composition depending on the desired end product (average
adopted here: 50 per cent liquor and 11 per cent cocoa
butter); for example, groups such as Cemoi-Cantalou have it
manufactured in Germany and then sell it on or process it

285
 372
(tempering, moulding, coating, etc.) in France . With our
price estimations and method (Section 4.1), the breakdown of
the commercial value of one tonne of dark couverture
chocolate (Figure 9) prompts the following comments.

1. Between 1992 and 2001, the prices of liquor, butter,

powder and sugar varied as much as the farm-gate or CIF
373
Amsterdam prices (coefficient of variation between 12
and 14 per cent), which was not the case for couverture,
for which the price was more stable (CV = 2.4 per cent): a
possible benefit of the futures and options markets, at
least at this stage of processing.

2. After Ivorian liberalization, the price of couverture, like that

of its ingredients, fell (it fell below the level of 2,000 euro
per ton), but unlike beans and liquor (and also sugar), this
price did not recover in 2001; was that linked to the
deferred repercussions of the price increases for the main
ingredients (liquor and sugar), or to the upstream
integration of grinders and to the economies of scale
making it possible to offer ever cheaper cocoa butter (–32
374
per cent between 1998 and 2001) ? It is difficult to
answer those questions here, particularly since the drop in
butter price can also be linked to the larger profits now
taken by grinders on powder. Indeed, the price of powder
has clearly increased since 2000 (Figure 10): the countries
of eastern Europe, where demand for chocolate-based

372
Such trade within Europe is therefore more of a matter of trade
within firms, where the prices – which we are measuring here – are
somewhat minimized in theory. However, the latter incorporate
transport costs, since CIF values are involved. The same applies for
our liquor, butter and powder prices, which may explain, for the last
two products, why our estimations are greater on average than the
ED&F Man price series (Section 4.1).
373
More strictly, the Netherlands and Germany (see Table 4).
374
The ED&F estimations, unlike our own, show a price rise for 2001
(
Figure 10).

286
 products is growing, are apparently importing more and
more to supply their chocolate factories.

3. In 2001, the producer’s share in the value of couverture

managed to rise to the record level of 25 per cent reached
in 1998. However, that of dealers and exporters clearly
decreased, in value and as a percentage. Indeed, many of
these operators have been pushed out or taken over by
375
grinders since Ivorian liberalization (see Sections 2.3.3,
2.3.4). Such upstream integration enables grinders to
strengthen their income by processing larger volumes of
beans, as their gross margin per tonne of couverture fell
below the level of 400 euro in 1997. In addition, if they
make couverture for chocolate makers (which is the case
for the largest grinders), it enables them to extract a
greater unit margin upstream. In fact, prior to liberalization,
the added value per tonne of couverture (price of the latter
minus the cost of its ingredients: liquor, butter and sugar)
steadily declined, from 36 per cent in 1992 (720 euro per
ton) to 18 per cent in 1998 (381 euro per ton), whereas it
has clearly been gaining ground since then (27 per cent in
2001, i.e. 532 euro per ton). It appears quite clearly in all
cases that the economies of scale achieved in the Côte
d'Ivoire since liberalization are not completely reflected in
the price of a tonne of couverture, and that they are of
greater benefit to downstream operators (grinders) than to
upstream operators (Ivorian exporters).

375
Grinders for whom the income derived from butter and powder
sales has been barely estimated in this study, if at all.

287
 Figure 9: Distribution of couverture value (1992–2001)
2 200
2 100
2 000
1 900 Manufacturing of
1 800 COUVERTURE
(Europe)
1 700
1 600 SUGAR (Europe)
euros per ton (current prices)

1 500 Manufacturing of
1 400 LIQUOR and
1 300 BUTTER (Europe)
1 200
1 100 LEVIES
1 000 (Ivory Coast)

900 CONDITIONING
800 & EXPORT
700 (Ivory Coast
=> Amsterdam)
600
500 COLLECTION
400 (Ivory Coast)
300
COCOA-
200
GROWER
100
(Ivory Coast)
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

288
Figure 10: European current prices of beans, butter and powder
(1980–2001)

4 500
Source : data from ED&F Man
4 000

3 500
pounds sterling per tonne

3 000

Butter
2 500 (Top four Dutch )

Bean
2 000 (Spot price,
Ghana, London )
1 500

1 000

500 Powder

0
1980 1985 1990 1995 2000

4.2.3. Chocolate tablet

Integration of the previous gross margins in the value

of a tablet of dark chocolate inclusive of tax (Figure 11 and
Appendix 1), as approximate as the latter value might be
(Section 4.1), shed fundamental light on price transmission
and value sharing within the cocoa-chocolate commodity
chain.

1. Whilst bean, liquor, butter and couverture prices fluctuate

– often substantially – along a stationary or even
depressive line, conversely, the retail price of a tablet has
increased from year to year: +2.6 per cent per year on
average from 1992 to 2001 in current euro, i.e. a gain of
1,550 euro per tonne in 10 years (+1 French franc per
100 g tablet). A similar trend can be seen for all French
chocolate-based products. On the other side of the border,

289
 376
in Germany where BDSI publishes a retail price index
for milk chocolate tablet, the upward trend is even greater,
but only since May 1996 (Figure 12). Prior to that, the
price of a German tablet of milk chocolate was tending to
fall, probably due to the upheaval of restructuring in the
country after reunification between West and East in
377
1990 . In terms of supply and demand, this upward
consumer price trend is not surprising, at least in the most
recent years. In fact, the intensification of cocoa
production in the 1980s (notably in south-east Asia) had
long left the commodity chain in a situation of surplus
production, while that is no longer the case today: since
2000, there has been a production shortfall (tapping into
stocks to meet demand) and, as that shortfall is somewhat
set to increase in the coming years (cf. Section 2.2.1),
prices are logically rising.

2. It can nonetheless be wondered why such an upward

trend barely benefits the operators bearing most of the
costs of chocolate making, from the cocoa producer to the
couverture manufacturer. Since 1999 in particular, when
the Ivorian cocoa sector was liberalized, European
consumers have continued to pay more for their chocolate
products (in France and even more in Germany, even if
378
chocolate seems to be cheaper there ) while the price of

376
Bundesverband der Deutschen Sübwarebindustrie (Bonn),
association of the German confectionery industry.
377
Adaptation of West Germany to a lower buying power in East
Germany, but possibly also supplies of cheaper milk in the East. In
any event, German milk imports from the rest of the European Union
(EUROSTAT) occurred at virtually stable prices from 1992 to 2000:
between 0.32 and 0.34 ECU/kg for code HS 040120 (milk and cream
of a fat content by weight of > 1 per cent but =< 6 per cent, not
concentrated nor containing added sugar or other sweetening matter)
which was the most frequently imported dairy product (614,150 t in
1990) (NB: there was a somewhat downward price trend for other
imported types of milk).
378
In December 2001, a (100 g) tablet of milk chocolate of the Milka
brand only cost 0.6 euro (apparently exclusive of tax).

290
 the raw material is clearly falling (couverture and even
more so imported cocoa beans) (Figure 9). Must this be
blamed on the increasing costs of advertising and of
product differentiation that incites the consumer society, or
on the increasing profits of distributors, which we are
379
unable to measure here ? On this last point, it should be
noted that distributor profits are not apparently dropping,
and even seem to be rising since, according to BDSI,
German industrial prices (wholesale prices) for some
chocolate-based products rarely exceeded in 2001 the
record levels reached in 1998 or 1999, while retail price
inflation continues (Figure 13).

379
This distributor profit would currently seem to be fluctuating
between 19 and 33 per cent in France, but this remains to be
confirmed.

291
Figure 11: Distribution of chocolate tablet value (1992–2001)
8 500
8 000 VAT
7 500
Manufacturing
7 000 and distribution o
6 500 TABLET
(France)
euros pet ton (current prices)

6 000
Manufacturing o
5 500
COUVERTURE
5 000 (Europe)

4 500 SUGAR (Europe

4 000 Manufacturing o
LIQUOR and
3 500 BUTTER (Europe
3 000
Collection and
2 500 export of
2 000 BEANS
(Ivory Coast
1 500 => Amsterdam)
1 000 Production of
500 BEANS
(Ivory Coast)
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

292
Figure 12: Current price indexes for beans and chocolate-based
products (Jan. 1990–Oct. 2002)
130

120 Chocolate-based produtcs Tablet of milk chocolate

FRANCE (source: INSEE), in current French Francs GERMANY (source: BDSI), in current Deutschmarks
110

100

90
Index (100 = May 1998)

80

70

60

50

40 Beans
London & New York exchanges (source: ICCO)
30

20

10

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Figure 13: German industrial prices for some chocolate-based

products (1995–2001)
5 000

Filled tablets and bars

4 500

Unfilled chocolate
e u ro s p e r to n n e (c u rre n t p ric e s )

4 000 Other bars/tablets of milk/fondant chocolate

3 500
Unfilled chocolate
With fruits, cereals, nuts

3 000

Spreads containing cocoa

2 500 Preparations for drinks containing cocoa

2 000

Dark chocolate couverture (average intra-EU imported prices)

1 500
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

293
3. The share of the tax-inclusive price of a tablet of dark
chocolate going to Ivorian cocoa producers has, in any
event, not increased: after descending below the 5 per
cent limit in 2000 (the lowest level over the decade
considered), it rose to almost 6 per cent in 2001, while it
managed to drag itself up to 7 per cent just before
liberalization (Figure 11). Which prompts further questions:
why is cocoa cultivation, which employs and provides a
livelihood for more people than in the rest of the
commodity chain, unable to capture a greater share of the
value of the end product, even after liberalization which
was primarily supposed to be of benefit to it? Moreover,
how is it possible to explain that research and public
authorities still concentrate virtually all their resources on
trying to improve the performance of cocoa cultivation,
when the prospects for improving income in that activity
(and thereby eventually its production techniques) lie more
surely in downstream reforms, since it is there that virtually
all the value is created and/or captured (more than 94 per
cent in 2001 taking the example of a dark chocolate
tablet)?

4. In 2001, the VAT levied by European countries throughout

the dark chocolate tablet manufacturing chain was around
420 euro per tonne, i.e. virtually double the Ivorian levies
on beans (228 euro per ton). Ivorian and European levies
combined therefore amount to 647 euro per ton, i.e. 8 per
cent of the price paid by consumers, and therefore more
than that received by a cocoa producer (under 6 per cent,
i.e. 475 euro per ton).

4.2.4. In other words

The above results can be backed up or, conversely,

moderated by expressing them in other ways.

294
1. Might the decision to carry out the analysis in French
francs, rather than euro have affected our conclusions?
Apparently not, since in a comparison of value in euro
(Figure 14) with that in French francs (Figure 15) for a
given quantity of beans during various stages of its
processing – another way of expressing the results (see
Section 4.1 and Table 5) – there are very few perceptible
differences, the most notable being for the tablet, right at
380
the beginning of the period .

2. However, in 1992 French francs (see Section 4.1), one

kilogram of chocolate tablet rose from 41.6 to 43.5 French
francs exclusive of tax between 1992 and 2001, i.e. an
increase of "only" 4.5 per cent in ten years (over 20 per
cent in current francs or euro), whereas in 1992 CFA
francs, the farm-gate price for a kilogram of beans
increased by 14.3 per cent, from 200 to almost 229 CFA
francs (Figure 16). However, several points should be
remembered: (1) this latter price remains lower than that
prevailing in 1998, just before liberalization (280 in 1992
CFA francs) and in reality compensates for the record
loss suffered in 2000 (174 in 1992 CFA francs), (2)
although Ivorian cocoa producers gained slightly more
purchasing power in their country in 2001 compared to
1992, they did not recover the loss after the "cocoa war"
in 1989/90, when their income was halved (Figure 17),
and (3) if the farm-gate price is deflated by the French
consumer price index rather than the Ivorian index, which
is a way of measuring the gains or losses in cocoa
producer purchasing power on the international market
(terms of trade), a drop of 10 per cent is unfortunately
seen between 1992 and 2001.

380
In US dollars, the trend of the curve is obviously very different, due
to larger annual exchange variations with the ECU (and the French
franc), and especially its virtually constant increase over the study
period.

295
3. Another way of assessing operator losses or gains over
the study period is to adjust the prices of all foodstuffs in
1992 to 100, and total up to 2001 the respective price
decreases or increases compared to this base, after
deducting for each iteration (year) the cost of cocoa-
381
based ingredients used in the foodstuff in question . It
can then be seen that since 1992, when international
bean prices were particularly depressed (Figure 10),
farm-gate beans accumulated a price "disadvantage" of –
22 up to 2001, entailing just as many "advantages" for
imported beans which totalled a gain of +181. In the
same way, this price advantage for imported beans
becomes a disadvantage for products made with them.
However, with the price rise seen for the latter, this
disadvantage is more or less well absorbed: loss of –19 in
10 years for liquor, –88 for butter and powder (combined),
and –71 for couverture. At the end of the chain, the
chocolate tablet accumulates an advantage of +114. The
main gains therefore appear between the farm-gate bean
and the imported bean, precisely where grinders have
concentrated their efforts over recent years. If grinders
indeed prove to have benefited most from this advantage
(the strategy of capturing it for oneself is logical in any
case), their downstream disadvantages (liquor, butter,
powder, or even couverture manufacture) would be
considerably reduced, leaving cocoa producers with the

381
Calculation of a sort of "advantages", by referring to the surplus
account method, with the following differences: (1) the values here
are not deflated by a general price index, since it is ambiguous to
choose one when working with products manufactured in different
countries, (2) it is assumed here that each operator produces the
same quantities each year, with the same quantities of inputs (no
productivity gain), and (3) the inputs here are limited to cocoa-based
products, though many others ought to be included (labour, etc.). This
therefore amounts here, as in the example of couverture, in deducting
from the price of the latter the prices for liquor and butter, multiplied
respectively by the coefficients of composition adopted in this study
(0.50 for liquor and 0.11 for butter, as couverture is assumed to
contain 61 per cent cocoa).

296
weakest bill. The line-up in decreasing order of gains
through simple price variations over the decade would
then be as follows: distributors and chocolate makers,
then grinders, and lastly, with losses, agricultural
producers: a further illustration – if any were needed
here – of the ability of some distributors and industrialists
in the North to impose on the South what strongly
resembles a market power, a power which liberalization –
all in all – merely seems to have exacerbated.

297
Figure 14: Value derived from one tonne of beans in current euro
(1992–2001)

10 500
10 000
9 500
9 000
8 500
8 000
e u ro s p e r to n n e (c u r re n t p ric e s )

7 500 Tablet (France)

7 000 Couverture (Europe)
6 500
Butter + Powder (Europe)
6 000
5 500 Liquor (Europe)
5 000 Imported bean (Europe)
4 500 Farm-gate bean (Côte d'Ivoire)
4 000
3 500
3 000
2 500
2 000
1 500
1 000
500
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Figure 15: Value derived from one kilogram of beans in current

French francs (1992–2001)
70
65
60
55
French francs per kg (current prices)

50
Tablet (France)
45
Couverture (Europe)
40 Butter + Powder (Europe)
35 Liquor (Europe)
Imported bean (Europe)
30
Farm-gate bean (Côte d'Ivoire)
25
20
15
10
5
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

298
Figure 16: Kilogram of beans and chocolate at constant prices
(1992–2001)
500 Farm-gate bean, in current CFAF 50
Farm-gate bean, in 1992 CFAF
450 Tablet, exclusive of VAT, in 1992 FF 45

400 40

French francs per kilogram

CFA francs per kilogram

350 35

300 30

250 25

200 20

150 15

100 10

50 5

0 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Figure 17: Kilogram of beans at current and constant prices

(1967–2001)
700 3500
Farm-gate price (current CFAF / Kg)
Farm-gate price (1992 CFAF / Kg)
600 International price (current SDR / Ton) 3000

500 2500
CFA franc per kilogram

SDR per ton

400 2000

300 1500

200 1000

100 500

0 0
1960 1965 1970 1975 1980 1985 1990 1995 2000

299
5. Call for a less restrictive competition policy

5.1. Strengthened policies in the North

Since the mid-1990s, in both the USA and Europe

(EU), the public authorities have seemed to be increasingly
called upon, and themselves determined, to intervene in
markets that have been marked since the 1980s by a vast
liberalization movement, which has also benefited the
dominance of certain firms beyond what is tolerable.

In this way, French competition policy has been

subject to three new laws in five years (Galland and Raffarin in
1996, New Economic Regulations in 2001), laws followed or
preceded by major reports, such as the one by the Conseil
d’Analyse Economique (Rey et Tirole, 2000), and by more or
less paralysing street demonstrations, such as that by fruit and
vegetable producers (summer of 1999 and end of 2002)
protesting against the “back margins” (“marges arrières” in
382
French) practised by major distributors. The Conseil de la
Concurrence (1986) – an independent body of the Direction
Générale de la Concurrence, de la Consommation et de la
Répression des fraudes (DGCCRF) of the Ministry of
Economics, Finance and Industry, a French specificity – is
stepping up its investigations and sanctions (28 issued in 2000
amounting to a billion francs). The same applies for the EU
Directorate General for Competition. For example, the latter
imposed a record fine of 855.23 million euro on a cartel
established at the end of the 1980s between 13 vitamin C

382
This practice consists in billing the supplier for the service that the
major distributors consider they are providing by selling the product in
question (and ensuring a more or less good position) on their
shelves. Legally, the product is therefore not sold below its invoicing
price (which would be a blatant case of dumping, which is strictly
forbidden and severely punished), whereas in practice, it amounts to
that, reducing the supplier's margin so much that he may finally not
even cover his production costs.

300
producers: their European turnover fell at the time from 250
million euro in 1995 to 120 million in 1998 (Pénard, 2003),
which provides an idea of the profits that can be derived today
from dominating certain markets.

The Antitrust Division of the US Justice Department

has also been stepping up its operations since the 1990s,
apparently even more so than in Europe. Total fines are
mounting up heavily (over US$2 billion between 1997 and
2001 as opposed to 27 million between 1986 and 1996), as
are prison terms: up to a maximum of 36 months as opposed
to 30 days previously, to which the Vice-President of ADM was
effectively condemned for having supported a lysine cartel
alongside Ajinomoto (Connor, 2003). The investigating powers
of the FBI have also been extended (particularly to the homes
of suspected managers), along with the clemency
programmes which, as in Europe, allow for fine reductions – or
even total exemption from punishment – for companies
denouncing a cartel and providing evidence of practices that
383
are now clearly defined as criminal .

This recent intensification of American and European

competition policies share two other characteristics: they
above all affect the agrifood sector (vitamins, lysine, citric acid,
white sugar, etc.), and are primarily applied against foreign
firms or managers. They also, and perhaps especially, share
the same doubts about their abilities: (1) the probability of
uncovering illicit collusion apparently still does not exceed 30
per cent today in the USA (10 per cent in Europe?); (2) the
increase in penalties does not always prevent repeat offenders
(e.g. ADM); (3) the procedures are still having great difficulty
also ensuring compensation for victims (under 50 per cent are
apparently compensated in the USA); (4) legal action is
possible and may be won by the accused; (5) for lack of
agreements or coordination, firms or managers cannot be tried

383
It should be noted here that in the USA an individual can call in the
competition authorities directly, whereas in France, this can only be
done via a consumer association.

301
in several countries. In other words, illicit agreements or
collusion between firms can still bring rich rewards, and
therefore still be practised: for the lysine cartel that was
dismantled, the total cost of its formation and management
was estimated at under US$15.7 million , i.e. 4 to 8 per cent of
its assumed profits (Connor, 2003).

5.2. A theory in practice

Both practice and theory show that a firm in a more or

less established monopoly position will always tend to propose
goods at a price above that of a competitive firm, the latter
consequently appearing to be much better for the collective
384
well-being (except for the so-called "natural" monopoly) .
This led to the voting of an antitrust law in the USA at the end
of the 19th century (1890 Sherman Act) to denounce and fight
monopolies or any agreement between firms on prices or
quantities. This type of competition policy (opposition to
certain mergers, dismantling of large companies, regulation in
company organization, etc.) seems today to have at last taken
precedence over those introduced with relative difficulty in the
last century: (1) price administration by making the monopoly
sell at the marginal cost (sale cost of a company in a
theoretical situation of pure and perfect competition), with all
the problems involved in assessing such a cost in the absence
of any competition; (2) nationalization, i.e. conversion of a
private monopoly into a State monopoly with civil servants less
likely to incite a reduction in production costs than private
shareholders; (3) total non-intervention, with the dubious
argument that, all in all, market deficiencies are less serious
than those introduced by State intervention.

384
In the case of a natural monopoly, production costs are such –
continual economies of scale – that a single producer proves in the
end to be more efficient than a multitude (example often quoted: rail
transport).

302
 The dismantling of cartels or other forms of collusion
on prices and quantities therefore seems today to be the
preferred approach taken by national authorities. The success
of such an approach – in fact less contested than others –
nonetheless remains restricted by some application difficulties,
apart from that linked to the financial and human resources
required for its effective implementation. The first of these
difficulties is to delimit in advance the "relevant market" on
which the behavioural analysis will be carried out, both
geographically (regional, national, world scale, etc.), and in
terms of products (Glais, 2003). For example, should butter
and margarine be considered as two separate markets? Is it
on the cola market or the vast drinks market that the case of
Coca Cola should be studied? Dividing economic activity up
into "industries" as proposed by Marshall (1920), and by
reference to a product that is representative of a generic need,
is unfortunately not particularly helpful, insofar as such
"economic markets" (geographical zone and range of products
within which prices are linked to each other by the arbitrage
phenomenon) perfectly tolerate the exertion of a market power
(with arbitrage enabling at most a reduction in that power). Yet
it is precisely areas likely to be affected by a market power
that competition policies do not tolerate. In order to identify
these particular areas, new market concepts have developed
on either side of the Atlantic.

In the USA, they have relied since 1982 (and even

more so since 1992) on the hypothetical monopolist test: over
a given geographical zone (a zone which should therefore be
defined more or less arbitrarily), the market corresponds to the
product(s) such that a (present or future) monopolist of the
product(s) would probably proceed with a price increase,
maybe slightly, but significantly (5 to 10 per cent) and not
transitionally (at least 1 year). This econometric test clearly
means possessing or gathering statistics to feed it, a major
constraint aside from the fact that it can be carried out with
data from a market already subjected to a power, which
consequently reduces its relevance considerably. The
drawbacks of this highly quantitative American method have

303
led the European authorities to prefer a more qualitative
approach to delimit reference markets. This approach discards
potential competition from the outset, since it attempts to
evaluate at a given moment the possibilities (or not) of
substituting a product or service, from the demand side, but
sometimes also from the supply side (particularly where
distribution is involved). In this framework, it delimits the
relevant zone by combining various pieces of information,
derived in this case from four analyses (alongside the
conventional analysis of market shares) (Glais, 2003): (1)
analysis of functional inter-exchangeability, by comparing the
physical, technical or even taste characteristics of products;
(2) analysis of reactive inter-exchangeability, to assess – after
consumer surveys and/or econometric tests – to what extent
variation in the price of one product might influence that of
another; (3) analysis of "natural" barriers to substitution, in
other words of very high investments and/or transaction costs
that the activity could entail; (4) analysis of geographical
delimitations, be it in terms of ingredient regulation, production
quotas, public markets, the bulk-related or unstockable nature
of the product, substantial price differences, special
distribution methods, etc. In short, in the USA as in Europe,
delimitation of the relevant markets is far from being a simple
matter, and leads in all cases to stormy discussions despite
the increasing sophistication of the methods intended to limit
disagreements on this subject.

Moreover, the delimitation of relevant markets is only

the first stage in a process intended to prevent and repress
collusion between firms and/or domination abuse. Yet this
objective, which is as simple as it is ambitious, is bound to
raise other real difficulties. It first of all raises the question of at
which stage collusion becomes reprehensible. Between the
academic case of "pure tacit collusion" (acting in consort
without any contact) and the severely punished "explicit
collusion" (cartel), many types of behaviour can be
condemned (at least suspected) up to the exchange of
information, or price displaying! Although, on this last point, it
has been shown that certain temporary price wars could be a

304
way of agreeing on a market share (as in American air
transportation), competition policies do not extend to such
cases. They settle for more formal, more "explicit"
agreements, the problem then being to gather the evidence.
But in fact that did not turn out to be difficult for the French
Label Rouge (Red Label), an example that clearly illustrates
what competition laws can condemn today. Despite its
recognition by French and European decrees, this Label
Rouge in the poultry sector was in fact challenged for the four
following reasons (Raynaud et Valceschini, 2003): (1) quantity
restrictions through entry regulations/barriers; (2) price
agreement from abattoirs to distributors; (3) non-competition
clause between abattoirs; (4) cumulative functions as far as
certification is concerned. As these practices did not arise from
the application of some legislation or regulation, an attempt
was then made to show that they contributed to economic
progress (production of better quality goods): the competition
authorities conceded that, but were not convinced by the
simulation intended to demonstrate at the same time that the
free market could not lead to the same result. This example
illustrates a given reasoning. It also strengthens a series of
questions on current competition policies.

5.3. Pending questions for action

The previous sections primarily set out to show, first of

all that the public authorities in Europe and the USA were
concerned about the increasing power of certain firms on the
markets, and secondly that they were mobilizing their
competition policy to meet the problems raised by such
situations, and lastly that those policies fell into a particular
conceptual framework which, apart from a few application
difficulties, also raised a few questions. This final section
endeavours to elucidate some of those questions in order to
outline the challenges of a true international competition
policy.

305
5.3.1. What competition policy for developing
countries?

The international organizations that already

successfully pushed for market deregulation and liberalization
20 years ago (World Bank, IMF, OECD, etc.) clearly neglected
to simultaneously promote and strengthen an international
competition policy. At the turn of the twenty-first century, the
fight against the abuse of economic dominance still, in fact,
falls to States and their own resources, which gives rise to at
least three more or less associated problems: (1) the risk of
national policies turning a blind eye to their own firms: do not
Americans or Europeans today condemn above all those firms
or managers not of their own nationality (over 80 per cent of
cases in the agrifood sector according to Connor (2003))? (2)
the risk of only considering and dealing with complaints from
residents: are not small farmer demonstrations against major
French distributors more efficient when they take place in
France rather than in some supplier country in West Africa?
(3) the risk of restricting the competition policy to a few
countries that possess not only the means to implement it
(financial, human and statistical resources for investigating
markets and groups of global dimensions), but also the power:
what clout does the threat of being condemned, boycotted, or
imprisoned by a small developing country hold when
compared to Europe or the USA, major economic and political
powers which themselves already have trouble being
dissuasive enough in the matter?

This situation is corroborated by the lack of a true

competition policy within the WTO (Boy, 2003): the WTO is in
fact limited to promoting the free circulation of goods (the most
summary way of promoting competition), and in no way to
preventing and fighting abuses of position that the
strengthening of free trade is very likely to amplify and
encourage. Consequently, in the name of competition, it is
perhaps towards the opposite that the WTO is working in the
long term. Moreover, in 1994, with the signing of the

306
Marrakech agreements, this international governance was
extended to agriculture, a sector that had until then been
exempted from the General Agreement on Tariffs and Trade
(GATT), due to specificities that we can appreciate today were
not all assumed. Indeed, the expansion of GATT to agriculture
meant, among other things: (1) resorting to scientific proof to
justify the introduction of barriers or regulations in a market,
which leads to major problems and disagreements when the
scientific community is unable to demonstrate that certain
substances such as animal growth hormones or MGOs are not
harmful for human health or ecosystems; (2) taking an
approach by product (and brands), and not by manufacturing
process, whereas it is through the latter that "organic" or "fair-
trade" products are differentiated and appreciated, as well as
some other products that integrate certain qualities that are
not restricted to those (phytosanitary) defined by the Codex
Alimentarius.

The WTO does not therefore offer developing

countries the means and the powers attached to the national
385
competition policies of industrialized nations , whilst the
Marrakech Agreements as well as structural adjustment plans
require them to free the sector on which their economy still
largely depends. This liberalization of the agricultural
economies of the South is all the more questionable in that the
commodities involved would precisely be exported to markets
where collusion is structurally encouraged or facilitated. As
explained by Connor (2003), and more so by Pénard (2003),
certain structural factors and certain company practices are in
fact propitious to collusion, either by facilitating a convergence
of views, or by reducing incentives to diverge from an
agreement. In both cases, there happens to be aspects

385
To our knowledge, since the liberalization of the cocoa commodity
chain in 1999 in the Côte d'Ivoire, only one measure has been taken
to limit abuses of dominant position: for the 2001/02 season, ARCC
fixed a tonnage ceiling for all cocoa exporters, a ceiling that was
raised from 42,000 to 50,000 tonnes in mid-December 2002 (BNETD,
2002:7).

307
inherent to the Ivorian cocoa bean export market: (1)
uniformity of goods (only one export quality), firm symmetry
(an oligopsony of multinationals), concentration of supplies
(three-quarters of cocoa supplies are provided by a few
African countries), entry barriers (for bean grinding and
especially the manufacture of highly diverse chocolate-based
products), information exchanges (professions much better
organized downstream than upstream); (2) regularity and
transparency of transactions (via the London and New York
futures markets), dispersion, regularity and growth of demand
(current characteristics of the world market for chocolate-
based products), multi-market contacts (multinationals trading
in or manufacturing other products). The "collective dominant
position" concept used by European competition authorities in
the case of the Nestlé–Perrier merger shows that those
authorities are well aware that certain market structures are
apt to favour collusion (duopoly, dispersed demand, weak
technical progress, high entry barriers). But it can be doubted
that they will one day use the same concept to demonstrate
that a similar market structure would affect Ivorian cocoa
smallholders, firstly because the scope of application of Article
386
82 that inspires it (UE, 2002) is limited to the markets of EU
Member States.

386
Article 82: "Any abuse by one or more undertakings of a dominant
position within the common market or in a substantial part of it shall
be prohibited as incompatible with the common market in so far as it
may affect trade between Member States. Such abuse may, in
particular, consist in: a) directly or indirectly imposing unfair purchase
or selling prices or other unfair trading conditions; b) limiting
production, markets, or technical development to the prejudice of
consumers; c) applying dissimilar conditions to equivalent
transactions with other trading partners, thereby placing them at a
competitive disadvantage; d) making the conclusion of contracts
subject to acceptance by the other parties of supplementary
obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts".

308
5.3.2. What policy against oligopsony powers?

More and more agricultural producers are currently

being held by a few major firms in a pincer movement (Marette
et Raynaud, 2003), with the major world seed and
agrochemical suppliers upstream (AstraZeneca/Norvatis,
Bayer-Aventis, Monsanto, etc.) and, downstream, the
emergence of major distributors operating over vast consumer
zones, such as the French Carrefour or American Wal-Mart
(the world's leading company in terms of turnover for 2001
according to Fortune magazine). In both cases, competition
policies – at least in Europe and the USA – are not failing to
monitor the phenomenon, which is amplified in the distribution
field by purchasing platforms set up by the major distributors
to ensure collective supplies. However, this last point has not
received all the attention it deserves, insofar as – more
generally and in slightly overstating things – the aim of such
checking of concentrations is to protect consumers from
market powers, and not producers from purchasing powers.
Yet, as already clearly pointed out in the report by the Conseil
d’Analyse Economique (Rey et Tirole, 2000), producers also
need to be protected, notably in cases where they are led to
387
make specific investments which they would ultimately be
unable to amortize if distributors subsequently imposed
388
inadequate prices on them (not to mention other good
reasons for specially protecting agricultural producers, notably

387
Like setting up a cocoa plantation.
388
To solve this problem, the solution would then consist, according
to the authors, in rebalancing contracts, and stepping up sanctions in
cases of violation of the commitments. This is perfectly realistic for
the particular case of French fruit and vegetable producers, but barely
so for the more universal case we are examining: agricultural
producers far from major distributors, not only vertically (numerous
processes and numerous middlemen before the end product) but also
horizontally (production in developing countries of foodstuffs
consumed in industrialized countries), i.e. a case in which the
possibilities of contractualization, and applying sanctions are severely
limited, or even ruled out.

309
those that are currently firing the lively debate on the
multifunctionality of agriculture).

Why such pronounced concern for consumers?

Probably because competition policies are based on an
economic theory presenting the same bias. As indeed
suggested by Alain and Chambolle (2003), traditional
microeconomic analysis tends to neglect upstream oligopsony
powers since it automatically models producer-distributor
relations by a principal-agent relation in which the dominant
role is assigned to the producer (i.e. power to impose his
conditions on distributors). Likewise, since Spengler revealed
the inefficiency of double marginalization in 1950, that same
literature has focused on the effect of vertical contracts on
efficiency and total profit of vertical structures, but virtually
ignores its impact on profit sharing within those structures. Yet
an imbalance in profit sharing can be harmful to long-term
social well-being, by threatening the survival of certain
producers and reducing the variety or quality of products
available to consumers. However, as early as 1950, the
negotiation model proposed by Nash (one of the fathers of the
games theory after J. von Neumann and O. Morgenstern) was
a first step towards endogenization in models of the balances
of power, and of the negotiating powers, between firms. But it
was not until 1991 that Shaffer, for example, showed – by
reversing the conventional within-brand competition model –
that when producers are in perfect competition with an
oligopoly of distributors, profit sharing between firms favours
upstream powers. Some other recent work seems to
corroborate theoretically what we observe empirically in the
cocoa-chocolate commodity chain. But as Allain and
Chambolle (2003) concluded, whilst several questions omitted
from the vertical analysis are at last starting to be explored
today, the work still required remains considerable.

Once this work has made some headway, competition

policies may then perhaps speak more of producers than
consumers, of monopsonies and oligopsonies than
monopolies and oligopolies, of a "hypothetical monopsonist

310
test" rather than a "hypothetical monopolist test". Like the
standard economic theory (neo-classical), they may also
thereby realize in future that productive efficiency does not
necessarily rhyme with allocative efficiency and innovative
efficiency, and that the latter two types of efficiency also have
good reasons to be encouraged, in a mindset that does not,
moreover, almost systematically condemn every form of
agreement on prices or quantities.

5.3.3. What coordination policies?

The founding principle of European competition policy

is set down in Article 81 of the Treaty establishing the
Community (UE, 2002): "The following shall be prohibited as
incompatible with the common market: all agreements
between undertakings, decisions by associations of
undertakings and concerted practices which may affect trade
between Member States and which have as their object or
effect the prevention, restriction or distortion of competition
within the common market, and in particular those which: (a)
directly or indirectly fix purchase or selling prices or any other
trading conditions; (b) limit or control production, markets,
technical development, or investment; (c) share markets or
sources of supply; (d) apply dissimilar conditions to equivalent
transactions with other trading parties, thereby placing them at
a competitive disadvantage; (e) make the conclusion of
contracts subject to the acceptance by the other parties of
supplementary obligations which, by their nature or according
to commercial usage, have no connection with the subject of
such contracts". Paragraph 3 of the same article allows for
389
exceptions from this general principle , but the example of

389
"The provisions of paragraph 1 may, however, be declared
inapplicable in the case of: any agreement or category of agreements
between undertakings, any decision of category of decisions by
associations of undertakings, and any concerted practice or category
of concerted practices, which contributes to improving the production
or distribution of goods or to promoting technical or economic

311
the Label Rouge shows how difficult it remains for agricultural
producer organizations to benefit from mitigating
circumstances, even when it involves improving the quality of
a product, or highlighting and guaranteeing a collective know-
how for consumers. In fact, the reinforced application of this
principle has clearly led to a retreat in the French and
European models of stakeholder coordination (cooperatives,
protected designations of origin, labels, etc.) which, it is true,
can also smack of neo-corporatism.

Yet the theoretical bases of this great principle are not

as infallible as they might seem. In some clearly identified
cases, it can firstly be shown, as did Gitaut-Hérault et al.
(2003) who were particularly interested in judgments by the
European Court of Justice against inter-professional
committees in the wine-growing sector (cognac, natural sweet
wines, etc.), that a group of producers or an inter-professional
body can adopt a restrictive policy of supplies which is
optimum for consumers, and which therefore does not
systematically lead to a slowdown in productivity gains and
innovation. In other words, such a restrictive policy can prove
to be optimum from a collective viewpoint, not only in terms of
quality as shown by Spence in 1975, but also in terms of
quantity and market prices. This result, which is novel when
compared to those of the standard monopoly theory, arises
notably when there exists an inverse relation between quantity
and quality, production hazards, and consumers expressing
an explicit preference for quality. Lastly, according to the same
authors, the more an increase in supplies leads to an objective
deterioration in quality, the easier it is to justify a decentralized
supply regulation policy. It would also be worth reflecting upon
these points in the cocoa-chocolate commodity chain.

progress, while allowing consumers a fair share of the resulting

benefit, and which does not: (a) impose on the undertakings
concerned restrictions which are not indispensable to the attainment
of these objectives; (b) afford such undertakings the possibility of
eliminating competition in respect of a substantial part of the products
in question."

312
 A second criticism of the principle, which is more
fundamental but also less acceptable in the standard theory
since it undermines its foundations, is based on the major
question taken up today by so-called "neo-institutional"
economics: are economic activities (and should they be) solely
coordinated by the market or within integrated undertakings?
Are there not, between these two modes of coordinating
transactions (the company on one side, the market on the
390
other), some "hybrid" forms (such as producer groups, etc.)
that may sometimes prove to be at least as efficient in
minimizing costs (and, at the same time, countering
oligopsony powers)? As Ménard (2003) points out, for the last
15 years or more (1985) there has existed a model for carrying
out such an analysis, that proposed by Williamson, who
attests to the existence of relatively high transaction costs
(TC) (in any case not zero) depending on the uncertainty (U)
surrounding a transaction, the frequency (F) of the latter, and
the degree of specificity (S) of the investments (assets) it
requires: TC = f(U,F,S). By only considering the last factor
(specificity of assets) Ménard was led to explain that when
competition authorities forbid a hybrid arrangement (

390
There is a wide diversity of arrangements involving agreements
between legally autonomous units which, on the one hand, develop
transaction networks coordinated by mechanisms other than the price
system and, on the other hand, pool a set of resources without
automatically combining their ownership rights, notably networks of
subcontractors/enterprises/franchises, collective brands,
partnerships, as practised for example by major Anglo-Saxon
chambers of lawyers. This diversity leads Ronald Coarse to say that
the hybrid form is no doubt the dominant form of transaction
organization in market economies (Ménard, 2003).

313
Figure 18), or impose restrictions on the parties to such an
arrangement (Figure 19 – move from k2 to k2’), in both cases a
zone is given up (between k1 and k2) where the hybrid form
proved to be more effective than the firm or the market in
reducing transaction costs. In other words, public intervention
here leads to an increase in transaction costs, which, as a last
resort, is passed on to consumers. It can therefore be
391
wondered why competition policies distinguish so much
between all types of organization that cannot be assimilated
into a single enterprise (such as producers or inter-
professional groups) and those that can be (such as
multinationals), particularly as they do it whilst denouncing the
coordination methods actually used by both. Entry selection,
internal disciplinary rules, quantitative restrictions and internal
resale price controls effectively structure the organization of
production just as much within multinationals. That does not
mean that they and their subsidiaries are accused of
"collusion", or of "concerted practices in contradiction of Article
85 of the Treaty of Rome". Lastly, on the pretext of
encouraging competition, are not current policies under that
name doing the opposite by discouraging any organizational
form likely to compete with integrated enterprises? In any
event, as can be seen, the boundaries between monopoly and
the exploitation of synergy to reduce costs – an old economic
science issue – are far from being clarified, which is not
without its consequences for small agricultural enterprises,
and for competition policies which are now required much
more than in the past to structure their environment.

391
In reality, competition policies are implemented with greater
flexibility than transpired here. Notably, they remain subjected to the
major European economic development policies (like Common
Market Organizations), or to the modulations suggested relatively
firmly by governments (case of the Red Label).

314
Figure 18: Case where the hybrid organizational form is not
allowed
Source: Ménard, 2003.
Transaction
Markets Hybrids
costs
Firms

k2 Specific
k1 k’1 Assets

Figure 19: Case where the hybrid organizational form is

rendered more expensive
Source: Ménard, 2003.
Transaction
costs Markets Hybrids
Firms

Specific
k1 k’2 k2 assets

315
5.3.4. What price stabilization policy?

Lastly, it is not possible to speak of competition

policies without touching upon the important question of
agricultural price stabilization. Moreover, the report by the
Conseil d’Analyse Economique (Rey et Tirole, 2000) refers to
it from the first page of its introduction, since it often turns up
in discussions, notably on fruits and vegetables. In the answer
provided, the authors first of all emphasize that the price
slump in a period of high production is inherent in the very
weak price elasticity of supplies of these products; they then
feel that the most appropriate solution is to develop futures
markets or income-insurance, at least for products with a
sufficiently liquid and established market. This proposal is
disappointing in more than one way. Firstly, it hardly bursts
with originality, since the World Bank, in line with lessons from
welfare economics, has been promoting for some time the
provision and use of such instruments in developing countries,
to replace the stabilization funds, boards and other
agreements often dismantled under its authority in the 1980s
and 1990s (Section 3). It then turns out, as we have shown,
that a commodity such as cocoa is as much marked by the
existence of futures and options markets for several decades,
as by the great insecurity of its producers' incomes. Of course,
the champions of such tools can retort that cocoa producers
do not really have direct access to those markets, and that
they cannot therefore benefit from them. Agricultural
producers should therefore be trained and helped to use these
risk management tools. But is that truly realistic, particularly for
developing countries? Or else, at what cost collectively and for
each farmer? Lastly, and above all, how effective are such
tools? As Daviron and Voituriez (2003) argue, their efficiency
is, in reality, far from having been demonstrated by the
economists, thereby placing an even greater burden of
reflection and intervention on the shoulders of policies –
particularly competition policies.

316
 Daviron and Voituriez start their demonstration with
several observations: (1) the post-war Keynesian or "self-
centred" development model, which subjugated foreign trade
to domestic stability objectives, has been succeeded by an
export-driven growth model; (2) in this move towards trade
liberalization, collective risk management through stabilization
has given way to individual and private management through
financial instruments such as futures or options contracts; (3)
the crisis seen since 1998 on the cocoa, coffee, rubber, wheat,
and soybean markets – which are theoretically complete since
they have acquired insurance institutions and risk transfer
financial markets – shows, however, that the efficiency of such
instruments is arguable in the case of an extended price
depression: the market price may drop below the marginal
cost of the most efficient producer, whilst no private
mechanism guarantees remuneration equivalent to the cost of
production, unless in return for payment of a premium at too
prohibitive a cost; (4) the allocation problem arising from
persistent instability on the markets is combined with that of an
unequal distribution of its costs, which are primarily borne by
developing countries.

This leads the authors to present a typology revealing

how economic science has evolved in the possible
representations of instability, and to what difference in price-
risk management instruments each representation leads: (1)
cyclical instability around a deterministic trend (upward or
downward linear trend) calls for public stabilization measures;
(2) stochastic instability (of the "random walk" type), on the
other hand, calls for private use of financial tools and opening
up of the markets; (3) chaotic instability (non-Gaussian
randomness generated by the market itself and its
imperfections), however, eludes the latter measures, since
they are likely to generate more instability than they resolve.
Thus, depending on the type of instability, economic science
can demonstrate that a risk management instrument is
required or should be ruled out. This is an undeniable
contribution, but which is unfortunately tainted by a major
limitation, which no one has seemed to care about over recent

317
decades: between deterministic and stochastic trends,
between randomness and chaos, agricultural price series do
not reveal any marked particularities. Uncertainty and
controversy remain, at least between economists since, as
quite rightly emphasized by Daviron and Voituriez, political
debates on the subject are prominent through their absence,
whilst technically they are required and demanded.

One explanation for this paradox probably lies in the

almost unanimous denunciation today of the cost of public
intervention on agricultural markets over the last 30 years,
which is all the more unanimous in that public stabilization
favoured assurance over incentive (competition), whilst since
then incentive (competition) has become the cooperation
yardstick. This said, alternative risk management systems
suffer from a symmetrical defect: they favour incentive over
assurance. Yet, as Daviron and Voituriez concluded, since
incentive is ineffective in the absence of assurance, and
assurance is not cooperative in the absence of incentive, the
major two types of instruments, public and financial, rather
than being opposed and considered as substitutable, seem in
reality to be complementary. Which, for our part, enables us to
conclude with a question: when will there be an international
competition policy which, in order to preserve incentive, also
takes assurance into consideration, particularly for
smallholders in the South, since today they bear most of the
costs of market instability?

6. Concluding summary

In an African country such as the Côte d'Ivoire, cocoa

cultivation employs over 700,000 farmers, provides a
livelihood for 6 million people (40 per cent of the population)
and counts just as much in State earnings (40 per cent of
budgetary income), the balance of payments (50 per cent of
exports) and national wealth creation (15 per cent GDP). On
the world market, it supplies over 40 per cent of world demand

318
for beans. But for how many years will that continue? Indeed
for some time now, cocoa cultivation has been in crisis,
whereas demand for chocolate has continued to grow
worldwide. Chronic price instability is now combined with
increasing competition from south-east Asia, the difficulty of
ensuring continued production by farming on newly cleared
forest, the growing threat of diseases and resistance to
pesticides, quite rough liberalization of the commodity chain in
1999, a European directive authorizing the use of cheap
substitutes for cocoa butter in chocolate, an American drive to
certify cocoa and chocolate "free of child slavery", dubious
events on the London and New York futures markets and,
lastly, on 19 September 2002, the outbreak of a civil war
dividing the country in two either side of what still remains the
world's largest cocoa reserve.

This crisis in African cocoa cultivation led us to

examine price formation and value sharing throughout the
commodity chain, from Ivorian farm-gate bean to tablet of dark
chocolate sold in a French supermarket. The main lessons we
learned from this exercise are as follows:

(1) In 1989/90, the "cocoa war" halved the price of a kilogram

of cocoa beans paid to Ivorian producers. Since then, up to
2001, that price barely improved in constant CFA francs; the
1999 liberalization, rather than helping smallholders to regain
their purchasing power, seems more to have destabilized their
working environment (price, credit, etc.).
(2) The liberalization of Ivorian cocoa seems to be more
advantageous to middlemen who transport harvests to export
factories, all the more so since their rivals, the cooperatives,
now collect fewer beans as they are unable to pay producers
for their crop immediately (their access to bank credit was
divided by 25 at the time of liberalization).
(3) International grinders (ADM, Barry-Calbault, Cargill…),
making semi-finished products (cocoa liquor, butter and
powder, or even couverture), are, for their part, increasingly
incorporating upstream activities (taking over or sidelining

319
Ivorian exporters, dealers and middlemen) to secure their
supplies and counter the shrinkage of their unit margins.
(4) On the French market, chocolate makers (Mars, Nestlé…)
and/or distributors (Carrefour and others) are, on the other
hand, gaining increasingly more from a tablet of chocolate:
between 1992 and 2001, unlike the ingredients (bean, liquor,
butter, couverture, sugar, etc.) its price rose steadily in current
euro (+2.6 per cent per year on average, i.e. +1,550 euro per
tonne in 10 years).
(5) Finally, in 2001, over 70 per cent of the French tax-
inclusive price for a tablet of dark chocolate with 61 per cent
cocoa went to chocolate makers and distributors (63 per cent
in 1992), as opposed to less than 6 per cent to Ivorian
producers (7 per cent in 1992), a share which is not even
equal to the taxes levied throughout the commodity chain (8
per cent in 2001), in the Côte d'Ivoire and, above all, in Europe
(5.5 per cent VAT).

These results, which are pioneering but obtained from

data and a method that call for reactions and suggestions for
improvement, lead us to believe that the world liberalization
process has not only strengthened the concentration of firms
downstream (confirmation of an oligopsony of multinationals
engaged in fierce competition), but has also led to the exertion
of a buying power upstream, particularly over farmers, since
their dispersal is now total (dismantling of State regulating
bodies, which in the past somehow united them, at least on a
national scale). This market power (ability to impose prices)
should in theory attract the attention of competition policies,
since the harm it entails for the collective well-being is
denounced by economic theory and in competition law. In fact,
such policies are being reinforced in the USA and the
European Union since the strengthening of planetary markets
and trusts, notably in the agrifood sector. But, curiously, there
is still no international body capable of correcting this market
failure affecting Ivorian cocoa farmers, and more generally
developing countries that do not have the resources to set up

320
their own competition policy, and more essentially to ensure
that it is respected. Indeed, the WTO is limited to promoting
just one very rudimentary form of competition (free circulation
of goods), yet it is towards competition that it is supposed to
work fully, and it is on competition that all its legitimacy is
founded.

From the decline in African cocoa cultivation, we have

thus been led to promote the introduction of a true competition
policy within the WTO: this is a vast undertaking, which is
primarily political, and which will mean discussing and
overcoming the substantial limitations of the arrangements
currently in place in the USA and Europe, be it a matter of
oligopsony powers, types of coordination, or the thorny
question of agricultural price stabilization.

321
APPENDIX 1: DISTRIBUTION OF DARK CHOCOLATE TABLET VALUE (1992–2001)

Current euro per ton:

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Production of Beans (the 441 451 422 369 370 420 536 477 347 475
Côte d'Ivoire)
Collection and Export of 333 277 459 541 520 590 579 551 441 364
beans (to Amsterdam)
- of which Collection (the 48 60 91 101 80 100
Côte d'Ivoire)
- of which Wholesalers & 173 213 215 251 177 36
Exporters
- of which Levies (the 298 317 273 198 184 228
Côte d'Ivoire)
Manufacturing of Liquor 364 454 452 440 409 295 353 358 367 347
and Butter (Europe)
Addition of Sugar 175 288 265 268 235 241 247 242 229 241
(Europe)
Manufacturing of 721 598 460 489 554 474 381 461 609 532
Couverture (Europe)
Moulding & Distribution 4041 4188 4232 4397 4599 4870 4976 5213 5502 5665
of tablet (France)
VAT (Europe) 334 344 346 358 368 379 389 402 412 419
Total (tablet price 6408 6601 6637 6861 7055 7270 7461 7704 7907 8042
inclusive of tax):

322
Percentages:
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Production of Beans (the 6.9% 6.8% 6.4% 5.4% 5.2% 5.8% 7.2% 6.2% 4.4% 5.9%
Côte d'Ivoire)
Collection and Export of 5.2% 4.2% 6.9% 7.9% 7.4% 8.1% 7.8% 7.2% 5.6% 4.5%
beans (to Amsterdam)
- of which Collection (the 0.7% 0.8% 1.2% 1.3% 1.0% 1.2%
Côte d'Ivoire)
- of which Wholesalers & 2.5% 2.9% 2.9% 3.3% 2.2% 0.4%
Exporters
- of which Levies (the 4.2% 4.4% 3.7% 2.6% 2.3% 2.8%
Côte d'Ivoire)
Manufacturing of Liquor 5.7% 6.9% 6.8% 6.4% 5.8% 4.1% 4.7% 4.6% 4.6% 4.3%
and Butter (Europe)
Addition of Sugar 2.7% 4.4% 4.0% 3.9% 3.3% 3.3% 3.3% 3.1% 2.9% 3.0%
(Europe)
Manufacturing of 11.3% 9.1% 6.9% 7.1% 7.8% 6.5% 5.1% 6.0% 7.7% 6.6%
Couverture (Europe)
Moulding & Distribution 63.1% 63.4% 63.8% 64.1% 65.2% 67.0% 66.7% 67.7% 69.6% 70.4%
of tablet (France)
VAT (Europe) 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2% 5.2%
Total: 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

323
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330
 PRODUCT STANDARDS, COMPETITIVENESS AND
DEVELOPMENT

Kamala Dawar392

1. Introduction

Some of the legal issues raised by international product

standards on economic development are examined. The legal
framework governing both mandatory and private standards is laid out,
before focusing on the impact of private product standards on economic
competitiveness and consumer welfare in developing countries. The
developments within the context of the informal market are further
analysed. It is concluded that there is a lack of coherent regulation for
certain types of mandatory and voluntary standards at the international
level. This legal vacuum may not be in the interests of either developing
country’s export competitiveness or pro-poor development. Finally,
possible policy options available to developing countries are proposed.

2. Product standards, developing countries and

competitiveness

In most developing economies, local consumer expectations for

product quality tend to be lower than international norms. Consequently,
domestic regulations and standards are generally ‘softer’ than
international ones and local producers develop production systems to
meet these lower standards. In addition to this, it has been estimated
that up 30 per cent of gross domestic product (GDP) and 70 per cent of
393
workers in the developing world are now informal . In Sub-Saharan
Africa, Latin America, Central Asia and Russia it is not unusual for
informality to exceed 50 per cent of GDP. Within the informal sector

392
University of Amsterdam Law School. February 2007.
393
Defined here as non-reported economic activities.

331
there is no obligation to conform to either domestic or international
394
regulations and standards, or offer consumer protection .

It has been argued that one of the root causes of this type of
informality is ill-designed and overly stringent product standards, which
395
result in more harm than good . In the case of Egypt, for example, the
ongoing imposition of obsolete quality standards on food products,
rather than minimum health regulation has resulted in more than 80 per
cent of the food being produced informally by low-productivity small-
scale providers. Inappropriate and expensive business legislation
discouraged small entrepreneurs from becoming formal, limiting the
number of new entrants to the formal market particularly in high-
396
productivity export sectors . These barriers to entry can compromise
the level of competition in these markets.

Where consumers are forced through lack of choice to use the

informal market for basic goods, they are denied their rights to safety,
information, redress and a healthy environment. Many consumer
organizations urge people not to engage in practices that fuel the
informal market as this will only expose them to further suffering.
Furthermore, prices on the informal market have been at least 15 per
397
cent more than the actual price on the formal market .

Clearly, a lack of capacity and resources will make it more

difficult for small producers to upgrade their production processes to
meet the stricter international standards. This situation can result in the
bulk of the lucrative export market going to the few largest local firms
and multinational companies who have the capacity to adjust their
production systems to meet international requirements. The smaller and
medium-sized firms (SMEs) and smallholdings can get caught in a cycle
of underdevelopment, whereby the lack of valuable market access
without conforming to international standards serves to prevent their
future development. This may also exclude them from other pro-
development initiatives such as the US’s African Growth and
Opportunity Act (AGOA) and the EU’s Everything But Arms (EBA).

394
Palmade (2005).
395
Ibid.
396
Ibid.
397
See for example, the Consumer Council of Zimbabwe: The Cost of Living Up
Again. 6th February 2007. http://www.ccz.org.zw/news/details.php?news_id=10.

332
 Despite these difficulties, it is clear that appropriately set
standards can facilitate trade by reducing transaction costs and risks
and generally improve intra-firm and industry linkages. Well-defined
standards and regulations can also enhance social and consumer
welfare. The difficulty is that while standards may be designed to
promote trade and meet important social objectives that are not
automatically addressed by the private sector, the motivations for using
trade measures to regulate an imported product’s process and
production methods (PPMs) also include competitiveness. Certain PPM
requirements mask comparative advantage and are imposed for
protectionist gain. This can undermine the success of any pro-poor
trade and development objectives. In the context of widespread poverty,
serious policy issues emerge if these measures lock small producers
out of the more dynamic export markets, leaving them to supply the less
lucrative local and informal markets.

Alongside these government measures, private standards are

now increasingly influencing the livelihoods of exporters and small and
398
medium-sized firms and farmers . The upsurge of private-sector
standards and codes of practice being passed down the supply chain to
suppliers in developing countries is generally promulgated by the major
399
retailers in developed countries and not governments . Although many
private product standards are not protectionist in intent and may simply
aim to respond to developed country consumer or producer concerns
and preferences, they are not necessarily in the interests of developing
country consumers and small producers. However, these are the very
sectors of the economy least able to make their interests known at the
international level.

398
UNCTAD (2007).
399
See for example: EUREPGAP: Harmonized standards and procedures for
global certification of Good Agricultural Practices (GAP) (i) developed by a
coalition of retailers; (ii) now 275 members from farm to fork; (iii) business-to-
business (not communicated to consumers); (iv) independent audits and
certification to measure compliance; (v) 35,000 producers certified in 62
countries; (vi) Protocol includes Integrated Crop Management (ICM), Integrated
Pest Control (IPC), Quality Management System (QMS), Hazard Analysis and
Critical Control Points (HACCP), worker health, safety, welfare and
environmental pollution and conservation management; (vii) Horticulture: 210
Control Points (Food Safety, Environmental, Social).

333
 400
World Bank research indicates increased difficulties for
horticultural exporters and associated smallholder outgrowers in East
Africa to comply with EU regulations and private standards. For
example, horticultural exports in East Africa grew at an average of 33
per cent per annum, with over 99 per cent of horticultural export
products in Uganda and over 70 per cent in Kenya coming from
smallholder producers. This sector represents a major source of income
and livelihood to smallholder farmers. Yet the poor infrastructure and
services available to smallholder farmers reduces their ability to meet
the private standards especially as regards traceability, and social and
environmental requirements, which is compounded by lack of effective
organization and coordination among the various stakeholders.

Auditing systems also present challenges when different

auditors have varied interpretations of the application of procedures.
The St. Vincent submission to the World Trade Organization (WTO), for
example, noted that in the Windward Islands the external auditors
consider treated sleeves used in the banana industry as a pesticide and
therefore require that these be stored under specific conditions.
However, in the Dominican Republic sleeves are not considered to be
pesticides and therefore there are no specific requirements for
401
storage .
402
Another commonly cited example of the impacts on market
access due to the rise in private standards is the Kenyan green bean
sector. Here production for UK markets in the 1970s–80s was
dominated by small-scale farmers delivering their goods to local markets
to be purchased by exporters. However, as standards rose and
supermarkets dominated the market for fresh produce, these big players
demanded more reliable sources than the wholesale markets were able
to offer. Consequently, there was an increase in direct purchases
through integrators/exporters throughout the 1990s. On the regulatory
side, the 1990 UK Foods Safety Act developed written procedures for
large retailers to follow when making their specifications, along with on-
site audits. This led to new contractual standards and stability for
suppliers, which in turn allowed them to make more long-term
investments in production. However, those suppliers now unable to

400
See Wilson and Abiola (2003), Czubala et al. (2007).
401
World Trade Organization (2007).
402
Fulponi (2007).

334
meet new retailer standards could no longer supply the market and were
marginalized because only those that could remain tightly integrated
with large exporters through contracts remain linked to the lead retailer
403
trade .

Colombian exporters of cut flowers were also adversely affected

by the introduction of the Flower Label Program (FLP) which is a
private, voluntary eco-labelling programme led by German industry
aimed at restricting the use of toxic chemicals and pesticides for the
cultivation of such flowers. Between 1992 and 1996 Colombia’s flower
exports increased and became Columbia’s third most important
agricultural export, accounting for 10 per cent of the world market.
Exports to Germany declined significantly after 1996, which was widely
attributed to the increase in private standards within German markets.
The Colombian government’s submission to the WTO contended that
the FLP is based on arbitrary criteria, which are also applied in a
discriminatory manner. Further, not only does the scheme impose
significant compliance costs but it is de facto a mandatory measure
since non-compliance results in ‘negative pressure’.

India has also noted that compliance with the footwear

industry’s voluntary labelling schemes has raised the costs of
compliance for Indian footwear exporters by approximately 33 per cent
of the export price. These costs are not confined to the developing
world, According to an Organisation for Economic Co-operation and
404
Development (OECD) study , based on 55 firms in three sectors in the
United States, Japan and the United Kingdom, the additional costs of
complying with foreign standards can be as high as 10 per cent. The
problem is that these private standards are becoming unavoidable for
SMEs and smallholders, to the extent that some analysts argue that
they are de facto mandatory for those producers who cannot afford to
be locked out of these markets. For example, by participating in
international standards and implementing acceptable international rules,
Africa has been estimated to gain up to US$1 billion a year from higher
exports of nuts, dried fruits, and other agricultural commodities.
Although other studies suggest that the price premiums for goods
complying with voluntary environmental requirements are not as

403
Ibid.
404
See Andrew et al. (2003).

335
 405
significant as previously thought . While these may be voluntary
standards set by retailers in response to developed country consumer
preferences for particular conditions to be met along the production
chain, the primary producer has little choice but to meet them.

In the US, private, voluntary standard-setting and product-

certification activities are scrutinized under US antitrust law because it is
acknowledged that when voluntary standards are set by groups of
dominant firms, they may easily become industry standards that are
misused against competing firms for whom such standards become a
406
market requirement . Because standard-setting and certification
activities by private trade associations may also benefit competitive
conditions in a marketplace, US courts have typically evaluated the pro-
competitive benefits of a product standard against any anti-competitive
407
implications under what is termed the ‘rule of reason’ analysis .
However, such a mechanism is absent at the international level despite
the evidence to suggest that these standards do affect the
competitiveness and ultimately the growth of developing country
markets.

This study examines some of the legal issues raised by these

developments. After setting out the legal framework governing
mandatory standards, it focuses on the regulation of private product
standards and their impact on the economic competitiveness and
consumer welfare in a developing country context. It identifies how
private standards are created and complied with, along with their impact
on economic competitiveness and consumer welfare, in the context of
the burgeoning informal market. It argues that the lack of coherent
recognition of non-product-related (nPR)-PPMs at the international level
applies to both mandatory and voluntary standards. This legal vacuum
may not be in the interests of developing countries.

While some of the challenges involved in setting and monitoring

private standards can be avoided through transparency alongside
widespread stakeholder consultation and cooperation from those most

405
Ibid.
406
Gandhi (2006).
407
Ibid. See Consolidated Metal Products, Inc. v American Petroleum Institute,
846 F2d 284 (5th Cir. 1988) and Allied Tube and Conduit Corp. v Indian Head,
Inc., 484 US 814.

336
affected, there are other policy responses to maintain competitive
environments. Finally, identified are appropriate policies for
governments to respond effectively to the challenges that private
standards pose at the international level, including the need to advocate
the formal and transparent regulation of nPR-PPMs.

3. The GATT/WTO legal framework governing product

standards

As noted above, product standards can be both mandatory

(government driven) and voluntary (market driven). These standards
can also be either ‘product related’ or ‘non-product related’ which refers
to the PPMs used to manufacture or grow the good, that either affect
(product related), or do not affect (non-product related) the nature,
properties or qualities of the final product itself.

A ‘product-related’ PPM (PR-PPM) typically describes a process

or production method that changes the characteristics and quality of the
final product and that PPM is discernible in the change. These PR-
PPMs are generally dealt with through product specifications and are
found in industrial process requirements to ensure the quality of a
product, its safety and its fitness for use. PR-PPMs typically aim to
protect the end-user or the environment from either harm from the
product or a substance incorporated into the product. For instance, the
use of certain pesticides in cultivating a product can be traced in the
final product.

Non-product-related PPMs (nPR-PPMs) describe a method of

processing or production that does not affect or change the nature,
properties or qualities of a product. How a product is created or
harvested will not affect that final product, although it may affect the
environment or society by its methods. For example, slave labour will
not affect the look of an object, but it violates multiple internationally
recognized and customary human and labour rights. Other examples of
nPR-PPMs are related to the environment or the welfare of animals.

Mandatory product standards set by government are regulated

by the following GATT (General Agreement of Tariffs and Trade)/WTO
agreements.

337
3.1. Annex 1 and Article 2 of the TBT Agreement

In the past, the PPM debate has focused largely on the

interpretation of the GATT, although both the Sanitary and
Phytosanitary (SPS) Agreement and the Technical Barriers to Trade
(TBT) Agreement are relevant to the PPM debate. For reasons of
space, only the TBT Agreement is examined where, to date, neither PR-
PPM nor nPR-PPM disputes have been handled within the WTO’s
Dispute Settlement Mechanism (DSM).

The principle of the TBT Agreement is to ensure that Members

can apply product regulations to fulfil legitimate policy objectives –
provided that these regulations are not “more trade restrictive than is
necessary” and do not create “unnecessary obstacles to international
trade”. Thus, the overall objective is to effectively prevent product
regulations being implemented for protectionist purposes. Therefore, the
WTO promotes existing ‘international standards’ for Members to use as
a safe haven while formulating their own domestic legislation. That is,
any legislation made in accordance with recognized international
standards is automatically presumed not to constitute an unnecessary
obstacle to trade.

The TBT Agreement provides specific disciplines for two

categories of domestic regulatory measures: technical regulations and
standards. Annex 1 states that technical regulations are mandatory
rules that regulate “product characteristics or their related processes
and production methods”. Standards are non-mandatory rules,
guidelines or characteristics “for products or related processes and
production methods”. Both definitions seem to imply that only PR-PPM-
based measures are covered; however, due to a lack of WTO
jurisprudence, these issues have not yet been clarified.

The last sentence of both definitions states that the technical

regulation or the standard “may also include or deal exclusively with
terminology, symbols, packaging, marking or labelling requirements as
they apply to a product, process or production method”. The first
sentence in the relevant definition refers to “related processes and
production methods”, suggesting that it is to cover only PR-PPMs, the
last sentence lacks such a reference and could therefore be seen to
include nPR-PPMs as well. However, if the last sentence is implicitly
informed by the context of the first sentence, the reverse is the case.

338
 The non-discrimination provisions under the TBT Agreement
are closer to the non-discrimination clauses of Articles I and III of the
GATT and therefore an analysis of the consistency of a PPM-based
measure with the TBT Agreement is likely to hinge upon a ‘like product’
test. However, the TBT Agreement offers no exceptions to these
obligations akin to Article XX. These Article XX considerations are
consumed in the balancing test provided by TBT Article 2.2.

The implications of this are that if nPR-PPM labelling is covered

by the provisions of the TBT there would be an obligation under Article
2.4 to use an international standard if one exists, and, under Article 2.2,
this label cannot create an unnecessary obstacle to trade. That is,
developed countries would have to notify the labels to the WTO,
especially in the case of non-conforming labels. From the position of
developing countries, this move towards incorporating this type of
private standard could overall be a positive step for developing
countries.

The TBT Agreement’s provisions only require Members to notify

mandatory technical regulations, not product standards (Article 2.9). In
cases where PPM-based measures are found to fall outside the scope
408
of the TBT Agreement, the GATT’s Article I, III or XI , as well as Article
XX will likely apply.

3.2. Article I GATT: Most Favoured Nation (MFN) clause

Article I of the GATT provides that with respect to customs

duties, taxes and internal regulations, any advantage, favour, privilege
or immunity granted by a party to any product must be accorded
immediately and unconditionally to the like products of all other parties.
The only legally recognized exceptions to this fall under either Article XX
(see below), Article XXIV provisions covering customs unions and free
trade areas, and the Enabling Clause.

Products have to be ‘like’ for the MFN obligations to be

applicable; WTO Member governments cannot apply different tariff rates
on products that are found to be ‘like’. The criteria used to determine

408
This chapter does not include an analysis of GATT Article XI.

339
‘like products’ include: i) ‘end use’; ii) product characteristics; iii) tariff
classification; and, iv) consumer tastes and habits. If a government has
implemented a standard in response to legitimate consumer
preferences and has adjusted its tariff lines appropriately, a WTO panel
would assess whether the criterion of consumer tastes and habits in the
marketplace was a sufficient basis on which to differentiate the products
according to the PPM. However, because there has not been a WTO
dispute based on consumer tastes and habits in a like-product case,
there is no ruling that consumer tastes is a factor that clearly applies in
Article I cases or on the link between consumer tastes and PPM
differentiation.

Where tariffs have been negotiated and then bound, exporting

WTO Members also have some right to reasonable expectations that
the tariff structures that have been the subject of previous negotiations
should not be altered to undermine their market access by increasing
import tariffs.

In GATT/WTO cases, importing countries maintaining a

differentiated tariff scheme have owed the affected exporters
compensation for their loss in trade. This applies even if a panel
assessment determined that the products in the new scheme were ‘not
like’, since the right to receive compensation by the exporting country
turns upon its legitimate expectations that the negotiated scheme would
not be later altered to the export Member’s detriment.

3.3. Article III: National Treatment (NT) and ‘like’ products

Article III obligates WTO Members to grant foreign products

treatment that is at least as favourable as the treatment granted to
domestic ‘like’ products. These provisions apply to both taxation and
other internal regulatory measures. This therefore potentially covers a
wide variety of measures regulating nPR-PPMs.

The GATT/WTO obligations rule out domestic taxes or other

regulatory measures that discriminate either between ‘like products’
from different WTO trading partners, or between foreign and domestic
‘like products’. However, unlike the provisions governing Subsidies and
Countervailing Measures (SCMs) for example, which assign ‘likeness’ a
specific meaning, nowhere else in the GATT/WTO framework are there

340
specific provisions for distinguishing between traded products based on
criteria that are not physically embodied in the products nPR-PPMs.
This is with the exception of the use of prison labour, which is explicitly
covered under the provision of Article XX(e).

If ‘likeness’ was interpreted so that nPR-PPMs such as

environmentally or socially harmful products are seen as different from
sustainable products, then the WTO’s non-discrimination obligations
offer considerably flexibility to Members wishing to implement measures
to regulate nPR-PPMs. However, an examination of process methods
does not play a role in determining the interpretation of whether or not
two products or services are like, and hence the WTO’s non-
discrimination provisions constrain the domestic regulatory prerogative
to enact environmental or social protection measures.

As noted, the exact boundaries of ‘likeness’ and the precise

impact of the ‘likeness’ determination on domestic environmental and
health policy making remain unclear. However, relevant GATT/WTO
nPR-PPM jurisprudence to date includes the 1991 US – Tuna I (Mexico)
GATT Panel report, which found that differences in nPR-PPMs are not
relevant in determining ‘likeness’ and the 2001 EC – Asbestos case
where the Appellate Body found that the determination of ‘likeness’ is
fundamentally a determination about the “nature and extent of a
competitive relationship between and among products”.

Article III ‘likeness’ cases almost always reference the three

Border Tax criteria for determining ‘like products’ from the 1970 pre-
WTO report: Working Party on Border Tax Adjustments: i) the product’s
end uses in a given market; ii) consumers’ tastes and habits, which
change from country to country; and, iii) the product’s properties, nature
and quality. The EC – Asbestos Appellate Body clarified the proper
application of the Border Tax criteria as follows. Firstly, panels must look
at all evidence relevant to a ‘likeness’ determination, analysing each
criterion separately, then weigh all relevant evidence in concluding
409
whether products are ‘like products’ . And secondly, even if evidence
related to one of the Border Tax criteria is extremely persuasive, a panel
may not end its ‘like products’ analysis after examining only that one
specific factor but must look at all of the evidence related to the other
three criteria.

409
EC – Asbestos Appellate Body Report, Paragraphs 101–103.

341
 The EC – Asbestos Appellate Body determination that ‘likeness’
under Article III:4 “is fundamentally a determination about the nature
and extent of a competitive relationship between and among
410
products” has been criticized by some for being too economically
oriented. It is argued that it leaves little policy space for Members to
distinguish between products based on non-market or non-economic
considerations and is unable to consider environmental or health
concerns arising from trade in certain products. However, from the
perspective of developing country governments, the emphasis on
competitive relationships and markets is in their favour should nPR-
PPMs be included within the remit of the Agreement. The comparative
advantage of most developing economy markets can be undermined by
standards governing the production process.

3.3.1. The legal provisions of Article III

Domestic taxation schemes are covered by Paragraph 2 of

Article III. The first sentence prohibits Members from taxing ‘like’
imported products ‘in excess of’ ‘like’ domestic products. The second
sentence states that Members will be in violation if, under their tax
regimes, “directly competitive or substitutable” imported and domestic
products are “not similarly taxed”.

Non-tax measures and regulations are covered by Paragraph 4

and include: “. . . laws, regulations and requirements affecting [the]
internal sale, offering for sale, purchase, transportation, distribution or
use” of products. Specifically, Article III:4 requires that “internal
regulatory measures are accorded treatment no less favourable to
imported products than that accorded to like products of national origin”.

The Article III jurisprudence on ‘likeness’ has been conducted

on a case-by-case basis, involving an “unavoidable element of
individual, discretionary judgement” as stated in the Japan – Alcoholic
411
Beverages (1996) Appellate Body report , Article III:2 has two
categories of comparable products because firstly it requires Members

410
EC – Asbestos Appellate Body Report, Paragraph 99.
411
Japan – Alcoholic Beverages Appellate Body Report. Section H.1.a. (1996).

342
 412
to ensure that ‘like’ imported products are not taxed at all ‘in excess’
413
of ‘like’ domestic products and secondly, but equally importantly , to
subject ‘directly competitive or substitutable products’ to similar levels of
taxation. Crucially, if they are not similarly taxed, they must be assessed
to see whether the different rates of taxation are applied ‘so as to afford
protection to domestic production’. While the scope of ‘directly
competitive or substitutable products’ is broad, it is governed by the anti-
protectionist thrust of Article III:1 by examining whether it is ‘so as to
afford protection’.

Although Article III:4’s ‘like products’ term has been interpreted

so as to give the overall article consistency, it is remains unclear. If
products are ‘like’ under Article III:4, then the panels must assess
whether the treatment afforded to imported products are ‘less
favourable’ than their domestic counterparts. In EC – Asbestos the
Appellate Body defined ‘less favourable’ treatment to apply to measures
implemented “so as to afford protection to domestic production” (EC –
Asbestos AB report, Paragraphs 97–98). Again, this is because the
overall objective of Article III is to prohibit regulations that may modify
the conditions of competition in that relevant market to the disadvantage
of the imported product. That is, it can be seen that ensuring
competition is the underlying objective of Article III.

Earlier in GATT/WTO jurisprudence, in the US – Malt

Beverages the Panel employed the ‘aims and effects’ test as a means to
ensure the general anti-protectionist objective of Article III and to
prohibit internal measures that are applied so as to afford protection to
domestic production when conducting ‘likeness’ analyses. The Panel
concluded that whether the challenged measure distinguished between
imported and domestic products for valid public policy purposes, or for
protectionist reasons, was relevant to the question of whether the
affected products were ‘like products’.

412
Any level of taxation imposed on imported products that exceeds the level
imposed on domestic ‘like’ products will likely be deemed inconsistent with the
first sentence of Article III:2 (Japan – Alcoholic Beverages (1996) AB report,
Section H.1.b.).
413
In Japan – Alcoholic Beverages (1996), the Appellate Body clarified that the
phrase ‘like products’ in Article III:2 must be interpreted narrowly so as to not
overshadow Article III:2’s second, broader category of ‘directly competitive or
substitutable products’ Ibid.

343
 The ‘aims and effects’ test was advocated to help balance free
trade and domestic environmental and social policies. Yet it was finally
deemed unworkable partly because of problems in assessing ‘intent’
and because it deviated too far from an ordinary meaning of the text of
Article III. The Japan – Alcoholic Beverages (1996) Appellate Body
explicitly rejected the test, holding that a party need not demonstrate
any protective aim or application of the challenged tax.

The aims and effects test has not been used to assess
‘likeness’ under Article III since 1996, although clearly in the area of
414
private standard setting it could have a role. A 2003 OECD report
noted that private, voluntary standard-setting and product-certification
activities undertaken by private trade associations in the US have
historically been the object of antitrust scrutiny under US antitrust law. It
is thought that even voluntary standards when formulated collectively by
some dominant firms could quickly develop into industry standards and
be misused against competing firms for whom such standards become
a market requirement. However, since standard-setting and certification
activities by private trade associations may also benefit competitive
conditions in a marketplace, US courts typically evaluate the pro-
competitive benefits of a product standard against any anti-competitive
415
implications under what is termed the ‘rule of reason’ analysis . This
approach could be applicable to DSM deliberations.

3.4. Article XX: the exceptions

The exceptions to Article XX include the central GATT provision

that attempts to balance tensions arising between trade and other listed
legitimate domestic non-trade policy goals. The most relevant sections
here are:

• Article XX(b) necessary to protect human, animal, or plant life or

health;
• Article XX(g) relating to the conservation of exhaustible natural
resources if such measures are made effective in conjunction

414
Andrew et al. (2003).
415
See: Consolidated Metal Products, Inc. v American Petroleum Institute, 846
F2d 284 (5th Cir. 1988) and Allied Tube and Conduit Corp. v Indian Head, Inc.,
484 US 814.

344
 with restrictions on domestic production or consumption.

Only measures satisfying one or more of the subparagraphs of

the exceptions are subsequently scrutinized for consistency with the
chapeau of Article XX, to ensure these measures are: “[s]ubject to the
requirement that such measures are not applied in a manner which
would constitute a means of arbitrary or unjustifiable discrimination
between countries where the same conditions prevail, or a disguised
restriction on international trade, . . . .”.

3.4.1. Article XX(b) of the GATT

The objective of this provision is to safeguard a country’s ability

to adopt measures “necessary to protect human, plant, or animal life or
health”.

In EC – Asbestos, the Appellate Body dismissed a Canadian

complaint against a health-based French ban on asbestos in
construction materials. It upheld that health measures under Article
XX(b) depended largely on the interpretation of ‘necessary’. The terms
‘necessity’ and ‘least-trade-restrictiveness’ are given considerable
emphasis when examining the ‘reasonably available alternatives’, in
light of existing scientific evidence as the basis for its finding on the
applicability of Paragraph (b) of Article XX.

In Korea – Beef, the Appellate Body found that for a measure to

416
be necessary it does not need to be ‘indispensable’ or ‘inevitable’ . A
‘necessary’ measure is situated between an ‘indispensable’ measure
and a measure ‘making a contribution to’ a goal, albeit significantly
closer to the pole of ‘indispensable’.

The Appellate Body created a three-factor balancing test for

deciding whether or not a measure is necessary when it is not per se
indispensable: i) the contribution made by the measure to the legitimate
objective; ii) the importance of the common interests or values
417
protected; and, iii) the impact of the measure on trade .

416
Korea – Beef Appellate Body report, Paragraph 161.
417
Ibid., Paragraph 164

345
 Elements of weighing and balancing are part of the
determination of whether an alternative GATT-consistent or less
inconsistent measure was reasonably available (Paragraph 166). It is
important to note also that in determining whether an alternative
measure was reasonably available, the Appellate Body in Korea – Beef
confirmed the Panel’s approach to consider factors such as the
domestic costs of an alternative measure (Paragraph 173).

Appellate Body EC – Asbestos: whether a French ban on the

manufacturing, sale, and import of asbestos fibres was ‘necessary’ to
protect the health of workers and consumers, as required under Article
XX(b). The Appellate Body accepted that a country may single out a
product and adopt measures to address its health risks, without first
exhaustively investigating the risks posed by substitutes. The Appellate
Body also reaffirmed that a Member was free to choose its level of
protection and found that the balancing test laid out in Korea – Beef with
respect to Article XX(d), was also applicable under Article XX(b). Finally,
the Appellate Body confirmed the importance of the value to be
protected, noting that the preservation of human life and health was
“both vital and important in the highest degree”.

3.4.2. Article XX(g) of the GATT

Article XX(g) relates to the conservation of exhaustible natural

resources if such measures are made effective in conjunction with
restrictions on domestic production or consumption.
The US – Reformulated Gasoline Appellate Body viewed
‘measures’ in Article XX as conservation measures in their entirety, and
not only as provisions or elements of an overall measure found to
violate the core GATT provisions (US – Reformulated Gasoline AB
report, Section III.A). This introduced greater deference to
environmental considerations, broadening the potential scope of
application of Paragraph (g) of Article XX. The Appellate Body also
interpreted the term ‘exhaustible natural resources’ to include living,
renewable and non-renewable resources.

The treatment of biological resources in pre-WTO jurisprudence

includes the adopted 1982 Panel Report US – Tuna and Tuna Products
from Canada. Here both parties considered tuna stocks, including
albacore tuna, to be an exhaustible natural resource in need of

346
 418
conservation management . In the adopted Canada – Unprocessed
Herring and Salmon 1988 the Panel Report also “agreed with the parties
419
that salmon and herring stocks are “exhaustible natural resources”” .
In US – Tuna/Dolphin I and US – Tuna/ Dolphin II: the Panels of both
420
cases concluded that dolphins qualified as natural resources . The
Panel also determined that, first, clean air is a resource, second, it is
natural, and third, potentially could be depleted in 1996 US –
421
Reformulated Gasoline . Finally, in US – Shrimp/Turtle I, the Appellate
Body found that living resources are just as ‘finite’ as petroleum, iron ore
422
and other non-living resources .

3.4.3. Article XX’s chapeau

The chapeau of Article XX prohibits a measures’ application if it

constitutes either “arbitrary or unjustifiable discrimination between
countries where the same conditions prevail” or a “disguised restriction
on international trade”.

In interpreting the chapeau’s requirements during the US –

Shrimp/ Turtle I dispute, the Appellate Body explicitly referred to the
notion of sustainable development in trade policy, as reflected in the
423
Uruguay Round negotiations and Members’ prior practice . The report
noted that the opening paragraph in the WTO Agreement’s preamble
confirmed that WTO negotiators departed from the original GATT
language and recognized that an optimal use of the world’s resources
should be made in accordance with the objective of sustainable
development. The Appellate Body stated that preambular language
“must add colour, texture and shading to the rights and obligations of
Members under the WTO Agreement, generally, and under the GATT
1994, in particular”, including under the chapeau of Article XX of the
424
GATT .

418
US – Tuna and Tuna Products from Canada AB report, Paragraph 4.9.
419
Canada – Unprocessed Herring and Salmon panel report, Paragraph 4.4.
420
US – Tuna/Dolphin II panel report, Paragraph 5.13.
421
US – Reformulated Gasoline panel report, Paragraph 6.37.
422
US – Shrimp/Turtle I Appellate Body Report, Paragraph 128.
423
Ibid., Paragraph 152.
424
Ibid., Paragraph 155.

347
4. Private voluntary standards

A voluntary initiative to promote certain social or environmental

objectives could take a number of forms, ranging from broad
aspirational principles to strict benchmark requirements or standards.
425
However, it is private standards and monitoring systems that have
been growing rapidly alongside business-to-business standards and are
evident in markets such as agriculture and food, tourism, fisheries and
426
forestry .

These private standards are often encouraged as a response to

consumer and producer concerns regarding product quality or suitability,
in addition to their potential to expand competition and trade
opportunities in certain sectors in economies that are able to respond
quickly to new demands and niche requirements. One recent study
suggested that one of the key motivational factors behind the
development of private standards schemes was establishing a firm’s
427
reputation regarding safety and quality . Developing and complying
with private standards can potentially offer producers access to the
global value chain, improved efficiency in operations, increased
information and improved worker safety, while offering consumers
428
greater choice, information and quality .

Competitiveness motivations are likely to reflect a perception

that high domestic requirements put domestic industry at a competitive
disadvantage in international markets. High levels of environmental or
social protection in response to government policy or consumer
preferences can, however, have positive effects on the competitiveness
of domestic producers and countries. They can spur technological

425
Private voluntary standards are also sometimes known as Non-
Governmental Standards.
426
For example, the monitoring system for the foresty sector is the Forest
Stewardship Council, for the apparel sector it is hasthe Fair Labour Association,
for tourism includes it is the Sustainable Tourism Stewardship Council, for
agriculture and food it is the Fair Trade Labelling Organization while fisheries
are monitored by the Marine Stewardship Council.
427
Fulponi (2007) op. cit.
428
Ibid.

348
change, stimulate investment, improve production efficiency, and
429
promote new industrial sectors and new market niches .

Nevertheless, it is also evident that private voluntary standards

may have the effect of raising the compliance costs of some smaller or
newer firms relative to other more established or larger firms. Such
measures particularly disadvantage SME exporting firms from
developing countries because they must bear the fixed and marginal
costs of meeting these export standards without gaining any domestic-
scale advantages. In a context of scarcity this has significant
ramifications for these economic operators. This can restrict competition
because it changes the competitive environment for these products by
creating potentially insurmountable barriers to entry. Despite this as yet
there are no international regulatory mechanisms for assessing the
impact on competition from these standards.

It has been further argued that rather than being private

voluntary standards, compliance with these schemes is becoming
430
increasingly mandatory for accessing lead-retailer supply chains .
Products must meet the importing country’s regulations in addition to the
requirements of private voluntary standards schemes. However,
because the necessary infrastructure and services to meet these new
commercial requirements demands is unavailable, SMEs and
smallholders are easily locked out of the market for supplying the
leading retailer chains.
Thus, although private standards are not mandatory and it is the
suppliers’ choice to participate in a scheme, it is clear that where private
standards become the industry norm, choice is limited. The choice of
whether or not to comply with a voluntary standard becomes a choice
between compliance or to exit from the market. In this way, the
distinction between private voluntary standards and mandatory ‘official’
or ‘public’ requirements can blur.

The scope of PPMs covered by private standards includes both

PR-PPM and nPR-PPM issues such as animal welfare, organics,
traceability, environmental impact and labour standards. These private

429
Processes and Production Methods (PPMs): Conceptual Framework and
Considerations on Use of PPP-Based Trade Measures OCDE/GD(97)137.
430
Fulponi (2007) op. cit.

349
measures are sometimes referred to as ‘producer characteristics
standards’.

4.1. Legal frameworks covering private standards

While mandatory government standards are subject to the

constraints of the MFN and NT non-discrimination provisions, it is not
clear that these disciplines extend to private voluntary standards, even
when these standards are capable of discriminating against exporters
and therefore changing the level of competition in these markets. Some
private standards schemes may fall within the scope of the TBT
Agreement. Annex 1 sets out the legal definitions for standards,
conformity assessment procedures and non-governmental bodies.
Article 4 requires that Members take reasonable measures to ensure
that non-governmental bodies accept and comply with Annex 3 of the
TBT Agreement (the Code of Good Practice for the Preparation,
Adoption and Application of Standards), which includes notification
obligations relating to the Code’s acceptance and work programmes.
Articles 5 and 8 of the TBT Agreement relate to conformity assessment
obligations. The TBT Agreement also obligates Members to take
"reasonable measures to ensure compliance" by Non-Governmental
Organization (NGO) bodies with the Code of Good Practice by non-
governmental bodies.

However, in the Tuna – Dolphin case the Panel found that the
provisions of a voluntary, federally promulgated, US eco-labelling
scheme did not violate Article I:1 of the GATT Agreement (MFN Clause)
because the Dolphin Protection Consumer Information Act (DPCIA) eco-
labelling scheme could not be said to constitute a market restriction
because it does not prevent a manufacturer from selling its product in a
marketplace without complying with the environmental requirement. This
implies that only ‘government-conferred’ advantages are subject to the
MFN requirements, and for a measure to restrict access to a market, it
must leave an exporter with no choice but to comply with it.

Nevertheless, from the perspective of developing country

producers even voluntary PPMs can impose additional costs upon
exporting manufacturers effectively preventing them from selling their
products in certain markets and consequently altering the competitive
environment of those markets. Developing countries have a different set

350
of issues related to standards and competitiveness. First, some
environmental and social standards in their export markets are not
always well publicized, or well understood or may not allow enough time
for producers to conform to these new production methods, especially
where there are many small-scale producers. Second, the standards
may be set at excessively high levels or require complex testing and
monitoring to ensure compliance.

Competitiveness issues underlie many of the challenges that

African commodities exporters face, for example, when appropriate
policies raise the price of the final good. Here a small price hike can
cause purchasers to switch exporter. Commodities purchasers will not
typically pay a premium for environmentally or socially high standards,
despite the environmental and social issues that surround their PPMs.
In the Tuna – Dolphin case, it was found that it was necessary for a
measure not only to restrict market access but also that any advantage
gained by one exporter over another exporter must be conferred by the
government implementing the measure and not by consumer
preference. Disputes between private entities, NGOs and non-state
organizations are beyond the mandate of the GATT Agreement. So too
are analyses of instances of market restrictions caused by private
cartels creating voluntary standards or de facto advantages conferred
by governments.

Thus, there are certain barriers to establishing that a private

standard violates the MFN clause, not least because private actors have
no direct role in the WTO. Not only must a private party be represented
by a government but there is also an absence of a state entity to launch
dispute settlement proceedings against. The scope of state attribution in
the WTO regime is at present interpreted narrowly. In the Japan Films
case, the WTO Panel acknowledged no ‘bright line rules’ that allowed it
to rule out an action as being non-governmental, just because it was
taken by a private party. In the Korea Beef Case, Korean retailers
responded to a government law introducing a dual retail system by
voluntarily renouncing the sale of imported beef because of commercial
considerations. Although the voluntary actions of the retailers could not
be attributed to the State, the WTO Appellate Body held Korea
responsible for violation under Article III:4 (NT) because domestic law
gave a sufficient incentive for its retailers to act in a manner inconsistent
with the WTO.

351
 In order to identify the criteria by which states should be held
accountable for the use and misuse of private voluntary standards, the
SPS and the TBT Agreements offer some different approaches. Article
13 of the SPS Agreement explicitly states that Members “shall not take
measures which have the effect of directly or indirectly, requiring or
encouraging…such non-governmental entities…to act in a manner
inconsistent with the provisions of this Agreement”. The TBT Agreement
affixes gradual levels of state responsibility relating to the extent of
control that a state can exercise over a non-governmental body.

However, WTO jurisprudence displays the DSM’s reluctance to

hold a state responsible for the trade-restricting activities of private
parties within its territories, even if such activities were directly or
431
indirectly supported by a governmental measure . Although the Japan
Films report found no ‘bright line rules’ to exempt private party actions
from WTO scrutiny and the Panel acknowledged that a government’s
measures could assist such cartels by limiting exports, it did not
incorporate a ‘due diligence’ requirement into Article XI:1 to ensure that
a state’s laws did not enable private parties to restrict trade.

The success of a contested private standard clearly depends on

how widely state attribution is interpreted. If the interpretation is broad
there is a case for challenging private standards under Article III:4. It is
difficult to show that a private standard violates Article III:4 because the
measure must be shown to constitute a law, regulation or requirement
that affects internal sale, discriminates between like products and does
not afford like treatment to imported products. Nevertheless, it can be
argued that the scope of a ‘regulation or requirement’ does not prima
facie exclude private actions under Article III:4. A private action can be
interpreted as a ‘requirement’ under Article III:4 if “there is a nexus
between that action and the action of a government such that the
government must be held responsible for that action”. This nexus can be
established by private standards supported by government policy, such
as the Nordic Swan Program, but these are not common.

If the primary objective of Article III is to protect the expectations

to particular behaviour not actual trade outcomes then the factor at
stake in judging whether a measure accords less favourable treatment

431
Argentina — Measures affecting the export of bovine hides and the import of
finished leather (DS155/R). 19 December 2000.

352
to an imported product should be determined by whether both imported
and domestic products are afforded an effective equality of competitive
conditions. In the case of developing country SMEs, it could be argued
that as long as the NGO standards result in discriminatory competitive
conditions which deny them effective equality, they could violate Article
III:4.

4.1.2. TBT Agreement provisions regulating the use of private standards

As noted above, the objective of the TBT Agreement is to

ensure that mandatory technical regulations and voluntary standards do
not constitute unnecessary barriers to trade. Voluntary standards have
to comply with the TBT Agreement’s Code of Good Practice, which
provides guidelines for the setting and implementing of these standards.
Technical regulations can be both governmental and non-governmental
measures. According to Article 3 Members take ‘reasonable measures’
available to them to regulate technical regulations that are formulated by
local government bodies or non-governmental bodies.

The benchmark for a private measure to be considered a

technical regulation is high. It must require mandatory compliance and is
generally thought that it cannot be based on an nPR-PPM. This implies
that the vast majority of private standards are not regulated by the WTO.
There is considerable opposition among developing countries to the
inclusion of nPR-PPMs within the WTO on the grounds that it is non-
negotiated mission creep and unfairly discriminates against their
economic interests. Resistance to technical regulations based on nPR-
PPMs derives from concerns about exporting domestic preferences and
values that are seen by some as, at best, inconsiderate of differing
432
endowments or preferences, and at worst ripe for protectionist abuse .

However, the exclusion of nPR-PPMs from the WTO due to

concerns over the protectionist abuse may not be the best policy option
for smallholders and producers. If nPR-PPM-standards are covered by
the provisions of the GATT and the TBT Agreement, the result would be
a more coherent, transparent and procedurally accountable rules-based
framework for setting these standards, be they mandatory or voluntary.
At present, the ‘default’ suite of GATT disciplines to which government

432
See for example, Bhagwati and Srinivasan (1996).

353
measures are subject when the TBT or SPS Agreements do not apply,
and generally no regulation when the measures are private and
voluntary, is clearly not in developing countries’ interests.

5. The Informal Market

“The first and second economies in our country are separated

from each other by a structural fault. … Accordingly, what we now have
is the reality … of a mainly informal, marginalized, unskilled economy,
populated by the unemployed and those unemployable in the formal
sector. The second economy is caught in a ‘poverty trap’. It is therefore
unable to generate the internal savings that would enable it to achieve
433
the high rates of investment it needs.” .

The informal economy in this description is positioned as

structurally disconnected from the mainstream of the economy. This
434
dualist perspective sees the informal economy as operating in a
distinctly separate and less advantaged position relative to the formal
435
economy . Chen (2007) argues that this conceptualization tacitly
acknowledges the failure of past trickle-down economic growth policies.
By splitting the economy, the government can argue that its economic
policies have been successful for the formal economy and export sector;
whereas, if there is an interconnected and even interdependent
relationship between the formal and informal economy, then
government policy for the latter is either absent or ineffective. Indeed,
Chen disputes the dualist school, finding few examples of informal
operators that are not linked in some way into the formal economy;
informal enterprises rarely, except perhaps some survival activities,

433
President Mbeki. ANC Today, Volume 4, No. 47, 26 November-2 December
2004.
434
See Sethuraman (1976), Tokman (1978).
435
The Structuralist school sees the informal and formal economies as
intrinsically linked. To increase competitiveness, capitalist firms in the formal
economy are seen to reduce their input costs, including labour costs, by
promoting informal production and employment relationships with subordinated
economic units and workers. See Portes (1989). The legalists’ school focuses
on the relationship between informal enterprises and the formal regulatory
environment, not formal firms, while acknowledging that vested capitalist
interests collude with governments to set favourable rules for trade. See de Soto
(1989).

354
operate in total isolation from formal firms. Most source raw materials
from and/or supply finished goods to formal firms either directly or
through intermediate – also often informal – firms.

If the formal and informal markets are integrally linked, focusing

pro-poor policy on the interdependencies and causes of the linkages
should be more effective in promoting development than ignoring
436
them . This is particularly the case when 93 per cent of new jobs in
437
Africa are created in the informal economy . At present, the formal
regulatory environment comprising government policies, laws,
regulations, and standards is biased towards formal registered firms to
the disadvantage of both informal enterprises and informal workers,
which are the majority in most developing countries. The benefits of the
formal economy include not only enforceable commercial contracts,
ownership rights, tax breaks and incentives to conform to standards and
increase their competitiveness, but also statutory social and consumer
protection. When informal enterprises obtain licenses, register accounts
and pay taxes, the costs are high before they start to meet the required
international standards to begin exporting their goods to the lucrative
developed country markets.

It is of little surprise that the core debate on the informal

economy is whether to ‘formalize’ it. If a small enterprise in a developing
country calculates that the only way to compete with cheaper imported
‘like products’ is by evading sales tax and hiding its workers from the
social security authorities, then the likelihood is that the enterprise will
remain largely in the informal sector. This may deprive the firm of a bank
loan to expand the business and increase its competitiveness by
conforming to export standards because it requires an external audit.
The bureaucracy of both formalization and standard conformity and
authentication is expensive, and small enterprises will conform only if
they calculate that it will be worth it to gain access to lucrative foreign
markets. In such a situation, pro-poor government policy may find it

436
For example, if an enterprise is required to have six official permits, for
example, but only has five, should it be considered informal even when the sixth
derives from a moribund regulation that most entrepreneurs ignore? It has been
seen that formality and informality are the opposite poles of a continuum with
many intermediate and mixed cases. See Chen (2007) op. cit.
437
Chen (2007) op. cit.

355
more effective to focus on creating incentives for voluntary formalization
rather than on enforcement activities.

The creation of effective incentives for formalization is clearly

important for consumer protection. Product informality escapes all
social, health and safety regulations, in addition to offering any effective
consumer protection.

6. Conclusions

The regulation of both mandatory and private standards is not

yet comprehensive regarding nPR-PPMs. While developing countries
have traditionally rejected the incorporation of these standards within a
binding framework, this may not be the most effective way of ensuring
that these non-tariff barriers are set according to legally rational and
recognized guidelines. There is a body of research to suggest that
compliance with private voluntary standards and schemes is becoming
increasingly mandatory for developing country producers wishing to
access the main retailer supply chains. While export traders are the key
438
link between the purchasers and the producers , SMEs have an
increased risk of being excluded from lucrative international markets
because of the constraints of complying with these private standards. In
developed countries, government policy is seen to complement
producer and export industries by ensuring the provision of the
infrastructure and services necessary to maintain competitiveness at
both macro- and micro-levels. In the context of economic development,
governments face more challenges in providing such an ‘enabling’
environment.

Developing country domestic policy solutions could start by

identifying the extent to which subsidies or public support programmes
are needed to offset the cost disadvantage that stems from international
technical regulations. This would involve assessing initial set-up and
variable production costs regarding both standards and technical
regulations. Appropriate policy solutions could include the targeted
upgrading of infrastructure along with the requisite training and capacity

438
These intermediaries are generally responsible for transmitting demand
specifications to all producers and frequently also for organizing, financing and
overseeing production and certifications of small-scale producers.

356
building at a grass-roots level. It is the SMEs and smallholders that are
most detrimentally affected by these regulations; therefore, their input in
setting standards is vital to ensure that the competitiveness of their
export markets is not discriminated against.

The domestic policy options to harness the informal market and

enhance social and environmental protection include simplifying and
reducing relevant regulations and standards, alongside arbitrary
economic intervention and governance. To date, progress at addressing
such issues relating to the informal market has been largely ineffective.
The poorest countries tend to be those that suffer most from an
inappropriate and burdensome regulatory environment – although
clearly they have a very low capacity for both policy making and
enforcement. In order to create a ‘smarter’ domestic regulatory
environment, it would be useful to identify critical and neglected
industry-specific policy issues. This should uncover policy priorities and
allow for limited enforcement capacity to be targeted more efficiently.

At the multilateral level, there is more scope for identifying and

assessing the damages to the exporting country’s trade benefits if the
importing country’s regulations do not conform to WTO obligations.
Developing country governments have been making more use of the
WTO dispute settlement mechanism and they could now increase their
examination of non-tariff barriers, including private product standards,
particularly those that can severely undermine the competitive trade
advantages that developing country exporters may have within the
multilateral trading system.

GATT and WTO Panel and Appellate Body findings tend to be

tough if they have been able to establish that there has been an
unnecessary restriction of trade or distortion of the market. Most
developing countries have not tended to make requests for
consultations or mount legal challenges to the formulation or application
of private voluntary standards. Rather, developing countries have
traditionally been united in their opposition to the inclusion of nPR-PPM
criteria within the WTO because they perceive that even to acknowledge
this form of trade-restrictive standards will begin a new era where ‘non-
trade related’ standards, such as labour and human rights are included
within the remit of the WTO, destabilizing the competitive advantages of
many developing countries. At present, the limitations of the TBT
Agreement also make such an nPR-PPM challenge difficult. Not only is

357
the political environment for including these criteria inhospitable, but the
provisions are ambiguous and risk assessment mechanisms
inadequate.

Challenging the legal basis of an nPR-PPM standard is not

necessarily strategically short-sighted. The WTO Shrimp – Turtles
dispute was based on a contested nPR-PPM scheme and the Appellate
Body in that case found that ultimately the measure only violated the
WTO because it was both arbitrary and discriminatory. This did not set a
legal precedent by authorizing the inclusion of nPR-PPM criteria within
the remit of the GATT/WTO Agreements; rather the Appellate Body
subjected the measure to an evaluation of its legality with the GATT
Agreement. Yet the Appellate Body did show sensitivity in a dispute
relating to the use of private product standards. It could be argued that it
is likely to judge the measure on the basis of its restriction rather than
on the criteria that were used in setting it.

The TBT Agreement is generally also thought to exclude any

product standard or regulation that is based on the nPR-PPM criteria of
most developing countries. While this may prevent these criteria being
used to discriminate between currently ‘like’ products, it also results in a
situation where private nPR-PPM product requirements are completely
unregulated within the WTO. The primary objective of the TBT
Agreement is to discipline the arbitrary use of technical barriers to trade
and is generally thought to be the most appropriate framework for
challenging a private standard. If terms including ‘non-governmental
bodies’, ‘standardizing bodies’, ‘Standards’ and ‘Technical Regulations’
are interpreted to exempt private standards from being regulated it
would undermine the primary objectives of the Agreement.

Given that the WTO DSM has been accused of enlarging the
remit of the WTO beyond what was originally intended by the
negotiating parties during its settlement of disputes, it is advisable that
the clarification of such issues of interpretation should be addressed by
the WTO membership itself and not left to rule making by judicial
interpretation during a potentially politically explosive dispute. The most
appropriate policy option identified here is to further utilize the TBT
Agreement’s ‘review’ mechanism, which was set up to provide the WTO
Members an opportunity to “review the operation and implementation of
this Agreement” at the Triennial Review of the TBT Committee with a
view to “recommending an adjustment of the rights and obligations of

358
this Agreement…to ensure mutual economic advantage and balance of
439
rights and obligations” .

Developing country WTO Members could see the TBT

Agreement’s unique review mechanism as a potentially effective
opportunity to clarify these matters of interpretation, as well as for
tabling amendments to the text of the TBT Agreement itself. In the
440
past , the review has acknowledged that some standards were being
formulated by bodies that are not commonly recognized as
standardizing bodies; however, there were no policy proposals beyond
calling upon WTO Members to encourage private standard setters to
utilize the use of the TBT Agreement’s Code of Good Practice. This
work could be used to draft a proposal sympathetic to developing
country WTO Members.

Elsewhere in the WTO, the Committee for Trade and

Environment has also long been aware of the ambiguous role that the
WTO has at present in facilitating the use of voluntary private
441
initiatives . Developing country WTO Members could also use this as
an opportunity to actively support proposals such as those demanding a
notification procedure for voluntary eco-labels and mechanisms for
insuring that private standards that restrict markets are not used for
protectionist purposes, in addition to proposing to increase the WTO’s
international policy coherence surrounding this work.

Private international product standards are playing a greater

role in determining the competitive environment in markets than
previously. At a very minimum, governments in both developed and
developing countries should work to ensure that the membership and
decision-making processes of these private standard bodies are subject
to a transparent, participatory and non-discriminatory framework that
can incorporate some aspect of competition policy.

439
See Article 15 of the TBT Agreement. Note: there is no equivalent provision
within the SPS Agreement.
440
The Triennial Review reports: G/TBT/5; GTBT/9 & G/TBT/13.
441
See for example, The Report to the 5th Session of the WTO Ministerial
Meeting at Cancun (WT/CTE/8, 11th July, 2003) under Paragraph 32(iii) on
Labelling.

359
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THE EFFECTS OF ANTI-COMPETITIVE BUSINESS PRACTICES ON
DEVELOPING COUNTRIES AND THEIR DEVELOPMENT
PROSPECTS

PART D:

Lessons from Competition Policy

and Law Enforcement

363
 IS THERE POTENTIAL FOR COMPETITION POLICY IN
THE ECOWAS?

James H. Mathis442 and Kamala Dawar443

Abstract

The main objective of this study is to discuss competition law

and policy in regional integration with the aim of identifying whether or
not effective competition law can be furthered within the Economic
Community of West African States (ECOWAS) integration plan. The
study argues that the ECOWAS region should establish an independent
competition law capable of addressing public and private anti-
competitive practices that can detrimentally affect the trade between the
member countries. Further, it argues that the ECOWAS requires a
regional body to promote the regional law. The study identifies a number
of different options for a regional competition law, ranging from a highly
centralized to a highly decentralized system of regional action. The
study concludes that the policy option with the most potential is the
‘middle road’, which allows for regional complaints and investigations
but still relies primarily on the enforcement mechanisms of the Member
States.

442 Associate Professor, University of Amsterdam Law School, The Netherlands.

443 University of Amsterdam Law School, The Netherlands.

365
Executive summary

• Preferential trade liberalization should facilitate increased

competition in the regional market but national or regional
competition policies may also be necessary to provide recourse
for injurious firm behaviour emerging after the removal of
governmental barriers.

• There is a stronger argument for an independent regional law

and a centralized authority in the case of export restraint
behaviours that affect trade between the members. The
problem of dumping can be resolved by effective national laws.
Intergovernmental approaches involving cooperation may be
satisfactory except in the case where exporting members refuse
to pass and implement national laws that can address those
practices.

• Two major elements are at play in the design of competition

policy in regional integration:

1. Whether or not the region will create an independent

law, together with the mechanisms by which this law
would be made effective within the members’ domestic
legal orders.
2. Whether the region should establish a separate
authority that would be able to treat individual cases,
either alone or in conjunction with the Member State
authorities and courts.

• Where the objectives of an integration agreement involve a

customs union or common market formation, it would be
somewhat logical to favour a more centralized approach.

For the Economic Community of West African States

(ECOWAS), a tension exists where the objectives of integration are set
at high levels (customs union/common market) but the institutional
powers are set ‘low’ to function by primarily intergovernmental
cooperation. It is therefore questionable whether the present institutional
design can give meaningful effect to the integration objectives of the

366
treaty. Institutional changes to the ECOWAS structure are necessary if
the integration objectives of the treaty are to be met. There is no simple
resolution to this other than to locate a middle ground of accommodation
and compromise between the ECOWAS objectives and the institutional
design in the treaty.

This study therefore recommends:

• Setting firm benchmarks for the establishment of an

independent regional law and, following that, to raise the
implementation aspects for an ‘organic’ system of enforcement
within the Member State legal orders. This is based at the
outset upon the superiority of the regional law (for which the
ECOWAS Treaty does provide), and then to institute certain
guarantees that might render a system of private rights
effective.

• An independent regional authority should also be established

that has certain granted powers. Here several alternatives are
discussed but what is ultimately recommended is to establish a
regional authority with the power to:

o receive individual complaints

o independently investigate complaints
o refer cases to the national authorities and courts for
action
o apply for an alternative case-hearing mechanism if
national authorities are unable to act.

• The study recommends establishing an independent regional

competition law with general application throughout the region
and superiority over inconsistent national laws and acts.
Conflicts of jurisdiction between regional and national law are
not a major barrier to the creation of a regional law. The
delimitation for the jurisdiction of a regional law should
ultimately reside with the highest regional court. A Council
Regulation can prescribe the minimum thresholds and other
exemptions that would also describe the jurisdictional
application of a regional law.

• A core proposal is therefore that either the treaty provisions or

367
 an ECOWAS Council Regulation provide for an express
declaration of direct effect. For competition law, this would
mean that the treaty practices listed as subject to the
prohibitions could be raised by a private party in a national court
in a lawsuit against other private parties or against the state and
its agencies. This would allow a national authority or court ruling
that an anti-competitive practice is inconsistent with the treaty
and that all agreements formed to give effect to such practices
are void and non-enforceable within that national legal system.
The Council has this power incumbent in its authority to
establish Community acts in the form of regulations.

• This recommended system of regional competition law

enforcement relies, at least in part, on individual claims and
cases, and includes:

o the use of direct effect before the national courts and

authorities for ECOWAS competition
o a procedure for preliminary opinions to promote
consistent interpretations and uniformity
o a final private right of appeal from the highest national
court (or final national court of jurisdiction) to the
regional court
o the West African Economic and Monetary Union
(WAEMU) system should function as a single entity
within the larger customs union structure.

368
1. Introduction: the elements of a competition law

This study refers to competition law as the set of rules and

remedies that governments can adopt to prohibit and challenge
practices by private enterprises and public authorities that restrict or
444
distort the contestability of a territorial market . There is no single
harmonized expression of a competition law and not all competition law
445
is formalized into statutory schemes . A number of common-law-style
legal systems recognize and redress a range of unfair and anti-
competitive trading practices. Many of these overlap with competition
law and policy considerations.

Where competition law is provided by statutory/legislative

expression, all or nearly all of these provisions recognize that certain
types of cartels (collusion among firms) that injuriously fix prices, restrict
output or allocate portions of the market are unlawful (void) or are made
actionable. This category is also known as ‘hard-core cartels’ and these
are generally understood to be without any possibility of legality or
446
redemption . Cartels constitute the most common ‘per se’ prohibition
within a competition law, where the law itself does not recognize any
pro-competitive effects to these arrangements that might outweigh the
injury to competition.

Other agreements among firms may also ‘on balance’ be

injurious to competition in the market but are not injurious ‘per se’.
These may be subjected to an assessment by a rule of reason, which is
a balancing determination made by an agency or by a court, or both.
Most distribution arrangements (vertical restraints) fall within this group.
Authorities deal with determinations on ‘competition effects’ by adopting
exemption rules that recognize the pro-competitive nature of certain
arrangements when they meet certain qualifications. For laws following
the European Community (EC) approach, this is normally a test of

444 On the theory of contestable markets and the function of competition laws, see, for example, Whish, R. (1993),
Competition Law, 3rd Edition, Butterworths, pp. 13–16.
445 There are of course ‘models’ for competition laws. See UNCTAD Model Law on Competition, TD/RBP/CONF.5/7, at
http://www.unctad.org/en/docs/tdrbpconf5d7.en.pdf.
446 See OECD (1998), Recommendation of the Council Concerning Effective Action Against Hard Core Cartels
C(98)35/Final, adopted 25 March, 1998.

369
 447
stated positive and negative conditions . Both the West African
448
Economic and Monetary Union (WAEMU) and the draft Nigerian
competition law include positive and negative conditions for establishing
exemptions from the application of a prohibition on certain types of
449
agreements .

A second common element of a competition law provides for

treatment of dominant positions or more commonly, abuses of
dominance. These are practices engaged in by a single or collective
enterprise, within or outside of the territory, with sufficient market power
upon the territory to restrict the contestability of the market by other
suppliers. These practices are also normally assessed by a balancing
test where certain pro-competitive effects of a dominant position may
also be taken into account. Some developing countries apply market
share criteria to initially capture a dominant position within the purview
of its law, and then proceed to analyse it in regard to the abuse.

A number (but not all) of regional systems also seek to address

public practices that distort competition in the market by the application
of state aid or subsidies. Some require pre-notification regimes with
thresholds whereby members are obliged to notify a central authority to
450
further determine the legality of the proposed subsidy . It is also
possible, as in the UEMOA arrangement, to have a stated prohibition on
subsidies that are conditioned on exports or that require domestic local
content. The World Trade Organization (WTO) Agreement on Subsidies
and Countervailing Measures also considers that subsidies directly
targeting trade are actionable by countervailing duties or by the
suspension of bound concessions.

1.1. Unilateral and preferential trade liberalization

From a competition policy perspective, multilateral or unilateral

trade liberalization may be most desirable when the tariff cuts made to
all other countries admit the broadest range of competitors to the local
market from the widest array of sources. This would tend to minimize
the risk of firms making new collusions to set cartel prices, or in the case

447 As contained in Article 81 of the EC Treaty.

448 Union Economique et Monétaire Ouest Africaine (UEMOA) in French.
449 As based on the authors’ field survey reports conducted in the spring and summer of 2006.
450 The EC state aids regime, for example.

370
of a dominant firm, the risk of a single dominant foreign firm abusing the
market. This is not to say that inefficient domestic firms should survive
this new competition, but that the resulting firms in the market should
trade more competitively. Competition law plays a role in guaranteeing
that new entrants to the market play by the rules of fair competition and
in respect to the existing domestic firms as purchasers and consumers.

In a regional trade agreement (RTA), the tariff cuts are not

made on a unilateral or multilateral basis and the possibility of a larger
number of foreign producers contesting the market may also be
reduced. This of course depends on the structure of the regional market
and the profiles of the producing firms. In a case where two highly
protected countries form a preferential bilateral tariff cut (to each other
only), whether the resulting market is more or less competitive
(contestable) would seem to require more information on the positions
of the firms and the markets in the region. Preferential trade
liberalization should not be viewed as automatically giving rise to a more
contestable market overall. An assessment is needed, inter alia, of the
number of firms operating in the regional market and whether they can
combine effectively to set prices or restrict output or segment the
market. This would also include identifying whether there is a single
dominant firm from one of the territories that may be capable of
451
extending that position across the regional market .

Thus, the basic argument for regional competition provisions in

a free-trade area or customs union arrangement is, therefore, that while
most of the traditional economic literature on welfare gains in regional
trade liberalization presumes that markets commence and end with
perfect competition, in the real world this is not necessarily the case. For
a customs union, the core rationale for a regional competition law
extends to incorporate the detrimental impact of anti-competitive
practices on the trade liberalization commitments made by the members
to achieve free trade. This further emphasizes the elimination of trade
measures (and their future potential to be used) within a formed single
customs territory. Since a customs union has the capacity to provide for

451 Generally, Nicolaides, P. (1997), “The Role of Competition Policy in Economic Integration and the Role of Regional
Blocs in Internationalizing Competition Policy”, in O. Hosle and A. Saether, (eds), Free Trade Agreements and Customs
Unions, European Commission and EIPA, Brussels, pp. 37–39. “But it is also possible that preferential trade
liberalization may stimulate cartelization even if an industry of at least one partner country does not have an oligopolistic
structure at the moment of liberalization.”, at p. 39.

371
the free internal movement for goods of origin, as well as duty-admitted
third-country goods, the focus is more on eliminating the underlying
trade distortions caused by anti-competitive practices.

1.1.1. Prices too high

If prices on export trade from one market to another are ‘too

high’ due to export cartel activity or a cross-border abuse of dominant
position, this affects the trade between the regional members. The tariff
cut made by the importing country is allocated not to the import country
consumers, but to the export country producers. The import country can
take lawful action against these foreign practices – if it has a functioning
domestic competition law. Usually, however, investigative information
gathering and enforcement against foreign actors are very difficult for
domestic agencies when the evidence lies outside the enforcing
territory. The more centralized the investigative and enforcement
mechanism, the more likely it is to capture these practices for a remedy.
The most ‘decentralized’ approach to this problem relies wholly on
national laws and agencies, and cooperation between them, in order to
pass information and other investigatory assistance. A more centralized
arrangement containing a separate regional law for competition, as well
as an independent agency, would bypass national authorities altogether
and independently assert any violation of a regional competition law.

1.1.2. Prices too low

‘Too low’ prices upon export trade, as in the case of dumped

goods, can also be the result of anti-competitive exclusionary practices
in the export country. If these firms can successfully dump (price below
normal value), then they may be operating in a ‘closed’ market whereby
those dumped goods cannot be re-imported to challenge the local
prices. If there are no trade barriers in place, this ‘closure’ may be
operated by a private set of exclusionary practices, perhaps in the form
of vertical restraints in the distribution system from the producer to the
ultimate consumer. In such a case, the ‘trade solution’ of ‘parallel
imports’ cannot be made effective, and this is then a competition law
problem that affects trade between the Member States. This problem
can be addressed in the producing territory by the affected foreign firms

372
if there is a competition law that can be invoked against anti-competitive
vertical restraints and which also guarantees a non-discriminatory right
452
of action on behalf of all complainants .

This remedy is also available in a decentralized scheme relying

only upon national laws that have a provision to address anti-
competitive exclusionary practices. However, there is an obvious
tension when there is no competition law in the producing market if the
other regional members do have competition laws. The overall result is
potentially highly damaging for both the free-trade regimes and
economic integration. Firms from those countries without laws can
effectively dump goods on the other regional members without being
challenged, other than by the use of a trade remedy. Yet firms from
regional members with functional competition law can always be
challenged if they are dumping from behind exclusionary vertical
restraints. The conflicts caused by the lack of reciprocity in competition
law remedies may result in some members utilizing destabilizing trade
measures (such as anti-dumping duties or safeguards), irrespective of
the tariff-cutting schedule and commitments in the RTA.

Most softer integration systems (non-supranational free-trade

areas) make some reference to the contribution competition policy can
make in achieving the objectives of the free-trade commitments.
National competition laws can contribute to reducing trade frictions even
when most agreements at this lower level do not seek expressly to
formulate a competition law remedy for dumping, nor do these
arrangements even seek to eliminate any or all internal trade measures
in the form of contingent measures, anti-dumping or safeguards. Most
stronger or ‘higher-level’ arrangements (customs unions) make some
attempt to address intra-regional dumping and attempt some link to
competition law regimes, such as the European Economic Community
(EEC) Treaty.

There is a stronger argument for an independent regional law

with a separate regional enforcement authority that can operate without
relying upon national laws at all, where a customs union has members

452
The EEC Rome Treaty, Article 91 treated dumping practices whereby
protective measures were permitted during the transition period until the EC
competition policy was in effect. Member States were also not permitted to
impose trade restrictions on the re-importation of goods.

373
with strong export potential but these exporter members refuse to enact
competition law. Nevertheless, it is possible that cooperation between
national authorities can be sufficient to support a customs union plan. If
the stronger export members are all willing to operate with a functional
national competition law, the more decentralized and intergovernmental
approach to ensuring that trade measures do not undermine the proper
functioning of the customs union is workable, although some institutional
overview by some overarching authority might also be necessary to
keep this lower level of cooperation functioning for the benefit of the
union.

1.2. Regional approaches, centralized, decentralized and

‘mixed’

It has become almost the universal practice for both free-trade

areas and custom union plans to declare that certain anti-competitive
practices are incompatible with the proper functioning of the agreement
or contrary to its free-trade objectives. These treaty expressions
obviously range from ‘very soft’ to ‘very hard’ law. It is doubtful whether
the softer expressions enunciate any regional principle at all that can
generate actual legal effects. An example of such a ‘soft’ provision
would recognize that certain anti-competitive practices will undermine
the objectives of the RTA members to the treaty, and that the members
should make (best) efforts to address anti-competitive practices. As it
stands, this is an aspirational expression; while it may or may not have
political effects on the behaviour of the members and their laws, it does
not have legal effects. Other customs unions and common market plans
contain far stronger expressions that establish an independent regional
law and then institutional regional power to enforce it. For those
modelled on the original EEC customs union plan, this is nearly a
‘boilerplate’ approach.

A ‘mixed’ harmonization model can be identified in some of the

newer free-trade area plans (north–south in particular). Here the trend is
to substitute the role of an independent regional law, with more
provisions on the criteria and performance of the domestic laws. In
some cases this explicitly requires the establishment of national
competition laws that can treat cross-border anti-competitive practices
according to certain substantive and institutional performance
standards.
374
 This study now surveys the range of possibilities available with
reference to these categories.

1.2.1. A regional law and a centralized authority

Where a regional treaty states a legal expression for anti-

competitive practices that affect trade between the members or distort
competition within the region, this establishes an independent law and a
distinct regional jurisdictional scope. This law may overlap with domestic
competition law (both laws may be applicable in a given case), but has
its own sphere where it is limited only to treating practices that affect the
trade between members or injure a portion of the territory beyond the
boundaries of a single Member State.

This regional law should be directly applicable in the laws of the

Member States and have a position of superiority to the member’s
inconsistent legal acts or administrative and court judgements. Such a
law may or may not be ‘directly effective’ in allowing individual firms or
citizens to invoke the regional law in the domestic courts of the member
countries. Where an institutional mechanism is also provided at a
regional level to conduct investigations, enforce actions and assess and
levy penalties, then these two features together would describe a fully
centralized regional system.

Among developing country (customs union) regional

arrangements, the Common Market for Eastern and Southern Africa
(COMESA) and the WAEMU Treaties appear to provide the basis for
centralized systems. Their approaches are modelled somewhat on the
EEC Rome Treaty. The Andean Pact also has strong centralizing
elements for both regional law and authority. The more centralized
approaches tend to appear in customs union/common market plans,
although this may be an historical accident caused by modelling on the
EEC provisions.

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1.2.2. A regional law and a partially centralized authority

In this model, the independent regional law is established with

the elements of direct applicability and superiority, and a central
authority is also created. However, that authority either does not have
the full range of powers or is not able to exercise those powers with full
independence. For example, it may have the power to receive
complaints and initiate independent investigations, but then be required
in the first instance to rely upon the Member State authorities and their
national courts for processing case actions leading to enforcement and
remedies. The Caribbean Community (CARICOM) arrangement as it
has evolved appears to follow a similar approach. This has a clear
regional law expressed by treaty provisions dealing with cross-border
anti-competitive practices. It provides for a regional authority, but this
authority operates together with Member State authorities. In the case
where a Member State cannot take action or disagrees with the regional
authority, a resolution is made after referral to a higher body.

1.2.3. A regional law but no central authority – intergovernmental

cooperation

Here the independent regional law is expressed by treaty or

protocol, but the application of the law is left entirely to the Member
States. Cases can be brought by their authorities, as they also receive
complaints dealing with regional law violations. The national courts may
also receive private complaints for violations of regional law. The
regional level may have an expression of common principles laying out
the minimum requirements for the domestic laws and procedures, and
may also prescribe some conditions for encouraging cooperation
between the Member States. There may also be an intergovernmental
committee formed to assist the cooperation and attempt to allocate
investigations and cases among the members. The Mercado Común del
Sur (MERCOSUR) competition protocol is a possible example of this
approach where Member State authorities act together on an
intergovernmental basis. This approach requires the existence of
Member State authorities operating under domestic competition laws
that have been passed and implemented.

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1.2.4. No regional law but criteria for national law and/or a duty to
cooperate

Several free-trade areas describe the practices that are

detrimental to the functioning of the RTA and then call upon Member
States to implement effective national laws to address these practices
as they affect trade between the members. This approach does not
establish a separate regional law at the level of treaty commitments. An
example of such an approach is found in the Canada–Costa Rica Free
Trade Agreement, whereby the substantive practices to be covered by
a satisfactory domestic law are detailed, including procedural matters
around transparency and due process (the right to be heard, the right to
appeal) and national treatment requirements. No cooperation
mechanism is expressly established, although the potential to engage in
cooperation among authorities is suggested. A sort of political review
mechanism (by a free-trade council or association) may be provided to
occasionally examine the overall functioning of the agreement and its
provisions. There are some examples of explicit timelines to have
national laws that can operate to treat certain practices. The EC–South
Africa agreement provides that the national law shall be made
operational within three years of entry into force of the agreement. It
further provides a sort of safeguard or recourse mechanism in the event
that the national law cannot be implemented.

Another African example of this approach is found in the

Southern African Customs Union (SACU) Treaty, although with far less
detail then those above. Here the two-sentence Article 40 states that the
members shall have competition policies (a treaty obligation) and that
they shall cooperate in the enforcement of competition laws and
regulations. While this provision does not establish an independent
regional law, it does allow for some additional development by protocol
or otherwise to outline the characteristics of Member State cooperation.
And while it does not allow for the establishment of a regional authority,
it does not exclude the possibility of Secretariat assistance to facilitate
cooperation.

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2. Minimum requirements: establishing a regional law

2.1. Independent regional law and jurisdictional scope

For a customs union, it is noteworthy that the Economic

Community of West African States (ECOWAS) Treaty does not contain
any expression whatsoever regarding anti-competitive practices that
either affect trade between the members or distort competition in the
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regional market . The treaty is silent on competition. A core
recommendation here is that a treaty (protocol) expression should be
established that includes a distinct substantive law for dealing with anti-
competitive practices as they affect trade between the Member States.
This law should have the capacity to operate within its own jurisdictional
scope of application.

2.1.1. Affecting trade and/or affecting regional territory standards

This regional law can be expressed either by reference to

practices “affecting trade between the members” and/or “affecting all or
a substantial portion of the region”. There is a difference between the
two. This study recommends that an ‘affecting trade standard’ is
essential to set a jurisdiction for applicable regional law, and that the
desirability of the second standard depends upon the longer-term
objectives of the ECOWAS. If the Community eventually intends to have
a centralized apparatus to review mergers or take action against foreign
practices that affect the region overall (or a substantial portion of it),
then the second standard would be desirable since it expresses a single
territory treatment. In this scenario both standards should be stated. If
the ECOWAS commences implementing common economic and
monetary policies, then this is also a stronger argument for stating a
‘territory-wide’ jurisdictional standard in addition to one ‘affecting trade’.

453
The Economic Community of West African States (ECOWAS) Treaty was
signed by the 15 Member States on 24 July 1993 and is available at
http://www.sec.ecowas.int/index.html. It was circulated to other WTO members
by communication to the Committee on Trade and Development on 6 July 2005
as WT/COMTD/54, 26 September 2005.

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 This broader scope of jurisdiction is already seen in the
WAEMU arrangements where the region is treated as a whole (as a
single territory), just as this would be expressed in a single national law
where practices affecting competition ‘in the territory’ are commonly
454
treated . The EC Treaty applies the more traditional ‘affecting trade’
expression although this has also been explicitly expanded to an
‘affecting territory’ dimension for the purposes of merger control. The EC
external agreements uniformly apply the ‘affecting trade’ standard. An
expression treating practices affecting the ‘territory as a whole’ is not a
prerequisite for a regional competition policy. A standard based upon
‘affecting trade between the members’ is a prerequisite for a regional
legal expression that sets a field of play for a regional law and legal
action against any anti-competitive practices affecting trade.

In order to have effects in the Community legal order, the

expression of jurisdictional power has to be made at the level of treaty
obligation. For the ECOWAS, this would be accomplished by a protocol
that added treaty articles within a section dealing with and entitled
‘competition policy’. It is believed here that the independence and
jurisdictional basis for a regional competition law cannot be promulgated
by a Community regulation, directive or decision. These legal acts would
be used to implement substantive standards and institutional features,
but the legal basis of the law itself should be generated at the treaty-
making level. For the ECOWAS, this suggests a protocol that provides
amendments to the existing treaty delineating the addition of
competition law articles to the treaty.

2.1.2. Zones of jurisdiction – Member States and Community

It is clear that the jurisdictional lines between regional and state

territory have to be clear and well prescribed. However, in a number of
regional and federal systems this jurisdictional line has also evolved

454
1994 Agreement for the West African Economic and Monetary Union, signed
by eight Member States, and as revised in 2003 (UMOA and UEMOA). The
1994 Agreement was circulated to WTO members via the Committee on Trade
and Development as WT/COMTD/23, 23 February 2000. The 2003 revised
treaty is dated 29 January 2003 and is provided on the WAEMU web site
(French) available at http://www.uemoa.int/index.htm.

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over time as a result of the cases and interpretations made by the
authorities and the courts. There are always cases where an ‘affecting
trade’ and an ‘affecting the national territory’ standard both apply. And
there are a number of jurisdictions (regional and domestic) where
remedies taken in one system do not preclude action and remedies
being taken in the other. The United States is one example where there
is often a concurrent action taken by an individual state (affecting
competition in the territory of the state) while the federal power is also
being applied according to either an ‘affecting trade between the states’
standard or with respect to the larger US territory.

The original EEC construction provided for a first enforcement

regulation, 17/62, and attempted to define several types of cases that
could not be considered as ‘affecting trade’ between the members, for
example where the subject firms were all based within a single Member
State and the practices did not relate directly to imports or exports. Over
time that expression did not serve so well for court interpretations
dealing with the rise of the ‘internal market’ concept. In legal practice,
the court has tended to grant quite a broader scope for ‘affecting trade’.
While this has assisted the development and application of regional law,
it has not tended to stimulate the Member States in applying their own
national laws. Over time this situation has also evolved as the Member
States have more actively pursued actions also contemplated by the
Community, but in regard to their own unique legal effects upon the
Member State territories.

There are inevitable overlaps between the two levels of

competition law. Rather than attempt to prescribe a precise line between
them, it is more important to recognize that concurrent jurisdiction is not
necessarily a problem to be avoided. What is recommended is for both
a final arbiter of the Community’s regional scope of application in the
event of clear conflicts of application, and a cooperation mechanism that
can help allocate cases between regional and national levels. The initial
management of conflict can be addressed by a Commission or regional
authority in respect of any particular case (if so empowered), but there
must also be an ultimate arbiter to rule in the event of conflicts between
laws. This function is traditionally held by the superior court, in the case
of the ECOWAS – the Community Court of Justice – either on the basis
of preliminary opinions, appeals, or cases of original jurisdiction. This
standard, as with any standard, calls upon the court to interpret the

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scope of a regional zone of jurisdictional action for regional competition
law application.

This is not so much a delimitation between state and region,

since the Community Court does not have the jurisdiction to instruct the
state law as to its proper scope of application. This is an issue that is for
the national court to determine. The only matter of issue before the
Community Court is the proper definition of the zone of authority for the
regional law. If this results in overlap and concurrent exercise of power,
then no matter.

Identifying the zone of authority of a regional legal expression

can also be prescribed by a Council Regulation that sets out the powers
and activities undertaken according to the regional treaty law (protocol).
This regulation can set de minimis levels of turnover (below which trade
between the states is not deemed to be affected) and it can also
establish the exemptions from regional law for small and medium-sized
enterprises (by which their agreements are deemed to not appreciably
affect trade between the Member States).

2.2. Prescribed anti-competitive practices: stated

prohibitions applying to private and public practices

Practices that are recognized by members as injurious to trade

between the states must be enunciated at the level of treaty law
(protocol); however, a regional law is chosen to be made enforceable
within the Community. As a basic point of departure and
recommendation, the private practices listed both in Nigeria’s proposed
law and the existing WAEMU law also reflect current EC Treaty practice
and the EC external relations (trade agreements) practice. These are
the obvious candidates for a regional statement of prohibited and
actionable practices. The argument being made here is to set the listing
of practices as close as possible to the existing WAEMU and the draft
Nigerian laws. Since any competition provision likely to emerge in an
EC–ECOWAS Economic Partnership Agreement will also contain a
listing for cartels, abuse of dominant position, and possibly a rule of
reason for pro-competitive vertical restraints, the use of these

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expressions for the anti-competitive practices to be treated should be a
455
‘given’ .

There can be an issue over whether the standard details that

the practices are ‘prohibited’ or ‘incompatible’ or ‘actionable’. The
recommendation here is that a prohibition against injurious practices be
clearly stated, as in the EC Treaty formulation. This establishes a
stronger basis for the superiority of Community law and the obligation
for the national courts and authorities to apply it. Agreements that fall
within the prohibition should be stated as being ‘void’ and without legal
effect in the Community either in the treaty or the supplementing
regulation. The ‘agreements’ and ‘practices’ covered within the listing
should be broad enough to cover any and all agreements or practices
that detrimentally (or appreciably) affect trade between the states. Any
further delineation to excuse practices should be undertaken according
to negotiated exemptions for a Council Regulation. A common
exemption made for this purpose is a labour agreement. It is not
common practice for a regulation to exempt industry association
agreements and it is not a common treaty expression to see any
particular reference to association agreements being ‘less actionable’ in
principle than any other restrictive agreement. The better principle is for
the treaty to cast a clearly stated but ‘wide net’ as to the practices to be
treated.

The listed practices and prohibitions should be applied without

distinction, at the treaty level, to both private and public practices. Public
practices present a myriad of complexities that have to be resolved as
an ongoing activity of the Community and its Member States. However,
in principle, they should be fully captured by the primary treaty
expression when they fall within the legal standard of affecting the trade
between the members. Otherwise, there is no legal basis to raise and
assess public practices via a Community apparatus, and even
cooperative approaches to dealing with public practices will not likely
move forward. For these areas, there is a risk of distorting the field of
play where one type of practice or agreement is singled out for some
better treatment (as in the form of an immunity) at the treaty level. The

455
Nigeria summary drawn from HB 70, as published in the Nigeria Official
Gazette, Vol. 92, Vol. 42, 10 June 2005. An English summation of the WAEMU
competition law can be found at, OECD, Global Forum on Competition,
Submission by WAEMU, 13 February 2004, CCNM/GF/COMP/WD(2004)31.

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treaty should not distort the field between private or public practices and
nor should it distort it between cartels and associations.

2.3. Community measure of damages

The regulation giving effect to a regional law should enunciate

the legal effect of agreements that violate the treaty provisions. This
regulation should make it clear that such agreements are not
enforceable within the national courts, i.e. that they are ‘void’ in respect
of the listed practices. In addition to this, the regulation should include
criteria for assessing injuries and calling for fines and penalties for anti-
competitive practices. These penalties should be set in such a manner
that they provide guidance to a national court in forming orders. The
measure of damages established should ensure that wrongdoers are
penalized for past practices in a manner that would not reward them or
where they are able to ‘break even’ for the rents they have secured from
the practices.

2.4. Rule-of-reason considerations

2.4.1. Vertical restraints

There are detailed theoretical arguments that can be made over

the advisability of stating any prohibition for vertical restrictions and
exclusionary practices, and various tests can be raised that apply to
dominance and the nature of its abuse. The two more comprehensive
laws in place (WAEMU and the legislation as proposed for Nigeria)
currently apply the ‘negative and positive’ criteria approach for rule-of-
reason assessments for pro-competitive vertical restraints. And for the
treaty expression, it is recommended that this is the better approach.
The practices themselves are covered by the prohibition, but then can
be validated by consideration of the rule of reason. This follows the
‘wider net’ for regional law. The ‘formula’ for the negative and positive
criteria to revalidate contractual restrictions has permitted decision
makers and the courts to develop a respectable body of law regarding
vertical restraints, which is available for reference in the ECOWAS
context. This approach also sets a clear legal basis for a regulation to
come forward over time to enunciate block and group exemptions
meeting the criteria of these listed tests.

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2.4.2. Dominance and abuse

Issues on dominance in the market and abuse are also

constantly debated among developed and developing authorities. The
most developed jurisdictions recognize that even highly concentrated
monopoly firms may not be engaging in abuse if complex markets for
technology innovations can render a determination of abuse redundant
even before it is finalized. Developing countries can examine the earlier
approaches applied to abuse of dominance by those same developed
country authorities and courts. These allowed for market share
expressions and particular practices that in combination with high
concentrations indicated an initial finding of abuse. To attempt any more
in a developing country arrangement, where the national courts will also
be playing a role, may overextend the capacity of a regional competition
law at the outset. A regulation can enunciate the criteria and can be
amended over time to reflect the status of the evolution within the
Community and its capacity to assess efficiencies generated by
dominant firms. The developmental and resource dimension is clearly a
consideration in this field and it does not seem appropriate here to
prejudge the evolution of law in this context.

2.5. Governmental practices

Two areas that require further consideration are state aids and
public practices, including government enterprise schemes and
governmental grants of special and exclusive rights. Unfortunately, they
are beyond the scope of this study and there is no shorthand
prescription to deal with the considerations for any of these subjects.
The issues that would have to be taken into account in the relationship
between a regional law and domestic industrial policies include
enterprise activities (special and exclusive rights) and state aids.

2.5.1. Enterprise activities – special and exclusive rights

Governmental grants of monopolies and the variety of joint

enterprise schemes between government and private firms should be
captured by the general treaty expression. That is, injurious public
practices affecting trade between the Member States are as actionable

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as purely private practices. Any other treatment at the treaty level will
distort the types of measures and practices being undertaken in the
Community where private arrangements can be shifted to governmental
and quasi-governmental arrangements. By clearly providing application
of Community law at the treaty level from the outset to all practices and
agreements, the legal basis is clarified for later regulations to reflect the
considerations of the members regarding exemptions and exceptions.
These can be developed in a process of transparent inventory
(disclosure) and classification of what activities the Member States are
engaged in that may actually detrimentally affect trade within the region.
This is essentially a negotiating terrain that also touches directly upon
economic development activities. However, it should be engaged within
the context of Community law application at the outset. Public and
private practices should be equally addressed without distinction in the
law of the treaty.

2.5.2. State aids

For state aids, a WAEMU legal prohibition provides an initial,

sensible expression so that a member’s subsidy falls within the
prohibition when granted upon (made conditional upon) exportation to
other members, or made conditional upon the purchase of local content.
Both of these types of subsidies are so trade distorting that they clearly
also fall within the actionable provisions prohibitions in the original
General Agreement on Tariffs and Trade (GATT). The members should
proscribe these practices as prohibitive in the treaty.

An additional complementary approach is also suggested by

reference to the WTO Subsidies Agreement. While this only applies to
trade in goods, there is no reason why it cannot be incorporated at the
regional level for its standards, and also extended to apply to services
as well. By a Council Regulation, the ECOWAS can ‘reference’ its
Community law to the WTO Agreement on Subsidies and can state the
WTO articles that are being adopted for the purposes of Community
law. This provides a definitional set of terms for what constitutes
actionable subsidies and provides the elements for tests dealing with
specificity and injury. The WTO regime is closely modelled on EC state
aid practice and has been found to be workable in the panel and
appellate body cases that have come through since the WTO
agreement entered into force. Where the members understand that

385
there is a need for greater flexibility for exempting subsidies (in relation
to regional development, poverty alleviation, environmental concerns,
etc.), than is currently provided for in the WTO agreement , then the
Council Regulation can define the terms of agreement between the
members as to the types of subsidies that should be made non-
actionable or adjust the burden of proof in such cases as they wish.

The EC state aids system provides for value thresholds and an

obligation of notification of subsidies to a central authority. That authority
has the power to make a decision, which can be appealed to the
Community Court i.e. the European Court of Justice (ECJ). Since the
EC Member States are also members of the WTO, their notifications to
the EC Commission are also compiled and notified to the WTO. EC
Member States have had little difficulty in managing the two applicable
regimes. ECOWAS members are also members of the WTO and have
the same notification obligations. Developing countries are no longer
exempt from the Subsidies Agreement, although differential provisions
still remain for least-developed countries (LDCs).

A Council Regulation for state aids should therefore be

established that can incorporate the primary elements of the WTO
system (by reference), apply it to services as well as goods, and
establish a Community notification and decision-making instrument.
Provisions should also be made for LDCs and for non-actionable
subsidies.

2.6. Merger control

There is a good argument for regional merger control and for a

system of pre-notification and clearance as the region develops a
territorial identity and attracts investment from firms doing business ‘in
the market’. While many criticisms are made of developing countries
operating pre-notification systems, the value of pre-notification is also
noted for developing country and regional authorities that receive
(without having to investigate) ‘free’ information on proposed
concentrations and the markets upon which they operate. Developed
country practitioners are critical of the proliferation of notification
systems. But for developing countries, there is a potential windfall in
market information generated by notices. Moreover, since developing
country (or regional) authorities are actually responsible for the quality of
competition upon their territories, notification systems allow them to

386
respond to new concentrations that affect their legitimate legal domains
in the same manner as such systems operate to inform developed
country authorities.

Where a pre-notification and clearance system operates in line

with accepted international principles (as enunciated by members of the
International Competition Network (ICN) for example), there can also be
an extended benefit for regional and international firms that can exercise
a single notice system for the region when their arrangements affect
more than one Member State. Similarly, a regional system allows the
smaller states to have access to a set of remedies for mergers
substantially restricting competition in their national markets without the
necessity of establishing a domestic control apparatus. A final positive
effect for regional merger control is that it allows the region itself to
defend its territorial interests in the external competition policy arena.

To provide for the possibility of regional merger control over

time, the jurisdictional standard in the treaty should refer to agreements
‘affecting the territory’ or a substantial portion of it, as discussed in the
section above. The administrative load on a pre-clearance system is
high and a decision to adopt merger control strongly suggests the
necessity of a centralized authority at the Community level capable of
working in very short time frames. However, it is also conceivable that
some elements of regional merger control can be facilitated by an
intergovernmental group of existing national authorities (or advisory
group) in cooperation with the Commission. Although there are
confidentiality issues presented by these approaches, in principle it is
also possible for a single member that already has a notification and
clearance system to share the non-confidential components of a
concentration with the other members, and then either cooperate on the
review of a concentration to the extent that it affects the other members,
or possibly to vet the merger in respect of the other territories. This is a
high form of intergovernmental cooperation and requires structured
intergovernmental or agency arrangements. An intergovernmental group
of existing authorities can also be established to consider and
recommend a more detailed approach to regional merger control for the
456
Community that can form the basis for a regulation at a later time .

456
For a similar proposal as applied to MERCOSUR, see Mathis, J. (1998),
Issues in Regional Merger Control, Journal of World Competition, 21/3, pp. 29–
44.

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 Although a regional merger control approach may not be viewed
as a first priority within a regional competition law, the groundwork
should be laid by cooperative action of the Member States that is both
substantive for dealing with current mergers that affect the region, and
that works prospectively with a view to recommendations for a regional
system of merger control.

3. Minimum requirements – Application of community law

3.1. Introduction – a system of private rights enforcement

This section examines the application of ECOWAS law within

the legal regimes of the Member States, with an emphasis on
application of the law by private rights of action and recourse. While this
discussion is closely related to that of a regional institutional
mechanism, such as establishing an ECOWAS authority or advisory
grouping, the focus of this section is on the application of the regional
law as it relates to the Member States.

The 1993 ECOWAS Treaty and the revisions undertaken by

decision and protocol in 2006 together clearly establish the superiority of
ECOWAS Community law. This indicates that the treaty provisions and
the regulations drawn up by the Council according to the ECOWAS
Treaty are already ‘generally applicable’ within each of the Member
State legal regimes, and are therefore binding upon the agencies and
the national courts of the members. Thus, where a national court or
authority is presented with a question of Community law, Community
law should be applied. Where an authority or court is presented with a
possible conflict between national and Community law, it should resolve
457
that conflict in light of the superiority of Community law .

These points of general application and superiority of regional

law appear clear from the ECOWAS Treaty as it stands. However, these

457
ECOWAS Treaty as cited above. Binding effects on Member States are set
out in Article 9 for Authority Decisions, Article 12 for Council Regulations, and
Article 15 for Court judgments.

388
two aspects also raise questions on the application of a regional
competition law:

1) Who can invoke the law within the national systems?

2) Before which national authorities can the law be invoked?
3) How can a uniform application of regional law be
guaranteed by the Member State courts and authorities?
4) What ultimate rights should be accorded at regional level to
redress improper applications or non–applications of
Community law?
5) What is the position of UEMOA competition law in the
ECOWAS legal order for these purposes?

This discussion focuses on the application of law without

reference to a regional authority except where the absence of a regional
authority has a bearing on the issue or the recommendation.

3.2. The argument for direct effect of regional competition

law before national courts and authorities: who can invoke
the law?

Superiority and general application are not the same as granting

an individual direct effect in the legal order of the Member States.
Because the existing treaty indicates the superiority of Community acts,
it is clear that national courts are obliged to apply the law. However, this
is not the same thing as granting a party the right to invoke the
Community law as expressed within the treaty articles before the
national court or authority. The legal basis to invoke the law directly
within a national court stems from the nature of the treaty rights and
obligations and their implications for affecting and conferring individual
rights, but there is no expression in the ECOWAS Treaty stating that its
regional laws shall have direct effect.

The EC Treaty does not provide for direct effect of its regional
competition law either. This development occurred (early on for
competition law provisions) by the action of the European Court of
Justice interpreting the treaty provisions as they were raised in actual

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disputes, and then ruling that the competition provisions conferred direct
rights for individual action. The ECOWAS Community Court has this
incumbent (inherent) power to interpret the treaty and reach the same
result. Arguably, so do the national courts, which also have a duty to
apply Community law and could rule on an issue of direct effect if and
when presented in a case.

However, the ECOWAS structure has two differences that may

delay a court interpretation granting direct effect for regional competition
law. Since access to the ECOWAS Court is limited to actions brought by
states, such an interpretive issue may be avoided by the states in their
decision to press a case. Similarly, since the ECOWAS Commission
cannot bring an action to the court, this avenue for raising direct effect
also may not be utilized. Nevertheless, the issue is still likely to arise in
private contractual enforcement actions in the Member States. The
example would be where a respondent in a private contract action
defends against the enforceability of the contract terms by asserting its
illegality under ECOWAS regional law. At this point a national court will
refer to the superior ECOWAS regional law, and will have to decide
whether or not a respondent has an individual right to invoke the treaty
provisions or the terms of a Council Regulation. While the rights to seek
a preliminary opinion from the ECOWAS Court are also not settled by
the treaty or the Council/Court Regulation either, there is the possibility
of inconsistent rulings on this point from different national courts. The
possible absence of a regional authority that can receive private
complaints and can rule on cases pushes the argument more strongly in
favour of a clear declaration of direct effect in the national systems.

3.3. Before which state authorities can the law be invoked?

As noted above, the issue of direct effect can arise in a private

contract dispute before a national court. It can also arise in an agency
enforcement action under national law where the respondent pleaded
an inconsistency with Community law, or sought to make a counterclaim
against the moving complainant as based solely on Community law.
There are states that have no competition laws, and the states
themselves choose the means by which to implement their national laws
– either by using an agency model exclusively or by installing a
regulation that is to be mainly applied by the national courts.

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 The various combinations possible suggest that the level of
direct effect that is to be granted to individuals within the region should
be done without regard to the existence of national competition laws, or
the means by which they are implemented by the national systems. This
would mean that where a state has not passed a national law
whatsoever, a private party could still assert (and defend) a claim based
on an ECOWAS regional law in the courts of that state. Similarly, where
a state has chosen to have an exclusive agency model (all competition
complaints must be made solely to the authority), one can still not
discount the possibility of defences being raised in private national court
actions that seek to invoke Community law. That is, direct effect should
be granted in respect of all courts and authorities within the Member
States and not be limited solely to competition authorities alone or to
those states that have competition authorities.

3.4. Can a uniform application of regional law among the

Member States be guaranteed?

If the Community law is generally applicable – which it is – and

the national courts have an obligation to apply it (irrespective of who can
invoke it), then the national courts will also be required to interpret the
Community law. The uniformity of this application, which is the ability to
apply it consistently from one court to another and from one Member
State to another, is an absolute priority for the legitimate grounding of a
regional legal system. Without uniformity of application of the regional
law, the system cannot be made functional and it cannot be relied upon
to distribute rights and obligations according to the treaty provisions.

There are several means by which uniformity can be promoted,

and all are relevant for any regional system that has established a
regional court. A first one is to allow a right of appeal to the regional
court from a national court ruling, normally from the highest national
court. A second is to provide the right of a national court to request and
receive a preliminary opinion from the regional court on matters of
interpretation and application of the regional law. A third is to allow
certain actions to have original jurisdiction before the regional court. A
final area is more ‘guidance oriented’ where a regional agency or body
issues papers and notices expressing its understanding for points of
interpretation of the regional law.

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 The ECOWAS Treaty does not provide for a right of access to
the regional court for any party other than a Member State acting
individually or collectively by the Authority. If this limitation cannot be
revisited in the context of developing regional competition law, then the
emphasis has to be placed on a preliminary opinion procedure. The
ECOWAS Council already has this right secured by the treaty (for the
purpose of ‘advisory opinion’), and what is proposed here is that this
should be extended to the national courts for any case where a treaty
article or a Council legal act is raised in a national proceeding. For the
purposes of judicial efficiency, this power to request preliminary opinions
should not be limited to the highest national court but the lower courts
should also be able to obtain the regional court’s interpretation and then
insert that opinion into the domestic legal proceeding. A preliminary
opinion procedure within the ECOWAS is therefore a minimum
requirement to ensure the uniform application of regional law.

3.5. What ultimate rights should be accorded to redress

incorrect application or non-application of Community law?

The ECOWAS Treaty confers a right of action before the

458
regional court to the Member States or to the Authority . It also may
appear that a state can bring an action on behalf of a private party
before the regional court. There is no other regional institutional entity
that can bring an action before the ECOWAS Court against a state or a
459
private individual . This final question opens the door to a discussion
on a regional enforcement mechanism and the balance between
institutional power and private rights that may be set under a regional
competition law. It can be argued that where there is no regional
authority that can form a claim against a Member State to enforce
compliance with Community law, that the final acts of securing legal
remedies should be strengthened at the level of appeal from the highest
national court. Where there is an independent enforcement mechanism
established at the Community level, then an alternative and final remedy
to challenge a state would be available.

458
ECOWAS Treaty as cited above, Article 76, Settlement of Disputes.
459
The Council is given the right by the ECOWAS Treaty to request advisory
opinions from the court. Article 10(3)(h).

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 This existing structure strongly suggests that the substantive
treaty rights being created by the ECOWAS are essentially only being
granted to the Member States and not to the firms that are seeking to
trade in the ECOWAS regional market, nor to the ECOWAS institutions
that have some limited mandate to make effective the treaty rules and
460
the Council Regulations . While this approach preserves the maximum
amount of sovereignty for the members in the execution of the
ECOWAS regional plan, it does not bode well for the ability of ECOWAS
law to obtain a sufficient degree of independence from national law or to
develop a system of recourse for continuing violations of the regional
law.

The situation appears to be even less conducive to the interests

of foreign firms who do business within the ECOWAS, since those firms
would have to convince a Member State to bring the action on its behalf
before the regional court. In addition to the possibility that this might be
discriminatory in any external agreement (the EC and an Economic
Partnership Agreement (EPA), or even under WTO rules for national
treatment), it is also a serious defect in the structure of the treaty and
the institutional powers of its high court. The value of this limitation on
actions is questionable, if the preservation of Member State sovereignty
is balanced against the functioning of the market rules for the customs
union and the political downside of having these disputes forced to be
generated at such a high political level. The evidence suggests that
there is little likelihood of resetting the ECOWAS Court authority to hear
original claims or appeals by any party other than a state in respect of a
potential ECOWAS competition law. Other possibilities must be
considered for a competition regime because the limitation of actions
before the ECOWAS Court will cause problems both internally for the
Member States and externally for the trading partners as the customs
union becomes more complete. Thus, a right of final appeal for issues
dealing solely with ECOWAS law should be granted from the national

460
The powers of the ECOWAS Commission (formerly entitled the Executive
Secretary) are provided in Article 19 of the ECOWAS Treaty. Subsection 3(a)
states that the Commission has the duty of ‘execution of decisions taken by the
Authority and application of the regulations of the Council’. We do not read this
provision as granting the Commission the power to make a claim against a
Member State in the regional court. The Council itself (the higher legislative
authority) is only granted power to request an advisory opinion from the court.
We do not offer an opinion on whether a regulation that did convey such a
power to the Commission would be in violation of the Treaty provisions.

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court of final jurisdiction to the Community Court. This should be
provided by a treaty provision or by a decision of the authority of the
Heads of State.

3.6. The position of WAEMU competition law in the ECOWAS

legal order

Within the ECOWAS arrangement, the WAEMU is also a

regional grouping. From a territorial perspective, the WAEMU is a
distinct customs territory within the larger (forming) customs territory of
the ECOWAS. For competition law, the WAEMU has all the
characteristics of a single national territory, with its own high court
providing for the superior application of its regional law in respect of its
own members and as applicable across the entire WAEMU regional
territory. This structure appears to be so identical to the position of a
single Member State (with full state territorial powers) within a regional
grouping, that for all practical purposes the WAEMU should be treated
as a single state (customs territory) entity in respect of a created
ECOWAS regional law. Just as ECOWAS law would be superior and
binding on the individual Member States, so would it also be applied to
the customs territory of the WAEMU. ECOWAS law already has
superiority over the individual Member State laws within the region and
must be applied by the courts and agencies of the states. This same
general applicability and superiority of ECOWAS regional law would
apply to the WAEMU territory just as it applies to the state territories of
the WAEMU members. Any other interpretation of the ECOWAS Treaty
would nullify its provisions stating that ECOWAS law has a binding
effect on the Member States.

4. Regional bodies and institutional control

4.1. The argument for regional authority

A diffuse system of treaty law application by individuals before

national courts and authorities can underpin an operational and
functional regional legal order, just as private rights of action operate to
ensure the legal security of law and remedies in many domestic legal
systems. In competition law, this area of private action is probably most

394
effective in addressing exclusionary practices and abuses of supply
chain dominance where complainants can more easily identify the
contractual practice that is affecting their commerce and bring that
practice before a court or authority for a legal assessment and action. A
system of private rights can also capture many of the minor actions that
otherwise fall below the ‘radar screen’ of competition authority attention.
This is positive for building and reinforcing a set of market rules and
principles that contribute to economic development where smaller
players and markets create local economic and commercial growth.
Many developing (and developed) countries have long provided for such
types of private actions at the lowest possible court levels where claims
for the ‘refusal to supply’ or ‘unfair contract terms’ overlap the subject
areas of competition law.

In different subject areas and within larger regional or

international markets, private rights of action are also understood to be
insufficient to provide a reasonable prospect of implementing and
enforcing competition law. Private actors find it difficult to obtain
information on anti-competitive practices generally, but on cross-border
cartel activity in particular. Cartels do not operate in public for obvious
reasons and the information needed to bring them to the surface for
remedial action requires investigatory power, expertise and resources. It
is a rare case where a cartel is disclosed by the investigatory efforts of a
private individual or firm. The vast majority of these cases are the result
of agency investigations, and increasingly those with the power to
operate amnesty and whistle blower programmes.

A similar gap occurs in anti-competitive practices which, while

affecting the downstream purchasing firms, are also able to be passed
along to the ultimate consumer who is ultimately the injured party.
Where cartels or abusive practices can be relayed to the largest national
and regional consumer markets, the losses to the consumer are high
and yet the capacity of individual injured consumers to identify the
practices and develop complaints before national courts is low.

4.2. Competition authorities and core powers

A brief examination of the types of powers granted to

independent competition authorities provides some insight into the
implications of considering an independent regional authority. The

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enumerated powers listed below are drawn from the original
enforcement regulation of the EEC, Regulation 17/62. According to the
regulation and operation of Community law, all powers enumerated are
made subject to review on appeal by the European Court of Justice.

• Investigations:

- to issue written requests for information to be received

from the Member States, private firms and associations
- to assess penalties in the event of non-compliance with
the Commission’s request for information
- to initiate independent investigations within the Member
States upon notice to the member. The right to obtain
the cooperation of the member’s own domestic search
and warrant system is specified. This includes the
power to enter business premises according to national
law and to examine books and records, and to request
explanations on the spot
- to assess penalties for providing misleading or false
information to the investigators

• Decision making and adjudication:

- to conduct hearings and compel testimony according to

due process rights to submit and to be heard
- to issue a decision that a practice infringes the treaty
and to order that the practice be brought to an end
- to determine that a practice does not fall within the
treaty prescriptions and the power to issue exemptions
on a case-by-case basis

• Remedies:

- to determine and assess fines for infringements of the

treaty according to the governing regulation,

There are important differences between a regional competition

regime and a regional trade regime where practices being addressed in
competition have a strong private nature (as addressing private firms
and private behaviour), and where the interaction between a regional
enforcement system and private economic actors is brought directly into

396
play. Another difference shown between a competition and a trade
regime is that the realm of investigatory power is enlarged in the
competition field. For governmental trade measures that may violate the
commitments of the treaty, there is not the same need to build evidence
of the practices involved or for the need to compel documents or
testimony in order to disclose the practice and prove a case.

4.3. Policy proposals

4.3.1. For a fully functional and independent competition commission

The establishment of an independent institutional power

considers the balance to be set between a regional authority and the
Member States as they are represented in the regional legislative
domain of the Council. This is fundamentally a question of balance
between executive enforcement power and legislative oversight power.
As such, while the questions addressed are ‘legal’ to the extent that they
deal with institutional design, they are also obviously political in
determining the degree of independence of a regional executive
enforcement authority and the degree of residual sovereignty to be held
by the Member States controlling the pace of regional integration. What
is ‘best’ for integration and what is ‘possible’ for integration present
mixed questions of law and politics.

The case for a fully functional and independent regional

competition authority to deal with the functions that are enumerated
above is based in a large part on the nature of competition law
enforcement itself. This presents unique issues in cross-border cases
that cannot be easily resolved by sole reference to national authority
power and private actions. Recognizing that the existing ECOWAS
Treaty structure cannot accommodate this degree of independence, the
functions of a competition commission should be based outside the
existing commission structure, in a separate commission or authority.
This is similar to many national competition authorities where the mix of
functions for investigation, decision making and adjudication renders
them somewhat different from many other executive branch activities. In
this sense, a competition commission is more of a complete or ‘closed’

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system touching upon elements that also include rule making
(legislative) as well as judicial (adjudication) aspects.

While the lower ECOWAS institutions do not have any direct

access to the regional court, the review or appeal of the authority’s
decisions should be located in the apparatus of the Council. This power
should be exercised by majority voting or by a reverse consensus
procedure. The Council does have the power to seek advisory opinions
from the court in its operations and this power can also be used in
dealing with the review of an independent commission’s activities on
particular cases. If the review power is to be held by the Council, then
the voting aspect of this regional system is critical. If the Member States
insist on retaining individual veto power over the decisions and
proposed actions of a regional authority, then a functional regional
authority cannot emerge with any sufficient independence to perform the
tasks necessary to give effect to a regional competition law. An authority
should not be established if a single member veto is retained.

4.3.2. For an advisory panel with power to refer actions

At the other end of the spectrum, the already intergovernmental

character of the ECOWAS structure allows for the creation of an
‘advisory panel’ of individual experts or representatives of the national
authorities to receive complaints by referral from the existing
Commission. The panel would then refer matters to the Member State
competition authorities for legal action. The minimum performance
characteristics of national laws would be set out by the ECOWAS
(probably by Council Regulation) and there would be minimum
requirements imposed for convergence regarding the practices to be
treated by the laws and the definitions for exemptions.

In this approach, the power to receive complaints and to refer to

national authorities would be (more or less) the extent of the regional
authority power with respect to the prosecution of individual cases. A
failure of a member to address an action referred to it by the authority
could be the subject of an advisory panel’s follow-up report to the
Council and the Council would have the power to address the Member
State or to make an additional report that serves as information to the
Heads of State. The advisory panel could have some power of
coordination with the national authorities and there could also be some

398
recognized potential to assist in the allocation of particular cases or to
facilitate cooperation (information sharing) instruments as these may be
developed.

Additionally, the remaining functions of the advisory panel would

be more similar to a system of peer review. This would include the
ability to survey the functioning of the Member State laws in a manner
that would isolate the points where the law was not being implemented
or applied, or was not adequately applying or addressing Community
law violations, or where the law was not being accorded on the basis of
national treatment (in respect to the rights of foreign complainants or
granting more favourable treatment of domestic firms).

4.3.3. Small economies and LDCs

The approach suggested above relies upon national law and

authority to render case action effective. The contentious issue here is
whether or not LDCs and the smallest economies should be required to
have any competition law at national level. The resource drain for
implementing national laws is demanding and some countries’
resources are possibly better spent either in dealing with localized unfair
trading practices or in promoting higher levels of consumer protection.
Furthermore, the current emphasis is on regulatory policies that have a
more direct relationship to meeting the demands of poverty alleviation
and the other millennium goals. Any system that requires a Member
State to have a national law should be examined in this context, since
the recommendation to have a law is establishing a national regulatory
priority, and obviously at the expense of some other priority.

While these smaller LDCs are also clearly affected by domestic

and external anti-competitive practices, their best opportunity for
recourse lies in a regional authority that can take care of their interests,
especially those anti-competitive practices originating in the other
Member States or internationally. Similarly, where their own firms may
be engaging in exclusionary practices to the detriment of other regional
member firms, a regional authority can also deal with those issues
according to the treaty law without the need for an LDC to create a
separate national law. Also, as a practical matter, in the smallest of
markets where consumption and production levels are low, it may well
be the case that most of the exclusionary practices engaged in within

399
these LDCs would fall below the regional turnover thresholds for
application of Community law or fall within the exemptions for small and
medium-sized enterprises.

4.3.4. Large economies and non-implementation

The smallest territories can be significantly hurt in an

intergovernmental referral apparatus if the largest territory markets do
not create functional laws that allow the regional law to be applied in
their jurisdictions. Here the referral apparatus has to have a stronger
mechanism to ensure either that the establishment of national
competition laws takes hold in the first place, or, in the event that it does
not, that cases can proceed anyway. It is not clear at all that a soft law
‘name-and-shame’ approach is going to be successful in the ECOWAS
for these purposes. This approach has been used in various forms for
aspects dealing with the trade liberalization regime of the ECOWAS,
and the record of implementation with an intergovernmental Council
apparatus is not very good. For matters involving trade, where the treaty
also calls for Council or Heads of State actions to ‘address Member
States’, as in the case of dumped goods for example, one wonders if
any state has ever been addressed by the intergovernmental bodies in a
manner that has stimulated compliance or a change of behaviour in
favour of meeting the treaty objectives.

If intergovernmental recourse has not stimulated compliance

with the core free-trade and compensation commitments, which have
been in place since the 1970s, then what countervailing consideration
would argue that this same approach should work for a competition law
regime – a regulatory area for which many African, Caribbean and
Pacific (ACP) foreign ministers are also on active record as opposing for
inclusion in the EC–EPA Cotonou construction? Even between only the
larger members, the intergovernmental route also has some significant
pitfalls. In the absence of a central authority, whatever promise has
been generated for a ‘customs union’ construction can be undermined
where differences emerge between the implementation pace of national
laws, or worse, by decisions taken by national authorities that others
see to be reflecting industrial and trade policy interests rather than
competition policy interests.

400
 Here the MERCOSUR example is unfortunately but necessarily
raised. This intergovernmental ministerial approach to regional
competition law has not been implemented, due to the failure of
individual members to pass national laws, and the absence of effective
regional competition remedies has contributed to a degrading of the
free-trade schedules for this common market. This example is too close
in point to the ECOWAS situation, and far more so than the other ACP
arrangements that are operating with higher degrees of institutional
treaty independence such as the COMESA or possibly the CARICOM.

4.3.5. Proposal for alternative case mechanism

The primary consideration is that while a referral concept has

solid value and can form the core of a regional approach, there has to
be an alternative to a national case referral in the event that the referral
cannot be effectively made or acted upon. This is a minimum
requirement for achieving an implemented regional strategy for
competition law, and without it the risk of non-implementation of regional
law is too high.

The argument here is to grant the advisory panel a clear right to

petition the Council in the event that a case referral cannot be
responded to either because of non-implementation, or because of a
substantive or procedural defect in the national legal provisions. This is
similar to the criteria applied by the EU–Euro-Med and EU–South Africa
free-trade area arrangements for instituting recourse on a request for
action that cannot be fulfilled. In the ECOWAS, the Council, by a
majority vote, would then decide whether or not the advisory panel, with
the support of the Commission, can either bring the case directly before
the ECOWAS regional court, or alternatively, be taken up by the Council
461
itself for a majority decision on the merits of the case . The Council
would, of course, have at its disposal the power to request an advisory
opinion from the court on the legal interpretation of ECOWAS law.

This alternative to national referral is a minimum loss of

prospective sovereignty of the Member States given the objectives of

461
EU–South Africa Trade, Development and Cooperation Agreement,
http://europa.eu.int/eur-lex/en/archive/1999/l_31119991204en.html. Article 37,
‘Appropriate Measures’.

401
the ECOWAS Treaty, and in view of the benefits that flow to all
members if the implementation system was made effective. If this
recourse procedure is included in the scheme, the likelihood of
successful implementation of national laws should be increased and it is
possible that the alternative procedure need not be utilized or only be
called upon in rare cases.

4.3.6. Other requirements for national referral – investigatory powers

and preliminary hearing

Even in a system where referral by an advisory panel is being

made functional, there are two other points of weakness that should be
addressed. First, the advisory panel is not being given a clear basis to
engage in investigations of the complaints referred to it by the
Commission. Second, the advisory panel does not appear to be
empowered to commence investigations in the absence of a complaint
being referred. Both are important aspects and discussed briefly in turn.

Whether or not a regional body should exercise all the

investigatory powers enumerated above for a centralized authority is not
determined here, but clearly the power to collect or compel information
from authorities and private firms is a priority. It is clear that without the
power to investigate, a regional advisory panel cannot make intelligent
referrals in the first place. The panel needs to be able to determine if a
referral should or should not be made, and investigatory powers to
inquire and receive information are needed to facilitate this.

One possibility is that the advisory panel could establish a

‘preliminary hearing’ procedure prior to referral that would allow parties
to submit information and be heard. The standard for making such a
referral would be based upon a ‘probable cause’ standard, i.e. that there
is a probable cause to believe that an infringement has occurred and
that the infringement can be addressed by a referral to a particular
Member State enforcement system. Investigatory power is also
necessary if the advisory panel seeks to fulfil its function of reporting to
the Council those cases that are not adequately treated by the national
authorities. Otherwise, it is not clear how the panel can compare the
outcomes of cases actually handled by the national authorities with the
expectations that an infringement could be determined and corrected.

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 The call for regional investigatory power also relates to
developing the capacity to address international practices that are
beyond the visible purview of domestic firms in the ECOWAS region. It
would allow the regional mechanism to survey international cartel
enforcement actions being taken abroad and consider the possibilities of
information collection within the ECOWAS. An authority with this power
can also derive the basis to extend its investigatory powers abroad,
including the potential to develop international cooperation
arrangements with other developing regional authorities (within the
African Union or the ACP group for example) and with other developed
country authorities. The international dimension also supports the
argument that the investigatory powers of an advisory panel should not
be limited to dealing only with actual received complaints. There is no
reason why an advisory panel should not be able to follow its own leads
and determine its own basis for referrals. Rather, limiting the panel to
investigate only received complaints would seem to inhibit the potential
for the ECOWAS to deal with international anti-competitive practices –
an area where no single Member State is likely to have sufficient power
to successfully play.

An advisory panel should therefore be established with the

power to receive complaints dealing with ECOWAS law and to refer
action to the Member State authorities. Where a relevant national law is
not implemented or cannot address the referred practice, that advisory
panel should have the power to refer the matter to the Council for a
decision (by majority voting) as to how the case will be heard and
decided. The panel should be given reasonable investigatory powers
that can be exercised in its referral determination, and the panel should
be permitted to exercise its investigatory powers without the receipt of
an individual complaint. A further recommendation is that the panel
should be constituted to have the power of conducting a preliminary
hearing on the question of infringement and referral, and that parties to
the proceedings are guaranteed a right to be heard and to submit
information. If the panel does not have the right to compel the provision
of information and appearances at a preliminary hearing, then it should
have the right to rule that a probable cause is found as a matter of
default on the basis of a failure to provide requested information or to
appear.

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4.4. Other considerations, notification systems and
cooperation instruments

4.4.1. Notifications

This study has not raised the question of whether or not a

regional authority should have the power to declare exemptions in
respect of individual agreements, or as to classes of agreements. Nor
has it, in tandem, raised the question of whether private parties should
be able to notify their private agreements for which, while falling within
the treaty prohibitions, they would also be seeking to have an exemption
applied based upon the balancing criteria of pro-competitive effects. The
value of notification systems, either mandatory or voluntary, is that
information flows to the regional body and the authority can learn the
nature of the distribution markets that affect cross-border trade and can
gradually determine the patterns that can form the basis for handling
cases and developing regional block exemptions.

4.4.2. Cooperation instruments

This study has started from the position of assessing the

prospects for decentralized administration of a regional law by the use
of Member State authorities acting in cooperation. There is a role for
cooperation between authorities in any regional system whether or not
there is a centralized authority in position and whether or not a system is
operating in tandem with private rights of enforcement. There are
obvious benefits to cooperation where existing authorities can establish
working relationships and render each other’s enforcement efforts more
viable. Cooperation can occur both in respect of Community law but
also in the application of national territorial laws.

The common mechanism for enforcement includes:

• coordination, by agencies on common fact patterns with effects

upon both jurisdictions
• investigatory assistance, upon a request by one agency to
another seeking information on possible practices that may be
occurring in the requested country that have effects on the

404
 requesting country
• positive comity, a request by one agency for another to assess
and take action on a possible anti-competitive practice that is
462
occurring in the requesting” country’s territory .

The record of cooperation instruments in existing RTAs that

have included these provisions is not positive. Surveys by the
Organisation for Economic Co-operation and Development (OECD) and
the Centre for Economic Policy Research suggest that little cooperation
actually occurs according to the RTA provisions. There are some cases
where countries are actively requesting and notifying, but not
consistently, and not in a manner that appears to be generating
consistent responses from the regional partners. These are tentative
characterizations because it is difficult to confirm how much informal
cooperation may be actually going on beneath the cover of these
cooperation provisions. Many of the agreements utilizing cooperation
instruments are fairly new, as are the authorities working with them.

ECOWAS competition law cannot be given effect by the sole

use of a cooperation approach. Nevertheless, there are clear benefits to
using cooperation as a supportive set of instruments to facilitate
enforcement of the domestic competition laws of the members.
Irrespective of the regional body ultimately proposed for the ECOWAS,
this body should also be given some coordination capacity to promote
intergovernmental cooperation to facilitate the application of the national
laws. This could be accomplished by the named regional body itself, or
as an alternative, a separate intergovernmental body composed of
representatives of the national competition authorities.

5. Conclusions

This study has aimed to identify a feasible middle path –

between pure intergovernmentalism and absolute supranationality – that
can resolve the deficiencies of the ECOWAS Treaty structure with its

462
These instruments as drawn from OECD (1995), Recommendation and
Guiding Principles for Anti-competitive Practices Affecting International Trade,
C(95)130/Final, Revised Recommendation, 27 & 28 July, 1995. These
techniques are commonly recited in bilateral cooperation agreements and in
RTAs.

405
rather ambitious integration objectives, and in light of a regional
competition law. An independent law at the regional level can and
should be established at the treaty level. Furthermore, this law should
have a general applicability and be binding upon the authorities and the
courts of the Member States. These elements are the fundamental
building blocks of regional integration that can act simultaneously as a
point of balance between state sovereignty and regional authority. It is
clear that these elements also underlie a system of diffuse individual
rights of action that relies upon a regional authority to address
infringements of regional law.

A system of private rights can be built upon this structure if

direct effect is made clear and if the national courts have the ability to
obtain regional court preliminary opinions. In addition to this, an ultimate
arbiter for appeal should be considered as a reasonable extension of
standing before the ECOWAS regional court. If these elements are
accomplished, then the ECOWAS can say legitimately that it has
installed an effective system of private action for regional law. A pure
system of private rights enforcement would not be adequate to give
effect to regional law; some level of regional authority action is
necessary for the regional law to operate. The differences in
approaches have been discussed above, but all regional proposals build
upon the same building blocks of independent law, general application
and superiority. This is even more so in the case of the referral system.

It is tempting to seek to avoid the pitfalls of a referral system

that relies upon Member State implementation of national authorities.
The alternative of a completely independent commission with full
powers is simple, effective and attractive. However, the lack of
institutional tolerance for full independent executive powers cannot be
ignored when this describes what the Member States may be willing to
actually tolerate. Thus, this study argues for regional action that adopts
a referral model but is modified to avoid the intergovernmental pitfalls
that can render such a system inoperative. These include an alternative
case-handling approach if a referral cannot be effectively made, and a
clear investigatory power granted to the advisory panel as it attempts to
determine referrals and monitor the merits of a case.

The competition law issue in ACP regional integration

arrangements is not a home-grown phenomenon. There are external
factors raising the competition agenda. This is particularly noticeable in

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the ECOWAS setting where the treaty does not even accord competition
policy the status of a regional activity. In contemplating the likely
requirements that will emerge in the negotiation framework for the EPA
agreements, it is perhaps helpful to identify the interests of foreign firms
in the establishment of regional competition law for the ECOWAS. From
the perspective of the EC, any foreign firm trading or doing business in
the Community has the individual right to complain and seek redress for
a violation of regional competition law. From a narrow and more
mercantilist perspective, the reciprocity that can be expected from an
ECOWAS arrangement is for a legal structure capable of responding to
similar complaints when raised by an EC firm. In other words: “How will
OUR firms address private and public exclusionary practices that
threaten to undermine the market access commitments that have been
bargained for in the EPA tariff schedules?”.

A completely intergovernmental system of enforcement cannot

make this EPA exchange on a reciprocal basis. Consequently, the
modifications proposed here are for a referral system and the institution
of private rights of action. Obviously the beneficiaries are not only
foreign firms. Consumers are the main beneficiaries and welfare gains
may also be generated by contestable markets. The argument put
forward in this study may not necessarily lead to the best or most
efficient institutional outcomes. However, the proposals aim to create an
outcome that can effectively implement a regional law for competition
policy in the ECOWAS. While ECOWAS Member States may not
welcome encroachments on national sovereignty, it is hoped that these
proposals are considered on the merits of how they meet these wider
objectives.

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408
 BENEFITS OF INTRODUCING AND APPLYING
COMPETITION POLICY IN EMERGING ECONOMIES

CASE STUDY – ROMANIA

Professor Gheorghe Oprescu

Daniela Eleodor
Maria Alexandru

Abstract

Romania is quite a special case as it has until recently been

considered to be both a developing country and an economy in
transition. Romania’s experience in building its competition regime may
therefore be useful for both developing countries and for economies in
transition, bearing in mind the important policy implications for economic
development of establishing an appropriate competition framework that
relies on a solid legal base and a suitable institutional structure.

Experience suggests that, in the process of transition to a more

open economy, the existence and application of competition law can
usefully support other policy initiatives. Trade policy, industrial policy,
privatization, deregulation, regional policy and social policy all need to
be conducted in a manner compatible with the market mechanism for an
economy to function as efficiently as possible. These policies need to be
conducted in a complementary manner and it is important that a
mechanism exists for incorporating the "competition dimension" within
government decisions on such policies.

The purpose of this essay is twofold. First, it provides an

assessment of the effectiveness of the implementation of competition
policy in Romania. Second, it shows the important role competition
policy plays in the liberalization of certain sensitive sectors of the

409
economy. It concludes that law enforcement, competition advocacy and
institutional effectiveness represent essential components and,
therefore, key priorities for effective implementation of competition
policy.

The available evidence suggests the importance of competition

policy in the context of transition towards a market economy and
emphasizes the necessity of developing an operational competition
system in developing countries.

1. Do we really need competition policy?

Widespread privatization and competition policy have been a

real challenge for Romania in its process of transition to a market
economy. Further, trade liberalization has been an important driver of
pro-competitive reforms in Romania, which brought about an
unprecedented abundance of goods and showed at the same time a
benchmark of competitiveness, making domestic companies that had
been working without exposure to competition recognize the limitations
of their competitiveness.

The introduction of the regulatory framework enabling “freedom

of ownership, investment and enterprise” created great opportunities for
domestic and foreign undertakings alike. The increase in the number of
businesses in general and in new investments together have led to
substantially improving competitiveness and, in this sense, the legal,
economic, and economic policy environment supporting the
implementation of the freedom of ownership, investment and enterprise
has been a definitely pro-competitive reform and a driving force in
transforming the Romanian economy.

As with other Central-East European countries associated to the

EU, Romania took important steps with a view to achieving full
harmonization of its legislation with the acquis communautaire, to
enforce its capacity building and to observe the commitments
undertaken through the Association Agreement concluded with the
European Union.

The Association Council had to adopt the necessary rules for

the implementation of competition provisions within three years of the

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entry into force of the Agreement. Accordingly, the Romanian
Competition Law was adopted even earlier, in 1996, and entered into
force in 1997.

The application of the competition acquis prior to the closure of

the negotiations was not only an EU requirement for Romania and other
Central-East European accession countries but also a necessity in order
to help companies to adapt well before the date of accession in order to
be able to withstand the competitive pressures of the internal market.
No transition period was granted to Romania since failure to properly
apply competition acquis could have jeopardized the proper functioning
of the internal market.

1.1. Building a competition regime in Romania

Against this background, an institution competent to strictly

enforce the competition rules had to be established. The institution
started its activity on 6 September 1996 with the elaboration of the
regulations required to ensure the enforcement of Competition Law. The
competition authority was defined as an autonomous administrative
body whose activity had two main objectives:

ƒ a preventive one, aimed at monitoring markets and supervising

the actors operating therein; and
ƒ a corrective one, aimed at re-establishing and consolidating the
development of a normal competition environment.

However, the creation of a competition authority is only the

starting point for building, on its own activity, its credibility. The
provisions related to the revision of the Romanian Constitution
acknowledge that “Romania is a market economy, founded on free
initiative and competition”, private ownership being guaranteed and
unchallengeable. It is true that stipulating the role of competition within
the fundamental law of a State is not a compulsory condition in order to
apply the rules of the competition authority, but it highlights commitment
by the political establishment. It confirms that the competition principles
are at the root of economic policies in Romania.

But the mere creation of a competition authority has not been

enough to provide substance to national legislation or to make it fully

411
operational. Since its entry into force in 1997, competition legislation has
required adjustments in order to adapt the national economy to the
requirements of accession to the European Union.

In December 2003, the Competition Council established by law

remained the sole Romanian Competition Authority, as an independent
and autonomous body, provided with institutional structures at local
level, consisting of representatives in Bucharest and in 41 counties of
Romania.

The law was revised extensively, eliminating unnecessary

notifications of exempted agreements, increasing the turnover
thresholds for merger notification, enforcing the publication of decisions,
increasing the sanctions for companies refusing to cooperate with the
Council, allowing for sanctions to be adopted with the same decision
that identified a violation of the competition rules. The Competition
Council was also entrusted with the application of the Leniency Policy
with regard to cartel cases. Furthermore, the discriminating regime for
the autonomous régies and State-owned undertakings, as compared to
other undertakings, was eliminated through the amendments brought
into law in November 2004. Last but not the least, the necessity of a
Court authorization for dawn raids was abolished.

This not only contributed to the fulfilment of the accession

criteria on competition, but most of all, it determined the sustainability of
the Romanian economy. The new responsibilities and powers provided
by the legislative framework considerably strengthened the Competition
Council’s role of overseeing and protecting the correct functioning of the
market economy. As a result, the Romanian Competition Law now
covers the principles of EC antitrust rules as regards restrictive
agreements, abuse of dominant position and economic concentrations.

While the adoption of the legislative framework on antitrust and

State aid was, to a great extent, a technical process that did not face
major obstacles, the most important and challenging task for Romania
was the foundation of a well-functioning competition authority. Thus,
besides providing the competition authority with adequate legislative
tools, a substantial strengthening of its administrative and operational
capacity was required.

412
 It was crucial to make the competition authority totally
independent. The main characteristics of such an independence were:
the competition authority had to have the appropriate legal instruments
to act against companies and public institutions that breached the
competition rules; the authority’s decision-making body had to be
approved so as to ensure that no political pressure was exercised over
its actions; and the staff of the authority had to be highly qualified and
sufficiently motivated.

Another challenge for the Romanian Competition Council

(RCC), as a young institution emanating from the economic reform
process, was to create adequate and effective relations with other public
authorities and to establish a real and constructive inter-institutional
dialogue. It is for this reason that competition advocacy has played a
crucial role in the enforcement process in Romania. Central and local
public institutions had to be, at least in broad terms, familiarized with the
main principles of the competition law so as to avoid implementation of
measures that could be harmful for competition. The business
community had to be made aware not only of the risks they face in
breaking the competition rules, but also of the possibility to address the
competition authority or, to some extent, the court if another economic
operator breached competition rules and caused them harm. The courts
had to be aware of the competition legislation as undertakings, harmed
by other undertakings, can bring the latter before the court to recover
the damages under civil law.

Through its continuous advocacy activities, the Competition

Council has clarified the rules of the game for Romanian society and
ensured the necessary climate for setting up the mechanisms of a
functional market economy.

A review of the operations of the Competition Council over the

last decade shows that, without a fully functional competition authority,
market rules are significantly distorted. It shows also that, without such
an institutional mechanism, competition policy-based corrective
measures cannot be introduced, thus jeopardizing the long-term
benefits of competition policy both for private business and for the
general economic growth of Romania.

Since the very beginning of its activity, the RCC has made full
use of its legal powers, including the power to carry out dawn raids, and

413
 has concentrated its resources on the most serious distortions of
competition. Thus, 3,302 decisions were issued from 1997 to 2007, of
which 42.2 per cent represented merger decisions (Table 1, Graph 1).

Table 1: The increasing trend in the number of decisions issued by the

Competition Council in 1997–2007

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Total

Total number 44 138 520 559 510 423 482 248 161 154 63 3,302
of decisions
reached
Economic 6 45 140 200 169 157 247 165 115 106 45 1,395
concentrations
Complaints 10 15 11 32 23 48 26 18 11 8 4 206

Negative 5 6 9 9 5 6 16 5 4 0 4 69
clearance
Individual 0 1 0 0 1 0 0 2 0 1 1 6
exemptions
Block 4 19 312 256 163 119 22 2 0 0 0 897
exemptions
Sanctioning 4 9 13 16 64 42 114 50 25 25 3 365
decisions463
Other types of 15 48 40 60 147 81 126 52 26 37 9 641
decisions

Graph 1: Structure of decisions issued by the Competition Council from

1997 to 2007

1 7.9% 3 9.0 %
1 0.2 %

25 .1% 5 .8%
0.2% 1.9 %
E c on o m ic con cen tra tion s C om p lain ts N e gativ e clea ran ce d ecision s
In d iv id u al exe m p tion s B lock ex em p tion s S an ction in g d ec ision s
O th er typ es of d ec ision s

463
These refer to sanctions for both substantive and procedural infringements.

414
 In the work of the Romanian competition authority, the gradual
transformation and re-concentration of the partially privatized market
structure became apparent in 1998. This was partly attributable to global
effects, as some of the mergers reflected the results of concentrations
abroad on the Romanian market, while others were essentially
Romanian phenomena, irrespective of the owner being Romanian or
foreign. This was reflected in the notable merger wave in Romania
between 2000 and 2006. This wave covered a major part of the
economy, for instance, the energy sector, public services, metallurgy,
the chemical industry, food and beverages, telecommunications, the
banking sector and trade. All types of concentration were present at this
stage, with horizontal concentration dominating, but there were also
some vertical and conglomerate-type concentrations.

Fines imposed by the Competition Council for infringements of

Competition Law in the 1997–2007 period amounted to 271.5 million
RON, i.e. around 78 million Euro (see Table 2). This figure confirms that
a systematic and conscious fining policy was drawn up and put into
practice by the Competition Council over its ten years of existence. The
increased total of fines recorded in 2005 can be partially attributed to the
fact that more hard-core cartels were discovered in that year. From
2006, the decrease in the number of anti-competitive practices
confirmed a better understanding by the business community that
competition was the engine of its affairs.

415
Table 2: Evolution in the amount of fines imposed by the Competition
Council in 1997–2007*

Amount of fines Amount of fines (Euro)

(RON)
1997 76,900 95,045
1998–2001 1,354,400 678,702
2002 42,394,180 13,563,859
2003 3,684,680 981,120
2004 8,590,420 2,119,411
2005 159,753,750 44,088,998
2006 55,235,000 15,671,726
2007 457,061 1369,55
Total 271,546,391 77,335,816
*The estimation of the value of fines in Euro is based on the average
annual exchange rate RON/Euro supplied by the National Bank of
Romania.

To sum up, the stages followed by Romania in order to improve

its competition regime were:

- a legislative framework on antitrust and State aid was adopted

and subsequently modified to adopt the EU rules;
- an independent competition authority was established and
equipped with highly qualified staff and appropriate technical
equipment;
- a credible enforcement record of the EU rules on competition
has been ensured with the support of other stakeholders, such
as public authorities, judiciary and the business environment.

1.2. Case law

Competition Law applies to anti-competitive practices by private

commercial operators and State-owned enterprises, including
commercial companies where the State is a major shareholder. The

416
 464
main substantive elements of the law are provided by Art. 5 – anti-
465
competitive agreements – and Art. 6 – abuse of dominant position.

Romanian Competition Law provides in a distinct chapter the

control of economic concentrations, following the model of the European
Council Regulation (EEC) No. 4056/1983, having as its objective the
prohibition of any economic concentration that creates or strengthens a
dominant position that would significantly impede effective competition.

The merger control rules contained in the Competition Law are

detailed and expanded through its secondary legislation, in regulations
and guidelines.
466
The economic concentrations – transfer of the ownership or
the use of assets, rights and obligations of an undertaking through

464
Art. 5 of the Romanian competition law no. 21/1996, which is similar to Art.
81 of the EC Treaty, prohibits any express or tacit agreements between
undertakings or associations of undertakings, any concerted practices or
decisions by the associations, which have as an object or as an effect the
restriction, prevention or distortion of competition in the Romanian market or in a
part of it. The most serious infringements are the cartels, allocation of market
power and other practices that prevent the proper functioning of the market. The
Competition Council may grant, by decision, exemption for individual cases of
agreements, association decisions or concerted practices, and establish (by
regulations/guidelines) exemptions for certain categories of agreements,
association decisions or concerted practices.
465
Art.6 of the Romanian Competition Law, which is similar to Art.82 of the EC
Treaty, prohibits certain unilateral conduct that jeopardizes competition.
According to this article, any abuse of a dominant position held by one or more
undertakings in the Romanian market or in a substantial part of it, by resorting to
anti-competitive deeds, which have as an object or may have as an effect the
distortion of commerce or the prejudice of consumers, is prohibited.
466
A concentration is subject to the Competition Council's control and it must be
notified if the aggregated worldwide turnover of the parties to the concentration
exceeds EUR 10 million and the turnover in Romania of at least two of the
participating undertakings exceeds EUR 4 million. The economic concentrations
may be authorized if, when analysing them pursuant to the criteria provided for
in the Competition Law, they are compatible with a normal competition
environment, and if the involved undertakings prove that they fulfil cumulatively
certain conditions such as increase of the economic efficiency and of the
competitiveness of exports, and benefits for consumer through reduced real
prices.

417
merger or through a direct or indirect acquisition of control over one or
more undertakings – are prohibited to the extent that they create or
consolidate a dominant position and lead to or are likely to lead to a
significant restriction, prevention or distortion of competition in the
Romanian market or in a part of it.

1.2.1. Ministry of Internal Affairs/RASP/Tuingdor/Mitsubishi, Decision

no. 127 [1998]

Keywords: Driving license photos, horizontal agreement,

467
vertical agreement, abuse of dominance, Article 9(1)

Facts: This case came to the attention of the Romanian

Competition Council following a large number of complaints alleging
infringements of the competition law in the market for driving license
photos.

The investigation undertaken showed that a contract for driving

license photos had been signed between the Ministry of Internal Affairs,
and the Regie for the Administration of the State Protocol (RASP), on
the one hand, and Tuingdor SRL (Tuingdor) and Mitsubishi Electric
Europe GmbH (Mitsubishi), on the other. According to this contract,
Tuingdor, the exclusive distributor of Mitsubishi in Romania, had been
granted exclusive rights to establish a network of photographers in the
entire national territory, using exclusively Mitsubishi equipment. The
Ministry of Internal Affairs refused photos where Mitsubishi supplies
were not used. Moreover, the contract set a maximum price for the
photos. It has to be mentioned that the computerized system issuing the
driving licenses had been introduced by a contract signed between
RASP and the Ministry of Internal Affairs, and, in the contract between
the Ministry of Internal Affairs and Canadian Banknotes Overseas Ltd,

467
Art. 9(1) Any actions by the central or local public administrative body that
have as an object or may have as an effect the restriction, prevention or
distortion of competition are prohibited, especially when:
a) making decisions that limit the freedom of trade or the undertakings’
autonomy which are being exercised under the law;
b) setting discriminatory business conditions for undertakings.

418
none of those contracts referred to the photos required for the newly
introduced driving licenses.

Tuingdor established a network of photographers, initially in

Bucharest and in the county capitals, which extended to around 150
photographers. The contracts between Tuingdor and each of the
photographers provided for exclusive usage of Mitsubishi equipment,
supplies and seals distributed by Tuingdor. The photographers also took
it upon themselves to sign a service and maintenance contract with
Tuingdor, for both the warranty and post-warranty periods. In cases
where photographers used Mitsubishi equipment not acquired from
Tuingdor, only post-warranty services were provided, on condition that
the photographer acquired an initial technical evaluation and a minimum
quantity of supplies.

In order to ensure the origin of the photos, Tuingdor introduced

a “Mitsubishi seal” applied on the photos. Such a seal was unnecessary
in terms of photos issued for drivers' licences. Its only use was to certify
that it had been issued by an authorized photographer. It is worth
mentioning that the price of the seal had to be paid by the final
consumer.

Definition of relevant market:

The relevant product market was defined as the market for
driving license photos, as there was no substitute between this type of
photo and any other type of photo. The geographic dimension of the
market was defined at the national level. Moreover, the anti-competitive
behaviour of the parties involved affected the market for video printing
equipment and supplies.

Harm on competition:
The Competition Council found that Tuingdor, Mitsubishi and
RASP infringed the provisions of Article 5(1) of the Competition Law by
concluding and implementing an anti-competitive agreement, having as
its purpose to eliminate competition from other photographers; oblige
photographers to acquire only a certain type of equipment and supplies;
limit the access of other distributors to the market, as well as to limit
parallel imports.

The Competition Council also found that Tuingdor infringed

Article 6 of the Competition Law by abusing its dominant position in the

419
relevant market, by indirectly setting retail prices, especially through the
price of the “Mitsubishi seal”; tying sales, forcing photographers to
acquire service and maintenance, beside equipment and supplies;
exploiting the dependency of its clients, as it had the right to unilaterally
extend or denounce the contract when photographers did not hold
similar contractual rights.

The Competition Council decided that the Ministry of Internal

Affairs had infringed Art. 9 of the Competition Law, as it unnecessarily
limited trade freedom and introduced discriminatory rules related to the
activity of undertakings by awarding exclusivities with regard to the
photo equipment and supplies used for driving license photos.

Enforcement measures:
Tuingdor, Mitsubishi and RASP were sanctioned with fines. The
Competition Council decided also that Tuingdor had to give the State
budget the profits it obtained as a result of anti-competitive behaviour.
The decision of the Competition Council annulled both the contract
regarding the photos for the driving licenses and the contracts between
Tuingdor and the photographers.

Appeal proceedings:
The involved parties appealed the decision. The Bucharest
Court of Appeal, as the first instance court, ruled by entirely rejecting the
Competition Council’s decision. In its judgment, the Bucharest Court of
Appeal stressed that the decision was issued before the infringement of
the provisions of competition law had been adopted and signed by the
entire Plenum of the competition authority, as the law stipulated. Also,
the ruling stated that Tuingdor and Mitsubishi did not infringe Article 5
since there was no anti-competitive agreement because, at the time
when the contract was concluded, the competition law was not in force.

The Competition Council appealed the Bucharest Court of

Appeal’s ruling before the High Court of Cassation and Justice. The
Supreme Court ruled that the ruling given by the first instance court was
illegal and unsubstantiated and that the Competition Council’s decision
was legal. Thus, the court stated that the decision was legally adopted
by the Plenum, one of the members being replaced during his absence
by the Vice-President of the competition authority who was legally
appointed. Moreover, the court concluded that the parties implemented
an anti-competitive agreement, having as its purpose to eliminate

420
competition from other photographers and to oblige photographers to
acquire only a certain type of equipment and supplies.

Harm on consumers:
This is a case where the award of exclusive rights by a State
authority to a single company affected not only the companies operating
on the downstream level but also the consumers through tying sales
and higher prices than those that would have been established in
conditions of competition. Also, despite the presence of the corruption
issue in this case and the non-responsibility of the Romanian
Competition Council to produce such evidence, it strove, however, for
the opening of the respective markets to competition for the benefit of
consumers.

1.2.2. Romanian Shareholders Registry (RSR), Decision no. 247 [1999]

Keywords: abuse of dominant position, refusal to deal, unequal

terms for equivalent services to trade partners

Facts: This case reflects the attempt of a dominant company to

hinder the entry of other companies to the market. Several well-
conceived behavioural measures that were imposed on the incumbent,
apart from the sanctions, played an important role in the re-
establishment of a normal competitive environment in the relevant
market.

The case came under the competition authority’s scrutiny as a

result of the complaint filed by seven independent stock registers
against the RSR. The complaint related to the RSR’s refusal to transfer
the registers of shareholders from the client companies.

The RSR was set up in 1996 as a stock company, with the

financial and logistical support of USAID, and took over, unconditionally
and without charge, shareholder lists held by the National Agency for
Privatization in a computerized register. This register included about
5,700 companies. During 1997–1998, the Romanian National Securities
Commission authorized another ten private independent register
companies to operate in this market.

421
 468
At that time, according to the specific legal framework , the
RSR was bound to transfer to other independent private register
companies the shareholder lists, within a five-day period from the day of
registering the company’s request. The transfer should have been
executed unconditionally, except in the case when the issuer company
is bound to pay to the register company the charge for the services
provided by it. If contractual relations were binding the issuer company
and the register company, the transfer had to be executed
unconditionally and without the imposition of a charge for that service.

Definition of the relevant market:

In this case, the competition authority defined the relevant
469
market as the market of registering services on RASDAQ . This
service did not have substitutes at that time. Beneficiaries of this service
were companies listed on RASDAQ which had the legal obligation to
keep a shareholder's register, as well as the proof of shares issued and
traded in this market.

Harm on competition:
From the analysis carried out on this market, the Council found
that in 1997, the RSR held a dominant position, determined by its
market share, i.e. 100 per cent, and in the following year, the RSR held
a market share of 96.4 per cent. The RSR owed its high market share to
the circumstances of its establishment mentioned above.

The investigation established that, once the other private

independent register companies entered the market, client companies
could either continue to use the services provided by the RSR, or
transfer their shareholder list to another private Register Company.
However, only 236 of 585 companies that had requested the transfer
effectively accomplished it. The explanation for this lies in the RSR’s
discriminatory behaviour. Thus, while for several companies that had
not concluded a contract with the RSR, the transfer was executed
unconditionally, in other cases client companies were compelled to

468
The regulation of this market is accomplished by the Romanian National
Securities Commission (RNSC).
469
RASDAQ (The National Securities Market was officially launched in October
1996, in order to address the need for a transparent, institutional and technical
trading environment dedicated to companies that had become public following
the Mass Privatization Programme).

422
conclude a contract in order to have their shareholder lists transferred.
Moreover, the RSR ceased charging for the services performed for the
companies that consented to enter into a contract. If client companies
did not follow through with their intention to transfer, the RSR wrote off
their debts.

Thus, the Competition Council found that the RSR abused its
dominant position by imposing unfair contractual terms in contracts
concluded with beneficiaries. The abuse consisted also in the refusal to
deal, namely by refusing to transfer shareholder lists to the independent
private register. The RSR’s action of imposing conditions on the
transfer’s execution with the payment for services allegedly performed
prior to the conclusion of the contract resulted in either the foregoing of
the transfer and entering into an agreement with the RSR, or the
transfer’s execution, but at a higher cost and in a longer period of time.
The Competition Council also found that the RSR applied a
discriminatory treatment to the issuer companies.

In that sense, the following anti-competitive practices were

identified: charging different tariffs for similar services; coercing the
issuer company to conclude a contract, while other companies, under
the same circumstances, had their transfer unconditionally executed;
requiring payments for services performed outside any contractual
relations.

Enforcement measures and remedies:

In its decision, the Competition Council’s Plenum sanctioned the
RSR for the infringement of Art. 6 lit. a) and c) of the Competition Law.

In order to re-establish a normal competitive environment in the

affected market, the Competition Council’s Plenum compelled the RSR
to allow transfers in strict observance of the RNSC regulations, without
imposing additional conditions. The Competition Council also forbade
the RSR to grant additional facilities, other than those laid down in the
contract, when the issuer companies expressed the intention to transfer
their lists to another register company, so as to prevent or to limit the
client’s transfer to other register companies.

423
1.2.3. National Agency of Mineral Resources/National Company of
Mineral Waters/APEMIN, Decision no. 575 [2000]

Keywords: horizontal agreement, vertical agreement, Article

9(1), mineral water.

Facts: The case came to the attention of the RCC upon

receiving, almost simultaneously, a request from the Ministry of Industry
and Commerce (MIC) and a complaint from the National Company of
Mineral Waters (NCMW). Both the MIC and the NCMW requested the
470
intervention of the Romanian competition authorities in solving a
contractual litigation between the NCMW and 19 companies bottling
mineral water regarding a price increase proposal made by the NCMW
for the extracted mineral water.
On the one hand, the 19 companies, members of APEMIN, i.e.
an employers’ association composed only of companies operating in the
mineral water bottling field, that refused to accept the price increase
proposal, decided to empower the chairman of the association to
negotiate a different price level. On the other hand, the NCMW, which
holds a quasi-monopoly for the activity of extracting mineral water,
claimed that in the last 3 years, i.e. in 1997–1999, the price had not
suffered any modification and that its proposal for a price increase was
based on its increased expenses.

The analysis of the product market evolution after 1990

emphasizes certain characteristics:
• Until 1990, companies that traded mineral water were
subordinated to a central administrative body, according to the
existing system at that time. These companies were responsible
for the extraction, bottling and trading process for mineral water.
• In 1990, the extraction activity was separated from the bottling
and trading activities. The extraction activity was entrusted to an
autonomous regie (RAMIN) and the bottling State-owned
enterprises were reorganized into trade companies under the

470
The competition legislation in force at the time of the infringement provided
for two competition authorities, namely the Competition Council as the
autonomous investigation and decision-making authority and the Competition
Office, the governmental body entrusted only with investigative powers.

424
 privatization process but maintained their object of activity.
• Through this separation, a new market was created, having as
its objective the trade of the extracted mineral water between
RAMIN and the bottling companies.
• The reform evolution, mirrored also in the legislation, triggered
the privatization of RAMIN and its subsequent conversion into a
trade company (the NCMW) in December 1997.
• State interests in the mineral resources field are represented by
the National Agency of Mineral Resources (NAMR).
• Mineral water resources are considered State public property
and the extraction activity can only be licensed or given into
administration by the NAMR to companies extracting mineral
water.

Definition of relevant market:

• The market regulation and organization at the time of

investigation show that the NCMW held a quasi-monopoly for
the activity of extracting mineral water.
• As a raw material, mineral water cannot be substituted by the
bottling companies with any other product.

As a result, the Competition Council found that the relevant

product market is the extracted mineral water market, traded as raw
material between the NCMW and the bottling companies.
With regard to the geographic market, both the supply and the
demand are located near each mineral water source, with only one
existing supplier and one buyer. The mineral water extracted from a
specific source can only be used by a single bottling company. It can
therefore be argued that each mineral water source can be defined as a
separate geographic market. However, the Competition Council found
that all those alleged local markets have common features, such as the
same selling company, similar exploitation technology, and similar
products. Based on those facts the Competition Council defined the
geographic market at the national level.

The analysis of the NCMW’s monopolist behaviour showed that:

• The NCMW reached an administrative monopolistic position,
not a real one based on its own forces. Furthermore, it did not
benefit from economic and financial strength so as to exercise
market power.
425
 • The customers rely on the NCMW, but in turn, the NCMW relies
on the mineral water buyers, since the contracts concluded with
the bottling companies have a long validity term (20–25 years,
according to the duration of the concession obtained by the
NCMW from the National Agency for Mineral Resources), and
the mineral water cannot be stocked. If the contractual relations
were broken, the NCMW would not have an immediate
alternative for selling the water to a different customer, the
investments located close to the mineral water source being
mandatory and quite substantial.

As can be observed, the elements of this analysis did not

highlight a potential abuse of the dominant position of the NCMW.

Harm on competition:

a) A written agreement represented by a “Negotiation Note”

concluded between RAMIN and APEMIN was found during the
investigation and considered illegal; first, this agreement, dated August
1997, was signed on behalf of APEMIN, only by some of its members
who held the largest market shares. Second, all contractual transactions
concluded between RAMIN and the bottling companies, members and
non-members of the association, provided for the same price fixing of
the mineral water.

b) The agreement lasted until the spring of 1999, when the

NCMW, RAMIN’s successor came up with a proposal for a price
increase and decided to start price negotiations with each bottling
company. Accordingly, some of the APEMIN members decided, within a
series of general extraordinary assemblies, not to accept the increase in
price proposed by the NCMW. Moreover, they empowered the APEMIN
chairman to negotiate a different price for mineral water on behalf of
APEMIN members and if the NCMW did not accept, to proceed in
boycotting the NCMW by ceasing payments.
Even if the minutes of the general assemblies had been signed
with no objection by the representatives of APEMIN’s members,
subsequently, some of them consented to sign additional documents
modifying the price to the level suggested by the NCMW, and others
paid the increased price.

426
 c) The NAMR permitted the concession of the mineral water
sources exclusively to a single company, the NCMW, without organizing
a public tender. This was contrary to the letter and spirit of the law that
stipulated that the concession should be granted to the winner of a
public tender. This led to the perpetuation of the existing monopoly in
the market of mineral water as a raw material, for a period of time
difficult to assess, given that the NCMW’s water sources represented
approximately 96 per cent of the exploited sources.

d) Since 1998, the NAMR granted the concession of other

sources by tender, the winners being both the NCMW and other trading
companies. The concession price, i.e. the royalty cashed by the State
through the NAMR, was calculated as a percentage of the value of
tradable mineral water.

Therefore, the NCMW had been advantaged as it had to pay a

royalty calculated on the basis of the price of the mineral water sold as a
raw material while the few bottling companies that were licensed
eventually to extract the mineral water had to pay a royalty calculated on
the basis of the sale price of the bottled mineral water bearing in mind
that any new company entering the field leased the spring for bottling
the mineral water and selling it for consumption.

Enforcement measures:
The Competition Council decided that both the vertical and
horizontal agreements infringed the provisions of Article 5(1) of the
Competition Law, ordered the cessation of the anti-competitive practices
and sanctioned with fines the NCMW and the 19 bottling undertakings
that were members of APEMIN.
The Competition Council also decided that the NAMR infringed
the provisions of Article 9(1) of the Competition Law by directly allowing
the concession of mineral water sources to the NCMW (with no tender
being held) and establishing discriminatory conditions for the
undertakings involved in the concession of sources on aspects
concerning the payment of royalties.

The impact on consumers:

The concerted action of the members of APEMIN led to the
creation of a monopsony. If we look at this case from the economic
theory perspective, we can see that the monopsony power cancelled to
a large extent the monopoly power and this in fact prevented the

427
increase in the price of extracted mineral water, which would have
eventually triggered higher prices for consumers. Moreover, the
enforcement measures taken against the decision of the state
authorities at that time to award the mineral water concession to a single
company, the NCMW and not, for example, to each bottling company,
and to establish discriminatory conditions for the undertakings involved
in the concession of sources on aspects related to the payment of
royalties, had also a positive indirect impact on consumers. The
concessionaire companies, other than the NCMW, were acting in the
market of trading the mineral water for direct consumption, in
competition with NCMW clients and they were required to pay a royalty
approximately 30 times higher than the NCMW. Accordingly, this higher
royalty converted itself into a price increase of bottled mineral water that
put the burden on consumers.

1.2.4. LAFARGE /HOLCIM /CARPATCEMENT, Decision no. 94 [2005]

Keywords: oligopoly, collusive agreement, cement market

Facts: In March 2001, the Competition Council opened an ex officio

investigation into the cement market. One of the main triggering events
behind this action was a significant and simultaneous increase in
cement prices in the specific market operated by the local cement
producers. The investigated parties were: Lafarge (member of the
French Group LAFARGE), Holcim (member of the Swiss Group
HOLCIM) and Carpatcement (member of the German Group
HEIDELBERGCEMENT).

The three cement companies operated in the Romanian cement market,

each of them controlling three homogeneously spread cement plants.
This indicated an oligopolistic market structure, favourable to anti-
competitive practices. The only competition the three cement producers
faced was represented by imports, which accounted for 2 per cent of the
market.

Harm on competition:
All three undertakings were accused of infringing Art. 5(1)(a) of the
Competition Law. The evidence showed that the activities of the three
st
undertakings (in the period analysed, 2000 – 1 quarter 2004), had as
scope (respectively as “object”) and had as a result (“effect”) the

428
restriction, prevention and/or distortion of competition in the Romanian
cement market.
471
In addition to the written evidence on the illegal agreement , evidence
on the market irrefutably showed the real effects of these activities:

• All Romanian cement producers behaved in the same way by

setting prices during the analysed period. This refers to the price lists
whereby they offered reference prices to be discounted by the
companies in order to obtain and maintain equal market shares.
• The market shares were kept constant and symmetrical, despite
differences between production costs.
• During the analysed period, cement prices constantly increased,
even if the real production costs were decreasing, due to investments to
modernize the plants.
• When the investigation was opened, there was another player
on the relevant market, Romcif Fieni, which was controlled by a
Romanian company. After the investigation began, Romcif Fieni
reduced its prices and maintained this downward trend until October
2001 when it stabilized the prices, which remained constantly lower than
those of its competitors. This “asymmetry” was changed at the end of
2002 when Romcif Fieni was acquired by Carpatcement. Carpatcement
then raised prices for the cement produced at Fieni by 30 per cent,
adjusting them to the price margin of its competitors.
• During that period, the three companies were members of the
Professional Cement Association – CIROM. Although the professional
associations are generally legal and play a positive role, this is not the
case when they are used for anti-competitive purposes. CIROM
published a quarterly bulletin comprising sensitive and detailed
information, including individual statistical data regarding each cement
plant. The “CEMENT Committee” in the Cement Professional
Association had as members only the three cement producers.

471
A holographic copy of a note from Holcim’s country manager in that period.
This note proves the existence of a common strategy, a collusive agreement
between all cement producers, with a view to coordinate the market shares by
price-fixing practices.

429
Enforcement measures:
In May 2005, the Competition Council decided to impose fines of over
27 million euro on the three cement producers, considering that all three
undertakings were members of a price-fixing cartel in the Romanian
market.

The Competition Council also decided to annul the CEMENT Committee

in order to stop the possibility of concluding collusive agreements. The
decision required each producer to provide a monthly submission of
cement prices for the prior month, for a period of 2 years.

The investigation also found that HOLCIM infringed the provisions of the
Law for the non-fulfilment of the obligations and the conditions imposed
through the conditional authorization Decision no. 221/08.05.2000
issued by the Competition Council. Holcim was sanctioned with a fine of
1 per cent of the total turnover achieved in the previous financial year.

Harm on consumers:
It is worth noting that companies that are members of the groups that
operate in the Romanian cement market behaved in an anti-competitive
manner in other countries. For instance, in 1994, the European
Commission levied fines of 248 million euro on six companies and the
cement manufacturers’ association. The parties involved used the
European Association of Cement (Cembureau) as a vehicle for market
allocation and exchange of information on prices. In judicial appeals
finally decided in January 2004, the fine was reduced by 140 million
euro, and the fine on the trade association was quashed. These six
included Lafarge and Holcim. Lafarge was fined 187 million euro by the
EC in 2003 for participating in another cartel, the third largest fine ever
levied for being a regular offender. In Germany, the competition
authority sanctioned a cartel in the cement market, in which companies
of the Lafarge and Heidelbergcement Groups were involved. The Italian
Competition Authority applied fines to the same companies for anti-
competitive behaviour in the concrete market, including price fixing and
illegal exchange of information. The list is endless and only goes to
prove that the reiteration of this kind of behaviour is possible and even
occurred in the Romanian market. Cement enterprises are the most
favoured of competition authorities around the world because they
almost always collude as a cartel and fix prices, thus adversely affecting
consumers and other businesses.

430
Apart from the sanctions applied, the impact of the RCC’s intervention in
such an important market for the development of the Romanian
economy had immediate and positive effects: the price fell by 6 per cent,
even if the construction materials sector had an upward trend.

1.2.5. National Company for Freight Railway Transport “CFR Marfa”

Decision no. 119 [2006]

Keywords: abuse of dominant position, refusal to deal, unequal terms

for equivalent services to trade partners, railway freight transportation
Facts: This is a case where private companies as competitors of a spin-
off owned by the State were disadvantaged in the market by having to
pay much higher charges than the companies that had split from the
former National Company of Romanian Railroads. The settlement of the
competition issues that arose in this case was made through sustained
advocacy measures of the Romanian competition authority that
triggered the amendment of the anti-competitive provisions of the legal
framework in force.

Through a complaint lodged by the Association of Romanian Private

Freight Railway Transport (ARPFRT) Companies against the National
472
Company for Freight Railway Transport ("CFR Marfa"-SA ), ARPFRT
accused CFR Marfa of anti-competitive practices. In fact, ARPFRT
claimed that CFR Marfa took advantage of its dominant position in the
market of ancillary services to freight railway transport. It adopted
several decisions whereby it imposed on the private-owned freight
railway operators, organized in ARPFRT, different tariffs from those
charged to the State-owned operators. CFR Marfa refused to deal any
further with private operators on the grounds that they were its
competitors.

Definition of relevant market:

In this case, the analysed product market included services of
exploitation, maintenance, and repairs of locomotives, specific services
for locomotive personnel (access of locomotive personnel to bedrooms

472
CFR Marfa is a spin-off owned by the State, set up after the reorganization of
the former National Company of Romanian Railroads, operating freight railway
transport.

431
in the locomotive depots), and all the other activities required for the
proper functioning of railway freight transportation.

The relevant geographic market was defined as regional given the

location of regional units owned by CFR Marfa where it performed these
services.

Entry barriers:
Access to the relevant market was regulated, in the sense that it
required a license to be obtained from the Romanian Railway Authority.
In addition, the locomotive shedding required a depot; the same
requirement was applied for the provision of the locomotive personnel’s
access to bedrooms, as for the personnel accommodation in other types
of space that would have contravened the specific legal framework.

The Competition Council’s investigation revealed that, initially, the

current depots were in the possession of the two State-owned railway
operators, namely CFR Marfa and CFR Calatori (passengers transport).
For that reason, the market had the structure of a duopoly and the
clients had the possibility to opt for the services provided by one of two
operators. It should be mentioned that CFR Calatori was charging much
lower tariffs than CFR Marfa. Subsequently, the Ministry of Transport
issued an order whereby the depots were passed either under CFR
Marfa’s ownership, or under CFR Calatori possession, and the market
was shaped as a monopoly, since there was only one depot in the end-
of-line stations, except for Bucharest and Ploiesti, where each of the two
companies held a depot.

Harm on competition:
Examining the behaviour of the two undertakings acting in the same
product market, CFR Marfa and CFR Calatori, the Competition Council
found that the tariffs charged by CFR Calatori were the same for all its
beneficiaries, while CFR Marfa was charging differentiated tariffs laid
down in an internal regulation, based on the beneficiary’s ownership
(State-owned or private railway operators). Following CFR Marfa’s
refusal to conclude contracts with private operators, the concerned
services continued to be provided by CFR Calatori in areas where it
possessed depots and sheds.

The non-discriminatory tariffs charged by CFR Calatori were considered

by the Competition Council to be a benchmark in the relevant market. In

432
comparison with this benchmark, the tariffs charged by CFR Marfa for
private operators were, until the contracts expired, from 5 to 20 times
higher.

Enforcement measures and remedies:

Based on all the evidence, the Competition Council’s Plenum decided
that CFR Marfa infringed the provisions of Art. 6 lit. a) and c) of the
Competition Law, abusing its dominant position in the relevant market
and resorting to anti-competitive behaviour consisting of:

• application of unequal conditions for similar services to private

operators, namely the application of distinctive charges as
compared to the same services provided to former SNCFR
companies;

• refusal to deal with certain business partners, namely privately

owned railway freight operators.

The Competition Council’s Plenum decided to recommend that the

Ministry of Transport modify the order whereby the existing depots were
divided between State-owned railway operators and private operators,
demanding the Ministry to guarantee equal conditions for all
undertakings, irrespective of their nature.

1.2.6. OMV/Petrom SA, Decision no. 299 [2004]

Keywords: corrective measures, commitments, acquisition, petrol

market.

Facts: On 23 July 2004, the Ministry of Commerce, as seller, and the

Austrian undertaking OMV Aktiengesellschaft (OMV), the owner of OMV
Group, as buyer, concluded a privatization contract regarding the
acquisition by OMV of a majority participation in SNP PETROM SA and
of sole control of this undertaking. This operation was notified to the
Competition Council.

OMV is the parent company of an international group of undertakings

acting mainly in the area of exploring, producing, processing and
distributing petrol products. In addition, at the international level, OMV
has joint control with Rompetrol Holding SA Switzerland over Rompetrol
433
Group N.V. Holland, the parent company of the Rompetrol group of
companies, operating in the Romanian petrol market. Petrom is a
diversified undertaking that operates in Romania and also in
international markets in exploring, developing, producing and selling oil
and natural gas; processing and distributing refined petrol products;
developing, producing and selling various chemical products and
chemical composts.

Since the acquirer OMV has joint control over Rompetrol Group N.V.
Holland, a real overlap existed between the activities of Petrom that
were presented above, and the activities of OMV and Rompetrol in
Romania, only regarding the following activities: oil refining and
processing, distributing and selling petrol products, selling lubricants,
producing and selling petrochemical products.

Harm on competition:
Analysing these four activities and the associated markets, the Council
found that the concentration OMV/Petrom restricted competition only in
two of these markets, as a result of the important market shares held by
the parties involved: the oil refining and processing market (Petrom and
Rompetrol) and the market for the distribution and sale of petrol
products (OMV, Petrom and Rompetrol).

Commitments:
In order to avoid restricted competition in these two affected markets,
OMV submitted to the Romanian Competition Council proposals of
commitments. Thus, OMV committed itself to relinquish joint control in
Rompetrol Group N.V. Holland, by selling its minority participation. Also,
until the sale of its shares, OMV was not to participate in decisions
regarding the daily activities of Rompetrol Group N.V. Holland, which
might have an impact on the competitive behaviour of this undertaking.

The RCC’s review of the commitments envisaged the prevention of a

possible consolidation of a dominant position in the affected markets.
The divestiture of minority shareholdings was therefore considered an
adequate and sufficient commitment in order to clear the transaction
and make it compatible with a normal competitive environment in the
Romanian market for the distribution and sale of petrol products.
Consequently, the Romanian Competition Council issued a non-
objection Decision with corrective measures.

434
1.2.7. Azomures/Chimpex, Decision 113 [2005]

Keywords: acquisition, corrective measures, chemical fertilizers

Facts: The parties involved in the economic concentration were:

– the acquirer, Azomures, holding a dominant position in the Romanian
chemical fertilizers market, according to its volume of production and
sales;
– the target company, SC Chimpex SA, the Romanian traditional port
operator for chemical fertilizers, which also held a dominant position in
the market of port operating services for chemical fertilizers and,
furthermore, for a certain type of solid chemical fertilizers (bulk urea).

Due to its storage spaces, Chimpex had a quasi-monopoly position,

being the only port operator specialized in that type of operation.

Definition of relevant market:

The relevant market has been defined as the market of Romanian port
operating services. According to the activities performed by the parties
involved, the economic concentration would lead to a vertical integration
in the Romanian market. Since both parties involved held dominant
positions in their markets, the affected market was defined as the
Romanian market of port operating services for solid chemical fertilizers.

Harm on competition:
The only competitor of Chimpex was SC Socep SA, which rented an
installation from SC Transocep Terminal SA. Azomures had joint control
at Transocep, together with other shareholders. These facts gave
Azomures the possibility to get involved in the activity of Socep, in the
segment of port operations for chemical fertilizers. After acquiring a
majority of the stock in Chimpex, Azomures would have been able, to a
considerable degree, to behave independently towards its customers
and competitors, a fact that might have led to a significant restriction,
prevention or distortion of competition in the relevant market.

Analysis of the compatibility of this acquisition with a normal

competitive environment:
The compatibility of the proposed merger with a normal competitive
environment was regarded and assessed in two directions:

435
 • the transaction’s implications for the Romanian fertilizers market
due to the vertical integration stemming from the merger;
• the transaction’s effects on the relevant market affected by the
proposed merger, i.e. the stevedoring operations of the solid
fertilizers Romanian market.

On the basis of a survey, it was found that the other stevedoring

operators either did not display any interest in performing in the future
fertilizer stevedoring services, or they were interested in re-orienting
their activity to this market, in case of an increased demand and a
developed infrastructure. Due attention was paid to the assessment of
entry barriers to the relevant market.

It was found that the entry to the relevant market depended both on the
obtaining of a license of an administrative nature and the observance of
certain compulsory norms. So, the total entry costs were considered as
medium in terms of financial investment.

Following the cumulative assessment of the compatibility of the

proposed transaction with a normal competitive environment, it was
concluded that even if the merger had contributed to the enhancement
of the target company’s economic efficiency, the positive effects of the
merger could not outweigh the negative effects of a restrained
competition that could allow the authorization of the merger.

Commitments:
In order to avoid the prohibition of the proposed acquisition, Azomures
submitted commitment proposals to the Romanian Competition Council,
in order to make the operation compatible with a normal competitive
environment. Thus, Azomures took upon itself to relinquish the joint
control in SC Transocep Terminal SA, by selling the 20 per cent
participation held in this undertaking.

The acquirer’s commitment in the form of a structural remedy made the

operation compatible with a normal competitive environment, giving
sufficient grounds for the approval of the economic concentration.

436
2. Role of competition policy and law in the regulatory reform

A large and growing number of economies are undertaking

major reforms in the area of economic regulation aimed at achieving
better regulatory outcomes in the public interest. Although there are
significant differences across countries and industries, major regulatory
reforms have generally envisaged the privatization of former State-
owned companies; rethinking universal service obligations; liberalizing
restrictions on entry, prices and business practices; and taking
measures to ensure that consumers are properly informed and
protected.

Restoring the governance of competition and free prices in

highly regulated sectors and protecting consumers against abusive
prices represents a difficult task, requiring a very broad range of
expertise and experience. In this context, competition authorities all over
the world have an important role to play. They have a vital role in
ensuring that the regulatory structures put in place are not anti-
competitive or do not create competitive distortions.

The Romanian competition law applies to all sectors of the

economy, even when these are subject to specific regulation. This
means that the Competition Council is empowered to open
investigations and to make pronouncements with regard to anti-
competitive practices and economic concentrations in all sectors of the
economy, even in the regulated ones.

The legal regulations applying to all these activities of general

interest call for the Competition Council’s specific intervention in these
markets. This intervention has a sanctioning character (ex-post) and
takes place when the regulatory authorities do not have the power to
ensure that the competition rules are observed, or fail in their preventive
intervention (ex-ante) or act in contradiction to the competition rules.

Over the last ten years, the Romanian Competition Authority

has been at the forefront in advocating extensive liberalization of the
domestic economy and has provided substantive input and support to
the design and sound implementation of competition-oriented
privatization and regulatory reforms in a large number of sensitive
economic sectors and public policy areas such as telecommunications,

437
electricity, gas, transport, construction, the steel industry, postal
services, public procurements and commercial distribution.

In Sections 2.1 and 2.2, focus will be on an analysis of two

essential sectors, i.e. electricity and telecommunications, respectively,
where preserving fair competition is considered of the utmost
importance for the development of Romania’s economy. For each of
these sectors, an analysis will be made of the structure of the markets
and of the general competition issues Romania faced in liberalizing
these two sectors. Where possible, this analysis will be upheld by
sectoral case studies handled by the Romanian Competition Council in
order to explore the actual or potential benefits of competition for
consumers, in particular, and for the development of a competitive
market environment, in general.

2.1. Competition issues in the electricity sector

The strategic role the electricity sector plays in any economy

(developed or otherwise) as well as in ensuring the welfare of
consumers/citizens is unanimously accepted. The complex reform of the
energy sector undertaken at the European Union level has also been
pursued by Romania, particularly during its EU accession process. The
heart of the liberalization process in the electricity sector in Romania
consisted of privatizing State-owned energy companies, thus creating
conditions for efficient competition and related reduction in the energy
price for consumers and in ensuring that consumers can freely select
their suppliers, the price and the quality of the product or service.

The electricity sector, as in other network industries, combines

natural monopoly activities (the transmission and distribution systems)
with potentially pro-competitive activities (the generation and supply
systems). In 1998, in order to attain the objective of creating and
ensuring the functioning of competitive electricity markets, Romania
began the process of restructuring its electricity sector. An independent
regulatory body, the National Authority for the Regulation of Energy
(ANRE), was established and the regulatory reform has advanced
significantly.

Following the example of some other European countries and

the EU Electricity Market Directives of 1996 and 2003 and the more

438
 473
recent Green Paper , the Romanian process of restructuring its
electricity sector moved through successive stages that envisaged the
vertical unbundling of generation, transmission and distribution systems
and the horizontal unbundling of some generation companies holding a
dominant position in the market. Even if it did not generate competition,
the vertical unbundling of production from transmission and distribution
was an important step in reforming the Romanian electricity sector that
provided for administrative transparency and non-discriminating access
to the network.

Thus, from 1998 to 2000, the vertically integrated State-owned

company CONEL was split into five separate State-owned enterprises:
Nuclearelectrica, for nuclear generation; Hidroelectrica, for hydroelectric
generation; Termoelectrica, for thermal power generation; Transeletrica,
for transmission; and Electrica, for distribution. Since then, the
distribution function carried out by Electrica has been further divided into
eight regional divisions: Muntenia Sud, Muntenia Nord, Transilvania
Sud, Transilvania Nord, Oltenia, Moldova, Banat and Dobrogea.

The Italian company ENEL further signed selling–buying

contracts with Electrica SA, subsequently acquiring control over three
distribution companies, namely Electrica Muntenia Sud, Electrica Banat
and Electrica Dobrogea. A similar sell-off strategy was approved for
Electrica Oltenia and Electrica Moldova. Thus, five of eight electricity
distribution companies have been privatized in Romania so far. The
other three continue to be in State ownership, but there are plans to
privatize them as well.

In accordance with current legal provisions, the privatization

process falls under the legislation of competition protection. Most of the
individual privatization acts are economic concentrations, as defined by
law, and they should be notified to and approved by the Competition
Council. The rationale is that privatization could create anti-competitive
effects through the restructuring of the markets while also potentially
enhancing efficiency. In order to establish their compatibility with the
Romanian competitive environment, all the above-mentioned operations
were notified and subsequently approved by the Competition Council.

473
European Commission Green Paper. A European Strategy for Sustainable,
Competitive and Secure Energy, EC (2006).

439
 The privatization that took place in the distribution system has
also played an important role in the restructuring of the Romanian
electricity sector. It upheld the financial development of the distribution
system, covering investment needs and promoted profit-oriented normal
market behaviour and the improvement of a competitive environment.

Furthermore, the process of creating independent generation

companies has just started to deliver significant efficiency gains, which
in the longer run can be passed on to the consumers. These gains refer
mainly to the decentralization of the less productive thermo generators
with a view to adapting the production capacities to local consumption
requirements. Thus grouping the most viable generators (the hydro
plants, the energy complexes and possibly, the nuclear producer,
Nuclearelectrica) together with other less efficient thermo generators
would create companies with similar average costs and market shares
that could successfully compete against each other. A relevant example
of horizontal unbundling is Termoelectrica. Together, the most important
entities that were spun off Termoelectrica account for about 25 per cent
of electricity production in Romania.

The restructuring process of the electricity sector has been

accompanied by the opening up of the market to competition through
the gradual increase of the competitive market. From the year 2000 to
June 2005, the opening rate increased from 10 per cent to 40 per cent.
Since July 2005, all industrial consumers have been able to switch their
supplier, even if it was anticipated that this would only happen by 1
January 2007. Romania’s market opening is 100 per cent for industrial
consumers as of 1 January 2007 and 100 per cent for residential
consumers as of July 2007.

The structure of the Romanian electricity market is promising

although the effects of competition have been limited, especially in the
generating sector. In 2007, in this market there were 22 producers out of
67 licensed operators, 7 system services suppliers, 48 electricity
suppliers in the gross market, 95 electricity suppliers in the retail market,
1 transport operator, 1 system operator, 8 distribution operators, 8
million residential consumers and 600,000 industrial consumers, able to
choose their suppliers.

440
 Regarding generation, the market structure offers a starting
point from which to judge the possible competitiveness level of the
electricity market. According to the economic theory, the following
market concentration indicator may be defined:

HHI, Herfindahl-Hirschman Index = sum of square market shares of

participants (%):

The indicator values signify:

1) HHI < 1,000 = competitive market;
2) 1,000 < HHI < 1,800 = moderately concentrated market;
3) HHI > 1,800 = highly concentrated market.

Since 2003, the annual values of the HHI based on both

installed capacity and production have been moderate, with values of
less than 1,800. More recently, i.e. in the first 11 months of 2007, the
HHI recorded a value of 1,405 in the electricity wholesale market, thus
reflecting a moderate concentration level of the market power held by
the main economic operators (Chart 2).

Chart 2: Market structure from generation perspective in the first 11

months of 2007

9.4% 27.8%
3.7%
7.7%

6.9%

12.0%

10.2%
10.7%

11.5%

Hidroelectrica SN Nuclearelectrica CET Turceni ElcenBuc CE Rovinari

EI Deva CE Craiova Termoelectrica Alţii

Source: ANRE.

441
 On the other hand, privatization of the generation sector has not
advanced and remains almost entirely State owned. The most attractive
generators, such as the hydro-generation power plants and the energy
complexes that could have been of interest for private investors are still
withheld from privatization, as they are considered of strategic
importance. On the contrary, the thermoelectric power plants that were
listed for sale several times did not attract investor interest due to their
age, outdated technology and a significant need for investment.
Nonetheless, it is planned that privatization will start in the short or
medium term with the first major power plant most likely to be the
Turceni and Rovinari lignite-fired thermal power complex, following the
reorganization of the State-owned generation player Termoelectrica.

Competition in the electric energy market faces many

constraints especially in the transition to its full liberalization. This is
attributable mainly to the particularities of the sector as well as to other
factors impacting on its functioning. For instance, it is more difficult to
define the relevant market to assess the competition in the electric
energy market than in other recently liberalized markets. Why? Because
in the case of the electric energy market, we are dealing with a
combination of different markets and different types of contracts.
According to the current legal framework, the Romanian
electricity market includes a regulated market and a competitive market
and the energy transactions can be performed through wholesale and
retail sales.

The regulated market of electricity and ancillary services works

on the basis of commercial contracts concluded between the market
players based on regulated prices. The quantities contracted through
wholesale transactions concluded between electricity producers and
suppliers are established by ANRE.

The regulated electricity acquisition contracts can be reviewed,

at the request of the supplier, as a result of the migration of the eligible
consumers and the decrease in the prognoses errors as the date to
deliver the electricity to consumers approaches. When the total quantity
of electricity decreases, the suppliers should ask the producers to
reduce the contracted quantities in the decreasing order of the prices
regulated by the contracts.

442
 However, when eligible consumers are migrating, it is less likely
for suppliers to relinquish high price quantities or to contract additional
low price quantities. In such circumstances, the additional costs or
incomes incurred by the suppliers caused by the adjustment of the
electricity quantities in the acquisition contracts are considered ex-post,
the next calculation of the regulated tariffs for captive consumers.

It appears that the mechanism to review the regulated

contracts as a result of eligible consumer migration may harm
household consumers and may lead to a distortion of competition in
the market.

The electricity competitive market is functioning on the basis of

bilateral contracts negotiated between suppliers and producers, bilateral
contracts negotiated by electricity suppliers with eligible consumers,
import and export electricity contracts, auction transactions on the spot
market and transactions of specific services.

The liberalization of the electricity market and the consumer's

option to choose between the centralized and the competitive system of
electricity delivery led to a 3.9 per cent increase in the beneficiary’s
consumption absorbed by the competitive market whereas the
consumption absorbed by the regulated system dropped by 0.7 per
cent, in November 2007, compared to that in the same month of the
previous year. The number of consumers supplied by the competitive
system increased by around 35 per cent in the same period (Table 3).

443
Table 3: Evolution in electricity consumption and in the number of
consumers supplied by the competitive system from November 2006 to
November 2007

Indicator November November %

2006 2007
Consumption within the 1,854 1,841 99.3
regulated system
(TWh)
Consumption within the 1.901 1,976 103.9
competitive system
(TWh)
Number of consumers 1,969 2,662 35.2
supplied by the
competitive system
(no.)
Source: ANRE.

In the EU-25 Member States, a comparative analysis of

electricity prices charged to industrial and household consumers reveals
that those charged to industrial consumers are lower than those
charged to household consumers. In Romania, the situation is the
opposite.

Since May 2007, the Romanian authority responsible for energy

regulation is ANRE, following the restructuring process that merged the
former National Regulatory Authority in the Electricity Field (ANRE) and
the former National Regulatory Authority in the Natural Gas Field
(ANRGN). The third-party access is regulated by provisions issued by
ANRE.

As an overall picture, the current structure of the electricity

sector in Romania reveals that all major producers are State owned
(100 per cent), five of eight distribution companies have a combined
ownership (51 per cent private, 49 per cent State owned), the transport
operator is State owned and the largest supplying companies are
private.

As shown previously, concentration in the sector is moderate

and the chances to create a competitive power sector in Romania are
genuine. The property regime, the inheritance of past regulation which
444
sought to use electricity prices as a tool for social protection, together
with the political interference in the management of State-owned
companies, have been the main obstacles to competition.

It is well known that the success of privatization is mainly

dependent upon prior restructuring, which is needed to provide a legal
background, transparency, and appropriate market conditions for
investors to enter the market. In Romania, the energy sector has seen
substantial change in recent years, as many of the old State-owned
monopolies have been restructured and privatized. The most common
method of privatization in the energy sector has been for a strategic
investor to be found. However, in the future, capital markets are
expected to play a greater role through the sale of shares on European
stock exchanges.

Privatization of the energy system in Romania was designed not

only to encourage foreign direct investment but also to allow market
liberalization and increasing competition. An important step forward was
made on 1 July 2007, when the entire EU market was liberalized, with
household consumers now being able to choose their suppliers of
electricity and natural gas. In principle, this should lead to cheaper
energy but in practice reductions in energy prices may not take place
immediately as major investments are needed in the sector, and will
subsequently be passed on to consumers. In practice, the regulation of
electricity and natural gas prices will continue and adequate measures
of protection for household consumers are permanently sought in
Romania. Low-income households, such as pensioners, will continue to
benefit from subsidies to ensure that energy consumption costs do not
exceed 15–20 per cent of their total income, according to ANRE.

A real challenge now for Romania consists in ensuring that

energy providers are accountable to their customers, with clearly
defined delivery targets and penalties for failure to meet them. Another
challenge is that its energy sector needs significant investment to bring
its technology up to date, since many installations are 35−40 years old.
According to an estimate by the Ministry of Economy and Finance, the
costs will be approximately EUR 30 billion between now and 2020,
Some EU funding is available for the Romanian energy sector for
2008−2013, but this is relatively low (around EUR 600 million) and for
selected sectors only, with a strong emphasis on improvement of

445
environmental standards. Still, the government is expecting that the
financial gap will be filled by the private sector.

Nevertheless, these investment needs also present an

opportunity for the Romanian energy sector as the latest technology will
be brought in, which will make it more competitive. The electricity
industry requires considerable modernization to bring the sector up to
European standards.

It is true that, as a result of reform measures in Romania, the

structure of available electricity output has improved in terms of primary
energy sources (the share of the thermal electric capacities decreased
whereas the share of the hydro-electric capacities increased), as has
the beneficiary’s ownership (the share of the State-owned capacities
decreased in favour of the private-owned ones). In addition, the number
of operators authorized to operate in the competitive segments of the
markets increased significantly.

However, in comparison with other countries, which use a

diversification of supply sources, with a mixture of hydro, renewable,
thermo and nuclear power, most electrical energy in Romania is still
supplied from coal-fired power stations. However, the following chart
shows that solid fuels (35 per cent) are followed by hydro resources (20
per cent) while liquid fuel lags behind with a share of only 1 per cent
(Chart 3).

446
Chart 3: Structure of the energy provided in terms of types of resources,
November 2007

1%
17%

35%

17%

30%

Solid fuels Hydro fuels Nuclear fuels Gas fuels Liquid fuels

Source: ANRE.

As an emerging market and a new EU Member State, Romania

offers many opportunities to investors in this field. While much still
needs to be done, the country has made significant progress in
environmental standards in recent years in order to comply with EU
requirements. Improvements have also been made to the quality of the
energy infrastructure and to the level of service provided to consumers.
In addition, Romania has seen substantial economic growth and very
high levels of foreign direct investment in most sectors. Potential
investors are likely to view the country as an attractive place to do
business.

2.2. Competition issues in the telecommunication sector

The liberalization process in the essential sectors of a transition

economy forces domestic monopolies to face international competition.
A perfect illustration of competition benefits for consumers, in particular,
and for the economy, in general, lies in the liberalization of the
telecommunication sector.
Following its liberalization in January 2003, the face of the
Romanian telecom market completely changed. At the beginning of that
year, Romtelecom lost its monopoly over fixed telephony. Initially, other

447
fixed telephony operators were reluctant to enter the market, which
required important infrastructure investment. However, towards the end
of 2005, the market share of the former monopolistic provider started to
decrease considerably, while other operators were gaining significant
slices of the telecom “pie”.
The new entrants made considerable investments in innovative
technologies so as to reduce the cost of infrastructure development.
This reduced the dominant operator’s market share and forced it to
reinvent itself. The former monopolistic operator thus needed to react to
the powerful wave of competition by investing significantly in its own
infrastructure. The end result was a reduction in the costs for the
maintenance and operation of infrastructure and higher quality
connections to its clients. In the increased competition from the new
entrants, the incumbent had to significantly reduce its prices. It even
started to provide free calls within its network, which was inconceivable
when there was no competition.
From 2002, the sector was given a totally new legislative and
regulatory framework in line with the latest EU standards. During recent
years the Romanian National Agency of Telecommunication
Regulations (ANRC) delivered a competition-oriented set of secondary
legislation, which offered investors easy access to the market, fair rules,
based strictly on economic grounds, and protection from potential
abuses of those attempting to take unfair advantage of their position.
Nowadays clients are expecting much more from their
telephone line: broadband Internet, interactive and multimedia content
and new services. From 2003 to 2006, there was a constant rate of
increase in the number of fixed telephony providers. Thus, in only 4
years the number of alternative providers increased by over 1.6 times
whereas the providers of telephony services using Internet connections
recorded an average annual rate of increase of over 6.7 per cent for the
period 2003−2006 (Chart 4).

448
Chart 4: Evolution of the number of alternative providers and of providers
of telephony services supplied through the Internet

80 80

70
64
60 59

51
50 49
(no.)

41
40

31
30

20 14
15

10 3 3 3 4 5

0
dec.03 mar.04 iun.04 sep.04 dec.04 mar.05 iun.05 sep.05 dec.05 mar.06 iun.06 sep.06 dec.06

Number of alternative providers Number of providers of telephony services supplied through internet

Source: ANRCTI, 2007.

Therefore, Romtelecom was forced once again to move into

new “territories” and transform itself into a multi-services and multi-
technologies provider. It is a process that has already started to produce
results, with 30,000 people opting for the new digital television Dolce
every month and a tenfold increase in the number of broadband Internet
users.

There are currently 65 alternative fixed telecommunication

suppliers other than Romtelecom that collectively account for 15 per
cent of the market. The most intense competition by far is for
international telecommunication services where, in 2006, 63 companies
were active.
Romania is entering a second phase of the deregulation
process, whereby all the benefits of liberalization are gradually
becoming visible. The market has reached the stage where the core of
telecom services − basic fixed telephone services – is being targeted by
a multitude of market players.

As a result, tariffs are in some cases significantly lower than

those of Romtelecom, the former monopolist incumbent. This is a clear
indicator that the market players are willing to invest in the possibilities
the sector is offering in the medium and long term.

449
 The highest expectation in the next few years is the emergence
of full competition on all fixed telephony segments. Beside the national
operator, there are currently few operators who could provide fixed
telephony based on their cable network.

Chart 5: The fixed telephony market in Romania – evolution of market

shares

0.2 1.2 4 9.8 14.7 19.6

% 99.8 98.8 96 90.2 85.3 80.4

mid 2004 end 2004 mid 2005 end 2005 mid 2006 end 2006

Market share of the incumbent Market share of other providers

Chart 5 illustrates that competition leads to managing business

in an efficient manner, with good results for both the consumers and the
economy. The quality of connections of the former monopolist
Romtelecom improved due to infrastructure developments generated by
competitive pressures. Further, its related services were improved due
to competition and good quality services provided by other companies.

2.2.1. Mobile telephony

Together with fixed telephony, mobile telephony has an

important and more expanding role. Nowadays, alongside the GSM
mobile communications, the latest advanced technologies – CDMA
(used by Telemobil), EDGE (used by Orange) and UMTS – are being
utilized in Romania. In April 2005 3G services were launched in
Romania by Vodafone and in June 2006 by Orange. In January 2007,

450
two more 3G licenses were granted for the providers S.C. Telemobil
S.A. and S.C. RCS&RDS S.A.
Because consumers have had the chance to choose between
fixed and mobile telephony, the total number of users increased
significantly, from 7 million (2003) to 19.5 million (2007). The penetration
rate practically tripled, as shown in Table 4.

Table 4: Evolution of the total number of users of mobile telephony

and of its penetration rate during 2003–2007
Indicator 31.12.03 30.06.04 31.12.04 30.06.05 31.12.05 30.06.06 31.12.06 30.06.07
Total 7.0 8.4 10.2 11.4 13.4 14.9 17.4 19.5
number of
users
(million)
Penetration 32.5 38.6 47.1 52.5 61.8 68.8 80.7 90.5
rate per
100
inhabitants
(%)
Source: ANRCTI.

Compared to the other EU-15 Member States, the average

penetration rate of the mobile telephony services in Romania was 90.5
per cent in 2007. It is shown in Chart 6 that Romania’s position as
regards the penetration rate of mobile telephony services is under the
Community average by 22.5 percentage points.

451
Chart 6: Romania’s position compared to EU-15 Member States as
regards the penetration rate of mobile telephony services

160
145
140 138 137
125
120 118
113 114 113 111 110 110 109
108 107
100 95 90,5
83
(%)

80

60

40

20

0
D a nd
Po e c e

ce
R um
xe lia

G g

Ir 5

ia

Sw y

Fr a
in

A k

G ain

Fi n
d

B e nd
Br l
a

an
r

i
ar

e
N lan

an
tr
re tug

ita

an
bu

ed
Lu Ita

la
EU

Sp
re

i
m

m
us
el

lg
om
er
n
m

en

er

ed
at
G

Source: ANRCTI.

The consumer's option for different means of payment for the

mobile telephony services is regarded as another positive effect of the
mobile telephony. Almost 70 per cent of about 2 million new “users”
recorded on 30 June 2007 compared to 31 December 2006 preferred
the supply of mobile services by means of prepaid cards instead of
monthly subscriptions. Compared to 2006, the number of users of
monthly subscriptions decreased by 2.4 percentage points, whereas the
number of users of prepaid cards increased by the same percentage
(Chart 7).

452
Chart 7: The evolution of users of prepaid cards

70 65.8% 66.1% 66.5%

64.1% 64.2%
65
60
55
50
45
40 35.9% 35.8%
34.2% 33.9% 33.5%
35
30
June 2005 December 2005 June 2006 December 2006 June2007

Monthly subscriptions Users of prepaid carts

Source: ANRCTI.

The rising trend in users of prepaid cards may also be regarded

as an increased freedom of consumers who use mobile telephony
services, as well as a reaction to the various costs involved in
subscriptions.

With regard to the application of competition rules in the fixed

telephony markets, two cases where Romtelecom was involved are
relevant.

2.2.2. ROMTELECOM/ GOCR, Decision no. 168 [2002]

Keywords: association of two companies, non-compete clause,

agreement, telecommunication

Facts: This is a case that illustrates the behaviour of

Romtelecom at the time when it had exclusive rights over the national
fixed telephony market. Moreover, it shows that whenever the behaviour
of the companies acting on a regulated market has the characteristics of
an anti-competitive practice prohibited by the competition law, the
Romanian Competition Council can intervene and impose the sanctions
provided for by the Competition law.

453
 In 1999, SNT Romtelecom SA (Romtelecom) filed a complaint
to the Competition Council about the non-compete clause provided by
the statute of SC Global One Communications Romania SA (hereinafter
GOCR), of which Romtelecom was a shareholder. Romtelecom alleged
that it was prevented from carrying out activities or capital investments
in the package data transmission market (where GOCR was active),
474
and invoked the provisions of Art. 54 of the Competition Law.

Gocr was established as a stock company in 1993.

Subsequently, following a series of transactions, from January 1996 to
April 2001, GOCR equity was held by SC Global One Communications
Holding BV (50.5 per cent) and Romtelecom (48.98 per cent).

Romtelecom was the national telecommunication incumbent,

which benefited at that time from exclusivity for national fixed telephony.
It held sole ownership of all Romanian telecommunication
infrastructures that it leased to the companies acting on the data
transmission market. Global One Communications Holding BV (GOCH)
was a joint venture of France Telecom, Deutsche Telekom and Sprint. It
was established as a vehicle company that allowed those companies to
enter the European data transmission market, services with added value
and Internet. Subsequently, Deutsche Telekom and Sprint left the
business, and France Telecom became the sole shareholder.

Harm on competition:
Analysing the GOCR statute, the Competition Council found
that the contracting parties (Romtelecom and GOCH) were not allowed
to compete with GOCR if they held shares and for a period of five years
from the termination of their activity as shareholders.

Furthermore, the investigation revealed that Romtelecom did

not exert any determinant influence on GOCR, which was controlled
only by GOCH. Consequently, the establishment of GOCR did not
constitute an economic concentration and the non-competing clause
could not follow the legal regime of an ancillary restraint. Against this
background, the non-compete clause had to be treated as an
agreement that affected competition on the data transmission market,

474
According to Art. 54, any contractual clauses referring to an anti-
competitive practice banned by Art. 5 are null and void.
454
preventing the two parent companies of GOCR from entering the market
independently.

The Competition Council also examined the compatibility of the

association between GOCH and Romtelecom with the national
competition legal framework. For that purpose, the relevant market was
determined as being the data transmission (using commuting packages)
475
market .

The competition authority examined the degree to which the two

parent companies competed with each other. More precisely, the
investigation analysed the ability of the parties to individually provide
services already performed by GOCR.

The investigation revealed that GOCR parent companies

undertook substantial activities in the related markets (namely on mobile
and fixed telephony). In the communications sector, these markets
account for a significant place in comparison with the market of GOCR.
In addition, Romtelecom and GOCH, by means of their parent
companies, were already performing substantial activities in similar
fields, and had the financial and technical capacity to enter the relevant
market on their behalf. In conclusion, GOCH (and consequently France
Telecom) and Romtelecom were potential competitors, having the
financial and technical capacity to enter the relevant market on their
own.

The decision made by Romtelecom and GOCH to cooperate

harmed competition, falling thus under the scope of the Art. 5 para. (1).
According to the legal principle accesorium sequitur principale, the
agreement on non-competing concluded between GOCH and
Romtelecom falls under the scope of Art. 5 para. (1).

The analysis of the relevant market’s structure made clear that,

in 1999, only two firms were active on this market: GOCR and LOGIC
TELECOM, GOCR being the market leader with a market share of 78
per cent. In 2000, GOCR managed to conserve its leading position in

475
Commuting packages represents a way to improve the network capacity and
consist in splitting data sequences in «packages», commuting the packages
towards the intended destination and then reassembling them in order to get the
original data sequences.
455
the data transmission market. Under the circumstances of an oligopoly
market, with substantial investments and being strictly specialized, the
association of two companies, together with the analysed non-compete
clause, clearly constituted an artificial entry barrier; this barrier
prevented the two potential competitors from entering the market,
seriously limiting competition.

Likewise, while reviewing this partnership during the

investigation in April 2001, the General Extraordinary Assembly of
GOCR Shareholders decided Romtelecom’s withdrawal from this
company, along with the annulment of the non-compete clause in the
GOCR statute.

Enforcement measures:
In its Decision, the Competition Council’s Plenum sanctioned
Romtelecom and Global One Communications Romania for having
breached the provisions of Art. 5(1) of Competition Law, by concluding
an association agreement in setting up a new company, Global One
Communications Romania SA, and for the stipulation of a non-compete
clause in the company’s statute.

Appeal proceedings:
The decision was appealed before the Bucharest Court of
Appeal (“Court”), which dismissed the complaint and maintained the
decision as legal and well founded. The Bucharest Court of Appeal
decision was further appealed before the High Court of Cassation and
Justice. In their appeal the parties (Romtelecom and Global One
Communications Romania) requested the annulment of the decision
claiming that the competition authority’s decision did not respect their
rights of defence. The parties also claimed that the decision infringed
upon the principle of non-retroactivity of the competition law because
the agreement and the establishment of the new company took place
long before the competition law was enforced, and thus the alleged
infringement of Article 5(1) of Competition Law no. 21/1996 exceeded
the limitation period. The Supreme Court upheld that the limitation
period of the infringement was not exceeded because it was a
continuous infringement, which ended only with the competition
authority’s investigation. The High Court of Cassation and Justice
upheld the Bucharest Court of Appeal decision.

456
 Another interesting case where Romtelecom was again involved
was brought to the attention of the RCC in 2004, after the liberalization
of the fixed-telephony market. This case shows that ex-ante regulations
must be applied together with legislation in the field of competition in a
complementary manner, in order to promote effective competition in the
market.

2.2.3. AIETES TELECOM vs. ROMTELECOM, 2004

The involved parties in this case were Aietes Telecom, as

complainant, and Romtelecom, as defendant. The alleged infringement
of Competition Law consisted in a possible abuse of a dominant position
committed by the incumbent fixed-line operator (former monopolist), i.e.
Romtelecom, against an alternative operator, i.e. Aietes Telecom, by
refusing to grant interconnection in certain pertinent and feasible terms
(both technical and economic). It was interesting that the complaint was
also sent to the ANRC, thus creating a positive conflict of competences
regarding the interconnection conditions provided by the incumbent in
the market of access to the fixed public telephone network for call
origination, termination and transit.

Since the facts of the case revealed technical problems and

infringements of both telecommunication legislation and the ANRC’s
decision, the RCC requested the ANRC’s viewpoint in this respect. After
consultation between these two authorities, the RCC suspended its
procedure until the ANRC issued a decision.

In its decision, the ANRC obliged Romtelecom to negotiate and

conclude an interconnection agreement (using the R2 signalling system
requested by Aietes Telecom) at the ANRC’s tariffs settled through its
previous decision. Under these circumstances, the reasons for the
complaint disappeared and the RCC closed the case after the
withdrawal of the complaint by Aietes Telecom.

It appears evident in this case that a clear procedure of

cooperation between a national competition authority and a sector
regulator needs to be in place when companies commit certain deeds or
acts that may constitute, simultaneously, both a breach of competition
legislation and a breach of the electronic communications legislation. In
the above case, it was considered more appropriate that the sectoral

457
regulator intervene. However, this does not mean that we can overlook
the fact that there are particular circumstances that trigger the
application of competition law even if access and interconnection come
under the ambit of sector-specific regulation.

Another conclusion we can draw from this case is that the

paramount role of cooperation between a national competition authority
and a sector regulator is to avoid the adoption of contradictory
measures and the imposition of disproportionate sanctions or
obligations.

Cooperation between a national competition authority and a

sector regulator should be based on a procedure that stipulates clear
rules for handling different circumstances, such as:

• where one of the parties finds that it does not have the
competence provided by law to investigate or settle a certain
dispute, but it considers that the dispute may fall under the other
party’s competence – it shall send the other party the relevant
information, notifying the interested persons;

• where one of the parties finds it has the competence, but it

considers that the respective case could also involve the
competence of the other party – it shall inform the other party, in
order to identify a potential positive conflict of competence;

• the party receiving the information shall make its stand on the
case;

• if, during the parties’ correspondence or meetings, it is revealed

that one of the parties is not competent to investigate or to solve
the case, that the measures or sanctions it may impose would
not be effective or that the other party’s actions would be
sufficient, this party shall decline its competence, or suspend
the exercise of its attributions;

• if both parties decide to continue the investigations, they shall

consult each other in order to ensure consistency of the
decisions and proportionality of the sanctions and obligations
imposed;

458
 • one party may investigate acts or deeds that have been
authorized or imposed by the other party, requiring the other
party to take a stand regarding that matter, and it shall consider
the respective answer in the process of making a decision;

• the parties shall provide each other with the information they
have, in order to exercise their legal attributions;

• the request for information shall be made in writing or, under

exceptional circumstances, orally, establishing deadlines for
providing the information;

• the information provided shall be used only for the purposes

indicated in the request (one party shall require the written
consent of the other party if it intends to use the information for
other purposes);

• in order to establish effective communication, contact persons

shall be designated to ensure operative collaboration between
the parties.

3. Conclusions

The role of competition policy in the efficiency and productivity

of the economy has not always been as relatively undisputed as it is
today. There was a time when many commentators doubted which of
the two competing economic orders in the world, a market economy or a
centrally planned economy, would eventually lead to better results.
Competition policy has slowly but surely became a growing element of
the economic governance in Europe and worldwide.

Today, competition policy is part of an investment climate aimed

at improving economic growth. As Joseph Stiglitz has observed: “Strong
competition policy is not just a luxury to be enjoyed by rich countries but
a real necessity for those striving to create democratic market
economies”.

The last ten years have seen a continuous evolution in

competition law in Romania and an enforcement policy that is now
widely accepted as a key policy to promote the competitiveness of the

459
Romanian economy. This could also serve as a model for countries with
an economy in transition or still at the developmental stage.

The adoption of the relevant legislation is relatively easy as

there are enough international pieces of legislation already validated by
practice that can be adapted to the individual state needs.

Enforcement of competition law is however much more difficult.

Public officers in transition economies or developing economies are
usually not familiar with or are even hostile to privatization and free
market mechanisms. If State employees, privatization authorities and
competition authorities are not genuinely favourable to market
mechanisms, any subsequent effort to train staff or encourage them to
enforce the law is pointless. As a result, enforcement may be
aggressive or passive and discretionary, with inconsistent outcomes and
effects on the market.

Decision makers have an important role in building a fully

functional and credible institution. Therefore, there is a need for
coherent internal policies to interpret the law and the regulations, so that
there is consistency in their application. Otherwise, the competition
authorities could be influenced by different lobby groups (political,
business, consumers, etc.) and practically “disappear”, thus
endangering the long-term viability of the institution.

Competition policy should be a constant part of the policy mix.

The existence of such a policy would considerably ease the competition
review of the privatization process and confer credibility on the
competition authorities. The control of the privatization process should
be fair and transparent enough to attract the interest of real investors. In
an economy in transition, most of the anti-competitive practices involve
the State represented at different levels (ministries, local
administrations, and other institutions). It sometimes plays a double role,
that of regulator establishing the rules of the game and another one as
market player. This anomalous situation can be rectified only by
strengthening the role of the competition authority as an independent
autonomous body capable of implementing an effective competition
policy, on the one hand, and by scaling down the role of the State as a
market player in the economy, on the other hand.

460
 International experience has shown that anti-competitive
practices tend to be less prevalent in economies where the effective use
of national competition law and policy acts as a deterrent. If correctly
implemented, competition policy can protect producers and consumers
from anti-competitive practices that increase costs and prices and
reduce production. At the same time it can promote transparency and
enhance the attractiveness of an economy to foreign investment, and
also reinforce and maximize the benefits of such investment.

An important part of competition policy is its advocacy function,

which helps to impart a culture of competition in the manner in which
firms interact in the economy and can in itself foster increased
adherence to competition principles and encourage self-discipline
amongst firms, thus reducing production and enforcement costs. Finally,
political will is extremely important for the success of competition and
regulation regimes in developing countries.

High-quality capacity building programmes, such as those

developed by UNCTAD in the area of competition law and policy, are
most useful. They should continue to assist developing countries in
particular in their efforts to construct and develop an efficient and
competitive economy.

461
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Parliament and of the Council concerning common rules for the internal
market in electricity and repealing Directive 96/92/EC.
10. European Commission (2005). DG Competition, Energy Sector
Inquiry – Issues paper.
11. European Commission (2006). BP Statistical Review of World
Energy.
12. European Commission (2007). 2020 vision. Saving our energy.
13. Ministry of Economy and Finances, Romania (2008). Strategy of
energy 2007–2020..
14. Information available on the following websites:
http://unctad.org/infocomm/anglais/gas/market.htm;
http://europa.eu.int/comm/dgs/energy_transport/figures/pocketbook/doc/
2005/etif_2005_energy_en.pdf;
http://www.competition.ro

462
 COMPETITION LAW AND ENFORCEMENT: THE
AUSTRALIAN EXPERIENCE

Deborah Healey*

1. Introduction

Competition law in Australia is well developed and has provided

significant benefits to the economy and consumers. The Australian
competition law, the Trade Practices Act 1974 (TPA), has changed
significantly over time. This discussion below is divided into two parts
and will focus on two particularly important factors in the effectiveness of
Australian competition law: the breadth of competition policy and the
law, and the robust enforcement of the TPA by the Australian
Competition and Consumer Commission (ACCC), the agency that has
responsibility for enforcement.

There was a general recognition in the early 1990s that the

country needed a competition policy that took a broad approach to the
issues of competition law. This led to the implementation of a National
Competition Policy in the mid-1990s which resulted in major benefits to
the economy, which are shared by all. Section 2 below outlines the
scope of the TPA and its significant limitations prior to the 1995
amendments. The amendment process and the current application of
the TPA are described, using case studies to illustrate the application to
areas previously immune from prosecution, including government
bodies. It also describes the broader reforms of National Competition
Policy and their quantifiable benefits for the economy and consumers.

The profile of the TPA and the development of a significant

culture of compliance in Australia have been aided by the robust
approach to enforcement taken by the ACCC. Section 3 of the
discussion outlines the ACCC’s broad powers to investigate
contraventions of the TPA, which have been particularly important to
enforcement. Case studies show the way in which the enforcement can
achieve outcomes that benefit a large number of consumers. These two
areas provide some interesting lessons for other jurisdictions.

463
2. The breadth of Australian competition law and policy

Australia has had some form of competition law since 1906,

although the area did not become particularly important until the
476
enactment of the TPA in 1974. Prior to 1974 the law was more
limited, the enforcement mechanisms underdeveloped and sanctions
provided little incentive to comply with the law. In summary, the laws
477
were not particularly effective.

The 1974 TPA was the first really serious competition law in
Australia and was modelled on provisions contained in both the US and
EU statutes operative at that time. There were, however, a number of
important areas of business to which it did not apply.

A range of government and non-incorporated bodies were not

subject to the TPA because of Constitutional limitations. Australia is a
Federation made up of States and Territories. The Australian Parliament
has specific powers to make laws under the Australian Constitution, and
the States exercise residual power. The Australian Parliament’s powers
478
under the Constitution to make laws with respect to corporations and
479
trade or commerce provide the Constitutional basis for the TPA.

* LLM (Hons) (Syd.), Senior Lecturer, Faculty of Law, University of New South
Wales and Solicitor.
References to legislative provisions are to the Trade Practices Act 1974 unless
otherwise stated.
476
The Australian Industries Preservation Act 1906 was declared to be
unconstitutional under a now-discredited view of Constitutional interpretation.
The 1965 Trade Practices Act was also declared to be unconstitutional and was
replaced by the 1971 Trade Practices Act, which had a more limited application
and was constitutionally uncontentious. It was superseded by the 1974 TPA,
which is the current law.
477
Under the 1971 TPA, in order to avoid prosecution, a company could simply
register an agreement and in 1974 there were some 14,000 registered
agreements. See Productivity Commission, Review of National Competition
Policy Reforms, Productivity Commission Inquiry Report, No 33, 28 February
2005 (the “Productivity Commission Report”).
478
Specifically trading, financial and foreign corporations: Constitution of
Australia, section 51(xx); TPA, Section 4(1).
479
Trade or commerce power: Constitution, Section 51(i); TPA, Section 6(2).
There are some other Constitutional provisions of more limited relevance but
those mentioned provide the major platform for the law.

464
Bodies that are not trading, financial or foreign corporations, or are not
engaged in Constitutional trade or commerce, are not within
Constitutional power. This means that the Australian Parliament itself
lacks power to legislate with respect to other bodies, and they cannot be
prosecuted under the TPA.

Another gap in coverage arose because State and Territory

governments could enact laws within their own jurisdictions expressly
exempting particular conduct and certain bodies from the operation of
the TPA, possibly for anti-competitive or protectionist purposes, without
480
the need to justify the action. Prior to the reforms the Australian
States and Territories often made laws and regulations favouring their
own industries and undertakings and the Commonwealth could not
control this.

Finally, there was a common law doctrine called the “shield of

the Crown” which gave government bodies forming part of the executive
arm of government immunity from the TPA, and substantially limited the
way in which laws were applied to bodies that formed part of the Crown
(or government). To clarify this issue, the Crown is the “government”.
This means in Australia that the Crown exists at Commonwealth, State
and Territory levels because each has its own government. In each of
these jurisdictions the government acts through its departments and
officers, and the reference to the “Crown in right of the State” or the
“Crown in right of the Commonwealth” refers to the Ministries that
discharge executive functions in those jurisdictions. They are not
generally separate legal entities.

Under Australian laws of statutory interpretation, if there was no

mention of the Crown, there was a presumption that it was not caught
by the law. The TPA itself originally did not mention the Crown in right of
the Commonwealth, State or Territory. In 1977 the Commonwealth
Parliament recognized that it was inappropriate for Government bodies
carrying on business to have immunity from the TPA, and a section was
added which made the TPA applicable to Commonwealth Crown bodies
481
where they were carrying on business.

480
Under the TPA itself the Australian Parliament could also enact laws
exempting particular conduct and certain bodies from the operation of the TPA
without giving reasons.
481
Section 2A.

465
 Under the Constitution, however, there is no power for the
Australian Parliament to make laws that bind the States, so State bodies
were not caught by the TPA even where they were carrying on
business.

2.1. Major review of competition policy

A major review of Australian competition policy took place in

1992 with the agreement of the Commonwealth, and all States and
482
Territories.
The reasons for the review are well summarized in the words of
the Productivity Commission:

“During the 1970s and 1980s, output growth slowed, inflation

and unemployment rose, and productivity growth was consistently low
by international standards…high trade barriers and various regulatory
and institutional restrictions on competition in the domestic market led to
significant inefficiencies across the economy. They also created a
business culture that focussed on securing government preferment
rather than on achieving a competitive edge through cost control,
innovation and responsiveness to customer needs…from the early
1980s, Australian governments embarked on a programme of extensive
economic reform. As the reform programme gathered pace, it became
apparent that aspects of Australia’s wider competition policy framework
were impeding performance across the economy and constraining the
scope to create national markets for infrastructure and other
483
services.” .

The outcome of the review, the Hilmer Report, emphasized that

competition policy embraces a range of laws, not just the TPA itself. It
concluded that an effective competition policy for Australia should
address six concerns:

1. Anti-competitive conduct of firms;

482
Report by the Independent Committee of Inquiry into National Competition
Policy, 1993, AGPS, Canberra (the “Hilmer Report”).
483
Productivity Commission Report at p. xiv.

466
 2. Unjustified regulatory restrictions on competition;
3. Inappropriate structures of public monopolies;
4. Denial of access to certain facilities that are essential for
effective competition;
5. Monopoly pricing; and
6. Competitive neutrality when Government businesses compete
484
with private firms .

It recommended a large number of significant reforms, which

were ultimately agreed to and adopted by the Australian Government
485
and the Governments of each of the States. These reforms, which
became known as “National Competition Policy”, included amendments
to the TPA. They also included review by governments of all laws
restricting competition, structural reform of public monopolies to facilitate
competition, third-party access to significant infrastructure facilities,
some price oversight and introduction of competitive neutrality.

2.2. Application outside Constitutional coverage: all persons

in business

The Hilmer Report stated that the competition law should apply
to all entities carrying on business and that any exemptions or immunity
should be of limited nature and implemented only after a transparent
process. It found a number of categories of conduct that were exempt
from the application of the TPA, including conduct by bodies outside
Constitutional limitations, and those that were entitled to the “shield of
486
the Crown” (or Crown immunity). In particular the Hilmer Report

484
Hilmer Report at p. 7.
485
See Competition Principles Agreement; Conduct Code Agreement;
Agreement to Implement National Competition Policy and Related Reforms. A
National Competition Council was established as part of these reforms to
provide advice about competition policy matters and make various
recommendations in relation to the statutory access regime contained in Part
IIIA of the TPA. See Productivity Commission Report.
486
There were also a number of other bodies such as statutory marketing
bodies and the professions. Other groups could be exempted by the laws of the

467
recommended that Government Business Enterprises (GBEs) should
not enjoy any advantages when competing against their private-sector
counterparts and that the TPA should apply to State and Territory GBEs
in the same way that it already applied to Commonwealth GBEs.

Ultimately, the competition laws were changed so that the TPA

prohibitions now cover both of these groups.

Because of the limitations of the Constitution, agreement was

reached that various laws would be enacted or amended. The States
enacted laws to mirror Part IV of the TPA, Restrictive Trade Practices,
which mean that bodies that are not Constitutional corporations or are
not carrying on Constitutional trade or commerce are caught under the
487
Competition Codes of the States. A new Part XIA was inserted into
the TPA creating this Competition Code. Application legislation in each
State and Territory makes the Competition Code part of the law of that
jurisdiction. While the Competition Code repeats the substantive
provisions of Part IV, it applies to “persons” rather than to corporations
to address the issue of the limitations on the Commonwealth
Parliament’s power to legislate in this area.

This means that unincorporated persons or bodies such as

partnerships, individuals not covered by Constitutional trade or
commerce, professionals such as doctors and lawyers, and
cooperatives are now caught by the TPA or a Competition Code of a
State if they are carrying on business.

2.3. Ability to exempt by law or regulations curtailed

States and Territories in a non- transparent way. Other conduct could be given
administrative approval after a more transparent process. So, for example,
those engaged in professional activities such as doctors or lawyers were not
generally caught by the TPA prior to these amendments due to constitutional
limitations they were not incorporated and did not engage in interstate or
overseas trade or commerce, i.e. Constitutional trade or commerce.
487
They also agreed to maintain the mirror legislation in a uniform way going
forward in the interests of creating one main competition statute for the whole of
the country.

468
 The ability of the Commonwealth, the State and Territory
Parliaments to exempt particular bodies or specific conduct was
significantly curtailed by the introduction of transparency and a more
488
rigorous process of evaluation.

The possibility of States and Territories exempting particular

organizations by legislation is now limited by a process set out in the
Competition Principles Agreement. There are also requirements for
review of any new legislation to prevent the enactment of laws that
hinder competition without examination under a transparent process
setting out the anti-competitive effect of conduct and justifying it on
489
public benefit grounds.

2.4. Application to government bodies

Sections 2B and 2C were inserted into the TPA making the

Crown in each the State and Territory liable for breaches of Part IV of
the TPA. Section 2B provides that the TPA applies to bind the Crown in
right of the States and Territories “so far as the Crown carries on a
business, either directly or indirectly or by an authority of the State or
Territory”. The Crown is not, however, liable to penalty, but an authority
490
of a State or Territory may be liable to penalty.

2.5. How do you determine the status of a government body?

The issue of the extent to which government bodies are or

should be subject to competition laws is an issue of complexity in many
jurisdictions.

488
See Hilmer Report at p. 108, and Sections 172(2); 51(1)(b),(c),(d);51(1C),
51AAA. As part of the process, the States and Territories must notify the ACCC
of the legislation, which must have a sunset period of two years.
489
Authorization, which is an administrative sanction, may also be granted by
the ACCC for most Part IV conduct on the basis of individual application if it can
be justified on public benefit grounds see Section 88ff. This process is outside
the scope of this study.
490
An “authority” of a State or Territory is a body corporate established for a
purpose of the State or Territory, or such an incorporated company in which a
State or Territory has a controlling interest.

469
 In Australia, for the purpose of determining whether a
government body is subject to the TPA it is necessary first to determine
whether it represents the Crown or not, and then secondly to see
whether or not it is carrying on business.

There is a whole range of government bodies of different

characters in Australia. Some continue to exist as Government
departments carrying out government functions. Some carry out
regulatory functions. Some have been corporatized and others have not.
Some are corporatized but wholly owned by government. Some are
partially government owned. There are various categories of legislation
governing their status and operation depending upon the nature of their
functions, the way they are managed and the degree of autonomy that
they have over day-to-day matters.

2.6. Does it represent the Crown?

In order to determine whether or not a body is part of the Crown

(executive) (and hence whether or not it is entitled to Crown immunity),
the courts have traditionally relied upon two tests: the incorporation test
and the control test.

The incorporation test asks whether or not the body has been
incorporated and the way in which this has been done. The fact that the
Government has decided to create a separate body to perform a
particular activity is an indication that it is not meant to be the Crown. To
determine whether an incorporated body is the Crown it is necessary to
look to the legislation establishing it to ascertain the intention of the
legislators. If the legislation setting up the body is silent on the issue of
whether or not it is part of the Crown, it is likely that it is not. The courts
generally require clear wording indicating that a body forms part of the
Crown for this to be the case. If a body is set up under the general
Corporations Act, for example, it is unlikely that the body represents the
491
Crown.

491
See, for example, NT Power Generation Pty Ltd v Power and Water Authority
& Anor [2004] HCA 48 (“NT Power case”) where the subsidiary of PAWA was
incorporated under the Corporations Act, not the statute setting it up.

470
 A test called the control test applies and a government body is
entitled to the Crown immunity if a Minister of the Crown exercises
control over it, in the sense of control and direction of activities. Control
for the purposes of the test refers to the right to control, not necessarily
the actual exercise of control. The test was summarized in the NT
Power case, discussed further below, where the High Court stated:

“...in every case where the question arises it is necessary to

examine the nature and degree of control that the Crown exercises over
the corporation. If the corporation is subject to the same control as a
governmental department it is likely to be the alter ego of the Crown. If
the corporation is largely free of ministerial control then it is unlikely to
492
be the Crown’s alter ego.”

In that case the High Court found that the mere giving of
guarantees by the government was not sufficient to suggest that Gasgo
should have immunity from the TPA on the basis of its connection with
the Crown or PAWA, which had Crown immunity.

Where the boards of Government-owned corporations or GBEs

are subject to Ministerial directions it is likely that they are entitled to
Crown immunity. This may not be a total immunity. It may be that they
are entitled to Crown immunity in respect of some activities and not in
respect of others. This will be the case should their relevant legislation
allow for the grant of Ministerial directions in respect of only some
conduct. This is an issue that has sometimes proved difficult to
determine without significant consideration and it thus an area of risk for
these bodies.

If a Government body is not part of the Crown, then the TPA

applies to it in the same way that it would to any other body. The
relevant questions are then whether or not it is a corporation and if it is,
is it a trading, financial or foreign corporation, or the holding company of
one of them, such that the TPA applies? If it is not within one of those
categories of corporation, then is it a “person” acting in trade or
commerce in which case the TPA applies, or if not, is it a person to
which one of the State Competition Codes would apply?

492
NT Power case at para. 126.

471
2.7. Is the Government body carrying on business?

Once a government body is characterized as the “Crown” the

next question is to consider whether or not it was carrying on business
when it engaged in the conduct, to see whether or not the TPA is
capable of applying to the conduct.

“Carrying on business” for the purposes of the TPA does not

493
require a profit motive. The nature of the activities undertaken, and
whether or not they are in the nature of government activities, or are
activities that usually would be undertaken by business, are important
considerations in analysing whether or not a body is carrying on a
business. The High Court emphasized in the NT Power case that the
TPA should be given a broad application rather than a narrow one,
based on it purposes and the intention of the Competition Policy
amendments. The nature of the statute setting up the government body
concerned is an important consideration in this issue. If activities are
carried on in a regular manner with repetition and system they are more
494
likely to involve carrying on a business. Carrying on procurement for
the use of the government body is unlikely to be carrying on a
495
business.

Section 2C of the TPA lists a number of activities that do not

constitute carrying on business and some of these are:

• Collecting taxes and levies;

• Licence fees;
• Granting or revoking licences;
• Transactions involving only Crown organizations;
• The compulsory acquisition of primary products by a
government body under laws in certain circumstances.

This idea of carrying on business has been the subject of many

decisions in Australia. The following activities have been held not to be

493
Section 4(1).
494
See J.S. McMillan Pty Ltd v Commonwealth (1997) 77 FCR 337 (“McMillan
case”).
495
McMillan case, op. cit.; GEC Marconi Systems Pty Ltd v BHP Information
Technology Pty Ltd (2003) 128 FCR 1.

472
carrying on business for the purposes of Section 2C and the similar
State provisions:
496
• Inviting tenders to sell off part of an existing business;
497
• Running immigration detention centres for profit;
498
• Managing a national park;
• Running the Trade Practices Commission (the predecessor of
499
the ACCC);
• Operating a public hospital providing services to public patients
500
through a contractor;

2.8. Other issues related to the Crown: derivative Crown

immunity

“Derivative Crown immunity” is the name given to a further

exemption that might be given to parties who are engaged in conduct
involving the Crown. Where conduct in breach of the TPA occurs
between two or more parties, and one of the parties is entitled to Crown
immunity (or the shield of the Crown), the other party may also be
entitled to immunity on the basis that to make orders against that party
501
would have the effect of indirectly applying the TPA to the Crown.
This approach was applied in a number of cases and in effect allowed a
party dealing with Government to escape liability for breaches of the
TPA in certain circumstances.

2.8.1. Case examples

Three fairly recent interesting cases have considered different

aspects of the way in which the TPA applies to government bodies in
Australia.

496
McMillan case, op. cit.
497
Corrections Corporation of Australian Ltd v Commonwealth of Australia
(2000) 104 FCR 448.
498
Easts Van Villages v Minister Administering the National Parks and Wildlife
Act [2001] ATPR (Digest) 46-211.
499
Thomson Publications Pty Ltd v TPC (1979) 40 FLR 257.
500
ACCC v Australian Medical Association (WA) Inc. [2003) FCA 686.
501
Bradken Consolidated Limited v Broken Hill Pty Co Limited (1979) 145 CLR
107.

473
 The first case considers what happens when a government
body not previously exposed to competition and traditionally performing
a public service is faced with a competitive threat; when a government
body entitled to Crown immunity is “carrying on business”; the extent to
which the TPA applies to the refusal of such a body to enter a new
business area or to assist others to do so and whether a subsidiary is
entitled to Crown immunity.

In NT Power Generation Pty Ltd v Power and Water

502
Authority, PAWA was a government body set up under a special law
and subject to directions of the Minister. It generated electricity and
purchased electricity from others; it transported electricity from
generation sites to distribution points and then distributed the electricity
to customers.

NT Power Generation Pty Ltd (NT Power) had a licence to

generate electricity issued by PAWA. It wished to sell the power it
generated to customers but could not do so without access to the
existing electricity transmission and distribution infrastructure, which
was owned by PAWA. It sought access to this infrastructure and PAWA
refused it access.

It was accepted by the parties that PAWA was entitled to the

Crown immunity because it was set up under special legislation and was
subject to Ministerial direction, but the issue before the High Court was
whether it was carrying on business in refusing the use. The fact was
that it had never allowed anyone to have access before – because of
industry restructuring this now became possible. PAWA was in the
process of setting up an access regime for its infrastructure under the
Access provisions contained in Part IIIA of the TPA, but this had not yet
been finalized when the request was made by NT Power. PAWA
refused to give the access because it wished access seekers to be dealt
with under that Part IIIA regime once finalized. It argued that it was not
carrying on business in making its refusal, which meant that the TPA did
not apply.

The High Court found that PAWA was carrying on business and
using the infrastructure as a significant part of its business. This was
despite the fact that PAWA had never before allowed anyone to use the

502
[2004] HCA 48.

474
infrastructure. PAWA had an express duty under its legislation to act in
a commercial manner, and itself described its transmission and
distribution facilities as “business products” in its own documentation.
The High Court said that the actual refusal was conduct that advanced
PAWA’s business and that it had taken the decision not to supply NT
Power because of the negative impact that this would have in the short
term on its business of selling electricity. The fact that PAWA had not
supplied the access before was not relevant to the point. Ultimately the
High Court found that PAWA had breached Section 46, Misuse of
503
Market Power, in refusing to allow NT Power to use the infrastructure.

There was a second government body involved in the dealings

with NT Power. PAWA had a subsidiary, Gasgo, and the High Court
also looked at whether Gasgo was entitled to derivative Crown
immunity. NT Power required gas from suppliers for its generator and
sought an undertaking from Gasgo that it would not insist on its existing
contractual pre-emptive rights, which might have left NT Power without
supply. Gasgo refused to give this assurance to NT Power. NT Power
said that this refusal was in breach of Section 46, Misuse of Market
Power, of the TPA and Gasgo said in its defence that it was entitled to
Crown immunity or derivative Crown immunity. It argued that the
Northern Territory Government would suffer financial prejudice if
derivative Crown immunity was not extended to Gasgo. This was
because Gasgo and PAWA would need to seek additional supplies of
gas in a competitive market where those supplies might be constrained
by the available reserves if the guarantee requested by NT Power was
given.

The High Court found that Gasgo was not entitled to Crown
immunity nor was it entitled to derivative Crown immunity. The finding
on derivative Crown immunity was on the basis that financial prejudice
was not enough to justify the immunity. The High Court said that in order
to benefit from derivative Crown immunity it is necessary for a body
seeking the immunity to demonstrate that the application of the TPA to
the party would adversely affect a more tangible right such as a legal
prerogative, or a statutory, proprietary, contractual or other legal or
504
equitable right or interest belonging to the Government.

503
The High Court overruled the decisions of the Federal Court and the Full
Federal Court on appeal.
504
Relying on earlier High Court authority.

475
 The issue of derivative Crown immunity was also considered in
505
ACCC v Australian Medical Association (WA) Inc. where the court
reviewed the issue of Crown immunity in a complex situation that arose
after the Hilmer amendments. There were two aspects to the case but
only one will be referred to here. The State Government entered into
contractual arrangements with Mayne Nickless Limited (MNL) under
which MNL would provide medical services free of charge to public
patients on behalf of the State and thereby the Minister would discharge
his statutory obligations to the community. The ACCC alleged that the
Australian Medical Association (WA) (AMA(WA)) and MNL made an
understanding containing a price-fixing provision, namely that MNL
would contract doctors to provide services to public patients at rates
prescribed by the State fee for service rates controlled under a relevant
state agreement.
506
The Federal Court found that there had been no price fixing.
However, even if there had been, the Court stated that MNL would have
been entitled to derivative Crown immunity. The State of WA was not
carrying on a business in operating a public hospital. The TPA thus did
not apply to the State. MNL was entitled to derivative Crown immunity
on the basis that the Crown had been heavily involved in the negotiation
of all of the arrangements and that the interests of the Crown would
have been prejudiced if the TPA had been applied to the contractual
arrangements.

A different view on derivative Crown immunity that did impose

some limits on the scope of the immunity was reached in another case
involving the health system in 2007. There the High Court considered
derivative Crown immunity in the context of the supply of
pharmaceutical products to the State-run hospital system. This is an
interesting case because in this context there is no consideration of the
market power of the State-purchasing authorities – ordinarily one would
assume that they had significant power but this was not an issue in the
507
case. ACCC v Baxter Healthcare Pty Ltd involved a situation where
Baxter Healthcare Pty Ltd (Baxter) had bundled one sterile fluid product
that it supplied almost exclusively in Australia with other sterile fluid
products that it competed with others to supply. The contract price for

505
[2003] FCA 636.
506
(2003) 199 ALR 423.
507
[2007] HCA 38.

476
the bundled products was much cheaper than the prices for the
individual products under the contract tenders submitted by Baxter. The
products were supplied to the State-purchasing authorities for public
hospitals in a number of States.

The lower courts found that this bundling conduct in some

respects breached Section 46, Misuse of Market Power, and Section 47,
Exclusive Dealing of the TPA. However, they found that Crown immunity
applied to the State-purchasing authorities because they were not
carrying on business in providing public health services to public
patients. The lower courts found that derivative Crown immunity also
508
applied to protect Baxter from the application of the TPA.

The High Court disagreed with the application of the derivative

Crown immunity in these circumstances. The relevant contracts were
entered into after a period of negotiations following a formal request for
tender by the State purchasing authorities and each of these requests
allowed bundled offers.

In finding that Baxter was not protected by derivative Crown

immunity, the High Court reiterated that the purpose of the TPA set out
in Section 2 was to enhance the welfare of Australians through the
509
promotion of competition and fair trading. The High Court noted that
the case relied upon in the lower courts to support derivative Crown
immunity, Bradken Consolidated Ltd v Broken Hill Proprietary Company
510
Ltd (“Bradken”) had been decided prior to the Hilmer amendments.
This meant that at the time of the Bradken decision, the State Crown
was not bound by the TPA at all. Amendments in 1995 meant that the
Crown in right of the State was now caught by the TPA in so far as it
511
carried on business. Later decisions of the High Court in relation to
Crown immunity had formulated a more flexible approach than that
512
applied in Bradken. Importantly, the High Court noted that Baxter was
a trading corporation and stated:

508
In doing so they felt compelled to following existing authority on the point.
509
TPA Section 2.
510
(1979) 145 CLR 107.
511
By the addition of Section 2B, discussed earlier.
512
Bropho v Western Australia (1990) 171 CLR 1.

477
 “A conclusion that, in carrying on dealings with a government in
the course of its own business, it enjoyed a general immunity not
available to the government when the government was carrying on
business itself would be remarkable. Such a conclusion would be
impossible to reconcile with the object of the Act as now declared in s2.
Further such a conclusion would go far beyond what is necessary to
protect the legal rights of governments, or to prevent a divesting of
proprietary, contractual and other legal rights and interests.”

2.9. Other National Competition Policy reforms

Processes were put in place as part of National Competition

Policy to review all Commonwealth, State and Territory laws to isolate
examples of provisions having an anti-competitive outcome and delete
those that could not clearly be justified on public benefit grounds. This
process of review of legislation was supervised by the National
Competition Council (NCC) and was completed under a timetable
approved by the NCC. States and Territories received payments for
compliance with this timetable.

In 2005 the Productivity Commission reviewed the impact of

National Competition Policy and related reforms on the Australian
513
economy and the Australian community. As part of the reform
process A$834m were paid to the States and Territories between 1998
and 2003 for compliance with agreed processes. The Productivity
Commission Report concluded that National Competition Policy had
delivered substantial benefits greatly outweighing its costs, contributing
to the productivity surge that has underpinned 13 years of continuous
economic growth and associated strong growth in household incomes.
The annual benefits to the Australian economy were estimated at 2.5
per cent of GDP, or A$20bn annually. Reforms had directly reduced the
prices of goods and services such as electricity, gas, milk, freight rail
514
rates, port charges and telecommunications. Many households would
have benefited from lower prices for other goods and services made
possible by cheaper infrastructure inputs for businesses, as well as from
515
the longer-term stimulus to employment and wages provided. They

513
The Productivity Commission Report also looked at the issue of ongoing
competition policy reform.
514
Productivity Commission Report at p. xix.
515
Productivity Commission Report at p. xx.

478
had stimulated business innovation, customer responsiveness and
516
choice. In summary, the Productivity Commission stated:
“In contrast with the 1970s and 1980s, Australia’s recent
productivity growth has also been strong by international standards.
That rapid overall growth has been sustained despite a decade of
economic stagnation in Australia’s largest export market (Japan) and
the financial crisis which struck that country and other key Asian trading
partners in 1997.
While many factors can influence productive growth, a number
of analytical studies indicate that microeconomic reforms – including
NCP – have been a major contributor to Australia’s productivity surge in
the 1990s and to the economy’s increased resilience in the face of
economic disturbances. The reforms have achieved this by increasing
the pressures on both private and government businesses to be more
productive, through increased competition, while simultaneously
enhancing their capacity to respond through more flexible work
arrangements, the removal of unnecessary red tape and the like. Other
suggested causes of the productivity surge, such as recovery from
recession or unsustainable increases in work intensity, have not
517
withstood analytical scrutiny.”

The mix of National Competition Policy reforms has had a very

significant impact on the community and particularly consumers in
Australia. The dismantling of many traditional regulatory barriers to trade
and commerce, the restructuring of government bodies and monopoly
suppliers, the broader application of the TPA and significant industry
reform have all contributed to these benefits.

To quote the ACCC on National Competition Policy:

“… whether you are a doctor or a lawyer, whether you own
shares in a power company, own a bottle shop, work on a wheat farm,
ever catch taxis, have gas heating in your home, purchase CDs, have
sugar in your tea, have milk on your cereal , take public transport, own a

516
Priorities for reforms going forward included strengthening the national
electricity market, building on the national water initiative, developing integrated
national strategies on efficient and integrated freight transport services, and an
overarching review of the health system.
517
Productivity Commission Report at p. xvii.

479
mobile phone, post letters , you are benefiting from competition policy
518
reforms.”

3. Enforcement of the TPA by the ACCC

Part IV of the TPA, Restrictive Trade Practices, contains

519
prohibitions similar in many respects to those of other jurisdictions. It
contains provisions dealing with the usual forms of anti-competitive
conduct, plus more onerous provisions in relation to aspects of the
telecommunications market, and an access regime in relation to
520
essential facilities. It also deals in depth with various areas of
consumer protection and product liability, which will not be discussed
521
here.

The ACCC has extensive powers to investigate and enforce the

TPA and has done so in areas related to both restrictive trade practices
522
and consumer protection. The successful high profile prosecutions
that it has taken over the years undoubtedly have raised the
consciousness of both business and consumers, and have acted as a
significant deterrent to businesses contemplating conduct that might
breach the TPA.
In enforcing the TPA the ACCC has stated that its priorities are
promoting vigorous, lawful competition and informed markets. When
deciding whether or not to pursue court action the ACCC looks at
whether the matter involves:

518
Willet, E., Commissioner, Australian Competition and Consumer
Commission, The ACCC’s role in promoting competition and protecting
Australian consumers, speech to Australian Bankers Association at Banking
Regulation Forum, 24 August 2007, at p. 1.
519
The Constitutional issues relating to its application have been discussed
above.
520
Part IIIA.
521
See Part V, Consumer Protection, Part VA, Product Liability.
522
There have been far more consumer protection cases taken under the TPA
than cases involving restrictive trade practices. In 2005–2006, for example, 87
per cent of total enforcement outcomes related to breaches of Part V. See
Samuel, G., Chairman, Australian Competition and Consumer Commission, The
foundations of good consumer protection policy: strong law, vigorous
enforcement and the educated consumer, Speech to National Consumer
Congress, 15 March 2007 at p. 1.

480
 • conduct that is in blatant disregard of the law;
• conduct that is by a person, business or industry with a history
of previous contraventions of competition law, including
overseas contraventions;
• conduct that causes significant detriment to consumers and/or
business, and/or a significant number of complaints or has
disproportionate effect on disadvantaged groups;
• conduct that is of major public interest or concern; or
• a situation that has the potential for action to have a worthwhile
educative or deterrent effect and achieve a likely outcome that
523
would justify the use of the resources.

A wide range of remedies is available to the ACCC in enforcing

524
the competition provisions of the TPA.

The ACCC may take a matter to the Federal Court and seek
civil pecuniary penalties. These penalties are currently set at the greater
of A$10 million, three times the value of the benefit from anti-competitive
conduct, or 10 per cent of the turnover of the body corporate and all its
related bodies corporate during the period of 12 months ending at the
525
end of the month during which the act or omission occurred.
Individuals involved in conduct are liable for pecuniary penalties for up
to A$500,000. Penalties are levied in respect of “each act or
526
omission”, so that the cumulative total of penalties may theoretically
527
be much higher than the levels set for an individual breach. There is
currently a well-advanced proposal to introduce criminal penalties for
528
serious cartel conduct.

523
See Samuel, G., op. cit. These views have been expressed by the ACCC on
many occasions over the years.
524
Private remedies are also available to parties under the TPA.
525
Section 76(1), 76(1A), 76(1B). The Crown is immune from pecuniary
penalties: Section 2B (2).
526
These are not criminal provisions. Contraventions must be proven on the
balance of probabilities and have been characterized as “quasi-criminal” due to
the size of the potential pecuniary penalties. Draft legislation is currently being
circulated for discussion to introduce criminal liability for “hard-core cartels”.
527
Factors relevant to penalty setting are set out in Section 76(1) and additional
factors have been set down in cases such as TPC v CSR Ltd (1991) ATPR 41-
076 at p. 52,152–3.
528
Both sides of Parliament have committed to the proposal and draft legislation
has been circulated for comment.

481
 The ACCC may seek injunctions restraining future similar
529 530
conduct, and other orders. It has the ability to reach binding
agreements called enforceable undertakings, which settle court
531
proceedings. In this context, or where respondents admit liability,
penalties may be negotiated and an agreed figure on penalty is
sometime presented to the court.

The ACCC may seek orders that individuals be disqualified from

532
managing corporations for a specified period.

3.1. Powers of the ACCC to investigate and question

The ACCC may investigate complaints lodged by consumers or

traders or initiate its own inquiries. In its investigations it has wide
administrative powers to gather information, which are contained in
533
Section 155 of the TPA, which it routinely uses.

Where the ACCC has reason to believe that a person is capable

of furnishing information, producing documents or giving evidence in
relation to a contravention, it may issue a notice requiring a person to
furnish information, produce evidence or appear before the ACCC to
534
give evidence. This can be done before or after proceedings are
535
commenced. There are two preconditions to the issue of such a
notice: a matter that may constitute a contravention, and a reasonable
belief that the person named in the notice is capable of assisting the
inquiries. The addressee must know what the possible contravention is.
The privilege against self-incrimination is abrogated in relation to these

529
Section 80.
530
Section 87.
531
Section 87B.
532
Parties may also take proceedings in relation to breach of Part IV of the TPA,
and have access to relief such as injunctions, other orders and damages under
Section 82 for loss or damage flowing from a contravention.
533
ACCC, Annual Report 2005–2006 at p. 43.
534
Section 155.
535
ACCC v Abbco Iceworks (1994) 52 FCR 96.

482
 536
notices. It is, however, permissible to refuse to provide information
537
and documents that are subject to legal professional privilege.

Where the ACCC conducts an oral examination it is unclear

whether or not the rules of natural justice apply as the TPA is silent on
the issue.
The ACCC may also formally interview persons suspected of
contravening the TPA before commencing proceedings to gain
admissions that it might use in the proceedings. In this situation a
person may decline to answer questions.

There has been controversy about whether a person is entitled

to be represented by a lawyer while being examined by the ACCC. The
TPA is silent on the issue. As a matter of practice the ACCC usually
allows representation to a limited extent but requires both the lawyer
and client to keep the content of the discussions confidential.

A more extensive power to enter facilities and seize documents

was introduced in 2006. Documents may be seized voluntarily where
there are reasonable grounds for believing that there is evidential
material on the premises. If consent is not forthcoming, the inspector
must obtain a search warrant from a magistrate after providing sufficient
538
information about the grounds for the warrant. Once a search warrant
has been obtained an inspector may enter, search, make copies of
material specified in the warrant, operate electronic equipment and take
equipment into the premises to carry out its search. Seizure of
documents is most likely to occur where the ACCC fears destruction of
potentially valuable evidence.
If a person fails to comply with an ACCC notice under the TPA
539
they are guilty of an offence.

In 2005–2006 the ACCC issued 347 notices under Section 155

to compulsorily acquire information, 124 notices to provide information
in writing (Section 155(1)(a)), 135 notices to provide documents
(Section 155(1)(b)), 88 notices to appear in person (Section 155(1)(c))
and no authorities to enter premises and inspect documents (Section

536
Section 155(5).
537
Daniels Corp International Pty Ltd v ACCC (2002) 213 CLR 543.
538
Section 154D, 154E.
539
Sections 155(5).

483
 540
155(2)). These statistics underscore the utility of the provisions for
information gathering, which add significantly to the enforcement law
arsenal of the ACCC.

Documents obtained under these provisions are not admissible

541
in criminal proceedings other than for non-compliance under the TPA.

3.2. Enforcement in relation to conduct affecting consumers

The ACCC has been successful in prosecuting conduct of

various types under Part IV of the TPA. Case studies set out below
illustrate a number of enforcement actions that have resulted in
substantial fines and concrete benefits for consumers.

3.2.1. Cartel conduct

Cartel conduct is routinely listed as the ACCC’s top priority in

enforcement. Cartel conduct is prohibited under Section 45 of the TPA,
which prohibits the making or giving effect to a contract, arrangement or
understanding that has the purpose, effect or likely effect of substantially
lessening competition. Additional provisions prohibit price fixing outright,
542
i.e. without consideration of its effect or likely effect on competition
and “exclusionary provisions”, which catch arrangements to share
543
markets and in the nature of primary boycotts.

The ACCC has prosecuted a number of high-profile companies

for cartel conduct such as price fixing, market sharing and collusive
tendering.

540
ACCC, Annual Report 2005–2006 at p. 43.
541
See, for example, ACCC v Neville [2007] FCA 1583, where a real estate
agent was fined A$2160 and given 200 hours of community service for giving
false evidence in breach of Section 155(5). See also Samuel, G, Chairman
ACCC, The enforcement priorities of the ACCC, Competition Law Conference,
Canberra, 12 November 2005.
542
Section 45A.
543
Section 4D.

484
 544
Industries as diverse as major construction, the express
545 546
freight industry, the pre-mixed concrete industry, the vitamin
547 548
industry and the power distribution transformer industry have been
the subject of major litigation, sometimes on more than one occasion.
Most of the behaviour in these cases had been going on for significant
periods of time. Importantly, each of the areas mentioned above has the
capacity to significantly impact on consumers. The express freight
industry case, for example, added costs to many deliveries of goods
paid for by retailers. Consumers bore the brunt of increased costs when
the costs were passed on in the retail purchase price. In the power
distribution transformer case, the costs were ultimately passed on to
consumers when they paid for their electricity.

3.2.1.1. Case studies

A recent high profile cartel case pursued by the ACCC was the
549
Visy case.
It involved two Australian companies, Visy and Amcor, which
together during the relevant period held 90 per cent of the corrugated
fibreboard packaging market in Australia. The two companies engaged
in price fixing between 2000 and 2004 in breach of Section 45 of the
TPA. Amcor received conditional immunity from the ACCC. The price fix
was revealed to lawyers acting for Amcor during unrelated legal
proceedings and Amcor approached the ACCC and received conditional
immunity under the ACCC Immunity Policy.

544
ACCC v CC (NSW) Pty Ltd (1999) 92 FCR 375 (collusive tendering and
market sharing by industry participants); A$200,000 penalty for CC (under lower
maximum penalties).
545
TPC v TNT Australia Pty Ltd (1995) ATPR 41-375 (price fixing in freight
forwarding); A$4.1m against TNT (under old limits); A$6m against Mayne
Nickless.
546
ACCC v Pioneer Concrete Pty Ltd (1996) ATPR 41-740 (price fixing); agreed
penalties of A$6.6m for each corporate respondent and A$50,000 for each
individual respondent.
547
ACCC v Roche Vitamins Australia Pty Ltd (2001) ATPR 41-809 (price fixing
re vitamins) fines of almost A$23m in total.
548
ACCC v ABB Transmission and Distribution Ltd (2001) ATPR 41-815.
549
ACCC v Visy Industries Holdings Pty Limited (No.3) [2007] FCA 161 2
November 2007 (Heerey J.).

485
 The behaviour included an overarching agreement to fix prices
and maintain market shares (including compensation where customers
were lost to the other), understandings to increase prices from time to
time and annually, and related understandings on price with customers.
The arrangements were agreed at almost 50 meetings, and the
overarching agreement was reinforced by the CEOs of the two
companies, one of whom was Mr Pratt, at a lunch meeting.

Ultimately Visy and three of its senior officers admitted the

contraventions. The Federal Court found that there were 69
contraventions of the TPA. It imposed a penalty of A$36 million on Visy
for 37 contraventions of the TPA but did not impose an individual
penalty on Mr Pratt, who was knowingly concerned in the conduct,
because he owned the company. Mr Debney was involved in 14
550
contraventions and was given a penalty of A$1.5 million; Mr Carroll
was knowingly concerned in 49 contraventions and was given a penalty
of A$500,000.

Of particular interest in relation to consumers was the following

statement of the Federal Court (Heerey J.):
“Every day every man, woman and child in Australia would use
or consume something that at some stage has been transported in a
cardboard box. The cartel in this case therefore had the potential for the
widest possible effect…
The cartel went on for almost five years. Had it not been
accidentally exposed, it would probably still be flourishing. It was run
from the highest level in Visy, a very substantial company. It was
carefully and deliberately concealed. It was operated by men who were
551
fully aware of its seriously unlawful nature.”

In the context of levying the highest cartel penalty ever in

Australia, His Honour made a number of statements that reflected his
views on the conduct of the participants. His Honour described the
corporate compliance culture of Visy as “non-existent” and stated:

“…The Visy Trade Practices Compliance Manual might have

been written in Sanscrit for all the notice anybody took of it”.

550
This was a very high penalty for an individual under the TPA, imposed
because of his seniority and level of involvement.
551
At para. 312, 315.

486
 He also described a statement made by Mr Pratt on behalf of
the company in relation to the decision to admit liability in the matter as
552
being “…hardly consistent with a frank admission of wrongdoing” , and
noted that the cartel in effect operated for Mr Pratt’s “personal benefit
553
via his ownership” of Visy”.

The size of the penalties in this case, and the publicity given to
it in the media given the high profile of the company and its owner,
illustrate the importance of such cases for protection of consumers and
also as a deterrent to others contemplating similar arrangements. A
class action has also been launched on behalf of persons suffering loss
because of the conduct, who are reportedly claiming A$700 million from
554
Visy and Amcor on the basis of additional packaging costs paid.
Other parties affected by the conduct have reportedly launched
additional, individual actions. Visy and Amcor supplied many of
Australia’s leading food companies such as Nestlé, Coca Cola Amatil
and Goodman Fielder.

3.2.2. Exclusionary conduct

Arrangements that constitute “exclusionary provisions” are

prohibited by the TPA per se or absolutely – without consideration of
their effect on competition in a market. This conduct involves a situation
where competitors agree not to supply or acquire from particular
555
persons or classes of persons . Market sharing or similar conduct
often falls within this provision.

3.2.2.1. Case study

In 2006 penalties totalling A$4,750,000 were imposed on

Liquorland (Australia) Pty Ltd when it admitted breach of the TPA.
Penalties were subsequently imposed on Woolworths for similar

552
At para. 324.
553
At para. 326.
554
Washington, S. and Wood L., Visy customers claim $700 m damages,
Sydney Morning Herald, 10 October 2007. The immunity granted to Amcor by
the ACCC will not protect it from third-party actions for damages.
555
Section 4D.

487
conduct. The two were Australia’s retailers and substantial retailers of
556
liquor. The conduct arose out of similar arrangements made by
Liquorland and Woolworths individually with applicants for liquor
licences in local areas. Under the state legislation, existing retailers of
alcohol in an area could object to the grant of additional licences by the
NSW Liquor Administration Board on various grounds. Liquorland and
Woolworths had existing retail outlets in the areas under consideration.
In each case Liquorland and Woolworths had lodged objections to the
granting of the licences to small applicants. Small applicants up against
the resources of very large retailers did not really have the resources to
deal with the objections. In each case there would have been a
contested hearing for the licences but Liquorland and Woolworths
agreed to withdraw objections to the applications on condition that the
applicants accept restrictions on their liquor licences. The agreements
were evidenced in various Deeds signed between Liquorland and
Woolworths and the various parties. The types of restrictions contained
in the agreements were:

• Liquor license applicants were prevented from selling packaged

takeaway liquor from their premises;
• Liquor licence applicants were restricted and prevented from
opening a dedicated bottle shop or establishing a separate
drive-through bottle shop;
• Liquor license applicants were restricted and prevented from
advertising or conducting promotions for the sale of packaged
takeaway liquor over the counter to consumers;
• Liquor license applicants were prevented from expanding the
size of their licensed premises; and
• The amount of liquor that liquor license applicants could keep
557
on their premises to meet consumer demand was limited.

Woolworths did not admit the conduct and was ultimately found
to have contravened the TPA. The Federal Court found that the
agreements between Woolworths and the small retailers contained
unlawful exclusionary provisions, and they also had the purpose of
substantially lessening competition. The Federal Court imposed
558
penalties totalling A$7 million.

556
ACCC v Liquorland (Australia) Pty Ltd (2006) ATPR 42-123.
557
ACCC Press Release 22 December 2006.
558
ACCC Press Release, December 2006, outlining judgment of Allsopp J.

488
 In levying this penalty, the Federal Court (Allsopp J.) made the
following comments:
“Lying at the heart of the Act is the competitive process. A subjective
purpose of a substantial commercial entity of substantially affecting
competition is of the utmost seriousness. This is especially so when
experienced senior officers undertook such conduct deliberately to
ensure that licences did not become any form of competitive platform or
threat. Whilst no particular effect was proved, I should approach the
matter on the basis that the conduct was seen as relevantly important to
protect Woolworths' interest by ensuring the absence of a competitive
platform. It was of relevant commercial significance to Woolworths and
should be viewed in that light".

The conduct of the two retailers was clearly relevant to the

potential for competition between liquor suppliers for the consumer
dollar at a local level. For this reason, the case was a significant
outcome for consumers, in that it eliminated conduct that limited the
ability of smaller liquor outlets to sell to consumers.

3.2.3. Misuse of market power

Section 46 of the TPA prohibits a corporation with a substantial

degree of market power from taking advantage of that power for anti-
competitive purposes such as deterring competitive conduct or
preventing market entry.

The enforcement of this provision has been problematical and it

was amended in 2006 to assist small business. Further amendments
are currently planned. Unresolved issues exist about the level of
protection that the provision should provide for small businesses, the
role of the concept of recoupment in cases involving allegations of
predatory pricing, and the approach to be taken to the measurement of
the threshold level of market power.

489
3.2.3.1. Case studies

559
The Safeway case involved a consideration of issues
including misuse of market power in the context of that company’s
acquisition of bread for sale in its stores. Safeway adopted a “deletion
policy” under which it imposed a term of trade on three bakers who
supplied bread to it. Under this term, if they sold bread to competitors of
Safeway at a price less than their price to Safeway they must offer
560
Safeway the same price. If they refused to do so, Safeway would not
display any of their bread products in its store and would stop
purchasing further supplies. This was found to fall within the misuse of
market power provision by the Federal Court. Safeway had a substantial
degree of market power in the market, and both the trial judge and a
majority of the Full Federal Court found that it had taken advantage of
that power in four instances where it removed all or most of the baker’s
products from one of its supermarkets. The conduct was directed at the
supply of discount bread to a competitor, and a firm without market
power would have been commercially compelled to stock the full range
of products in order to satisfy consumer demand. Safeway had also
introduced “fighting brands” of different bakers to achieve its outcome.
The majority (Heerey and Sackville J.J.) characterized the conduct as:

“…the use of the leverage it had in the market to inflict pain on the plant
baker concerned and thereby dissuade it from continuing to supply
561
discounted bread to Safeway’s’ local competitor”
Penalties totalling A$8 million were imposed on Safeway in respect of
562
this conduct.

3.2.4. Exclusive dealing

Section 47 of the TPA prohibits various vertical arrangements

that have the purpose, effect or likely effect of substantially lessening
competition. Both the making of the arrangements with specified

559
ACCC v Australian Safeway Stores (2001) FCR 1; (2003) FCR 339.
560
Commonly called a “most favoured customer” provision.
561
Op. cit. at para. 329.
562
(2006) ATPR 42-094 (Keifel J.).

490
conditions, and the refusal to deal without acceptance of those
conditions, are prohibited. Third line forcing conduct is prohibited per se
or absolutely.
The conditions concern such things as customer and territorial
arrangements, tying contracts and requirements contracts.

3.2.4.1. Case study

The Universal Music case involved the issue of anti-competitive

conduct in the supply of CDs to retailers. On 30 July 1998, amendments
to the Copyright Act 1968 (Cth) removed the previous prohibition on the
importation of sound recordings without the consent of Australian
copyright owners or licensees. The effect of the amendments was that
Australian wholesalers and retailers of CDs and other sound recordings
could acquire stock from other countries; provided the manufacture of
that stock did not infringe copyright law in the source country and had
been carried out with the consent of the copyright owner. This meant
that Australian retailers were no longer obligated to acquire their stock
from Australian sources. Australian distributors Universal Music
563
Australia Pty Ltd (‘Universal’) and Warner Music Australia Pty Ltd
(‘Warner’), ceased to supply certain retailers who imported CDs from
overseas. They also made it known they might not supply other retailers
who imported. The ACCC brought proceedings claiming breaches of
Sections 45, 46 and 47 of the TPA. Hill J., at first instance, found that
both distributors had contravened Sections 46 and 47, and that certain
564
executives had been knowingly involved in the conduct. He also
found certain of their executives had been knowingly involved in those
contraventions. Between the decision at first instance and the appeal
the Boral case was handed down. This overruled the original decision
on Section 46. The recording companies appealed on the Section 47
issue.

The relevant market was confirmed as the Australian wholesale

market for recorded music, and 70 per cent of this music originated
overseas. Specifically, Universal wrote to retailers stating that it
reserved the right to review the terms and conditions of trade with

563
The actual Universal conduct was engaged in by PolyGram, which
subsequently became part of the Universal group.
564
[2001] FCA 1800.

491
retailers who parallel imported its recordings. Threats were made to
discontinue certain discounts. Other threats were made to cease supply
where parallel importing took place. Warner engaged in similar conduct.
The conduct was said to constitute an offer to supply goods and
services to retailers on condition that they agreed not to acquire goods
of a particular kind or description, namely imports consisting of non-
infringing copies, directly or indirectly, from a competitor.

The conduct was found to infringe Section 47 and the Full

Federal Court confirmed this. The conduct did not have the effect of
substantially lessening competition because many retailers purchased
non-infringing copies by direct importation or purchasing stock imported
by others. This may have been because the conduct was “nipped in the
bud” by the intervention of the ACCC, or because many retailers were
not intimidated by the threats. It was not possible on the evidence for
the Full Court to find that the conduct had the likely effect of
substantially lessening competition. The conduct did, however, have the
purpose of substantially lessening competition. The record companies
said that their purpose was to prevent freeriding, but the trial judge
found that it was motivated by an intention to bring about the result that
persons would not import recordings into Australia. The Full Court
agreed that this brought the conduct within Section 47.

3.2.5. Resale price maintenance

Resale price maintenance, or fixing the price at which goods are

565
to be resupplied, is prohibited in wide-ranging provisions of the TPA.
The ACCC has been particularly successful in prosecuting cases under
this provision. Of recent note are two cases involving consumer
products. The highest ever penalties for resale price maintenance were
imposed in 2007 against companies involved with the sale of Jurlique
cosmetics for conduct occurring between 1991 and 2003. There was a
long-standing policy against discounting, and the conduct in question
included attempting to induce retailers not to sell at prices less than
those specified by Jurlique, supplying on condition that there would not
be discounting, and withholding supply on account of discounting.
Ultimately the parties admitted the conduct. The Federal Court ordered
penalties totalling A$3.4 million against four companies and their

565
Sections 48, 96–105.

492
founder, Dr Jurgen Klein. Dr Klein was ordered to pay a penalty of
A$200,000 personally as well as A$20,000 in costs. The penalties were
large because the conduct went on for a long time and involved the
566
most senior executives of the company. In another recent decision
penalties totalling A$1.36 million were imposed on Navman Australia
Pty Ltd, a company supplying car, marine and personal navigational
567
equipment, and its employees. The company sought to ensure that
there was no discounting in its products and in some cases cut off
supply where discounting took place. In levying the penalty the judge
commented that the conduct was not merely deliberate but was
systematic and pursued in an aggressive and high-handed manner by
senior managers of the company. In commenting on the outcome, the
Chairman of the ACCC noted that consumers like to shop around to get
the best deal on GPS and other electronic equipment, encouraging
568
competition and enabling consumers to buy at lower prices.

3.2.6. Mergers

Mergers and acquisitions in Australia are prohibited if they have

the purpose, effect or likely effect of substantially lessening competition
569
in a market. Enforcement action by the ACCC in this area is
extremely rare. It engages on a regular basis in reviewing acquisition
activity in an administrative context. There is no requirement for
mandatory filing of pre-merger notifications in Australia. Where parties
are of the view that conduct risks breaching the TPA there are a number
of options available to them.

A party may approach the ACCC informally to seek its views

and seek reassurance that it would not be likely to take the matter to
570
court. This informal process is used extensively but there is no review

566
ACCC v Jurlique International Pty Ltd & Ors. [2007] FCA 79 (8 February
2007).
567
ACCC v Navman Australia Pty Ltd [2007] FCA 2016 (21 December 2007).
568
See Australian Competition and Consumer Commission, Press Release
Navman penalised $1.2 million for resale price maintenance, 21 December
2007.
569
Section 50.
570
See ACCC, Merger Review Process Guidelines, July 2006. As to the
approach of the ACCC to examining such proposals, see ACCC, Merger
Guidelines, July 2006.

493
and the outcome does not protect the parties to the merger from action
by third parties.

A new formal merger review process, administered by the

ACCC and reviewable by the Tribunal was introduced in 2007. Its aim is
to provide additional certainty to applicants while maintaining a relatively
571
short time approach to the issue. This process is not reviewable.

Alternatively parties may apply to the Australian Competition

Tribunal for an authorization, which is an administrative sanction
available for a variety of conducts under the TPA based in this context
on a test which provides that the authorization must not be granted
unless the Tribunal is satisfied in all the circumstances that it would
572
result in such a benefit to the public that it should be allowed to occur.
573
The authorization route was previously used only rarely.

The ACCC has not taken court proceedings in relation to a

proposed acquisition for a number of years, although this is open to it
and it has the power to seek divestiture of assets for conduct in breach
of the TPA.
It is, however, extremely active in the area of informal
clearance. In 2005–2006, for example, the ACCC examined 272
mergers, acquisitions and asset sales for compliance with the TPA. Two
hundred and sixty-one were not opposed (including 26 withdrawn before
final decision). Two were initially opposed and subsequently resolved
with acceptance of court-enforceable undertakings. Six were resolved
during the review process with court-enforceable undertakings. One
hundred and forty-one matters were considered on a confidential basis
and, of these, three were opposed or had concerns confidentially
574
expressed.

571
See Part VII Division 3.
572
Section 95AZH. This process was previously undertaken by the ACCC.
Delays arising from the process, including the ability to appeal to the Tribunal,
made the process unworkable and it was amended in 2006 to its current form.
There are no decided cases as yet.
573
But see Qantas Airways Limited [2004] ATPR 42-027; 42-065; Re Qantas
Airways Limited [2005] ATPR 42-065 where the original rejection of
authorization by the ACCC was overturned by the Tribunal on review. This was
before matters went straight to the Tribunal, and also involved other areas of the
TPA.
574
See ACCC Annual Report 2005–2006.

494
3.2.7. Conclusions

It can be seen from the Case Studies that the ACCC takes
particular note of the potential impact of conduct on consumers when
making decisions on enforcement priorities. All of the cases mentioned
have a significant consumer impact. The tangible effect of the
curtailment of offending conduct in all cases was increased competition
and ultimately reduced costs for consumers. The broad powers given to
the ACCC to investigate and enforce the provisions of the TPA
significantly assist and are essential to the effective prosecution of
competition law cases under the TPA.

495
References

Australian Competition and Consumer Commission, Annual Report

2005–2006.

Australian Competition and Consumer Commission, Merger Guidelines,

July 2006.

Australian Competition and Consumer Commission, Merger Review

Process Guidelines, July 2006.

Independent Committee of Inquiry, Report of Independent Committee of

Inquiry into National Competition Policy, 1993 AGPS, Canberra.

Productivity Commission, Review of National Competition Policy

Reforms Report, No 33, 28 February 2005.

Samuel, G., Chairman, Australian Competition and Consumer

Commission, The foundations of good consumer protection policy:
strong law, vigorous enforcement and the educated consumer, Speech
to National Consumer Congress, 15 March 2007.

Samuel, G., Chairman, Australian Competition and Consumer

Commission, The enforcement priorities of the ACCC, Competition Law
Conference, 12 November 2005.

Willett, E., Commissioner, Australian Competition and Consumer

Commission, The ACCC’s role in promoting competition and protecting
consumers, Speech to the Australian Bankers Association Regulation
Forum, 24 August 2007

496
AN OVERVIEW OF THE ANTI-MONOPOLY PRACTICE IN
THE PEOPLE’S REPUBLIC OF CHINA

Mao Xiaofei*

1. Introduction

This study seeks to explore the anti-monopoly practice in China

from 1993 to 2007. In 1993 the first competition law, the Law Against
575
Unfair Competition (“LUC”), was enacted which embodies a few
provisions concerning anti-monopoly issues and laid down the initial
foundation for the antitrust practice in China. Thereafter, the Chinese
government issued several other anti-monopoly provisions in different
laws, regulations or even directives to supplement the LUC. Such an
incremental approach led to a fragmented legal framework against
restrictive behaviour in the Chinese market. The status quo is expected
to be altered when the new Anti-monopoly Law (AML) takes effect on 1
August this year. The law was passed by the People’s Congress on 30
August 2007, after a long legislative history of about twenty years.

The basic pillars such as prohibition of restrictive agreements,

abuse of market dominance and merger review, which are common in
all antitrust regimes, have been gradually established from 1993 to 2007
in China. It began with the condemnation of abusive conduct of public
enterprises and undertakings with monopoly positions, provided for in
the LUC. The law empowers the State Administration for Industry and
Commerce (SAIC), along with its local offices, to safeguard competition
in the Chinese market. The supervision over restrictive agreements, in
576
particular price cartels, was stipulated in the Price Law passed by the
People’s Congress five years later. Not the SAIC but the National
Development and Reform Commission (NDRC) was authorized in this
respect since the NDRC and the local price bureaus have been
responsible for pricing activities in the long administrative tradition.
However, in practice, the SAIC seemed to be actively involved as well.

*
Research Fellow at the Chinese Academy of Social Sciences.
575
It was promulgated on 2.9.1993 and took effect on 1.12.1993.
576
It was promulgated on 29.12.1997 and took effect on 1.5.1998.

497
The competition review on mergers and acquisitions (M&A) was
attached with no great importance until the issue of takeovers of
domestic enterprises by foreign investors, in particular its impact on
Chinese industries, raised notable concerns of policy makers. In 2003,
the first merger review was provided for in the Interim Provisions on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors
577
(Interim Provisions), which put only M&A involving foreign enterprises
under control. A third authority – the Ministry of Commerce (MOFCOM)
– was entrusted, together with the SAIC, to carry out competition
assessment.

Therefore, not only was the legal framework for antitrust issues
fragmented but also the competence for implementation was granted to
different administrative bodies. In the following, the enforcement
practices by respective bodies will be addressed. Part 2 explores the
crackdown of price cartels as the most pernicious form of anti-
competitive behaviour. After reviewing the cases dealt with by the SAIC
in sanctioning abusive conduct of public enterprises and undertakings
with legal monopoly status (Part 3), the focus will be turned to merger
control by the MOFCOM and the SAIC (Part 4). In Part V, abuse of
administrative power impeding competition, a special feature of the
Chinese anti-monopoly practice, will be addressed. A brief comment on
the transition from the past anti-monopoly practice to the implementation
of the AML will be given at the end of the analysis.

2. Restrictive agreements

The prohibition of restrictive agreements by the Chinese

authorities has been limited to the hard-core cartels, in particular price
cartels and rig bids. Cases concerning production restriction and market
allocation were little condemned. Due to the lack of legal basis, other
restrictive agreements such as collaboration in production, joint
marketing schemes and resale price maintenance, which may also raise
competition concern, were not even investigated.
For the crackdown of price cartels, two major administrative
agencies are involved: one is the NDRC together with local price
bureaus, and the other is the SAIC with its local offices. The NDRC and
local price bureaus became sluggish ever since they failed in the first

577
It was enacted on 2.1.2003 and took effect on 12.4.2003.

498
cartel case in 2001. It lasted until July 2007 when the draft of the AML
was discussed in the People’s Congress. The SAIC and its local offices
seem to be more active, according to the cases and the statistics
578
disclosed to the public. However, their competence is controversial,
which thus leads to an inconsistency in the practice of different local
SAIC offices. As far as rig bids are concerned, there was a structural
change conceived in 2000 as the Chinese Tender Law was
promulgated. This greatly reduced the power of the SAIC.

2.1. A growing awareness of the NDRC and local price

bureaus

By virtue of the Price Law, the NDRC and local price bureaus
are the government authorities that are authorized to investigate abuse
in pricing activities including cartels. Most of the cases are handled by
local price bureaus and only important ones with a significant effect on
the whole Chinese market are to be dealt with by the NDRC. Compared
to other kinds of unlawful pricing practices condemned by the
authorities, cartel prohibition is rare in practice.
The first notable case is the price collusion among sellers of
gold jewellery in Shanghai in 2001. After the abolition of the price control
over pure gold jewellery by the state, gold jewellery sellers in Shanghai
started to reduce their sales prices. Facing such a “price war”, the
Shanghai Industrial Association for Diamond and Jade and the
Shanghai Gold & Jewellery Trade Association, upon the request of
several members, called for a meeting with the participation of 13
undertakings, amounting to 80 per cent of the total market share in
Shanghai. As a result of the conference, the participants agreed on a
minimum price for pure gold jewellery. This action was made public in a
joint statement released by the participants claiming that an

578
From 1999 to June 2005, there were 14 price cartels investigated by the local
SAIC offices, whereas there were only two cases investigated by local price
bureaus of the NDRC at the same period of time. For details of cases and

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
statistics regarding the SAIC, see
SAIC/CASS[ / ], Fan Long Duan
Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-

《 反垄反反反反反反中国反垄反垄中垄垄》
monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement ],
MAO Xiaofei (ed.), 2007, p. 216.

499
unreasonable price war among them would only destroy their own
existence. The Price Bureau of Shanghai initiated an investigation over
the issue and concluded that the concerned practice constituted a price
579
collusion infringing Article 14 of the Price Law.
The participants contested the decision by arguing that the price
coordination was aimed at curbing the destructive price war among
them since a ruinous pricing under cost would only destroy the market
order, consequently to the detriment of consumers. Moreover, there
were no formal agreements concluded. No coercive measures had been
taken by associations to enforce the minimum price agreed. It was
absolutely up to the participants whether or not to implement the pricing
scheme. Therefore, there was no intention of collusion and price
manipulation for violation of Article 14 of the Price Law. Besides that, it
was argued that the minimum price was supposed to protect 95 per cent
of the small and middle-sized enterprises in the industry that had to pay
a higher purchase price for gold as a raw material for production, which
was still under the control of the central government. Only a few
companies with special rights could acquire gold directly from the
People’s Bank of China. They were capable of saving production costs
and could sell at a lower price. A price competition on such a basis was
unfair to those small and middle-sized competitors. A minimum price for
pure gold jewellery would, to a certain extent, offset the negative effects
of the unequal distribution of raw materials and improve the competitive
strength of the small and middle-sized firms. The most disputed issue in
the case was whether or not the associations who were involved in the
price conference should be responsible for the conduct since the
administrative decision was merely addressed to the undertakings. Most
controversial was whether or not the self-regulation of prices by
industrial associations fell under the legal activities of associations who
580
are supposed to establish codes of conduct for member enterprises.
The appeal was brought to the administrative review office of Shanghai
Municipality. Finally, the Price Bureau revoked its decision on the

579
SAIC/CASS[国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
/ ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected
Anti-monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement 《 反垄反反反反反反中国反垄反垄中垄垄》 ],
MAO Xiaofei (ed.), 2007, p. 112.
580
Ibid., p. 113.

500
grounds of procedural defects. Thus, the first effort by the Price Bureau
581
could more or less be regarded as having failed.

The justification of the prevention of “destructive” pricing is

popular with cartelists but hardly accepted in any antitrust jurisdiction
because it has been always proven to be the excuse adopted by
cartelists to charge a price that is higher than the competitive level. It is
well acknowledged that competition is a process by which a reasonable
market price is to be established according to the demand and supply of
the market. No producers themselves are in a position to decide
whether a price is reasonable or not. A so-called destructive price may
occur when a dominant producer intends to drive his/her competitors out
of the market by selling the relevant product below cost. Furthermore,
there must exist the possibility that the loss incurred by the destructive
price can be recouped at a later point, otherwise no rational producer
would operate under such circumstances. However, in China this
populist explanation has been put forward repeatedly by undertakings,
582
even in recent cases. The attitude of the responsible authority is
unclear since there is no official comment available, but neither is there
an absolute rejection of this justification.

The argument that the price cartel was established in order to

protect the disadvantaged producers of gold jewellery, above all small
and middle-sized enterprises who had to pay a higher purchase price for
raw materials, was unique in the Chinese context. In the reform process
of the Chinese economy, the deregulation of markets has been put
forward gradually. The side effect of this incremental approach is that
some markets are liberalized, whereas their neighbouring markets may
still be under the control of the government. As shown in this case, the
sale price for pure gold jewellery was market oriented, but the price for
gold and its distribution was regulated by the Chinese People’s Bank.

581
Shanghai Zai Qi Jin Jia Zi lü Zhi Zheng [The Resurge of the Dispute over the
Self-regulation of Gold Prices in Shanghai“ 上海再起金价自律之争 ”], available at
http://www.chinawestnews.net/gb/westnews/cjkb/gdxw/userobject1ai234290.ht
ml, last visited on 2.3.2008.
582
“Mai Ji Song Yi” Jiang Dan Chu Beijing Ru Pin Shi Chang [“Buy More One
Free” will fade out of the Market for Dairy Products in
买几送 将淡出北京乳品市场
Beijing“‘ 1’ ”], Xin Jing Bao [New Beijing Newspaper
《新京报》 ], 20.7.2007, available at http://finance.jrj.com.cn/news/2007-07-
20/000002447213.html, last visited on 2.3.2008.

501
Enterprises that have special access to the raw material are indeed
privileged in competition. Nevertheless, the price cartel cannot be
justified on this ground because it doesn’t function as an adequate
instrument for solving the real problem. The disadvantaged producers
may set forth a higher price by establishing a cartel, but since this price
is higher than that of the privileged producers, the cartelists are still less
competitive in the market. Or, both the disadvantaged producers and
the privileged agree on a cartel price so that the disadvantaged may
also survive in the market by acquiring monopoly profits. However, such
a cartel leads to a lessening of price competition, which functions as a
key instrument in selecting those competitors who survive based on
better business merits. In other words, inefficient producers may
continue their production resulting in a waste of economic resources
and a significant loss of consumer welfare. The price cartel is unable to
drive out the privileged producers who are inefficient as well. Unfair
competition as such can only be effectively resolved by a structural
approach that eliminates unequal treatment in the distribution of
resources. In the case in question, this justification was upheld by the
sellers of pure gold jewellery rather than the producers, which
demonstrates an obvious misuse by the cartelists since they were not all
affected by the unfair distribution of resources.

The issue of the involvement of the associations and their

liability was controversial in this case. The Price Bureau in Shanghai
didn’t condemn the concerned associations for coordinating the price
conference. The undertakings contended that they were requested by
the associations to take part in the meeting. The associations
recognized their engagement but considered it to be lawful since it fell
583
under the scope of their self-regulating activities within the industry.
Thereafter, a discussion on the function of industrial associations was
raised in public.

The role of industrial associations is ambiguous in China. In

theory, they are designed as organizations established on the free will of
the undertakings to stand for the interests of members. However, in the

583
Ge Shuo Ge De Li “Shanghai Jin Jia Zi lü” Feng Zheng Yi Ran [Each
Insisting on its Viewpoint, Dispute over the “Self-regulation of Gold Prices”
continues 各说各的理
“ 上海金价自律 纷争依然
‘ ’ ”], available at
http://news.xinhuanet.com/fortune/2002-02/05/content_268817.htm, 06.02.2002,
last visited on 2.3.2008.

502
Chinese context, industrial associations could include representatives of
undertakings. In many cases they were viewed as an external
administrative body of the government facilitating the implementation of
certain administrative measures by means of imposing compulsory
obligations upon their members. Hence, they have been variously
entitled “second government”, “half government”, and “new ‘mother-in-
584
law’ for enterprises”. Consequently, it is hard to make a clear
distinction as to whether they are acting for member companies or are
taking action on behalf of the government. In the latter case,
undertakings are left with little latitude to make their own decisions. This
is why the undertakings were arguing that they were in fact organized by
associations, and therefore “innocent” in the case.

The complicated identity of industrial associations has come

into being during the transitional process of Chinese society, particularly
in the reform of the Chinese administrative structure. As a huge number
of administrative organs were cut back during the administrative reform,
some of the former governmental bodies were transformed into
585
industrial associations. It has been the conventional practice that the
roles of chairman or directors of industrial associations are held by
586
current or former governmental officials. There is a hazy
interrelationship among administrative bodies, industrial associations
and enterprises, though efforts have been made to confine the boundary
of associations’ power. For instance, the Shanghai Municipality enacted
the first specific regulation in this regard on the local level, which defines
industrial associations as non-profit institutions created voluntarily by
undertakings and prohibits governmental officials from holding leading
587
positions in these associations. However, things cannot be changed
overnight.

584
Hang Ye Xie Hui: Guo Hao Zheng Fu Guan He Qi Ye Guan [Industrial

行行
业业过好好好好
过业
好过
Associations: Overcome the Hurdles set by the Government and Enterprises
“ : ”], available at http://www.snet.com.cn/news/sdbd/200302/Index.htm,
last visited on 2.3.2008.
585
Ibid. available at http://www.snet.com.cn/news/sdbd/200302/Index.htm, last
visited on 2.3.2008.
586
Ge Shuo Ge De Li “Shanghai Jin Jia Zi lü” Feng Zheng Yi Ran [Each

各各
说各各上上上上上上争
纷争争
Insisting on its Viewpoint, Dispute over the “Self-regulation of Gold Prices”
continues “ ‘ ’ ”], available at http://news.xinhuanet.com/fortune/2002-
02/05/content_268817.htm, 06.02.2002, last visited on 2.3.2008.
587
Art. 2 and Art. 7(4) of the Temporary Provisions for Industrial Associations in
Shanghai, enacted by Shanghai People’s Government, 2002.

503
 With regard to the case in question, though the influence of
industrial associations was noticeable, it was still not enough to argue
that the participating firms were obliged by the associations to enter into
the cartel. In contrast, there are sufficient facts proving that the price
conference was initiated by the associations upon the request of some
of the jewellery sellers. Furthermore, the agreement maintaining a
588
minimum price was concluded by the participants themselves. The
liability of the participants is well grounded by the Price Bureau,
regardless of the liability of the involved associations. As to the legality
of the associations, the Price Bureau in Shanghai found it difficult to
assess the nature and the scope of the self-regulation in pricing
activities by industrial associations provided for in Article 17 of the Price
Law. However, the majority of the commentators from academic circles
589
condemned it as anti-competitive. Indeed, Article 17 of the Price Law
obliges industrial associations to comply with the Price Law and the
relevant rules and to reinforce the self-regulation in pricing. Obviously,
the self-regulation by associations is to be construed in the context of
disciplining the pricing activities of member enterprises so as to conform
to the Price Law. By virtue of a supervisory obligation, industrial
associations shall in fact not only themselves refrain from any
engagement in price cartels but also prevent their members from cartel
practices, which is nevertheless the contrary in this case. It was a flaw
that the negative finding was solely addressed to the undertakings
without carrying out any investigation regarding the associations’
responsibility for the infringement. Even more questionable was that the
initial decision of the Price Bureau was subsequently revoked by it
because of some procedural defects during the administrative review.
The defeat of the Price Bureau of Shanghai in the first cartel
case shadowed the later administrative actions against price cartels in
China. In 2004, the Shanghai Gold & Jewellery Trade Association, the

588
Shanghai Huang Jin Shi Pin Qi Ye Lian He Xian Jia De Long Duan Xing Wei
Zao Dao Chu Fa [Sanctions on Concerted Price Fixing as Monopoly Practice by

上海黄金饰品企业联合限价的垄断行为遭到处罚
Enterprises selling Gold Jewellery in Shanghai
“ ”, available at
http://economy.enorth.com.cn/system/2001/12/25/000226861.shtml, last visited
on 2.3.2008.
589
Hang Ye Xie Hui Neng Bu Neng Gao “Jia Ge Xie Yi”[Can Industrial
Associations make “Price Agreements” “ 行业协会能不能搞 价格协议 ‘ ’”], available
at http://www.ica.gov.cn/llyj/llyj2002/llyj0205-1.htm, last visited on 3.2.2008.

504
same association involved in the above-mentioned case – again issued
a statement on the self-regulated prices for gold jewellery in which a
standard price, adjustable weekly to the estimation of the Association,
was proposed. The sellers of gold jewellery could set forth their prices
without exceeding the 3 per cent limit of the standard price. For the sake
of supervision, a hotline was established for complaints. The concerned
distributors could be sanctioned in case of non-compliance. The Price
Bureau of Shanghai didn’t take any action on this occasion, though the
responsible official held personally that such a price restriction by the
association, in particular the minimum price, might curb the free
reduction of prices by enterprises which could be a matter of price
collusion. Whether or not the self-regulation by associations may violate
the freedom of undertakings in their pricing activities is another issue,
which is irrelevant for the discussion here. It won’t be explored in further
590
detail at this point.

The ambivalence that resulted from the defeat of the authority in

the first case led to confusion in the practice. A few of the cartels were
591
cracked down upon by local price bureaus, whereas quite a number
of alleged collusions exposed to the public were not dealt with until the
592
summer of 2007.

590
Shanghai Zai Qi Jin Jia Zi lü Zhi Zheng [The Resurge of the Dispute over the
Self-regulation of Gold Prices in Shanghai “ 上海再起金价自律之争 ”], available at
http://www.chinawestnews.net/gb/westnews/cjkb/gdxw/userobject1ai234290.ht
ml, last visited on 2.3.2008.
591
Shang Jia Lian He Gao Ti Jia Bei Zhi Zhi, Zhu Zhou 20 Duo Jia Mi Fen

商商商
联商商上商商商株株 多商多多多商查查
Chang Bei Cha Chu [The Annulment on undertakings jointly increasing Prices,
over twenty Producers for Rice Flour were punished “ 20 ”],

；
available at http://finance.news.tom.com/1001/1005/2004313-46619.html, last
visited on 2.3.2008
Xie Che Ye Ji Ti Zhang Jia She Xian Long Duan [The Collective Increase of

洗洗
车业车
洗上洗洗
涉车
Prices in the Car Wash Sector leads to suspicion of Monopoly Behaviour
“ ”], available at
http://www.hbqnb.com/news/html/HqLocalnewsSimple/2007/530/075303134308
68JAD9H09AFAGC9CJ0.html, last visited on 2.3.2008.
592
Guo Nei Hang Kong Gong Si Da Cheng Jia Ge Lian Meng, Ji Piao Jia Ge Pu

国国国国国国国国上国国国 机机上国机机上机
Bian Shang Zhang [Domestic Airlines agreed on Price Collaboration, Prices for
Flight Tickets are increasing“ ”], available at
http://finance.sina.com.cn/chanjing/b/20050404/07401484238.shtml, last visited

上国国国能能多远？，
on 4.4.2005; “Jia Ge Tong Meng” Neng Zou Duo Yuan? [How far can the “Price
Collaboration” go? “‘ ” ”] available at
http://news.xinhuanet.com/fortune/2002-04/30/content_378737.htm, last visited

505
 The turning point occurred while the draft AML was being
discussed at the People’s Congress. In July, several key producers in
the instant noodles industry, together with the China Branch of the
International Ramen Manufacturers Association, hereinafter referred to
as “IRMA (China)”, announced a joint increase in prices for their
noodles, which aroused great public concern. Upon complaints from
consumers, the NDRC carried out an investigation and found that the
IRMA (China) had organized three meetings with the participation of
major producers to increase prices for instant noodles in different quality
categories from 2006 to 2007. The conference memos were printed in
the periodical so that information on prices was made available for all
undertakings. The producers involved subsequently raised their prices.
The NDRC requested the IRMA (China) to correct its excessive
practices, make an open statement to eliminate the negative effects and
annul the decision regarding the collective price increase agreed in the
593
conference memos.

It is notable that for the first time an administrative action on the

level of the central government was taken, while the previous ones were
typically undertaken by local officials. It shows that the NDRC, and even
the State Council, were becoming aware of the issue of price cartels in
the Chinese market. Thereafter, a series of punishments for cartel
594
activities was carried out by the local officials in China. It is
noteworthy that the growing concern regarding the harmful effects of

on 1.1.2006; Rong Er Shou Che Shi Bei Zhi“Jia Ge Tong Meng”[An

榕榕榕榕
车商榕上国国国 ，
alleged“Price Collaboration’in the Market for Second-hand Cars in Rong
(“ ‘ ’”) available at http://www.fjxf315.com/news2.asp?unid=23725, last
visited on 2.3.2008; MAO Xiaofei, Xiao Fei Zhe Bu Neng Wei Hang Ye Zi lü Mai

消消
费消能行上
费业费
上费 《新新报》
Dan [Consumers shall not pay the Bill for the Self-regulation in Industries
“ ” ], Xin Jing Bao [New Beijing Newspaper ], 22.07.2007.
593
国家发改委
NDRC [ ], Guo Jia Fa Gai Wei Dui Fang Bian Mian Jia Ge Chuan
Tong An Diao Cha Qing Kuang Tong Bao [A Notice concerning the Investigation
of the Price Collusion for Instant Noodles on 16.8.2007
国家发改委对方便面价格串通案调查情况的通报
“ 2007/08/16”], available at
http://www.ndrc.gov.cn/xwfb/t20070816_154142.htm, last visited on 2.3.2008.
594
Fa Zhan Gai Ge Wei Gong Bu Jia Ge Chuan Tong, Hong Tai Wu Jia He Jia
Ge Qi Zha Dian Xing An Li [The NDRC published Typical Cases of Price

发展改革委公布价格串通、哄抬价格和价格欺诈典型案例
Collusion, Malicious Price Increase and Price
Cheating“ ”], available at
http://www.gov.cn/zxft/ft38/content_729143.htm, last visited on 2.3.2008.

506
price collusions to the detriment of consumers imposed great social
595
pressure on the government to take action. The occurrence of cartel
cases was coincident with a rapid increase in the price of food products
where the standard of living for the average person was significantly
affected. As the NDCR noted, the price increase even incurred a rush to
596
purchase among consumers in some areas. Unlike the case of gold
jewellery, the decision by the NDRC was addressed directly to the
concerned association but not to the enterprises, which implies a
tougher attitude toward associations playing an unfavourable role in the
most pernicious anti-competitive practices. Ultimately, an explicit
provision was incorporated into the AML (Article 16) to obstruct the
involvement of the associations in cases of cartels as well as other
monopoly agreements.

2.2. A controversial competence of the SAIC and its local

offices

In 2002, the SAIC office of City X initiated an investigation into

an alleged cartel involving seven gas suppliers and the Association of
Gas in the local market. It was found that a unanimous wholesale price
for gas was negotiated, facilitated by an allocation of market shares
among participants. A working group was set up to supervise this.
Subsequently, the wholesale price for gas was raised from 38 RMB per
can to 40 RMB in the city. The local SAIC office held that the joint action
of the seven gas companies constituted an infringement of Article 18 of
the Regulation against Unfair Competition of Zhejiang Province,
597
hereinafter referred to as “UCR<Zhejiang>” enacted by the local
People’s Congress to implement the LUC. Article 18 bans any
distribution of markets, restriction of trading partners and production, or

595
Fang Bian Mian Ji Ti Zhang Jia, Bei Zhi Yi Jia Ge Long Duan [The Collective
Price Increase for Instant Noodles suspected as Monopoly
方便面集体涨价 被质疑价格垄断
Pricing“ ”], available at
http://info.yidaba.com/economics/cjzx/227985.shtml, last visited on 2.3.2008.
596
国家发改委
NDRC[ ], Guo Jia Fa Gai Wei Dui Fang Bian Mian Jia Ge Chuan
Tong An Diao Cha Qing Kuang Tong Bao [A Notice concerning the Investigation
of the Price Collusion for Instant Noodles on 16.8.2007
国家发改委对方便面价格串通案调查情况的通报
“ 2007/08/16”], available at
http://www.ndrc.gov.cn/xwfb/t20070816_154142.htm, last visited on 2.3.2008.
597
The rule was passed on 25.8.2000 and took effect on 1.12.2000.

507
other practices impairing fair competition by means of contracts,
agreements, proposals, etc. Fines were imposed on the participating
companies.

The parties disagreed with the decision and appealed to the

District Court of City X. They argued that Article 18, as the legal basis
for the administrative sanction, doesn’t conform to the Administrative
598
Punishment Law (APL) in China. By virtue of Article 11(2) of the APL,
where an administrative punishment for the misconduct is provided for
in laws and regulations on the central level, the specification thereof by
local laws and regulations must be in line with the form, the type and the
degree set forth in the upper laws and regulations. Since there is no
provision contained in the LUC corresponding to Article 18
UCR<Zhejiang>, local legislators are not entitled to extend the scope of
the LUC by establishing new types of anti-competitive practices and
relevant sanctions. It was further contended that even if the joint action
had constituted a price cartel, it had to be sanctioned pursuant to the
Price Law for which the local Price Bureau, but not the SAIC, is
599
responsible.

The local SAIC office insisted on the legality of its decision on

the grounds that the stipulation of Article 18 is based on the Legislative
600
Law in China which permits local governments to enact local laws
and regulations on issues that are not ruled by the central government
according to the particular circumstances and factual necessities in the
601
region. This opinion was upheld by the courts both on the first and
second appeal.

598

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
The Law was passed on 17.03.1996 and took effect on 1.10.1996.
599
SAIC/CASS [ / ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected

《 反垄反反反反反反中国反垄反垄中垄垄》
Anti-monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement ],
MAO Xiaofei (ed.), 2007, pp. 116–117.
600
Art. 64(2) of the Legislative Law, passed on 15.03.2000 and took effect on

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
1.7.2000.
601
SAIC/CASS [ / ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected

《 反垄反反反反反反中国反垄反垄中垄垄》
Anti-monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement ],
MAO Xiaofei (ed.), 2007, p. 117.

508
 The overlap of the authorities’ competence in some respects is
well displayed in this case. The legality of the SAIC in treating hard-core
cartel cases, in particular those with relevance to price collusion, is
questionable, though the courts in the city confirmed the competence of
the local SAIC office. The problem is to be understood against the
background of the complicated legislative structure in China. As we can
see, both the central and local governments have the power to make
laws and regulations. Local rules are subordinate to those issued on the
central level. However, in the absence of upper laws and regulations,
local governments may enact special provisions to adapt to the regional
circumstances. In this case, there was no comprehensive Anti-monopoly
Law available on the central level, and the regulation on anti-monopoly
issues contained in the LUC is not exhaustive. Indeed, local
governments have the right to stipulate specific rules according to
“specific circumstances of the region and the factual necessities”. It is
debatable whether this condition of Article 64(2) of the Legislative Law
was fulfilled in the given case. Another restriction on the legislative
power of local governments in this regard is that local governments are
not authorized to regulate issues reserved for the legislation of the
central government, provided for in Article 8 of the Legislative Law.
According to No. 8 of Article 8, issues concerning the fundamental
economic system are to be regulated by laws of the People’s Congress.
Differing legal opinions could be held on the point of whether the content
of Article 18 UCR<Zhejiang> is concerned with the fundamental
economic system or not.

Furthermore, Article 18 UCR<Zhejiang> is worded broadly so

that an overlap with the application of Article 14 of the Price Law may
occur, particularly in the case of price collusion. In general, Article 14
shall prevail due to the doctrine of lex specialis. The Price Law doesn’t
empower the SAIC, but in fact empowers the NDRC and local price
bureaus to deal with price cartels. It is reasonable that the gas
companies questioned the competence of the SAIC. But in this case,
besides the price fixing, the market share of each participant was
allocated. The latter conduct could be viewed as a component of a price
cartel but not necessarily so, which means that it may in itself constitute
anti-competitive behaviour to which Article 18 UCR<Zhejiang> is
applicable. It is common in practice, as shown in this case, that a
scheme of price fixing among competitors may consist of several anti-
competitive measures. For example, parallel to the coordination in
pricing, a distribution of product volumes may be agreed by cartelists as

509
well. Therefore, it would have been adequate to have a general
provision proscribing hard-core cartels. A fragmented legal framework is
always prone to generate potential conflicts.

This case raised, on the one hand, the dispute over the
competence of the SAIC in this regard; on the other hand, it created in
602
fact an alternative for combating cartels in practice. However, due to
the legal ambiguity stated above, the practice of the local offices of the
SAIC is inconsistent. The local office in City X, after its first decision was
confirmed by the local courts, continued its efforts in punishing cartel
behaviour, while other local offices remained inactive.

2.3. A structural change in the prohibition of rig bids

Before the year 2000, rig bids were completely banned by the
603
LUC. The SAIC and its local offices were therefore the authorities
having the exclusive right to deal with such cases. However, the Tender
Law was promulgated in 2000, which also embodies a prohibition of rig
bids in Article 32. Different administrative agencies are responsible for
its enforcement, depending upon in which sector the concerned
collusion in bidding occurred. In most cases, the power rests with the
respective ministries for various industries such as construction, railway,
telecommunication and post, etc. Hence, institutional tension between
the SAIC and other ministries surged as the Tender Law took effect. As
a response to the problem, the Commission Office of the Central
Communist Party for Institutional Arrangement released a decision,
whereby it is made clear that the undue practices in tendering, including
rig bids, shall be handled by the administrative agencies in the related
604
industries that are affected by the alleged practices. Where there is

602
Ibid., p. 217.
603
Art. 15 of the LUC.
604
Zhong Gong Zhong Yang Bian Zhi Wei Yuan Hui Ban Gong Shi [The
Commission Office of the Central Communist Party for Institutional Arrangement
中央机构编制委员会办公室 ], Guan Yu Guo Wu Yuan You Guan Bu Men Shi Shi
Zhao Biao Tou Biao Huo Dong Xing Zheng Jian Du De Zhi Ze Fen Gong De Yi
Jian [An Opinion of the State Council for the Supervision of Tendering Activities

关于国务院有关部门实施招标投标活动行政监督的职责分工的意见
on the Allocation of Responsibilities to Relevant Authorities
“ ”], distributed
国务院办公厅
by the Secretary of the State Council [ ], State Council Official File

510
no sector regulator, the SAIC and its local offices are responsible. Along
with this structural change, the power of the latter is reduced on a large
scale. It is illustrated in a sudden decline in the number the cases of rig
bids – falling from 229 to 131 for all of China in 2001 and 2002. But it
didn’t cause the complete withdrawal of the SAIC and its local offices
from this area. In some cases, they currently seek to cooperate with the
605
relevant sector authorities to carry out investigations.

3. Abusive practices

In the Chinese anti-monopoly practice, actions against

enterprises abusing market dominance have been primarily focused on
public enterprises and undertakings with legal monopoly status granted
by laws and regulations. Privately owned companies were rarely
challenged. The reason is that a general prohibition on the restrictive
behaviour of public enterprises and undertakings with legal monopoly
status is expressed in the LUC. Article 6 stipulates that such enterprises
are banned from restricting others to purchase products from appointed
business operators, thereby excluding other undertakings from fair
competition. Private undertakings are only prohibited from selling
products under cost and from bundling products or imposing other
unreasonable conditions under Article 11 and Article 12 of the LUC.
Since “market dominance”, a key notion in the antitrust law, was not well
established in China, the condemnation of private undertakings for
predatory pricing and tie-ins was restricted to a considerable extent.

Though “market dominance,” or any other comparable concepts

such as “market power” or “superior market position,” is not inscribed in
the LUC, it doesn’t necessarily mean that the basic conception relating
to abuses in the sense of antitrust law was unknown to the Chinese

孔祥俊
[2000]No. 34, in KONG Xiangjun [ ]: Zhong Guo Xian Xing Fan Long Duan
Fa Li Jie Yu Shi Yong [An Understanding and Application of the current Chinese
605
《中国现行反垄断法理解与适用》
Anti-monopoly Law ], 2001, pp. 368–369.
SAIC/CASS
国家工商行政管理总局公平交易局 中国社会院国家法学研究中心
[ / ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected
Anti-monopoly Cases and the Investigation and Analysis of the Chinese

《反垄断典型案例及中国反垄断执法调查》
Administrative Anti-monopoly Enforcement
], MAO Xiaofei (ed.), 2007, p. 213.

511
lawmakers. In contrast, it was well acknowledged that strong market
power may be misused by undertakings to distort competition. The
Legislative Affairs Commission (LAC), an influential working group in the
legislative process which is affiliated to the People’s Congress, pointed
out that “the meaning of this provision [Article 6] is that public
enterprises or other undertakings with legal monopoly status shall
refrain from abusing their superiority to impair fair competition of other
undertakings. An abuse of such a superior position refers to the
situation where such undertakings may engage in unfair competition
due to their positions, but others (customers) are not capable of leaving
or challenging them. For instance, if one wants to get telephone access,
one is obliged to buy devices provided by the telecommunication
supplier. Or, if one wants to get hot water, one must purchase the
606
particular appliance required by the gas supplier. Thus, it was
presumed under Article 6 that public enterprises and undertakings with
legal monopoly status have superior market power compared to their
competitors and trading partners. As shown in the following analysis, in
most cases, no serious efforts were made to investigate the market
power of the concerned enterprise when ascertaining abuses, with a few
exceptions. In other words, the presumption has been treated almost as
irrebuttable. As a result, instead of the concept of “market dominance” in
modern antitrust law, “public enterprises” and “undertakings with legal
monopoly status” constitute the central elements relating to the sanction
of abusive practices in China.

3.1. “Public enterprise” and “undertaking with legal

monopoly status”

The term public enterprise is not defined in the LUC. Instead, it

is specified in a directive issued by the SAIC called Several Provisions
on Prohibition of Anti-competitive Conduct by Public Enterprises
607
(hereinafter referred to as “Several Provisions”). Pursuant to Article 2,
public enterprises are undertakings engaged in supplying public utilities
including water, electricity, heating, gas, post, telecommunication,

606
LAC, Zhong Hua Ren Min Gong He Guo Fan Bu Zheng Dang Jing Zheng Fa

《 中国中中中中国反中中中竞中中竞竞》
Shi Yi [Interpretation ofthe Law Against Unfair Competition of the People’s
Republic of China ], HU Kangsheng (ed.), 1993,
p. 18.
607
It was issued on 24.12.1993.

512
transportation, etc. This definition is in line with the perception of the
608
LAC. Public enterprises are characterized by the nature of their
business activities and their involvement in supplying public utilities. The
public utilities sectors are illustrated by examples that are not
exhaustive. In practice, the SAIC adheres to the listed examples without
extending the scope. In cases where an alleged undertaking may not fall
under the catalogue, the SAIC seeks to construe them as “undertakings
with legal monopoly status”, which will be explored at a later point.

Public enterprises are not necessarily stated-owned enterprises

(SOEs), albeit in many cases they are concerned with the same entity in
the background of the strong state economy in China. But it was
reinforced by the SAIC in one case that the qualification of a public
enterprise rested upon the business activity of the concerned party
rather than upon its ownership. In that case, a natural gas company was
punished for compelling its customers to buy its gas appliances when
supplying natural gas. The concerned company contended in the
investigation that it shouldn’t be qualified as a public enterprise because
it was privately owned. The local SAIC rejected the defence by arguing
that “the major criterion for judging a public enterprise is whether the
concerned enterprise is engaged in a business activity of public utilities
and whether it is exclusive and non-competitive. It has nothing to do
with its state ownership, the proportion of state capital or the form of its
609
legal liability”.

“Undertakings with legal monopoly status” is not defined in any

legal documents after the promulgation of the LUC. The LAC explained
the notion by providing merely two examples: the undertakings involved
in transportation and those involved in the sale of cigarettes and

608
In the interpretation by the LAC, public enterprises are also categorized as
companies engaged in providing public utilities such as water suppliers, gas
companies and electricity suppliers, etc. See LAC, Zhong Hua Ren Min Gong
He Guo Fan Bu Zheng Dang Jing Zheng Fa Shi Yi [Interpretation of the Law

《 中国中中中中国反中中中竞中中竞竞》
Against Unfair Competition of the People’s Republic of China

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
], HU Kangsheng (ed.), 1993, p. 18.
609
SAIC/CASS [ / ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected

《 反垄反反反反反反中国反垄反垄中垄垄》
Anti-monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement ],
MAO Xiaofei (ed.), 2007, p. 30.

513
 610
tobacco, which are nevertheless not very illuminating for the
application. The SAIC has adopted essentially a case-by-case approach
in practice.

In 1997, the SAIC was confronted with the first case on this
issue, upon the request of the local SAIC office of Sichun Province. The
local SAIC office initiated an investigation against a credit cooperative in
the town of Lidian in Muchuan County. It was alleged that the Lidian
credit cooperative granted loans, designed for agricultural use, to
applicants under the condition that the latter had to purchase fertilizer
from an appointed supplying company. Instead of receiving cash, the
applicants were given loan certificates issued by the credit cooperative,
with which they had to buy all their fertilizer from the appointed supplier.
The key question at issue was whether the concerned credit cooperative
could be construed as an undertaking with legal monopoly status under
611
Article 6 of the LUC. The SAIC confirmed the monopoly status of the
concerned party by arguing that credit cooperatives were special
financial institutions established and regulated by financial laws. They
had an exclusive position in managing loans for agricultural use. The
constraint imposed on applicants to purchase fertilizer violated Article 6
612
of the LUC. Pertaining to the reply of the SAIC, the local office

610
LAC, Zhong Hua Ren Min Gong He Guo Fan Bu Zheng Dang Jing Zheng Fa

《 中国中中中中国反中中中竞中中竞竞》
Shi Yi [Interpretation of the Law Against Unfair Competition of the People’s
Republic of China ], HU Kangsheng (ed.), 1993,
p. 18.
611
KONG Xiangjun, Zhong Guo Xian Xing Fan Long Duan Fa Li Jie Yu Shi
Yong [Understanding and Application of the Current Chinese Anti-monopoly
Law,
612
《中国现行反垄断法理解与适用》 ], 2001, pp. 71–75.
SAIC, Guan Yu Xin Yong He Zuo She Xian Ding Dai Kuan Ren Gou Mai Qi
Zhi Ding Jing Ying Zhe De Shang Pin De Xing Wei Ding Xing Chu Li Wen Ti De
Da Fu [Reply to the Question on How to Deal with the Trust Association Forcing

《 关于于于于于中于于关于中关关于于于关关于于国于于国关于于关国关关于于关》
Loanee to Purchase Products Provided by the Appointed Undertakings
, SAIC Official

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
File [1997] No. 170, in: SAIC/CASS
[ / ], Fan Long Duan Dian Xing
An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-monopoly

《 反垄反反反反反反中国反垄反垄中垄垄》
Cases and the Investigation and Analysis of the Chinese Administrative Anti-
monopoly Enforcement ], MAO Xiaofei (ed.),
2007, p. 309.

514
imposed a fine of 50,000 RMB. The Lidian credit cooperative appealed
613
to the local court, but the court upheld the SAIC’s decision.

Thereafter, the SAIC identified the undertakings operating cable

614 615
television stations and providing insurance services as having legal
monopoly status. Until 2000, in the reply for the case concerning the
status of a Xinhua bookstore, the SAIC sought to define “undertakings
with legal monopoly status”.

The Xinhua bookstore at the Jianlin County of Jinzhou City in

Hubei Province was found to require all the primary and middle schools
in its distribution area to purchase books and learning materials,
supplementary to the compulsory textbooks for students, at the
beginning of the new semester in 1999. To sanction the non-
compliance, the Xinhua bookstore refused to provide textbooks for the
schools. The question was whether the concerned Xinhua bookstore
could be qualified as an undertaking having legal monopoly status so

613
KONG Xiangjun, Zhong Guo Xian Xing Fan Long Duan Fa Li Jie Yu Shi
Yong [Understanding and Application of the Current Chinese Anti-monopoly
Law,
614
《中国现行反垄断法理解与适用》 ], 2001, p. 73.
SAIC, Guan Yu You Xian Dian Shi Tai Shi Shi Qiang Zhi Jiao Yi Xing Wei
Ding Xing Chu Li Wen Ti De Da Fu [Reply to the Question on How to Deal with

《 关于于关关关于关于强于国国国关于于关国关关于于关》
the Cable Television Station Conducting Forced Dealing

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
], SAIC/CASS
[ / ], Fan Long Duan Dian Xing
An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-monopoly

《 反垄反反反反反反中国反垄反垄中垄垄》
Cases and the Investigation and Analysis of the Chinese Administrative Anti-
monopoly Enforcement ], MAO Xiaofei (ed.),
2007, p. 309.
615
SAIC, Guan Yu Zhong Bao Cai Chan Bao Xian You Xian Gong Si Ning Xia
Fen Gong Si Zai Bo Li Puo Sui Xian Li Pei Zhong Zhi Ding Shi Yong Fu Yao Bo
Li Shi Fou Gou Cheng Bu Zheng Dang Jing Zheng Xing Wei Wen Ti De Da Fu
[Reply to the Question on Whether the Ningxia Subsidiary of the China People’s
Property Insurance Co. Ltd. Limiting Consumers to Use Glass Provided by

《 关于中于关关于关于于国于于于于国于于于于于关国赔中于于理于理理于于理理理理中中中竞中国关
Fuyao in Insurance Claims can be Construed as Anti-competitive Practice

关关于于关》 ], SAIC Official File [1999] No. 176, in SAIC/CASS

[国国国国国国国国总国国国国国国/中国中中中国国中中中中中中], Fan Long Duan Dian Xing
An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-monopoly

《 反垄反反反反反反中国反垄反垄中垄垄》
Cases and the Investigation and Analysis of the Chinese Administrative Anti-
monopoly Enforcement ], MAO Xiaofei (ed.),
2007, p. 311.

515
that Article 6 would be applicable. The local SAIC office in Hubei
Province submitted the question to the SIAC.

In its administrative reply, the SAIC put forward an interpretation

by which “‘undertakings of legal monopoly status’ are not public
enterprises but are those granted with monopoly rights to business
operations for certain products including services by means of laws,
regulations, directives or other legal regulatory documents. The
monopoly status refers to the circumstances where the concerned
undertaking is the monopolist, or operates without sufficient competition
restraints, or upon whose products customers or consumers are
616
strongly dependent.” It was clear in the statement that, first,
undertakings with legal monopoly status are those who do not fall under
617
the scope of public enterprises. Second, there must be a legal basis
granting the monopoly status. The description of monopoly status is
noteworthy because it encompasses not only the pure monopoly with a
single undertaking but also the circumstances where no effective
competition is perceivable or a strong dependence between customers
including consumers and providers exists. The monopoly status was
broadly interpreted, almost equal to the concept of “market
618
dominance.” Regarding the concerned bookstore, the SAIC
ascertained its legal monopoly status on the grounds that the exclusive
right of the Xinhua bookstore to distribute textbooks for primary and
secondary schools was provided for in several rules. Pursuant to Article
2 of the Regulatory Rules on Distributing Textbooks for Ordinary

616
SAIC, Guan Yu Ru He Ren Ding Qi Ta Yi Fa Ju You Du Zhan Di Wei De Jing
Ying Zhe Wen Ti De Da Fu [Reply to the Question on How to Identify

《 关于于于关于于于于中于于于于于于于关关于关关于于关》
Undertakings with Monopolistic Status
], SAIC Official File [2000] No.

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
48, available in: SAIC/CASS
[ / ], Fan Long Duan Dian Xing
An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-monopoly

《 反垄反反反反反反中国反垄反垄中垄垄》
Cases and the Investigation and Analysis of the Chinese Administrative Anti-
monopoly Enforcement ], MAO Xiaofei (ed.),
2007, p. 318.
617
KONG Xiangjun, Zhong Guo Xian Xing Fan Long Duan Fa Li Jie Yu Shi
Yong [Understanding and Application of the Current Chinese Anti-monopoly
Law,
618
《中国现行反垄断法理解与适用》 ], 2001, p. 64.
KONG Xiangjun, Zhong Guo Xian Xing Fan Long Duan Fa Li Jie Yu Shi
Yong [Understanding and Application of the Current Chinese Anti-monopoly
Law, 《中国现行反垄断法理解与适用》 ], 2001, p. 67.

516
Primary and Middle Schools issued by the Chinese State Education
Commission (now the Ministry of Education) and the Administration of
Press and Publication, Xinhua bookstores were responsible for the
subscription and distribution of textbooks for primary and middle
schools. The rules enacted by the local government reinforced the
monopoly rights of the local Xinhua bookstores and banned any other
619
undertakings from carrying out this activity.

The perception of the SAIC relating to undertakings with legal

monopoly status in the Xinhua Bookstore case reflects the development
of the idea of market dominance and the awareness of an economic
620
approach in practice, at a minimum, on the central level of the SAIC.
However, since the market dominance is not an indispensable
constituting element required, it was then up to the local SAIC office to
decide how to address this issue in individual cases. Hence, there is an
inconsistency among local SAIC offices. A few local offices made
investigations over the market power of the concerned undertaking,
621
whereas the majority attached less importance to the issue.

619
See SAIC, Guan Yu Ru He Ren Ding Qi Ta Yi Fa Ju You Du Zhan Di Wei De
Jing Ying Zhe Wen Ti De Da Fu [Reply to the Question on How to Identify the

《 关于于于关于于于于中于于于于于于于关关于关关于于关》
Undertakings with Monopolistic Status

国国国国国国国国总国国国国国国 中国中中中国国中中中中中中
], SAIC Official File [2000] No.
48, in: SAIC/CASS [ / ], Fan
Long Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha
[Selected Anti-monopoly Cases and the Investigation and Analysis of the

《 反垄反反反反反反中国反垄反垄中垄垄》
Chinese Administrative Anti-monopoly Enforcement
], MAO Xiaofei (ed.), 2007, p. 318.
620
KONG Xiangjun, Zhong Guo Xian Xing Fan Long Duan Fa Li Jie Yu Shi
Yong [Understanding and Application of the Current Chinese Anti-monopoly
Law,
621
《中国现行反垄断法理解与适用》 ], 2001, p. 67.
Compare the case “X Subsidiary of X Airline Co. Ltd. restricting Competition”
with the case “X Gas Co. Ltd. in Shanghai selling Insurance by Tie-Ins”, in
SAIC/CASS [ 国国国国国国国国总局公平交易局 中中中中中中中中中中中中中 / ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected
Anti-monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement
《 反垄断典型案例及中国反垄断执法调查》 ], MAO Xiaofei (ed.), 2007, pp. 33 and
21.

517
3.2. Abusive practices

In principle, a business practice always entails certain

limitations on trading partners in terms of the conditions for supply,
payment, maintenance, etc. It is the freedom of enterprises in economic
activities. However, for public enterprises and undertakings with legal
monopoly status, this basic principle is reconciled. As noted above, they
are prohibited from imposing restrictions impeding competition on the
622
presumption that they possess superior market positions.

Instead of continuing the abuse of market dominance, conducts

of public enterprises and undertakings with legal monopoly status were
condemned because of the coercive nature in the Chinese antitrust
practice. Pursuant to Article 6 of the LUC, public enterprises and
undertakings with legal monopoly status shall not constrain others to
purchase products from the appointed undertakings. The key point is
whether the concerned enterprise imposes any restrictions on its
customers. But to determine what measures are restrictive is a difficult
issue because it must be kept in mind that public enterprises and
undertakings with legal monopoly status must not be deprived of their
reasonable business autonomy. In one administrative reply, the SAIC
defined “restrictions” as “direct or indirect coercive measures, such as
compulsory requirements, hurdles on services, constraints, suggestions
and unequal treatment, etc., adopted by public enterprises and
enterprises with legal monopoly status to compel others to acquire
623
products from the appointed undertakings”. In the concerned case, a

622
LAC, Zhong Hua Ren Min Gong He Guo Fan Bu Zheng Dang Jing Zheng Fa

《 中中中中中中中反中中中竞中中竞竞》
Shi Yi [Interpretation of the Law Against Unfair Competition of the People’s
Republic of China ], HU Kangsheng (ed.), 1993,
p. 18.
623
SAIC, Guan Yu Dian Xin Ju Dui Bu Cong Gai Ju Gou Mai Shou Ji Ru Wang
Zhe Duo Shou Ru Wang Fei De Xing Wei Shi Fou Gou Cheng Bu Zheng Dang
Jing Zheng Xing Wei Wen Ti De Da Fu [Reply to the Question on Whether the
Post and Telecommunication Bureau Charging Consumers Using Cell Phones

《 关于关于于关中于关于关关于于于于于于于于于关于于关于于于于中中中竞中于关关关于于关》
from Other Providers a Higher Network Fee is an Anti-competitive Practice
],

中中国国于国国国总于国国国国于 中中中中中中中中中中中中中
SAIC Official File [1999] No. 190, in: SAIC/CASS
[ / ], Fan Long Duan Dian Xing
An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-monopoly
Cases and the Investigation and Analysis of the Chinese Administrative Anti-

518
public enterprise providing mobile network access in Shangdong
province was found to be involved in a discriminatory practice. For
authorization of access to the mobile network, it charged its customers a
fee of 1,000 RMB for cell phones provided by its company, but 2,500
RMB for cell phones that customers bought from other suppliers.
Thereby, unequal treatment was qualified as a form of restriction. In
practice, several typical restrictive measures have been established
which will be explored below.

(i) Abusive pricing

The Electric Company of Qihe County charged local farmers
additional prices for material costs, installation fees, transportation
expenses and subsidies for its own employees, as it upgraded the
electricity network in the rural area from 1999 to 2000. After having
carried out investigations on the facts of the alleged excessive pricing,
the local SAIC office of Dezhou City in Shandong province submitted
the question to the SAIC as to whether the pricing activity was abusive
as defined by Article 6 of the LUC. The SAIC held it as abusive for the
reason that the electric company was the sole enterprise that was
authorized to upgrade the electricity network for the farmers of Qihe
County in the concerned region. This monopoly position was misused
by the alleged company to charge prices exceeding the level set forth by
the government. In this regard, the State Council and the relevant
regulatory agencies had issued several decrees and directives making it
clear that the upgrading project was subsidized by the government.
Except for cables connecting the electric energy meter to home
appliances, no other prices in the form of material fees, installation fees,
624
maintenance fees, etc., should have been paid by the farmers.

monopoly Enforcement 《 反垄反反反反反反中中反垄反垄中垄垄》 ], MAO Xiaofei (ed.),

2007, p. 311.
624
SAIC, Dui Gong Dian Bu Men Qiang Xing Shou Qu Bu Gai Shou Qu De Fei
Yong Xing Wei Ding Xing Chu Fa Wen Ti De Da Fu [Reply to the Question on

《 关供关供对强于于供中关于供于关供于关供供对对关关于于关》
How to Deal with the Electricity Supply Department Charging Unreasonable
Price ], SAIC Official File

中中国国于国国国总于国国国国于 中中中中中中中中中中中中中
[2001] No. 175, in:
SAIC/CASS[ / ], Fan Long Duan
Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected Anti-

《 反垄反反反反反反中中反垄反垄中垄垄》
monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement ],
MAO Xiaofei (ed.), 2007, pp. 13–16 and 323.

519
Therefore, the additional prices imposed by the concerned company
were abusive.

It was shown in this case that, unlike abusive pricing

condemned in common antitrust regimes, the excessive pricing was not
reasoned on the calculation of any costs, neither marginal costs nor
average costs. It was still established on the fact that the pricing activity
infringes the relevant pricing rules issued by the state. Therefore, the
condemnation of monopoly pricing in the Chinese practice was in fact
different from that excepted in the modern antitrust law.

Furthermore, such an approach resulted in overlaps with the

application of the LUC and other administrative laws, in particular the
Pricing Law, for which the NDRC and the local price bureaus are
responsible. Conflicts as such did occur between the two authorities. It
was resolved in a practical way, that is, the authority who is first
informed of the claim is to be in charge.

(ii) Tying
A typical case of tying is that the local SAIC office in City X of
Liaoning province sanctioned a local company as a wholesaler for
cigarettes and tobacco in 2001. The concerned company was
condemned for obliging the retailers for cigarettes and tobacco in the
region to purchase cigarettes of certain brands which were not required
by the latter. Since the concerned company was the only authorized
supplier for cigarettes in the local market, this means that it had a
monopoly status, and the customer was in fact forced to buy the tied
products. Such a practice not only impeded competition in the local
cigarette market but also caused harm to consumer welfare.

The second type of tying case in China is notable for its

“altruistic” character, which means that the tying arrangements were
carried out by the concerned party not to benefit the production or sales
of its own products but for those of other companies. For example, in
1999, Ningxia Property Insurance Company, a subsidiary of the Chinese
Property Insurance Co. Ltd., required all its affiliates in the regional
market to follow a unanimous policy when paying insurance benefits in
the case of broken car windows. By virtue of this policy, all new windows
were to be supplied and installed by the Fuyao Glass Engineering
Group Ltd., hereinafter referred to as “Fuyao.” As to the indemnity for
broken windows of insured cars, the calculation of prices was subject to

520
the Price List of Car Windows jointly issued by the Chinese Property Co.
Ltd. and Fuyao. There were no disputes over the point that Ningxia
Property Insurance Company was an undertaking with legal monopoly
status under Article 6 of the LUC in the local market of Ningxia, since its
parent company monopolized the whole Chinese insurance market for
property pursuant to the relevant laws and regulations. The measure
adopted by the local subsidiary was aimed at bundling the insurance
service with the sale of car window glass provided by Fuyao. It was anti-
competitive because customers had no other alternative but to choose
glass from Fuyao, as otherwise the damages would not be
compensated by the insurance company. Other producers of car
window glass were virtually restricted in competition as a result of the
restrictive measure. As noted above, the concerned practice was not
benefiting the car insurance service provided by the company but
facilitating the sale of car window glass by Fuyao. The bizarre
phenomenon as such can only occur in a monopolized market where
the monopolist has no fear of losing customers when carrying out
restrictive measures.

(iii) Unequal treatment

In 2005, the SAIC office of Wulanbucha made a finding of a
discriminatory practice by the local subsidiary of an oil company X in
Wulanbucha. From 2003 to 2005, the concerned company provided
petroleum and diesel to its associated gas stations at a wholesale price,
whereas other gas stations had to pay a much higher price – the full
retail price. The company was an enterprise with legal monopoly status
since it was the sole supplier for petroleum and diesel in the local oil
market. The price discrimination distorted competition among gas
stations in the region because the non-associated gas stations were
placed in a disadvantaged position in competition due to the higher
costs resulting from the unequal treatment. Based on these facts, the
local SAIC decided that the discriminatory pricing adopted by the
concerned company infringed Article 6 of the LUC. The concerned
company was sanctioned by the confiscation of its illegal gains
amounting to 836,927 RMB and a fine of 100,000 RMB.

521
3.3. Problem with the current transition to the concept of
market dominance

As a whole, the doctrine of market dominance hasn’t been fully

established in competition enforcement, albeit this perception was
reflected by legislators and administrative enforcers on several
occasions. Under the absolute state economy prior to the economic
reforms, public enterprises were state-owned companies and
simultaneously monopolists in the relevant market. No doubts were cast
on this presumption at the earlier stage of the administrative
enforcement as the public utilities sectors were not open to any effective
competition, or even monopolized by one SOE. This structure has
undergone a change as barriers to market entry are gradually reduced
and more and more private undertakings are introduced into the market
to compete with public enterprises. It makes the rigid application of
Article 6 of the LUC, without taking the market power of the concerned
enterprise into account, questionable.

This issue was discussed in the case where the decision of the
local SAIC office in Shanghai was challenged in the local court. The
local SAIC office made a finding that the concerned gas company was a
public undertaking since it engaged in supplying gas, which falls under
public utilities. From 1997 to 2000, the gas company sold insurance for
gas cans to its customers as it provided liquefied gas to the local
residents, which was held as restrictive by the SAIC office in Shanghai.
The gas company contended that it shouldn’t be construed as a public
enterprise in the meaning of Article 6, which requires that an enterprise
shall have a monopoly position in the relevant market. On the contrary,
there were still six other liquefied gas companies in the same area
competing with this company. It had no market strength to force its
customers to buy any insurance service. The court favoured the general
approach applied by the SAIC through the years. However, it was
indeed worth considering whether the non-economic assessment would
even impose restrictions on new entrants entering into the markets for
public utilities. Regardless of this, the local SAIC office lost the case on
the other point.

As we can see in this case, there is a need for a conceptual

change in the Chinese anti-monopoly practice as the Chinese economy
is becoming more liberalized.
522
4. Merger control

The control over mergers and acquisitions in China has been

greatly influenced by the conception of the socialist market economy.
On the one hand, the Chinese government is still deeply involved in the
management of SOEs. In respect to M&A, most of the transactions of
SOEs have been carried out by the state as part of the reform program.
In 1994, the central government restructured large and middle-sized
SOEs in 100 cities. In 1997, 120 giant groups of enterprises were
created in industries of strategic importance to constitute the “national
fleet” under the direct supervision and guidance of the State Council.
Measures were taken on the local level as well. For example, 75 per
cent of the enterprises owned by Shanghai Municipality were
625
reorganized. The M&A of SOEs has constituted the basic form of
merger in China since the 1990s. On the other hand, the idea of a
socialist market economy implies the liberalization of the market with the
involvement of private enterprises. At the end of the 1990s, China
adjusted its policy toward foreign investment to encourage more foreign
investors to acquire domestic companies so as to accelerate the pace of
626
reforming Chinese enterprises. The policy permitted not only the
direct establishment of enterprises in China but also the acquisition of
shares of the existing domestic firms on the stock market. Thus, the
merger activities by foreign investors contribute to a significant part of
M&A in China. The third major form of M&A includes those among
private domestic companies which, compared to the aforementioned
two forms, plays a subordinated role because of its limited scale of
transactions.

M&A of SOEs have been considered as measures to reform the

uncompetitive structure of the former state economy and increase
economies of scale by reallocating resources to efficient enterprises.
From the perspective of the government, it in itself is an effort to
improve the competition situation in the market. Therefore, no additional

625
LIN Ping [林国], Zhong Guo Qi Ye Jian Bin De Fan Long Duan Kong Zhi [The
《 中中中业中中于反垄反中中》 ], in WANG Xiaoye [王晓晓], Jing Ji Quan Qiu Hua Xia
Anti-monopoly Control on M&A of Enterprises in China

Globalization 《 经经全全全全竞中中于全经全》 ], 2005, p. 27.

Jing Zheng Fa De Xin Fa Zhan [New Development of Competition Laws under

OECD， Zhong Guo Kua Guo Bing Gou Zheng Ce Bao Gao [Investment
626

Policy Reviews CHINA 《 中中中中中关国中购中》 ], 2006, p. 25.

523
assessment in this regard is necessary. Little attention has been paid to
M&A among private domestic enterprises, since the transaction volumes
in most cases appear to be relatively low. On the contrary, merger
activities of foreign enterprises are noteworthy due to the high volumes
of transactions, which may give rise to serious concerns of competition
threats particularly to domestic competitors.

Early in 1999, the Chinese authorities issued a decree on the

merger and separation activities of enterprises with foreign
627
investments. A review on the matter of competition related to a
merger was stipulated for the first time. It is generally provided for in
Article 24(2) that if the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) holds that the proposed merger “tends to
monopolize an industry or may constitute a predominant position in the
market”, the review time can be extended to 180 days. However, since
no substantial competition assessment was seriously carried out in the
628
practice, this provision was only a perfunctory one.

A more detailed merger review system, established as The

Interim Provisions on Mergers and Acquisitions of Domestic Enterprises
629
by Foreign Investors (hereinafter referred to as “Interim Provisions”),
630
was jointly issued by four Chinese authorities. Since the rule only
targets the M&A by foreign investors and is not applicable to Chinese
631
enterprises, it has been regarded as discriminatory. The Interim
Provisions system was amended in 2006; the provisions regarding

627
The Provisions on the Merger and Division of Enterprises with Foreign
Investment, enacted by the Ministry of Foreign Trade and Economic
Cooperation and the State Administration for Industry and Commerce on

叶军
23.9.1999.
628
YE Jun [ ], Wai Zi Bing Gou Zhong Guo Qi Ye De Fa Lü Fen Xi [An

《 外资中关中中中业于中外外外》
Analysis of Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors – From a Legal Perspective ], 2004, p. 318.
629
It was enacted on 2.1.2003 and took effect on 12.4.2003.
630
The four authorities are the Ministry of Foreign Trade and Economic
Cooperation (later the Ministry of Commerce), the State Administration of
Taxation, the State Administration for Industry and Commerce and the State

黄黄 ，
Administration of Foreign Exchange.
631
HUANG Yong [ ] Wo Guo De Qi Ye Bing Gou Fan Long Duan Gui Zhi

我中于中业中关反垄反业中关关中中 ， 史史史
Wen Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of
Enterprises in China “ ”] in SHI Jiansan [ ]

《 中中中关中购中》
(ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A Laws
], Vol. 2007, 2007, p. 33.

524
 632
merger control were kept intact. Indeed, there is unequal treatment
with regard to the effects of M&A on competition since anti-competitive
harm may be incurred by merger activities, regardless of the national
identity of the enterprises. The Interim Provisions illustrate the Chinese
government’s concern about the foreign enterprises’ deep involvement
in the Chinese market. The different treatment has been abolished in
the newly enacted Chinese Anti-monopoly Law, which is, indeed, a
great improvement and one to be welcomed. As the phenomenon of
oligopoly markets is becoming noteworthy with the proceeding of the
restructure of SOEs, considerable importance shall be attached to the
acquisitions by giant SOEs, which may increase the anti-competitive
danger subject to this kind of market structure. Furthermore, with the
growth of private undertakings, their business operations also turn out to
be influential on the market.

In the following, the controversial Interim Provisions and the

implementation practice by the Chinese authorities will be explored.

4.1. Interim provisions

The Interim Provisions system is designed to stipulate various

issues concerning the takeover of domestic companies by foreign
investors, such as the requirement on foreign investors and the issue of
foreign exchange and taxation in M&A, where the competition review is
only one component thereof. Unlike the vague rule of 1999, the Interim
Provisions system is more detailed and practical. Specific thresholds for
notification and a substantial test for competition appraisal are provided
for, albeit there are obvious loopholes when compared to merger control
in other well-developed antitrust regimes. For example, though a pre-
notification system for merger control is provided, there is no sanction
on its infringement to safeguard the effective enforcement. Therefore,

632
The amended Interim Provisions system was issued jointly by the Ministry of
Commerce, the State-owned Assets Supervision and Administration
Commission of the State Council, the State Administration of Industry and
Commerce, the China Securities Regulatory Commission and the State
Administration of Foreign Exchange on 8.8.2006 and took effect on 8.9.2006.
Merger control is provided for in Articles 51 to 54 of the new Interim Provisions,
while it was dealt with in Articles 19 to 22 in the old version.

525
there is an inconsistency in the notification practice among foreign
enterprises.

It is provided in the Interim Provisions that the concerned

undertakings shall notify their merger proposals to the MOFCOM and
the SAIC. It is reported that there were over 300 cases of M&A notified
633
to the MOFCOM, whereas the SAIC announced only over 200
634
applications. This discrepancy strengthens the impression that the
SAIC is less involved in the merger review than the MOFCOM. The
latter played a key role in almost all the important merger cases
635
disclosed to the public. It was also the MOFCOM who organized the
636
first hearing for merger control in the case of SEB/Supor.

4.1.1. Definition of M&A

The term “M&A” is defined in Article 2 of the Interim Provisions

(2006) as follows:

633
Shang Wu Bu Guan Yuan Jie Du Fan Long Duan Fa [MOFCOM Official
reading the Anti-monopoly Law “ 商务部官员解读反垄断法 ” ], available at
http://finance.jrj.com.cn/news/2007-10-08/000002754887.html, last visited on
2.3.2008.
634
Chuang Xin Zhi Fa Li Nian, Yan Ge Yi Fa Xing Zheng, Fan Long Duan Fa
Cheng Guo Xian Zhu [New Perceptions for Enforcement Work, Strengthening

创创
新新新新 严格格新格格 反反新
垄创反反反
垄
the Rule of Law in Administration, Significant Achievements in the Anti-
monopoly Enforcement “ ”, available at
http://www.gov.cn/gzdt/2007-07/05/content_673503.htm, last visited on
2.3.2008.
635
Carlyle cuts its stake to 50 per cent in Xugong takeover bid, 19.10.2006,
China Daily, available at
http://english.mofcom.gov.cn/aarticle/newsrelease/commonnews/200610/20061
003455893.html, last visited on 2.3. 2008; Guo Mei Yong Le He Bing Reng Zai

国国国国
乐国国国国
乐乐
Shen Cha Zhong [The Acquisition of China Paradise by Come still being
reviewed “ ”], available at
http://finance.sina.com.cn/chanjing/b/20061107/00303053948.shtml, last visited
on 2.3.2008; Gome Finances Acquisition of Rival Dazhong, available at
http://english1.mofcom.gov.cn/aarticle/newsrelease/commonnews/200712/2007

黄黄，
1205286998.html, last visited on 2.3.2008.
636
HUANG Yong [ ] Wo Guo De Qi Ye Bing Gou Fan Long Duan Gui Zhi Wen

我国我我国反反我我
业业垄业业业我， 史史史
Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of Enterprises in

《国国国新中
业购》
China “ ”] in SHI Jiansan [ ] (ed.), Zhong Guo Bing Gou Fa Bao
Gao [A Report on Chinese M&A Laws ], Vol. 2007, 2007, p. 33.

526
 “For the purpose of the Provisions, mergers and acquisitions of
a domestic enterprise by foreign investors shall mean that foreign
investors, by agreement, purchase equity interest from shareholders of
domestic enterprise with no foreign investment (hereinafter referred to
as the "Domestic Company") or subscribe to the increase in the
registered capital of the Domestic Company with the result that such
Domestic Company changes into a foreign investment enterprise
(hereinafter referred to as "Merger and Acquisition by Shares"); or the
foreign investors establish a foreign investment enterprise and then,
through such enterprise, purchase the assets of a domestic enterprise
by agreement and operate such assets, or the foreign investors
purchase the assets of a domestic enterprise by agreement and use
such assets as investment to establish a foreign investment enterprise
to operate such assets (hereinafter referred to as "Merger and
Acquisition by Assets").”

As we can see, there are two forms of merger – “M&A by

Shares” and “M&A by Assets”– provided for in the above definition, both
of which are nevertheless inadequate from the perspective of merger
control. “M&A by Shares” requires that a takeover shall enable a
domestic company to be changed into a “Foreign Investment
Enterprise.” That is the case when the acquisition results in the foreign
investment of no less than 25 per cent of the company’s total equity
637
interest, pursuant to the relevant laws and regulations in China. With
such restriction, a great number of merger cases that may cause
competition problems are ignored. For instance, a foreign investor
increases its stake in a company, which is already registered as a
Foreign Investment Enterprise in China, from 25 to 60 per cent, which
enables the foreign investor to have control over the latter replacing the
Chinese shareholders. In fact, the change of control in the same
company may also have an impact on competition in the relevant
market. However, this transaction doesn’t fulfil the constituent element
of the definition, and thus does not need to be approved by the
responsible authority. The narrow form of acquisition by shares has
virtually restricted the scope of merger review to a great extent.

637
Art. 18 of the Rule on Implementing the Law on Chinese-foreign Equity Joint
Ventures, approved by the State Council on 7.8.1995, promulgated by Order
No. 6 of the Ministry for Foreign Trade and Economic Cooperation on 4.9.1995;
Art. 4 of the Law on Foreign-Capital Enterprises, enacted on 1.7.1979, last
amended on 3.15.2001.

527
 The second form, “M&A by Assets”, sets no substantial
condition for the notification. It means that even a minor purchase of
assets of a domestic undertaking by foreign investors, for example
buying merely some products from the domestic enterprise, could be
qualified for a notification, albeit no negative effects on competition in
the relevant market can be expected. This may lead to an excessive
merger review, which not only produces unnecessary administrative
costs for enterprises but also an overload for the authorities.
Furthermore, it is criticized that other forms of acquiring control
of one enterprise over the other, such as by appointing key members in
the board of the latter as well as other contractual means, are not
638
encompassed in the definition. The reason for the inadequacy lies
mainly in that the definition in the Interim Provisions is not designed for
merger control, but for a general scrutiny of foreign investment in China.

4.1.2. Thresholds for notification

With regard to thresholds for notification, a differentiation is

639
made between onshore (Article 51) and offshore transactions (Article

638
黄勇
HUANG Yong [ ], Wo Guo De Qi Ye Bing Gou Fan Long Duan Gui Zhi
Wen Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of
我国的企业并购反垄断规制问题研究 ，
Enterprises in China “ ”] in SHI Jiansan
史建三
[ ] (ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A
《中国并购法报告》
Laws
639
], Vol. 2007, 2007, p. 31.
Article 51 provides that in case of any of the following occurrences in
connection with the merger or acquisition of a domestic enterprise by foreign
investors, the investors shall submit notification to the MOFTEC and the
SAIC: (1) the revenue of a party to the merger or acquisition in the domestic
market for the current year exceeds RMB1.5 billion; (2) the foreign investors
have merged with or acquired more than ten domestic enterprises in aggregate
engaging in the related businesses within one year; (3) the market share of a
party to the merger or acquisition in the domestic market has reached 20 per
cent; or (4) the market share of a party to the merger or acquisition in the
domestic market will reach 25 per cent as a result of the merger or acquisition.
Even without the above occurrences, the MOFCOM or the SAIC may still
require the foreign investors to submit notification upon the request by any
competing domestic enterprise, relevant functional department or industrial
association, if the MOFCOM or the SAIC finds that the merger or acquisition will
involve a huge market share, or if there is any other material aspect of the

528
 640
53). The reason for the different treatment is that the Chinese
government seeks to review those merger activities taking place outside
the territory of China that could impede competition in the domestic
market. It has been the international practice that merger control by the
national competition authority can be extended to overseas transactions
that may affect the national market. This is known as the effect doctrine.
Since the Interim Provisions system as a whole is not extraterritorially
applicable, a special provision permitting the review of offshore M&A
was introduced. However, Article 53 doesn’t stipulate any requirement
for a noticeable effect of the concerned merger in the domestic market
but merely requires the notification where at least one of the conditions
listed is satisfied by the parties involved. Consequently, a great number
of M&A, which may not even affect the Chinese market, would have
been notified to the Chinese authorities. For example, Coca-Cola,
641
whose turnover in the Chinese market exceeds ca. US$208.3 million
in the current year, could purchase a local vodka producer in Russia

merger or acquisition that might severely affect market competition, the national
economy or people's livelihood and national economic security. The above-
mentioned "party to a merger or acquisition" shall include any affiliated
enterprise of foreign investors.
640
Article 53 provides that in case of any of the following occurrences in
connection with an offshore merger or acquisition, any party to the merger and
acquisition shall, prior to its public announcement of the plan for the merger or
acquisition or together with its application to the regulatory authorities of the
country where it is located, submit to the MOFCOM and the SAIC the plan for
the merger or acquisition. The MOFCOM and the SAIC shall examine whether
the merger or acquisition might cause over-concentration of the domestic
market, impair fair competition in the domestic market or damage the domestic
consumers' interests, and decide whether to approve the plan:
(1) the assets owned by a party to the offshore merger and acquisition within
China exceeds RMB 3 billion;
(2) the sales of a party to the offshore merger or acquisition in the domestic
market for the current year have exceeded RMB 1.5 billion;
(3) the aggregate market share in the domestic market by a party to the
offshore merger or acquisition and its affiliated enterprises has reached 20 per
cent;
(4) the aggregate market share in the domestic market by a party to the
offshore merger or acquisition and all of its affiliated enterprises in the domestic
market will reach 25 per cent as a result of the offshore merger or acquisition; or
(5) as a result of the offshore merger or acquisition, a party to the offshore
merger or acquisition will hold, directly or indirectly, equity of more than 15
foreign investment enterprises engaging in the related businesses within China.
641
The exchange rate applied for the calculation is 1US$ to 7.2 RMB.

529
that has no sales in China. Under the Interim Provisions, such an
acquisition scheme would be submitted for approval. Nevertheless, a
review on notification wouldn’t make any sense since the impact of the
transaction can be almost ruled out at the outset.

The basic concepts of thresholds reflected in Articles 51 and 53

will be examined in the following, without addressing each provision
separately, since most of the thresholds are identical, at least
conceptually. The criteria are applied alternatively, which means the
notification is necessary when one of these requirements is fulfilled.

(i) Turnover
Both Article 51 and Article 53 embody the same turnover
standard. This means that when the turnover of one of the merging
undertakings reaches 1.5 billion RMB (ca. US$208.3 million), the
proposed merger shall be submitted to the responsible agencies for
approval. The turnover is generally applied as a filter for merger
notification in many antitrust regimes, albeit the instrument itself is not
perfect. The critique, in particular by overseas commentators, focuses
642
on its application to offshore transactions. As stated above, without
the requirement for noticeable effects of the concerned merger in the
Chinese market, the turnover requirement alone brings excessive
control on overseas M&A, which may have no relevance to the
competition situation in China.

(ii) Asset
The asset standard is only provided for in No. 1 of Article 53 for
offshore transactions. Should the assets owned by a party for the
offshore merger with China exceed 3 billion RMB (ca. US$416.6
million), the proposed merger is to be notified to the MOFCOM and the
SAIC. This threshold results in the same problem as the turnover
standard since there is no noticeable effect in the Chinese market
required as well.

(iii) The number of required domestic enterprises

Both No. 2 of Article 51 and No. 5 of Article 53 make the
notification dependent upon the number of the domestic enterprises
taken over by the acquirer in the corresponding sectors – for onshore

642
Moritz Lorenz, Chinesische Fusionskontrolle [Chinese Merger Control], WuW
12/2006, p. 1248.

530
mergers 10 domestic companies and offshore mergers 15. In cases of
onshore acquisitions, it is further required that the subsequent takeovers
shall succeed in one year, whereas there is no time limit for offshore
activities. It was pointed out by commentators that this threshold cannot
reflect the competitive circumstances in the market, and appears to be
643
“ill-grounded and unnecessary”.

(iv) Market share

As for the market share standards in No. 3 and No. 4 of Article
51 regarding onshore transactions (No. 3 and No. 4 for offshore), they
are difficult to apply in practice because, before ascertaining the market
share of the merging party, the relevant market must be first identified.
However, the scope of the relevant market at issue is seldom clear from
the outset. On the contrary, in most cases it can only be outlined during
the investigation, which first requires a formal notification. Moreover, the
issue of relevant market is always extremely controversial. It can’t be
expected that the concerned enterprises would voluntarily make a
644
notification on the grounds of the high market share.

(v) Notification upon request

Beyond the aforementioned thresholds, Article 51(1) also
enables the MOFCOM or the SAIC, upon the request of domestic
competitors, regulatory bodies or industrial associations, to ask the
concerned foreign investors to notify a merger or an acquisition, which
would affect a large scale of market share. Article 51 also expects
investors to reveal other important concerns in the perspective of the
officials. Obviously, it gives more discretion to administrative bodies to

643
HUANG Yong [ 黄黄 ， ] Wo Guo De Qi Ye Bing Gou Fan Long Duan Gui Zhi

我中于中业中关反垄反业中关关中中 ， 史史史
Wen Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of
Enterprises in China “ ”] in SHI Jiansan [ ]

《 中中中关中购中》 林国
(ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A Laws
], Vol. 2007, 2007, p. 32. See also LIN Ping [ ], Zhong Guo Qi

《 中中中业中中于反垄反中中》 王晓晓
Ye Jian Bin De Fan Long Duan Kong Zhi [The Anti-monopoly Control on M&A of
Enterprises in China ], in WANG Xiaoye [ ], Jing Ji

《 经经全全全全竞中中于全经全》
Quan Qiu Hua Xia Jing Zheng Fa De Xin Fa Zhan [New Development of
Competition Laws under Globalization ], 2005, p. 27.
644
黄勇 ，
HUANG Yong [ ] Wo Guo De Qi Ye Bing Gou Fan Long Duan Gui Zhi
Wen Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of
我国的企业并购反垄断规制问题研究 ，
Enterprises in China “ ”] in SHI Jiansan
史建三
[ ] (ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A
《中国并购法报告》
Laws ], Vol. 2007, 2007, p. 32.

531
extend the scope of merger control. The restriction of the qualification of
a complainant upon domestic competitors displays the attitude of the
lawmakers to give more attention to Chinese companies, since foreign
competitors who could also be affected by the merger as participants in
645
the Chinese market wouldn’t be granted the opportunity. As to the
involvement of the relevant regulatory bodies in this regard, it is held
critically that this power could be misused by local governments to
646
protect the fiscal interests of local enterprises. In practice, however,
there has been no single merger case that has been notified upon
647
request.

4.1.3. Substantial competition test

If a merger may “result in over-concentration”, “impair fair

competition” or “damage consumers' interests” according to the
assessment of the MOFTEC and the SAIC, the proposed merger shall
be prohibited.

It is not specified further how the over-concentration is to be

assessed; therefore, it is unclear whether the examination of
concentration shall be limited only to factors such as the addition of
market shares and the increase of concentration ratio. Otherwise, a
comprehensive evaluation of the effects on competition is to be carried
out so that other important parameters such as market barrier entry may
also be taken into account. In practice, it can be seen that the MOFCOM
pursued an overall assessment because it was required in its guideline
for notification that the applicant should make a detailed description of
648
the competition situation in the relevant market.

645
LIN Ping [林国], Zhong Guo Qi Ye Jian Bin De Fan Long Duan Kong Zhi [The
《 中中中业中中于反垄反中中》 ], in WANG Xiaoye [王晓晓], Jing Ji Quan Qiu Hua Xia
Anti-monopoly Control on M&A of Enterprises in China

Globalization 《 经经全全全全竞中中于全经全》 ], 2005, p. 36.

Jing Zheng Fa De Xin Fa Zhan [New Development of Competition Laws under
646

Policy Reviews CHINA 《 中中中中中关国中购中》 ], 2006, p. 34.

See OECD, Zhong Guo Kua Guo Bing Gou Zheng Ce Bao Gao [Investment
647
Moritz Lorenz, Chinesische Fusionskontrolle [Chinese Merger Control], WuW
12/2006, p. 1250.
648
See the Guideline on the Notification of Foreign Investors’ M&A of Domestic
Enterprises, issued on 8.8.2006.

532
 As to the impediment of fair competition, doubts were raised by
commentators as to whether it is an adequate standard for the
competition appraisal since the concept of “fair competition” is a term
649
conventionally applied in the LUC. It must be acknowledged that no
rigid distinction can be drawn between laws against unfair competition
and antitrust laws since in many competition regimes they are integrated
into one comprehensive competition law. However, there is a significant
difference between the two legal areas. That is, a practice is deemed as
unfair pursuant to the LUC if it acts “unduly” or “improperly” against
certain business customs without any reference to the market position of
the undertakings and the structure of the relevant market. By contrast,
anti-competitive conduct in the sense of antitrust laws must be generally
judged under the circumstances of the relevant market. In particular,
merger activities cannot be labelled as “fair” or “unfair” since most of the
mergers are pro-competitive. Some mergers are regarded as “bad.” But
“bad” mergers are not in themselves unreasonable; rather they are
“harmful” to competition in the context of the market circumstances
where they are embedded. Therefore, “unfair competition” in the
definition of the Interim Provisions is no other than the market status
where (effective) competition is restricted by M&A.

The notion of “damaging consumers’ interests” is also

ambiguous because it can be either narrowly understood as concrete
rights of consumers which are protected in various laws, for example,
650
the Law on Protecting Consumers’ Rights and Interests or the Law on
651
Quality of Products. Consumers’ interests can also mean “consumer
welfare” – a term which is more commonly used in antitrust terminology.
In such cases, consumers’ interests are not treated as individual rights
but mostly protected as a whole. This results from the competitive
process. Therefore, it could sometimes be misleading if the same
652
terminologies are applied in different contexts.

649
HUANG Yong [ 黄黄 ， ] Wo Guo De Qi Ye Bing Gou Fan Long Duan Gui Zhi

我中于中业中关反垄反业中关关中中 ， 史史史
Wen Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of
Enterprises in China “ ”] in SHI Jiansan [ ]

《 中中中关中购中》
(ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A Laws
], Vol. 2007, 2007, p. 30; see also Moritz Lorenz, Chinesische
Fusionskontrolle [Chinese Merger Control], WuW 12/2006, p. 1250.
650
It was enacted on 31.10.1993.
651

黄黄，
It was enacted on 22.2.1993 and last amended on 8.7.2000.
652
See also HUANG Yong [ ] Wo Guo De Qi Ye Bing Gou Fan Long Duan
Gui Zhi Wen Ti Yan Jiu [A Study of the Anti-monopoly Regulations on M&A of

533
4.1.4. Justifications for exemption

The prohibition of the proposed merger or acquisition may be

exempted if one of the four justifications contained in Article 54 is
fulfilled: (1) the merger or acquisition can improve the conditions for fair
competition in the domestic market; (2) the merger or acquisition can
restructure the enterprise running at a loss and ensure employment; (3)
the merger or acquisition can absorb advanced technologies and
management professionals and enhance the international
competitiveness of the domestic enterprise; or (4) the merger or
acquisition can improve the environment.

The first justification – the improvement of conditions for fair

competition – entails a trade-off between pro-competitive and anti-
competitive effects related to the merger or acquisition. The argument of
efficiency can be taken into consideration on this point.

Exemptions on the grounds of No. 2 to No. 4 are granted in

consideration of other economic or social interests. No. 2 provides for
an exemption if the takeover may solve problems resulting from the
bankruptcy of a domestic undertaking, such as the loss of assets and
the issue of unemployment. In such cases, the authorities have to
balance not only economic benefits but also social interests in terms of
increased unemployment caused by competition. The national industrial
policy is reflected in the justification of the international competitiveness
of domestic enterprises (No. 3), and the environment policy is pursued
in No. 4. Concerns are raised about the question of whether or not the
responsible authorities are capable of striking a balance between
competition concerns and other social or economic interests, which
would make the complicated competition appraisal even more
653
unpredictable.

4.1.5. Procedural rules

Enterprises in China “我中于中业中关反垄反业中关关中中 ， ”] in SHI Jiansan [ ] 史史史

《 中中中关中购中》
(ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A Laws
], Vol. 2007, 2007, p. 32.
653
Ibid. p. 33.

534
 A general rule for merger control is provided for in Article 52. It
simply sets a time limit of 90 days for a review by the MOFCOM and the
SAIC. A quick review, commonly 30 days or one month for cases that
are unlikely to raise competition concerns, is not stipulated in the Interim
Provisions. A hearing can be held by authorities with the involvement of
the relevant departments, organizations, enterprises and other related
parties.

The procedural rule is obviously simple because important

issues concerning the qualification of applicants and the documents
required are not even mentioned. Moreover, the authorities are
empowered with great discretion to decide how long the review shall
actually take within the 90 days. It entails a legal uncertainty for
undertaking a merger. Furthermore, an unreasonably long review
period, particularly in less problematical merger cases, may hamper the
economic activities of enterprises.

In 2007, the MOFCOM issued The Guideline on the Notification

of Foreign Investors’ M&A of Domestic Enterprises to specify the
654
procedural requirements (hereinafter referred to as “Guideline”),
which will be examined in the following.

According to the Guideline, the acquirer is in general obliged to

notify the transaction, while the acquired may also be the applicant
under certain circumstances. Where more applicants are involved, the
notification can be made either jointly or respectively. The applicant may
apply in its own name or through an authorized Chinese law firm.
As to onshore mergers and acquisitions, the notification shall be
done before transactions are made known to the public. Concerning
offshore transactions, it is to be undertaken at the same time as it is
notified to the responsible authorities in the countries where the involved
enterprises are registered.

The Guideline specifies the general rule on the review period by

the MOFCOM in that a two-stage procedure is provided for. The first
stage of merger review is to be finished in 30 working days after the
completed documents are submitted. If the applicant doesn’t receive a
notice for further review, the transaction is deemed to be approved.

654
The Guideline was issued on 8.3.2007 by the MOFCOM. There is no similar
document available by the SAIC.

535
Where the applicant isn’t informed of further scrutiny, the review will be
prolonged to 90 working days.

For a successful notification by the MOFCOM, the following

information is required:

i. the application(s),
ii. the Identify Card(s) of the applicant(s) or the certificate of
registration,
iii. the authorization letter(s) for the law firm(s) and the introduction
letter(s) for the representing lawyer(s) issued by the law firm(s),
iv. the basic information on the parties to the merger,
v. the names and a brief introduction on the related enterprises of
the parties to the merger,
vi. certificates and business licences of the enterprises established
by the parties to the merger, the standing representative offices,
affiliated undertakings and other entities registered in the
territory of China,
vii. a description of the transaction(s),
viii. the definition of the relevant market(s),
ix. the turnovers and market shares of the concerned parties to the
merger in the last two accounting years,
x. the names of the five largest competitors in the relevant market,
xi. the supply and demand structure of the relevant market,
xii. the statement on the competition situation in the relevant
market,
xiii. the M& A agreement(s),
xiv. the audited financial reports of the parties to the merger in the
previous accounting year,
xv. documents for the request of exemption if necessary,
xvi. information on the industrial associations in the relevant market,
xvii. the notification of the concerned merger in other jurisdictions,
xviii. other information that needs to be disclosed to the responsible
authority,
xix. the statement on the truthfulness of the information and the
accuracy of its sources.

Before the formal notification, an informal consultation between

the applicants and the MOFCOM can be undertaken to improve the
efficiency, transparency and predictability of the merger review, which is
influenced by the practice of the European Union.

536
 Obviously, the MOFCOM Guideline provides more detailed
rules on notification, which improves the legal certainty for parties
involved in M&A to a great extent. Presumably, it will shed light on the
future enforcement of merger control in the AML.

4.2. “SEB/Supor”

Since the Interim Provisions took effect, the MOFCOM has

carried out detailed investigations on several M&A cases, which also
attracted public attention. Among them, the takeover of Supor by SEB is
historical since it triggered the first hearing in the history of Chinese
655
merger review.

On 14 August 2006, Shanghai SEB International Co. Ltd.

(hereinafter referred to as “SEB”), wholly owned by the French home
appliance giant SEB S.A., agreed with Zhejiang Supor Co. Ltd.
(hereinafter referred to as “Supor”) on a framework of strategic
investment. Supor is a listed company on the Shenzhen Stock Market
and wholly owned by the Supor Group. Supor is regarded as a leading
manufacturer of pressure cookers, woks and other kitchenware in
China.

Pertaining to the acquisition agreements, SEB subscribed 40

million normal (A) shares at a price of 18 RMB per share by means of
the targeted issuing by Supor. Furthermore, it purchased 9.17, 4.24 and
0.43 per cent of the equities from Supor Group, SU Zengfu, Su Xianze,
respectively, which amounts to 25,320,116 shares. Finally, SEB
acquired between 48,605,495 and 66,452,084 shares from other
shareholders of Supor through a partial tender offer on the stock market.
With all the above transactions, SEB held 52.4 to 61 per cent of Supor’s
equities and become the controlling shareholder. The A shares held by
SEB were not to be transferred for 3 years. The deal was worth around
656
US$296 million.

655
Shang Wu Bu Qi Dong Supor Bing Gou An Fan Long Duan Shen Cha Cheng
Xu [The MOFCOM initiated the Anti-monopoly Review Procedure on the
Acquisition of Supor “ 商务部启动苏泊尔并购案反垄断审查程序 ”], available at
http://finance.sina.com.cn/chanjing/b/20061024/07463012759.shtml, last visited

陈瑛明
on 2.3.2008.
656
CHEN, Yingming [ ], Wai Guo Zhan Lue Tou Zi Bing Gou Zhong Guo
Shang Shi Gong Si De Fa Lü Wen Ti [Legal Problems on the Acquisition of the

537
 After the takeover was made known to the public, concerns on
competition rose among competitors and several related industrial
associations. It was feared that “the acquisition may create a monopoly
in the market and bankrupt most of the country’s cookware
657
manufacture”. The MOFCOM initiated the review procedure and held
a hearing with the participation of the concerned undertakings, related
industrial associations as well as representatives of local governments
on different levels.

On 4 November 2007, the MOFCOM issued the approval of the

acquisition of Supor by SEB China. The consent decision was almost
658
identical to the proposed transactions.

Listed Companies in China by Foreign Investors by Means of Strategic

Investment 《外国投资者战略投资并购中国上市公司的法律问题》 ], in SHI
Jiansan [史建三 ] (ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese
M&A Laws
657
《中国并购法报告》 ], Vol. 2007, 2007, p. 69.
Government urged to block Supor Sale, available at
http://english.peopledaily.com.cn/200608/24/eng20060824_296334.html, last
visited on 2.3.2008.
658
The decree reads: “It is generally approved that Zhejiang Supor Co. Ltd.
issued to the target client – French SEB International Co. Ltd. 40 million normal
(A) shares at a price of 18 RMB per share; it is generally approved that Supor
Group, SU Zengfu, Su Xianze sell respectively to French SEB International Co.
Ltd. at a price of 18 RMB per share with 9.17, 4.24 and 0.43 per cent of its
equities, amounting to 25,320,116 shares; it is generally approved that French
SEB International Co. Ltd. acquire not less than 48,605,495 shares, no more
than 66,452,084 shares by means of partial tender offer. After the strategic
investment of French SEB International Co. Ltd. on Zhejing Supor Co. Ltd.,
French SEB International Co. Ltd. will hold 52.4 to 61 per cent of the equities
and become the controlling shareholder. The A shares held by French SEB
International Co. Ltd. shall not be transferred for 3 years. This decree is effective
within 180 days of the date of issue.”, MOFCOM, The general Approval on

陈瑛明
Zhejiang Supor Co. Ltd. introducing overseas strategic Investors, No. 649
(2007) MOFCOM, 11.4.2007, available in CHEN, Yingming [ ], Wai Guo
Zhan Lue Tou Zi Bing Gou Zhong Guo Shang Shi Gong Si De Fa Lü Wen Ti
[Legal Problems on the Acquisition of the Listed Companies in China by Foreign
Investors by Means of Strategic Investment
《外国投资者战略投资并购中国上市公司的法律问题》 ], in SHI Jiansan [史建三 ]
(ed.), Zhong Guo Bing Gou Fa Bao Gao [A Report on Chinese M&A Laws
《中国并购法报告》 ], Vol. 2007, 2007, pp. 70–71.

538
 In this case, two issues were intensively discussed. The first
one is the definition of the relevant market. However, neither definition
for relevant market nor a formula for the calculation of market shares is
659
stipulated in the Interim Provisions.

For the competitors of SEB/Supor, the relevant product market

involved shall be the market for pressure cookers. The relevant
geographic market is defined as the different regional markets in cites.
In accordance with this definition, SEB/Supor held a market share of
41.94 per cent based on the statistic released by the Chinese Center for
660
Publication of Information on Enterprises in Industries. SEB/Supor
insisted on a broader relevant product market that covers the whole
range of products in the cookware market, where pressure cookers
make up only a segment of the market. It was argued that there is high
substitutability of different cooking devices and the market entry is easy
due to the low barriers for new entrants. By virtue of the need of
demand, the availability of outlet channels as well as the supply model
of products, no single cooking appliance may constitute a relevant
product market. In respect to the relevant geographic market,
SEB/Supor considered it to be the national market since there are no
differences in relevant laws and regulations ruling the business
conditions and technical specifications in different regions. Moreover,
the sales circumstances are almost identical so that producers and
distributors can set up production bases and sales networks
everywhere. Consumers have the opportunity to choose the competing
products.

Merely from the arguments presented above, both the definition

of the competitors and that of the SEB/Supor seem to be problematic.
The market for pressure cookers brought about by the competitors is too
narrow since pressure cookers can be replaced by other cookers, for
instance, the traditional pots without pressure techniques or electric
cookers. However, the broad definition of SEB/Supor appears to neglect
the simple fact that pressure cookers are not interchangeable with water
cookers, though both of them fall under the category of cookware. Yet,

659

《国国中国国格
业购》
中中
OECD, Zhong Guo Kua Guo Bing Gou Zheng Ce Bao Gao [Investment
Policy Reviews CHINA ], 2006, pp. 33–34.
660
The data are based on the result of a survey on the sales of pressure
cookers in 70 per cent of all department stores in 15 large and middle-sized
cities throughout China.

539
there is no official statement by the MOFCOM available on this critical
point. Therefore, it is unclear how the authority had made the
evaluation. The finial decision shows us that the argument by
SEB/Supor could have been accepted since the merger was approved
just as notified. But as stated above, the broad definition by SEB/Supor
is questionable.

Secondly, the acquisition gave rise to an intense debate over

issues that have social dimensions, in particular the maintenance of
national brand names and the matter of national economy security
among the public.
The opponents held that there have been sufficient cases in
sectors such as cosmetics and toothpaste, where national brand names
disappeared after the completion of takeovers. Foreign investors had
utilized the distribution network of the purchased firm just to sell
products of their own brands to replace the Chinese brands. Thereby,
the acquired Chinese enterprises were merely transformed into the
661
production units for foreign products. However, Supor assured that
the Chinese brand name (Supor) wouldn’t disappear from the market.
On the contrary, the financial and technical support from SEB would
assist the further development of Supor in the domestic market and
662
open overseas markets.

Regarding the economic securities, it was a concern that

acquisitions as such would curb the growth of national companies. The
price war incurred thereafter in the sector would drive domestic
producers out of the market. It is also reported that the local government
of Zhejiang Province has launched surveys on the tide of foreign
enterprises’ takeover of privately owned Chinese companies in
Zhejiang. The aim of the project was to carry out an analysis on the

661
Bing Gou Shi Min Zu Pin Pai Xue Zang Hai Shi Zeng Qiang, Yi Kou Guo De
“Zhan Zheng” [Acquisition of National Brand Names Means a Snow Freezing or
a Power Gear, a “War” on a Cooker “ 并购是民族品牌雪藏还是增强
一口锅的 战争 ‘ ’”], available at
http://news.xinhuanet.com/fortune/2006-09/10/content_5072317.htm, last visited
on 2.3.2008.
662
Supor Jing Bao: Wai Zi Bing Gou Chu Ji Fan Long Duan Jie Xian [Supor

苏泊尔警报：外资并购触及反垄断界限
Warning: the Takeover by Foreign Investors challenges Anti-monopoly limits
“ ”, available at
http://finance.sina.com.cn/chanjing/b/20060903/16362880303.shtml, last visited
on 2.3.2008.

540
scope of such acquisitions and their potential negative effects on the
competitive process in the related sectors as well as the influence on
brand names of the privately owned companies. This “danger” was
viewed by supporters of the merger as “a narrow-minded nationalism in
the economic sense”. “Even the issue of ‘a cooker’ would have affected
national securities; there will be then no way for China to proceed with
663
the reform and opening policy”.

5. Abuse of administrative power

A special characteristic of the Chinese anti-monopoly practice is

that it also condemns administrative measures having anti-competitive
effects. This is not covered by many antitrust jurisdictions such as the
US antitrust law. Article 7 of the LUC prohibits governmental bodies
from restricting others to purchase products from appointed
undertakings impeding the business activities of other undertakings. The
application of this provision by the SAIC has proven to be difficult, as
shown by statistics. There have been only 335 cases dealt with by the
SAIC, while the number of cases concerning public enterprises and
664
undertakings with legal monopoly status reaches 5,188. The reason
for this notable discrepancy is not necessarily that there was less
misconduct taking place in this regard, rather it was because of the
difficulty faced by the SAIC and its local offices to challenge
governmental agencies in the Chinese political and social background.

The sanction on such abuses is also relatively moderate, as is

shown in the following case. In 1998, the Housing Fund Management
Center of City X (hereinafter referred to as “Center”) in Jiangsu
Province, adopted an interim measure that required the applicants for

663
Supor Chu Rang Fa Guo SEB Zhe She Min Qi Di Er Dai Xuan Ze [Takeover
of Supor by French SEB reflects the Choice of the Second Generation of
Private-owned Enterprises “ 苏泊尔出让法国 折射民企第二代抉择
SEB ”, available
at http://finance.sina.com.cn/g/20060906/08402888867.shtml, last visited on

中中国国于国国国总于国国国国于 中中中中中中中中中中中中中
2.3.2008.
664
SAIC/CASS [ / ], Fan Long
Duan Dian Xing An Li Ji Zhong Guo Fan Long Duan Zhi Fa Diao Cha [Selected

《 反垄反反反反反反中中反垄反垄中垄垄》
Anti-monopoly Cases and the Investigation and Analysis of the Chinese
Administrative Anti-monopoly Enforcement ],
MAO Xiaofei (ed.), 2007, p. 207.

541
public housing loans to buy insurance from the local subsidiary of the
People’s Insurance Corporation when submitting applications. The
insurance fee consists of property insurance, liability insurance and
guarantee insurance. The local SAIC office in the city ascertained that
the Center involved was a governmental body of the city that was
authorized to manage public housing funds – an administrative
responsibility of the government. The restriction it imposed on applicants
had anti-competitive effects because it curbed other insurance
companies from providing the same services. As a result, competition in
the insurance market was distorted by this administrative measure. The
local SAIC office informed the Municipality of City X about the issue.
The latter asked the Center to annul the anti-competitive policy.

6. Conclusion

As we can see, the Chinese authorities have gathered some

experience in previous anti-monopoly issues, which means that the
enforcement of the AML doesn’t have to start at zero. But on the other
hand, the authorities have to struggle with the “old habits” of the past,
where laws and regulations with somewhat different objectives and
conceptions to those of the AML were applied. As shown in many cases
handled by the SAIC, the definition of relevant market and the
assessment of market power were hardly addressed in investigations.
This old approach, which rested upon the LUC, shall be abandoned
since “market power” constitutes the key element of abusing dominant
market positions. As to merger review, the new substantial legal test is
to replace the one applied in the current competition assessment.
Presumably, there will be a transitional period for the Chinese
authorities to adopt a new approach that is consistent with international
standards.

The issue concerning the shared enforcement power by

different administrative bodies, and thus the conflicts and inconsistency
between them, is not clarified in the AML. As a compromise, a new
authority, the Anti-monopoly Commission, has been created by
lawmakers to coordinate individual enforcers in problematic cases.
Whether or not this institutional arrangement will function as an effective
instrument to solve those past problems is left to be evaluated in future
anti-monopoly practice.

542
THE EFFECTS OF ANTI-COMPETITIVE BUSINESS PRACTICES ON
DEVELOPING COUNTRIES AND THEIR DEVELOPMENT
PROSPECTS

PART E:

Dealing with Specific

Anti-competitive Practices

543
 ESTIMATION OF ANTITRUST DAMAGES AND ITS
EFFECTS ON ANTITRUST POLICY IN DEVELOPING
COUNTRIES: A CASE STUDY OF A TURKISH YEAST
CARTEL665

Alper Karakurt and Ussal Şahbaz666

1. Introduction

This study quantifies damages from an anti-competitive practice

667
in the Turkish yeast market . The overcharges and the deadweight
loss for the whole market are computed using before-after methodology.
The magnitude of fines is compared with the damages within an optimal
deterrence perspective. Damages for households are also estimated in
order to assess the effect of the infringement on household budgets.
After reviewing the reasons why households are not responsive to
damages resulting from competition infringement in the Turkish yeast
market, the role of market assessment in solving this problem is
emphasized.

To our knowledge, this study is the first attempt to quantify

damages from an anti-competitive practice in Turkey. Section 2 deals
with the optimal deterrence theorem. Section 3 outlines the competition
legal framework in Turkey. Section 4 describes the yeast market and the
anti-competitive conduct. Section 5 shows damage calculations for the
whole market and for households. Sections 6 and 7 discuss the market

665
The authors are case officers at the Turkish Competition Authority (TCA).
The views expressed herein are those of the authors and do not necessarily
reflect the views of the TCA. The authors are grateful to Ebru Gökçe of
UNCTAD, Gülin Yurdakul, Yaşar Tekdemir, Ümit Görgülü and Meltem Bağış
Akkaya of the TCA.
666
Corresponding author. Contact details: Rekabet Kurumu, Bilkent Plaza,
Bilkent 06800, Ankara, Turkey. E-mail: ussal@rekabet.gov.tr
667
The decision of the TCA has been criticized on various grounds. However in
this chapter there is no attempt to take a position regarding whether or not an
anti-competitive practice exists. Given the decision of the TCA, this study
intends to quantify the damage caused by the practice in question.

545
assessment tool. Finally, Section 8 provides policy recommendations
and the concluding remarks.

2. Optimal deterrence theory and importance of damages

The major goal of competition law enforcement is to increase

social welfare by maximizing total surplus in a given industry, which is
668,669
defined as the sum of producer and consumer surpluses .
Competition policy makers should take this major goal into account in
assessing the magnitude of fines imposed by public bodies and courts
in assessing the scale of damages. Hence, anti-competitive conduct
should be deterred to the extent that deterrence maximizes social
welfare. The optimal deterrence model (OD-model) provides a
framework for assessment of the magnitude of fines and damages such
that anti-competitive conduct, which results in social loss, is deterred.

Figure 1: Overcharge and deadweight loss

668
Massimo Motta. Competition Policy. Cambridge University Press (2004) See
the same source for discussion of other objectives.
669
It is difficult to asses whether a consumer welfare standard is preferred over
a total welfare standard in application, or whether it should be preferred;
however, this does not result in a major change in the consequences of the
economic analysis that are discussed below.

546
 670
The OD-model follows the seminal paper of Gary Becker ,
which proposes that a conduct should be deterred if and only if the
social cost of conduct is higher than the gains from the conduct plus the
enforcement cost. In parallel, the OD-model suggests that penalties for
anti-competitive conduct should equal “the net harm to persons other
671
than the violator” . Any increase in prices due to a cartel or to
monopoly pricing brings two types of cost to consumers: the overcharge
and the deadweight loss. Assume that, in Figure 1, as a result of a cartel
agreement, the price increases from P1 to P2. In this case, the area
P1TRP2 represents the overcharge, which is transferred from the buyer
to the cartel members or monopoly. On the other hand, the area RTS
represents the deadweight loss. This cost occurs because some buyers
discontinue buying the product at the cartel (monopoly) price. The
deadweight loss is lost by consumers, and does not represent a gain to
producers. It is a net social loss.

Although how much of the overcharge constitutes a social loss

is controversial from a deterrence perspective, the penalty should be set
equal to the sum of the overcharge and deadweight loss, which
corresponds to the area P1SRP2 in Figure 1. A simple numerical
example demonstrates this. Assume that the overcharge is US$10 and
deadweight loss is US$5. The gain of the infringer from the anti-
competitive conduct is US$10. If the penalty is set at the deadweight
loss (US$5), the net gain of the infringer will be 10-5 = US$5; therefore
the conduct will not be deterred. Obviously the magnitude of the penalty
should be higher than US$10. The question is how much it should be.

670
Gary Becker. Crime and Punishment: An Economic Approach. 76 J. of
Political Economy 169 (1968).
671
William Landes. Optimal Sanctions for Antitrust Violations. 50 U. Chi. L. Rev.
652 (1983).

547
Figure 2: Overcharge, deadweight loss and efficiency

The answer to this question should take into account any

efficiency that an anti-competitive conduct may create. Assume that the
cartel lowers the marginal cost from P1 to C1 in Figure 2. Considering
that under perfect competition marginal cost equals price at equilibrium,
this change in price causes an efficiency represented by the area
C1BTP1. Assume that the monetary value of this efficiency is US$4. Now
the gain of the infringer is US$14 while the net social cost of the conduct
is 5 (deadweight loss) – 4 = US$1. A penalty equal to the sum of the
overcharge and deadweight loss will still deter this anti-competitive
conduct. If the C1BTP1 area equals US$5.1, now the gain of the infringer
(10 + 5.1 = US$15.1) will exceed the penalty and the conduct will not be
deterred. Obviously, any conduct that creates net social cost will be
deterred by a penalty comprising the overcharge and deadweight loss,
and any conduct that does not create a net social cost will not be
deterred by it. Therefore, this penalty formulation results in optimal
deterrence.

The above discussion presumes that the detection and

conviction probability for any anti-competitive conduct is one. Of course,
this is not the fact for some anti-competitive practices, especially for
cartels. Although it is hard to estimate this probability, various studies

548
 672
estimate it as being lower than 20 per cent . In this case, optimal
673,674
penalty can be assessed using the following formula , which results
in a higher magnitude than the sum of overcharge and deadweight loss:

optimal penalty = 1 × net harm to the persons other than the violator
probabilit y of conviction (1)

The optimal penalty mentioned above is, in practice, the total of

any fines that the infringer will face through public law enforcement and
any damages it will be forced to pay through private litigation. Private
damage actions constitute the major enforcement tool in the United
675 676
States , but it is not well developed in Europe and other
jurisdictions.

672
Gary Becker. Crime and Punishment: An Economic Approach. 76 J. of
Political Economy 169 (1968).
The detection possibility for cartels is estimated as 13-17 per cent for the US
[P.G.Bryant and Eckard E. Woodrown. Price Fixing: The Probability of Getting
Caught, 73(3) The Review of Economics and Statistics 531-536 (1991)] and
12.9-13.3% for the EU [Emmanuel Combe, Contance Monnier and Renauld
Legal. Cartels: The Probability of Getting Caught in the European Union.
Available:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1015061 (2007)].
673
Robert Cooter and Thomas Ulen. Law and Economics. Addison Wesley
Longman (2000, 351). Mitchell Polinsky and Steven Shavell. Punitive
Damages: An Economic Analysis. 111 Harvard Law Review 869 (1998).
674
For an application to cartel cases, see John Connor. Optimal Deterrence and
Private International Cartels. Department of Agricultural Economics. Purdue
University (2005).
675
In recent decades, private damage actions constitute more than 90% of
antitrust suits filed in the United States [Herbest Hovenkamp Federal Antitrust
Policy: The Law of Competition and Its Practice. Second Edition. West Group.
593 (1999)].
676
See the recent Green Paper Damages actions for breach of the EC antitrust
rules, published by the Commission of the European Communities, “this area of
the law in the 25 Member States presents a picture of total underdevelopment”
(p. 4).
http://ec.europa.eu/comm/competition/antitrust/actionsdamages/documents.html
#greenpaper

549
3. Legal framework in Turkey

This section introduces the legal framework in Turkey that

regulates anti-competitive agreements and concerted practices as well
as fines and private damage actions for those practices. The Act on the
677
Protection of Competition (the Act) includes provisions on
agreements, decisions and concerted practices, which prevent, restrict
or distort competition; abuse of dominant position and anti-competitive
mergers/acquisitions. The Act was enacted in 1994 and became
operational in 1997 with the establishment of the Turkish Competition
Authority (TCA).

The undertakings that engage in anti-competitive practices,

upon investigation by the TCA, are fined up to 10 per cent of their
annual turnover. When assessing the amount of the fine, factors such
as existence of intent, the severity of fault, the market power of the
undertaking or undertakings upon which a penalty is imposed, and the
678
severity of potential damage should be taken into consideration .
However, no standard procedure exists to reflect those considerations
into the magnitude of the fine.

Private damage actions are also possible against the

679
undertakings that engage in anti-competitive practices . In certain
680
cases where fault is severe treble damages can also be awarded.
However, no damages in private actions have been awarded in the ten-
year application of the Act.

4. Yeast case

In 2005, the TCA received a complaint claiming that the yeast

producers operating in Turkey were engaged in concerted practices.
The yeast market has an oligopolistic structure with four players. The

677
The Act on the Protection of Competition (Date: 7 December 1994, No:
4054). http://www.rekabet.gov.tr/word/ekanun.doc
678
Article 16 of the Act.
679
Article 57 of the Act.
680
Article 58 of the Act. Although the wording of the Article is not clear, many
scholars support the view that treble damages can be awarded only in cases
where the fault of the infringer is severe.

550
 681
customers are 15,000 bakeries in Turkey. Upon the complaint, an
inquiry was initiated, and as a result of a dawn raid and other
682
examinations, the TCA decided that, between February 2003 and
November 2003, the yeast producers raised their prices as a result of an
anti-competitive concerted practice. The four yeast producers were fined
by 1 per cent of their annual turnover. The fines for these undertakings
are as follows (thousand YTLs):

Pakmaya 1,217
Özmaya 906
Maurimaya 134
Akmaya 455
TOTAL 2,712

Fresh baker’s yeast is one of the main ingredients used in bread

production (the others being flour, salt, and warm water). It has a
relatively short life of two to three weeks. A vast majority of the fresh
yeast is used by bakeries in producing bread. During the investigation,
the relevant market has been determined as the “fresh baker’s yeast
market,” which is from now on referred to as the “yeast market.”

Since yeast is a highly homogenous product, bakers do not take

brands into consideration when they select their yeast providers. Thus,
many of the bakeries source their yeast requirements from different
suppliers at the same time, shifting to another supplier without a
problem. In such a market structure where brand dependence is at a
negligible level, price is the only means for competition.

The reason to elaborate on this case is that yeast prices are

directly related to the price of bread, which is a staple food for low-
income people. The bread market does not have a competitive structure
683
– bakeries usually form cartels and fix bread price at the

681
Source: Bakeries Federation of Turkey
682
Decision Date: 23.9.2005, No: 05-60/896-241
683
There had been four investigations that penalized bakery cartels [İstanbul
Ekmek (Date: 04.08.1999, No: /99-37/376-241), Kütahya Ekmek (Date:
17.08.2004, Number: 04-54/750-187), Ankara Ekmek (Date 18.01.2005, No:
05-06/52-21), Gaziantep Ekmek (Date: 07.01.2005, Number: 05-02/18-9)]

551
 684
recommended level, which is announced by the local chambers and
is usually calculated on a cost basis. Therefore it is fair to assume that
any increase in yeast prices will in turn be reflected in bread prices. With
this assumption, in addition to computing the amount overcharged in the
next section, the financial burden on bread consumers resulting from the
anti-competitive practice in the yeast market will be demonstrated.
Another reason for the selection of the yeast case is that it is
one of the rare cases that data necessary for damage calculation have
been collected during the investigation. It should be emphasized that
these data have been collected not for damage calculation, but for the
analysis of oligopolistic interdependence. As damage calculation is not a
standard part of fining procedure in Turkey, after the investigation is
over, it is hard to find related data for many anti-competitive practices.

5. Damage estimation

This section is the empirical part of the study where damages in

the yeast case are estimated. Although estimation of damages is a hot
topic in EU competition policy circles, damage estimation techniques
have mostly developed within the US private litigation system. In this
section, first, the US legal standards in damage estimation, which are
widely shared by different jurisdictions, are reviewed. Then the damages
in the yeast case are estimated.

In the US private litigation system, the plaintiff proves the

existence and amount of antitrust damages. Once the existence of
damages is proved, the determination of the amount of damages
requires a less rigid standard of proof. The Supreme Court reasoned
that for a calculation of damages, it is sufficient to show “the extent of
the damages as a matter of just and reasonable inference, although the
685
results be only approximate” . This relaxed standard of proof,
however, does not allow for damage estimates that are based on
“speculation or guesswork”. In damage calculations, “there must be a
686
reasonable basis for assumptions employed in the […] model” .

684
Article 62 of the Act Numbered 5362 and Article 12 of the Act Numbered
5174.
685
Story Parchement Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 563
(1931).
686
Hobart Brothers Co. v. Malcolm t. Gilliland, Inc., 471 F.2d 894, 903 (1973).

552
 The Supreme Court’s relaxation of standard of proof stems from
its position that “the vagaries of marketplace usually deny us sure
knowledge of what the […] situation would have been in the absence of
687
[…] antitrust violation” . Moreover, it is recognized that “if there is
uncertainty, the defendant should bear the burden of uncertainty
688
because his unlawful actions created it” .

The overcharge is the difference between the cartel price and

the price that would occur but for the violation. Therefore, measurement
of overcharge requires estimation of the price had the violation not
occurred. There are two major established methodologies for this
estimation: The before-after method compares the period before
violation with the period during violation. The yardstick method
compares a similar business in a similar market (often a nearby
geographical market) in which a violation did not take place with the
689
business and market affected by the violation . As the infringement in
the yeast case affected the whole national market, there exists no
similar market that can be a benchmark. Therefore, the before-after
method is used.

Yeast producers, during the investigation, reported their monthly

average price and quantity data, along with the average monthly cost
data for four major variable costs (molasses, chemicals, electricity and
packaging) for the period of June 2002–November 2003 (18
observations per each of four firms). The price figures are plotted in
Figure 3. First a regression model is estimated with the price as the
dependent variable for the period before the violation (June 2002–Feb
2003). Then, using this model, but-for prices are predicted for the period
after violation has started (Mar 2003 – Nov. 2003).

687
J. Truett Payne Co., Inc. v. Chrysler Motors Corp., 451 U.S. 557, 566 (5th
Cir. 1981).
688
Malcolm v. Marathon Oil Co., 642 F.2d 845, 864 (5th Cir. 1981).
689
For a detailed explanation about these methodologies and their applications
in the US, see William Page. Proving Antitrust Damages: Legal and Economic
Issues. American Bar Association (1996).

553
Figure 3: Yeast prices (YTL/kg, Pakmaya June 2002 = 100)

180

160

BEFORE AFTER
140

120

100

80

60
Pakmaya
40 Özmaya
Maurimaya
20 Akmaya

0
Au 2

Ju 3

Au 3
02

Fe 3

03
O 2

D 2

Ja 2

M 3

Ap 3

O 3

3
N 2

N 3
Se 2

Se 3
M 3
l- 0

l- 0
-0
0

-0

-0

0
-0

-0
-0

-0
0

0
0
p-

p-
n-

n-

n-
b-
g-

g-
r-
ov

ec

ov
ay
ar
ct

ct
Ju

Ju
Ju

Ideally cost items and demand for yeast might be used as

independent variables to predict the prices. However quantity
demanded is simultaneously determined with the price and using
quantity in our regression will result in biased estimates. On the other
hand, the reaction speed for fermentation is proportional to the
temperature, hence in hot weather demand for yeast falls. Consequently
quantity demanded and temperature are highly correlated (-0.77), while
correlation between temperature and price is low. As a result,
temperature is used as an instrument for quantity demanded. The
monthly average temperature data are retrieved from the Turkish State
Meteorological Service. All variables are in logarithms (Cm: Cost of
molasses, Cc: Cost of chemicals, Ce: Cost of electricity, Cp: Cost of
packaging, TEMP: temperature in degrees Celsius). The following
model is estimated:

Pti = β 0 + β1Cmti + β 2Ccti + β 3Ceti + β 4Cpti + β 5TEMPti (2)

554
 The methodologies developed to estimate damages are only
useful for estimating the overcharge. However, there exists no standard
methodology for estimation of the deadweight loss as it is not
690
recoverable . Its estimation requires knowledge about actual and but-
for prices and quantities along with the shape of the demand curve
between R and S (in Figure 1). Various methodologies have been
691
developed for an accurate estimation of deadweight loss , but they
692
have extensive data requirements. Leslie proposes that for damage
calculation purposes, in line with the “just and reasonable inference”
standard, it may be reasonable to presume that the demand curve is
linear from R to S in Figure 2. If demand and supply curves are perfectly
linear, the monopoly overcharge is equal to twice the deadweight
693
loss . If the demand curve is concave, which is the case in many
markets, then damages will be greater. While estimating deadweight
loss, it is assumed that the demand curve is linear. Hence the estimates
in this study constitute a lower threshold.

Table 1: Regression results to predict but-for prices

Coefficient St. error p-value 95% confidence
interval
Cost of molasses
(Cm) 0.209 0.287 0.467 -0.354 0.771
Cost of
chemicals (Cc) 0.160 0.157 0.308 -0.148 0.468
Cost of electricity
(Ce) 0.228 0.248 0.358 -0.258 0.713
Cost of
packaging (Cp) 0.367 0.610 0.547 -0.828 1.563
Temperatures
(TEMP) 0.186 0.056 0.001 0.076 0.295
N = 32.
R2 = 0.58.

690
Id. at 195.
691
Jerry A. Hausman, Exact Consumer’s Surplus and Deadweight Loss, 71
American Economic Review 662 (1981); Vincent Requilart and Michel Simioni,
Welfare Losses Due to Market Power: Hicksian Versus Marhallian
Measurement, 83 American Journal of Agricultural Economics 157 (2001).
692
Christopher R. Leslie. Antitrust Damages and Deadweight Loss. 51 The
Antitrust Bulletin. 521-568 (2006).
693
Hovenkamp, supra note 11, at 653.

555
 The results of the panel data regression to predict but-for prices
are shown in Table 1. But-for prices in the violation period are predicted
using these estimates. The price predictions are shown in Appendix 1.
95 per cent confidence intervals for price predictions are also calculated.

Table 2: Overcharge estimates (thousand YTLs)

Unadjusted to inflation Adjusted to inflation

(1) High (2) Average (3) Low (1) High (2) Average (3) Low
Pakmaya 20,769 17,190 12,670 24,152 19,987 14,724
Özmaya 19,407 15,899 11,393 22,574 18,498 13,262
Maurimaya 8,883 6,757 4,009 10,330 7,858 4,666
Akmaya 9,749 7,885 5,264 11,326 9,164 6,126
TOTAL 58,809 47,732 33,337 68,382 55,506 38,778
Deadweight 29,405 23,866 16,669 34,191 27,753 19,389
Optimal 88,214 71,598 50,006 102,573 83,259 58,167
penalty

These predictions yield three scenarios for but-for prices: (1)

high but-for price, (2) average but-for price, and (3) low but-for price.
Overcharges are calculated by subtracting but-for prices from actual
prices and multiplying them by the quantity purchased. Summing over 9
months of the violation period, three total overcharges are calculated for
each scenario: (1) low overcharge, (2) average overcharge, (3) high
overcharge. Deadweight losses are also calculated as half of the
overcharge. These estimates are demonstrated in Table 2.

The following calculation shows the overcharge per kilogram of

bread using the overcharge magnitudes in the average scenario: As
mentioned above, yeast is one of the ingredients of bread. When
producing bread, 100 kg of flour are mixed with an average 3.5 kg of
yeast; 100 kg of flour are mixed with 58 kg of water to produce 122 kg of
694
bread . Hence it is necessary to use 3.5/122 = 0.0286 kg of yeast to
produce one kilogram of bread. The total quantity of yeast sold during
the conduct is 86,342 kilograms; and using the total overcharge in
scenario 2 in Table 2, an average overcharge of 0.552 YTL/kg is
calculated (47,732/86,342 = 0.552). Keeping our presumption that the

694
Source: Bakeries Federation of Turkey.

556
overcharge is fully passed on to bread prices, average overcharge of
bread is 0.0158 YTLs (0.0286 x 0.552 = 0.0158). The average price of
bread during the conduct was 1.2 YTL. Therefore the price of bread
increased by around 1.3 per cent due to the conduct (0.0158 / 1.2 =
≈0.013).

It is also possible to calculate the share of this overcharge in the

household budget. Estimates for allocation of a poor household budget
695
relying on minimum wage suggest that 30 per cent of household
consumption is allocated for bread consumption. Although this estimate
seems to be high, even in this case, the effect of the anti-competitive
conduct on a poor family’s consumption will be 0.30 x 0.013= ≈0.4 per
cent.

The damages and fines issued to undertakings are compared in

Table 3. Even in the low-damage scenario, which is shown in Table 3,
the fines that undertakings face are far less from the overcharges. The
estimate for total overcharge is 12 times higher than the fines imposed.
The optimal penalty estimate, which also includes the deadweight loss,
is more than 18 times higher than the fines. It should be noted that, if we
also take the fact that the probability of conviction is less than one, the
optimal penalty would be much higher (Equation 1 in Section 2).
Apparently, the fines are not high enough to be a deterrent of anti-
competitive behaviour.

Table 3: Comparison of unadjusted damages in low scenario with fines

(thousand YTLs)

Damages Fine
Pakmaya 12,670 1,217
Özmaya 11,393 906
Maurimaya 4,009 134
Akmaya 5,264 455
TOTAL 33,337
Optimal penalty 50,006 2,712

695
Minimum wage was around US$160 per month at the time of the
infringement.

557
 For fines to be a deterrent, the magnitude of fines should be
linked to damages. Although the Act mentions the severity of potential
damage as a factor in assessing the magnitude of fines, this is not
standard procedure in practice in Turkey. Nevertheless, even if the legal
maximum fine of 10 per cent of turnover is imposed, the total fine would
be 27,120 YTL, still lower than the damages. Therefore, to attain optimal
deterrence, the administrative fines should be accompanied by other
measures against infringers.

Private damage actions can be another factor in increasing the

liability that infringers would face. The legal framework includes such
actions in Turkey, as stated above, but no damages have been awarded
up to now. Various factors in the European legal framework hinder
696
private damage actions , but another factor is lack of capacity in
697
damage calculation . It should be noted that the low magnitude of
damages relative to the price of the product (1.3 per cent per kilogram of
bread) or relative to the household consumption budget (0.4 per cent in
the worst case for the poorest family) is another factor that constitutes a
698
disincentive for private damage actions. Allowing for class action suits
will be a good way for initiation of more private damage actions against
anti-competitive practices that harm consumers. Private damage
actions, in this way, will also bring competition law/policy closer to the
consumers.

As seen from the above calculations, in contrast to the high

amount of the overall damage caused, the infringement results in a
relatively low value of damage per consumer. More interestingly, the
anti-competitive behaviour took place in the yeast market, where the

696
See Green Paper, supra note 12.
697
Damage calculation capacity, development of which is among the purposes
of this study, is not adequately present in the competition enforcement agencies
as well.
698
A class action is a procedural device used in litigation to determine the rights
of and remedies for large numbers of people whose cases involve common
questions of fact by aggregating a large number of individualized claims into one
representational lawsuit. In antitrust damage class actions, injured parties from
an infringement seek for damages as a class. Class actions avoid "the problem
that small recoveries do not provide the incentive for any individual to bring a
solo action prosecuting his or her rights", Amchem Prods., Inc. v. Windsor, 521
U.S. 591, 617 (1997).

558
buyers are bakeries, whereas the damages were borne by bread
consumers. Hence, the market where the violation occurred is different
to the market where the damages appeared. Because of these two
facts, households did not respond to the competition infringement in the
yeast market. It is obvious that competition authorities operating in
developing countries need an instrument to make the micro-damages
resulting from infringements visible to a large number of consumers.
“Market assessment,” which is a component of competition advocacy, is
one of the instruments that can be employed in generating awareness
and responsiveness among consumers to competition restrictions
caused by undertakings.

6. Market assessment

Competition advocacy is different from competition law

enforcement. Competition advocacy deals with policy measures to
create a competitive business environment and promote a competition
culture in society. Competition advocacy may be achieved through
active participation of stakeholders in the preparation of regulatory
proposals, public consultations, and reports on the state of competition
in the economy. The review of the literature on competition advocacy
indicates that there is an emphasis on encouraging active participation
in the preparation of regulations and public consultations. However,
market assessment has been ignored or, at least, has not been given
due attention.

559
 699
Market assessment , seeking to analyse the market structure
from a competition perspective, serves in determining the current
competition level in the market, uncovers the results of limited
competition, and demonstrates the ways that possibly enhance
competition. Furthermore, market assessment drives the attention
towards competition and strengthens it by giving local market examples.
It is very important for an antitrust authority to raise awareness among
stakeholders on gains resulting from competition. As such assessment
seeks to define the causes and consequences of competition
restrictions, the natural outcome would be that the affected parties
become more sensitive to competition restrictions and tend to take
action against them. In this way, it may be possible to establish a local
mass that reacts to competition infringements and supports antitrust
authority.

699
Market assessment is different from competition assessment. The aim of
competition assessment is to focus on public policies that distort or prevent
competition in the market.
It appears that, so far, a very limited number of general and comprehensive
templates have been publicized to guide competition assessments. The 2007
report of the Organisation for Economic Co-operation and Development (OECD)
entitled Institutional Options for Competition Assessment sheds light on
competition assessment, based on government regulations, rules and/or laws
that hinder competition in the market. Recently, the Office of Fair Trading (OFT)
(2007) published an outstanding template, entitled Completing Competition
Assessments in Impact Assessments, for policy makers to help them assess
whether or not the proposed policy is likely to have a significant impact on
competition. In contrast to the OECD’s report, the OFT focuses on the scope
and structure of the relevant market to some extent. But mainly, the OFT
struggles to identify the impact of existing legislation on competition as well. In
the light of these studies, it can be claimed that competition assessment is
directly related to rules and regulations that have the potential to restrict
competition in the market.
It is also apparent that both documents mentioned above have a narrow
approach, which considers competition assessment as a tool that enables
antitrust authorities only to evaluate other public policy instruments that deter or
impede competition. On the contrary, market assessment examines the full
range of restrictive factors regardless of their sources. Both public-policy-
originated and market-oriented restrictions fall under the scope of market
assessment. Therefore, market assessment has a broader scope than
competition assessment.

560
 In this context, two points are noteworthy. First of all, it should
be recognized that the creation of public opinion about the importance of
competition is not an easy task. Therefore, any action or instrument
contributing to this process merits attention. It should be kept in mind
that if a competition authority fails to create strong public opinion that
supports its work, undertakings subject to competition cases or firms
whose interests are adversely affected by competition advocacy will
divert public opinion on competition.

Furthermore, market assessment generates a spillover effect on

future enforcement activities by providing essential information for case
work, as competition assessment extracts the sector-specific
information embedded in the market. This practical information is
essential for case-law applications. Thus, market assessment allows an
agency not only to evaluate competition restrictions in effect but also to
estimate potential anti-competitive behaviour. In this way, market
assessment sends signals to an agency keeping it informed about
possible strategies of firms in the future.

Market assessment provides another benefit for developing

countries by revealing the full range of effects of competition as well as
factors that determine the competition level in the market. These are
helpful indicators for policy makers, which can be exploited in a
700
decision-making process. The study by McMillan et al. indicates the
importance of market assessment implicit in the policy-making process.
The said authors worked on the distributional and efficiency
consequences of the reform in Mozambique’s cashew sector. This
sector was liberalized in the early 1990s through the removal of quotas
and a decrease in export tax. The aim of liberalization was to create a
double benefit: an efficiency gain arising from the reversal of adverse
resource allocation and a distributional gain arising from the rise in farm-
gate prices for the poorest households in Mozambique. The study
concludes that the multilayered marketing chain and the monopsony
position of India resulted in low benefits to cashew farmers. In other
words, the market structure in this specific case together with
liberalization efforts caused frustration among the farmers.

700
Margaret S. McMillan, Dani Rodrik and Karen Horn Welch. When Economic
Reform Goes Wrong: Cashews in Mozambique. NBER Working Paper No.
W9117 (2002).

561
 This example demonstrates that market assessment may
produce meaningful indicators that should be taken into consideration
by the decision makers in designing an appropriate policy for a given
sector. In many cases, it is observed that the outcomes of public policies
have been influenced by the competition landscape of the given market.
Public policies established without taking the market structure into
701
consideration may bring about undesired outcomes .

Another important issue to look at is the necessity of market

assessment to demonstrate the damage borne by consumers even if
this damage (or the efficiency loss) is very small.

Market assessment helps to determine the competition level in

the market and to demonstrate the ways that possibly enhance
competition. It can be said that the final aim of assessment is to
increase efficiency gains by providing useful information that can be
used to support competition. At that point one can say that any market
assessment contributes little to overall efficiency gains. The calculation
below gives insight into the importance of boosting competition with the
help of market assessment for economic growth in the long run. The
study done by Sala-i-Martin and Barro is an example to illustrate the
consequences of small differentials in growth rates when accumulated
702
over long periods of time . In this study, the authors calculated what
the GDP of the United States would be in 2000 if it had grown at 0.8 per
cent per year since 1870, which is one percentage point per year below
703
its actual rate . If the United States had begun at a real per capita
GDP of US$3,340 in 1870 and had then grown at 0.8 per cent per year
over the next 130 years, its per capita GDP in 2000 would have been
$9,450, only 2.8 times the value in 1870 and 28 per cent of the actual

701
Market assessment may generate another benefit. As long as any antitrust
authority has a strong position in terms of institutional capacity, advocacy
conditions evolve in favour of an antitrust authority. Market assessment displays
talents and in-depth knowledge of the authority about markets. Comprehensive
assessment carried out by an antitrust authority is an indicator of mastery of the
market and so gives credibility to the antitrust authority from an institutional
perspective.
702
R.J. Barro and Xavier Sala-i Martin. Economic Growth. Cambridge: MIT
Press (2004).
703
The real per capita gross domestic product in the United States grew by a
factor of 10 from US$3,340 in 1870 to US$33,330 in 2000. This increase
corresponds to a growth rate of 1.8 per cent per year.

562
value of US$33,330 in 2000. Then, instead of ranking second in the
world in 2000, the United States would have ranked 45th out of 150
countries. To put it another way, if the growth rate had been lower by
just 1 percentage point per year, the US per capita GDP in 2000 would
have been close to that in Mexico and Poland.

The authors demonstrate the impact of small differentials in

growth rate on the overall economic growth over a long period of time.
The study does not elaborate on the effect of efficiency gains due to
competition on economic growth. Nevertheless, this example helps us to
understand how a complete set of competition assessments may play a
vital role in increasing efficiency and thereby supporting economic
growth in the long run.

7. Elements of market assessment

This section examines the components of “market assessment”

in order to clarify the concept itself. Market assessment requires three
filters: market structure and conditions, public policies, and firm
behaviour/strategies. Market outcome is defined by the interaction of
these three elements. In this part of the study, these components,
except public policies, will be analysed in order to illustrate how they
determine the competition landscape in any market.

In the first part of market assessment, the market structure is

examined. The concept of relevant market is a crucial step in analysing
the market structure. Actually, a well-defined relevant market helps in
understanding market structure questions in general and the following
issues related to the market power in particular. The relevant market
establishes the scope of competition assessment. Other connected
markets such as upstream and downstream markets or aftermarkets
may also be taken into account, as the competitive process in the
relevant market is shaped by conditions pertaining to other markets.
Alternatively, the conditions under which the relevant market operates
can be deeply manipulated by another market. In some instances,
defining the relevant market and analysing connected markets -
upstream and downstream markets or aftermarkets - may still not be
sufficient to fully evaluate competitive conditions. Technology and

563
 704
innovation markets also have special positions in marking out the
competitive environment.

Some sectors, even if not directly related to the relevant market,

have a potential to considerably affect competition in the relevant
705
market. As for the financial infrastructure, Stiglitz claims that the
United States has clearly been worried about the possible deleterious
effects of banking practices that limit competition among firms. Banks
can serve, and have served, the function of limiting competition in
product markets, as they are in an ideal position for coordinating
decision making. The rationale behind this fear is that the more likely
fierce competition is, the higher the number of inefficient firms within the
market that will go bankrupt, increasing the possibility that some loans
may not be reimbursed. This obviously illustrates the possible side
effects of financial markets for all markets.

The aforementioned explanations reveal the fact that it is

essential to adopt a holistic approach while making a market
assessment. It is not sufficient to focus only on the relevant market
without examining other markets, including aftermarkets, upstream and
downstream markets, technology and innovation markets, which in
some way affect the functioning of the relevant market.

After defining the markets that should be covered by market

assessment, the next step is to analyse market factors to understand
the competitive structure. There exist many factors that influence the
competitive environment in a given market. If these factors can be
categorized, a user-friendly analysis with in-depth information can be
made. These factors are separated into three categories: market-based,
product-based and firm-based factors.

704
The relevant technology market includes technologies that are regarded by
licensees as interchangeable with or substitutable for the licensed technology,
by reason of technologies, characteristics, their royalties and their intended use
(Commission Regulation (EC) No 772/2004 of 24 April 2004 on the application
of Article 81(3) of the Treaty to the categories of technology transfer
agreements). An innovation market consists of research and development
directed at particular new or improved goods or processes, and the close
substitutes for that research and development (Department of Justice and
Federal Trade Commission, 1995 Antitrust Guidelines for the Licensing of
Intellectual Property).
705
J.E. Stiglitz. Whither Socialism. Cambridge: MIT Press (1996:222).

564
 There are a number of firm-based factors that should be borne
in mind in making market assessment. One of them, relying on the
structure of firms and connections between undertakings, has an
importance in the process that aims to uncover the competitive structure
of the market. For instance, if the number of competitors becomes
relatively small and their market position (size, costs, R&D potential,
etc.) is rather similar, this market structure may increase the risk of
collusion. On the other hand, if firms have any connection such as a
joint venture in any part of the market, the likelihood of getting a
competitive market structure becomes less. The study done by
UNCTAD, in this context, is a great example unveiling the importance of
706
connections among market players . UNCTAD believes that the global
water market has been controlled by three big groups and these actors
can be dominant alone or collectively in a bidding process after a reform
process. Joint ventures established by these three global actors lead to
a lower number of potential bidders. According to UNCTAD, failures of
water privatizations have been resulting from this specific trait of the
water provision market.
Another firm-based factor is the concentration level. It is one of
the most informative indicators that should be utilized when examining
the market structure. While highly concentrated markets do not
necessarily imply a shortage of competition in the market, it is generally
agreed that market concentration is one of the most important
determinants of competitiveness. For example in the banking sector, the
relationship between market concentration and competitiveness has
been examined in detail for many countries, and the results indicated
707
that high concentration tends to reduce competitiveness in this sector .
Although most of the empirical works in the literature are built on data
from developed economies, some other studies related to the banking
sector arrive at the same conclusion for developing economies.

In many cases, concentration ratio is not a sufficient explanatory

708
component of market outcomes. Khawaja and Musleh-ud Din studied
the determinants of interest spread in Pakistan. Given the specific

706
UNCTAD. FDI and Development: The Case of Privatization-Related Services
FDI: Trends, Impact and Policy Issues. United Nations Trade and Development
Board. TD/B/COM.2/EM.14/2 (2003).
707
Richard J. Gilbert. “Patents, Sleeping Patents and Entry Deterrence”, in
Strategy, Predation and Antitrust Analysis (1984:223-255).
708
I. Khawaja and Musleh-ud Din, Determinants of Interest Spread in Pakistan,
PIDE Working Papers 22 (2007).

565
characteristics of the banking sector in Pakistan, such as the lack of
financial intermediaries, it was concluded that the inelasticity of deposit
supply to banks works as a determinant of interest spread. Another
important finding is that concentration does not have a positive and
significant impact on interest spread.

Another firm-based factor consists of barriers to entry. Today,

some business strategies have become critical in market entry
decisions. For instance, in “patent fences” strategy, an initial innovator
may seek to build a “fence” around its position by securing additional
patents on near substitutes, thereby blocking follow-on innovators from
designing around the initial patent or raising their R&D costs. Under a
pure “fence” strategy, the patentee would have no intention either to
license the substitute patent technologies or to develop them on its own.
The only goal would be to keep rivals out. A related strategy, which
might be designated as “patent extensions”, involves efforts to extend
patent protection beyond the life of an initial patent by accumulating
709
patents on improvements . Another strategy - “patent flooding” - that
covers efforts to build a sufficient patent portfolio to induce others to
share their technology through cross-licences may shade into more
aggressive strategies. When rivals obtain patents on trivial variants of
an initial innovation, “patent flooding” becomes possible. Under this
strategy, “[t]he flooder ‘surrounds’ a competitor’s patent or technology . .
710
. so that over time, the competitor finds itself ‘unable to maneuver.’” .

An example for market-based factors is transparency that may

allow undertakings to restrict competition in the market to some extent.
In the Turkish yeast case, there is a close relationship between yeast
producers and bakeries. The fact that fresh yeast loses its effectiveness
shortly after production requires yeast firms to deliver the product on a
frequent but short-term delivery basis. During very large number of
deliveries, yeast producers have contacts with bakeries and discover
rivals’ sales conditions, which results in a very transparent market
structure. Besides, due to the homogeneity of fresh yeast, product
differentiation is not an effective strategy to compete in this market.
Hence, yeast producers have difficulty in maintaining long-term

709
Federal Trade Commission. To Promote Innovation: The Proper Balance of
Competition and Patent Law and Policy. England. (2003:35).
710
Sri Krishna Sankaran. Patent Flooding in the United States and Japan. 40
IDEA 393 (2000).

566
relationships with bakeries. Under these market conditions, each yeast
producer has the potential to easily control the price offered by its rivals.

Another market-specific condition appears in the water sector. A

widespread metering network in the water sector is an essential element
711 712
for competition . Helm and Jenkinson found that the failure to meter
the consumption level of water by consumers who have low demand
blocks the competitive process in the lower segment of the market in
England.

As to product-based factors, it should be pointed out that the

nature of the product plays a critical role in assessing the competition
level in the market. It is important whether products on the market are
more homogeneous or heterogeneous, whether the product is cheap,
taking up a small part of the consumer’s budget, or is expensive and
whether the purchasing process of the product is repeatedly ongoing or
not. Examining the cement industry in general, we see that although a
huge fraction of cement consumption is attributable to the building
industry, costs for cement amount to about 1 per cent of the overall
building cost. Since any movement in cement price will slightly affect
demand, demand for cement can be seen as highly inelastic.

The strength of barriers to entry depends on the nature of the

product. In some cases, the homogeneity of the product leads to the
elimination of certain entry barriers. This is the case for the yeast
market. As mentioned above, bakers, being industrial users, do not take
brands into consideration in selecting their yeast provider. In such a
market form, where brand dependence is at a negligible level, entry
barriers such as product differentiation and advertisements would not
bring about the expected impact on yeast sales. Therefore, price is the
only tool to be competitive in the yeast market.

In fact, all of these (market, product and firm-based factors)

contribute to the process of shaping the competition landscape.
Therefore, without taking these factors into account, it is not possible to

711
OECD. Competition and Regulation in the Water Sector. Paris: Working
Party No. 2 on Competition and Regulation. DAFFE/COMP/WP2/WD(2004)1.
712
D. Helm and T. Jenkinson. The Assessment: Introducing Competition into
Regulatory Industries, Oxford Review of Economic Policy 13. (1997:1-14).

567
make a comprehensive market assessment that provides the decision
makers with useful and critical information about the market structure.

8. Concluding remarks

The estimations on the magnitude of the damage caused by the

anti-competitive conduct in the Turkish yeast case show that the fines
issued to the undertakings are much lower than the amount necessary
to deter the anti-competitive conduct. Even though the magnitude of the
fine issued was the maximum provided by the Act, it would still not
suffice. In order to increase deterrence and ensure that consumers
benefit from competition law enforcement it is essential to encourage
private damages actions. However, the relatively low amount of
individual damages does not provide sufficient incentives for consumers
to file suits.

Market assessment is another useful instrument for raising

awareness among consumers. Market assessment, seeking to analyse
the market structure from a competition perspective, serves in
determining the current competition level in the market, uncovers results
of limited competition, and demonstrates the ways that possibly
enhance competition. One of the reasons for insufficient support is the
ignorance of consumers with regard to the damage of competition
infringements imposed upon them. This ignorance stems from the
relatively low value of harm per consumer and the fact that consumers
are generally not proximate to the markets where infringements occur.
Undertaking market assessments by competition enforcement agencies
may help them overcome this problem. As a matter of fact, by seeking
to define the causes and consequences of competition restrictions,
market assessment allows competition agencies to encourage the
affected parties to be more responsive to anti-competitive practices and
to raise awareness about the damages caused by competition
infringement.

568
Appendix 1. Price prediction for infringement period

Figure A1. Predicted prices for Pakmaya (price Feb 2007 = 100)

300

250

200
actual price
150
but-for price
100

50

0
Jan-03 Mar-03 May-03 Jun-03 Aug-03 Oct-03 Nov-03

Figure A2. Predicted prices for Özmaya (price Feb 2007 = 100)

250

200

150
actual price
but-for price
100

50

0
Jan-03 Mar-03 May-03 Jun-03 Aug-03 Oct-03 Nov-03

569
Figure A3. Predicted prices for Maurimaya (price Feb 2007 = 100)

250

200

150
actual price
but-for price
100

50

0
Jan-03 Mar-03 May-03 Jun-03 Aug-03 Oct-03 Nov-03

Figure A4. Predicted prices for Akmaya (price Feb 2007 = 100)

250

200

150
actual price
but-for price
100

50

0
Jan-03 Mar-03 May-03 Jun-03 Aug-03 Oct-03 Nov-03

570
 ABUSE OF DOMINANCE AND ITS EFFECTS ON
ECONOMIC DEVELOPMENT

Michael Adam and Simon Alder

Abstract

Rules on abuse of dominance are used to find a balance

between three objectives: 1) ensuring enough competition between
firms in order to force them to be efficient and to compete on merit, 2)
allowing a certain degree of profitability so that companies have
incentives to become more efficient, and 3) achieving an equal
distribution of wealth and business opportunities among different sectors
of society. While the discussion in developed countries focuses on the
first two aspects in order to maximize innovation and growth, developing
countries may also want to consider the third dimension and include the
reduction of inequality and poverty as objectives of abuse of dominance
laws. But even the relationship between the first two aspects tends to
vary among regions, because investment depends on factors that differ
between developing and developed countries. These factors sometimes
contradict each other and it is crucial to find a sound balance between
them. Firstly, since developing economies often have smaller markets
and, therefore, a lower equilibrium number of firms that can exploit
economies of scale and operate efficiently, markets in developing
countries are more likely to be concentrated. Furthermore, entry barriers
tend to be higher and capital markets are often less developed, which
causes obstacles for firms trying to compete with a dominant company.
Secondly, large firms play a different role regarding their investment
activity in developing countries than they do in more developed
economies. Established firms can be important for less developed
economies to have a sufficiently high level of investment in production.
In such countries, the benefits of increased investments may outweigh
efficiency losses that can arise from a more lax treatment of dominant
firm conduct. Thirdly, distributional aspects may be especially important
for developing countries. Smaller firms, which often represent poorer
sectors of society, may have to be given better chances to compete
against large dominant companies. Competition law can be used for

571
such public interest issues, but it is crucial that the law gives clear
guidance on how these objectives should be balanced against other
objectives such as efficiency. The comparison of the EU and the US
regarding abuse of dominance shows that significant differences exist
even among developed countries. One reason for the disparity is
differing assumptions about what types of conduct are harmful and how
difficult it is to differentiate them from other conduct. The 'access to
market principle' of the EU arises from the assumption that restrictions
of market access are harmful to the economy and that a harmful
conduct can be distinguished from other, not harmful, conduct. On the
other hand, the 'non-intervention principle' of the US is based on the
assumption that the distinction of such conduct is difficult, that there is
great danger of prohibiting behaviour that is efficient and that the
unnecessary prohibition of efficient conduct is severe. One conclusion
from the comparison is that these assumptions should be analysed and
be grounded on the economic reality. How likely and severe errors of
competition authorities are can, for example, be assessed in an analysis
of past decisions and their effects on the economy. Support of
developing countries' competition authorities in analysing their own
cases and the impact of their decisions on the economy would therefore
be valuable.

1. Introduction

The fundamental goal of competition policy is to increase

welfare. Competition policy aims to accomplish this goal by defining
appropriate rules for business conduct, but the impact of competition on
welfare is complex and may differ between countries. On the one hand,
competition can improve the efficiency of firms and consequently
increase the welfare of consumers. On the other hand, unfettered
competition may augment an unequal distribution of assets, power and
business opportunities which exist in many countries and reduce
growth. This aspect is particularly important for developing countries,
which face poverty and inequality as their most pressing issues.

Laws on abuse of dominance are central to both aspects of

competition, i.e. the efficiency of the firms and the equal distribution of
opportunities. Outperforming competitors and achieving a position of
dominance that allows making profits is the key incentive for firms to do
their best in serving their clients and thus to become more efficient: “It is

572
precisely the prospect of enjoying some market power (i.e. of making
profit) that pushes firms to use more efficient technologies, improve their
713
product quality, or introduce new product varieties.” . But welfare is
reduced if a firm abuses its dominant position to keep more efficient
competitors away or exploit its costumers. Maximizing the efficiency
therefore requires a careful trade-off between providing incentives and
limiting abuses. Given that market structures are different in developed
and developing countries, the outcome from this trade-off is likely to be
different across countries and regions. For example, higher barriers to
entry, less developed capital markets and asymmetries of information
reduce the opportunities of firms and thus the dynamic of competition
714
particularly in developing countries . Authorities in these countries may
choose to adopt a stricter approach towards dominant firms. On the
other hand, investments in production made by established firms are
important for less developed economies, this being an argument for
developing countries to be more in favour of dominant firms than
developed countries. Laws on abuse of dominance are also crucial for
the distributional aspects of competition. Many developing countries
may find it important to include rules that focus on reducing the
foreclosure of markets. The objective of such an approach can be to
give better opportunities to small firms often representing poorer parts of
society to engage in the economy and to increase the income of their
owners and employers.

The purpose of this study is to link the discussion about the

appropriate competition policy for developing and emerging economies
to the specific issue of abuse of dominance. To establish this link, we
first briefly provide an economic and legal background of abuse of
dominance. We then look at the situation of different developed,
developing and emerging economies and make recommendations for
future cooperation between institutions and organizations to improve the
legal framework.

713
Motta (2004: 64).
714
Anderson and Heimler (2007: 61).

573
2. The scope of the prohibition of abuse of a dominant
position

2.1. The United Nations Set of Principles and Rules on

Competition

The abuse of a dominant position is addressed in the United

Nations Set of Principles and Rules on Competition and naturally also in
individual jurisdictions worldwide.
The United Nations Set of Principles and Rules on Competition
– like the majority of national competition authorities – defines
dominance in a behavioural way, although many structural criteria are
still used in practice: "Dominant position of market power refers to a
situation where an enterprise, either by itself or acting together with a
few other enterprises, is in a position to control a relevant market for a
715
particular good or service, or groups of goods or services" . The set
then lists a number of acts from which dominant firms must refrain.

Box 1: Section D.4 of The United Nations Set of Principles and Rules on
Competition

Enterprises should refrain from the following acts or behaviour in a relevant market
when, through an abuse or acquisition and abuse of a dominant position of market
power, they limit access to markets or otherwise unduly restrain competition, having or
being likely to have adverse effects on international trade, particularly that of developing
countries, and on the economic development of these countries:

(a) Predatory behaviour towards competitors, such as using below-cost pricing to

eliminate competitors;
(b) Discriminatory (i.e. unjustifiably differentiated) pricing or terms or conditions in the
supply or purchase of goods and services, including by means of the use of pricing
policies in transactions between affiliated enterprises which overcharge or undercharge
for goods or services purchased or supplied as compared with prices for similar or
comparable transactions outside the affiliated enterprises;
(c) Mergers, takeovers, joint ventures or other acquisitions of control, whether of a
horizontal, vertical or a conglomerate nature;
(d) Fixing the prices at which goods exported can be resold in importing countries;
(e) Restrictions on the importation of goods which have been legitimately marked abroad
with a trademark identical with or similar to the trademark protected as to identical or
similar goods in the importing country where the trademarks in question are of the same
origin, i.e. belong to the same owner or are used by enterprises between which there is
economic, organizational, managerial or legal interdependence and where the purpose

715
UNCTAD (2000).

574
 of such restrictions is to maintain artificially high prices;
(f) When not for ensuring the achievement of legitimate business purposes, such as
quality, safety, adequate distribution or service:
(i) Partial or complete refusals to deal on the enterprise's customary commercial terms;
(ii) Making the supply of particular goods or services dependent upon the acceptance of
restrictions on the distribution or manufacture of competing or other goods;
(iii) Imposing restrictions concerning where, or to whom, or in what form or quantities,
goods supplied or other goods may be resold or exported;
(iv) Making the supply of particular goods or services dependent upon the purchase of
other goods or services from the supplier or his designee.

UNCTAD: The United Nations Set of Principles and Rules on Competition. United
Nations. Geneva. 2000.

2.2. Different competition laws in developed and developing

countries

Most developing countries have adopted laws on abuse of

dominance that have been inspired by the rules of the European Union
(EU), i.e. Art. 82 of the EC Treaty. According to EU case law, dominant
firms have the "special duty" not to exploit consumers and not to
716
exclude competitors by anti-competitive means . The idea of a special
responsibility of dominant companies is founded in the view that
competition is already weakened when one company dominates the
market. The decreased level of competition is balanced by stricter rules
on the conduct of the dominant firm, which should not be able to take
advantage of this situation. The European concept of special
responsibility of dominant firms is in conflict with the rules on dominance
717
in the US, where dominant companies are granted greater freedom.
Developing countries often have highly concentrated markets with
sometimes only one or two companies offering a certain product or
718
service . Therefore, there is a danger of dominant companies taking
advantage of their position by charging higher prices, offering inferior
products to consumers and foreclosing potential competitors thus
consolidating their dominant position. This explains why it makes sense
for many developing countries to opt for strict rules on the behaviour of

716
Case 322/81, Nederlandsche Banden-Industrie Michelin N.V. v Commission,
1983 E.C.R. 3461, [1985].
717
See Section 5.
718
Lipimile (2004: 199, 201).

575
dominant companies and to invoke a special responsibility of dominant
firms.

2.3. Theoretical concepts of abuse of dominance

There are two tests in the European framework for assessing

whether the prohibition of the abuse of dominance applies:
1) the undertaking has to be dominant, and
2) it must be abusing that dominant position.
The first test raises two questions: the definition of the market in
which the undertaking is alleged to be dominant, and whether it is
actually dominant in this market.

2.3.1. Market definition

Before assessing whether an undertaking is dominant, the

relevant market must be determined. This relevant market has two
dimensions:
1. the product market, and
2. the geographic market.

As to the product market, it is examined if the product offered by

the dominant company is interchangeable with other, similar products. If
it is found that buyers would be ready to switch to an alternative product
if the price of the first product increases slightly, these two products
belong to the same product market. If buyers prefer paying a higher
price for the first product rather than switching to another product, the
two products are offered on different markets.

576
 Box 2: Market definition in the EU

The basic principles for the market definition are for example laid down in the EU
Commission Notice on the Definition of Relevant Market for the Purpose of
Community Competition Law (Official Journal C 371, 09/12/1997 p. 5-13). According
to Paragraph 2, market definition is a tool to identify and define the boundaries of
competition between firms. Market definition is not an end in itself but is an analytical
tool.
Paragraph 13 states that firms are subject to three main competitive constraints:
1. demand substitutability
2. supply substitutability
3. potential competition.
For the purpose of market definition, it is demand substitutability that is significant.
One way of making this determination can be viewed as a speculative experiment,
postulating a hypothetical small, lasting change in relative prices and evaluating the
likely reactions of customers to that increase (the so-called SSNIP Test – Small but
Significant Non-transitory Increase in Price).
Paragraph 25 relates to the evidence to be used in order to define the relevant
market. There is a range of evidence permitting an assessment of the extent to which
substitution would take place. In individual cases, certain types of evidence will be
determinant, depending very much on the characteristics and specificity of the
industry and products or services that are being examined. The same type of
evidence may be of no importance in other cases. In most cases, a decision will have
to be based on the consideration of a number of criteria and different items of
evidence. The Commission follows an open approach to empirical evidence, aimed at
making an effective use of all available information which may be relevant in
individual cases. The Commission does not follow a rigid hierarchy of different
sources of information or types of evidence. Evidence of substitution in the recent
past, the views of customers and competitors, studies and consumer surveys, barriers
and costs associated with switching demand to potential substitutes and the different
categories of customers and price discrimination are factors that can be taken into
account.

When defining the geographic market, a similar test is carried

out: will buyers switch to a product from another geographic region if the
price of the first product increases slightly? If transportation costs and
other barriers are low, this is likely and the two products could belong to
the same geographical market. If goods are perishable and cannot be
transported or if transport is very costly, buyers are not able to switch to
products from other regions, which therefore are offered on a distinct
geographic market.

The outcome of the market definition is crucial in determining

dominance. The same firm may be regarded as dominant if the market
in which it is active is defined narrowly or it may be considered as not

577
dominant if the market is defined broadly. The key concept for the
market definition is substitutability. A market should not simply be
defined as a collection of similar goods, but of goods that can be used
for the same purpose and thus exercise a competitive constraint on
719
each other . Other factors that have to be considered here are, for
example, functional characteristics of the product or transportation
720
costs . All these factors are reflected in the willingness of the
customers to switch to other products. It is therefore a straightforward
way to define a market by investigating whether customers change to
other products when the price of the product they normally purchase
increases. This test is used in areas of antitrust such as merger
721
control . However, in the case of abuse of dominance, the test can be
misleading, because the consumers' willingness to change supplier can
be considerably influenced by the abusive conduct under consideration.
If a firm has in the past undertaken abusive conduct such as excluding
direct competitors, it is likely to have a dominant position and to be able
to set higher prices. The consumers who are faced with this high price
may switch to imperfect substitutes if they would have to pay an even
higher price (which is hypothetically assumed in the test). This substitute
would consequently be included in the market and, on this broadly
defined market, the firm under consideration may appear to not even
722
have market power . Consequently, this test will be biased towards
723
defining markets too broadly in abuse of dominance cases . The
assessment of dominance in cases of abuses is difficult and authorities
will have to rely more than in other cases on the products’
characteristics and their interchangeability in the individual case and
they will have to take the distortions in observed prices into account.
This reflects a more behavioural approach to dominance, which looks at
the firm’s ability to act to some extent independently from other market

719
Motta (2004: 102).
720
Anderson et al. (1999).
721
This is referred to as the Hypothetical Monopolist Test or the Small But
Significant Non-transitory Increase in Price (SSNIP) Test. See Motta (2004:
102).
722
This is referred as the Cellophane Fallacy. See also Motta (2004: 105).
723
However, the test can still be used in a negative way. Evidence that two
products are substitutes at current prices does not prove that they are in the
same relevant market, but the failure to show that two products are substitutes
at current prices does prove that they are not in the same market. See National
Economic Research Associates (NERA) (2001: 24).

578
forces, as opposed to the structural approach, which looks at the market
724
conditions .

2.3.2. Existence of a dominant position

Having defined the relevant product, geographical and temporal

markets, the next issue is to decide what constitutes dominance. In
United Brands, the EU Court of Justice defined dominance as “a
position of economic strength enjoyed by an undertaking which enables
it to hinder the maintenance of effective competition on the relevant
market by allowing it to behave to an appreciable extent independently
of its competitors and customers and ultimately of its consumers”.

The question remains, however, how to measure such market

power. Market shares may be a useful indicator but there are several
other factors that have to be taken into consideration such as market
725
position, buyer power and entry conditions . There are differences
between markets regarding at what market share level a firm is
dominant, but a lower bound (safe harbour presumption) and an upper
bound (dominance presumption) can give guidance and predictability.
However, an investigation that takes the characteristics of the case into
consideration may be needed in an individual case. The size and market
shares of competing firms also have to be considered. Secondly, entry
barriers must be analysed, whereby special attention needs to be paid
to those barriers that may be an outcome of the firm’s abusive conduct
726
itself . Thirdly, buyer power needs to be considered in order to know
whether the buyers can put a constraint on the dominant firms.

The more direct assessment of market power uses econometric

techniques to estimate the elasticity of demand in response to price
changes. Market power then is defined as the ability of a firm to raise
727
prices above its marginal cost . This ability depends on the elasticity of
demand and estimating the elasticity therefore allows one to directly
assess market power. The econometric analysis can become

724
For the discussion of the behavioural and structural definition of dominance,
see Section 4.3.3.
725
Motta (2004: 117).
726
Anderson et al. (1999: 71).
727
Motta (2004: 115).

579
complicated and demands a certain quality and quantity of data. The
traditional indirect approach, which focuses more on the market
structure (such as concentration), is therefore still widely used in
728
practice .

Dominance not only exists if one company holds a paramount

market position, but it can also be found with regard to several firms if
certain conditions are fulfilled. Cases involving collective dominance
have emerged in developed and in developing countries and posed
significant problems in both.

728
This was shown in International Competition Network (ICN) (2007: 43).

580
Box 3: Case 1 – Collective dominance in the Zimbabwean cement
industry
In December 1998, the Competition Commission commenced a preliminary probe into
various allegations of restrictive and unfair trade practices in the cement industry,
which were leading to shortages and excessive prices of cement on the local
Zimbabwean market. The allegations came from complaints made to the Commission
by the cement trade and the general public, as well as from newspaper reports.
Four companies were involved in the production and distribution of cement in
Zimbabwe: (i) Portland Holdings Limited (Unicem) of Bulawayo, (ii) Circle Cement
Limited of Harare, (iii) Zimbabwe Cement Company (Pvt) Limited (ZimCement) of
Norton’ and (iv) Techniks (Pvt) Limited of Gweru. Only Unicem and Circle Cement
were involved at all stages of cement production, from the quarrying of limestone to
the final product. The other two companies were more involved in blending
operations. A new cement manufacturing plant, under a joint venture between China
and the Industrial Development Corporation (IDC), was nearing completion in
Lalapanzi. The cement industry was found to be highly concentrated, with a
Herfindahl-Hirschman Index (HHI) of 4,602. The two largest players in the industry
(Unichem and Circle Cement) controlled a combined market share of over 90%.
The evidence gathered confirmed some of the allegations levelled against Unicem
and Circle Cement, and others which came up during the course of the investigation,
such as: (i) restricting the distribution of cement; (ii) enhancing or maintaining the
price of cement; and (iii) supporting or promoting the distribution of cement by
inefficient and uneconomical means. No evidence was found to support the
allegations of: (i) prevention or restriction of entry into the cement industry; (ii) undue
refusal to distribute cement; and (iii) collusive arrangements between the cement
producers. With regards to allegations of collusion between Unicem and Circle
Cement, it was found that the fact that Unicem was a more efficient producer than
Circle Cement was clearly reflected in that company’s lower retail prices on the
market. It was also found that even though the two companies had natural markets in
the northern and southern parts of the country, because of high transports costs of
distributing their products, the companies’ products were sold in either of their
‘natural’ markets.
The Commission therefore ordered Unicem and Circle Cement, in terms of Section 31
of the Competition Act, to discontinue and terminate the identified restrictive practices.
The Commission’s investigation also identified other public interest concerns in the
distribution of cement on the local Zimbabwean market, such as lack of transparency
in the distribution of the product, lack of distribution outlets in remote rural areas, high
import duties on cement raw materials and discriminatory sales tax regime in favour
of large buyers. The Commission made appropriate recommendations to the relevant
authorities and parties on the alleviation of the concerns.
Quoted from: UNCTAD: Review of Recent Experiences in the Formulation and Implementation of Competition Law
and Policy in Selected Developing Countries: Thailand, Lao, Kenya, Zambia, Zimbabwe. United Nations. New
York and Geneva. 2005.

581
 Defining when a collective dominant position exists is a difficult
task. The case law in the EU has developed a rather specific definition
that may be helpful for the treatment of collective dominance cases in
developing countries as well. According to this definition, collective
dominance exists if two independent firms act as a collective entity on
the market and are as this entity not subject to substantial competition
from other companies. Collective dominance exists mostly in
oligopolistic markets and is therefore of special interest for developing
countries, where markets are often highly concentrated. However, the
existence of an oligopoly in itself is not enough to assume that collective
729
dominance exists .

Box 4: EU case law regarding collective dominance

According to the case law of the EU Court of Justice, three conditions have
1
to be met:
1) The market has to be transparent enough for every member of the
oligopoly to be able to quickly inform itself of the conduct of the other
members.
2) There must be an incentive for tacit and permanent coordination between
the members of the oligopoly. This means that all members must know that
unilateral moves of one member with the objective of trying to increase its
market shares - e.g. by cutting prices - would immediately provoke the same
measure or sanctions by the other members, so that it would make no
sense for the individual member to make moves of this kind.
3) The oligopoly is not faced with substantial competition from outside the
group so that members can be sure that customers will not switch to other
providers easily.
1
ECJ, Judgment of 16 March 2000, Compagnie maritime belge, Joined cases C-395/96 P and C-
396/96 P, ECR 2000 Page I-01365.

Substantial market power of few companies can make it

especially difficult for small firms to remain in the market and even more
to enter new markets. Markets in developing countries are often highly
concentrated and dominated by – often foreign – firms that hold strong
positions in these markets and are sometimes the only provider of a

729
Another crucial issue is the role of the state, which may allow, facilitate or
even create dominant companies. This issue will be discussed in more detail in
Section 4.5.

582
 730
certain good or service . On the other hand, the local economy is often
characterized by a large number of small business units that create
employment for most of the population but lack economic power.
Survival in the markets by these small, often newly created, companies
is made difficult if dominant players abuse their dominant position in
order to prevent market entry and competition by other players. In order
to create a more level playing field and to protect smaller local
companies from such abusive practices, rules on abuse of dominance
are essential for developing countries.

2.3.3. Abusive conduct

There are two types of abusive unilateral conduct by dominant

731
firms: exploitative abuses and exclusionary abuses . The former refer
to cases where firms charge excessively high prices from their
customers, pay low prices to suppliers, or discriminate among
consumers. The latter refer to cases where firms suppress competition
by refusing to deal, engaging in predatory pricing or tying products in
order to raise costs of entry and exclude competitors from the market to
create or strengthen a dominant position. The difficulty with abusive
conducts is that the same conduct can be pro- or anti-competitive,
depending on the individual case. For example, refusals to deal may be
necessary to ensure quality standards, and lower prices are, in principle,
a fundamental goal of competition policy.

730
Lipimile (2004: 199, 201).
731
Anderson et al. (1999: 72).

583
Box 5: Case 2 – Preliminary investigations into allegations of
predatory pricing in the clear beer brewing and distribution industry in
Zimbabwe
In December 1999, Nesbitt Brewery (Pvt) Limited of Chiredzi complained to
the Competition Commission that National Breweries Limited was engaged
in predatory pricing, having drastically reduced the price of its clear beer in
Chiredzi to levels that were unprofitable, with the intention of driving Nesbitt
Brewery out of the market. The investigations conducted by the Commission
revealed that the clear beer industry in Zimbabwe is highly concentrated
with an HHI (Hirschman-Herfindahl Index) concentration index in excess of
8,000. Nesbitt Brewery was a new entrant into the clear beer market
challenging the long-standing monopoly position of National Breweries,
which held a market share of 90%. National Breweries has a national
distribution network while Nesbitt Brewery only operates in Chiredzi. The
investigations further revealed that the National Breweries had run a beer
promotion in Chiredzi from May 1999 to April 2000 when the Competition
Commission started gathering information on the case. The promotion
included free snacks and T-shirts, lucky-draw tickets, free beers and
substantial price reductions. The promotion was only held in Chiredzi where
Nesbitt Brewery is based and sells the bulk of its beer. The National
Breweries retail prices for its beer in Chiredzi during the promotion period
were below its normal landed prices in that town. The Commission found the
alleged practices to be predatory within the terms of Section 2 of the
Competition Act. Although National Breweries stopped the practices as soon
as it became aware that the Competition Commission was investigating it,
the Commission compelled it to formally undertake that it would desist from
future practices aimed at driving Nesbitt Brewery out of the market.
Quoted from: UNCTAD: Review of Recent Experiences in the Formulation
and Implementation of Competition Law and Policy in Selected Developing
Countries: Thailand, Lao, Kenya, Zambia, Zimbabwe. United Nations. New
York and Geneva. 2005.

584
Box 6: Case 3 – The Coca-Cola Company (TCCC)/Zambia Bottlers (ZB)
exclusive dealing arrangements
ZB notified its exclusive dealing arrangements to the Zambia Competition
Commission (ZCC). The Board observed that ZB had in place both
distributorship and cooler hire contracts into the trade. It was also found that
ZB owned the distribution containers, the Strategic Sales Depots (SSDs),
and appointed operators for public service after purchase of merchandise.
ZB also had cooler hire contracts with retailers along with conditions not to
sell competing products. The Board approved the exclusive dealing
arrangements in so far as the SSDs are owned by ZB, on condition that they
are devoid of price fixing, abuse of dominant position and that the cost of
cooler repairs be met by ZB since maintenance fees are being paid. These
conditions have also been made an essential part of the compliance
programme regarding the takeover of Cadbury Schweppes (CS) brands by
TCCC. The compliance programme will be monitored by ZCC.
Quoted from: Zambia Competition Commission: Annual Report 1999.
Lusaka. March 2000.

Box 7: Case 4 – Microsoft's abuse of market dominance in the

Republic of Korea
The Korea Fair Trade Commission (KFTC) reported to UNCTAD that, in
2000, Microsoft had tied its Windows Media Service (WMS) to the Personal
Computers (PC) Server Operating System (OS). The Window Media Player
(WMP) was first tied to the PC Operating System Windows 98 Second
Edition in 1999, and since then, WMP has been tied to the succeeding PC
Operating Systems. Additionally, the company combined MSN Messenger
with Windows ME in 2000 and Windows Messenger with Widows XP in
2001. Under the Monopoly Regulation and Fair Trade Act (MRFTA) of the
Republic of Korea, Microsoft has a dominant position in the market. Its
market share of the PC Operating System was 99% in terms of domestic
sales, as compared with a 50% threshold stipulated in the Act.
The investigation and analysis of the case revealed three factors. Firstly, the
tie-in sales constituted obstruction of competitors' business, which is part of
abuse of market dominance. The tie-in sales deprived companies of the
opportunity to purchase PC OS without WMS, WMP, and Windows
Messenger attached, even when they did not wish to purchase them.
Moreover, the tie-in sales had the effect of driving competitors out of
business by restricting competition in the market. The market shares of
other players in the market, for example RealNetworks, Daum Messenger,
Nate-On Messenger and others, continued to decline as Microsoft’s market
share continued to rise in all aspects of its business.

585
Secondly, it was feared that the tie-in sales would significantly undermine
consumer interest. Using dominance, Microsoft virtually forced consumers
to purchase WMS, WMP, and Windows Messenger, even when they did not
wish to do so. This is an infringement of the consumer’s right to choice.
Lastly, in the tied product markets, Microsoft's tie-sales constituted unfair
business practices, as they restricted competition from competitors and
consequently forced consumers to purchase the PC OS bundled with WMS,
WMP or Windows Messenger.
The KFTC concluded that the company's tie-in sales were in violation of
Articles 3-2 and 23 of the MRFTA ban on abuse of market dominance and
unfair business practices that work against consumer interests and restrict
or hinder competition in related markets.
On 7 December 2005, the KFTC imposed a series of corrective measures:
(i) a surcharge of 33 billion Won (US$ 31 million); (ii) with regard to the tie-in
of WMS, the KFTC ordered the company to strip WMS from the PC Server
OS within 180 days from the date when the corrective order was imposed;
(iii) for the bundling of WMP and Windows Messenger, the company was
ordered to provide two different versions of the PC OS, whereby one version
would have WMS and the Messenger programme removed from the PC OS
while the other would keep WMP and Windows Messenger and allow
customers to download competitors' products; and (iv) to ensure compliance
with the decision of this case, the KFTC was to appoint a Supervisory Board
composed of members nominated by the KFTC, the Minister of Information
and Communication and Microsoft. The board was to be tasked with the
responsibility of determining the specifics of the remedies and overseeing
their implementation, while Microsoft was to bear all costs associated with
the running of the Supervisory Board.

Quoted from: UNCTAD: Recent important competition cases involving more

than one country. Report by the UNCTAD Secretariat. Geneva. 2007.

2.3.4. The possibility of objective justification

In some cases, an objective justification of an abusive conduct

may be invoked. A company has the right to legitimate commercial
behaviour and the defence of its legitimate interests. Under which
circumstances a justification of otherwise abusive behaviour exists is
determined on a case-to-case basis. Examples for such a justification
can be efficiency increases or quality improvements that arise from the
conduct.

586
3. Why should developing countries and countries in
transition consider abuse of dominance?

3.1. The political economy dimension in developing

countries

One of the reasons why rules on abuse of dominance are

important for developing countries lies in the challenges many of them
face as a result of their political institutions. Most developing countries
have had economic systems with a relatively strong degree of command
economy until recently. A command economy brings about the inherent
existence of concentrated markets and of monopolies, because in many
fields of the economy the state is the only actor and will not expose itself
to competition. Nowadays, these systems have mostly been subject to
the liberalization and privatization efforts of developing countries'
732
economic systems . In this process, the former public monopolies had
to be abolished and the markets were supposed to be open to free
competition of various private actors. However, what has happened in
many cases is that large companies, often from developed countries,
have been able to take over the position of the former state monopoly.
Privatization has in many cases not led to more competition but simply
to a substitution of public monopolies by private ones. This is one of the
733
reasons for high market concentrations in developing countries .
Examples for this tendency exist in various sectors, for example in the
field of sugar, beer, cement or packaging. These private companies
have acquired a key position in many developing countries' markets. If
they decide to engage in exploitative conduct – e.g. by charging overly
high prices to customers or by offering only inferior products – or
exclusionary conduct by excluding their competitors and thus
consolidate their dominant position, developing countries' authorities
need an instrument to tackle such business behaviour. This instrument
is the existence of laws on abuse of dominance. Developing countries
can only regulate efficiently the conduct of dominant firms if they create

732
Lipimile (2004: 177).
733
As to the high market concentrations, e.g. in the beer brewing and
distribution and the cement distribution sectors, see the cases cited in Lipimile
(2004: 199, 201).

587
and apply laws on abuse of dominance that allow them to tackle the
anti-competitive behaviour of such firms to protect competition in their
markets and, as a result of this, consumers. It is in this context that
especially the EU approach, which attributes a "special responsibility" to
a dominant company, suits rather well the interest of developing
countries to gain control over dominant firms and keep their markets
open to competition.

Another aspect that is linked to the political economy of

developing countries concerns the role of the state. In newly liberalized
economies, the role of government in the national economy typically
remains strong. Many dominant companies are either state owned or
controlled by the government; others are afforded a special protection
by government policies. Such phenomena can especially, but not only,
be witnessed in many network industries (railways, ports, electricity,
telecommunications, etc.). The question of the role of the state in
competition policy is delicate and difficult to handle, especially by public
authorities that are themselves subject to government control. On the
other hand, also, companies protected by governments should not be
allowed to exploit consumers or to unduly restrain competition, which
may lead to the exclusion of other players that offer better products or
lower prices. Competition policy and, more specifically, rules on abuse
of dominance are a useful instrument to treat this issue. By laying down
general rules that apply to all companies with a paramount market
position, a more level playing field can be created and it can be argued
that governments also have to respect the basic rules of fair play in the
markets which in the end will benefit the overall welfare and consumers.

3.2. Inequality, competition, and growth in developing and

emerging economies

Laws against abuse of dominance can influence the distribution

of assets, power and business opportunities. This distributional aspect
of competition is particularly important for developing countries, where
economic power and wealth are not fairly distributed. Competition policy
may have to play the dual role of raising the power of underprivileged
individuals and enterprises to participate in the process of competition
and of creating a sound legal framework for free competition. If these
objectives are not met, unfettered competition will simply help the big
firms to monopolize domestic markets that are usually protected from
588
 734
foreign competition . The resulting inequality will lead to public
dissatisfaction and the excessive market power has the potential to
735
raise prices . Dominance not only leads to an unequal distribution of
market power, wealth and business opportunities, but has also a
potential negative effect on growth and development if such power is
abused. The abuse hampers the good functioning of markets and the
efficient allocation of resources so that the economy cannot reach its
growth potential. Developing countries with low growth rates are unable
to catch up with industrialized economies and are unlikely to experience
substantial and sustained poverty reduction. Growth is therefore a
central goal of limiting abuse of dominance in developing countries. On
the other hand, the possibility of achieving a certain degree of market
power is necessary, because it allows firms to make profits and this
gives them incentives to become more efficient. If the limits on dominant
firms and their conduct are too restrictive, growth may be reduced.

Although the relationship between market structure and

economic performance is complex, it is, particularly in developing
countries, crucial to consider it in the context of abuse of dominance.
The extreme view is “the market will fix it all”, which is partly based on
736
the theory of contestable markets . According to this theory, even a
firm that enjoys a monopoly position in a market cannot price above the
marginal costs because new firms would enter the market as soon as
they observe that profits can be made. But this outcome depends on
strong assumptions: the monopolist cannot change the prices as a
reaction to entry and there are no barriers to and sunk costs of entry.
These assumptions obviously do not hold in many markets of developed
and developing economies. A third reason why market forces may not
be able to reduce market power is anti-competitive practices, which is at
the focus of this study.

Even in newly liberalized economies where barriers to entry

have been reduced substantially, incumbent monopolists may not be
challenged by new entrants and foreign investments may remain low in
737
many cases . This could suggest that a stricter approach to

734
Fox (2003: 163).
735
Economic theory predicts that the optimal pricing of a monopolist usually is
above the welfare maximizing level.
736
Motta (2004: 73).
737
This situation has for example been observed lately in Albania.

589
dominance should be chosen, but it is clearly valuable to understand
why there is no entry. Firstly, if the dominant position is unchallenged
because of anti-competitive practices by incumbent firms or because
obstacles to competition remain even after liberalization, then a stricter
738
approach is appropriate . Secondly, if dominant firms are not
challenged simply because not enough profits can be made in the
market, it would most likely be counterproductive to restrict incumbent
firms and thereby reduce their incentives to invest in the development of
the market.

Acemoglu et al. (2006) argue that less developed countries rely

more on investment by incumbent firms and that less product market
739
competition may be beneficial . The reason is that established firms
are important in order to have sufficiently high levels of investment in
these countries, even if less intense competition is likely to have a
negative impact on innovation. If there was fierce competition with new
firms constantly entering the market and established, but less efficient
ones leaving it, then the currently existing firms will be able to make
smaller investments. Since less developed countries operate in sectors
with generally lower levels of technology, they can use existing
technologies and do not themselves need to innovate as much.
Consequently, it is less important for them to have the most innovative
and efficient firms selected by the competitive process, but rather to
have large incumbent firms that can make investments in production. In
less developed economies, the benefits of increased investments are
therefore more likely to outweigh efficiency losses such as higher prices
and less innovation that may arise from the dominant position. In
developed countries on the other hand, it is more important that the
competitive process selects the firms that are the most efficient and
innovative, because they compete in sectors where innovation is a key
factor of success. For this selection process to work, a fiercer
740
competition policy may be required .

738
Related to this issue is the discussion about natural and state-created
monopolies and how liberalization should be managed. It is important that the
consequences for competition are considered when planning and implementing
liberalization. See also Section 4.5.
739
Acemoglu et al. (2006).
740
It may be difficult to switch out at the right time of the setting that protects
dominant firms, because those who have profited from the monopolization will
use their economic power to influence the political process. This raises the

590
 A special case of the trade-off between investment and
competition is infrastructure. This is particularly relevant for
governments with low budget resources, because they may rely on
private firms to finance and build infrastructure such as roads and ports.
Given that the infrastructure would not come into existence if not
financed, owned and used by a private enterprise, it may be a crucial
driver for development. But at the same time, the firm can strengthen its
dominant position and exclude competitors if the infrastructure is an
essential facility that is necessary for all other industry participants and
741
is not easily duplicated . As in the case of intellectual property,
governments need to calculate carefully how much ownership they want
to transfer to firms in order to give sufficient incentives to invest. It must
be assessed for what sectors a monopoly should be allowed, how broad
it must be, for what period it is granted, and if concessions can be
renegotiated after a certain time or when circumstances have changed.

3.3. Exploitation of producers by dominant buyers

Dominance not only has the potential to exclude competitors or

exploit consumers, but can also lead to exploitation of producers if they
are faced with a dominant buyer. This is likely to be the case if a large
number of small producers supply a relatively homogenous good, such
as a commodity, to a small number of large buyers. Producers in
developing countries may often find themselves in such a situation,
where they have little choice as to which buyer they sell to and at what
price because there is only one buyer, they have limited information
about other possible buyers or switching to a different buyer involves
high costs. It can therefore be important for developing countries to also
have rules that apply to the abuse of buyer power.

related issue of linkages between political and economic power and we will
come back to this in Section 3.3.
741
Motta (2004: 66). For example, a government can give a logistics enterprise
the licence to build and maintain a port on a certain part of the coast. If this port
cannot be duplicated nearby and if other firms need the port in order to
compete, then the incumbent can exclude competitors by refusing them access
to the essential facility.

591
 Box 8: Buyer power of oligopsonistic cocoa traders vis-à-vis
farmers
Abuse of market power may occur in the upstream market at the
farmers' level. Local farmers do not have bargaining power vis-à-vis
an "oligopsony" of cocoa traders as buyers. The buyers have
enough buyer power to set cocoa prices at a level below what would
be set under competitive market conditions. Economic analysis has
shown that the abusive behaviour of firms with excessive buying
power tends to disadvantage sellers while the excessive profit made
due to such behaviour is not passed on to consumers in the
downstream market to which these firms sell, regardless of the
1
degree of competition in this market. Thus, in the context of cocoa
producers, the question would rather be how to deal with the buyer
power of cocoa traders and processors.
1
Peter C. Carstensen, Competition, Concentration and Agriculture. Statement to the
Senate Committee on Agriculture, Nutrition, and Forestry, Agriculture Concentration
and Competition Hearing, 27 April 2000.
Quoted from UNCTAD, Cocoa Study: Industry Structures and Competition. United
Nations, forthcoming 2008.

3.4. The implementation of inequality considerations in

developing countries

Fox (2000) analyses the trade-off between efficiency and

distributional aspects of competition in the cases of South Africa and
742
Indonesia . The question that the examination of these two countries
helps to answer is whether competition law can be used in practice to
foster social and economic equality and if these goals are compatible
with the goals of efficiency and growth.

742
The discussion of South Africa and Indonesia in Boxes 9 and 10 is based on
Fox (2000).

592
Box 9: South Africa

During the apartheid regime in South Africa, the white minority had political
and economic power. Markets were extremely concentrated and cartels and
1
monopolies largely controlled the economy . When the apartheid regime
ended in the mid-nineties, the process of democratization was accompanied
by reforms of the competition law in order to reduce discrimination and
inequality, but also to foster efficiency. For the most part, the competition
law adapted rules and principles that were already successfully applied in
2
developed countries . But besides the common objective of efficiency, the
new policy also wanted to “(…) ensure that small and medium-sized
enterprises have an equitable opportunity to participate in the economy; and
(to) promote a greater spread of ownership, in particular to increase the
3
ownership stakes of historically disadvantaged persons” . However, these
objectives are balanced against the impact on competitiveness so that the
additional clauses are only likely to be decisive in cases where there is
doubt as to whether a conduct is efficient.
1
OECD: Competition Law and Policy in South Africa. An OECD Peer Review. OECD. Paris. 2003.
at p. 10.
2
UNCTAD: Handbook on Competition Legislation. Note by the UNCTAD Secretariat.
Intergovernmental Group of Experts on Competition Law and Policy. 2007.
3
Ibid. p. 6.

Box 10: Indonesia

The International Monetary Fund (IMF) intervened in Indonesia in the late

nineties because of the Indonesian financial crisis. This crisis was caused
by a political elite, which controlled important parts of the economy and put
a large debt burden on the country. One requirement after the intervention
was the adoption of a competition law. This law included a large number of
rules against certain conducts such as price discrimination and vertical
foreclosure. The law generally contained more rules to promote equality
than the South African law, but it gave less guidance on how the potential
conflict between efficiency and equality should be resolved. There is
therefore great responsibility on the courts to find a sound balance between
1
the different goals .
1
Eleanor M. Fox: Equality, Discrimination, and Competition Law: Lessons from and for South
Africa and Indonesia. Harvard International Law Journal. Vol. 41. 2000. at p. 592.

593
3.5. The balance between different objectives

What becomes clear from the study of the two countries is that if
competition policy should play a role in reducing inequality in developing
countries, there needs to be clear guidance on how to balance efficiency
743
and equality . The two cases of South Africa and Indonesia also show
that the current political environment strongly influences the competition
law. In both countries there was, in the beginning, a politically or
economically powerful minority that had every reason to protect its
position and to allow its enterprises to dominate the economy and
restrict smaller competitors. Once the political situation changed and the
links between political and economic power broke, politicians’ incentives
may have moved towards protecting the smaller businesses of their
supporters. Good political institutions are needed to make sure that
there are incentives to follow long-term goals in both political
environments.

4. Cross-country differences and their implications for

developing countries

4.1. Abuse of dominance laws in the general context of

unilateral conduct laws

Abuse of dominance refers to cases in which a firm has a

dominant position and then engages in harmful conduct. It is related to
the concept of unilateral conduct, which focuses on single-firm action
and its potential anti-competitive effects, including the creation or
strengthening of dominance, but that does not always require a prior
existence of a dominant position.

The following section now gives an overview of how abuse of

dominance and unilateral conduct are assessed in a number of
developing and developed countries. A range of differences persists,
744
and the recent EU Microsoft judgement of 17 September 2007 and

743
Fox (2000: 594).
744
Microsoft v Commission, T-201/04 [2007]. Judgement under:
http://curia.europa.eu.

594
the US reaction to it have highlighted again that within the developed
world also there are significant differences as to the treatment of
745
dominant market players . On the other hand, there are also areas of
convergence. In this context, the International Competition Network
(ICN) identified several issues that merit further research and
746
cooperation : objectives of unilateral conduct laws, assessment of
dominance, and state-created monopolies.

4.2. Objectives of unilateral conduct laws

The objectives of unilateral conduct laws differ across

competition systems. In most unilateral conduct regimes, more than one
objective is considered relevant. Objectives include: ensuring an
effective competitive process, promoting consumer welfare, maximizing
efficiency, ensuring economic freedom, ensuring a level playing field for
small and medium-sized companies, promoting fairness and equality,
promoting consumer choice, achieving market integration, facilitating
privatization and market liberalization, and promoting competitiveness in
international markets.

In many countries, ensuring an effective competitive process is

considered an objective on its own. The competitive process is seen as
a dynamic, self-initiating market phenomenon that requires competition
agencies’ intervention only when obstructed. In other systems it is seen
as a means to achieve other desirable goals such as consumer welfare,
economic freedom or efficiency. In some cases it is both an objective
and a means to achieve such goals. Apart from ensuring the competitive
process itself, the most commonly used goals seem to be the economic
goals of promotion of consumer welfare and enhancing efficiency. One
example of the difficult relationship between these goals is the
discussion about the ‘more economic approach’ to unilateral conduct
747
rules in the EU . This discussion focuses on whether the European
rules of unilateral conduct should be interpreted in a more economic
way thus aligning with current US law. This would essentially mean
looking at the type of effects of a certain practice on consumers rather

745
Vickers (2007).
746
Parts of the discussion below are based on International Competition
Network (ICN) (2007).
747
European Commission (2005).

595
then at the market structure and the abusive behaviour in question,
which were relevant criteria in the traditional European approach to
748
unilateral conduct .

In developing countries, the objective of competition law and

more specifically of unilateral conduct rules is sometimes also to protect
domestic firms by seeking to prevent powerful foreign firms from using
749
their power in order to eliminate local competitors . In principle,
countries are free to choose the objectives they see appropriate for
unilateral conduct rules. This is a political decision that stakeholders in
every country have to take, considering the economic realities in their
markets. However, different standards across jurisdictions represent
obstacles not only for companies with cross-boarder business, but also
to the effective enforcement and cooperation in the field of competition
750
policy. A certain degree of harmonization may therefore be desirable .
The relationship between the objectives of intellectual property
and unilateral conduct rules remains another possible field of conflict,
where further work is required. Also, the widespread practice of
exemptions from unilateral conduct rules may create a conflict with the
very goals of these rules.

4.3. The assessment of dominance

Significant differences exist in the way the surveyed jurisdictions

assess dominance and also what the finding of dominance then implies
for a dominant firm and its conduct. The following sections give an
overview of the differences between countries and illustrate the situation
with examples from individual countries.

4.3.1. Finding of dominance as a filter for anti-competitive effects

748
Dreher and Adam (2006: 259 et seqq.).
749
Gerber (2007: 707, 721).
750
The notion that domestic firms should be protected until they are able to
compete against foreign competition leads to an industrial policy that wants to
foster national champions. Section 4.5 discusses the relationship of industrial
policy and competition policy in greater detail.

596
 In the majority of countries the finding of dominance serves as a
first filter for separating conduct that has anti-competitive effects from
conduct that does not. However, it is not dominance itself that is
prohibited, but the anti-competitive unilateral conduct of dominant firms.
The underlying assumption is that such a conduct would not harm
competition if exercised by a non-dominant firm or that such a firm
cannot even enter into the conduct. Some countries do not use the
existence of a dominant position as a filter, but the existence of a
dominant position is nonetheless often a criterion in the assessment of
751
the conduct .

4.3.2. Interventions against unilateral conduct by firms without strong

market power or against the creation of dominance

In total, 15 out of 35 jurisdictions in the ICN report have

prohibitions against anti-competitive unilateral behaviour by non-
752
dominant firms or firms that attempt to acquire a dominant position .
These standards are also often related to fair trade laws. The examples
of intervention against firms that do not have a dominant position show
that dominance is not necessarily the decisive test in cases of unilateral
conduct. But even in jurisdictions where dominance is not required as a
precondition for considering unilateral conduct cases, it still has a role to
play as a criterion in the assessment of the conduct and its potential for
harm.

Box 11: Examples of interventions against unilateral conduct by firms

without strong market power or against the creation of dominance

The Sherman Act in the US prohibits “attempts to monopolize” and

“monopolization”. The former is the anti-competitive conduct with the
specific intent to acquire a dominant position and with the high
probability of doing so. The latter is the use of anti-competitive
conduct either to acquire or to maintain a dominant market position.
The existence of a dominant position prior to the conduct is therefore
not required for attempts to monopolize. An example is the US
Microsoft case where the Court of Appeals had to investigate whether

751
Marsden (2006: 292).
752
International Competition Network (ICN) (2007: 60–61).

597
 Microsoft had unlawfully harmed Netscape’s Internet Navigator
browser in order to protect the monopoly position of its Windows
operating system (monopolization) or to leverage the monopoly
1
position of Windows to the browser market (attempt to monopolize) .
Brazil and Chile contain a general prohibition of restrictive trade
practices. The French competition law sanctions abuses of economic
dependence on the basis of reputation, access to essential facilities or
the structure of the business relationship. Similarly, the German law
prohibits that one undertaking hinders another without objective
justification if it has relatively more market power than the other one.
An example would be sales under costs or under acquisition prices.
Also, the Japanese law does not require dominance when prohibiting
unfair trade practices, e.g. unjust refusals to deal.

1
United States v Microsoft, 253 F.3d 34 (D.C. Cir. 2001). Section 5.2. will look at the US approach
in more detail. For the above also see UNCTAD: Model Law on Competition. UNCTAD Series on
Issues in Competition Law and Policy. United Nations. New York and Geneva. 2007.

4.3.3. Behaviour vs structural definition of dominance

Twenty-eight out of 35 jurisdictions in the ICN survey use a

behaviour definition for dominance that focuses on a firm's appreciable
freedom from competitive constraints. This freedom is sometimes
referred to as independence (e.g. EU) and in other cases as the ability
753
to profitably raise prices (e.g. Canada, US ). Many authorities also
consider the durability of this freedom. Only five out of 35 use a
structural definition, which means that dominance is primarily defined by
structural criteria.

Although most of the countries state that they use a behaviour

definition, many of them still use structural criteria for the assessment of
dominance. The following section illustrates that many of the most
frequently used criteria are structural. The fact that the vast majority of
countries name their general definition ‘behavioural’ consequently loses
some significance, because a different – more structural – definition
seems to be used for the actual assessment of dominance.

753
See discussion on ‘hypothetical monopolist test’ in Section 2.1.

598
 There is little doubt that structural criteria have an advantage in
754
the practical application . It seems easier for competition authorities to
observe a current situation such as the market structure than to look at
the behaviour of actors in the market. This concern of practicability is
especially important for competition authorities in developing countries,
because their means to assess dominance are more limited. On the
other hand, the behaviour approach to defining dominance is
theoretically more exact, because it focuses on the target variable,
which is the actual and potential behaviour of firms. The downside of
this approach is that it requires more case-specific analysis.

4.3.4. The criteria for the assessment of dominance

Table 1 shows that structural criteria are important for the assessment
of dominance in most jurisdictions.

Table 1: Criteria for assessment of dominance

Which of the following criteria do you use? Yes No
- Market share of the firm and its competitors 32 0
- Market position and market behaviour of competitors 32 0
- Barriers to entry or expansion 32 0
- Buyer power 32 0
- Economies of scale and scope/network effects 32 0
- Access to upstream markets/vertical integration 32 0
- Durability of market power 30 2
- Market maturity/vitality 30 2
- Access to essential facilities 29 3
- Financial resources of the firm and its competitors 23 9
- High prices (at absolute or comparative level) 23 9
- Profits of the firm 17 15
Source: ICN (2007).

The first three criteria are also those most often mentioned as
being among the most important criteria. However, this is not the case
755
for some large jurisdictions such as the UK, the US and Japan .

754
Dreher and Adam (2006: 259 et seqq.).
755
This observation will be discussed further in Section 5, which concerns the
US and EU laws.

599
 Market shares:
Market shares are a relevant criterion for the assessment of
dominance, because they are a close approximation of how a firm
stands vis-à-vis its competitors. It is not a perfect approximation for
market power because the latter depends on a number of other factors.
Even a firm that has more than a 50% market share may have little
market power if there is only one buyer or many possible entrants.
Therefore, the significance of a certain market share depends on the
characteristics of the market.

Market share thresholds are levels of market shares above

which market power is assumed and below which it is not assumed. The
use of market share thresholds has both advantages and
disadvantages. The most obvious advantage is legal certainty and
predictability. If the procedure of the competition authorities is
sufficiently transparent, firms can to some extent predict how the
authorities will define the market and what market share they will
assume. A market share threshold then allows them to assess whether
they are assumed to be dominant or not and consequently if their
conduct could be prohibited. This higher degree of legal certainty allows
them to invest more efficiently, because they know when an activity is
likely to be profitable. The apparent disadvantage is that market share
thresholds are generalizations across a large number of special cases.
Consequently, they need to be defined conservatively, i.e. levels for
safe harbours must be rather low to take into account that in some
instances even firms with relatively low market shares can be dominant,
and thresholds to assume dominance must be high in order to consider
the possibility that firms with large market shares have no market power.
However, when the levels are defined too conservatively, the market
share thresholds lose their significance, because few firms can actually
use them. It becomes evident from these considerations that the
definition of the optimal thresholds is a difficult task. The benefits of
thresholds are particularly high for jurisdictions with less experienced
competition authorities that profit from a more structured approach.
However, the definition of the accurate threshold is likely to be very
difficult for these countries as well. Table 2 shows that in our sample
less developed countries in terms of gross domestic product (GDP) per

600
capita are more likely to have market share thresholds, but they are not
756
necessarily higher or lower than in developed countries .

Nineteen out of 35 jurisdictions in the ICN survey use market

share thresholds to assume dominance or safe harbours. Interestingly,
some countries have a differentiated approach to thresholds for
dominance, since they apply a lower benchmark for a rebuttable
presumption and a higher mark for a non-rebuttable presumption (South
Africa, Ukraine). The majority of jurisdictions that use safe harbours only
have 'soft' safe harbours, because their presumption is rebuttable.

756
Our sample consists of countries referred to in the ICN report, the UNCTAD
model law, and one additional country. Two identical thresholds do not
necessarily imply the same treatment, because some jurisdictions make them
dependent on other conditions.

601
Table 2: Market share dominance
Dominance Safe Dominance Safe
Country presumption harbours Country presumption harbours
Australia* Lithuania** 40%
Brazil* 20% 20% Mexico*
Bulgaria* 35% 20% Mongolia** 50%
Canada* 80% 35% Netherlands*
Chile* New Zealand* 20%
Croatia*** 40% Pakistan* 33%
Czech
Republic** 40% Poland** 40%
Estonia* 40% Portugal** 40%
EC* Romania* 40%
France* Russia* 50% 20%
Germany* 33% Singapore*
Hungary* 20% Slovakia*
India* South Africa* 45% n.a.
Indonesia** 50% Spain*
Ireland* Sweden* 40%
Israel* 50% Switzerland*
Italy* Turkey*
Jamaica* 50% Ukraine* 35% 35%
United
Japan* Kingdom*
Republic of
Korea* 50% 10% United States* 70% 50%
Latvia* 40% Zambia** 40%
Data: *ICN (2007), **UNCTAD (2007), ***country legislation.

Barriers to entry:

Apart from market shares, dominance is also linked to the ease

of entry and thus to the existence of entry barriers. Entry barriers make
it more difficult for potential competitors, i.e. new firms or firms that are
currently active in other markets, to enter the market under

602
consideration. Entry barriers can for example be legal barriers in the
form of licences or structural in the form of high sunk costs that make
757
entry either more costly or more risky . If such barriers exist, the firms
already in the market are protected from potential competition and thus
enjoy more market power. Most agencies look not only at the theoretical
possibility of entry, but also at whether entry is likely, timely and
sufficient. Some respondents stated that barriers must be put into a
dynamic perspective, where the changes in barriers are observed over
time.

Buyer power:
The profitability of a firm is not only threatened by its
competitors who take away its costumers, but also by the costumers
themselves, because buyers bargain with the sellers to get lower prices.
If the bargaining power of a buyer is high, for instance if there is only
one buyer but many potential sellers, the sellers have to lower the price
758
until it only covers costs .

The ICN survey shows that buyer power is one of the most
important criteria for competition authorities in the assessment of
dominance. The EC stressed that strong buyers can discipline the
dominant seller if they actually switch to new entrants when the
incumbent offers bad deals. In doing so, they ease the entry of new
firms that are willing to sell at lower prices and therefore also benefit
other, smaller, buyers. Competition authorities in developing countries
should pay special attention to this, because small and poor buyers are
likely to suffer from the abusive conduct by dominant firms.

4.3.5. Market size and economies of scale

Developing countries, and especially the least developed

countries, are mostly characterized by a low GDP, which has important
implications for competition policy. Due to economies of scale, firms
must be of a certain size to be cost-efficient. Small markets naturally

757
Sunk costs can arise when a firm must make an investment, e.g. in
infrastructure, to enter a market, but cannot recoup the investment if the market
entry fails. This is especially the case if the investment cannot be used for other
purposes.
758
This is conceptualized in Porter’s five forces analysis. See Besanko (2003).

603
enable fewer firms to be large enough to produce at the efficient scale
and consequently there will be higher levels of concentration in small
economies.

For some industries the domestic markets may be too small to

allow even one firm to be efficient and if it does, the resulting monopoly
759
is likely to be inefficient exactly because it is a monopoly . Openness
to trade is therefore crucial for such countries in order to enlarge their
760
markets and allow their firms to exploit economies of scale . It is
argued that due to this need of openness to trade, small economies are
likely to have lower barriers to entry and that higher levels of
761
concentration on domestic markets should be tolerated . However,
small economies are not always open, and it is therefore necessary to
make a distinction between open and isolated small economies. This
also becomes clear in the ICN survey: "There was a general consensus
among the respondents that if an economy is small and isolated from
external trade, this may result in higher barriers to entry which could
facilitate a finding of dominance or substantial market power. On the
other hand, the presence of free-trade agreements can be seen as
lowering an economy’s entry barriers to new or potential competition,
and thus making the exercise of market power in the economy’s
762
markets less likely." .

Most respondents agreed that in small economies the same

type of criteria for the assessment of dominance is appropriate, but that
the size of the economy significantly influences the outcome. They didn't
agree on the question of whether small economies should generally
assume dominance at lower or higher levels of concentration, which is
not surprising in view of the argument made above that countries are
not equally open to trade and therefore have different entry barriers. The
necessity to take into account openness to trade when defining tolerable
concentration levels shows that the appropriate level of concentration
needs to be defined by each country individually and that the markets
are defined correctly.

759
Monopolies can for example be inefficient because they set prices too high or
do not innovate enough.
760
Alesina et al. (2000).
761
The definition of the market is crucial here. When economies are open and
their markets expand beyond their political borders, the market should be
defined accordingly and concentration levels will be lower.
762
International Competition Network (ICN) (2007: 58).

604
4.3.6. Examples of dominance assessment in developed and
developing countries and countries in transition

Box 12: Examples of dominance assessment in developed and developing

countries and countries in transition
The presumption contained in the 1991 Law of the Czech Republic is 40%, which is
also the case in Portugal and Poland. In the Czech Republic, provided that the other
indicators mentioned in the Act do not show otherwise, a competitor or competitors
with joint dominance that have not achieved the 40% market share in a given period
are considered not to have a dominant position on a market.
In Estonia, an undertaking in a dominant position is one that accounts for at least 40%
of the turnover in the relevant market or whose position enables the undertaking to
operate in the market to an appreciable extent independently of competitors, suppliers
and buyers. Undertakings with special or exclusive rights or in control of essential
facilities are also undertakings in a dominant position.
Under Lithuanian law, a 40% market share establishes a presumption of dominance;
in addition, the new law creates a presumption of joint dominance when the three
largest firms in a market have a collective market share of 70%.
Under Canadian law, it must be shown that the practice has had, is having or is likely
to have the effect of preventing or lessening competition substantially.
In Germany, the legislation contains several presumptions, namely: at least one
enterprise has one-third of a certain type of goods or commercial service; three or
fewer enterprises have a combined market share of 50% or more; five or fewer
enterprises have a combined market share of two-thirds or over.
In the “Akzo” Judgement, the Court of Justice of the European Communities
considered that highly important parts (of the market) are by themselves, except
for extraordinary circumstances, the sole proof of the existence of a dominant
position. In the Michelin Judgement, the Court of Justice of the European
Communities stated that under Article 82 of the EEC Treaty a dominant position
refers to a situation of economic strength that gives the enterprise the power to
obstruct the maintenance of effective competition in the market concerned because it
allows the enterprise to conduct itself in a way that is independent from its
competitors, clients and, finally, consumers. In addition to market shares, the
structural advantages possessed by enterprises can be of decisive importance. For
example, the Court of Justice of the European Communities in the United Brands
Judgement took into account the fact that the undertaking possessed a high degree
of vertical integration, that its advertising policy hinged on a specific brand (Chiquita),
guaranteeing it a steady supply of customers and that it controlled every stage of the
distribution process, which together gave the corporation a considerable advantage
over its competitors. In consequence, dominance can derive from a combination of a
number of factors, which, if taken separately, would not necessarily be
determinative.
In the United States, monopoly power is not defined by statute but courts have
traditionally defined it as being “the power to control market prices or exclude

605
competition.” (United States v E.I. du Pont de Nemours & Co., 351 US 377, 391
(1956)). The market share is not the only factor considered in determining whether
monopoly power exists. Other factors, such as the absence of entry barriers, may
indicate that a firm does not have monopoly power even if it does account for a large
share of the relevant market.
The Indian Competition Act 2002 defines, ‘dominant position’ as a position of
strength, enjoyed by an enterprise, in the relevant market, in India, which enables it
to: (i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect in its favour its competitors or consumers or the relevant market. The
Competition Commission of India, while inquiring whether an enterprise enjoys a
dominant position or not, has due regard to all or any of these factors.
The legislations of Mongolia and the Ukraine consider that dominance exists when a
single entity acting alone or a group of economic entities acting together account
constantly for over 50% of supply to the market of a certain good or similar goods,
products or carried out works and provided services.
In Zambia, under Section 7 (2) of the Act, an enterprise is considered to be dominant
if it has a level of market power that allows it to behave independently of competitive
pressures (e.g. pricing and distribution strategies). An important but not conclusive
factor in determining dominance is the share of the market that the undertaking has.
An undertaking is unlikely to be dominant if its market share is less than 40% –
although this rule will largely depend on the circumstances of the case.
The Saudi Arabian Implementing Regulations on Competition Law state in Article 1
that dominance exists where an entity or group of entities are in a position to influence
the prevailing price through controlling a specific percentage of the total supply. A
specific threshold is not mentioned.
The Indonesian Competition Law (Law No. 5) defines dominance in Article 25 as a
situation in which one business actor or a group of business actors controls over 50%
of the market segment of a certain type of goods or services; or if two or three
business actors or groups of business actors control over 75% of the market
segment.
The Competition Act of Trinidad and Tobago defines in Section 20 monopoly power in
a market as a situation in which an enterprise, by itself or together with an
interconnected body corporate, occupies a position of economic strength that will
enable it to operate in the market without effective constraints from its competitors or
potential competitors. The Act contains no threshold for the positive presumption
of dominance, but states in Section 22 (2) that the Commission should not investigate
cases unless it is satisfied that the enterprise controls 40% of the market or more or
such percentage as the Minister may by order prescribe. This can be labelled as a
"negative presumption".

Source: UNCTAD: Model Law on Competition. UNCTAD Series on Issues in Competition Law and Policy. United
Nations. New York and Geneva. 2007.

606
4.4. Examples of abusive practices

Once dominance has been found, authorities need to

investigate whether a certain conduct should be prohibited. The
following are some examples from both developing and developed
countries of practices that are considered abusive.

4.4.1. Predatory pricing

Box 13: Some examples of rules on predatory pricing from

country legislations
Hungary prohibits the setting of extremely low prices that are not based on
greater efficiency in comparison with that of competitors and that are likely
to drive out competitors from the relevant market or to hinder their market
entry.
The Law for Countering Unfair Competition in the People’s Republic of
China states that an operator (i.e. enterprises or individuals) may not sell its
or his or her goods at a price that is below the cost for the purpose of
excluding its or his or her competitors.
In the United States, the Supreme Court has held that two elements must be
present in order to establish predatory pricing. First, the prices complained
of must be “below an appropriate measure of cost”, and second, the
competitor charging low prices must have a “dangerous probability” of
1
recouping its investment in below-cost prices. The US Supreme Court has
stated that it is important to distinguish between pro-competitive price
cutting and anti-competitive predatory pricing because “cutting prices in
2
order to increase business often is the very essence of competition” .
Predatory pricing is also prohibited in the European Community. The
3
European Court of Justice defined in TetraPak that pricing is predatory if
4
the price is set below the average variable costs .
1
Brooke Group Ltd. v Brown & Williamson Tobacco Corp., 509 U.S. (1993). See also
Cargill Inc. v Monfort of Colo., Inc., 479 U.S. 104, 117 (1986).
2
Matsushita Elec. Indus. Co. v Zenith Radio Corp., 475 U.S. 574, 594 (1986).
3
Tetra Pak v Commission, [1996] ECR I-5951 (ECJ).
4
For the above see also UNCTAD: Model Law on Competition. UNCTAD Series on
Issues in Competition Law and Policy. United Nations. New York and Geneva. 2007.

607
Box 14: Case 5 – Predatory pricing in the Zambian beer brewing
industry
On 8th June 2001, the Official agents of the Zambian Breweries lodged a
complaint, with the Commission alleging that MetPress Zambia Limited, t/a
Metro Wholesalers was wholesaling the Zambian Breweries “Mosi” and
“Castle” clear beers at prices lower than the manufacturer’s, i.e. predatory
pricing. This conduct was allegedly forcing members out of business. It was
observed that the firm was actually taking over business in various parts of
Lusaka. The complainants alleged further that the local distributors did not
have the financial power to compete with such pricing strategies from Metro.
Metro is part of the Metro Cash & Carry, which operates in at least 15
countries. The conduct by Metro appeared to be in breach of Section 7(2)(a)
of the Competition and Fair Trading Act (the Act), which requires enterprises
to refrain from predatory behaviour towards competition including the use of
cost pricing to eliminate competitors.
Metro was a new entrant in the market and was growing at a fast rate aided
by its below-cost pricing (which was used as a market penetration strategy).
It purchased its clear beer from Zambian Breweries as did other distributors.
However, it appeared that its selling price was below the purchase price and
there appeared to be no objective justification for the conduct. Zambian
Breweries confirmed that they had no unique “trade arrangement” with
Metro. The selling price from Zambian Breweries was uniform.
The Commission considered that while Metro was not a dominant player, its
pricing strategies had an effect on the smaller distributors, hence the
intervention. Although the Competition and Fair Trading Act provides that
any form of price resale maintenance is anti-competitive it was in this
situation found to be special to justify its continuity. A resale price
maintenance was proposed (the “minimum price”) to avoid future breaches.
As noted already, the business relies heavily on volume sales and small
disparities in price can and do have significant effects on other players. The
favourable credit period awarded to Metro by Zambian Breweries was
ordered to be discontinued and or be extended to all the other distributors.
Quoted from: UNCTAD: Review of Recent Experiences in the Formulation
and Implementation of Competition Law and Policy in Selected Developing
Countries: Thailand, Lao, Kenya, Zambia, Zimbabwe. United Nations. New
York and Geneva. 2005.

608
 Box 15: Case 6 – Abuse of dominance cases in Jamaica
The FTC (…) considered, under the abuse of dominance provisions, three
complaints regarding predatory pricing. In its decision regarding price
reductions of Super Plus Food Store, it found that the list of items for
promotion was limited and the duration of the sale was short such that
predation did not occur. With regard to the allegation that Tank-Weld Metals
Limited (TWM) was selling nails at predatory prices, it concluded that TWM
was dominant but, except for one month, its prices were above average
variable costs. It thus found there was no evidence of predation. The last
case involves an advertisement by Telstar Cable Ltd. for three months of
free cable service to subscribers who switch from another cable company
within the month of December 1999. The FTC found that the pricing was not
below costs and the duration of the offer was not long enough to have an
appreciable effect on competition.

Quoted from: UNCTAD: Voluntary Peer Review on Competition Policy:

Jamaica. United Nations. New York and Geneva. 2005.
FTC, Fair Trading Commission.

4.4.2. Resale price maintenance

Box 16: Some examples of rules on resale price maintenance from

country legislations
In the Swedish Competition Act, setting minimum prices that have an
appreciable effect on competition is prevented through the prohibition of
anti-competitive cooperation. An economic approach has been chosen
concerning resale price maintenance
In the United States, the Supreme Court has held that minimum resale price
maintenance is per se illegal under Section 1 of the Sherman Act, but there
must be an actual agreement requiring the distributor to adhere to specific
1
prices . Because maximum resale price maintenance may lead to low
prices, the Supreme Court has recently ruled that maximum resale price
maintenance is not per se an offence.
Resale price maintenance is also prohibited for example in India, New
Zealand, the Republic of Korea, and the United Kingdom.
In the European Community, fixing the resale price of goods is normally

609
 2
prohibited if competition between Member States is affected.
1
See Business Elecs. Corp. v Sharp Elecs. Corp., 485 U.S. 717, 720, 724
(1988).
2
For the above see UNCTAD: Model Law on Competition. UNCTAD Series
on Issues in Competition Law and Policy. United Nations. New York and
Geneva. 2007.

Box 17: Case 7 – Carbonated soft drinks sector in Kenya

The Minister of Finance directed the Commission to investigate the
carbonated soft drinks sector, believing that it might feature one or more
factors relating to unwarranted concentrations of economic power. The
Minister had received complaints from other companies and was aware of
the dominance of Coca Cola and its vertical integration with its bottling
operations and its distributors. The Commission conducted an investigation
that included interviews with the major players in the industry and a sample
of 85 distributors.
The investigation found that Section 23(1)(a) of the Act, which deals with the
control of a chain of distributing units, the value of whose sales exceeds a
third of the relevant market, was relevant to the activities of Coca Cola East
Africa Limited. Section 23(1)(b), which concerns companies that control two
or more physically distinct units that manufacture substantially similar
products and that supply more than one-third of the value at ex-factory
prices of the domestic market, applied to Coca Cola Holdings Limited.
Finally, Section 23(1)(c), which applies to a person who has a beneficial
interest exceeding 20% in a manufacturing enterprise and simultaneously
has a beneficial interest in one or more wholesale or retail enterprises that
distribute products of the manufacturing enterprise, is relevant to ICDC and
Softa Bottling Company.
During the investigation, several potential restrictive trade practices came to
light and were addressed in a draft consent order. These included possible
resale price maintenance, territorial allocation, exclusive dealership
arrangements and tied selling. However, the Commission suspended its
investigation under Section 23 when some of the complainants took the
matter to the High Court. The High Court proceedings have not been
concluded.
Quoted from: UNCTAD: Voluntary Peer Review on Competition Policy:
Kenya. New York and Geneva. 2005.

610
4.4.3. Exclusive dealing

Box 18: Case 8 – Exclusive dealing arrangements in the poultry sector in

Zambia
During investigations into alleged cartel activities in the poultry industry in Zambia in
1998, the Commission became aware that there existed restrictive business
arrangements involving Hybrid Poultry Farm (HPF – a day-old chicks (DOCs) rearer
with 60% market share then), Galunia Holdings Limited (GH – a commercial chicken
broiler rearer), and Tamba Chicks (Tamba – a (DOCs) rearer with 30% market share
then). ZCC advised the parties to notify the said exclusive agreements as required
under the Competition and Fair Trading Act Cap 417 of the laws of Zambia. At the
time, parallel investigations were launched on the sale of Tamba Chicks. GH
management was interviewed.
During the investigations it was revealed that in the sale of Mariandale Farm, which
specializes in the raising of DOCs into table birds, HPF required GH to only purchase
DOCs from itself. Further, GH was also required to consider HPF’s right of first refusal
should it intend to resell Mariandale Farm. GH was also not allowed to raise any type
of poultry, at the farm, apart from broiler chickens, including the provision not to go
into the business of a chicken hatchery. The parties also agreed that GH should be
accorded the right of first refusal should HPF intend to sell some of its shares and that
HPF should be given the first right of refusal to participate in an outgrowers scheme
should GH come up with one. The ZCC noted that the parties to this transaction are
the two leading players in the poultry sector’s upstream (HPF) and downstream (GH)
subsectors. HPF is the dominant producer of DOCs in Zambia with a 60% market
share. GH with its Mariandale and Diamondale Farms has an uptake of 48,000 DOC
per week and hence is the largest buyer in the poultry sector.
The exclusive dealing arrangements appear to have been over and above the offers
each party made and hence the considerations made by the other. The excesses
hinge on the ulterior motives of the parties in as far as the poultry sector is concerned.
The parties seem to have taken advantage of their dominant market positions
upstream and downstream – where each party was dominant. The parties were, both
by motive and concerted practices, foreclosing competition both in the DOCs, table
birds (broiler) and frozen chicken markets.
These practices were in direct contravention of Section 7 of the Act and have the
tenets of distractive cartel behaviour. The Board of Commissioners found all the
exclusive dealing provisions in the sale and purchase agreements by the parties anti-
competitive and nullified them.
UNCTAD: Review of Recent Experiences in the Formulation and Implementation of Competition Law and Policy in
Selected Developing Countries: Thailand, Lao, Kenya, Zambia, Zimbabwe. United Nations. New York and
Geneva. 2005.

611
4.5. State-created monopolies and national champions

4.5.1. Sectors with state-created monopolies

In many countries certain companies derive their dominant

position from government support or are even publicly owned
enterprises. The ICN report identified postal services, lottery, airports,
and commodities as the most frequent sectors where monopolies have
763
been created by the government . Table 3 shows that both developing
764
and developed countries have such sectors .

Table 3: Sectors with state-created monopolies

Sector Countries
Postal services Australia, Brazil, Bulgaria, Canada, Czech
Republic, Germany, Hungary, Italy, Jamaica,
Japan, Jersey, Republic of Korea, New Zealand,
Slovak Republic, Spain, Switzerland, Turkey, UK,
US
Lottery Brazil, France, Germany, Hungary, New Zealand,
Slovak Republic, Spain, Sweden, Turkey
Airports/Airport infrastructure Australia, Canada, Czech Republic, Jersey,
Spain, UK
Commodity Australia (rice, wheat, sugar, barley), Canada
(wheat), Pakistan (rice), Turkey (opium)
Ports Jamaica, Jersey, Israel, Pakistan, Spain, UK,
Turkey
Insurance France (insurance companies in social services),
Germany (social insurances), New Zealand
(accident), Pakistan
Airlines Jamaica, Israel, Pakistan, Spain, Turkey
Public transport Australia, Chile, France, Jamaica
Highways Brazil, France, Russia
Tobacco France (retail trade), Spain, Turkey
Mining Chile, Serbia, Turkey
Alcohol retailing Sweden
Alcohol products Turkey

763
International Competition Network (ICN) (2007: 64). This report only covers
state-created monopolies, not natural monopolies.
764
The table provides a non-exhaustive list of sectors where state-created
monopolies existed or still exist.

612
Table 3: Sectors with state-created monopolies
Sector Countries
Hospitals Germany
Pharmaceuticals Sweden
TV/Radio centres Russia
Motor industry/automobile
production Serbia
Table from ICN (2007).

4.5.2. Objectives of creating monopolies by the state

These monopolies were usually created by governments in

order to fulfil a public service mission or to play an active role in
coordinating the economy instead of relying on free markets. Table 4
provides a non-exhaustive list of the objectives that the various
jurisdictions stated.

Table 4: Objectives of creating monopolies by the state

Objective Country
Public service obligations ensuring citizens have Australia, Czech Republic,
access to important/essential services France, Germany, Hungary,
Japan, Republic of Korea,
Serbia, UK, US
The state made necessary investments in Brazil, Turkey
infrastructure and important sectors as part of a
previous economic policy based on import
substitution
Safety standards Switzerland
In order to align with the recommendations of the Czech Republic
European Commission
Prevent illegal gambling and ban excessive gaming Germany, Hungary
incentives and exclude commercial profit-making
purposes
Marketing in an orderly manner grain grown and Canada
leveraging the size to obtain the highest price
Operation of state liquor monopolies in order to US
prevent over-consumption by limiting economic
incentives for liquor sales
Public safety in taxi cab monopolies US

613
Table 4: Objectives of creating monopolies by the state
Objective Country
Public interest: government intervention is Netherlands
warranted if the private sector fails to produce the
desired outcome
Insuring traffic security in air, space, naval Russia
transportation; meteorological service, including its
satellite component
Table from ICN (2007).

Public service missions may be particularly important in

developing countries that face problems of severe poverty and lack of
infrastructure. Governments in such situations may find it more often
necessary to create or hold ownership of firms that fulfil these public
service missions, but at the same they should keep restrictions on
competition as low as possible.

4.5.3. Natural monopolies and state-created monopolies

In some industries, state intervention is due to natural

monopolies that arise because the market size and the cost structure of
production allow a monopoly to produce more efficiently than if
production was split among several firms. The market failure is evident
in this case because the resulting monopoly position will lead to
inefficiencies and therefore regulation is needed. Where a monopoly is
accepted (and possibly regulated) for such reasons, it is crucial to define
the market correctly in the vertical dimension. For example, if
economies of scale are highly important in the distribution, but not so
much so in the production, then it has to be ensured that a distribution
monopoly is not allowed to vertically integrate into production. A
possible solution is the approach of the European Commission that
765
intends to split the production and distribution of energy .

4.5.4. National champions

Section 4.5.2 has shown that there are also industries without a
natural monopoly justification, but where the state still intervenes and

765
European Commission (2007a).

614
creates a monopoly in order to reach other political or economic goals.
One such goal can be the creation or protection of ‘national champions’.
This is subject to a lot of debate and is often related to the infant-
industry argument for developing countries. Those in favour of such
protection argue that certain national firms must – at least for a certain
period – be protected in order to become internationally competitive. It is
often suggested that firms with small domestic markets have a
disadvantage because they cannot exploit economies of scale and that
they should be protected until they reach the critical size that allows
them to compete globally against firms with larger home markets. A
second argument is that some sectors are strategically important or that
they produce positive externalities – such as innovation spillovers or
supply capacities – on other sectors. One counter-argument is that
competition on domestic markets is the best condition for firms to
become internationally competitive, because they are forced to be
innovative in order to succeed. Having incentives to become competitive
is likely to be more important for productivity and growth than only
having the ability to do so based on government protection. Secondly, it
is difficult for governments to choose the sectors and firms that may
deserve protection. In particular those firms that already receive support
are likely to use their influence to get government assistance. Thirdly,
the support that one country gives to its national champions generates
pressure on other countries to also support their businesses. If every
national champion receives support from its government, the relative
positions between these firms remain the same, but resources are lost
at the expense of private citizens and consumers. When all this is taken
together, it becomes clear that the risks and costs that the support of
766
national champions involves are often greater than the benefits .

4.5.5. Competition policy in sectors with state-created monopolies

In some jurisdictions actions of public companies are exempted

under a state action doctrine, others treat public companies as they
would privately owned entities. The special treatment of public
enterprises is usually justified by the ‘public service mission’. In these
cases, the powers of competition authorities are often limited to
767
advocacy activities and other ‘soft’ enforcement tools .

766
Paul A. Geroski: Competition Policy and National Champions. March 2005.
767
International Competition Network (ICN) (2007: 87).

615
 Box 19: Case 9 – Preliminary probe into allegation of abuse of
dominant position in the steel sheet industry in Thailand
In 2002, there was a complaint lodged by end-users of steel sheet products
that the alleged party and its wholesalers raised the price of their hot-rolled
steel sheet every week and certain hot-rolled steel sheet products were not
available on the market. Those end-users who tried to import such products
were threatened by the alleged party that the supply would be cut off. The
investigations conducted by the officials at the office of the Competition
Commission revealed that the alleged party distributed its steel sheet
through three channels. The first one was through its distributors (12%). The
second one was through wholesalers (26%) and the third one was the direct
sale to end-users (62%). During August 2002-December 2000, the alleged
party adjusted its price up and down below the controlled-price ceiling (steel
sheet is a “controlled product” under the Price Control Act of 1999). The
price adjustment of the alleged party led its distributors, wholesalers, to do
the same thing. The officials concluded that the price adjustment conduct of
the alleged party did not violate the Price Control Act of 1999 because the
price was below the controlled-price ceiling for steel sheet. Also, there was
no evidence to support the allegation of abuse of market dominance by
setting an unjustly high price.
Quoted from: UNCTAD: Review of Recent Experiences in the Formulation and Implementation of
Competition Law and Policy in Selected Developing Countries: Thailand, Lao, Kenya, Zambia,
Zimbabwe. United Nations. New York and Geneva. 2005.

Most agencies stated that they determine dominance in the

same way as for privately owned and managed firms. The past has
shown a tendency towards privatization and liberalization to foster
efficiency and competition, which is implemented either by a general
privatization law or by a sector-specific law. During privatization,
competition authorities should have an advocacy role to ensure that the
markets work properly after the privatization. For this advocacy to be
effective, the competition authorities should be in a position to give
binding recommendations in defined areas.

616
5. Best practices from the US–EU discussion regarding
abuse of dominance

While other areas of competition law have experienced

significant convergence, rules on unilateral conduct differ considerably
768
across jurisdictions . The EU and the US are good examples of this as
769
is illustrated by the diverging Microsoft rulings in the two jurisdictions .

5.1. Objectives and criteria of unilateral conduct laws in the

US and the EU

Almost all countries in the ICN report agree that ensuring an

effective competitive process is an important goal or means to achieve
770
other goals . The survey also showed that the EU and the US have
almost the same objectives (the EU has the additional objective to
'achieve market integration'). Even the list of criteria used for assessing
dominance seems similar, with the EU using two additional criteria 'high
prices' and 'profits of the firm' which the US does not use. However,
when asked what the most important criteria are, significant differences
are revealed between the US and the EU In the EU, 'market share',
'barriers to entry', 'market position and behaviour of competitors' and
'buyer power' are very important, but the US authorities mention none of
these criteria as the most important one and focus instead on consumer
harm. The first conclusion therefore is that both jurisdictions say that
they pursue the same goals but use different approaches to reach them.
These differences may be justified not only due to the historic and
771
political context, but also because of different business environments .

768
Vickers (2007).
769
United States v Microsoft, 253 F.3d 34 (D.C. Cir. 2001) and Microsoft v
Commission, T-201/04 [2007].
770
International Competition Network (ICN) (2007). See also Section 4.3, which
concerns the assessment of dominance.
771
Well-developed capital markets provide an example for this. It is more
accurate to trust in the well functioning of competition if access to capital is
relatively easy because it enables the creation and expansion of firms that can
enter into the market. See Anderson and Heimler (2007: 71).

617
Table 5 illustrates the features that the US and EU laws have in
772
common and where they differ:

Table 5: Differing features of US and EU unilateral conduct laws

EU (Article 82 EC) US (Sherman Act Section 2)

"Access-to-markets principle" "Non-intervention principle"

• Contestability of • Privilege to single-firm
monopolized markets action
• Fear of blockage of markets • Fear of false positives

5.2. Harm to competition vs harm to competitors

Article 82 of the EC Treaty prohibits the abuse of a dominant

position. The authorities have to establish that a dominant position
exists and that there is anti-competitive conduct. The counterpart in the
US is Section 2 of the Sherman Act, which prohibits the monopolization
and attempts to monopolize. There is a different approach to dominance
in the US, because it is not the existence of dominance that requires the
dominant firm to refrain from an anti-competitive conduct, but the anti-
competitive attempt to create or maintain this position, which is
forbidden by Section 2 of the Sherman Act. Hence, there must be a
773
causal link from the anti-competitive conduct to market power .

The legal standards in the two jurisdictions differ considerably,

but how much their approaches differ in practice depends crucially on
how the terms are defined and interpreted. Harm to the competitive
process for example is prohibited in the EU because it is assumed that
the outcome of a sound competitive process is generally favourable to
consumers. But harm to the competition process such as from
foreclosure may also involve a strengthening or creation of a dominant
position and consumers may be hurt directly, which are the necessary
conditions in the US, so that the two standards may overlap in many
respects.

772
The following discussion is based on Fox (2003: 149 et seqq., 2006a).
773
Vickers (2005: 247).

618
5.2.1. The US view

The US Supreme Court followed the view of the US Department

of Justice and the Federal Trade Commission that Section 2 of the
Sherman Act is not an abuse of dominance law. Even monopolists who
control a facility that competitors need have no duty other than to refrain
from increasing their monopoly power by anti-competitive means. They
have no duty of refraining from leveraging their market power in other
markets, of fair dealing, or of providing a level playing field to
774
competitors . The framework that the US authorities follow is based on
the harm to consumers and this harm is only expected when either
prices increase or output decreases. If this is not the case, the unilateral
conduct by a firm is said to only hurt competitors, not competition.
Behaviour that increases efficiency and thereby benefits consumers is
not prohibited by Section 2 even if that behaviour harms the competition
775
process . In the US Microsoft case, the Court of Appeals had to decide
whether Microsoft had unlawfully tied its web browser to its operation
776
system . The Court of Appeals rejected the ruling of the lower court
that had found the tying per se illegal and it demanded from the lower
court a rule of reason evaluation that shows the anti-competitive effect.
The Court of Appeals would probably require a showing that the tying
increased or maintained the monopoly in the operating system market
777
or that it decreased output and therefore directly harmed consumers .
This illustrates that even if a monopolist significantly suppresses the
chances of competitors, the conduct is not necessarily illegal in the US
The next section will show that in the EU, on the other hand, such
conduct is likely to be illegal.

774
Fox (2006b: 69). Leveraging market power means that the dominant position
in one market is used to exercise power in a related market. For example, a firm
that has market power in one market can tie its product for this market to a
product that it sells in another market where it initially does not have market
power.
775
Bloch et al. (2005: 331).
776
United States v Microsoft, 253 F.3d 34 (D.C. Cir. 2001). For a description of
the case, see Motta (2004: 511). The case not only involved tying, but also
monopolization and attempted monopolization.
777
Fox (2006a: 737).

619
5.2.2. The EU view

Article 82 EC prohibits all conduct that is covered by the

Sherman Act Section 2 and in addition covers conduct by dominant
firms that is not increasing market power. In the EU, dominant firms
have the special duty not to exclude competitors by anti-competitive
means, because it is assumed that a conduct that excludes firms from
778
competing may harm the competition process . This can be explained
by the 'access-to-markets principle' mentioned above and is illustrated
in Table 6. Harm to the competition process refers to situations where
the behaviour of a firm reduces the intensity of competition, for example
by putting constraints on the entry of new competitors, but does not
have an immediate effect on consumers by limiting output or raising
prices.

Table 6: The EU vs. US view

Harm to Competition Harm to
Competitors
(Outcome) (Process) Efficient business
Business conduct Business conduct conduct hurts
limits output, raises unnecessarily blocks competitors.
prices competition on the Enforcement
merits against this conduct
will protect
competitors and
harm consumers.
Table based on Fox (2006b).

In a recent ruling, the European Court of First Instance

considered the tying of the Windows Media Player to the Windows
779
operating software . The court found that Microsoft had foreclosed
competition because other providers of media players could not
compete on the merits and that Microsoft had tied the two products
without objective justification. The diverse decision of the Microsoft case

778
This is expressed in the case law of the European courts, but there is
currently a discussion about a re-orientation of the European rules in the sense
of a ‘more economic approach’. See Dreher and Adam (2006: 259 et seqq.,
2007).
779
Microsoft v Commission, T-201/04 [2007]. The case also involved the refusal
to supply interoperability information.

620
in the US and the EU are illustrated in Table 6. The US authorities tend
to assume that if a conduct does not directly harm consumers, it is only
harmful to competitors, not to competition. Harm to the competition
process is not investigated if there is no harm to consumers. The
European authorities on the other hand are concerned with the
foreclosure of markets and thus harm to the competition process. But
harm to the competition process is difficult to distinguish from harm to
competitors and there is a risk that they unnecessarily prohibit a conduct
that is not harmful.

5.2.3. Identifying harmful conduct

The US courts and agencies assume that this probability of

error is high because they consider it to be difficult to distinguish
conduct that is harmful to the competition process from conduct that
only hurts competitors. Furthermore, they assume the damage of over-
enforcement to be greater than that of under-enforcement and are more
780
sceptical towards the capabilities of enforcement agencies . Their
approach is therefore mainly a fear of false positives (incorrectly
prohibiting conduct that belongs to the right-hand column of Table 6)
and they do not consider harm to the competition process (i.e. assume it
to be within the right-hand column of Table 6). The follow-up question is
whether this leads to too many false negatives, because if cases of
harm to the competition process are frequent, firms are allowed to
behave anti-competitively. This shows the differences between the
approaches in the two jurisdictions. The US law gives preference to
single-firm action and not to possible harm to the competition process,
because it considers it difficult to distinguish it from not harmful conduct.
The EU law privileges the contestability of markets and thus investigates
cases where markets are blocked. As pointed out above, the divide
between the two jurisdictions is also due to differing assumptions about
the consequences of considering or not considering a conduct. A
possible answer would be a more detailed analysis of cases in the
middle column of Table 6, i.e. those that concern the competition
781
process . Empirical work should be done to assess the effects of

780
Kovacic (2007: 70).
781
Fox (2006b: 76).

621
exclusionary practices and to quantify the dynamic losses from harm to
782
the competition process .

Other competition authorities are more likely to be successful in

the implementation and application of abuse of dominance laws when
they are aware of the various possible conducts and their impacts in
their country-specific context. Instead of following one of the approaches
discussed above, competition authorities in developing countries should
assess the consequences of, for example, considering or not
considering harm to the competition process. If they choose to consider
such cases, it will need more resources and may in some cases result in
the prohibition of conduct that is not harmful. On the other hand, not
considering them will allow certain dominant firms to foreclose the
market and thus increase inequality, which may have particularly
negative consequences in developing countries. Knowing the actual
impact of these cases on the economy helps to find the optimal balance
between the advantages and disadvantages of different approaches and
legal standards.

5.3. Assessing error costs of competition enforcement

A possible approach to analyse the impact on the economy is

an empirical assessment that estimates the error costs and the
783
probability of errors based on the analysis of past cases . Table 7
illustrates schematically the types of errors that can be made. One type
of error is to declare a practice that is actually not harmful to competition
to be illegal (dark grey). The other type is to declare a conduct that is
harmful to competition as legal (light grey).

782
This is another question addressed by a study on the quantitative effects of
anti-competitive practices in developing countries, which is currently being
undertaken by UNCTAD.
783
Kovacic (2007: 71). Such an error-cost framework must constantly be
updated to take into account that the investigation techniques of the authorities
are improving and the economic environment changing.

622
Table 7: Error costs of competition enforcement
Harm to Competition Harm to Competitors
(should be illegal) (should be legal)
Incorrectly prohibit conduct
Declared Correctly prohibit conduct that that does not harm
illegal harms competition competition, but only
competitors
Correctly allow conduct that
Declared Incorrectly allow conduct that
doesn't harm competition, but
legal harms competition
only competitors

Table based on Evans and Padilla (2004) 784

Evidence about the probability that a certain conduct is

assessed incorrectly should be provided. Together with the costs of
each incorrectly decided case, these probabilities provide evidence on
the accuracy of the present law and can give guidance on what changes
should be made, because it will give competition authorities as well as
policy makers a better picture of the economic reality in their jurisdiction.
An illustrative example is the use of market share thresholds. Once
authorities know how likely and costly it is to incorrectly find or not find
dominance with the current standard, they know if they should change
the threshold or use more behavioural criteria. Other costs, such as
increased inequality, social instability, etc., should also be given a
weight and be included in the framework. This will allow basing the legal
standards on empirical evidence, but it will also increase the capacity of
less experienced authorities and courts to use economic analysis in the
decision making in future cases and therefore advance their
competence and lead to convergence in the approaches between
countries. It is clearly a demanding exercise and the lack of accurate
data will form an obstacle to many jurisdictions, especially in developing
countries. However, the discussion above showed that the benefits are
likely to be significant and competence in the application of economic
analysis is increasingly an essential skill for the competition authorities.

784
Evans and Padilla (2004).

623
6. Recommendations

Abuse of dominance refers to cases in which a firm has a

dominant position and then engages in a harmful conduct. It is related to
the concept of unilateral conduct, which focuses on single-firm action
and its potential anti-competitive effects, including the creation or
strengthening of dominance, but does not require a prior existence of a
dominant position. Abuse of dominance can be seen as an approach
that uses the criterion of dominance as a filter to only analyse cases in
which harmful effects are likely, because it is assumed that only
dominant firms can engage in such conduct or that the conduct is only
harmful if entered into by a dominant firm.

To find dominance, the relevant market first has to be defined.

One problem here is that the often-used criterion 'willingness of the
consumer to switch to other products' (substitution) is biased by the
firm’s conduct, which has already taken place and possibly allowed the
sellers to set prices above the competitive level. Consumers who are
then faced with an even further price increase might easily be willing to
switch to other suppliers. When this criterion is used for the market
definition, then the suppliers to which consumers switch are included in
the relevant market under consideration because it is assumed that
these producers sell close substitutes. But actually the switch to other
suppliers is due to the fact that the price of the original product is
already too high. The relevant market is then defined too broadly and
other criteria, which focus more on product characteristics, have to be
given more weight. On the basis of the market definition, it needs to be
established that a dominant position exists. This assessment includes
the analysis of market shares, entry barriers, position of competitors,
vertical integration, economies of scale, buyer power, and access to
infrastructure.

The second element of abuse of dominance is the abusive

conduct. There are generally two types of abusive conduct: exploitive
conduct and exclusionary conduct. The former refers to cases where
firms charge excessively high prices from its customers, pay low prices
to suppliers, or discriminate among consumers. The latter refers to
cases where firms suppress competition by refusing to deal, engaging in
predatory pricing or raising costs of entry in order to exclude competitors
from the market and thus to create or strengthen a dominant position.

624
The difficulty here is that the same conduct may be harmful or efficient,
depending on the individual case.

After looking at what abuse of dominance is and how it is

approached in theory, we turned to the role of laws on abuse of
dominance in developing countries. Such laws have to find a balance
between three objectives: ensuring enough competition between firms in
order to force them to be efficient, allowing a certain degree of
profitability so that they have incentives to invest and innovate, and
achieving an equal distribution of wealth and business opportunities
among different parts of the society. While the discussion in developed
countries focuses on the first two aspects in order to maximize
innovation and growth, developing countries may also want to consider
the third dimension and include the reduction of inequality and poverty
in their objectives. But even the relationship between the first two
aspects tends to be different in developing countries than in other
regions, because they depend on factors that differ between developing
and developed countries.

Firstly, since developing economies often have smaller markets

and therefore a lower equilibrium number of firms that can exploit
economies of scale and operate efficiently, it is more likely that one finds
more concentrated national markets. One argument is that smaller
markets allow fewer firms to operate efficiently and that higher
concentration should therefore be accepted. The opposite view is that
since small economies are more vulnerable to abuse of dominance, a
stricter approach should be followed. The optimal solution differs from
one country to another, because it depends on a number of individual
characteristics such as barriers to entry. A stricter approach prevents
high levels of concentration and this may be more accurate in cases
where barriers to entry are high and where the economies are isolated
from international trade. But this approach would have significant
disadvantages for open economies with low barriers to entry if the
market was not defined accordingly, because it can prevent firms from
reaching an efficient size. Each country therefore must choose the
optimal approach and define the relevant markets according to its
situation. In general, in developing countries there are higher barriers to
entry, less developed capital markets and more information asymmetry,
which make the good functioning of competition more difficult than in
developed countries.

625
 Secondly, large firms play a different role regarding their
investment activity in developing countries than they do in more
developed economies. Established and possibly dominant firms can be
important for less developed economies to have a sufficiently high level
of investment in production. Long-term relationships and profitability
make it easier for incumbent firms to invest. If there was fierce
competition with constantly new firms entering the market and
established, but less efficient ones leaving it, then the currently existing
firms would not be able or willing to make sufficient investments. The
dominant positions may have a negative impact on innovation, but since
less developed countries generally operate in sectors with less
advanced technology, they can use existing technology and innovation
is not as important for them. Therefore, it may be less important for
them to have the most innovative and efficient firms, but rather to have
large incumbent firms that can make investments more easily. In less
developed economies, the benefits of increased investments are more
likely to outweigh efficiency losses that arise from a dominant position,
because investments in production are relatively more important. As
economies become more developed, it is increasingly crucial that the
competition process selects those firms that are the most efficient and
innovative. Countries therefore need to switch out of the more protective
setting at the right time and expose their firms to more competition.

A related issue concerns investment in infrastructure. A

government may not have sufficient resources to make investments in
infrastructure and therefore may allow private firms to exercise a
monopoly position in markets such as port, airport, or even road
infrastructure. If the infrastructure is an essential facility for other
enterprises, this firm has the power to exclude competitors or demand
high prices. There needs to be a balance between the firm’s incentives
to invest and efficiency losses. It must be carefully assessed for what
sectors the monopoly is allowed, how broad it needs to be, for what
period it should be granted, and if concessions can be renegotiated after
a certain time or situation.

Thirdly, distributional aspects may be important for developing

countries. Smaller firms, which often represent poorer parts of society,
may have to be given a better chance to compete against large
dominant firms. Enforcement against exclusionary practices of dominant
firms may therefore have to be fiercer. Competition law can be used for
such public interest issues, but it is crucial that the law gives clear

626
guidance on how these objectives should be balanced against other
objectives such as efficiency. Comparing this to the investment
argument above shows that there are justifications for more but also for
less strict standards in developing countries. These justifications
naturally contradict each other and therefore necessitate a sound
balance.

After analysing the role of abuse of dominance laws in

developing countries, we took a broader perspective and compared the
approaches to abuse of dominance across a number of developed and
developing countries. A survey by the ICN investigated the differences
between countries regarding the objectives of unilateral conduct laws
and the assessment of dominance. It found that 'effective competitive
process' and 'consumer welfare' are objectives that almost all
jurisdictions share. There are, however, considerable differences in
other objectives such as 'ensuring a level playing field' and ‘promote
fairness and equality’.

The assessment of dominance is very much based on the

criteria mentioned above. Most countries rank 'market shares of the firm
and its competitors' and 'barriers to entry or expansion' among the most
important criteria. These criteria are structural criteria, because they do
not directly look at the firms’ behaviour, but at the market structures that
influence their behaviour. The use of more structural criteria has the
advantage of giving more clear-cut rules, which may be important
particularly for developing countries and less experienced competition
authorities. But even apparently clear rules such as market share
thresholds for the assessment of dominance can make demanding
case-specific analysis such as market definition necessary.

Developing countries often look at the situation in developed

countries for possible ways to design their own competition laws.
Examples could be the US or the EU, but particularly in the area of
abuse of dominance, these two jurisdictions differ significantly. It is
therefore beneficial to look at the differences in the two approaches in
order to derive some lessons for developing countries. The first
difference is that in the US Section 2 of the Sherman Act is not regarded
as an abuse of dominance law, but as a unilateral conduct law. It does
not always require a prior existence of a dominant position, but there
has to be a causal link from the conduct to the creation or maintenance
of a dominant position. A second difference is that the EU law wants to
protect the competition process, while the US law only intervenes when

627
there is direct harm to consumers. The legal standards in the two
jurisdictions differ considerably, but how much their approaches differ in
practice depends crucially on how the above-mentioned terms are
defined and interpreted. Harm to the competition process for example is
prohibited in the EU because it is assumed that the outcome of a sound
competition process is generally favourable to consumers. But the harm
to the competition process may also involve a strengthening or creation
of a dominant position and consumers may be hurt directly, which are
the necessary conditions in the US, so that the two standards overlap in
many respects. A reason for the disparity are differing assumptions
about what types of conduct are harmful and how difficult it is to
differentiate them from other conduct. The 'access to market principle' of
the EU probably arises from the assumption that impediment to this
access is severe and that it can be distinguished from other, not
harmful, conduct. On the other hand, the 'non intervention principle' of
the US is rather based on the assumption that the distinction of such
conduct is difficult, that there is great danger of prohibiting behaviour
that is not harmful, and that the unnecessary prohibition of efficient
conduct is severe. One conclusion from the comparison is that such
assumptions should be analysed and be grounded on the economic
reality. How likely and severe errors of competition authorities are can,
for example, be assessed in an analysis of past decisions and their
effects on the economy. The impact of decisions should be assessed ex
post in order to know if the rules need to be revised. The resulting
country-specific error-cost framework can be an important input for
competition authorities in developing countries, because it allows basing
the rules on empirical evidence. Support of competition authorities in
analysing their own cases and their impacts would therefore be
valuable.

The insights from quantitative analysis are also crucial for

finding a sound balance between the different objectives of competition
policy. For example, incentives to innovate arise from the possibility to
make profit and therefore depend to some extent on dominance, but this
must be weighted inter alia against price increases by dominant firms. A
second example is that developing countries often also have to consider
distributional aspects of laws on abuse of dominance and therefore
need to assess whether there exists a trade-off with efficiency
considerations. Quantitative analysis will help competition authorities to
understand the economic and political context in which their decisions
and rules take place.

628
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631
STRIKING A BALANCE BETWEEN COMPETITION LAW
ENFORCEMENT AND PATENT POLICY: A DEVELOPING
COUNTRY’S PERSPECTIVE

Thomas K. Cheng*

1. Introduction

The intersection of competition law and intellectual property

785
rights (IPRs) is one of the most complex areas of competition law .
These two areas of law share a potentially conflicting relationship, as
competition law restricts the abuse of substantial market power while
IPRs may confer market power. Commentators in developed countries
have proposed various ways to resolve this conflict. Some of them give
primacy to competition law, while others emphasize the importance of
786
protecting IPRs . Yet some others advocate solutions that require
balancing the policy considerations underpinning these two bodies of
law, while scholarship from developed countries is didactic on how
1
developing countries should resolve this conflict . In a well-known article
in 1984, Louis Kaplow proposed a complex analytical framework for
balancing the conflicting policy goals of competition law and patent
policy. (See generally Kaplow, supra note 785.) Developing countries

* The author is an assistant professor at the Faculty of Law of the University of

Hong Kong. He wishes to thank Mr. David Llewellyn of the IP Academy of
Singapore for inviting him to New York to attend the Asian IP Law & Policy Day
at Fordham Law School, where he presented his first thoughts on the subject
matter of this research. He welcomes comments and feedback on this research,
and may be reached at thomas.cheng@hku.hk.
785
Kaplow characterizes the intersection of competition law and patent law in
particular as “a source of perpetual confusion and controversy” and as a conflict
“even more deep-seated than is generally perceived”. The Patent-Antitrust
Intersection: A Reappraisal, 97 HARV. L. REV. 1813, 1815–16 (1984).
786
Ward Bowman, Jr. was one of leading proponents of minimal competition law
restrictions on the exercise of IPRs, while William Baxter advocated a stronger
role for competition law in regulating the exercise of patent rights. See generally
WARD S. BOWMAN, PATENT AND ANTITRUST LAW (1973); William F. Baxter, Legal
Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis, 76
YALE L.J. 267 (1966).

633
must be mindful of their own unique policy considerations. The main
justification for protecting IPRs, especially patents, is to generate
incentives to innovate. This justification is persuasive in developed
countries, where most of the potential inventors in the world are located.
It carries much less weight in developing countries, most of which
possess limited capacity to innovate. In resolving the conflict between
competition law and IPRs, developing countries must recalibrate the
balance struck by developed countries.

Although all the major IPRs grant their owners some proprietary
rights, the focus of this research is primarily on patents. Of the three
major types of IPR — patents, copyrights and trademarks — patents
grant the strongest protection. A patent gives a patentee the exclusive
right of exploitation, which entitles the patentee to exclude others from
copying or commercializing an invention that falls within the scope of the
patent. Patents are also more likely than copyrights and trademarks to
endow their owners with substantial market power. As will be discussed
in greater detail later, whether an IPR creates market power, and hence
potentially raises competition law issues, crucially depends on the
availability of substitutes for the product incorporating the protected
787
intellectual property . In the absence of substitutes, the producer of
such a product will wield substantial market power. An example will
illustrate this point. Assume that a patentee has obtained a patent on a
new drug that cures a rare disease. The patented drug is currently the
only cure for that disease. Under these circumstances, the patentee will
possess substantial market power in the market for treatment for that
rare disease. In practice, it is not altogether rare for a patented
technology to be the only one capable of performing a certain function
or possessing a unique quality desired by consumers. Patent protection
of such a technology would create market power and raise competition
law issues.

In comparison, with the exception of software copyrights,

788
copyrights are less likely to create substantial market power . This is

787
The focus here is on competition law issues in product markets incorporating
intellectual property, and not on technology markets and innovation markets.
While the latter two are undoubtedly important, the economics literature and
legal thinking on them still remain to be developed. Moreover, these two types of
markets are likely to have less salience for developing countries.
788
In many ways, software is different from other types of materials that are
copyrightable in that software is mostly valued for its functionalities and not its

634
 789
due to the fact that copyrights offer a narrower scope of protection .
While a patent prohibits an unauthorized third party from replicating a
protected technology, even if that is done with no assistance from the
patentee or with no knowledge of the patentee’s know-how, copyright
protection poses no bar to independent creation of protected content.
Copyright law merely prohibits a third party from copying and
reproducing the content created by the copyright holder. Moreover,
copyright-protected materials rarely constitute the only product in a
relevant market. Even in the case of most popular fiction, a novel such
as The Da Vinci Code is but one of many popular adult thriller novels in
the market. If the price of The Da Vinci Code doubled, some readers
might switch to other novels, or to other forms of entertainment, such as
films or music, altogether.

Trademarks are similarly unlikely to give rise to substantial

market power. A trademark rarely possesses such unique qualities that
it faces no competition from other trademarks. It is important to
distinguish between the substitutability of the trademark and that of the
underlying product. One may argue that a desktop computer operating
system bearing the Microsoft mark has few meaningful substitutes.
However, it is the underlying product of a desktop computer operating
system, not the Microsoft mark that lacks substitutes. Presumably, if
Windows were manufactured by, say, Sun Microsystems instead of
Microsoft, consumers would be happy to purchase it from Sun. Two
prominent U.S. competition law commentators have concluded that “IP
other than patents, secret know how or software copyrights, is unlikely
to yield sufficient economic power to give (sic) rise to serious Section 2
790
[monopolization] issues” . In light of the preceding discussion, the
focus is on the conflict between competition law enforcement and patent
policy.

creative content. Due to a variety of reasons, such as network externalities,

software may possess unique properties and functions that give it a very low
degree of substitutability in the eyes of consumers. In terms of market effects, a
software copyright is similar to a patent. This may explain why software is often
protected by patent as well as copyright.
789
Pierre Régibeau & Katharine Rockett, IP Law and Competition Law: An
Economic Approach, in THE INTERFACE BETWEEN INTELLECTUAL PROPERTY RIGHTS
AND COMPETITION POLICY, 541 (2007).
790
LAWRENCE A. SULLIVAN & WARREN S. GRIMES, THE LAW OF ANTITRUST: AN
INTEGRATED HANDBOOK 831 (2000).

635
 At this juncture, it is important to clarify the scope of this
research. It does not address the relationship between competition law
and economic development. The question of whether competition law
enforcement may promote economic development has received
considerable attention in recent years. It has been argued that by
improving consumer welfare and encouraging domestic enterprises to
become more efficient, competition law enforcement helps developing
countries to progress economically. It is certainly possible that the
balance between competition law enforcement and patent policy may
have general implications on development, and that possibility is itself a
worthwhile object of research. However, the scope of this research is
narrower. It is confined to how developing countries should strike a
balance between competition law enforcement and patent protection as
a matter of sound competition policy, taking into account both allocative
and dynamic efficiency considerations. The perspective adopted is one
of competition law, and not one of development.

Part 2 explains the prevalent views in developed countries on

the intersection of competition law enforcement and patent policy, with a
special focus on the framework advocated by Louis Kaplow. Part 3
examines the problems with applying Kaplow’s framework to developing
countries, and suggests necessary modifications based on lessons from
development economics literature. Part 4 reviews some practical issues
arising from the implementation of the modified framework and suggests
how developing countries may use this framework to help them balance
competition law enforcement against patent policy.

2. The balance between competition law enforcement and

patent policy in developed countries

The fundamental cause of the conflict between competition law

enforcement and patent policy lies in the fact that competition law
restrains the abuse of substantial market power that patents sometimes
create. Competition law constrains a dominant firm’s choice of
competitive conduct. As the European Court of Justice (ECJ) has
repeatedly asserted, a dominant firm bears a special responsibility
791
towards the competitive process . While the U.S. courts have

791
In Michelin, the ECJ stated that a dominant firm “has a special responsibility
not to allow its conduct to impair genuine undistorted competition” in the market.

636
 792
generally given dominant firms greater freedom of action, it is
nonetheless true that in U.S. antitrust jurisprudence, there exists a class
of competitive conduct that a firm without market power is free to
pursue, but which may ran afoul of competition law when undertaken by
793
a dominant firm . Meanwhile, by granting a patentee the exclusive
right to exploit an invention for a certain period of time, a patent may
give rise to market power. The existence of market power must be
determined on a case-by-case basis. As discussed earlier, one of the
main determinants is whether there are close substitutes for a patented
product. Early U.S. case law suggested that patent ownership created a
794
presumption of market power on the part of the patentee . This
presumption had long been criticized by economists and competition
law scholars as being inconsistent with economic reality. In 1995, the
U.S. Department of Justice and the Federal Trade Commission
announced in the Antitrust Guidelines for the Licensing of Intellectual
Property that they would not, as a matter of enforcement policy, apply
795
this presumption to a patentee . Finally, in 2006, the U.S. Supreme
796
Court adopted the same view in the Illinois Tool Works case . After
elucidation of the fundamental cause for the conflict between
competition law enforcement and patent policy, what follows is a review
of the divergent approaches suggested by commentators to resolve the
conflict.

2.1. Patent policy trumps competition law enforcement

Some commentators have suggested that patent policy trumps

competition law conflict. Bowman is a prime example. His competitive
superiority test “assumes the propriety of allowing a patentee to use any
method of charging what the traffic will bear if, and only if, the reward to

Case 322/81, NV Nederlandsche Banden-Industrie Michelin v. Commission

[1983] ECR 3461, [1985] 1 CMLR 282, para. 57.
792
See Verizon Communications v. Law Offices of Curtis V. Trinko, LLP, 540
U.S. 398 (2004).
793
See Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).
794
See, e.g., Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 16
(1984); United States v. Loew’s, Inc., 371 U.S. 38 (1962).
795
Department of Justice and Federal Trade Commission, Antitrust Guidelines
for the Licensing of Intellectual Property, 4.
796
Independent Ink, Inc. v. Illinois Tool Works, Inc., 547 U.S. 1002 (2006).

637
the patentee arising from the conditional use measures the patented
797
product’s competitive superiority over substitutes” . This test favours
patent policy by giving a patentee enormous freedom of action. Under
this test, “a licensee’s or buyer’s willingness to accept a restriction as a
condition” to a patent licensing transaction is treated “as affirmative
798
evidence of legitimacy” . In fact, according to Kaplow, Bowman’s test
is so permissive that “pure horizontal cartelization is virtually the only
799
behavior he would prohibit” .

Régibeau and Rockett propound a similarly pro-patent view.

They advocate for “independence” of patent law from competition law
enforcement. In particular, they argue that “competition law should
respect the rights granted by (intellectual) property law and that the
trade-off between static and dynamic efficiency is not a primary concern
800
of competition law” . They provide two main justifications for their
position. First, they argue that patent law, and intellectual property law
generally, has struck an appropriate balance between static efficiency
and dynamic efficiency considerations, with which competition law
801
should not tinker . Second, they argue that patent law focuses on the
ex ante incentives to innovate whereas competition law evaluates the
competitive effects of a business practice ex post. More information is
always available in the ex post scenario, when competition law
intervenes. With the benefit of hindsight, a competition authority often
will be tempted to take away the rewards that induced an inventor to
pursue the innovation ex ante. In fact, Régibeau and Rockett assert that
802
“the optimal level of monopoly power ex post is none” . However,
falling for this temptation would “wreck the delicate balance achieved by
803
IP law” .

797
Bowman, supra note 786, at x; see id. at 88.
798
Kaplow, supra note 785, at 1849–50.
799
Id.
800
Régibeau & Rockett, supra note 789, at 524.
801
Id. at 523.
802
Id. at 524.
803
Id.

638
2.2. Competition law enforcement trumps patent policy

Another common view is that competition law enforcement

takes precedence over patent policy, although this view is usually
asserted less forcefully than is the patent primacy view. One of the early
proponents of this view is Baxter, who put forward the comparability test
as a solution to the competition law–patent conflict. Under this test,
competition law should ensure that a patentee receives benefits that are
804
roughly comparable to the ultimate value of the patent . Kaplow
characterizes Baxter’s test as reflecting “a bias toward minimizing the
infringement upon antitrust policy” and as tending “toward results
805
favoring [the] antitrust side of the conflict” . In a variety of contexts, the
U.S. Supreme Court has expressed a similarly pro-antitrust view. In
Kodak v. Image Technical Services, the Court, addressing the issue of
leveraging monopoly power from one market to another, stated that
“power gained through some natural or legal advantage such as patent,
copyright, or business acumen can give rise to liability if a seller exploits
his dominant position in one market to expand this empire into the
806
next” .

On the other side of the Atlantic, the European Community

courts have propounded similar views favouring competition law in a
number of landmark refusal-to-deal cases. In the Court of First Instance
(CFI) Microsoft decision, the CFI concluded that the fact that Microsoft’s
workgroup server interoperability information was protected by patent
and trade secret laws did not relieve the company’s refusal to supply
807
competitors with such information from competition law scrutiny .
Under certain conditions, “an undertaking in a dominant position may be
808
required to grant a license covering its intellectual property rights” . In
IMS Health v. NDC Health, the ECJ laid down the conditions that must
be established to compel a dominant firm to license its IPRs to
competitors: first, the refusal to license prevents “the emergence of a
new product for which there is a potential consumer demand”, second,

804
Baxter, supra note 786, at 313.
805
Kaplow, supra note 785, at 1853–54.
806
Eastman Kodak v. Image Tech. Servs., 504 U.S. 451, at 480, n. 29 (1992).
807
Case T-201/04, Microsoft v. Commission [2007] ECR 00, [2007] 5 C.M.L.R.
11, para. 283–290.
808
Id. at para. 290.

639
the refusal “is unjustified”, and third, the refusal excludes “any
809
competition on a secondary market” . Two observations of this
judgment are in order. First, even though the IPR at issue in the IMS
case was a copyright and not a patent, the ECJ did not limit its
conclusions to copyrights. The ECJ spoke of IPRs generally in the
810
judgment . The ECJ’s characterization of an intellectual property that
may be subject to a special duty to supply is also more reminiscent of a
patent than of a copyright. The ECJ asserted that only an intellectual
property that is indispensable to competitors’ ability to compete with the
811
dominant firm is subject to this duty . The ECJ defined indispensability
by the following two criteria: “whether there are products or services
which constitute alternative solutions, even if they are less
advantageous, and whether there are technical, legal or economic
obstacles capable of making it impossible or at least unreasonably
difficult for any undertaking seeking to operate in the market to create,
possibly in cooperation with other operators, the alternative products or
812
services” . Copyrighted materials rarely enjoy such a degree of
indispensability; patented subject matter is more likely to do so.
Therefore, the ECJ’s statements in IMS are likely to apply with equal
force to patented products. The CFI’s invocation of the IMS criteria in
the Microsoft case, which involved patent and trade secret protection,
corroborates this view.

The second observation is that the three conditions laid down in

the IMS case are very stringent and the judgment therefore should not
be read as an unequivocal endorsement of the competition law primacy
view. However, the fact remains that the European Community courts
have generally taken a pro-competition law stance on the conflict
between competition law enforcement and patent policy. This is all the
more apparent when one compares the European Community’s
approach to refusal to license IPRs to that in the U.S., where some have
813
argued for a per se right to refuse to license .

809
Case C-418/01, IMS Health GmbH v. NDC Health GmbH [2004] ECR I-5039,
[2004] 4 C.M.L.R. 28, para. 38.
810
Id. at para. 23, 25.
811
Id. at para. 28–29.
812
Id. at para. 28.
813
SULLIVAN & GRIMES, supra note 790, at 848–53.

640
2.3. Striking a balance by weighing allocative efficiency
losses against dynamic efficiency gains

While there are some merits to the views that either competition
law enforcement or patent policy should reign supreme, these are
nonetheless overly simplistic. Kaplow has insightfully pointed out the
deficiencies in Bowman’s and Baxter’s tests, which will not be repeated
814
here . Moreover, the assertion by Régibeau and Rockett that
competition law should not be concerned with balancing static efficiency
with dynamic efficiency is plainly mistaken. Competition law regularly
takes into account the effects of a business practice on innovation, and
balances dynamic efficiency against static efficiency. Merger review is
one prime example. It would be untenable to argue that competition law
should ignore dynamic efficiency considerations only in its interface with
patent policy, which is arguably the area of competition law in which
these considerations are the most important. These commentators fail
to take into full account the fact that both competition law and patent law
incorporate allocative efficiency and dynamic efficiency considerations.
A sensible resolution of the competition law–patent conflict would
require a careful balancing of these considerations.

Despite their different purposes, both competition law and

patent law take into account allocative efficiency and dynamic efficiency
815
considerations, albeit with different emphases . Competition law is
primarily focused on allocative efficiency, i.e. ensuring that consumers
obtain the goods they desire the most at the lowest possible price and
that producers produce the goods that consumers desire in the most
cost-efficient manner. However, competition law recognizes the
importance of dynamic efficiency and the fact that the most significant
improvement in consumer welfare often results from technological
innovations that give rise to new or better products, and not from keener
competition in the provision of existing products. Therefore, as
mentioned earlier, competition authorities and courts do consider gains
in dynamic efficiency when assessing the competitive effects of a
business practice. Patent law grants exclusivity in exploitation in order to
induce potential inventors to innovate. This exclusivity results in losses
in allocative efficiency, because patented products are likely to be
produced below the competitive level. However, these losses are

814
See Kaplow, supra note 785, at 1845–55.
815
For a more detailed discussion of this issue, see id. at 800–07.

641
deemed to be the necessary price that must be paid to induce
innovations. The balance to be struck in patent policy is how to offer
potential inventors sufficient incentives without incurring excessive
losses in allocative efficiency. Therefore, both bodies of law balance
allocative efficiency against dynamic efficiency, which forms a useful
starting point for the resolution of the conflict between them.

Having established a common ground between competition law

and patent law, it remains to be seen how precisely this common ground
can be used to resolve the conflict between them. Kaplow provides the
816
most elegant framework for the resolution of this conflict . Two
fundamental premises underpin Kaplow’s framework. First, there are
two main policy dimensions to the competition law–patent conflict — the
length of the patent term and the scope of patent protection and
permissible exploitation, the latter of which is governed by a variety of
817
patent and competition law rules . Second, society should set the first
dimension by maximizing the net social benefits of granting patent
protection, and the second dimension by comparing the reward that
redounds to a patentee from adjusting a particular rule on patent
exploitation with the allocative efficiency loss resulting from the
adjustment. The second dimension, which is the principal concern of
this research, is set taking the optimal patent life as given, even though
the two dimensions ideally should be determined simultaneously.

With respect to the second dimension, the fewer and the more
lax are the restrictions imposed by competition law on patent
exploitation, the greater is the patentee reward from an invention, and
therefore the greater is the inducement to potential inventors. With
respect to the first dimension, the net social benefits of patent protection
are maximized when the difference between the total social benefits and
the total social costs of patent protection is the greatest. This difference
is maximized when the marginal social benefit of patent protection
equals its marginal social cost. The social benefits of patent protection
include the consumer welfare derived from the emergence of a new

816
The following discussion is based on Kaplow’s article, “The Patent-Antitrust
Intersection: A Reappraisal”. Unless otherwise indicated, the ideas are attributed
to pp. 1821–1845 of that article, supra note 785.
817
Although he does not discuss the possibility, Kaplow’s model presumably
can be used to determine other dimensions to the scope of patent protection,
such as the breadth of the patent misuse doctrine.

642
product or the improvement of an existing product, and the possible
future inventions that are built upon the current invention. The most
important social cost of patent protection is the deadweight loss
resulting from the exclusive exploitation of a patent. Exclusive
exploitation is likely to result in production below the competitive level.
Whenever that happens, society suffers a loss in allocative efficiency,
known as the deadweight loss.

The pivot of Kaplow’s framework is the ratio test, which is

defined as patentee reward divided by monopoly loss. This test is used
to determine the second dimension discussed above, i.e. whether
competition law should permit a particular patent exploitation practice,
such as an exclusive license. Patentee reward and monopoly loss refer
to the incremental reward and loss from allowing the patent exploitation
practice at issue. When setting the optimal patent life, the policy maker
will implicitly also determine an optimal patentee reward–monopoly loss
ratio, which represents the reward–loss trade-off made when extending
the patent life by the last incremental year. The implicit determination is
explained by the fact that the marginal social benefit of patent protection
is dependent on the incremental patentee reward, and the monopoly
loss is one very important component of the marginal social cost of
patent protection.

Once the optimum patent life has been set, what the ratio test
seeks to answer is “whether the total reward to the patentee implicit in
818
the optimal patent life can be achieved at a lower cost” . The answer is
obtained by comparing the ratio associated with a particular patent
exploitation practice with the optimal ratio. A patentee reward–monopoly
819
loss ratio can be computed for every patent exploitation practice . The
optimal ratio represents the most cost-effective way in which society can
induce inventions by adjusting patent life. If the ratio for a particular
patent exploitation practice is lower than the optimal ratio, the practice

818
Kaplow, supra note 785, at 1831.
819
Strictly speaking, there is a ratio associated with every patent exploitation
practice for every patent, because patentee reward depends on “a number of
factors, including the market value of the invention, the structure of the market
involving the patented process or product, and the attributes of the patentee
(such as marketing and production capacities) that determine its range of
options within that market.” Id. at 1823. However, for ease of application, it is
assumed that there is a generalized ratio for every type of patent exploitation
practice.

643
should be prohibited. Society would be better off prohibiting the practice
at issue and keeping the last incremental year of patent life. If the ratio
for a particular patent exploitation practice is higher than the optimal
ratio, the practice should be allowed, subject to the requirement that
patent life should accordingly be shortened. Society would be better off
obtaining the incremental patentee reward by allowing a particular
patent exploitation practice than by granting the last incremental year of
patent protection.

Despite the theoretical elegance of his model, Kaplow himself

acknowledges that there are considerable obstacles to applying his
model in real-world contexts. First and foremost, the optimal patentee
reward–monopoly loss ratio that serves as the benchmark for
comparison is very difficult to ascertain. Kaplow remarks that “our
knowledge is inadequate to inspire great confidence even in the
desirability of having a patent system at all, much less in the ability to
make the subtle measurements of marginal effects that determine the
820
ratio implicit in the optimal patent life” . As a second-best solution,
Kaplow proposes a cost-effectiveness analysis, which requires the
competition authority to derive the ratios for all possible patent
exploitation practices and align them from the highest to the lowest. A
comparison can then be made of the practices that are currently allowed
and prohibited to ensure that the total patentee reward is obtained from
practices that have the highest ratios. This analysis is so named
because the goal of the exercise is to obtain the same total reward in
the most cost-effective manner, i.e. by incurring the least aggregate
monopoly loss.

Even this second-best formulation of his ratio test, however, is

too difficult to apply. Therefore, Kaplow suggests a number of factors
that can be used as proxies to facilitate the application of the test. These
factors include “the extent to which the reward is pure transfer, the
portion of the reward that accrues to the patentee, and the degree to
821
which the reward serves as an incentive” . The first of these factors
requires some explanation. By a pure transfer, Kaplow refers to a
situation in which a patent exploitation practice results in transfer of
surplus from one group in society to another, such as licensees to the
licensing patentee, without an attendant increase in deadweight loss. In

820
Id. at 1833–34.
821
Id. at 1842.

644
the case of a pure transfer, the patentee reward may increase
substantially without a corresponding increase in monopoly loss.
Therefore, all else being equal, a patent exploitation practice that results
in a pure transfer is to be preferred to one that does not.

Given the difficulty in quantification, in the concrete applications

of the ratio test in his article, Kaplow does not attempt to calculate any
ratios. Instead, he analyses qualitatively the effects of a patent
exploitation practice on the ratio’s denominator and numerator. This is
often done with reference to the three factors mentioned in the last
paragraph. If a practice is likely to result in a substantial increase in the
numerator, patentee reward, without an attendant substantial increase
in the denominator, monopoly loss, Kaplow concludes that competition
law should permit it. An example would be a practice that results in a
pure transfer. If a practice is likely to result in a substantial increase in
the denominator without an attendant increase in the numerator,
competition law should prohibit it. An example would be a price-fixing
cartel disguised as a licensing arrangement with price restrictions.

Even though Kaplow’s ratio test and its alternative formulations

are difficult to apply in practice, they provide useful insights into how the
balance between competition law enforcement and patent policy should
be attained. When assessing a patent exploitation practice, a
competition authority must consider both its effects on patentee reward
and hence innovation incentives, and its social costs in the form of
deadweight loss. This insight proves to be useful in balancing
competition law enforcement and patent policy in developed and
developing countries alike.

3. The balance between competition law enforcement and

patent policy in developing countries

3.1. Adapting Kaplow’s model to developing countries —

relevant considerations

Having introduced an analytical framework for balancing

competition law enforcement and patent policy in developed countries, it
is important to articulate why adjustments are needed to adapt Kaplow’s
framework to the developing country context. At this point, one should

645
recall that one of the basic premises of Kaplow’s framework is that
patentee reward induces potential inventors to engage in research and
development. The ratio test compares patentee reward against
monopoly losses resulting from allowing a particular patent exploitation
practice. The underlying policy judgment is that some static efficiency
loss in the form of monopoly loss should be sustained to generate
patentee reward to induce innovative activities. However, depending on
the country at issue, what is a sound policy decision in the context of a
developed country may not be so in a developing country. As noted by
Correa, “the static-dynamic efficiency rationale applicable to a
developed country does not necessarily hold in low income
822
countries” . In the case of least developed countries, “the present
sacrifice of static efficiency finds no justification in future gains of
dynamic efficiency as domestic innovation is unlikely to occur and
foreign innovation depends on larger markets in developed
823
countries” .

The fundamental reason that Kaplow’s framework requires

adaptations is that, oftentimes, the potential inventors are not located in
developing countries, but in developed countries. This is especially true
of countries with little capacity to innovate. The implications of this are
twofold. The first concerns the domestic welfare impact of favouring
patent policy. Increasing patentee reward by adopting more permissive
competition law standards for patent exploitation practices may not spur
innovation in some developing countries because there may not be any
potential inventors to whom to provide incentives. These developing
countries may legitimately question whether the trade-off of between
allocative efficiency and dynamic efficiency is worth making. Moreover,
adopting more permissive competition law standards for patent
exploitation practices may impede domestic producers’ ability to imitate
a foreign technology. For instance, under a stringent competition law
standard — one that imposes significant restrictions on a patentee’s
freedom of action — a developing country may make it easier for
domestic firms to obtain a compulsory licence from a foreign patentee.
This could be achieved by adopting a liberal interpretation of the

822
Carlos M. Correa, Intellectual Property and Competition Law—Exploring
Some Issues of Relevance to Developing Countries, ICTSD INTELLECTUAL
PROPERTY AND SUSTAINABLE DEVELOPMENT SERIES ISSUE PAPER NO. 21, 6 (2007).
823
Id.

646
 824
essential facilities doctrine, as is advocated by Correa . Such a policy,
which favours competition law enforcement, will enhance a developing
country’s imitative capacity. Adopting a contrary policy in the name of
promoting dynamic efficiency will hurt domestic imitative capacity.
Whether this is a relevant consideration depends on the extent of
imitation taking place in a particular developing country.

The second implication concerns the international incentive

effects of favouring patent policy. With the exception of a few developing
countries, potential inventors are much more likely to be found in
developed countries. Therefore, favouring patent policy will only
increase reward to foreign patentees and induce foreign inventors to
innovate. A developing country may justifiably ask whether and why it
should sacrifice domestic consumer welfare and perhaps imitative
capacity in favour of foreign inventors, especially those in developed
countries. Even if the answer is in the affirmative, the competition
authority of a far-flung developing country may still wonder whether a
potential inventor in a developed country would take into account the
incentives provided by its competition law regime. The answer to this
question will depend on the size of the economy of the developing
country at issue, among other factors.

If adjustments were to be made, would one set of adjustments

suffice? The answer seems to be no. Correa’s comments crucially
suggest that developing countries cannot be treated as a monolith. The
question is how one should categorize developing countries for our
present purpose. In order to do so, one must distinguish between
825
production capacity, imitative capacity, and innovative capacity . The

824
Correa, supra note 822, at 8–13.
825
Carlos A. Prima Braga and Carsten Fink of the World Bank distinguish
between production capabilities and innovative capacity. See The Relationship
Between Intellectual Property Rights and Foreign Direct Investment, 9 DUKE J.
COMP. & INT’L L. 163, 167 (1998). Economists have distinguished between
imitative and innovative capacities. See, e.g., Carmelo Pierpaolo Parello, A
North-South Model of Intellectual Property Rights Protection and Skill
Accumulation, 85 J. OF DEV. ECON. 253 (2008); Yongmin Chen & Thitima
Puttitanun, Intellectual Property Rights and Innovation in Developing Countries,
78 J. OF DEV. ECON. 474 (2005); Edwin Lai, International Intellectual Property
Rights Protection and the Rate of Product Innovation, 55 J. OF DEV. ECON. 133
(1998); Yong Yang, Why do Southern Countries Have Little Incentive to Protect
Northern Intellectual Property Rights?, 31(4) CANADIAN. J. OF ECON. 800 (1998).

647
meaning of the first and the last capacities should be apparent.
Regarding the second capacity, economists have observed that
imitation itself requires considerable know-how and human capital.
Therefore, some developing countries may only have the technical
capacity to produce and not to imitate.

Some developing countries may have little imitative and

innovative capacities, and only engage in production of the simplest
kind. The least developed countries are examples of such countries,
which may be called “production” countries. Some developing countries
may possess both production and imitative capacities, but not innovative
capacity. Even though imitation requires know-how and human capital,
the technological sophistication required for innovation is higher than
that required for imitation. Therefore, some developing countries may
only possess the technical capabilities to imitate and not to innovate.
Most developing countries are likely to belong to this category of
“imitation” countries. Finally, some developing countries may possess all
three capacities. South Korea, with its prominent electronics and
shipbuilding industries, and Taiwan, with its strength in the computer
and the semiconductor sectors, come to mind. China, which has
become one of the top five countries of origin for Patent Cooperation
Treaty applications at the World Intellectual Property Organization
826
(WIPO), is another example . These countries may be called
“innovation” countries. The importance of patentee reward in Kaplow’s
ratio test, and more generally, the importance of dynamic efficiency
considerations in the competition law–patent balance, understandably
differs for various categories of developing countries. The balance must
be struck differently for each of them.

3.2. Review of economics literature

To understand precisely the kind of adjustments needed to be

made to Kaplow’s framework, it is didactic to consult relevant economics
literature. Unfortunately, there is scant economics literature that
examines the relationship between the competition law–patent balance

826
World Intellectual Property Organization, WIPO Patent Report: Statistics on
Worldwide Patent Activity (2006 Edition), available at
http://www.wipo.int/ipstats/en/statistics/patents/patent_report_2006.html#P70_1
820.

648
and the incentive to innovate in developing countries. However, based
on stylized models, economists have studied the impact of heightened
IPR protection on the incentives to imitate and innovate in developed
and developing countries. Heightened IPR enforcement will render it
more difficult for competitors to imitate a protected technology, hence
increasing patentee reward. Even though this body of literature does not
directly address the competition law–patent balance, it is nonetheless
highly relevant. Recall Kaplow’s insight that adjusting the length of
patent life and modifying the scope of permissible patent exploitation
827
under competition law are two means to the same end . Stated more
generally, as long as a policy decision raises patentee reward, whether
it is made in the realm of patent policy by lengthening the patent life or
by intensifying patent enforcement, or in the realm of competition law by
adopting more permissive standards on potentially anti-competitive
patent exploitation practices, that policy decision will boost incentives to
innovate.

In keeping with the prevalent approach in the development

economics literature, known as the international product cycle, Parello
constructs a model, which assumes that developed countries innovate
and developing countries imitate the technology created by developed
countries, to study the impact of heightened IPR protection on the rate
of innovation in developed countries and the rate of imitation in
developing countries. Parello elaborates two scenarios, one in which
imitation is the only means of technology transfer, and one in which
technology transfer takes place both by imitation and through foreign
828
direct investment (FDI) . In his model, firms in developing countries
only compete with those in developed countries by imitating the
829
technology of the latter Parello concludes that in the absence of FDI,
improved IPR protection induces a short-term slowdown in the
innovation rate in developed countries (even though there is no change
in the long-term innovation rate), and impedes technology transfer by
830
imitation . Parello does not draw any definitive conclusions regarding
831
the rate of innovation and the rate of imitation in the presence of FDI .

827
Kaplow, supra note 785, at 1831–37.
828
Parello, supra note 825, at 255.
829
Id. at 260.
830
Id. at 255, 265–66.
831
Id. at 255.

649
 One key analytical step in Parello’s model is that improved IPR
protection affects producers in developing countries by raising the costs
832
of imitation . The causal link between improved IPR protection and the
costs of imitation is likely to be strong. Even though the causal link
between adopting more permissive standards for patent exploitation
practices and the costs of imitation may not be as strong, it is
nonetheless substantial. For example, as mentioned earlier, by making
it harder for domestic producers to obtain a compulsory licence from a
foreign patentee, a developing country raises the costs of technology
transfer to its producers and hence the costs of imitation. Moreover, by
allowing a developed country patentee to use exclusive dealing
arrangements to foreclose imitating domestic competitors, a developing
country similarly raises the costs of imitation by making it harder for its
domestic producers to market their products. The costs of imitation
determine the ease and likelihood of imitation by a developing country
producer. In Parello’s model and other models considered below, once
a developing country producer successfully imitates a foreign
technology and produces the same product to compete with the
developed country patentee, the patentee’s profit from his invention
falls. The patentee reward diminishes, thereby reducing a potential
inventor’s incentive to innovate. Therefore, favouring patent policy in the
competition law–patent balance has a similar effect to raising IPR
protection in Parello’s model. The fact that the variable at issue is
different does not undermine the relevance of his conclusions.

Lai supplements Parello’s analysis by examining the effect of

enhanced IPR protection in developing countries on the rate of
innovation in developed countries when the means of technology
transfer consists of both imitation and FDI. Again, Lai assumes that only
developed countries innovate and developing countries can only imitate
833
technologies created by developed countries . When imitation is the
only means of technology transfer, Lai’s conclusions are similar to
Parello’s. They both find that the rate of innovation in developed
countries and the rate of imitation in developing countries fall as a result
834
of heightened IPR protection in developing countries . Meanwhile,
when technology transfer is accomplished through FDI, Lai finds that
both the rate of innovation and the rate of imitation rise in response to

832
Id. at 261.
833
Lai, supra note 825, at 134.
834
Id. at 135.

650
 835
enhanced IPR protection in developing countries . The difference in
results is due to the fact that in the former case, heightened IPR
protection in developing countries will induce inventors in developed
countries to invest in more innovation, raising their demand for skilled
836
labour in their countries . Wages for these workers rise raising the
837
costs of innovation . This increase in costs will in fact overwhelm any
gains to the inventors from the enhanced IPR protection in developing
838
countries, causing the overall rate of innovation to drop . More
importantly, Lai concludes that, when technology transfer is
accomplished through both imitation and FDI, the rate of innovation in
developed countries and the rate of imitation in developing countries will
increase in response to improved IPR protection in developing countries
so long as certain conditions are met, including that the rate of FDI is
839
sufficiently high .

Yang focuses on a different aspect of the relationship between

IPR protection in developing countries and the incentive to innovate in
developed countries. Yang posits that only developed countries have
the capacity to create the technologies for which developing countries
840
are the main source of demand . An example of such a technology is
the cure for a tropical disease that is most commonly found in
developing countries, such as malaria. The question that Yang seeks to
answer is that, under these circumstances, how developing countries
can induce developed country inventors to invest in these technologies
by offering adequate IPR protection to these technologies in their
countries. Yang finds that because of their incentive to freeride on each
other’s IPR protection, developing countries must cooperate with one
841
another . One of Yang’s key insights is that it is not worthwhile for a
developing country to offer IPR protection to developed country
842
technologies alone . The welfare loss from the enhanced IPR
protection will more than outweigh the gains from the increased inflow of
developed country technologies, given that one country’s enhanced
protection will provide negligible incentives to developed country

835
Id.
836
Id.
837
Id.
838
Id.
839
Id. at 147.
840
Yang, supra note 825, at 802.
841
Id.
842
Id.

651
inventors. In the ideal world, all the developing countries would
cooperate to offer IPR protection to developed country technologies.
Given the practical difficulties in achieving that goal, some of the
843
developing countries should form “cooperation coalitions” . Countries
within these coalitions offer higher protection than those outside of the
844
coalitions . In fact, non-coalition developing countries are likely to
lower their IPR protection to freeride on the effort of the coalition
845
countries . However, once the number of countries in these
cooperation coalitions is large enough, developed country inventors will
receive sufficient incentives to invest in technologies needed by
846
developing countries .

Yang leaves unanswered an important question, which is how

one goes about deciding which developing countries should join these
cooperation coalitions. Yang merely suggests that a “practical approach”
847
would be to start with “WTO member countries” . He does not
distinguish developing countries by their ability to induce R&D
investment by developed country inventors. However, given the varying
sizes of the economies of developing countries, one would most
certainly expect some of them to have greater ability to induce
investment by developed country inventors.

Chen and Puttitanun construct a model that examines both the

imitative and the innovative capacities of a developing country. Their
848
model includes two sectors, the import sector and the local sector .
The import sector consists of two firms, a foreign firm from a developed
country, which possesses a patented technology, and a domestic firm
849
which competes by imitating the foreign firm’s technology . The local
sector consists of two local firms, one of which engages in innovation
850
and the other of which only imitates . The variable in the model, again,
is the level of IPR protection. In this model, heightening IPR protection is
a double-edged sword for a developing country. It both benefits and
harms it. On the one hand, it renders it more difficult for the domestic

843
Id. at 807–10
844
Id.
845
Id.
846
Id.
847
Id. at 807.
848
Chen & Puttitanun, supra note 825, at 476.
849
Id.
850
Id.

652
firm in the import sector to imitate the foreign firm’s technology, thereby
851
reducing competition in that sector . The price of the good in the
852
sector increases and consumer welfare is harmed . On the other
hand, heightening IPR protection also increases incentives for the
innovative firm in the local sector to innovate, as it is now more difficult
853
for its domestic competitor to imitate its technology . A developing
country must balance the effects in these two sectors and find an
optimum level of IPR protection.

Chen & Puttitanun’s conclusion is that the optimal level of IPR

protection for a developing country is related to its level of economic
development. In particular, they find that the relationship between these
two variables is captured by a U-shaped curve. For a country with a low
level of economic development, “an initial increase in [the] country’s
technological ability has a greater impact on the efficiency of imitating
northern [developed countries’] technologies than on the efficiency of
domestic innovations, which makes it desirable for the country to lower
854
[the protection of] IPRs” . However, at some point in economic
development, the “imitation effect is dominated by the innovation effect,
and the optimal protection of IPRs increases with the level of
855
development” . Their empirical study shows that the bottom of the U-
shaped curve — the point at which the innovation effect begins to
dominate the imitation effect and developing countries should start to
enhance IPR protection — is US$854.06 in per capita GDP in 1995
856
prices . This is a rather low level of development, suggesting that it is
beneficial for most developing countries to enhance IPR protection.

3.3. Conclusions from the review

Recall the three types of capacity — production, imitative, and

innovative — distinguished by economists and the categorization of
developing countries based on their possession of these capacities
proposed earlier. The discussion for now proceeds by examining the

851
Id.
852
Id.
853
Id.
854
Id.
855
Id.
856
Id. at 487.

653
developing countries individually, and not in the aggregate as
“cooperation coalitions” as suggested by Lai. It focuses on the domestic
welfare effects of a shift in the competition law–patent balance, in
particular, on how such a shift affects the domestic rate of imitation and
the domestic and foreign rates of innovation.

Nothing in the economic models seems to refute the obvious

conclusion that the “production” countries have little to gain by favouring
patent policy. Since there is no domestic innovation to be had,
monopoly loss should not be traded off to increase patentee reward and
to create incentives to innovate. Unless the patentee reward provided by
these countries is a strong inducement to developed country inventors,
these countries should favour competition law enforcement in the
balance. For the remaining two categories of countries, the trade-off in
shifting the competition law–patent balance is between the allocative
efficiency loss plus the reduced domestic imitation on the one hand, and
the increased domestic innovation on the other hand. For the “imitation”
countries, since once again there is no domestic innovation to be had,
they should favour competition law enforcement over patent protection.
This conclusion is subject to the same caveat as that for “production”
countries regarding inducements to developed country inventors. The
trade-off becomes difficult for the “innovation” countries. Chen &
Puttitanun suggests that these countries have much to gain from
domestic innovation, even though their domestic imitative capacity
suffers. These countries may strike a more neutral balance between
competition law enforcement and patent protection.

The picture becomes more complicated for all three categories

of developing countries if the incentive effects on developed country
inventors are considered. Here, the main distinction among developing
countries is whether they receive substantial foreign direct investment
as a means of technology transfer. For those that do not receive much
FDI, Parello’s model is most salient and suggests that favouring patent
policy will give little boost to the incentive to innovate in developed
countries. These countries should continue to favour competition law
enforcement. For those that do receive substantial FDI as a means of
technology transfer, Lai’s model is more relevant and suggests that
these countries could boost the incentive to innovate in developed
countries by favouring patent protection. Lastly, if one considers
technologies that only developed countries have the capacity to develop
— the scenario examined by Yang — one may conclude that at least

654
some developing countries should tilt the balance in favour of patent
protection. Recall that Yang offers no guidelines on how to decide which
countries should join the “cooperation coalitions”. The most one can say
for now with some confidence is that developing countries with large
economies are likely to offer the most substantial inducements to
developed country inventors, and hence should join these coalitions.
The least developed countries are likely to freeride on these large
developing countries’ effort. China, Brazil and India are probable
candidates for these cooperation coalitions.

In sum, both “production” and “imitation” countries with little FDI

should favour competition law enforcement in the balance. “Production”
and “imitation” countries with significant FDI, and “innovation” countries
of all kinds need to take greater care in striking the balance. Lastly, to
induce developed country inventors to create technologies required by
developing countries, developing countries with larger economies may
need to shoulder the responsibility to favour patent protection.

One observation here is in order regarding the causal link

between a policy change and the incentive to innovate in the economic
models explained above and in Kaplow’s framework. In most of these
economic models, the policy decision at issue is the intensity of IPR
enforcement, which determines the costs of imitation for producers in
developing countries, which in turn affects the patentee reward and the
incentive to innovate. Most of these models assume that once imitation
begins, it is no longer profitable for the original inventor in the developed
country to produce the product. The developing country producer has
lower costs of production, due to its lower wage costs, and therefore can
undercut the developed country producer by charging a lower price. As
soon as that happens, the developed country producer will shut down its
production. Therefore, a change in the intensity of IPR enforcement has
a direct and immediate effect on patentee reward and the incentive to
innovate.

Meanwhile, not every type of patent exploitation practice

regulated by competition law has such a direct and immediate effect on
patentee reward and the inventive to innovate. In fact, most of them do
not. Take the practice that is likely to have the most direct impact,
compulsory licensing, as an example. A developing country may adopt
permissive standards for compulsory licensing that allow domestic
imitators to obtain such licences from developed country inventors

655
easily. Such a policy obviously will have a significant impact on patentee
reward, as patentees now must face competition in the market for their
products. However, even under these circumstances, the extent of the
impact may be less than expected. As long as the licence fee is set at
such a rate that it compensates the patentee for its loss of profit from
increased competition in the supply of the product, the patentee reward
may not be drastically affected. In fact, the licence fee could be set at
such a rate that the patentee is indifferent between commercializing the
patent itself and licensing it to developing country producers. In that
case, the patentee reward will not be reduced at all. One may question
how likely it is that a developing country intent on providing easy access
by its domestic producers to a patented foreign technology would set
the licence fee at such a high level. The point remains that the causal
link between adjusting competition law restrictions on patent exploitation
practices and patentee reward is more tenuous than the effect of
altering the level of IPR protection in the economic models examined in
the previous section.

The causal link may be further weakened by the fact that a

potential inventor does not look at actual reward, but expected reward,
when deciding whether to undertake certain research and development.
In general, a potential inventor is likely to be more aware of his/her
entitlements under the patent system than of the scope of his/her
permissible exploitation practices under competition law. Kaplow notes
that “the wholesale abolition of patent rights would likely have a greater
negative influence on expectations of reward, and hence on innovative
activity, than would a severe cutback in the range of permissible
857
licensing practices” . To sum up, even though the economic models
examined in the last section suggest that strengthening IPR protection
in developing countries may induce both domestic and foreign
innovation, cutting back competition law restrictions on patent
exploitation practices in developing countries may in reality offer weaker
inducement effects than is the case in these models. The paramount
conclusion from this discussion — a modification of Kaplow’s framework
— is that, whatever is the appropriate competition law–patent balance in
developed countries, developing countries, especially those with little
innovative capacity but considerable imitative capacity or neither
capacity, should tilt it more in favour of competition law enforcement.
Developing countries have stronger policy justifications than do

857
Kaplow, supra note 785, at 1838.

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developed countries for imposing more stringent competition law
restrictions on patent exploitation practices.

4. Practical implementation of Kaplow’s framework to

developing countries

The above discussion of the competition law–patent balance —

both Kaplow’s original framework and the suggested modifications
based on the development economics literature — still needs to be put
into practice in developing countries. The obstacles to implementing
these ideas are many. First, recall that Kaplow’s framework itself faces
considerable practical difficulties in implementation. The patent reward–
monopoly loss ratio implicit in the optimal patent life is very difficult to
858
calculate . The alignment and comparison exercise that he calls the
859
cost-effectiveness analysis is similarly difficult to undertake . If an
advanced competition law jurisdiction with more than a hundred years of
enforcement experience such as the US has difficulty applying its
framework, developing countries with newly instituted competition law
regimes will have little hope. However, this does not mean that the
above discussion was an unproductive endeavour. The key insight from
Kaplow’s framework that a competition authority must balance patentee
reward and monopoly loss when assessing the legality of a patent
exploitation practice remains valid. While a precise quantitative weighing
of the two is unlikely to be easy, a general qualitative balancing should
be the guiding principle in a competition authority’s assessment.

What about the modifications to Kaplow’s framework suggested

by the development economics literature? The modifications suggested
in Part 2 would require the competition authority of a developing country
to take into account a variety of general economic factors, such as the
imitative and innovative capacities in the country, the extent to which
technology transfer is achieved through FDI as opposed to direct
imitation, or even whether there is international cooperation in IPR
protection in the form of “cooperation coalition” between that country
and other developing countries. One may legitimately question whether
any competition authority has the capability to incorporate such a wide
variety of general economic factors in its analysis. One may further

858
Kaplow, supra note 785, at 1833.
859
Id. at 1833–34.

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question whether such general economic factors should determine the
outcome of a case. Prohibiting a particular patent exploitation practice
on the grounds that the dominant mode of technology transfer in that
country is imitation may justifiably cause uneasiness.

Further complicating the matter is the fact that the dominant

mode of technology transfer in any developing country probably differs
sector by sector. This suggests a possible need to strike a different
competition law–patent balance on a sector-by-sector basis. This need
is substantiated by the fact that the existence of the three capacities
likely differs not on a country-by-country basis, but on a sector-by-sector
basis. Calling developing countries “production”, “imitation”, and
“innovation” countries is a gross simplification. The reality is more likely
to be that a developing country will possess only production capacity in
some sectors, but imitation capacity in some other sectors. While a
sector-by-sector approach may be most consistent with the theoretical
implications of the development economics literature, it is also
susceptible to allegations of inconsistent enforcement, and worse still,
regulatory capture and corruption. It would be much easier for a
competition authority to justify arbitrary enforcement by arguing that the
same patent exploitation practice in various sectors demands disparate
analysis in light of sectoral differences. This state of affairs would
undermine competition law enforcement in many developing countries,
where competition law is still in its early stages of development.

The most practical implementation of the lessons from the

development economics literature is for the legislature of a particular
developing country to calibrate the competition law–patent balance for
the general economy, taking into account all the relevant factors
highlighted in Part 2. This will lead to overly stringent competition law
standards with respect to patent rights in some sectors but overly lax
standards in other sectors. However, that is an inevitable price to pay to
attain more consistent enforcement. Based on the lessons learned in
Part 2, many developing countries are likely to come to the conclusion
that tenuous dynamic efficiency gains do not justify substantial allocative
efficiency losses and reduced imitative capacity in their countries, and
are likely to impose stringent competition law restrictions on patent
exploitation practices.

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5. Conclusion

This research suggests a theoretical framework for calibrating

the competition law–patent balance in developing countries. It takes as
the starting point Kaplow’s ratio test, and asserts that modifications to
the framework are needed due to the fact that most developing
countries have much weaker innovative capacities than do developed
countries. Canvassing the relevant development economics literature,
this research suggests some modifications to be made to Kaplow’s
framework, and concludes that different categories of developing
countries must approach the competition law–patent balance differently.
Despite this need for more nuanced approaches, overall, developing
countries should favour competition law enforcement more than
developed countries do in the balance between competition law
enforcement and patent policy.

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