When Distribution Triggers Cartel Risks
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A cartel is traditionally considered to be the most serious breach of competition and is, thus, punished by competition authorities with maximum severity. A cartel implies a certain agreement of competitors, which weakens or eliminates competition between them in a certain market. This, in turn, means that the market switches to the “manual control” of several players, who decide among themselves what the price, range, offer, etc., would be. This affects primarily the consumer and may have a negative impact on other or potential market players that do not have enough market power to resist cartelists.
Under Ukrainian law cartels, i.e. anticompetitive collusions between competitors, are clearly prohibited by Article 6 of the On the Protection of Economic Competition Act of Ukraine.
At the same time, relevant domestic regulation provides for exemption with regard to agreements between the seller and the buyer, which are described as “vertical agreements” in antitrust (Article 8 of the Act).
Indeed, distribution relations, due to which goods actually find their way to the consumer, are normally not relations between competitors, while their participants ideally pursue a common goal, which is beneficial for consumers. Following this logic, antitrust regulation does not establish any absolute bans on vertical practices, referring at the same time to the effects, i.e. consequences, of such actions.
Why care about cartel-like consequences of supply chains?
First of all, goods should make their way to a consumer through a variety of distribution channels and finally appear on the market, which is most often competitive, and its price is set depending on the competitive pressure of other goods. Thus, the weaker the competitive pressure, the higher the price paid by the consumer, which results in higher profits for all or individual members of the distribution system.
In other words, competing manufacturers and/or trading entities may be interested in raising barriers for such competitive pressure. The competitors, however, do not enter into any direct communication, but choose their common service providers as a “means of communication” to make the information exchange look quite reasonable and natural. Therefore, we can deal with a classical cartel involving persons who are not the direct “beneficiaries” of such a conspiracy, but get their indirect benefit from the absence of effective competition.
On the other hand, it is impossible to suspect any and all distribution channels of having an intersection with competitors, firstly because supporting a cartel requires the mutual willingness of competitors that have a lot of weight on the market, which is not always or hardly ever true; and secondly because the market is susceptible to the stability of anti-competitive agreements, which is also not a common case.
Thus, to understand and explain why a particular distribution system functions the way it does is quite a challenging task. For consultants it is sometimes difficult to assure the antitrust authorities that a particular vertical practice (e.g. setting of the resale price, reporting system, etc.) is justified by rational considerations rather than by anticompetitive intents, which is mostly advantageous for consumers. At the same time, the competition authorities need to react in time to untypical changes in the market and assess the nature of such changes comprehensively, with the appropriate degree of commercial understanding so as not to destroy a well-functioning competitive structure.
Where look for anticompetitive effect of vertical arrengements?
If we take national practice, i.e. approaches that have been applied by the Antimonopoly Committee of Ukraine in a number of investigated or pending cases, we can single out the following areas, which should always be kept in mind by the relevant stakeholders of the distribution market.
Firstly, it is the system of discounts, bonuses and other payments and their linkage to the main subject of the relationship.
Secondly, it is the system of information about the sales, range and pricing circulated between the parties to vertical relationships as well as contiguity, the integration of the distribution system in a competitive environment.
Thirdly, it is the participation in trade associations and overall information background of the market.
The evaluation of the above areas is only the initial stage and does not provide any definite “yes” or “no” answers, but will rather propose such wording as “acceptable, where such and such factors are not established” or “unacceptable, due to the totality of particular factors. In this context, it is needless to insist on the importance of economic analysis of the effects of a particular practice.
Referring to application practice, the first to remember is the retailers case, which represents a radical outcome in the activities of the previous composition of the Antimonopoly Committee and an encouraging statement of the judiciary on the application of the European standard of proof in cartel matters.
The merits of the case were quite similar to the recent Bundeskartellamt case on vertical concerted actions resulting in anticompetitive price setting1, though the Ukrainian antitrust authority has chosen to follow the cartel scenario instead.
The Antimonopoly Committee of Ukraine, after more than 3 years of investigation, several public hearings and recommendations, fined major retail market players around UAH 203.6 million (about USD 9.65 million). This is the second biggest antitrust fine in Ukrainian history, following the raw timber bid rigging case, where the fine was in the range of UAH 419 million (EUR 41 million) in 2012.
The investigation on the retail food market was initiated in May 2012 and concerned the biggest retail chains operating in the City of Kiev under the well-known local brand names of Silpo, Fora, Furshet, Velyka Kyshenya, Karavan, ATB, Novus, EKO Market, Bimarket, Perekrestok as well as international players like Billa, METRO and Auchan.
The Committee concluded that the concerted practices of the mentioned undertakings shaped disproportionate pressure on producers and exercising of buying power resulted in higher consumer prices. As a focal point for collusion due to the AMCU’s allegations, an independent intermediary, namely market research company AC Nielsen Ukraine LLC, was identified. The AMCU found that marketing information collected on an individual basis by AC Nielsen Ukraine LLC facilitated the collusion, as the exchange of respective strategic information increased transparency on the retail food market. In particular, the Committee claimed that the information exchanged was current and extremely detailed in terms of sales volumes, numbers of transactions in different segments, change in sales volumes and number of stores.
The Committee qualified two separate collusive practices: 1) cartel on exchange of information; and 2) the similar acting or omissions regarding setting the conditions of supply agreements (i.e. parallel conduct without due justification with the objective market circumstances, thus implying tacit collusion).
In the AMCU scenario the retail chains applied similar conditions to different suppliers, which were obliged to bear additional costs for the provision of services by retailers to consumers which consequently led to ill-founded resale prices. In the meantime, as claimed by the AMCU, the retailers were not able to substantiate the calculation mechanism for the trade mark-up in the absence of the expenses for service provisions. The respective practices generated super-profits for the retail chains, placed suppliers at a significant competitive disadvantage and significantly raised market entry barriers.
The decision is currently going through the Ukrainian courts and there are several judgments on the claims of some retailers, indicating that the AMCU was too fast with its conclusions and failed to prove collusion or to find out the market conditions that contributed to maintenance of the cartel.
Of course, the mentioned judgments are a breakthrough and a triumph of economic logic, which we cannot but rejoice at. However, we would also welcome some fundamental “work on the bugs”, both on the part of the Committee’s current composition and of the retail chains.
First of all, it would be worth agreeing on a formalized and procedurally acceptable manner for submission of economic evidence. Next, it is important to hear the Committee’s confirmation that it will be guided by the approaches used by the European Commission (although it follows anyhow from the content of international obligations to the European Union).
Finally, we would recommend the parties to the proceedings, which came out victorious in the relevant case, pay special attention to the development of Antitrust Compliance integrated in business processes. The idea is that such a policy and its implementation practices, which are purely individual and authentic, would be able to quickly and efficiently convince the AMCU of the economic feasibility of the uniform practices in question.