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Information Exchange and the role of Government Departments Public Sector Consultative Forum 26 March 2010. Towards a fair and efficient economy for all. Introduction. Successful collusion requires: Coordination (agreement/understanding) Monitoring

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Information Exchange and the role of Government Departments

Public Sector Consultative Forum

26 March 2010

Towards a fair and efficient economy for all

introduction
Introduction
  • Successful collusion requires:
    • Coordination (agreement/understanding)
    • Monitoring
    • Ability to respond to deviations (‘Punishment’)
  • SA Competition Act:
    • Section 4 (1) (b) prohibits an agreement or concerted practice or decision by an association of firms, (in a horizontal relationship) that involves price fixing, dividing markets, or collusive tendering
    • A concerted practice means co-operative, or co-ordinated conduct between firms, achieved through direct or indirect contact, that replaces their independent action, but which does not amount to an agreement
    • Agreement prohibited regardless of whether collusion is successful

Towards a fair and efficient economy for all

information exchange and competition
Information exchange and competition?
  • Competition is about firms providing more competitive offerings (price, quality, service) to increase sales
    • E.g. Discounts are undertaken because firms expect to increase sales at expense of their rivals
    • Competition is thus a means to efficient economic outcomes
  • But, firms (especially in concentrated markets) have clear incentive to dampen competition to increase or protect margins
  • Reaching an agreement/understanding, monitoring it, and responding
  • Are firms able to identify deviations from the prevailing market position, where these are well understood?
  • E.g. transparent pricing and a reduction in costs? Firms may engage in secret discounting, rebates etc. Will information exchange disincentivise this?

Towards a fair and efficient economy for all

information exchange and competition1
Information exchange and competition?
  • Example:
    • if firm A is considering a discount, and knows that others will quickly identify when they have lost market share and will respond (such as by cutting their own prices) then firm A will not expect an increase in market share to be sustained, and the incentive to make a more competitive offering may be substantially weakened
  • At the extreme, there is no need to ‘fix’ prices if each firm knows it is effectively a monopolist over its share of the market (information exchange can have the effect of dividing markets)
    • Are there clear and communicated pricing points (‘focal points’), and or understandings in the market about customers, conditions etc?
    • Is there excess capacity?
    • What is rationale for information exchange?

Towards a fair and efficient economy for all

bread and flour prices
Bread and flour prices

Towards a fair and efficient economy for all

standards for information exchange
Standards for information exchange
  • Complex area of competition law, SA precedents yet to be established
  • International case law can be examined (e.g. UK Tractors – EC case)
  • Generally considering pricing and sales information
  • Criteria where information exchange has greater effect dampening competition (independent action) include:
    • Small number of competitors, barriers to entry
    • Homogeneity of products
    • Extent of disaggregation (note: with two participants there is in effect no aggregation), and how readily can conduct of others be identified
    • Timeous nature of information exchange
  • Efficiency reasons?
  • E.g. US safety zone (for survey of prices or salaries): at least five providers (none >25%), info greater than three months old, survey by third parties

Towards a fair and efficient economy for all

implications
Implications
  • South African markets are very concentrated
  • History of regulation in many markets
  • Often well understood pricing points
  • May be close relationships between marketing managers of competitors, including at regional/local level
  • Monthly sales data, disaggregated by region, product, customer grouping is likely to be problematic
  • Where cartels uncovered in terms of e.g. price fixing arrangements, does information exchange inhibit more competitive conduct post-cartel?
  • Information exchange is a major focus of the Commission and involved in important investigations, as well as in cases already referred

Towards a fair and efficient economy for all

role of government departments
Role of Government Departments?
  • Government has objectives for economic development and social welfare which may be promoted by cooperation with industry
  • Government uses information for decision-making and monitoring purposes
  • Industry may share these objectives, but may also have its own objectives
    • May benefit from unintended consequences of Government pursuing its objectives
    • Industry may cynically manipulate forums and Government interactions
  • Examples?
    • Cement
    • Fuel
    • Milling
    • Steel

Towards a fair and efficient economy for all

way forward
Way forward?
  • Deeper interactions between the relevant Government Departments and Competition Commission required
  • Difficult to generalise, especially before cases are contested in the Tribunal in order to set legal precedent
  • Competition Commission keen to assist in finding solutions to achieve range of objectives
  • Trade/Industry associations? Competition Law is not an obstacle to lots of work of associations in e.g. promoting SA industry, dealing with challenges of SABS standards and certifications
    • But, industry associations have been associated with cartel conduct
  • If there is uncertainty then the Commission can be approached for a view

Towards a fair and efficient economy for all