Price fixing, market sharing and collusion are illegal

KUALA LUMPUR, May 31 (Bernama) -- Action will be taken against any enterprise or association found to be acting in concert to fix prices and/or other trading conditions, said the Malaysia Competition Commission (MyCC).

Source from (Bernama): http://www.bernama.com/bernama/v7/bu/newsbusiness.php?id=953360
Published: Jun 02, 2013

Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2013/6/1/business/13178879&sec=business
Published: Jun 02, 2013

Source from (The Sun Daily): http://www.thesundaily.my/news/715001
Published: Jun 02, 2013

THREE words should take us out of the middle-income trap: Be More Competitive.

But that's going to be tough despite the economic transformation already in train, because price fixing, market rigging and collusion are so common place. With the coming into effect of the Competition Act (since June 10, 2010 and enforced on Jan 1, 2012), anti-competitive practices are now illegal!

The Act is intended to promote and safeguard “the process of competition, thereby protecting consumers.” It states that because competition “encourages efficiency, innovation and entrepreneurship,” it will reward consumers with (i) competitive (lower) prices, (ii) improved quality of products and services, and (iii) wider choices. That's why the Act serves “to prohibit anti-competitive conduct.”

To oversee the effective implementation and enforcement of the Act, the Malaysia Competitive Commission (MyCC) was established. MyCC is charged to investigate any anti-competitive practices and is also empowered to impose strong financial penalties. The Act applies to all commercial activities in Malaysia and abroad which affect competition in the Malaysian market place.

However, decisions by MyCC may be appealed to the Competition Appeal Tribunal, on which I have been appointed as a member. In addition, MyCC also (a) advises government and public regulatory authorities on all aspects of competition, (b) advises the government on the impact of laws governing competition, (c) undertakes studies and market reviews, and (d) issue guidelines governing the conduct of competition.

Competition Act (Act 712)

Act 712 (or CA) provides a framework for identifying and dealing with anti-competitive practices by all enterprises ranging from multinationals to other large as well as small and medium-scale enterprises. Activities in communications, and multimedia and energy are exempted as these are regulated by their respective governing laws. In essence, CA can be expected to promote competitive markets by levelling the playing field for all. Its focus is to safeguard the market against all anti-competitive and unfair practices (including cartel-like and restrictive initiatives).

In so doing, benefits will accrue to consumers through (i) lower entry barriers into the market place, (ii) encouraging competitive forces to drive enterprises to become more efficient, (iii) promoting innovation and investment in R&D to create new products and processes, (iv) enlarging domestic markets, and (v) promoting efficient allocation and utilisation of scarce resources.

Anti-competitive practices are centred on two main prohibitions:

Anti-competitive agreements (ACAs): Act 712 prohibits ACAs whether horizontal (i.e. among enterprises operating at the same level of the production or distribution chain) or vertical (i.e. among enterprises operating at different levels of the production or distribution chain) with the object or effect to significantly prevent, restrict or distort competition in Malaysia. Agreements mean any arrangement or understanding among enterprises, including decisions by any association and concerted practices. Enterprises refer to any entity carrying on commercial activities to provide goods or services. Prohibitions include price fixing (agreements to fix, control or maintain prices of goods and services), market allocation (enterprises agreeing to divide customer markets geographically or by customer-type or to sell only to allotted customers), bid-rigging (agreements on who should win a tender) and limiting production (enterprises maximising profits by limiting or controlling supply).

Abuse of dominant position (ADP): Act 712 prohibits any ADP by enterprises occupying a dominant position in the market (i.e. dominant in their ability to adjust prices or dictate trading terms without effective constraint from competing enterprises or consumers). They include price discrimination (practice of selling same products to different customers at different prices simply by exercising market power), excessive pricing (enterprises using market power to dictate prices beyond the effective competitive level), and predatory pricing (enterprises exercising market power to drive down selling prices of their products or services with the aim of driving competitors off the market or creating barriers to entry of new competitors).

Act 712 provides for certain activities to be excluded from these prohibitions, including (i) exercise of government authority, (ii) agreements and conduct to comply with legal requirements, (iii) collective bargaining activities and collective agreements, (iv) purchase of goods and services not for economic activity, and (v) services of general economic interest.

However, the Act allows for relief of this liability for engaging in listed prohibitions, provided all 4 reasons are met simultaneously: (a) there are direct significant identifiable technological, efficiency or social benefits, (b) the benefits could not reasonably be provided without such restrictions, (c) detrimental effects of such anti-competitive agreements are proportionate to the benefits, and (d) such restrictive practices do not lead to the complete elimination of competition. These, I dare say are rather onerous conditions. But, it is worthwhile noting that in the European Union (EU), an additional criterion must be met to qualify for exemption, i.e. benefits resulting from any agreements must be passed on to the consumer. This seems fair. Nevertheless, each enterprise or block of agreements may apply for exemption. I am told MyCC has not granted any exemption so far. Furthermore, to assist consumers to better understand the process of competition, MyCC is empowered to conduct market reviews to determine whether any feature or combination of features in the market-place prevent, restrict or distort competition. All reviews would be made public. In the end, the intention is to promote a more competitive and efficient market-place to maximise consumer welfare, resulting in lower prices, more choices, better quality of goods and services, and a higher standard of consumer services. Current situation

Act 712 comes on the heels of similar laws, put into place in Singapore, Indonesia, Thailand, Vietnam and Hong Kong. It is still common practice in Malaysia for trade associations and guilds and professional regulatory bodies to indulge in a wide range of anti-competition practices, including open price-fixing, market sharing, supply limitations, bid-rigging and scale-fees setting as well as the sharing of price and supply of sensitive information.

These represent “hard-core” cartel offences under the Act. For a long time, the association of banks and insurance companies, for example, fix prices, as do product-based associations on the sale of cars, flowers, food and beverages, steel, etc, while professional guilds set scale fees for their membership to comply. Also, producers and distributors gather to share commercially sensitive information. These must remain of grave concern to MyCC who worry about open offences breaching the CA.

Entrenched in Malaysian business is a culture of collusion to fix things in the name of advancing the common good, including arrangements having the effect of preventing, restricting and distorting competition. This has gone on for so long that it has become something like a second nature in business discourse. Thus, change won't come easy.

However, rigorous enforcement of competition laws can help bring about badly needed change. Already, MAS Cargo was reported to have been penalised to pay A$6mil (plus legal costs) by the Australian Federal Court for price fixing as part of a cartel. As I understand it, other airlines including Singapore Airlines, Cathay Pacific, Air New Zealand and Thai International are also being pursued for a similar offence. Cartel conduct is both a civil and criminal offence in Australia; it is particularly damaging because it usually inflates prices for consumers. MyCC needs to act boldly. It has to begin building a body of traditions of robust adherence to the law, enforcing it without fear or favour to protect the greater good of consumer interests; of absolute integrity and technical competence; of dependable expertise that readily accepts absolutely the dictates of the national interest.

CA has yet to be really tested. Like most global competition laws, the Act contains presumptions and deeming provisions. In Malaysia, prohibitions can arise either because a restrictive agreement has the “object” or “effect” of preventing, restricting or distorting competition, similar to competition legislation around the world.

What's unclear at this time, according to Prof R. Whish (King's College, London) is whether such prohibitions will be interpreted in the same way as in EU and UK, viz. where agreement restrictions “by object” are presumed per se to have anti-competitive effects without a need to go through the process to demonstrate such impact, thereby injecting legal certainty and conserving the use of resources at MyCC. Clarity on other issues is also important, including the standard of proof required; use of effects analysis and how to prove effects; quality of empirical analysis and economic evidence, adoption of time tested “best practices;” and jurisdiction over the impact of mergers and takeovers on competition even though “the government is of the view that for the time being, the Act should not regulate M&As.”

Dawn raids

Like its European counterparts, Act 712 provides MyCC with the authority to conduct surprise on-site inspections, commonly known as dawn raids. This serves as an important avenue for MyCC to gather (check-on and co-ordinate) information particularly early-on in a cartel investigation. Such a move includes wide ranging powers, and combined with a court warrant, have proved invaluable to investigations especially in cases focused heavily on compiling deep documentary (including corporate records) evidence.

The rigour of enforcement is often enhanced by suitably-timed dawn raids. This has proved to be an indispensible tool for national competition authorities to investigate “hard-core” infringements of competition rules and their presumed negative market effects. In practice, based on European experience, any secret agreement or understanding among competing enterprises that seek to fix prices, limit output, share markets, customers and sources of supply i.e. involving cartel behaviour, will inevitably attract intense regulatory scrutiny sooner or later. Such hard-core “price-fixing” must inevitably attract dawn raids.

What then, are we to do?

Competition remains at the heart of economic policy. CA relates to only behavioural prohibitions, not structural ones. Indeed, the Act says little about the structure of markets and the structure of pricing or the profit margins derived.

As an example, it has been reported that the Honda Insight which retails for less than US$20,000 in the United States, is priced much higher in Malaysia at around RM100,000 (even without excise or import duty). So, we are still far from fair and competitive pricing. Besides, philosophy also matters. In markets where the invisible hand (forces) of supply and demand are allowed free play a l Adam Smith or Hayek tradition, competitive pricing inevitably reflects the maximisation of profits, not necessarily the maximisation of consumer benefits.

But in a truly utilitarian regime or under egalitarian Communism, the greatest good of the greatest number prevails in assessing real social benefits. In the end, the outcome is to be reflected in lower prices, better products and wider choices for consumers. The final test of competition must rest on consumer benefits, even though it can harm inefficient enterprises in the process but that's creative destruction. Like UK and Hong Kong, MyCC smartly adopted a phased-in approach to implement CA. Relevant implementing guidelines have already been issued and more are expected. But it must avoid over-regulation at all cost. Realistically, I don't see rigorous enforcement of the prohibitions in the Act in practice any time soon. This remains MyCC's major challenge.

Ultimately, Malaysia badly needs to Be More Competitive to get out of the middle-income trap. The sooner the better. No two ways about it.

Former banker, Tan Sri Lin See-Yan is a Harvard educated economist and a British chartered scientist who speaks, writes and consults on economic & financial issues. Feedback is most welcome; email: starbiz@thestar.com.my.