AFRICA LAW CENTRE: COMPETITION LAW NOTES

*DISCLAIMER*

The notes below are adapted from the Kenyatta University,UoN and Moi Teaching module and the students are adviced to take keen notice of the various legal and judicial reforms that might have been ocassioned since the module was adapted. the laws and statutes might also have changed or been repealed and the students are to be wary and consult the various statutes reffered to herein

THE THEORY OF COMPETITION

It is important to distinguish the meaning of competition from the function it is to fulfil.

Competition means a struggle or contention for superiority. In the commercial world, it means a striving for the customer and the business at the market place.

According to Neo-classical economic theory consumer welfare is maximised in conditions of perfect competition. Under perfect competition economic resources are allocated between different goods and services in precisely the quantities which consumers wish their desires being expressed by the price they are prepared to pay in the market. This is termed as Allocative Efficiency.

Apart from allocative efficiency many economists and non-economists think that under perfect competition goods and services will be provided at the lowest cost possible which means that as little of the society’s wealth is used in the production process as necessary and this is termed as Productive Efficiency.

There are further desirable effects that follow from perfect competition. The price at which goods or services is sold never rises above the marginal cost of production. In this case costs for this purpose include a sufficient profit margin to encourage the producer to invest his capital in the industry in the first place but no more than that.

Monopolists on the other hand flee from the constraints of competition may be high cost producers. In the competitive market, it is said that producers will constantly innovate and develop new products as part of the continuing battle of striving for consumer business. Thus competition may have the desirable dynamic effect of stimulating important new technological research. These beneficial effects would flow from a state of perfect competition if such a state could ever exist.

What perfect competition means is that on any particular market, there is a very large number of buyers and sellers all producing identical or similar products and that consumers have perfect information about market conditions. Also that resources can freely flow from one area of economic activity to another and that there are no barriers to entry which might prevent the emergence of new competition nor barriers to exit which might hind firms wishing to leave the industry.

Of course a market structure satisfying all these conditions is unlikely if not impossible. But what the theoretical model shows is that in perfect competition any producer will be able to sell his products on the market only at the price which the market is prepared to bear. In this situation the producer is said to be the price taker with no capacity to affect the price by his own unilateral action because it depends on the market.

The consumer is said to be sovereign

Allocative efficiency is achieved under perfect competition because the producer assuming he is acting rationally and has the desire to maximise his profits will expand his production for as long as it is privately profitable to do so. As long as he can earn more by producing one extra unit of whatever he produces than it costs to make it, he will do so. Only when the cost of a further unit exceeds the price he would obtain from it will he cease to expand production.

Productive efficiency is achieved because a producer is unable to sell above cost, if he did so his customers would immediately desert him and he will not of course sell below cost because he will not make a profit. If he charges above cost other competitors would move into the market in the hope of profitable activity. They would attempt to produce on a more efficient basis so that they could earn a greater profit.

In the long run the tendency of this will be to force producers to incur the lowest cost possible in order to be able to earn any profit. Eventually the point will be reached where price and the average cost of producing goods necessarily coincide and this will mean that price will never rise above cost. If on the other hand price were to fall below cost, there would be an exit of capital from that industry and as the output would therefore decrease price would be restored to a competitive level.

MONOPOLIES

Monopoly is the extreme opposite to perfect competition. They exist when there is only one supplier for a particular product and there is no close substitute for that product.

Under conditions of monopoly the situation is different. The Monopolist is in a position to affect market price since he is responsible for all of the output and since it is the aggregate output that determines price through the relationship of supply to demand he will be able to increase price by reducing the volume of his own production.

Furthermore again assuming a motive to maximise profits, the monopolists will see that he will be able to earn the largest profit if he refrains from expanding his production to the maximum possible. The results will be that output is lower than could be the case in perfect competition. Thus the consumer will be deprived of goods and services that they would have been prepared to pay for at the market price.

There is therefore allocative inefficiency because society’s resources are not being distributed in the most efficient way possible. This inefficiency is made worse by the fact that consumers deprived of the monopolised product that they would have bought will spend their money on products which they wanted less. The extent of this allocative inefficiency is sometimes referred to as the ‘Dead Weight Loss’ attributable to monopoly.

The objection to monopoly does not stop there, there is also the problem that productive efficiency may be lower because the Monopolist is not constrained by competitive forces to reduce costs to the lowest possible level. Instead the firm becomes inefficient, resources are used to make the right product but less productively than they might be. Management spends too much time on the golf course, outdated industrial processes are maintained and a general laziness creeps into the organisation. Furthermore the monopolist may not feel the need to innovate because he does not experience the constant pressure to go on attracting customers. Thus it has been said that the greatest profit of the Monopolist is the quiet life he is able to enjoy.

Another objection to the monopolist is that since he can charge what he likes, he is the price maker and wealth is transferred from the consumer to him and this may be particularly true where he is able to discriminate between consumers charging some more than others. Moreover it has been argued that the very prospect of earning large monopoly profits can encourage firms to misallocate resources and this induces wasteful expenditure. In attempts to acquire a monopoly position which is a loss to society at large.

QUESTIONING THE THEORIES

We have said that the theory of perfect competition is only a theory and that such conditions are extremely unlikely. Between the market structure of perfect competition and monopoly, there are many intermediate positions. Many firms will sell products which are slightly different from their rivals or will command some degree of consumer loyalty which means that an increase in price will not necessarily result in a massive loss of business. In such a situation there is said to be monopolistic competition. This means that on the one hand the producer enjoys some monopolistic power in respect of products differentiated from that of others but on the other hand that the consumers loyalty to a particular brand is not endless and that he will switch to a competitor’s brand if the price rises too greatly. It is also unlikely that a customer will have such complete information of the market that he will immediately know that a lower price is available elsewhere for the product he requires. Yet the theory depends on perfect information being available to the consumer. In the same way monopoly in its purest sense is extremely rare and a point may come when even a firm which produces the entire output of one particular product will find that it has raised prices so high that consumers cease to buy.

Monopoly power does not exist in relation to a product but in relation to a relevant product market. This definition of relevant product market must meet two criteria

1. It must be sufficiently narrowly drawn to exclude non-substitutes.

2. It must be sufficiently broadly drawn to include all substitutes.

Much more likely is the situation where one firm dominates a market without having a complete monopoly. That firm may be able to behave in a manner similar to the monopolist. But the complex economic problem is to establish at what point a firm has the requisite degree of power to be able to do so.

Apart from the fact that perfect competition and pure monopoly are unlikely, there are other problems with the theory itself. It depends on the notion that all business people are rational and that they always attempt to maximise profit but this is not necessarily the case.

Directors of a company may not think that earning fast profits for the shareholders is the most important consideration they have. They may be more interested to see the size of their business grow or indulge themselves in the quiet life that monopolists may enjoy.

Critique of the Theories of perfect competition

Another problem with the theory of perfect competition is the assertion that costs are kept at an absolute minimum which is not necessarily correct. It may be correct as far as the private costs of the developer are concerned but it does not take into account the social costs or externalities as they are known which arise from society at large; from for example the air-pollution that a factory causes or the injuries caused to workers because of cheap machinery used which does not include satisfactory safeguards against injury.

It has been argued that competition law should not concern itself with those social costs and that this is a matter best left to specific legislation on issues such as conservation, the environment, health and safety at work. It would also wrong to suppose that the monopolist does not produce social costs but none the less it is reasonable to sceptical of the argument that in perfect competition costs will be inevitably kept at a minimal level. So given these doubts it might be wondered whether a pursuit of an ideal is worthwhile at all.

There are further problems; if perfect competition cannot be achieved then alternative model is needed to explain how imperfect markets work or should work. In particular it will be necessary to decide how monopolistic or dominant firms should be treated and an adequate theory will be needed to deal with oligopoly which is a common industrial phenomena which exists where a few firms between them supply most of the products within the relevant market without any of them having a clear advantage over the other.

Some economists have argued that the most common market form is oligopoly and therefore competition policing ought to be designed around an analytical model of this phenomenon rather than on the theory of perfect competition.

QUESTIONING THE THEORY OF COMPETITION:

A Case for Monopoly?

Another line of inquiry considers whether perfect competition would be beneficial anyway. It may have some attractions but does it necessarily offer society the best economic policy? one of the arguments against the notion of perfect competition relates to scale. In some industries products can be produced very cheaply and the market for them may be large so that there is no difficulty in the way each producer expanding output to the point at which marginal costs and marginal revenues intercept and disposing of the entire amount produced. In reality this is not always the case, considerable capital investments may be needed to produce some goods and the size of the market may be small in relation to the cost of production. In some markets a profit can be made only by a firm supplying at least one quarter or one third of the total output. It may even be that the minimum efficient scale of operation is achieved only by a firm with a market share exceeding 50% so that the monopoly may be seen to be a natural market condition. Where the scale is of such importance to the market it is absurd to attempt to achieve perfect competition which would destroy the efficiency of production at the appropriate level.

OPTIONS

Where the minimum efficient scale is very large in relation to total output, a separate question arises as to how industries can be made to operate in a way that is beneficial to society as a whole. One of the solutions may be Nationalisation.

1. Nationalization

2. Bureaucratic Regulations being introduced while leaving the producers in the private sector; let the private sector do it then we regulate them

3. Firms should be allowed to bid for a franchise to run the industry in question for a set period of time at the end of which there would be a further round of bidding. In other words there will be periodic competition to run the industry although no actual competition within it.

Whatever the solution to the problem of natural monopoly, the point at this stage is simply that efficiency of scale presents difficulties for the theory of perfect competition. Equally it might be that social or political value judgments lead to the conclusion that competition is inappropriate in a particular economic sector. For example in the US, Agriculture is an obvious example and the legislator has tended to view that agriculture possesses special features entitling it to protection from the potentially ruthless effects of the competitive system and especially outside foreign competition.

Another example is the labour market which is not fully exposed to the competitive process and there is a tendency to refrain from insisting that professionals should engage in price competition in advertising.

Another line of argument is that in some circumstances restriction of competition can have negatively beneficial results which can manifest themselves in various ways. For example the suggestion that firms which are forced to put down costs to the minimum because of the pressures of competition will be negligently on safe cheques. This is particularly true of the transport sector where fears have often been expressed that safety has been subordinated to the profit motive.

Another example which is more important in practice is that two or more firms acting together and restricting competition between themselves may be able to develop new products or to produce goods on a more efficient scale. For example in the pharmaceutical industry the benefits to the public at large may be considerable.

These examples suggest that a blanket refusal to allow restrictions of competition may deprive the public of substantial advantages.

Another objection is that the notion of striving for superiority may be considered ethically unsound. One of the arguments is that cutthroat competition means that firms are forced to charge lower prices until in the end the vicious cycle leads them to charge below marginal costs in order to keep customers at all. The inevitable results will be insolvency.

Competition is also thought to be undesirable because of the wasteful effects for example the consumer may be incapable of purchasing a tin of beans in one supermarket because of fear that at the other end of town there is a competitor who is offering the product more cheaply. He will waste his time which is a social cost and money in shopping around. Meanwhile competitors will be wasting their own money by paying advertising agencies to think up more expensive and elaborate campaigns to promote their products. It has been argued that this type of conventional competition leads to chronic waste in which everybody loses and attention should be focused not on the supposed evils of say for example cartelizaton in the petroleum industry but rather on the freedom of firms to exit from an industry if and when they see an opportunity to operate more profitably on another market (contestable markets).

A more serious practical objection to promoting competition is that it is often contrary to the general thrust of industrial policy in many countries. The suggestion has been made that in conditions of perfect competition firms will innovate in order to keep or attract new customers. However governments often encourage firms to collaborate where these would lead to economies of scale or to more efficient research and development. And therefore in practice is seems that the innovator, the entrepreneur and the risk taker may require some immunity if they are to indulge in expensive technological projects and this is recognised in the law of Intellectual Property Rights which provides incentives to firms to innovate by preventing the appropriation of the commercial ideas which they have developed. Thus owners of copyrights patents, registered designs and other related rights are given exclusive rights to exploit the subject matter of their innovation for a certain number of years. This is recognition of the fact that in some circumstances competition suppresses innovation and an indication that it is not realistic to pursue the ideal of perfect competition.

A last point which should be made with regard to objections to competition is that the competitive process contains an inevitable paradox. Some competitors win by being the most innovative. The most responsive to customers wishes and by producing in the most efficient way possible, thereby succeeding in seeing off its rivals. It would be strange if that firm is condemned for being a monopolist.

WORKABLE COMPETITION

This discussion on the theory shows that the issue is not as simple and one must decide whether competition has any properties sufficiently beneficial to justify its protection. The conclusion would seem to be that notwithstanding the doubts expressed sufficient benefits may be expected to flow from competition to warrant some system of control. In particular monopoly does seem to lead to a restriction in output. There is a greater incentive to achieve productive efficiency in a competitive market and competition is likely to leave the consumer with a greater degree of choice. However if perfect competition is not attainable the question arises as to whether there is any other economic model to which it could be reasonable to aspire to.

Some economists have settled for the theory of workable competition, they recognise the limitations of the theory of perfect competition but nonetheless consider it worthwhile seeking the best competitive arrangement that is practically attainable. Again what is workable competition and what it should consist of has caused some theoretical difficulties. However a workable competitive structure might be expected to have a beneficial effect on conduct and performance and therefore be worth striving for and maintaining. If it is accepted that workable competition is desirable then a competition law designed to protect it will need to deal with four problems:

1. To prevent firms entering into agreements which has the effect of restricting competition either between themselves or between themselves and third parties and which do not have any beneficial features.

2. It will need to control attempts by Monopolists or dominant firms to abuse their position and prevent new competition emerging.

3. It will need to ensure that workable competition is maintained in oligopolistic industries.

4. It will need to monitor mergers between independent undertakings, the effect of which maybe to concentrate the market and diminish the competitive pressure within it.

CONTESTABLE MARKETS

In recent years some economists have advanced a theory of contestable markets upon which competition will be forced to ensure and optimal allocation of resources provided that the market on which they operate is contestable i.e. a market where barriers to entry and exit are reduced. In a perfectly contestable market entry into the industry is relatively free and exit is costless. The emphasis on exit is important as firms should be able to leave an industry without incurring a loss if and when opportunities to profit within it disappear.

A perfectly contestable market need not be perfectly competitive. This means that the theory can accommodate much more real business behaviour than the theory of perfect competition. Even an industry in which only two or three firms are operating may be perfectly contestable where there are no barriers to entry or exit.

THE ROLE OF POLICY DIRECTION IN COMPETITION LAW

If the sole function of competition law was the maximisation of consumer welfare by achieving most efficient allocation of resources and by reducing costs as far as possible the formulation of legal rules and their application would be relatively simple. In reality however, many different policy objectives have been pursued in the name of competition law many of them which are not rooted in the notion of consumer welfare strictly speaking. Some of them are even contrary to the pursuit of allocative and productive efficiency. It is important to note that competition policy does not exist in a vacuum. It is an expression of the current values and aims of society and it can change depending on the political thinking because views change overtime, competition law is often infused with tension and furthermore different systems of competition law reflect different concerns.

Several objectives have been ascribed to competition law.

1. Its essential purpose should be to protect the consumer not in the sense of maximising consumer welfare but in the more specific sense of safeguarding individuals against the power of monopolists or the anti-competitive agreements made by independent firms. Monopolies can earn huge profits and there is an argument for preventing the accumulation of wealth at the consumer’s expense.

2. Competition law should be applied in such a way as to protect the small firms against more powerful rivals. The competition authorities should ensure that the small businesses are given a chance to succeed.

3. Competition law may be used as an instrument of other policies.

4. There is the issue of competition outside the borders of the country i.e. International Trade issues and the internal barriers to trade. Firms should be able to outgrow their national markets and operate on a more efficient scale throughout the region or the world. The positive role that competition law can play is that it can be modelled in such a way as to encourage inter-country trade and level the playing ground.

Prima facie void – void on the face of it. The stand of the court would be that on the face of it a contract in restraint of trade was prima facie void at common law. one would have to convince the court to uphold the contract as valid.

Solus Agreement –

Interest that merits protection

Reasonableness between the parties – the burden of proof is on the person trying to enforce the contract. The Plaintiff has to show the court that the contract is reasonable, i.e. as to time, extent and nature.

Fitch was a solicitor who had employed Dewes as his junior clerk who was over a period of time eventually promoted to managing clerk. In his contract of service the Defendant had agreed that on leaving the Plaintiff’s employment, he would not practice within 7 miles. For the rest see hand out

Restrictive Trade Practices Act -

TYPES OF AGREEMENTS & BUSINESS PRACTICES IN COMPETITION LAW

HORIZONTAL RESTRAINTS

Horizontal Agreements between independent undertakings on the same level can be entered into to increase price and to limit outputs. Also restraints can be designed to foreclose potential competition from other firms in order to protect the privileged position of the cartel members. These are obvious targets of competition law.

(a) Horizontal Price Fixing: which may also involve agreements to fix quotas and a system of collective resale price maintenance. Price fixing can take various forms and a fully effective competition law must be able to comprehend not only the obvious forms of the practice but also a whole range of subtle agreements whose object is to limit price competition. For example where firms agree to restrict credit to customers to abstain from offering discounts to refrain from advertising prices to notify one another of the prices they charge or adopt identical cost accounting methods, the object or effect of the agreement maybe to diminish or totally prevent price competition.

(b) Horizontal Geographical Market Division:

Competition may be eliminated between independent undertakings in other ways for example by agreeing to apportion particular markets between themselves. Firms may agree that each will have exclusivity in a particular geographical area and that none should poach on the other’s territory. Market sharing is particularly restrictive from the consumers point of view since it diminishes choice. It has been sometimes argued that market sharing should be permitted since they reduce the distribution costs of the producers who are relieved of the need to supply outside their exclusive territories or to categories of customers other than those allotted to them. It may also lead to efficiency. Some experts believe that some cases of horizontal market sharing should be permitted.

A further way in which a cartel might be able to earn supra competitive profits is by agreeing to restrict its members output. If output is reduced prices will rise. In the absence of direct price fixing system, cartels will normally agree on a quota system whereby they will each supply a specified proportion of the entire industry output within a given period. some agreements which involve restriction of production may be beneficial for example specialization agreements, joint production, research and development agreements etc. but some are simply naked restrictions on production which limit output without producing any compensating benefits.

(d) Collusive Tendering:

This is a practice whereby firms amongst themselves agree to collaborate over their response to invitation to tender. It is particularly likely to be encountered in the engineering and construction industries where firms compete for very large contracts. Often the tenderee will have a powerful bargaining position and the contractors feel the need to concert their bargaining power. It may lead to higher prices, it may keep overheads lower because tendering is costly. It takes many forms for example simply agreeing to quote identical prices so that each can receive fair share of orders. it may involve rotation orders in which case the firm whose turn it is to receive an order will ensure that its quote is lower than everybody else’s.

(e) Agreements Relating to Terms & Conditions:

Restrictive Agreements which limit competition in terms and conditions offered to the customers can have an effect of earning supra profits for firms. An agreement not to offer discounts is in effect a price restriction as well as an agreement not to offer credit. In some market conditions it might be that non-price competition is particularly significant because of the limited opportunities that exist for price cutting. For example in an oligopolistic market one Oligopolist might be able to attract custom because it can offer a better after sales service or guarantees or a free delivery service. Although competition in terms and conditions is an important part of the competitive process it is also true to say that in some circumstances standardization of terms and conditions can be beneficial. This might have the effect of enhancing price transparency i.e. the customer may be able more easily to compare the real costs of the goods on offer. Again a trade association may have the knowledge and expertise and legal resources to draft appropriate standard form contracts and they would not be able to negotiate individually. Competition law monitors the activities of trade associations carefully in order to ensure that they do not act as a medium for the restriction of competition. Codes of practice may fall within the ambit of competition legislation although they may be desirable and indeed may be encouraged or even required by other aspects of consumer legislation.

(f) Information Agreements:

Competitors may agree to exchange information with one another. Such agreements pose considerable problems for competition authorities. They may be highly beneficial as competitors cannot compete in a statistical vacuum. The more information they have about market conditions, the volume of demand, the level of capacity that exists in an industry and the level of capacity that exists in an industry and the investment plans of rivals, the easier it is for them to make rational and effective decisions on their production and marketing strategies. Information may also be exchanged about new forms of technology and the results of research and development projects. Buyers too will benefit from an increase in information. The more they know about the products available and their prices, the easier it will be to make satisfactory choices. Indeed perfect competition is dependant on consumers having perfect information about the market. Against these the dangers of information agreements have to be borne in mind. The essence of competition is that each producer should act independently on the market and not coordinate its behaviour with that of its rivals. If they share information, it may be easier for them to act in collusion or to collude. The problem for competition law is to distinguish those exchanges of information which have a neutral or beneficial effect upon efficiency from those which seriously threaten the competitive process. The line between these cases is often illusory and proper characterization can be difficult. However there are some guidelines that can assist to determine what type of information agreements could harm or can harm competition. For example the structure of the market should be considered. It is easier to distort prices in an oligopolistic market where the products are similar or the same. Information agreements should be considered in their economic contexts. Another important consideration is the type or quality of information which is imparted. They should not inform each other of matters such as pricing policy or research and development projects which in the normal course of things might be regarded as secret matters. Also the effect of an information agreement might be considered less serious where purchasers as well as sellers have access to the information in question. Also pre-notification agreements where you inform of intended future conduct are more anti-competition than post-notification agreements where firms simply pass information of action which has already been implemented. Information may be exchanged in a variety of ways depending on the industry. Trade associations may accumulate relevant information and disseminate it amongst the members through articles or notices in the press or trade journals. The method of exchange should not colour its analysis for purposes of competition law. in each case the question should be whether the agreement might impair competition or enhance efficiency.

UNITED STATES

In the United States the application of The Sherman Act 1890 to information agreements has produced some conflicting decisions. In the American Column and Lumber Co. V. United States (1921) the Supreme Court ruled that an Agreement to exchange price information in an atomistic market where conditions for collusions were unlikely to succeed infringed the Act. While in Maple Flooring Manufacturing Association V. United States (1925) the Supreme Court reached the opposite conclusion that where the market was oligopolistic and the opportunity for price fixing much greater. This is the problem that arises when courts do not analyse cases in their economic context. However American Courts presently exhibit greater sensitivity to economic issues raised by information agreements and the present position would appear to be that information agreements are presumptively illegal where the market is oligopolistic.

UNITED KINGDOM

In the UK under the Restrictive Trade Practices Act 1968 the Trading Act of 1973 and the Restrictive Trade Practices(Information Agreements) Order of 1969 the Secretary of State has power to bring information agreements relating to goods i.e. prices, terms and conditions under the control of the Act. Various categories of agreements are described in the Schedule to the Order and some are excluded from its scope. The application does not depend on the economic context but rather on the formal issue of whether the parties have agreed to exchange information upon the specified issues which have harmful effect upon competition. The technique adopted remains Form rather than Effect based. The Director General must decide whether to take the matter before the Restrictive Practices Court. He will also have to consider whether it would diminish competition. If the matter is brought before the court, it would still be open to the parties to argue that the agreement does not harm competition to any material extent.

EUROPEAN UNION

The Applicable Section in the European Union is Article 85(1) of the Treaty of Rome which provides for a large range or anti-competitive agreements between independent undertakings that are prohibited and void unless it qualifies for some exceptions under Section 85(3) because of compensating beneficial effects. So a general test is applied that is namely whether the object or effect of an agreement might be to restrict, prevent or distort competition. The Union aims to prevent coordination between independent firms. There is a notification which indicates the beneficial types of agreements for example exchange of opinion or experience, joint market research and joint preparation of statistics. However such agreements should not lead to a restraint of competition. Market Structure and the type of information exchanged is also investigated for example in the matter of Fatty Acids 1989 it was said that some information is inherently confidential and therefore not to be disclosed to competitors. In another matter Re UNP and COBELPA [1977] it was indicated that an information agreement within Article 85(1) would be unlikely to be given exemption. However in exception circumstances an agreement may be exempted because of its beneficial effects. In the International Energy Programme a programme was drawn up between 21 States; the purpose of the programme was to establish cooperation between States in the event of disruption in the supply of oil. The participation of companies was an important element in this programme and they were required amongst other things to supply important and normally secret information. The Commission granted an exemption and it felt that the strategic importance of maintaining supplies of oil outweighs the loss of competition occasioned by the exchange of information.

JAPAN

In Japan there specific guidelines concerning the activities of trade associations under the Anti Monopoly Act and these Guidelines were passed in 1979 by the Fair Trade Commission. They aim to provide an outline of the system of controls established by the Act and to make clear through specific examples the type of Trade Association activities that may infringe the Act. These are basic considerations based on enforcement experiences on a case to case basis and the activities of Trade Associations. These Guidelines are divided into two categories

Firstly acts which in principal constitute or are likely to constitute a violation and acts which in principal do not constitute a violation; such administrative guidelines do not eliminate the illegality or legality of an act and therefore the Fair Trade Commission has to coordinate with the relevant agencies to ensure that the Anti-Monopoly Act is not violated.

With regards to price related acts, the general policy is that prices are to be determined through free and fair competition where associations attempt to determine minimum prices, standard prices, common price calculation formula, resale price maintenance, information regarding future prices. These acts are deemed to be a violation. In the case of Y Barbers Association (1965) through a questionnaire survey the opinions of Barbers concerning revision of the price of services were gathered and the results published. The Association decided that each Barber should raise his service price based on the price level which a considerable number of barbers decided to quote. This was found to be a violation and therefore restraining competition. However supply of information that may help pricing for example actual prices prevailing in the industry in the past, technical difficulties, fair and objective comparative data concerning quality, accounting guidelines in small and medium sized enterprise associations, expression of opinions and desires concerning legally determined prices are acts which in principal do not constitute violation.

Another example from these Guidelines is Guideline Number 6 which deals with acts related to the type nature and methods of management. According to these guidelines there should be no limitations on the type nature and method of management. However establishment of standards for the purpose of consideration of the public interest is allowed provided observance by individual member is not mandatory. For example there should be no restriction on advertising but there can be establishment of standards and voluntary standards for elimination of false or exaggerated description or advertising to aid the consumers in product selection and therefore such would be in principal not constitute violation.

Guideline 7 relates to information activities. The general policy is that collection and presentation of information and materials concerning technology market conditions and demand tendency that aids the members in making rational management decisions do not of themselves constitute violations. However, where that information may actually restrain competition, then the Anti-Monopoly Act will apply. Acts likely to constitute violation include information regarding future prices, information on activities concerning individual transactions e.g. equipment, biding prices and exchange of opinion concerning supply plans in connection with short-term demand forecast. Acts that in principal do not constitute violation include presentation of information from government offices, private research firms on management, presentation of information on objective facts in the past and presentation of information concerning the creditworthiness of customers.

(g) Advertising Restrictions:

The function of advertising in competition policy raises important and controversial issues. Advertising is an essential part of the competitive process unless the consumer knows what goods and services are on offer and what their price is, he will be unable to choose what to buy and competition between the suppliers will be diminished. Competition is about attracting business and a vital part of the process is to advertise ones product. Therefore Competition Law should ensure that advertising is not restricted. However steps should be taken to ensure the truth of the advertisements and prevent the appropriation of ideas by competitive rivals. In some circumstances collaboration between independent undertakings in advertising may not be harmful for example to present a strong brand image. The advertising media itself should function effectively and be free from restrictive trade practices which might reduce the availability of advertising space. However advertising itself is expensive and can be a barrier to entry by new firms and established firms can engage in predatory advertising that is short term expensive campaigns designed to present new entrants establishing a foothold in the market. Opinion is divided in this issue and most believe that advertising should not be treated as a barrier

A separate objection to advertising comes from quite different quarter namely the liberal professions. They have argued that advertising is contrary to their ethical standards and that consumer protection in their sphere of activity is best served by maintaining professional standards through self-regulation, codes of practice and professional ethics.

In the UK attention in recent years has been given to consumer legislation designed to ensure that the truth of advertising material and the introduction of a duty to provide certain particulars to customers in respect to some products.

There has been an unwillingness however to introduce a generalized notion of unfair competition to enable competitors to take action against one another for comparative advertising or misappropriation of advertising ideas.

An important influence upon the integrity of advertising is exercised by the Advertising Standards Authority. Action has been taken in the UK on several occasions to ensure that an efficient and open advertising market is maintained.

Anti-competitive horizontal complaints

Members of a cartel will frequently take action designed to keep off the possibility of new competition in just the same way that a monopolist would or might. For example a collective reciprocal exclusive dealing arrangement might be negotiated whereby a group of suppliers agree with a group of dealers to deal only with one another. The effect would be to exclude other producers from the market if they cannot find retail outlets for their product.

A common pricing system may be supported by rebates or discounts whereby purchasers are offered discounts calculated according to their purchases from all the members of the cartel.

Again it may be decided to boycott any dealer who handles the product of producers outside the cartel. These exclusionary devices are illegal in the USA per se. Although it has been argued that the scope of the rules against collective boycott is inappropriate because some independent firms will inevitably decide to refuse to deal with certain people, for example, inadequately trained people entering into a profession or inefficient dealers access to a branded product.

It is suggested that a distinction be made between naked restraints which are clearly in to be exclusionary on the one had and agreements which might produce better efficiency and therefore be permitted. In the UK the competitive authorities have consistently condemned naked horizontal restraints. However there is some flexibility in the UK law which was revealed in the decision of the Association of British Travel Agents limited agreement in 1984. In that case the members of the

ABTA defended their reciprocal agreement before the court. In effect it was essential for anyone in the travel business to belong to the ABTA in order to access the holidays offered on the retail outlet which they sold on the retail side.

The ABTA exercised close control over the affairs of its members and was in a position to guaranteed or to come to the rescue if a tour operators went into liquidation leaving holiday makers stranded abroad. There had been some controversy over the rules over the ABTA membership which were restrictive and prevented innovative marketing. The court upheld the main terms of the agreement while liberalizing the rules for membership.

“Beneficial” horizontal restraints

Not all types of restraints are anti-competition and some may indeed enhance economic efficiency and produce other beneficial effects. Examples:

1. Research and development agreements. This promotes a vibrant and successful economy. It brings new products into the market. It leads to improved processes of manufacturing which reduce costs increase safety or eliminate environmental damage. However a particular research may be beyond the capabilities of a single firm acting alone and may not be in a position to acquire expertise. The only solution is collaboration with independent undertakings and therefore blanket prohibition against such action is not useful. However the competition authorities have to decide at what point beneficial collaboration may turn into restraints of competition. For example, where cooperation leads to price fixing and market sharing.

2. Specialization agreements. Specialization agreement between independent undertakings may have beneficial effect where they resort in longer production runs which enable economies of scale to be taken advantage of and costs to be reduced. Firms may agree to specialize in a particular aspect of a joint project or produce specific goods.

3. Other agreements that improve efficiency. Undertakings may decide to establish a joint venture company to manufacture a product and achieve economies of scale. It allows undertakings to make use of complimentary technology. There are also disadvantages. Firms may concert their plans, they may limit output and force market prize of goods upwards. It is important to distinguish those that are beneficial and detrimental to consumer welfare.

4. Restructuring agreements and prices cartels. The market place and the process of competition is open and free. Those who live by the market may also die by it. However, in some circumstances an industry may face severe problems, for example, during recession or overcapacity and the competition authorities may be willing to accept some degree of cooperation to overcome this. It may be difficult to make rational restructuring in the absence of an intelligent understanding of what competitors are doing.
Each may slim down the undertaking to the extent that one goes from overcapacity to under-capacity. And of course this would involve a social cost of loss of employment. Therefore agreements may sometimes be allowed to limit production for a certain time.

5. Standardization agreements. Competitors may agree to produce certain goods or services of specified dimensions, types or quality, or only enter into contract with customers on agreed standard terms or conditions. The benefit would be reduced shopping around and reduced costs as the product would be standardized. It may enhance quality and there are countries withy various consumer legislation that require goods

And services to be provided in standardized form.

Undertakings themselves can agree upon standardization. They do reduce competition and it should be decided whether the loss in choice of product is offset by benefits attributable to standardization.

6. Vertical restraints (distribution). A restraint may be termed vertical where it is accepted between firms which operate at different levels of the market. They raise complex theoretical and analytical problems. They vary in scope. It is the task of the competition policy to decided which provisions in such agreements can be said to give rise to a restriction of competition and distinguish harmless or beneficial restrictions from those which should be prohibited.

Methods of distribution

An undertaking may decide to supply goods or services through a distributor where the producer supplies himself he may put in place retail outlets. It may be costly to set up outlets and efficient to appoint an independent undertaking with knowledge of and expertise in the distribution trade. Distribution can also be done through commercial agents paid on commission, or sell them to a third party through a commercial agreement who will then sell them on its own behalf. It is upon the nature of these agreements that most attention is focused. The competition law question revolves around the extent to which restrictions upon the conduct of the producer and the distributor can be included in the agreement. There are various levels of distribution. The producer may sell to a distributor who may sell to wholesalers who may then sell to retailers.

Types of distribution agreements.

From a legal perspective they are divided into four types: exclusive distribution, exclusive purchasing, selective distribution and franchising. But one cannot always neatly pigeonhole these agreements.

Exclusive distribution

This occurs where a producer may agree with a distributor that it will sell only to that particular distributor in a given territory and the same arrangement may be made between a distributor and a retailer. This agreement would provide the distributor or retailer with a degree of immunity from intra-brand competition or territorial protection or distributor can be given exclusive right to use the trade market of the goods in question. Another type of protection is for a producer to enter into an exclusive right to supply particular class of customers, that is known as customer allocation clause.

Exclusive purchasing

A produce may require that a purchaser obtain its requirements of particular goods exclusively fro, itself and it may extend to a whole range of the producers products. It can be justified in terms of efficiency and guaranteed outlet for products and therefore rationalized production. It can also be beneficial in terms of maintenance of demand and distributor may be encouraged to promote and increase sales and also to feedback complaints from customers to the producers. The producer is then more willing to give preferential terms, assistance with promotion, or technical advice. These are common in beer and petrol markets.

Selective distribution

A producer may operate a distribution system whereby it is safe to limit the type or number of retail outlets which may handle its products. For example, for technically sophisticated or luxury goods. The producer may impose terms on the types of outlets that may sell their product. It may play a role in maintaining the brand image of its product and may also ensure that products are effectively promoted by retailers with sufficient skill and competence. It raises some problems. Limitation on outlets may mean that price competition is limited and prices are higher than would otherwise be. Retailers may feel aggrieved by denied access to goods and claim that they can only be able to compete successfully if they have access to the particular goods (refusal to supply on deal).

Franchising

This is a popular business format and various intellectual rights will be associated with this. For example, copyrights and trade marks. The franchiser is in a position to license this package or rights to a franchisee which can then trade under the common name of the franchised network at a fee for the right to do this, and maintains obligation to preserve the character of the franchise. The advantage is that the franchiser can spread business without itself raising capital and the franchisee is able to enter the market and to operate under an established name without having to invest in its creation. Competition law has to rapidly adopt to this relatively new business method or model.

Some theorists argue that vertical restraints are not a suitable target for competition authorities at all. Or that they should be investigated only where a producer possesses power over the market. They argue that generally that a producer should be left to decided its own market strategy and that its self-interested decisions will themselves be in accordance with the best interests of consumers. This is not yet fully accepted. There are several objections that have been stated to vertical restrain distribution systems:

1. Foreclosure of competition.

The producers competitors are denied access to the particular outlet for their goods. If for some reason the number of available outlets is seriously restricted, for example, because of licensing laws for public houses or restrictive planning laws as in the case of petrol stations. Inter-brand competition between producers may be seriously diminished. This would lead to harm to competition at the primary level, that is between the producers themselves. Where distributors and sellers are already tied in such arrangements entry into the market for a new firm is difficult. It also limits competition between distributors and retailers.

2. Harm to consumers.

It can be argued that vertical restraints are directly harmful to consumers. Limitation of inter-brand competition may result in higher prices. For example where individual resale price maintenance is an aspect of the agreement and therefore resolves in price fixing. It can reduce consumer choice. Selective distribution may mean quality products and excellent guarantees but the consumer may be willing to forgo all that and pay less.

3. Cartels.

Vertical restraints may produce cartels between producers and distributors with detrimental consequences to the public interest. It is also possible that the competing producers themselves might form a cartel and agree to impose vertical restraints on their distributors in order to stabilize the market and minimize the opportunity or incentive to cheat. Vertical restraints may intensify the problems associated with oligopoly.

4. Compartmentalization of markets.

Vertical restrictions have an ability to seal off one geographical market from another. Economic theory suggests that exclusivity may be perfect justified but others see it as a barrier to trade. For example in the context of the European Union where such measures can have the effect of segregating national markets from one another. Where a conflict does occur the tendency of the community authorities is to opt for the political goal of market integration rather than the economic one of efficient distribution.

5. Who decides?
The issue is who should decide between the authorities and the producers who has a vested interest to achieve maximum output, best profit, maintain brand image and better position to make decisions than some outside authority. According to some the market should be free to make its own decisions. However, most feel this would not be in the public interest. And that decision making should be vested in a public body or at least intervention by regulatory authorities.

6. Vertical restraints other than distribution

Not all vertical restraints are concerned with the distribution of goods and services. Many products are supplied to customers for consumption rather than resale. For example, a firm that produces sulphuric acid will need reliable access to the sulphate from which the chemical is produced. They may enter into agreements where the supplier guarantees supplies for the next five years. Exclusive dealing and exclusive purchasing agreements enables produces to plan its production more rationally and affords security of guaranteed outlet. It can foreclosure competition and restrict the purchasers commercial freedom to purchase elsewhere.

The second example is that tie-ins and full line forcing. A tie-in stipulates that the buyer must purchase part or all of its requirements of a second (tied) product from the supplier of the first (typing) product. Full line forcing occurs when a buyer is required to purchase quantities of each item in a product range in order to be able to buy any one of them. These mainly feature in a producers distribution policy. For example a firm that makes photocopying machines might insist that purchasers taken ink and paper exclusively from it. In the USA tied transactions have attracted considerable debate and it is argued against tie-ins that they take away a purchasers freedom of choice. This view has attracted criticisms also. It is pointed out that tying may be used for reasonable purposes. One is to maintain the efficiency of tying product. For example, a piece of equipment may function at its best only if a particular chemical or material is used which is solely available from the manufacturer because it has a patent or relevant know-how. It encourages economies of scale and leads to lower prices. In the UK these arrangements can be investigated and where appropriate reports indicate tying would be condemned. It has been suggested that they should not be condemned wholesale and could be used for legitimate reasons.

Refusal to supply

This is a very difficult topic in competition law. Objection can be taken to the very notion that refusal to supply can be termed a restraint at all as it does not involve the imposition of a restriction on any one in contractual terms. However, it may have the object or effect of restricting competition. In most cases the refusal will be vertical since it will involve a refusal by a firm higher in the market to supply someone lower down rather than a refusal by competing firms to supply one another. The first problem is that in a market economy the view is that one should be allowed to contract with whomsoever they wish. There are many justifications for refusal to supply. The customer may be bad debtor. There may be a shortage of stock. Refusal may be a way of persuading distributors to maintain a resale price or to force customers to purchase from it rather than a rival or keep off threat of potential competition or to destroy competition.

AFRICA LAW CENTRE

COMPETITION LAW NOTES