In a free market economy, undertakings (defined as any entity engaged in economic activity and including (groups of) companies, partnerships, sole traders etc.) compete with each other to offer the best range of products at the best price. Competition also drives efficiency and innovation, and directs businesses to meet consumer demands by providing the right products at the right price and quality.
A competitive market leads to lower prices, higher quality of products and more choices for customers. However, anti-competitive practices such as price fixing or output limitation agreements among competitors will harm competition and lead to higher prices and reduced choices for consumers.
This section introduces different types of anti-competitive practices that potentially raise concerns under the Competition Ordinance (Cap.619), and how businesses should comply with the Ordinance. The contents of this section are based on the Competition Commission’s publications (available at https://www.compcomm.hk/en/legislation_guidance/guidance/guidance.html) and the hypothetical examples taken directly from the Commission’s Guideline on the First Conduct Rule and Guideline on the Second Conduct Rule.
[Hong Kong Competition Commission website – Competition & Anti-Competitive Practices > Overview]
I. About the Competition Ordinance
The Competition Ordinance (Cap. 619) applies to all sectors of the economy in Hong Kong and is enforced by the Competition Commission (Commission) and the Communications Authority (which shares concurrent jurisdiction with the Commission in respect to the telecommunications and broadcasting sectors). The Ordinance prohibits conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong. Such conduct includes anti-competitive agreements and concerted practices and abuses of a substantial degree of market power. The Ordinance also prohibits mergers which have or are likely to have the effect of substantially lessening competition in Hong Kong (currently only applicable to mergers involving a telecommunications carrier license holder).
The Ordinance prohibits restrictions on competition in Hong Kong through three “competition rules”:
The First Conduct Rule prohibits anti-competitive agreements;
The Second Conduct Rule prohibits abuses of substantial market power; and
The Merger Rule prohibits anti-competitive mergers.
Further guidance on these prohibitions can be found in the Commission’s Guideline on the First Conduct Rule, Guideline on the Second Conduct Rule and Guideline on the Merger Rule.
[Source: Commission’s Guideline on Complaints Paras 1.1-1.2]
II. The First Conduct Rule
The First Conduct Rule seeks to prohibit any arrangement between independent market participants (whether they are competitors or not) which has the object or effect of preventing, restricting or distorting competition in Hong Kong. Without limiting the general scope of its application, the Commission’s Guideline on the First Conduct Rule discusses how, in the Commission’s view, the First Conduct Rule is applicable to the following conduct (amongst others):
What are cartels?
Cartels are agreements between competitors to cooperate rather than compete to win customers by means such as price fixing, restricting output, bid rigging and market sharing.
In which market conditions are cartels susceptible to appear?
Some markets are particularly vulnerable to cartels especially where:
- The competitors are few in number, making it easy for them to collude;
- The relevant products/services are homogeneous in nature;
- There are considerable barriers to entry for potential competitors to overcome; and
- There is excess capacity on the supply side of a market.
How might cartels harm competition in the market?
Cartels would increase prices while lowering quality and innovation incentives – harming both consumers and the economy.
[Source: Competition Commission’s website – Competition and Anti-competitive Practices > Cartels]
What are the main types of cartel agreements that competitors should not enter into?
- Fixing the price: Competitors should not agree with one another to fix prices, either directly, for example by agreeing upon a specified price, the amount or percentage by which prices are to be increased or a price range, or indirectly by agreeing not to charge less than any other price in the market or agreeing not to quote a price without consulting other competitors. An agreement concerning price may still amount to price fixing even if it does not entirely eliminate all price competition. [Hypothetical example 1]
- Sharing the market: Competitors should not agree to divide up a market in order to be sheltered from competition in their allotted portion of the market. For example, competitors should not allocate the production of certain products, sales territories or customer groups, or otherwise agree not to expand into a market where another party to the agreement is already active. [Hypothetical example 2]
- Restricting output: Competitors should not agree to fix, maintain, control, prevent, limit or eliminate the production or supply of products, for example with the use of production or sales quota limiting the volume or type of products available in the market. [Hypothetical example 3]
- Bid-rigging: In the context of tenders actual and potential competitors should not manipulate the tender results by agreeing not to compete with one another, for example through allocating who is to bid or not to bid, or coordinating on each other’s bidding terms with a view to influencing who the winner would be. [Hypothetical example 4]
[Source: Commission’s Guideline on the First Conduct Rule Paras 6.11-6.13, 6.17, 6.21-6.28]
Hypothetical example 1
A number of new car dealers in Hong Kong meet to discuss how to avoid supposed consumer confusion on the range of car-financing options available in the market. The dealers agree to minimum interest rates on car finance packages.
They also note that many dealers regularly offer heavy discounts from the list price prior to Chinese New Year. To prevent “too much” undercutting in the market, they agree to a discount of no more than 5% off the list price.
These agreements relating to the elements of price would be viewed by the Commission as having the object of harming competition. By collectively setting a minimum interest rate and fixing the maximum discount, particular elements of price competition have been agreed by the competitors when these matters should be determined independently.
As the conduct has the object of harming competition, it is not necessary for the Commission to consider whether the conduct has or is likely to cause harmful effects on competition in the relevant market.
The Commission would also consider the conduct in the example to be Serious Anti-competitive Conduct under the Ordinance.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 5]
Hypothetical example 2
A group of coach companies supplying services to residents at particular residential buildings meet to discuss how they operate their services across Hong Kong. To enable them all to make what they consider to be a reasonable profit, they decide to allocate between themselves a number of buildings based on the total projected number of passengers. They agree not to provide services or to pursue customers which have been allocated to another company. They also agree not to launch new services without consulting each other.
This agreement not to compete with one another for defined customers has the object of harming competition. The agreement removes a choice of supplier with the likely result of higher prices for the services concerned.
Having concluded that the agreement has the object of harming competition, the Commission is not required to show that the conduct has or is likely to have harmful effects in the market.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 6]
Hypothetical example 3
Local salted fish producers have faced financial difficulty for a number of years as supply in Hong Kong has increasingly outstripped demand. Given this “crisis” affecting the industry, the main producers meet to discuss how to restructure the sector with a view to rationalising what they consider to be a situation of “overcapacity”. A scheme is agreed which encourages certain producers to withdraw from the production of salted fish for a period and to refocus their commercial activities on other areas of business. Those producers who continue to operate their salted fish businesses make certain compensation payments to the producers leaving the market and, as a further expression of solidarity, agree to cover the costs of decommissioning relevant production lines.
The Commission would view this scheme as having the object of harming competition. In a competitive market, the producers would be expected to make production and capacity decisions independently. It is not for the market participants in a particular market collectively to agree what the market outcome should be.
The Commission would also regard the conduct as Serious Anti-competitive Conduct within the meaning of the Ordinance.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 7]
Hypothetical example 4
A large company with a number of offices across Hong Kong decides to outsource its catering services. The company invites four major competing caterers to bid for the new contract. The sales representatives of the four caterers meet, by chance, at a charity football match and discuss the tender. The sales representatives agree as follows: the first caterer will decline to submit a bid while the second will withdraw a previously-submitted bid; the third caterer will submit a higher priced “cover bid”. The company calling for the bids was not aware of these arrangements and proceeded to award the contract to the fourth caterer which, on the face of it, submitted the most “competitive” bid.
The Commission will consider this arrangement as having the object of harming competition. The caterers have sought to artificially pre-determine the outcome of the tender. In addition to reducing customer choice, the bid-rigging results in inflated prices for the outsourced catering services.
The Commission would also regard the conduct in the example to be Serious Anticompetitive Conduct under the Ordinance.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 8]
2. Joint buying
What is joint buying?
A joint or group buying agreement arises when undertakings agree to jointly purchase products including inputs (e.g. raw materials) used for the production of other products. Joint buying can be carried out through a jointly controlled legal entity, through an association, or by a contractual arrangement between undertakings or some looser form of cooperation.
[Source: Commission’s Guideline on the First Conduct Rule Paras 6.31-6.32]
What are the possible benefits of joint buying?
Joint buying frequently allows small and medium-sized enterprises (SMEs) to achieve economies of scale similar to those of their larger competitors’. This may lead to lower prices in the market where the joint buying takes place, lower transaction costs, and/or enhanced distribution efficiencies for the SMEs.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.33]
When does joint buying raise competition concerns?
A joint buying arrangement would typically not be considered by the Commission to have the object of harming competition unless it is a disguised buyers’ cartel. An analysis of the effects on competition of joint buying will consider the effects of the arrangement on both the upstream buying and the downstream selling markets, i.e. the relevant markets where the undertakings engage in the joint buying and the relevant markets where the jointly purchased products are subsequently sold or where other products produced using jointly purchased inputs are sold.
Harmful effects on competition in the downstream market may occur if, for example, the joint buying results in competitors in the downstream market achieving a high degree of commonality of costs or where there is some sharing of competitively sensitive information beyond what is necessary for the purposes of the buying arrangement. As regards the upstream buying market, concerns may arise if, for example, the joint buying results in the buying market being foreclosed to competing purchasers.
In general, joint buying is unlikely to give rise to concerns under the First Conduct Rule if the parties do not have market power in the relevant downstream markets.
[Source: Commission’s Guideline on the First Conduct Rule Paras 6.34-6.37]
With a view to achieving savings in their input costs, 100 small snack food retailers and market stall holders from across Hong Kong form a joint buying group. The buying group members must buy at least half of their snack food products through the buying group. Together, the small retailers account for a small portion of the relevant buying and selling markets in Hong Kong and there are a number of strong competitors in both buying and selling markets (including large wholesalers and supermarket chains).
The arrangement does not have the object of harming competition and the Commission would be unlikely to find that the arrangement has any anticompetitive effects.
Even if the formation of the buying group enhances the commonality of input costs across the small retailers to an extent, their market position on both the buying and selling markets and the presence of large competitors suggests harm to competition is unlikely.
If the joint buying agreement did give rise to harmful effects on competition, it would still be likely to generate economic efficiencies in the form of economies of scale. As the buying group members face strong competitive pressures in the downstream selling market(s) from supermarket chains, it is likely that the cost savings achieved by the joint buying will be passed on to consumers. The general exclusion for agreements enhancing overall economic efficiency may therefore apply.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 9]
3. Exchange of information
What are the possible benefits of information exchange?
Competition is often enhanced through the sharing of information, for example, in relation to best practices or exchanges of information which allow firms to better predict how demand is likely to evolve. Similarly, information exchanges may facilitate price comparisons by consumers or reduce consumer search costs. As a general proposition, the more informed consumers are, the more effective market competition is likely to be.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.38]
When does information exchange raise competition concerns?
Concerns may arise where undertakings which are competitors exchange competitively sensitive information such as confidential information relating to price, customers, production costs, quantities, marketing and investment plans etc.
In particular, if competitors share information in private on their future individual intentions or plans with respect to price, the exchange of such information has the object of harming competition.
[Source: Commission’s Guideline on the First Conduct Rule Paras 6.39-6.40] & Hypothetical example 10
A trade association for junk owners collects from and circulates to its members information on their respective proposed future prices. This includes information as to the proposed prices for specific journeys. The information is not made available to the public and is circulated to members in advance of a seasonal price review by the association members.
Absent a decision of the association giving rise to the information exchange or evidence of an agreement between members to engage in the information exchange, the Commission would infer that this arrangement is implemented as part of a concerted practice with the object of harming competition. The conduct allows the junk owners to adjust their future pricing to reflect the proposed pricing of competitors and thus reduces price competition in the market. The information exchange arrangement is an indirect form of price fixing.
The Commission would also regard the conduct to be Serious Anti-competitive Conduct under the Ordinance.
4. Activities of trade associations
What is the role of trade associations in promoting competition?
Trade associations have a vital role to play in educating their members on the Competition Ordinance and promoting a pro-competitive compliance culture.
[Source: “Competition Ordinance and Trade Associations” Brochure - “Do” section]
What are the competition risks associated with trade association activities?
A trade association will be an association of undertakings if the members of the trade association are undertakings. Where undertakings, as members of an association of undertakings, make or give effect to a decision of the association of undertakings which has the object or effect of harming competition, the undertakings and the association may both incur liability under the Ordinance.
Trade association should not:
- Recommend or require their members to set particular prices for their products or impose particular fees for their services.
- Impose restrictions on members regarding the terms and conditions on which they sell their products.
- Help members divide up their sales territories, including by geographic areas, types of customers or types of products.
- Set or recommend production targets for members.
- Coordinate or facilitate collusive tendering by members.
- Help members share strategic information that a business normally doesn’t want its competitors to know. Generally, information relating to price (including future pricing intentions) and quantities of members’ products or services is the most competitively sensitive.
- Organize or encourage a boycott by members against targeted individuals / businesses.
- Set rules or codes restricting or reducing competition among members, for example, setting rules limiting members’ discount/ promotional activities.
- Use arbitrary rules to admit and/or expel members.
- Prevent members from developing alternative standards or providing products that do not comply with the association’s standards.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.54 & “Competition Ordinance and Trade Associations” Brochure - “Don’t” section]
5. Joint ventures
What are joint ventures?
Joint ventures may refer to various types of cooperative arrangement between undertakings including, joint production arrangements, joint buying arrangements, joint selling, distribution and marketing arrangements, and joint R&D ventures. The activities of a joint venture may be carried out through a legal entity separate from the parties to the joint venture or by some or all parties to the joint venture.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.90]
Joint production agreements take a number of forms. They may provide that production is carried out by one party or by two or more parties or the parties may establish a separate legal entity for the purposes of the joint production.
Where a joint production agreement allows parties to produce a product that they would not, objectively, be able to produce alone, the agreement will not likely have the object or effect of harming competition.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.95 & 6.98]
Joint production agreements may sometimes have the effect of harming competition, for example where:
- Producing jointly leads to reduced product variety in the markets where the joint venture partners competed prior to forming the joint venture;
- Producing jointly results in higher prices for customers;
- Producing jointly results in an increase in the parties’ commonality of costs with the result that the parties can more easily coordinate market prices; or
- The agreement leads to an exchange of competitively sensitive information beyond that which is strictly necessary for producing jointly.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.99]
Two leading suppliers of an industrial chemical product in Hong Kong, Company A and Company B, decide to close their existing independent production facilities, and open a more efficient joint plant solely for use by A and B. Company A and B do not agree on any terms beyond those strictly limited to the running of the new facility. There are only two other competitors, C and D in the market who arerunning their plants at full capacity. Company B already has an existing joint venture with C. Costs of production are a significant proportion of the variable costs of the companies active in the market. The market has not seen any recent entry.
In assessing whether the creation of the joint production facility would give rise to concerns under the First Conduct Rule, the Commission would consider:
- the existing market structure and the state of competition in the market;
- whether the agreement enhances the commonality of costs of Companies A and B; and
- whether competition (on price) would likely be softened in the market as a result of the joint venture.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 20]
Joint tendering generally involves undertakings cooperating openly with a view to making a joint bid.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.101]
Circumstances in which joint tendering is unlikely to raise competition concerns:
A joint tender can be of benefit to competition if it allows companies to participate in biddings when otherwise they would not be able to make a stand-alone bid, or if the joint tender enables companies to submit more competitive bids. Joint tendering is less likely to give rise to competition concerns when the undertakings involved pool their complementary skills or different specialties.
Circumstances in which joint tendering is likely to raise competition concerns:
It might be of concern if the parties, which could have made individual bids, decided to submit a joint tender, as such joint tendering may reduce the number of potential bidders which in turn is more likely to harm competition if there is already a limited number of potential bidders in a concentrated market.
Joint tendering will not generally be considered by the Commission to have the object of harming competition, rather such arrangements will be assessed for their actual or likely effects on competition in the relevant market.
[Source: Commission’s Guideline on the First Conduct Rule Paras 6.101 & 6.103-6.106]
A tender is announced for the renovation of a high-rise office building in Mong Kok. The tender requires bidders to have significant manpower to be able to complete the project in the given timeframe and also sets out a minimum financial resource threshold for the bidder – to ensure the chosen construction company has sufficient liquidity throughout the project.
Two small construction companies with a limited market share in Hong Kong, TungBuild and ChungConstruct, considered independently bidding for the tender. However, neither company had sufficient manpower resources or financial capital to satisfy the tender specifications and would thus individually be excluded from bidding.
Tung and Chung therefore submitted a joint bid which allowed them to combine their resources to deliver the required project. The bid makes it clear they are submitting a joint tender, which transpires to be one of the lower prices submitted. Six other bids were submitted by larger construction companies who in the past five years have won the vast majority of the tenders for similar sized projects.
Assuming the creation of the TungBuild/ChungConstruct joint venture does not amount to a merger the arrangement may be assessed under the First Conduct Rule. In that regard, the joint venture does not have the object of harming competition and appears unlikely to give rise to anti-competitive effects. The fact that Tung and Chung could not individually bid for the project is particularly relevant here – they are not in fact competitors for the project in issue. The collaboration results in enhanced choice for the party organising the tender and a more competitive bidding process overall.
Nonetheless, Tung and Chung would need to be careful that any competitively sensitive information they share in submitting the bid and in carrying out the joint venture is used strictly for the purposes of the joint venture and that the joint venture is not used as a vehicle for exchanging commercial information on their usual prices and costs.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 21]
This type of arrangements refers to a wide range of possible joint ventures between undertakings where they agree to jointly sell, distribute or market particular products, which are known as “sales-related joint ventures”. Such arrangements range from collaboration in respect of advertising only or the joint provision of after-sales service, through joint selling involving the joint determination of key commercial parameters including price.
Circumstance in which sales-related joint ventures is unlikely to raise competition concerns:
Sales-related joint ventures can be an effective way of facilitating market entry for a new product, particularly where SMEs collaborate with a view to selling a new product they could not market individually.
Circumstance in which sales-related joint ventures is likely to raise competition concerns:
However, sales-related joint ventures can give rise to concerns under the First Conduct Rule where they lead to price fixing, output limitation, market sharing or the exchange of competitively sensitive information between competitors.
[Source: Commission’s Guideline on the First Conduct Rule Paras 6.107-6.109]
Various leading European flower producers have previously sold their products to Hong Kong through individual contracts with distributors. To rationalise their resources and reduce air freight costs, they form Bloomport JV, a joint venture arrangement under which each party agrees to make all its export sales to Hong Kong through the Bloomport brand. Bloomport will also decide on the products and volumes to be sold, the choice of customers and the prices to be charged.
The Commission would consider that this type of arrangement has the object of harming competition. By coordinating key commercial decisions, the parties risk contravening the First Conduct Rule by engaging in price fixing and output restriction.
The Commission may also consider the arrangement to be Serious Anticompetitive Conduct under the Ordinance.
[Source: Commission’s Guideline on the First Conduct Rule Example 22]
6. Vertical price restrictions
What are vertical price restrictions?
They are restrictions imposed or recommended by an undertaking which affect the prices at which another undertaking operating at a different level of the production or distribution chain sells its products.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.69]
What is resale price maintenance (RPM)?
The most common example of a vertical price restriction is resale price maintenance. It occurs when a supplier establishes a fixed or minimum resale price for the distributors, for example retailers, to follow when they resell the product.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.71]
RPM may be considered as having the object of harming competition if:
- a supplier implemented the RPM in response to pressure from a distributor (e.g. retailer) seeking to limit competition from competitors of the distributor (e.g. other retailers) at the resale level; or
- the RPM is implemented by a supplier solely to foreclose competing suppliers.
Where RPM does not have the object of harming competition, it will be assessed based on its effects including any possibile efficiencies.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.75-6.76]
HomeStore is the owner of a wide number of household goods shops across Hong Kong. HomeStore is a significant customer of CleanUpCo for a number of daily use products which are widely available in supermarkets, convenience stores, specialist stores and smaller shops.
HomeStore is concerned that its competitors, including other large chain stores and smaller independent stores, are offering CleanUpCo’s products at a lower price than HomeStore. HomeStore is concerned that its competitors’ pricing decisions will impact on the profitability of a number of important business lines in its stores. HomeStore therefore pressures CleanUpCo to require its customers to sell CleanUpCo products across Hong Kong at a fixed retail price determined by CleanUpCo. As HomeStore is a significant customer of CleanUpCo, CleanUpCo implements the RPM policy.
The Commission would view this arrangement as having the object of harming competition. HomeStore’s insistence on CleanUpCo introducing a fixed retail price across Hong Kong has an inherent ability to harm competition. In this scenario, the purpose of the arrangement is merely to protect HomeStore from the competitive pricing of its competitors. In addition, there would be unlikely to be sufficient justifications for the RPM practice to satisfy the terms of the general exclusion for agreements enhancing overall economic efficiency in section 1 of Schedule 1 to the Ordinance.
The Commission would also consider the RPM in the example to be Serious AntiCompetitive Conduct under the Ordinance.
[Source: Commission’s Guideline on the First Conduct Rule Example 16]
Recommended or maximum resale price agreements may give rise to a concern where they serve to establish a “focal point” for distributor pricing (that is, where the distributors generally follow the recommended or maximum price), and/or where they soften competition between suppliers or otherwise facilitate coordination between suppliers. An agreement which entails recommended or maximum resale prices will be subject to an analysis of its competitive effects. The more market power the supplier has, the more likely would such agreements have the effect of harming market competition.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.79-6.80]
7. Exclusive distribution and exclusive customer allocation
What is an exclusive distribution agreement?
In an exclusive distribution agreement, a supplier assigns exclusivity for the re-sale of its products in a particular territory to a single distributor (or a re-seller).
[Source: Commission’s Guideline on the First Conduct Rule Para 6.85]
What is an exclusive customer allocation agreement?
In an exclusive customer allocation agreement, the supplier assigns exclusivity to a single distributor for re-sale to a particular group of customers.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.85]
Exclusive distribution and exclusive customer allocation agreements will not generally be considered by the Commission to have the object of harming competition. For the purposes of the First Conduct Rule, these types of agreement will generally require an analysis of their effects or likely effects on competition in the relevant market, including an assessment of how intra-brand and inter-brand competition is affected, the extent of the territorial and/or customer sales limitations, and whether exclusive distributorships are common generally in the markets impacted by the agreements under consideration.
[Source: Commission’s Guideline on the First Conduct Rule Para 6.86]
SportCo, a global brand, is a medium-sized player in the Hong Kong market for sports equipment. SportCo’s practice is to appoint an exclusive wholesale distributor for each country where its products are marketed and it has one such distributor for Hong Kong. To become a SportCo exclusive wholesaler, the distributor is obliged to sell only SportCo products and not to sell the products of SportCo’s rivals. Distributors are responsible for all promotional activities in their allotted territory and SportCo reimburses certain of the promotional costs incurred by its distributors including costs associated with staff training.
In addition to the SportCo distributor, a large number of competing distributors already operate in Hong Kong. Moreover, as many of SportCo’s competitors do not require exclusivity, a number of these distributors operate successfully on a nonexclusive basis. SportCo does not seek to prevent online retailers based outside of Hong Kong from selling to end consumers in Hong Kong. Hong Kong consumers can therefore also purchase SportCo’s products online from overseas should they wish.
While the combination of an exclusive territory arrangement with a non-compete clause might give rise to concerns under the First Conduct Rule in some cases in terms of foreclosing competing suppliers’ access to the market, there is no evidence on the facts that this would be an issue here. SportCo’s practice may limit competition for SportCo’s own products at the distributor level, but interbrand competition appears strong and it is notable that a number of the competing distributors in Hong Kong do not operate on an exclusive basis. Further, the fact that end consumers can purchase SportCo’s products online may serve to alleviate some concerns around a restriction of intra-brand competition.
[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 19]
B. Exclusions and exemptions
The Competition Ordinance provides for a number of general exclusions (section 3 in respect of statutory bodies, and Schedule 1 in respect of certain types of agreements and conduct) as well as mechanisms under which the Chief Executive in Council may create specific exclusions and exemptions (sections 4, 31 and 32).
Businesses can self-assess whether a particular agreement benefits from any one of the following general exclusions provided under Schedule 1, thereby making the First Conduct Rule inapplicable:
- agreements enhancing overall economic efficiency;
- compliance with legal requirements;
- services of general economic interest;
- mergers; and
- agreements of lesser significance.
Further guidance on these exclusions are provided in the Commission’s Guideline on the First Conduct Rule.
III. The Second Conduct Rule
The Second Conduct Rule prohibits businesses with a substantial degree of market power from abusing that power by engaging in conduct that has the object or effect of harming competition in Hong Kong. Examples of conduct which may raise concerns under the Second Conduct Rule include:
1. Predatory pricing
What is predatory pricing?
Offering low prices to consumers for example by giving out discounts, cutting costs and otherwise competing on prices is the epitome of competitive conduct. However, if an undertaking with substantial market power sets prices so low that it deliberately foregoes profits in order to force one or more other competitors out of the market, this may amount to predatory pricing.
[Source: Commission’s Guideline on the Second Conduct Rule Paras 5.3-5.4]
How could predatory pricing harm competition?
Generally speaking, an adverse effect on competition will arise where there is or likely to be anti-competitive foreclosure of existing competitors or new entrants. In the short run, the undertaking with substantial market power which set the below-cost prices may incur losses; however, in the long run, it would be able to charge higher, supra-competitive prices once it has forced other competitors out of the market. In this scenario, consumers will ultimately be worse off due to weakened competition leading to higher prices and reduced product quality and choice.
[Source: Commission’s Guideline on the Second Conduct Rule Para 5.4]
KowloonVend Ltd and New Vending Co are the only two companies that sell vending machines in Hong Kong. KowloonVend has the majority of vending machine sales, while New Vending, a recent entrant in the market, has a much smaller share. KowloonVend was selling its machines at a highly profitable price. When it entered the market, New Vending began selling its machines at a much lower price and KowloonVend’s market share began to decline. New Vending gained these lost sales from KowloonVend. In response, KowloonVend cut its prices in half. This low price is not enough to cover any measure of KowloonVend’s costs and KowloonVend loses money with each vending machine sold. New Vending cannot compete with these low prices and eventually goes out of business.
Assuming it can be established that KowloonVend has a substantial degree of market power, the Commission may assess KowloonVend’s conduct as predatory and a contravention of the Second Conduct Rule. The conduct might also be considered as having the object of harming competition.
[Source: Commission’s Guideline on the Second Conduct Rule Example 5]
2. Anti-competitive tying and bundling
What are tying and bundling?
Tying occurs when a supplier makes the sale of one product (the tying product) conditional upon the purchase another product (the tied product), and thus the tying product is not sold separately. Bundling refers to selling a package of two or more products at a discounted price.
[Source: Commission’s Guideline on the Second Conduct Rule Para 5.8]
Tying and bundling are common commercial arrangements that generally do not harm competition and may often result in:
- Lower production costs;
- Reduced transaction and information costs; and
- Increased convenience and variety for consumers.
[Source: Commission’s Guideline on the Second Conduct Rule Para 5.9]
When does tying and bundling raise competition concerns?
An undertaking with a substantial degree of market power in the tying market can use tying to harm competition in the tied market. By doing so it may reduce the number of potential buyers that are available for its competitors in the tied market. This may in turn cause its competitors to be less effective as competitors or to exit the tied market.
Similarly for bundling, the undertaking with substantial market power in the market of one bundled product can use bundling to harm the other competitors in the markets for the other products that are also part of the same bundle.
Tying and bundling will be assessed on an effect basis. An anti-competitive effect may arise in particular when the conduct is used to force the other competitors out of the market.
[Source: Commission’s Guideline on the Second Conduct Rule Paras 5.10-5.11]
The leading supplier of medical devices to Hong Kong hospitals and clinics stipulates in its sales contracts that the consumable medical products used with the devices must be purchased exclusively from it. These contractual requirements significantly limit the customer base available to competing manufacturers of consumables. If the medical devices supplier has a substantial degree of market power in the relevant medical devices markets, the contractual arrangements (which cause harm to competition in the market for consumable medical products) may amount to an abusive tie in contravention of the Second Conduct Rule.
The analysis might be similar with respect to the tying of a service. For example, if the medical devices supplier imposed a condition requiring customers to use the supplier (or an affiliate of the supplier) for the purposes of obtaining maintenance and repair services for the devices, this could raise concerns under the Second Conduct Rule.
[Source: Commission’s Guideline on the Second Conduct Rule Example 6]
3. Margin squeeze
What is margin squeeze? How could it harm competition?
Margin squeeze may arise when a vertically integrated undertaking with substantial market power supplies an important input (e.g. an indispensable raw material) to downstream businesses while it also operates in that downstream market.
Margin squeeze occurs if the undertaking with substantial market power reduces the margin between the price it charges for the input to its competitors in downstream market (i.e. the upstream price) and the price its downstream operations charged to its own customers (i.e. the downstream price), to an extent that the margin is insufficient to cover the its own downstream product-specific costs, such that the downstream competitors will be unable to compete effectively.
[Source: Commission’s Guideline on the Second Conduct Rule Paras 5.13-5.14]
4. Refusals to deal
When does refusal to deal raise competition concerns?
While businesses are generally free to decide with whom they will or will not deal with, refusal to deal by a vertically integrated undertaking with substantial market power is likely to raise competition concerns when the refusal relates to an input that is indispensable to its downstream competitors. In such context, refusals to deal may harm competition in the downstream market by preventing the downstream competitors seeking the input from operating in the downstream market or acting as an effective competitive constraint.
[Source: Commission’s Guideline on the Second Conduct Rule Paras 5.16-5.17]
5. Exclusive dealing
What is exclusive dealing?
‘Exclusive dealing’ includes exclusive purchasing obligations, which refers to where an undertaking requires its customers to purchase all or a substantial portion of its requirements for a particular product from the undertaking. It may also take the form of a conditional or otherwise loyalty-inducing rebate. Where an exclusive purchasing obligation is imposed by an undertaking with substantial market power, this may prevent other competitors from selling their products to those customers, and potentially foreclose such competitors.
Exclusive dealing also includes exclusive supply obligations or incentive arrangements with a similar effect. Where an undertaking with substantial market power uses such arrangements to foreclose competitors by preventing them from accessing particular inputs, this may raise competition concerns if the exclusive supply locks up most of the efficient input suppliers in the market, and the competitors of that undertaking would be unable to secure the inputs from alternative suppliers.
[Source: Commission’s Guideline on the Second Conduct Rule Paras 5.24-5.25 & 5.27]
When does exclusive dealing raise competition concerns?
Exclusive dealing is commonly used in commercial arrangements and in most cases will not harm competition. Competition concerns may only arise where:
- the undertaking with substantial market power has imposed exclusive purchasing obligations on many customers.
- it is likely that consumers as a whole will not derive a benefit from such exclusive dealing; and
- the relevant exclusive dealing obligations, as a whole, prevent the entry or expansion of its competitors because of, for example, the exclusive purchasing locking up a significant part of the market and foreclosing its competitors.
[Source: Commission’s Guideline on the Second Conduct Rule Para 5.28]
B. Exclusions and exemptions
The Competition Ordinance provides for the following general exclusions in respect of the Second Conduct Rule:
- compliance with legal requirements;
- services of general economic interest;
- mergers; and
- conduct of lesser significance.
Further guidance on these exclusions are provided in the Commission’s Guideline on the Second Conduct Rule.
IV. The Merger Rule
What is a merger, and what are the forms of it?
Generally speaking, mergers may take the following forms:
- Transactions that involve the merging of two or more undertakings into one.
- The acquisition of one undertaking (or part of it) by another undertaking.
- The forming of a joint venture.
- The acquisition of assets by one undertaking from another undertaking.
[Source: Commission’s Guideline on the Merger Rule Para 2.1]
What is the Merger Rule?
Under the Competition Ordinance, an undertaking must not directly or indirectly carry out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong.
[Source: Commission’s Guideline on the Merger Rule Para 1.1]
What is the scope of application of the Merger Rule?
For the time being, the Merger Rule only applies when an undertaking that directly or indirectly holds a carrier license under the Telecommunications Ordinance (Cap. 106) is involved in a merger.
The Merger Rule does not apply to a merger if the economic efficiencies (further explained below) that arise or may arise from the merger outweigh the adverse effects of any lessening of competition in Hong Kong.
[Source: Commission’s Guideline on the Merger Rule Para 4.2]
Under what circumstances would the merger raise competition concerns?
This is a complicated question. Please refer to the Commissioner’s Guideline on the Merger Rule.
B. Exclusions and exemptions
The following exclusions and exemptions are provided for:
- The Merger Rule does not apply to a merger if the economic efficiencies that arise or may arise from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong.
- The Chief Executive in Council may, by order published in the Gazette, exempt a specified merger or proposed merger from the application of the Merger Rule if he or she is satisfied that there are exceptional and compelling reasons of public policy for doing so.
- The Merger Rule does not apply to a statutory body as defined the Competition Ordinance, unless it is specified in a regulation made by the Chief Executive in Council that, inter alia, the Merger Rule applies to the statutory body, or to the statutory body to the extent that it is engaged in an activity specified in the regulation.
- The Merger Rule does not apply to a person specified in a regulation made by the Chief Executive in Council, which provides that, inter alia, the Merger Rule disapplies to such specified person, or to such specified person to the extent that the person is engaged in an activity specified in the regulation.
(Source: Commission’s Guideline on the Merger Rule Paras 4.2 & 4.12-4.14)
V. Complaints and investigations
A. What should I do if I suspect a company is contravening, or is likely to contravene a competition rule?
You may contact the Commission to express your concerns and make a complaint. The Commission will consider any complaint that is related to anti-competitive behavior. The Commission also has the discretion to decide which complaints need to be investigated further.
(Source: Commission’s Guideline on Complaints Paras 1.4 & 4.1)
B. How to make a complaint?
A complaint can be made directly, anonymously, or through an intermediary such as a legal adviser. A compliant or query can be made by telephone, email, post, by completing an online form on the Commission’s website, or in person at the Commission’s offices (by appointment only).
A complaint can be made by post or in person to Room 3601, 36/F, Wu Chung House, 213 Queen’s Road East, Wanchai, Hong Kong
Note: For the most up-to-date contact details for making a complaint or query, please visit the Commission’s website (https://www.compcomm.hk/) for details.
[Source: Commission’s Guideline on Complaints Paras 2.1-2.2]
C. Would my complaints be kept confidential?
The Commission will not normally disclose the complainant’s identity without the complainant’s consent. In fact, publicizing a complaint might even affect the Commission’s ability to effectively investigate a complaint. Therefore, the Commission normally asks the complainants to keep their complaints confidential. If a complainant chooses to disclose the complaint publicly, the complainant should inform the Commission of such disclosure in advance.
[Source: Commission’s Guideline on Complaints Paras 3.2 & 3.4]
D. In what cases would the Commission consider not to investigate a complaint?
If the Commission considers that a complaint is not reasonable to investigate, for example if it is trivial, frivolous or vexatious, or if it is misconceived or lacking in substance, the Commission is not required to investigate the complaint.
[Source: Commission’s Guideline on Complaints Paras 4.2 - 4.3]
E. If I cease to cooperate with the Commission after making a complaint, would my complaint still be investigated?
Yes, the Commission may still continue to investigate a complaint even if the complainant no longer cooperates with the Commission.
[Source: Commission’s Guideline on Complaints Para 4.2]
F. After a preliminary review of a complaint, what are the possible actions that the Commission would take?
- The Commission may take no further action, and provide an explanation to the complainant in written form explaining such outcome. However, it may later re-consider the complaint, for example when additional evidence is obtained, or when a pattern of such conduct arises which starts to be a concern, or if the Commission has more capacity to investigate such issue.
- The Commission may take no further action and recommend the complaint to refer the complaint to another agency, and write to the complainant to explain this outcome.
- The Commission may review the matter further by conducting an initial assessment. During the initial assessment phase, the Commission will identify if it is reasonable to conduct an investigation, and if there is sufficient evidence to support that the case is contravening the competition rule(s).
[Source: Commission’s Guideline on Complaints Paras 5.1 – 5.3 and Commission’s Guideline on Investigations Paras 3.1 & 7.24]
G. How would the Commission proceed if it considers that the complaint should be investigated?
At the end of the initial assessment phase, if the Commission has reasonable cause to suspect a contravention of a Competition Rule, it may commence the investigation phase.
During the investigation phase, the Commission may exercise its investigation powers to obtain evidence by issuing notices requiring a person to provide documents and information or to give evidence before the Commission. The Commission may also seek evidence without relying on its investigation powers, for example by inviting parties to voluntarily provide relevant facts as well as legal and economic arguments. The Commission also has the capacity to apply to a judge of the Court of First Instance for permission to enter and search specific premises to obtain documents, information and other items relevant to an investigation.
[Source: Commission’s Guideline on Investigations Paras 5.1-5.3, 5.5 & 5.22]
H. What are the possible outcomes after the investigation?
- The Commission may take no further action, and will provide a written explanation of this outcome to the complainant. Sometimes it is not necessary for the Commission to take any action if the parties have already changed their conduct in response to the Commission’s enquiries. In such case, the complainant will be informed of this.
- The Commission may accept a commitment to take any action or refrain from taking any action from parties under investigation.
- If the Commission has reasonable cause to believe that there has been a contravention of the First Conduct Rule, and this suspected contravention does not involve Serious Anti-competitive Conduct, the Commission must first issue a warning notice before commencing proceedings in the Tribunal. The warning notice provides parties under investigation with an opportunity to cease the conduct within a specified period.
- The Commission may issue an infringement notice where it has reasonable cause to believe that there has been a contravention of the First Conduct Rule involving Serious Anti-competitive Conduct and/or the Second Conduct Rule. In the Infringement Notice, the Commission will offer not to bring proceedings in the Tribunal on condition that the undertaking(s) under investigation makes a commitment to comply with the requirements of the notice within a specified compliance period.
- Instead of issuing an infringement notice, where the Commission has reasonable cause to believe that a person has contravened the First Conduct Rule involving Serious Anti-competitive Conduct and/or the Second Conduct Rule, or been involved in such a contravention, the Commission may also directly initiate proceedings before the Competition Tribunal.
- The Commission may refer the complaint to a Government agency wherever appropriate, and provide a written explanation of this outcome to the complainant.
- In addition to the investigation, the Commission may also conduct market studies into matters affecting competition in markets in Hong Kong.
[Source: Commission’s Guideline on Investigations Paras 7.6, 7.14, 7.16-7.17 & 7.24-7.25]