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Economics
Elective 1 Chapter 1
Monopoly Pricing
1
Perfectly competitive market Firms are price takers
Price is determined by the price mechanism If a firm raises its selling price it will lose all of its
customers Eg Market price = $6 Quantity demanded = 80 units
If a firm sells at $7 customers will buy from other firms2
Price ($)
0
Market demand (D = MB)
Market supply(S = MC)
Quantity (units)
6
80
Total social surplus
Market
Price ($)
0Quantity (units)
6
A single firm in perfectly competitive market
An individual firm can sell all its quantity supplied at the market price (Horizontal demand curve)
Demand faced by an individual firm
Perfectly competitive market A firm can sell all its goods at market price
P = $6 Each additional unit sold revenue = $6 Marginal Revenue (MR) = $6
In perfectly competitive market P = MR
Marginal cost rises when output rises MC curve is upward sloping
Perfectly competitive market Condition of profit maximization
Total revenue gt Total cost ie P gt AC
Price (Marginal revenue) = Marginal cost ie P = MC If P gt MC firm can earn more profit by raising output If P lt MC firm can earn by cutting output Suppose no fixed cost
If therersquos no externality whenMB = MC TSS is maxie Market efficiency
Monopoly
A single supplier in the market
No close substitution
Will not lose all the customers when it raises the price
Price searcher with monopoly powers on price and
determine its output
Eg MTR in HK CLP in Kowloon and NT
5
The demand curve faced by monopolists
Suppose Firm A is a monopolist
Market demand is the demand faced by Firm A
6
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
B
C
D
E
F
Price ($)
0
DemandQuantity (units)
5
1
Demand curve faced by the monopolist
6
8
9
7
2 3 4 5
4 G
6
A10
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Perfectly competitive market Firms are price takers
Price is determined by the price mechanism If a firm raises its selling price it will lose all of its
customers Eg Market price = $6 Quantity demanded = 80 units
If a firm sells at $7 customers will buy from other firms2
Price ($)
0
Market demand (D = MB)
Market supply(S = MC)
Quantity (units)
6
80
Total social surplus
Market
Price ($)
0Quantity (units)
6
A single firm in perfectly competitive market
An individual firm can sell all its quantity supplied at the market price (Horizontal demand curve)
Demand faced by an individual firm
Perfectly competitive market A firm can sell all its goods at market price
P = $6 Each additional unit sold revenue = $6 Marginal Revenue (MR) = $6
In perfectly competitive market P = MR
Marginal cost rises when output rises MC curve is upward sloping
Perfectly competitive market Condition of profit maximization
Total revenue gt Total cost ie P gt AC
Price (Marginal revenue) = Marginal cost ie P = MC If P gt MC firm can earn more profit by raising output If P lt MC firm can earn by cutting output Suppose no fixed cost
If therersquos no externality whenMB = MC TSS is maxie Market efficiency
Monopoly
A single supplier in the market
No close substitution
Will not lose all the customers when it raises the price
Price searcher with monopoly powers on price and
determine its output
Eg MTR in HK CLP in Kowloon and NT
5
The demand curve faced by monopolists
Suppose Firm A is a monopolist
Market demand is the demand faced by Firm A
6
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
B
C
D
E
F
Price ($)
0
DemandQuantity (units)
5
1
Demand curve faced by the monopolist
6
8
9
7
2 3 4 5
4 G
6
A10
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Perfectly competitive market A firm can sell all its goods at market price
P = $6 Each additional unit sold revenue = $6 Marginal Revenue (MR) = $6
In perfectly competitive market P = MR
Marginal cost rises when output rises MC curve is upward sloping
Perfectly competitive market Condition of profit maximization
Total revenue gt Total cost ie P gt AC
Price (Marginal revenue) = Marginal cost ie P = MC If P gt MC firm can earn more profit by raising output If P lt MC firm can earn by cutting output Suppose no fixed cost
If therersquos no externality whenMB = MC TSS is maxie Market efficiency
Monopoly
A single supplier in the market
No close substitution
Will not lose all the customers when it raises the price
Price searcher with monopoly powers on price and
determine its output
Eg MTR in HK CLP in Kowloon and NT
5
The demand curve faced by monopolists
Suppose Firm A is a monopolist
Market demand is the demand faced by Firm A
6
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
B
C
D
E
F
Price ($)
0
DemandQuantity (units)
5
1
Demand curve faced by the monopolist
6
8
9
7
2 3 4 5
4 G
6
A10
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Perfectly competitive market Condition of profit maximization
Total revenue gt Total cost ie P gt AC
Price (Marginal revenue) = Marginal cost ie P = MC If P gt MC firm can earn more profit by raising output If P lt MC firm can earn by cutting output Suppose no fixed cost
If therersquos no externality whenMB = MC TSS is maxie Market efficiency
Monopoly
A single supplier in the market
No close substitution
Will not lose all the customers when it raises the price
Price searcher with monopoly powers on price and
determine its output
Eg MTR in HK CLP in Kowloon and NT
5
The demand curve faced by monopolists
Suppose Firm A is a monopolist
Market demand is the demand faced by Firm A
6
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
B
C
D
E
F
Price ($)
0
DemandQuantity (units)
5
1
Demand curve faced by the monopolist
6
8
9
7
2 3 4 5
4 G
6
A10
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Monopoly
A single supplier in the market
No close substitution
Will not lose all the customers when it raises the price
Price searcher with monopoly powers on price and
determine its output
Eg MTR in HK CLP in Kowloon and NT
5
The demand curve faced by monopolists
Suppose Firm A is a monopolist
Market demand is the demand faced by Firm A
6
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
B
C
D
E
F
Price ($)
0
DemandQuantity (units)
5
1
Demand curve faced by the monopolist
6
8
9
7
2 3 4 5
4 G
6
A10
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
The demand curve faced by monopolists
Suppose Firm A is a monopolist
Market demand is the demand faced by Firm A
6
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
B
C
D
E
F
Price ($)
0
DemandQuantity (units)
5
1
Demand curve faced by the monopolist
6
8
9
7
2 3 4 5
4 G
6
A10
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Monopoly pricing
Simple monopoly pricing
A firm set a uniform price for each unit of its output at this price consumers
can buy as much as they want
Market demand restricts the market power of a monopolist
From the demand schedule When P = $9 Qd = 1 unit
If Firm A set the price at $9 1 unit will be sold only
If Firm A want to sell 4 units it has to lower the price to $6
One price-output combination based on consumersrsquo demand
7
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Monopoly pricing
Under simple monopoly pricing
The price a firm can charge = the consumersrsquo willingness to pay
ie P = MB8
Demand schedule faced by Firm A
Combination Price ($) Qd (units)
A 10 0
B 9 1
C 8 2
D 7 3
E 6 4
F 5 5
G 4 6
Max price a firm can charge
Combination Output (units) Price ($)
A 0 10
B 1 9
C 2 8
D 3 7
E 4 6
F 5 5
G 6 4
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Revenue of a firm under simple monopoly pricing
Price = Average Revenue (AR)
Under simple monopoly pricing
Total revenue (TR) = P x Q
Since AR = TR Q then P = AR
9
Output (Qd) (units) Price ($)Total revenue ($)
TR = P x Qd
Average Revenue ($)AR = TR Qd
1 9 9 x 1 = 9 9 1 = 9
2 8 8 x 2 = 16 16 2 = 8
3 7 7 x 3 = 21 21 3 = 7
4 6 6 x 4 = 24 24 4 = 6
5 5 5 x 5 = 25 25 5 = 5
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Revenue of a firm under simple monopoly pricing
Demand curve = AR curve
10
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2 3 4 5
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Revenue of a firm under simple monopoly pricing
Marginal Revenue (MR) The change in total revenue as a
result of selling an additional unit of output
MRn = TRn ndash TR(n-1)
At Q = 1 unit MR = P = $9
At Q = 2 units MR = $7 P = $8 MR lt P
When output increases MR falls Hence MR curve is downward sloping
below the AR (demand) curve
Remarks TR = Sum of MR
11
Qd (units) Price = AR($)
TR ($) MR ($)
0 10 0 -
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -5
9 1 9 -7
10 0 0 -9
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Revenue of a firm under simple monopoly pricing
Under monopoly pricing
12
Price ($)
D = ARQuantity (units)
9
8
1 2 3
4
3
2
1
-1
-2-3-4
-5
0
7
6
5
4 5 6 7 8 9
-6
-7
MR
MR curve is below D curve
MR lt P
MR keeps falling
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
(-)
Revenue of a firm under simple monopoly pricing
Why MR lt P
Firms Lower P Increase sales
Unit price $9 $8 where 1 more unit can be sold
MR from the 1st unit = -$1
MR from the 2nd unit = $8
MR = $8 - $1 = $7
13
Price ($)
0
D = ARQuantity (units)
5
1
6
8
9
7
2
(+)
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Revenue of a firm under simple monopoly pricing
Why does MR keep falling
In order to increase sales
Lower P
MR lt P
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Determination of price and output
Objective Profit maximization
Conditions
1 Total revenue gt Total cost ie TR gt TC
or Average revenue gt Average cost AR gt AC
2 Marginal revenue = Marginal cost
ie MR = MC
15
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Determination of price and output
Finding the price-output combination under profit maximization
16
Demand Revenue of firm Cost of firm Profit of firm
Qd (units
)P ($) TR ($) MR($) TC ($) MC ($)
Total profit TR-TC
($)
Marginal profit ($)
A 1 9 9 9 3 3 6 6
B 2 8 16 7 7 4 9 3
C 3 7 21 5 12 5 9 0
D 4 6 24 3 18 6 6 -3
E 5 5 25 1 25 7 0 -6
F 6 4 24 -1 33 8 -9 -9
At Q=1 MRgtMC conrsquot to produceAt Q=2 MRgtMC conrsquot to produceAt Q=3 MR=MC profit maximized
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Profit-maximizing price and output
The output at which MR equals MC and P gt AC 17
Price ($)
D = AR
3
7
MR
Determination of price and output
5
MC
Quantity
Total cost
Total profit
1 Price ($7) = MB ($7) 2 Price = AR ($7) gt AC ($4)
MR ($5) = MC ($5)
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
A monopolist does not have a supply curve
Supply curve Qs at different prices
In a price-taker market Market demand and supply determines the market price At market price each firm determines its Qs
In a perfectly competitive market there is a supply curve
In a price-searcher market Price is determined by
1 demand curve faced by the firm 2 marginal cost curve
A monopolist faces a downward sloping demand curve Price is determined at which MR = MC
No supply curve18
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Price range and elasticity
Demand is elastic P TR and MR is positive
Demand is unitary elastic P TR no unchanged and MR is 0
Demand is elastic P TR and MR is negative
Price not set at or below $4 because MR is negative
To maximize profit if MC = $6
MR = $6 where then Q = 3 units and Price = $8
Within the range where Ed gt 1
Price ($) 10 9 8 7 6 5 4 3 2
Qd (units) 1 2 3 4 5 6 7 8 9
TR ($) 10 18 24 28 30 30 28 24 18
MR ($) 10 8 6 4 2 0 -2 -4 -6
Ed gt 1 Ed lt 1Ed = 1
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Efficiency implications of monopoly
Efficiency in price-taking market Market price = Equilibrium price At Qt (where Qd = Qs ) MB = MC Total social surplus is maximized
20
Consumer surplus
Producer Surplus
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Efficiency implications of monopoly Efficiency in price-searching market
Profit-maximizing output = 3 units where MR=MC At Qt = 3 P = MB = $7 and MC = $5 Since MB gt MC total social surplus is not maximized Deadweight loss Monopoly is inefficient
Comparison Output in a perfectly
competitive marketQ = 4 units
Output in a monopolymarketQ = 3 units
Deadweight loss appearsunder monopoly
21
Price ($)
D = MB
3
7
MR
5
MC
Quantity
Total cost
Produce surplus
0
Consumer surplus
Deadweight loss
4
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Price discrimination
Definition
A situation where seller sells identical goods produced at
the same cost to different customers at different prices
Examples
MTR Lower prices for children and elderly
Fast-food shop Special offer for students
University scholarship
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Reason for practising price discrimination
In simple monopoly pricing buyers have consumer surplus
Sellers may try to capture the consumer surplus to increase profits
ie From consumer surplus to producer surplus
Price discrimination is a pricing arrangement a firm uses to
increase profit
Price setting based on the different consumersrsquo demand curves
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
If the selling price of the flower is
Then the profit-maximizing price is $50 and quantity is 2 units
Consumer surplus A $80 - $50 = $30 and B $50 - $50 = $0
Producer surplus $50 x 2 = $100
Total social surplus $100 + $30 = $130
Customer Marginal Benefit ($)
A 80
B 50
C 20
Price ($) Quantity sold (units) Total revenue ($)
20 3 60
50 2 100
80 1 80
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
How does price discrimination increase profit
Given MB of a flower
Suppose cost = $0
Suppose the seller bargains with the customer separately Price to A = $80 Price to B = $50 and Price to C = $20 Total revenue = Producer surplus = $80 + $50 + $20 = $150 Consumer surplus A $80 - $80 = $0 B $50 - $50 = $0 and C $20 - $20 = $0 Total social surplus = $150 + $0 = $150 Total sales = 3 units
Price discrimination Qt Producer surplus (profits) Total social surplus But consumer surplus
Customer Marginal Benefit ($)
A 80
B 50
C 20
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
How to identify price discrimination
Key 1 Whether the goods and their costs are the same Price discrimination is found if
Same product sold in different price to different customers
No price discrimination if Quality is different Costs are different
However Price discrimination is found if Difference in price is disproportionate to the different in quality or cost Eg Normal Set Lunch Soup + Curry Chicken + Tea ( $30 )
Student Set Lunch Curry Chicken + Tea ( $16 )
[The bowl of soup is disproportionately expensive]
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
How to identify price discrimination
Key 2 Whether the unit prices are the same Example Telecommunication Plan
Plan A $51 ndash 1100 minutes [ie $00464 per minute] More preferable to common users like students for leisure usage
Plan B $73 ndash 1600 minutes [ie $00456 per minute] Plan C $88 ndash 2100 minutes [ie $00419 per minute]
More preferable to businessman for occupational needs
Who has higher price elasticity in buying telecommunication services student or businessman
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Different in price is not necessarily price discrimination Peak hour surcharge
Eg Minibus fare Higher cost in running on the road Higher demand
Eg Salon before CNY Higher cost in hiring additional workers Higher demand
Special offer to privileged customers Eg Loan with lower interest rate
Loyal customers lower chance of bad debt (cost) With stable occupation stable income less possibility of late
repayment
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Types of goods can price discrimination be more easily practised
Easy to separate the consumers
Low cost of preventing resale If consumers can resell the goods they can buy at a
lower price and resell at a higher price so sellers canrsquot capture the consumer surplus
In general price discrimination is more common in services than commodities Immediate consumption Hard to resell For commodities itrsquos hard for the sellers to prevent resale
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
3 Types and examples of price discrimination
First degree price discrimination
Second degree price discrimination
Third degree price discrimination
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Third degree price discrimination
A situation where the seller separates customers with different
price elasticity of demand into two or more groups and charges
them different prices
Also known as market segmentation
Different elasticity suggest that
Different willingness to pay
More elastic demand lower willingness to pay
Less elastic demand high willingness to pay
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Third degree price discrimination
Suppose MC of the good is constant
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Third degree price discrimination
Examples Discount for students and the elderly
Eg MTR restaurants etc Less income
Lower willingness to pay Higher elasticity of demand
Easy to be identified
Local and overseas market Eg Kindle sold in amazoncom (US$109) and amazoncouk (pound89) Easy to separate the market according to the price elasticity of demand Geographical separations can effectively prevent resale
When MC = MR PB (inelastic demand) gt PA (elastic demand)
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Third degree price discriminationDoes prohibiting price discrimination benefit consumers
Profit = ($50 - $10) x 3000 + ($15 - $10) x 2000 - $50000 = $80000 If the law requires a uniform price books will be sold locally only
Total revenue = ($50 - $10) x 3000 - $50000 ) = $70000 Publisher will lose Less profit Overseas consumers will lose They canrsquot buy the books Hence less consumer surplus
Conclusion Prohibition of price discrimination will reduce the choices that producers and
consumers have This may lead to Overall loss to society
Local market Overseas market
Price ($) 50 15
Sales (copies) 3000 2000
Marginal cost ($) 10 per copy 10 per copy
Fixed cost ($) 50000
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Second degree price discrimination
A situation where the seller charges buyers higher prices for
quantities with greater marginal benefits and lower prices for
quantities with small marginal benefits
Not to charge according to different customers
but different quantities
Also known as multipart pricing
Customers have the power to do lsquoself-selectionrsquo
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Second degree price discrimination Mutlipart pricing sellers charges different prices for different
amounts (or blocks) of a good with higher prices for the first few units and lower prices for subsequent one
Sellers do not need to separate their customers into different groups A quantity-based pricing arrangement to the customers Customers will do the self-selection
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Second degree price discrimination
Examples
1 Provide discount for specified quantity $100 per piece First two average $100 per piece Buy 3 10 discount ie $100 x 3 x 90 = $270
Average price = $90 per piece
2 Provide discount package First 2 units $100 each Average $100 per piece Third unit $$70 Total $100 + $100 + $70 = $270 Average $90 per price
Both methods have the same effect of multipart pricing They are second degree price discrimination
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Second degree price discrimination
Examples
3 Two-part tariffs
Amusement Park Tokens before entrance at higher price Tokens after entrance at lower price The more tokens customers buy the lower the average price
Token$100 per piece First two average $100 per piece
Video rental clubs Membership fee (fixed) + Coupons (variable) The more coupons customers buy the lower the average price
Admission Fee
Admission fee at $200 inclusive of 50 tokens
After entering the park 10 tokens for every $20
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
First degree price discrimination
A situation where the seller charges each consumer the maximum
price who prepared to pay for each unit which is along the
demand curve of different consumers
Extract the consumer surplus
ie Consumer surplus becomes producer surplus
Producer surplus = Total social surplus
Also known as perfect price discrimination
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
First degree price discrimination
According to the buyersrsquo marginal benefit the seller charges $9 for the 1st unit $8 for the 2nd unit $7 for the 3rd unit $6 for the 4th unit $5 for the 5th unit where profit-maximization achieved (MC = MB)
No consumer surplus All surplus becomes producer surplus Seller has to know the willingness to pay of all consumers Quite impossible to practise the first degree price discrimination in the reality
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
First degree price discrimination
If sells at uniform price = $3
Pam 3 units TR=$3x3=$9 consumer surplus = ($5-$3) + ($4-$3) = $3
Ada 2 units TR=$3x2=$6 consumer surplus = $4-$3 = $1
If practices first degree price discrimination until $3
Pam 3 units TR=$5+$4+$3=$12 average price=$123=$4 consumer surplus = $0
(Therefore Pam will accept a package of 3 apples at $12)
Ada 2 units TR=$4+$3=$7 average price=$72=$35 consumer surplus =$0
(Therefore Ada will accept a package of 2 apples at $7)
Pamrsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($) 5 4 3 2 1 0
Adarsquos marginal benefits schedule for apples
Q 1 2 3 4 5 6
MB($)
4 3 2 1 0 0
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
First degree price discrimination
Examples
First degree discrimination takes place when bartering exists
between buyers and sellers
The bid and offer system in the housing market where potential
home buyers put in an offer on an individual property
Negotiating prices with dealers for second hand cars
Haggling for the price of a hotel room (mostly foreign
countries)
Dutch auctions The sellers begins with a high asking price for an item If nobody responds to it he lower the price until
the item to be sold to the first person who accept the price
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Differences among 3 types of price discrimination
1 First degree vs Second degree price discrimination
Whether the firm can extract the consumer surplus from each consumer
complete
First degree Complete extraction Different price for each unit
Second degree Multipart pricing consumer surplus still found
2 Second degree vs Third degree price discrimination
Whether market segmentation exists
Third degree Different groups face different price arrangement
Second degree Consumers can choose different price arrangement according
to their willingness to pay but the firm may not know which groups do they
belong to and how much they are willing to pay
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Other examples of price discrimination
1 Coupon clipping Customers can have lower price by using coupon The firm does not cut the price because
Customers with higher elasticity of demand and lower willingness to pay will try hard to use the coupon
The customers separate themselves into different groups
2 Medical fees Cost of providing the treatment of same illness to the rich and the poor is
the same Rich people higher income higher willingness to pay Poor people lower willingness to pay
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Other examples of price discrimination
3 Air ticket Different prices for tickets Passengers for business trip
lower elasticity higher price donrsquot want to stay over the weekend
Passengers for leisure Higher price elasticity lower price Donrsquotlsquo mind staying over the weekend so lower price for ticket for travellers
to stay for the weekend
However different prices of first class business class and economy class may not be price discrimination because of different costs for providing services
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Conditions for price discrimination
General conditions
1 Monopoly or market power The firm can influence the market price by changing its output Price search facing a downward sloping demand curve
2 Can effectively prevent resale If consumers can resell the products easily buy low sell high Take away the firmrsquos
customers who are willing to pay higher prices
3 Consumersrsquo willingness to pay is different If no difference products will be sold in the same price
4 Low cost is practising price discrimination Price discrimination involves complicated pricing arrangement If cost is too higher simple monopoly pricing will be better than price
discrimination
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Conditions for price discrimination
Specific conditionsFor first degree price discrimination
Aim at extracting all consumer surplus Seller must have perfect information on each customerrsquos willingness to pay
For third degree price discrimination Aim at put different consumers into different group according to their elasticity
of demand Consumersrsquo price elasticity of demand must be different
For second degree price discrimination No need to have perfect information on consumersrsquo willingness to pay (1st) No need to group consumers according to their price elasticity of demand (3rd) Need to have a general idea about consumersrsquo preferences or consumption
patterns before making different price arrangement
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Conditions for price discrimination
Consumersrsquo market information and price discriminationIn tradition economics for third degree price discrimination
Different price elasticity of demand of consumer is necessary
Argument from Steven NSCheung Not necessarily have different price elasticity of demand Different information cost can help price discrimination to be practised
Consumers have different information about the market Eg
Tourists and local residents might have the same elasticity of demand on camera However tourists have less information ie higher information cost and would
likely to pay higher than local residents
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Monopoly and anti-competition
In traditional economics lsquoMonopolyrsquo is often labelled as
anti-competitive
harmful to the interest of consumers and society
However economists argue that
monopoly may be anti-competitive
but might not be harmful to the society
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Monopoly and anti-competition
Ask yourself
1 Is monopoly necessarily anti-competitive
No the reasons are
Monopoly because of economies of scale
Elimination of weak competitors under normal market competition
Not necessarily anti-competitive but beneficial to the society
Natural monopoly lower average cost so lower price
Dominate the market because of high quality eg MS Windows XP in 2001
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Monopoly and anti-competition
Ask yourself
2 Why is monopoly often seen as being anti-competitive and harmful
Monopolists whorsquos dominate the market aimed at more profit
have the ability and
have the incentive to engage anti-competitive practices
great temptation to control the price and output
So monopoly is always suspected of being anti-competitive
Large enterprises may abuse their dominance and hinder
competition
sell products below cost
ask suppliers to stop supplying goods to competitor
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Definition of anti-competition
Enterprises use unfair or inappropriate ways to reduce or restrict
market competition
In USA Australia the UK and Singapore
Define ldquoanti-competitionrdquo according to the behaviours of the
enterprises instead of their scales and market shares
Whether they use unfair and inappropriate ways to reduce or restrict
market competition
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
First Conduct Rule
Prohibition of anti-competitive agreements concerted practices and decisions
(1) An undertaking must not ndash
(a) make or give effect to an agreement
(b) engage in a concerted practice or
(c) as a member of an association of undertakings make or give effect to a decision of the association if the object or
effect of the agreement concerted practice or decision is to prevent restrict or distort competition in Hong Kong
(2) Subsection (1) applies in particular to agreements concerted practices and decisions that ndash
(a) directly or indirectly fix purchase or selling prices or any other trading conditions
(b) limit or control production markets technical development or investment or
(c) share markets or sources of supply
(3) Unless the context otherwise requires a provision of this Ordinance which is expressed to apply to or in relation to
an
agreement is to be read as applying equally to or in relation to a concerted practice and a decision by an association
of
undertakings (but with any necessary modifications)
(4) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquofirst conduct rulerdquo
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Definition of anti-competition
Hong Kong - ltltCompetition Billgtgt (Proposed to be legislated in 2012)
Second Conduct Rule
Abuse of market power
(1) An undertaking that has a substantial degree of market power in a market must not abuse that power by
engaging in conduct that has as its object or effect the prevention restriction or distortion of
competition in Hong Kong
(2) For the purpose of subsection (1) conduct may in particular constitute such an abuse if it involves ndash
(a) predatory behaviour towards competitors or
(b) limiting production markets or technical development to the prejudice of consumers
(3) The prohibition imposed by subsection (1) is referred to in this Ordinance as the ldquosecond conduct rulerdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第一行為守則 禁止反競爭的協議經協調做法及決定 (1) 如某協議經協調做法或業務實體組織的決定的目的或效果是妨礙限制或扭曲 在香港的競爭則任何業務實體 mdash (a) 不得訂立或執行該協議 (b) 不得從事該經協調做法或 (c) 不得作為該組織的成員作出或執行該決定 (2) 第 (1) 款尤其適用於符合以下說明的協議經協調做法及決定 mdash (a) 直接或間接訂定買入或售出價格或其他交易條件 (b) 限制或控制生產市場技術發展或投資或 (c) 分享市場或供應來源 (3) 除文意另有所指外如本條例的條文明訂為適用於協議或就協議而適用該條文須 解釋為在經必要的變通後同樣適用於經協調做法及業務實體組織的決定或就該 等做法及決定而適用 (4) 第 (1) 款施加的禁止在本條例中稱為ldquo第一行為守則rdquo
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Definition of anti-competition
Hong Kong - 《 競 爭 條 例 草 案 》
第二行為守則
濫用市場權勢
(1) 在市場中具有相當程度的市場權勢的業務實體不得藉從事目的或效果是妨礙限
制或扭曲在香港的競爭的行為而濫用該權勢
(2) 為施行第 (1) 款符合以下說明的行為尤其可構成上述濫用 mdash
(a) 該行為包含對競爭對手的攻擊性表現或
(b) 該行為包含以損害消費者的方式限制生產市場或技術發展
(3) 第 (1) 款施加的禁止在本條例中稱為ldquo第二行為守則rdquo
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Different types of anti-competitive practiceAnti-competitive practices refer to all behaviours that distort or restrict market competition
4 Types of anti-competitive practices
Mergers ( 合併 )
Horizontal agreement ( 橫向協議 ) [also known as lsquoCartelrsquo]
Competitors in the same industry make agreement on price and output in order to jointly control the market price
Vertical agreement ( 縱向協議 )
Agreement on purchasing or sales conditions made between firms in different stages in production (producers) or sales chain (distributors)
Abuse of dominance ( 縱向協議 )
a dominant firm perform any practices to restrict market competition is regarded as abuse of dominance
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Mergers
1 Horizontal mergers
the merging of firms producing the same type of goods
Aim at reduce competition
Increase the power of the newly merged enterprise in controlling the price
Examples Toyota and Lexus (motor vehicle) HP and compaq (computer)
Guideline in US case Large horizontal mergers are often perceived as anticompetitive
If one company holding 20 of the market share combines with another company also holding 20 of the
market share their combined share holding will then increase to 40
This large horizontal merger has now given the new company an unfair market advantage over its competitors
The amalgamation of Daimler-Benz and Chrysler is a popular example of a horizontal merger
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Mergers
2 Potential competition mergers
the merging of a firm and another firm that plans to enter the market and
compete with it
Former taking over the latter or vice versa
Removal of potential competitors more power in price control
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Mergers
3 Vertical mergers
the merging of firms which are in different production stages and have a
buyer-seller relationship
Cut off the raw material supply or retail outlet of competitors unable to
compete
Newly merged enterprise has more power to control the market price
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Horizontal agreements
1 Price-fixing
An agreement between firms to fix or raise the price to restrict price
competition and increase profits
Distort normal operation of the market
Customers bear higher costs
Examples
Newspapers Fixed before the publication of Apple Daily in 1995
Telecommunication $12 Mobile Service Licence and Administration Fee of $12
Gasoline Price adjust at the same time (Suspected only)
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Horizontal agreements
2 Sales and production quotas
An agreement among producers or suppliers to fix a sales or production
quota so that their joint reduction in output can raise the product price
Less quantity higher price
Examples
Oil Limit the oil export in 1973
Limited version Ferrari Motor vehicles
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Horizontal agreements
3 Bid rigging Collusive bidding ( 串通投標 ) Govrsquot or organisation seek bids to use price competition to lower the cost of
the project or services An agreement to submit
common bids to eliminate price competition The lowest bid to win the contract by rotation and thereby getting a certain
amount of contracts If bid rigging price of project will be higher than the market price Disadvantageous to tendering organisation (higher cost without better quality) Often seen in tenders for the govrsquot or public organisation Illegal Example
In 1993 representatives of two dairies from Cincinnati in the US Meyer Dairy and Coors Dairy confessed to rigging bids in school milk auctions in the 1980s10
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Horizontal agreements
4 Market division in products and location ( 市場分配 ) An agreement among producers or suppliers on the scope of operation Each firm specifies in
Selling a certain kinds of products Selling in a certain locations
Creation of monopoly in product supply or in locations Colluded firms can sell the products at a higher price Example
In January 2003 Bluefield Regional Medical Center (BRMC) and Princeton Community Hospital Association (PCH) entered into agreements to allocate cancer services to PCH and cardiac-surgery services to BRMC in six West Virginia counties and three Virginia counties
5 Customer allocation ( 分配顧客 ) An agreement among market participants on the source of customers Divide up the market without competition Distributors may monopolize the market
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Horizontal agreements
6 Joint boycotts ( 聯合抵制 ) An agreement among competitors not to trade with certain suppliers or
customers or the joint effort of competitors to force suppliers or customers not to trade with another competitor
Take away the supply or choices of the targets of the boycott Damage the market efficiency Example
In 1976 a group of Indiana dentists formed the Indiana Federation of Dentists13 to pursue a restraining policy not to comply with dental health insurersrsquo requests for x-rays resisting insurersrsquo control on the costs of dental treatment The restraining policy was found to violate the US antitrust laws and the Federation failed to establish a pro-competitive justification for trade restraints
7 Unfair or discriminatory standards ( 不公平或歧視性的準則 ) The standards agreed upon among members of a trade union or professional
body which deny newcomers the chance to enter or compete in the market
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Vertical agreements
1 Exclusive dealing ( 獨家交易安排 )
An agreement made between a supplier and its distributors so that the
distributors cannot sell products of the same kind provided by other suppliers
Illustration
Fruit Supplier A made an agreement with its distributor with a discounted price
The distributor can sell fruit from Fruit Supplier A only
Channel of Fruit supplier B is blocked
Restrict the sales channels of competitors
Hinder market efficiency
Less customersrsquo choices
Fruit Supplier A
Fruit Supplier B
Distributor(Agreement to sell fruit from Fruit
Supplier A only)
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Vertical agreements
2 Sole distributor Exclusive territories ( 獨家代理 )
An arrangement that the producer only assigns one distributor for its products
in a specified sales territory
Example
Before 2007 Ng Fung Hong ( 五豐行 ) was the sole distributor of live cows imported from
the mainland to HK
Dai Chong Hong ( 大昌行 ) is the official dealer to sell Honda motor vehicles in HK
Monopolize the market Higher price
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Vertical agreements
3 Tie-in sales ( 搭賣 )
The buyer can buy the desired good or service (the tying good) only if he
agrees also to buy a different good or service (the tied good)
Example
Printer (the tying good) and specified cartridge (the tied good)
Playstation 3 and Gamedisc
Reduce consumersrsquo choice
Restrict competition of the tied good
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Vertical agreements
4 Bundling ( 搭賣 )
A commercial strategy whereby two or more products (or services) are offered
together at a bundled price lower than the sum of the individual prices
Example
Microsoft Windows Vista and Media Player
Goodwell Property Management Limited (under Cheung Kong Holdings) charges the
management fee of its residents with broadband service charge bundled together no matter
they use the service or not
Reduce consumersrsquo choice
Unfavourable to market competition
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Vertical agreements
5 Resale price maintenance (RPM) ( 規定零售價 )
A supplier specifying the minimum or maximum price at which a product
must be re-sold to customers by downstream firms
Example
Suggested price of electronic appliances and books
Selling price must be fixed or within a price range Lack of competition
between retailors
Unable to lower price Customers canrsquot pay less through price war
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Abuse of dominance
1 Predatory pricing
A firm with dominant market position sells below the costs of production
Drive the competitors out and prevent new firms entry
Raises the price finally
2 Tie-in sales
Tied products or services without justifiable purposes eg quality and safety reassurance
3 Price discrimination
Different prices to different consumers
4 Retail price minimum
Set a minimum price for products or services without close substitution
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Impacts of anti-competitive practices
1 Hindering the development of the industry
Reduce the number of competitors Less development in the future
Anti-competitive practices damage free trade and fair competition
2 Unfavourable to consumers
Less choices
Higher prices
3 Harmful to economic efficiency
Monopoly has less output as compared with perfect competition
Deadweight loss
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Justification and concerns for competition policy
The Hong Kong SAR Government set up Competition Policy Review
Committee (CPRC) in June 2005
Review the policy and law overseas
Propose competition policy and law for legislation
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Justification and concerns for competition policy
Major justification
To provide a legal basis for the investigation and sanctioning of anti-competitive conduct
To strengthen the competition regulatory framework in order to promote market discipline
To improve the business environment and provide a level playing-field for business
To improve transparency through delineating what constitutes anti-competitive conduct so that firms and the public are fully aware of them and can prevent their occurrence in society
Without such regulation through legislation in the long run there might be an adverse effect on the relative competitiveness of HK especially in those sectors with high entry barriers
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Justification and concerns for competition policy
Concerns
1 Does HK need a competition policy
Interference with the market structure
Harmful to the famous free and competitive market in HK
Increase in the cost of doing business
Higher cost of production Lower HKrsquos regional competitiveness
Effects on the development of small- and medium-size enterprises (SMEs)
SMEs may not fully understand their responsibilities under the new law Easy to break the law
SMEs may have high legal fee
SMEs may under the threat of facing a lot of lawsuits Large enterprises may make use of the law to kick out SMEs
Use of alternative ways to enhance market competition
Legislation should be the last option Any other better ways to achieve the target
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Justification and concerns for competition policy
Concerns
2 Should it be a cross-sector or a sector-specific competition law
Existing sector-specific anti-competition provision could not stop cross-sector anti-competitive practices
The property management company bundled management fee with telecommunication service charge
However Telecommunication Ordinance does not regulate the practices of property management companies
Anti-competitive practices can be found in different sectors
Legislation to tackle cross-sector bundling effectively and avoid discrimination against certain business sectors and consumers
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Justification and concerns for competition policyConcerns
3 What scope of behaviour should be covered by the competition law
The new law should not point against market structures or natural monopolies
Focus on stopping specific anti-competitive practices that hinder economic efficiency or free trade and are not in the interest of consumers
The CPRC recommended 7 types of anti-competitive practices to be covered in the new law
Price-fixing
Bid rigging
Market division
Sales and production quotas
Joint boycotts
Unfair and discriminatory standards
Abuse of dominance
However the CPRC added that these practices are not illegal unless they are found1 To have been carried out with the
intent to distort the market or2 To have the effect of distorting
normal market operation and lessening competition
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate
Justification and concerns for competition policy
Concerns
4 Should there be exclusions or exemptions
The new law is aimed at avoid anti-competitive practices in business sectors
Government should be exempted from being sued under the new law
Since the new law may be abused to suppress lawful competitive business activities the CPRC also suggested that the regulatory authority should have the discretion to ignore complaints that are inappropriate
5 Should it be a civil or criminal offence
Heavy fine and disqualification from holding a directorship in a company should be enough
Since the law is first enacted civil penalties are more appropriate