Submission on Amendments to the Competition Bill and the Guidelines
on the Second Conduct Rule (November 15, 2011)
PDF version
Introduction
1. The Consumer Council (CC) is taking this opportunity
to comment on the amendments to the Competition Bill (the Bill)
recently proposed by the Government and the guidelines regarding
Clause 21(1) of the Bill dealing with an undertaking that has a
substantial degree of market power in a market and who abuses that
power by engaging in conduct that has as its object or effect the
prevention, restriction or distortion of competition in Hong
Kong.
Proposed
Amendments
2. CC appreciates the efforts to facilitate
passage of the Bill behind the amendments to the Bill proposed by
the Government. CC believes that these amendments have addressed
all reasonable concerns of SMEs and it will not be in the public
interest to make further concessions. Other demands for further
concessions, such as raising the thresholds for de minimis,
extending the coverage of infringement notice to violations of the
Second Conduct Rule and granting more exemptions are only aimed at
undermining the effectiveness of the future law and as such
objectionable.
Warning notice
3. CC believes that the implementation of
warning notice should remove SMEs' worry about the possibility of
inadvertent violations and is very generous to SMEs. CC does not
agree to any further extension of the application to Second Conduct
Rule violations. The practice of warning notices should be
withdrawn after the law has been in effect for a certain
time.
De minimis
arrangements
4. With the proposed generous de minimis
thresholds, most genuine SMEs who cannot afford to obtain legal
advice on compliance will be exempted. CC considers that the
proposed thresholds for de minimis are sufficient and already
generous.
Pecuniary
penalty
5. As other jurisdictions with competition law
might follow up on cases ruled as anti-competitive by the courts in
Hong Kong, CC believes the amendment in lowering the pecuniary cap
to 10% of the local turnover for each year of infringement, up to a
maximum of three years, would still serve the purpose of deterring
international cartel conduct.
6. CC, however, is worried that the level
of the amended cap might not be adequate in deterring repeated
violations by local companies. CC urges the Government to review
the level of penalty if repeated violations are observed in the
economy.
Standalone
action
7. CC is of the view that the removal of
stand-alone private action would reduce the ability of consumers to
seek redress to protect their own interests when faced with
anti-competitive behaviours.
8. With the removal of stand-alone private
action, the future Competition Commission will be the only body to
safeguard competition in the market place so it is crucial that the
Commission is adequately funded to address complaints by consumers,
SMEs and business entities against any anti-competitive
behaviours.
9. CC doubts whether the current budget
would be sufficient for an agency that will oversee the entire
local economy, and is also concerned whether the Competition
Commission would have representatives for consumers to address
anti-competitive behaviours affecting consumers at
large.
10. There were concerns among SMEs that
large companies, which have more resources, could make use of
private actions to affect the business of smaller competitors.
Experience in other jurisdictions did not substantiate such worry.
CC calls for stand-alone private action to be introduced as soon as
possible after the business community has acquired experience with
the new competition regime.
Merger rule
11. It is always the position of CC that a
merger regulation can strengthen the effectiveness of the law
safeguarding market concentration and market competition. As the
merger rule stood in the gazetted Bill, there was already a
restriction to application of the merger rule so that it cannot
regulate merger activities in business other than
telecommunications. CC is concerned that in the latest amendments
proposed by the Government an even further restriction of the
merger rule by the addition of section 4 to Schedule 1.
12. In particular, CC noted that the
existing formulation of the merger rule as stated in section 3 and
5 of Schedule 7 is broad, covering:
(a) [Cross-share holding where] 2 or more
undertakings previously independent of each other cease to be
independent of each other [stated in section 3(2)(a) of Schedule
7];
(b) [Strategic alliance where] one or more
persons or other undertakings acquire direct or indirect control of
the whole or part of one or more other undertakings. [stated in
section 3(2)(b) of Schedule 7]; and
(c) [Joint venture] the creation of a joint
venture to perform, on a lasting basis, all the functions of an
autonomous economic entity also constitutes a merger within the
meaning of subsection (2)(b) [stated in section 3(4) of Schedule
7].
13. The Bill also states that for the
purposes of Schedule 7 control, in relation to an undertaking, is
to be regarded as existing if, by reason of rights, contracts or
any other means, or any combination of rights, contracts or other
means, decisive influence is capable of being exercised with regard
to the activities of the undertaking.
14. Assuming mergers were to be included in
Schedule 1 as one head of general exclusions if the broad
definition of the merger in Schedule 7, the proposed exclusion of
merger from the First Conduct Rule could apply to all joint
ventures and almost all cooperative activities between companies,
thereby rendering any prohibitions against hardcore activities and
anti-competitive agreements under the First Conduct Rule
ineffective.
15. CC believes that in proposing the new
exclusion of merger in Schedule 1, the intention of the Government
is to exclude application of the First Conduct Rule to merger in a
narrow sense. If that is the case, CC urges that the scope of
merger to be excluded be defined and specified.
Guidelines on the Second Conduct
Rule
16. The Guidelines set out three elements to
define market power: (a) the ability to set prices irrespective of
reactions of customers and competitors; (b) the ability to impede
competition; and (c) the ability to make "excessive" profit. The
Guidelines do not state whether they are cumulative or they can
stand alone. CC supports adoption of the stand-alone approach in
defining market power which will be in line with the general
understanding of consumers.
17. Regarding assessing whether an
undertaking has a substantial degree of market power, the
Guidelines illustrate constraints on an undertaking's ability to
profitably sustain prices above competitive levels. Relevant
constraints on an ability to exercise market power include: (a)
existing competitors; (b) potential competitors, where the strength
of potential competition is affected by barriers to entry and the
ability of potential competitors to enter the market; (c) other
factors: such as the existence of powerful buyers. CC is of the
view that local factor such as conglomerates, which can be defined
as an undertaking assuming market power by leveraging across
multiple relevant markets or industries, should be considered when
examining the extent of market power of an undertaking in Hong
Kong.
18. It is understood that the Bill has not
set any market share threshold in defining a substantial degree of
market power. To avoid uncertainty and to demonstrate that the
proposed law should be able to address the monopolization in some
notorious problematic oligopoly markets (such as one-stop shopping
market, property development market, shopping mall market and
estate agency market in which the incumbents only have around
market share of 35%), CC proposes a threshold of market share of
30% as a condition of substantial market power for the future
Competition Commission to tackle the abuse of market power of the
incumbents in those markets.
19. Under the Guidelines, it is stated that
in assessing whether the conduct under examination had the effect
of preventing, restricting or distorting competition, the future
Competition Commission will consider whether there has been an
appreciable adverse effect on competition in the relevant market on
a case-by-case basis in the light of available evidence. The
Guidelines have illustrated some prohibited effects including:
anti-competitive foreclosure of competitors; raising of barriers to
entry; or withdrawal of products or services from the market or a
reduction in the quality of the services offered.
20. CC proposes that 'reducing consumer
welfare', which is considered more appropriate in Hong Kong's
context to protect consumer interests and safeguard the competition
in the market, should be one of the criterion in deciding different
abuses of substantial market power to prevent, restrict and distort
competition in Hong Kong.
Consumer Protection against
Excessive Market Concentration
21. Hong Kong is a small economy and the local
market is replete with oligopolies and corporations with market
dominance. It would be extremely unfair to consumers to abandon a
cross-sector merger provision without offering an alternative mean
of protection against exploitation of consumers resulting from
excessive market concentration.
22. Under sections 1 to 4 of Schedule 1,
the First Conduct Rule does not apply if certain conditions are
met. Section 1, which concerns agreements enhancing overall
economic efficiency, is modeled after Article 101(3) of the Treaty
on the Functioning of the European Union, except that the
requirement under EU law that consumers are allowed a fair share of
the benefit has been removed, CC believes that this requirement
should be re-introduced to ensure that consumer interests are
adequately considered by the future Competition Commission and
Tribunal before granting any exclusion under sections 1 and 4 of
Schedule 1.
