Professional Development Course in Knowledge Enrichment for
Senior Secondary Economics Teachers
Outline of Lecture 2 –
Microeconomics: Anti-competitive behaviors and competition policy
18 May 2009
Topics covered:
I.
II.
Introduction
International Experience
III. Approaches to competition analysis
IV. Major forms of anti-competitive practices
V. Mergers: horizontal mergers, vertical mergers and potential competition
mergers
VI. The impact of anti-competitive practices
VII. Justifications and concerns for competition policy
I.
Introduction

The antitrust laws give the government various ways to promote competition.
 Sometimes, companies merge not to reduce competition but to lower costs
through more efficient joint production. These benefits from mergers are
sometimes called synergies.
II.
International Experience

According to information compiled by UNCTAD (2006), there are over
100 “competition authorities” in the world.

Examples: USA, Canada, Japan, South Korea, Mainland China,
Taiwan, Singapore, Australia, South Africa and all members of EU etc.
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
Coverage of competition legislation may include:

Monopolies and cartels

Merger and acquisition

Abuse of dominant position

Horizontal constraints: price fixing, bid rigging, output collusion,
division of markets etc.

Vertical restraints: resale price maintenance, tie-in sales, discriminatory
supplies etc.


Unfair trade practice: predatory pricing
Exemptions:

On the basis of certain public interests, some structures, conduct or
performance can be exempted from the competition law, e.g. R&D
cartels, networks.

International tendencies

Focusing on anti-competitive conduct

Starting from “hard core cartels”: price fixing, bid rigging, collusive
restrictions on output and division of markets (mainly horizontal
restraints) (OECD, 2000) and refining legislation and enforcement
over time

Increasing transparency in the implementation of competition laws

“Leniency” programmes to alleviate investigation and sanction
problems

Promoting international cooperation in dealing with multinational
cartels

Enhancing advocacy and education work of competition authorities
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III. Approaches to competition analysis

The basic approaches to competition policy (Boner and Krueger, 1991)
encompass three key aspects:
1.
Structure (結構)

The focus is on market concentration, which may serve as a trigger
for examination that would take into account the definition of the
“relevant” market from both supply and demand sides, and
determining factors such as substitutability, geographical and
temporal considerations.
2.
Performance (表現)

The key concerns are the prices charged and outputs produced by
dominant market players, and the possibilities of “abnormal profits”.
3.
Conduct (行為)

The attention is centred on the abuse of dominant position, horizontal
and vertical restrictions and unfair trade practices.
IV. Major forms of anti-competitive practices
1.
Monopoly and cartels (壟斷及卡特爾)

Definition of collusion: an agreement among firms in a market about
quantities to produce or prices to charge.

Definition of cartel: a group of firms acting in unison.
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The Inefficiency of Monopoly
Price
Deadweight
loss
Marginal cost
Monopoly
price
Marginal
revenue
0
2.
Monopoly Efficient
quantity quantity
Demand
Quantity
Abuse of dominant position (濫用支配地位)

unfair or discriminatory standards among members of a trade or
professional body intended to deny newcomers a chance to enter or
contest in the market, and have the effect of impairing economic
efficiency or free trade.

Hong Kong suspected cases (疑似個案):
 Broadband Services (屋苑寬頻服務)
 Medical Services (屋苑醫療服務)

Australia cases:
 Taxi and Retail Filling and Service Stations (的士 vs 加油站服務)
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3.
Horizontal restrictive practices (橫向限制行為)
(i)
Price fixing (操縱價格)

An agreement between firms to fix or raise price to restrict
competition and earn higher profits

Colluding to fix the price is always a violation of the antitrust law.
Reason:
 A duopoly cartel can maximize profit and behave like a monopoly.
 To achieve the monopoly outcome, the cartel restricts production and
fixes the price at the monopoly level.
 The consumer suffers because consumer surplus shrinks.
 And the outcome is inefficient because a deadweight loss arises.

Some Hong Kong suspected cases (疑似個案):
 Auto-Fuel Retail Market (香港燃油界)
 Shipping Industry (船運業)
 Credit Card Industry (信用咭公司)
 Telecommunication Industry (電訊業)
 The Laundry Association of Hong Kong Ltd. (洗衣業商會)
 Hong Kong & Kowloon Vermicelli & Noodle Manufacturing
Industry Merchants' General Association (港九粉麵製造業總商會)
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(ii)
Collusive bidding/bid rigging (串通投標)

(1) firms agreeing to submit common bids, thus eliminating price
competition;

(2) firms agreeing to submit the lowest bid by rotation and
thereby each getting a certain amount of contracts

Australia case:
 Concrete Market (混凝土市場)

Hong Kong suspected cases (疑似個案):
 Public rental housing (PRH) metal gateset (公屋鐵閘事件)
 Old Building Maintenance Project(舊樓維修工程)
(iii)
Market division (分配市場/瓜分市場/分餅仔)

allocating specific customers or sales territories to particular firms
and not competing over the territory or customers of other firms

Australia case:
 Express company (速遞公司案)

Global case:
 Vitamin C Industry (維他命 C 案)
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(iv)
Customer allocation /joint boycotts (分配市場/瓜分市場/分餅仔)

not dealing with firms that supply competitors’ products in their
market

Australia case:
 Chicken farms case (雞農案)
(v)
Sales and production quotas (設立銷售限制)

setting quotas on the supply of certain goods or services in order
to push prices up

Australia case:
 Banana farmers case (香蕉農民案)
4.
Vertical restrictive practices (縱向限制行為)
(i)

Resale price maintenance (RPM) (控制轉售價格)
RPM occurs when a manufacturer agrees with a distributor on the
price at which the product will be resold.

A producer insists that any retailer selling his product must sell it at
the ‘list’ price. This practice is designed to reduce competitive
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pressures at the retail level.

It is inefficient if it enables dealers to charge the monopoly price. By
setting and enforcing the resale price, the manufacturer might be able
to achieve the monopoly price.

It is efficient if it enables a manufacturer to induce dealers to
provide the efficient standard of service.
(ii)

Tie-in sales /tied selling (搭賣)
The sale of one good on the condition that another good is purchased,
in other words, a customer who buys one product must buy another.
Examples

Mortgage Company used to insist that those who obtained mortgages
from them purchase fire insurance as well.

Nintendo designs its console so that it can only be used with Nintendo
games. In effect, it forces a tie-in sale between the console and the
computer games.

Microsoft has been accused of tying Internet Explorer and Windows.
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(iii)

Exclusive dealing (獨家交易)
It is a practice by which a manufacturer does not allow a retailer to
sell goods made by a competitor.
V.
Mergers: horizontal mergers, vertical mergers and potential competition
mergers

Vertical mergers – a firm merges with its suppliers.

Horizontal mergers – two firms selling the same good or the same type of
good merge.

How does the U.S. government decide whether a merger by firms reduces
competition in the market?

Concentration is usually measured by the Herfindahl-Hirschman index
(HHI). (nickname: Herf)

HHI: the sum of the squares of the market shares of all the firms in the
industry. The more concentrated the industry, the larger the shares and,
therefore, the larger the HHI.

The HHI is used because it indicates how likely it is that firms in the
industry after the merger will have enough market power to raise
prices well above marginal cost, reduce the quantity produced, and
cause economic inefficiency.
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
Contestable (可競逐的) Market

Ease of entry of new firms into the industry is also an important factor,
as is the potential contestability of the market by other firms.

Market Definition

When measuring concentration in a market, the market definition is
very important.

Market definition is a description of the types of goods and services
included in the market and the geographic area of the market.

Defining the geographic area of a market is also a key aspect of
defining the market for a good or service.
VI. The impact of anti-competitive practices

Among the above overlapping categories of anti-competitive behaviour,
vertical restrictive practices are more controversial.

Do vertical restraints reduce economic efficiency?

Critics of competition policies often argue that they are necessary for
efficiency considerations, e.g. RPM is essential for viable after-sale
maintenance service; while package tie-in is beneficial to consumers
etc.
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VII. Justifications and concerns for competition policy

Justifications

Providing a legal basis for the investigation and sanctioning of
anti-competitive conduct

Strengthen institutional framework for regulating competition and for
its advocacy, and hence promoting market discipline

Improve the business environment and promote a level playing-field
for business

Improve transparency through delineating what constitutes
anti-competitive conduct

Without such regulatory regime, in the long term there might be an
adverse effect on our relative competitiveness, especially in sectors
with high entry barriers.

Concerns

Concerns 1: Institutional Arrangements

Concerns 2 : Conduct Rules

Concerns 3 : Private Action

Concerns 4 : Issues of concern to SMEs

Concerns 5 : Relationship with existing sector-specific laws

Concerns 6 : Exemptions and exclusions
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References
1.
Mankiw, N G (2006), Principles of Economics, 4th edition, Thomson,
South-Western. Chapter 15, 16
2.
Taylor, John B (2004), Principles of Microeconomics, 4th edition, Houghton
Mifflin. Chapter 12
3.
Stiglitz, Joseph E (1997), Principles of Microeconomics, 2nd edition, Norton.
Chapter 16
4.
APEC Competition Policy and Law Database: http://apecweb.apeccp.org.tw/
5.
HKSAR Government Competition Policy Advisory Group website:
http://www.compag.gov.hk/
6.
Professor Tsang Shu-ki’s Homepage: http://www.hkbu.edu.hk/~sktsang/
7.
Consultation Document on Competition policy
http://www.edlb.gov.hk/edb/eng/papers/compete/index1.html
8.
星期日檔案 2006.10.08,
9.
星期日檔案 2006.10.15
10. Report on Public Consultation on the the detailed proposals for a competition
law http://www.compag.gov.hk/reference/Consultation_Report_01.pdf
11. OECD (2006), “Hard Core Cartels: Third Report on the Implementation of the
1998 Recommendations”, OECD Report, available from the website
http://www.oecd.org/dataoecd/30/2/36600303.pdf.
12. Boner, Roger Alan and Krueger, Reinald (1991) “The Basics of Antitrust Policy:
A Review of Ten Nations and the European Communities”, World Bank
Technical Paper no.160.
13. OECD (2000), “Hard Core Cartels”, OECD Report, available from the website
http://www.oecd.org/dataoecd/36/24/2367816.pdf.
14. OECD (2006), “Hard Core Cartels: Third Report on the Implementation of the
1998 Recommendations”, OECD Report, available from the website
http://www.oecd.org/dataoecd/30/2/36600303.pdf.
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