REBALANCING THE SUPPLY CHAIN:
p
Contents
About the South Centre
Acknowledgements
In August 1995, the South Centre became a permanent
intergovernmental organization of developing
countries. In pursuing its objectives of promoting
South solidarity, South-South co-operation, and
coordinated participation by developing countries
in international forums, the South Centre prepares,
publishes and distributes information, strategic
analyses and recommendations on international
economic, social and political matters of concern to
the South.
This report was written by Liz Dodd from Traidcraft
and Samuel Asfaha from the South Centre.
Background material for the case studies was
researched by Yared Tsegay. The authors would like
to thank Sophia Murphy, Myriam Vander Stichele,
Dominic Eagleton, Eline Demey, Fiona Gooch and
Luisa Bernal for their comments. Traidcraft and the
South Centre would also like to thank the European
Commission for its support.
The South Centre enjoys support from the
governments of its member countries and of other
countries of the South and is in regular working
contact with the Group of 77 and the Non-Aligned
Movement. Its studies and publications benefit from
technical and intellectual capacities existing within
South governments and institutions and among
individuals of the South. Through working group
sessions and consultations that involve experts from
different parts of the South, and also from the North,
common challenges faced by the South are studied
and experience and knowledge are shared.
About Traidcraft
Traidcraft Exchange is the UK’s only development
charity specialising in making trade work for the
poor. In collaboration with local partners we work to
create opportunities for poor people to harness the
benefits of trade, helping them to develop sustainable
livelihoods. Traidcraft also aims to use the experience
of its sister fair trade company, Traidcraft plc, to
improve wider trade practices. Traidcraft’s Policy Unit
conducts research and advocacy work to improve trade
rules and the practice of companies.
Summary
Page 4
Introduction
Page 5
Section 1
This report is a contribution to the work of the
Responsible Purchasing Initiative, a pan-European
initiative led by IDEAS (Spain), Oxfam-Wereldwinkels
(Belgium) and Traidcraft (UK). For more information
visit www.responsible-purchasing.org.
Glossary of terms
FAO – Food and Agriculture Organisation
Monopoly – When a single firm has selling power
Monopsony – The buying form of monopoly, when a
single firm has buying power
OECD – Organisation for Economic Co-operation and
Development
Oligopoly – A market dominated by a few sellers
Oligopsony – A market in which there are few buyers
Own-label – Range of products carrying the retailer’s
label and produced to retailer’s specification; typically,
but not necessarily, sold at lower price than main
brand competition (UK Competition Commission)
Transnational corporation (TNC) – An enterprise with
activities in two or more countries with an ability to
influence others (UN definition)
Vertical integration – A single firm undertaking
successive stages in the chain of a product’s production
UNCTAD – United Nations Conference on Trade and
Development
Section 2
Section 3
Section 4
References
Buyer power, corporate concentration and commodities
Page 6
What is buyer power?
Page 6
What gives companies buyer power?
Page 7
Transmission of risk and shifting power
Page 8
How companies maintain buyer power
Page 9
Buyer power and the commodity problem
Page 10
Impact of buyer power case studies
Page 13
Competition policy and buyer power
Page 15
Introduction to competition policy
Page 15
Principles and practice of competition policy
Page 16
Competition policy and buyer power
Page 17
Competition policy opportunities
Page 17
Competition Policy limitations
Page 18
Examples of competition policy being used to tackle buyer power
Page 22
1. Retailer power accumulation prevented
Page 22
2. Competition authorities tackle multinational retailer power
Page 23
3. Tackling buyer power of processors
Page 24
4. First steps in tackling the probem of global supply chains
Page 25
5. Tackling capacity constraints through leniency programmes
Page 25
6. Using public scrutiny as a deterrent
Page 26
7. Tackling the ‘climate of fear’
Page 26
8. Designing competition policies to promote the public intrest
Page 26
Conclusions and recommendations
Page 27
Page 30
Cover Photograph: Rajendra Shaw
Page 2
Page 3
Rebalancing the supply chain: buyer power, commodities and
competition policy
Summary
Introduction
The power of increasingly concentrated retail and processor buyers in global
agricultural supply chains allows them to exert pressure on their immediate suppliers,
which can then be passed down the supply chain to vulnerable commodity producers
and their workers. Traidcraft and the South Centre are concerned about the impacts
of this on some of the most vulnerable producers in the world, particularly as their
ability to organise and respond collectively is being increasingly limited. In assessing the
potential of competition policy to act as a check on the exercise of this buyer power,
the paper finds clear opportunities, in particular for tackling the accumulation of power
which is one of the root causes of the problem. However there are also clear limitations
(both conceptual and practical) which need to be addressed if competition policy is to
be effective, these include: competition policy’s consumer focus; its lack of dedicated
instruments to assess and deter buyer (as opposed to seller) power; the ‘fear’ associated
with buyer power, resource constraints and most fundamentally the need to recognise
the global nature of trade either through expanding the scope of national laws or
thought the establishment of an international competition agreement or authority.
This paper is an attempt to explore the extent to which competition policy can be
used to address problems caused by corporate concentration and the exercise of
‘buyer power’1 in agricultural commodity markets.2 It assesses the conceptual and
practical opportunities of current competition policy to tackle this phenomenon and
also highlights its limitations. This is a difficult and complex area. Many studies that
have looked into the adverse affects of buyer power and corporate concentration
on commodity producers have suggested that competition policy may offer a useful
avenue for investigation.3 This study is therefore an attempt to do this and should be
seen as a contribution to the debate.
Section 1 of this paper will outline the problems that buyer power and corporate
concentration present for commodity producers in developing countries. Section 2
outlines different approaches to competition policy and assesses its usefulness and
weaknesses in tackling buyer power. Section 3 presents a series of case studies outlining
successful attempts to use competition policy to tackle buyer power and Section 4 offers
conclusions and recommendations.
For many policy makers international negotiations on competition policy are now
unfortunately associated with the “Singapore Issues” debate at the World Trade
Organisation (WTO). The Singapore Agenda on competition policy was an attempt
to achieve multilateral agreement on competition law. It was not the first attempt to
do so, the Havana Charter of 1947/48 contained provisions which would have bound
each member to prevent practices affecting international trade which restrained
competition, limited access to markets, or fostered monopolistic control, and in 1980
the United Nations agreed the “Set of Multilaterally Agreed Equitable Principles
and Rules for the Control of Restrictive Business Practices (the UNCTAD Code).” The
Singapore Agenda contained provisions more similar in content and approach to US
Anti-trust law than to the relatively developing-country friendly UNCTAD Code and
also omitted many of the more pro-development aspects of the Code. The approach
taken by the Singapore discussions would not have addressed problems of market
concentration in the hands of a few transnational companies and may in fact have
exacerbated problems by emphasising market access aspects and reducing the policy
options available to developing country governments. Therefore, its successful dismissal
by developing countries at the Cancun Ministerial in 2003 was commendable.
This paper takes a different approach. It assesses the extent to which governments
could use competition policy instruments as a way of regulating the power and
practices of powerful transnational and national retailers and food processors.
As discussed in the subsequent sections, it is clear that there are high levels of
concentration in these sectors and there is real concern that some companies may be
abusing their dominant position more frequently than the number of cases suggests
and that these practices may have impacts right down the supply chain. These nodes
of concentration may be amongst sellers (for example of inputs such as seeds and
fertilisers to producers) or amongst buyers (processors or retailers who buy a farmer’s
produce). Both can be a problem for primary producers of agricultural products, but
this paper will focus exclusively on buyer power.
Footnotes
1
2
3
Page 4
According to the OECD (1981), buyer power is a situation which exists when a firm or a group of firms, either because it
has a dominant position as a purchaser of a product or service or because it has strategic or leverage advantages
as a result of its size or other characteristics, is able to obtain from a supplier more favourable terms than those available
to other buyers.
This paper defines agricultural commodities fairly broadly as undifferentiated, largely unprocessed agricultural products,
including tropical beverage crops (tea, cocoa, cotton), sugar, cereals, meat, dairy products, rice, grain, rubber, fibres
(cotton, jute, sisal) oil crops, fruits and horticulture crops. These products can be traded either in bulk or increasingly as
part of ‘buyer driven supply chains’ involving the same products, but with a greater degree of retailer-led standardisation.
See Vorley 2004 for a fuller explanation of these terms.
See Asfaha 2005, Vorley 2002, Murphy 2005, ActionAid 2008.
Page 5
Section 1: Buyer power, corporate concentration and commodities
What is buyer power?
There are various different definitions of buyer power.
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it has a dominant position as a purchaser of a product or service, or
because it has strategic or leverage advantages as a result of its size or
other characteristics, is able to obtain from a supplier more favourable
terms than those available to other buyers.” 4
What gives companies buyer power?
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state that buyer power is exercised when “a firm or group of firms obtain
from suppliers more favourable terms than those available to other buyers
or would otherwise be expected under normal competitive conditions.”5
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Ê
strength that the buyer has vis-à-vis the seller in commercial negotiations
due to its size, its commercial significance to the seller and its ability to
switch to alternative suppliers”.6
Ê
When buyer power is exercised suppliers accept terms that they would not normally
and in addition, may not complain, for fear of commercial retaliation by the buyer.
The existence of a ‘climate of apprehension’ amongst suppliers was clearly found by
the UK Competition Commission’s enquiry into the behaviour of the UK’s four largest
supermarkets:
As the definitions imply, buyer power stems from a number of factors, including a
company’s size, lack of competition in a particular market or the supplier’s relative
dependent position which allows the buyer to play a ‘gatekeeper’ role between
the supplier and the consumer. If a company is the only buyer in a market it is in a
‘monopsony’ position. This rarely occurs in practice and more often there are small
numbers of concentrated buyers who dominate a particular market. This is known as
‘oligopsony.’ Buyer power can also be created when a group of buyers who in other
aspects are competitors agree to collaborate in their purchasing. This can take the form
of ‘buying groups’ or ‘buying alliances’. The power of a buyer is situation–specific.
It relates not only to market power, but to the relative position of the supplier.
Even a small retailer with tiny market share can exercise buyer power if it takes half a
supplier’s output.
Suppliers of differentiated products or those with recognised brands are better
able to withstand the pressure of dominant buyers. In contrast, producers supplying
undifferentiated bulk commodity products are extremely vulnerable. In ‘buyer-driven’
supply chains the supplier is kept vulnerable by having to comply with buyer-specific
standards, which reduces their ability to sell elsewhere and therefore increases their
dependence on that particular buyer.
“Small producers, in particular, are likely to suffer when they are unable to
resist retailer buyer power, forcing them to cut prices to the point where only
the most efficient can survive. The longer-term effect will be to threaten the
viability even of efficient producers when investments are undermined by
inability to recover fixed costs as a result of being forced to price at (shortterm) marginal cost.” 8
“Overall, there was a general climate of apprehension. Some suppliers
expressed what appeared to be very real fears that any hint of involvement
in our inquiry would threaten the existence of their commercial operations.” 7
As well as squeezing on price there are non-price aspects of buyer power which involve
extracting more favourable treatment in terms and conditions. Buyer power practices
include:
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Footnotes
4
5
6
7
Page 6
OECD (1981) “Buying Power: The Exercise of Market Power by Dominant Buyers”,
Report of the Committee of Experts on Restrictive Business Practices.
Dobson, P.W., Waterson, M., Chu, A., (1998) “The Welfare consequences of the exercise of buyer power”,
Office of Fair Trading.
European Union DG Competition Glossary of Terms (2003).
UK Competition Commission (2000) “Supermarkets: A report on the supply of groceries from multiple stores in the
United Kingdom”.
Footnotes
8
Dobson, P. (2002), “Retailer Buyer Power in European Markets: Lessons from Grocery Supply”,
University of Loughborugh Business School Research Series.
Page 7
Transmission of risk and shifting power
Buyer power can be exercised at any point in a supply chain. In particular it seems to
be prevalent at the agricultural processing, manufacturing and retail levels. This may
be because these are the more capital-intensive parts of the chain and entry costs are
high, leading to high levels of concentration. The impact of buyer power can also be
transmitted along long and complex supply chains and felt by primary producers. So
buyer power exerted by a retailer in France, can affect a powerful brand manufacturer
who passes the pressure and risk onto their primary suppliers. The UK’s Competition
Commission enquiry in the grocery sector confirmed this:
“...the evidence that has been presented to us during this inquiry by suppliers
to intermediaries and processors, especially primary producers, strongly
suggests that supply chain practices transferring excessive risks and uncertain
costs up the supply chain are sufficiently prevalent in many sectors to justify
greater scrutiny of the nature of these commercial relationships.” 9
How companies maintain buyer power
Large companies are able to maintain and increase their power by virtue of their size.
This enables them to negotiate larger volume related discounts, which means in turn
that they are able to offer lower prices than those offered by smaller rivals, which
in turn increases the dominant buyer’s market share and so on. Firms also engage in
behaviour described below which has the effect (intended or not) of increasing and
sustaining their ability to exercise buyer power.
Supply chain pressures create precarious employment
Shareholder pressure for
Consumers expectations
high returns
of low prices
Retailers and brand owners
offload costs and risks down the supply chain
There seems to be a shift in buyer power towards the retail end of the supply chain
and away from the traditionally dominant processors.11 However it is also clear that
increasing consolidation at the retail level is in turn driving consolidation at the
manufacturing level as well. For example Planet Retail observes that the pressure
from the likes of Wal-Mart, Tesco and Carrefour are thought to be a motivating factor
behind the 2005 link up between Procter and Gamble and Gillette.” 12 Retailer power
is also accelerating the drive towards vertical integration in particular supply chains,
for example the banana giant Dole’s move into processing is thought to be in part a
response to supermarket price pressures. It also seems to be the case that consolidation
at the retail level with growing demands for private standards and traceability
requirements is driving consolidation amongst suppliers – often in favour of large
exporting firms whilst pushing smallholder farmers out of supply chains.13
“Sector analysts
predict that it is
not unrealistic to
imagine future
global markets in
which the sale of
food is controlled
by four to five
global firms with a
handful of regional
and national
companies, and
in which food
manufacture is
dominated by some
ten companies
using only about 25
brand names.” 15
Mergers and acquisitions:
The growth in mergers and acquisitions (for example SuperValu’s acquisition of
Albertson’s in the United States in 2006 and Edeka acquiring SPAR Germany in 2005)
has contributed to an increase in market share and buyer power amongst retailers.
This shift is also occurring in the developing world where aggressive investment in the
retail sector in Latin America, South East Asia, and to some extent in Africa has lead to
increased market concentration at the retail end of commodity value chains.14
Retailers and brand owners push for:
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long-term commitment
Mid-chain suppliers
seek low-cost producers
Producers
farms and factories pass the pressures on to workers
Sub-contractors
Employees
Producers, as employers:
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Precariously employed workers,
mostly woman and migrants, are:
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Sourcing globally:
Purchasers can increase their power by buying their raw materials from multiple
sources. This allows them to avoid dependence on a single or a few suppliers and
enables them to extract the lowest possible prices, forcing suppliers to compete fiercely
both within and between countries. This practice is particularly seen where the buyer
(for example a brand or a processor) is sourcing undifferentiated commodity products.
In the tea industry for example, certain types of tea used for particular blends are
substitutable. This allows the buyer to play suppliers off against each other. Farmers do
not possess the reciprocal power to play one agribusiness giant off against another.
Sub-contracted and
home-based workers
10
Footnotes
9
UK Competition Commission enquiry into the groceries market, (February 2008) “Provisional decision on remedies
relating to supply chain practices”.
10 Oxfam (2004), “Trading away our rights: Women working on global supply chains”.
Page 8
Footnotes
11
12
13
14
Planet Retail (2006), “Global Retail Concentration”.
Planet Retail (2006), “Global Retail Concentration”.
Brown O. with Sander, C. (2007), ”Supermarket Buying Power: Global Supply Chains and Smallholder Farmers”, IISD.
Dobson, P. (2002), “Retailer Buyer Power in European Markets: Lessons from Grocery Supply”,
University of Loughborough Business School Research Series.
15 Tickell. S. (2004), “Fairtrade in perspective” Sustainability Radar.
Page 9
“Seen in this light, it is not just the activity of international expansion by the
leading multinational retailers that is driving greater integration of markets
on the procurement side, but also alliances of nominally independent
retailers.” 18
Buyer power and the commodity problem
Two and a half billion people make their living by producing primary agricultural
commodities.19 As many as 43 developing countries depend on a single agricultural
commodity export for more than 20 percent of their total export revenues.20
Commodity production is characterised by large numbers of producers, producing
largely undifferentiated products. They are often vulnerable and the high costs of
exiting commodity production and lack of alternative livelihoods means that they may
continue to produce even when the market price is below their cost of production. They
will compensate for low prices by producing more, exacerbating oversupply.
value added in consuming country
transport costs and weight loss
80%
value added in producing country
grower price
60%
40%
20%
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
0%
1965
National and cross border collaboration:
By strategically collaborating (which companies do to improve economies of scale,
reduce transactional costs etc.) firms are able to reinforce their dominant position.
This may take the form of ‘buyer groups’ or ‘buying alliances’. Buyer groups purchase
collectively on behalf of members that remain independent retailers while buying
alliances tend to have only one member from any country (i.e. generally they are not
direct competitors). This practice has the effect of reducing options for suppliers and so
increases the buyer power of those participating.17
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100%
*Àœ«œÀ̈œ˜ÊœvÊw˜>ÊÀiÌ>ˆÊ«ÀˆVi
“Losing market
share to private
labels is now
a key problem
faced by brand
manufacturers in
developed retail
markets, not
least as a result
of strong price
differentials.” 16
Rise of own-label products:
By developing own-label products, retailers are able to capture more of the value on
those products and are increasingly displacing traditional brands. In doing this they
become a competitor, as well as a buyer, in relation to their suppliers. This increases
their buyer power in several ways. They can refuse to buy products from suppliers
because they can offer an own-label product, the development of their product with
manufacturers gives them critical information about the cost make-up behind that
product, and because they are the final decision makers in the retail pricing of products
they can price their own-label product below that of branded competitors.
Year
21
There are many reasons for the long term price declines and low proportion of the final
retail price for tropical agricultural commodity producers, including oversupply and the
collapse of international supply agreements. However the combination of corporate
concentration and increased farmer disorganisation is particularly of interest in terms
of competition policy.22 The relationship between concentration and lower prices is
complicated, but ActionAid and the South Centre have recently traced the trends and
linked levels of corporate concentration directly with declining prices in the coffee
market.23
Examples of corporate concentration in commodity supply chains
Processor concentration
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Despite recent price rises for some commodities (especially those used in the
manufacture of bio fuels and also minerals), there is debate about how long this
peak will last, and for many tropical products the long term price trend continues to
be downwards, punctuated by increasingly volatile short term price fluctuations. The
former reduces producers’ living standards while the latter makes it very difficult for
them to plan. In addition, commodity producers also appear to be receiving a low and
declining proportion of the final product price (see figure below).
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Retailer concentration
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food and daily goods
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Footnotes
16 Planet Retail (2006), “Global Retail Concentration”.
17 Dobson, P. (2002), “Retailer Buyer Power in European Markets: Lessons from Grocery Supply”,
University of Loughborugh Business School Research Series.
18 Dobson, P. (2002), “Retailer Buyer Power in European Markets: Lessons from Grocery Supply”,
University of Loughborugh Business School Research Series.
19 Tickell, S. (2004), “Fairtrade in perspective” Sustainability Radar.
20 FAO (2004), “The State of Agricultural Commodity Markets”.
Page 10
Footnotes
21 Kaplinsky for UNCTAD (2004), “Competition Policy and the Global Coffee and Cocoa Value Chains”.
22 Green, D. (2005), “Conspiracy of Silence: Old and new directions on Commodities” Conference paper presented to
‘Strategic Dialogue on Commodities, Trade, Poverty and Sustainable Development.
23 Asfaha, S. (2008) “Commodities dependence and development: some suggestions on how to tackle the commodities
problems”. South Centre, ActionAid 2008.
24 Sources: Vorley (2003), CUTS (2005), Planet Retail (2007), ActionAid International (2005),
UK Competition Commission (2007).
Page 11
“An FAO panel of
experts concluded:
‘there are serious
power imbalances
arising from the
concentration of
economic power
in the hands of a
few.’” 25
Various factors have exacerbated the trend towards corporate concentration. Economic
liberalisation has accelerated cross border mergers and acquisitions (usually between
companies headquartered in rich countries), which have now reached unprecedented
levels. This is not likely to lead to the stated aim of liberalisation which is more
competitive markets. The push towards privatisation in many developing countries has
had similar effects, replacing public monopolies with private ones instead of fostering
greater competition. In agriculture this has impacted on the ability of producers to
counter corporate concentration as state marketing boards have been abolished
and there has been strong opposition to producer or farmer organisations in both
the developed and developing worlds. For example in the late-1990s co-operatives
«ÀœViÃÃi` Ìܜ ̅ˆÀ`à œv >˜>`ˆ>˜ “ˆŽÆ ̜`>Þ Ì…>Ì ˆÃ `œÜ˜ ̜ {Ó¯° /…i ÈÌÕ>̈œ˜ ˆÃ “œÀi
striking in Sub-Saharan Africa where the advent of neo-liberalism under the IMF/World
Bank-led structural adjustment programmes swept many state marketing boards from
the continent. The weakening or abolishing of the marketing boards has left producers
isolated, disorganised and has limited their ability to bargain collectively. So while
upstream stages of the supply chain have become more concentrated, competition
amongst suppliers has intensified at national and international levels, allowing buyers
to play producers off against each other, extract better terms and transfer value from
South to North.
Impact of buyer power case studies
Bananas
In 2002 Asda Wal-Mart negotiated with supplier Del Monte and dropped the price
of loose bananas in the UK from £1.08 to 94p/kg. Within days Tesco, Safeway,
Sainsbury’s and Morrison’s all followed, and by 2005 Asda’s price had fallen to 79p/
kg. Banana Link claim that at a retail value of 81p/kg it is impossible for a grower
in Costa Rica to be paid the legal minimum price for a box of bananas and in turn
impossible for that grower to pay workers a legal minimum wage.28
The global banana bottleneck from Latin America/Caribbean to the UK
Consumers
Retailers
Ripeners/distributors
“Control of commodity value chains by a small number of powerful
corporations can also drive down commodity prices and erode the share of
the final product price that goes to producers. When markets bring together
large numbers of competing suppliers against a handful of large-scale
buyers, the buyers are likely to have most leverage in setting prices. When
the buyers are also linked to processors and retailers in vertically integrated
commodity chains, they are in a strong position to capture a greater share of
the value of the final product for traders, processors and retailers.” 26
This has important implications for global income inequality when those farmers
are located in developing countries, while the processors, international traders and
retailers are mostly located in developed countries. A World Bank report estimated that
divergence between producer and consumer prices may have cost commodity-exporting
countries more than $100 billion a year. 27
Buyer power has many negative impacts which can be transmitted through the supply
chain. They include increased costs for suppliers, uncertainty which reduces incentives
for investment and innovation, financial distress including high levels of debt and
insolvency, as well as transfer of commercial pressures onto workers in the form of low
wages, short term contracts and delayed wage payments.
Footnotes
25 FAO (2001), “Report of the Panel of Eminent Experts on Ethics in Food and Agriculture”.
26 FAO (2004), “The State of Agricultural Commodity Markets”.
27 Morriset, J. (1997), “Unfair Trade? Empirical Evidence in World Commodity Markets Over the Past 25 Years”
World Bank.
Page 12
The ‘Banana Split’ how much of £1.00 retail value of loose
Ecuadorian bananas stays with each chain
actor to cover costs and margin.
60 million
5 retailers = 70% of UK grocery market
5 companies or alliances (Fyffes, Del Monte,
JP/Dole, SH Pratts, Keelings/Chiquita)
= 88% of UK market
Transnational banana companies
5 companies (Dole, Chiquita, Del Monte,
Fyffes, Noboa) = 80% of global market
Smallholders & Plantation
workers
2,500 plantations, 15,000 small-medium
scale farmers, 400,000 plantation
workers involved in
export sector
29
Wine
œÕÀ ÃÕ«iÀ“>ÀŽiÌ V…>ˆ˜Ã Vœ˜ÌÀœ nä¯ œv ̅i 1½Ã “>ÀŽiÌ vœÀ -œÕ̅ vÀˆV>˜ ܈˜i°
Each is able to exert significant buyer power on their suppliers.
“In this context, the supermarkets have the wineries in almost a vice-like grip such
that they are not only able to demand adherence to quality and health standards
(typically at the wineries own cost) but in particular are able to bear-down on the
prices the wineries are paid.”30
“In turn this has contributed to increased casualisation of the workforce.
Specifically the power that British supermarkets are able to exert by virtue of their
oligopolistic nature as the single most important market for South African wine, is
forcing down prices for producers. This, in turn, is resulting in a downward pressure
on direct and indirect labour costs that is having negative consequences for poverty
alleviation among the industry’s black workers.”31
Footnotes
28 Quoted in Fox and Vorley (2004), “Concentration in food supply and retail chains” DFID.
29 Vorley, B. et al (2004), “Food Inc”, Bill Vorley at al UK Food Group.
30 Henderson, J. (2005), ”Global Production Networks, competition, regulation and poverty reduction: policy implications”,
Centre on Regulation and Competition Working Paper Number 115.
31 Henderson, J. (2005), “Global Production Networks, competition, regulation and poverty reduction: policy implications”,
Centre on Regulation and Competition Working Paper Number 115.
Page 13
Section 2: Competition policy and buyer power
Introduction to competition policy
Where does buyer power happen?
Increasingly buyer
power is exerted
here as the retail
sector becomes
more concentrated
Retailer
Food service company
Processor/
manufacturer/brand
Primary buyer
(Agent/co-operative/
marketing board)
Buyer power can occur
here, for example a
tea factory or cotton
ginnery which may be
the only processor in a
particular location
Primary processing
facility
“The buying
power of the large
multiples in the
food market must
continue to be a
matter of concern
for the competition
authorities.” 34
Number of developing countries that have adopted competition laws,
as of June 2000
Importer/exporter
Buyer power often
occurs here for example
4 coffee roasters
account for 45% of
global processing
Competition policy is one aspect of an overall policy framework. History, legal traditions
and social and economic needs differ among countries and also over time. Competition
policy regimes around the world reflect these different realities. This makes it difficult
to generalise about competition policy. However broadly speaking the purpose of
competition policy has historically included a notion of public good or public interest.
Recently amongst certain countries, especially those following the OECD model, there
has been a narrowing of the aims of competition policy to focus on the promotion of
economic efficiency and consumer welfare. Most competition laws cover a few central
issues: mergers (which can produce anti-competitive effects for example by preventing
the entry of smaller players); anti-competitive practices (such as price fixing and cartels)
and abuse of dominance. Not all countries have competition policies, but there was a
rapid rise in this number during the 1990s structural adjustment period, in response
to the wave of privatisation (and its failure to lead to a competitive environment) and
in response to the Asian financial crisis. Those countries that have introduced laws
have been influenced variously by US, EU, Germany, Japan, but also South Korea and
multilateral bodies including the OECD, World Bank and UNCTAD.32
Pre1950s
1950s
1960s
1970s
1980s
1990s
Under
preparation
Total
Asia/Pacific
0
0
2
2
2
14
6
26
Central/Eastern Europe
0
0
0
0
1
16
1
18
Latin America &
Caribbean
1
2
1
1
0
6
10
21
Africa
0
1
0
1
2
14
10
28
Total
1
3
3
4
5
50
27
93
33
Primary Producer
Footnotes
32 Lee, C. (2005), “Model competition laws: The World Bank-OECD and UNCTAD approaches compared”,
Centre on Regulation and Competition Working Paper Number 96.
33 Singh, A. (2002), “Competition and competition policy in emerging markets: international and development dimensions”,
University of Cambridge.
34 European Economic and Social Committee, Bulletin, March 2005.
Page 14
Page 15
Principles and practice of competition policy
Jurisdiction
The implementation of competition policy is limited by jurisdiction which is usually
national. Although there are bilateral and regional competition agreements and some
broader regional and bilateral trade agreements include sections on competition, the
aim of these is usually limited to voluntary co-operation and facilitating market access
for firms rather than providing instruments that would allow regulation or sanction.
Sometimes there is tension between the national and regional levels and occasionally
there are disputes about which level has authority. At the multilateral level the first
attempt to introduce competition rules was the Havana Charter, which was negotiated
in 1947/8 to lay down the blueprint for the International Trade Organization (ITO). This
did include regulatory aspects, requiring nations to take appropriate measures against
transnational restrictive business practices including price-fixing and market access
limiting restraints.35 However, the Havana Charter was never adopted because the
United States withdrew support. In 1980 the United Nations Conference on Trade and
Development (UNCTAD) presented a “Set of Multilaterally Agreed Equitable Principles
and Rules for the Control of Restrictive Business Practices (the UNCTAD Code)” to the
United Nations General Assembly. The General Assembly accepted the UNCTAD Code
as a non-binding recommendation. The rules provided for in the code have the explicit
objective of furthering the trade and development of developing countries. However
support to the Code was short-lived due to a shift of approach by the US.36
Exemptions
In some countries certain sectors are completely exempted from the remit of
competition policy. These are called ‘carve outs’ and one of the most common has
been agriculture. Traditionally this has been to help farmers and to protect the ‘noneconomic’ gains from agriculture including food security and environmental protection.
For example, Article 36 of the Consolidated Treaty of the European Union states that
provisions on competition law shall apply to production of and trade in agricultural
products only to the extent determined by the Council within the framework of
ensuring a fair standard of living for the agricultural community, in particular by
increasing the individual earnings of persons engaged in agriculture.37 There are similar
provisions in the United States and Japan. However few developing countries have such
carve outs, and the trend is turning against them, irrespective of their usefulness for
countries at different stages of development.
Footnotes
35 Fox, E. (1999), “Competition law and the millennium round”, Journal of International Economic Law.
36 Fox, E. (1999), “Competition law and the millennium round”, Journal of International Economic Law.
37 European Union (2006), “Consolidated Versions of the Treaty on European Union and of the Treaty Establishing
the European Community”.
Page 16
Powers and resources
Competition authorities broadly judge cases against their remit (for example consumer
welfare) and on whether they are likely to have anti-competitive effects. To do this
they normally rely on the party affected by the anti-competitive behaviour to make
a complaint to competition authorities, but authorities can also take the initiative to
set up regulatory bodies or watchdogs or to monitor particular markets. The sanctions
available to authorities vary from country to country and can be quite wide-ranging
for example some can prevent an action or in rare cases order the reorganisation or
break up of a company (in merger cases for example), or they can impose fines on
companies found guilty of abuse of dominance. In some instances fines are related to
the turnover of a company and can be significant. However in practice investigating
and successfully prosecuting cases can be very difficult and requires considerable time
and resources. In some situations investigation of an entire market is required. In many
countries, including developed ones, the resources available to competition authorities
are limited.
Competition policy and buyer power
The debate as to whether competition policy is capable of dealing with the problem
of buyer power in its present form depends partly on the model of competition policy
chosen. The OECD model tends to be more consumer (rather than supplier) focused
although it does specify clear punishments for abuse of dominance, including in
situations of oligopsony. The UNCTAD model is more flexible and explicit about dealing
with TNC dominance. There is debate among competition policy experts as to whether
buyer power should be treated differently from seller power. Carstensen has argued
that similar analytical tools can be used, but that different metrics (benchmarks) are
needed to measure the different types of effect and that in terms of ‘diagnosis’ firms
need a considerably smaller market share to exert buyer than seller power. In contrast
the OECD concludes that monopsony buying problems can be addressed using the
same basic antitrust and benchmarks for measuring effects as that used for addressing
monopoly selling problems.38
Competition policy opportunities
Competition policy as currently conceived can clearly be used to tackle a number of
the problems outlined as associated with buyer power, by restraining the formation
of a dominant position through mergers and by preventing or circumscribing some
of the practices associated with abuse of that dominant position. Competition policy
is therefore an important tool for policy makers. Section Three will provide examples
where competition policy has been used to tackle the exercise of buyer power in both
developed and developing countries.
Footnotes
38 Cartensen, P. (2004), “Buyer power and merger analysis: the need for different metrics”, University of Wisconsin.
OECD (2006), “Competition and regulation in agriculture: monopsony buying and joint selling”.
Page 17
Competition policy limitations
In its current form, competition policy has a number of limitations for dealing with
buyer power.
1. Buyer power versus seller power
Competition authorities tend to focus on the problem of seller power rather than
buyer power. This is because usually they are tasked with ensuring that the consumer
is protected. This consideration is often reduced in practice to achieving low consumer
prices rather than other factors such as ensuring choice or quality. As long as the
consumer is getting low prices, competition authorities have little reason to act. Indeed
the emphasis on consumer welfare means that many of the practices carried out by
firms when exercising buyer power would be considered pro-competitive. Where there
is recognition of the existence of the problem of buyer power, the trend advocated
by powerful entities such as the OECD is to use the same tools as that used for seller
power. But some suggest that the low number of buyer power cases points to the
weakness of the current instruments rather than the absence of the problem.
“Both buyers and retailers are increasingly influencing the process of
production, with the result that farmers feel that not only are their margins
being reduced but their independence to govern their own commercial
activity is more limited than in the recent past. On occasion, price-fixing
among buyers has been found and prosecuted in many OECD jurisdictions.
Given the difficulty of identifying local price-fixing agreements, there may be
more price-fixing activity by agricultural buyers than has been prosecuted.” 39
Thus a narrow interpretation of the aim of competition policy limits its usefulness in
tackling the problem of buyer power. There are some interesting exceptions to this
which are explored in the next section.
Footnotes
39 OECD (2006), “Competition and regulation in agriculture: monopsony buying and joint selling”.
Page 18
Ó°Ê*ÀœLi“Ãʜvʓ>ÀŽiÌÊ`iw˜ˆÌˆœ˜Ê>˜`ʓ>ÀŽiÌÊ`œ“ˆ˜>˜Viʓi>ÃÕÀiÃ
To prove an incidence of buyer power, it may be necessary to show that the firm
exercising the power is in a dominant position within a market. Thus how the ‘relevant’
market is defined and how dominance is measured are both of critical importance.
Markets are usually defined as geographic, (for example local), or as product markets
(for example ‘the grocery sector’). Different countries have different approaches for
establishing market dominance. Some use quantitative measures, others qualitative
and there are wide disparities between the level of market share at which a firm is
Vœ˜Ãˆ`iÀi`Ê̜ÊLiÊ`œ“ˆ˜>˜ÌÊqÊvÀœ“Ê>ÃʏœÜÊ>ÃÊÓä¯Ê̜Ê>Ãʅˆ}…Ê>ÃÊÇ䯰40 If a market is
defined too widely or the measure of market dominance is set too high this makes
it difficult to prove buyer power. This has resource implications for the competition
authorities too. For example it could be very difficult or very costly to prove that a
single firm is dominant across the entire EU market, but that does not mean it cannot
be exercising buyer power. It should be noted that most analysts agree that because of
the variety of ways that buyer power can be exercised as well as the issue of supplier
dependence, it is possible for a firm to exert buyer power at levels of market share
much lower than that of seller power.
Linked to this is another weakness of the current competition law approach when
trying to apply it to buyer power. Usually any assessment of market dominance takes a
horizontal approach – that is it looks to see whether a firm or group of firms are able
to exert anti-competitive power at a certain point in a supply chain. There are also rules
governing vertical agreements that might have an anti-competitive effect – for example
in the OECD model law the ‘threshold’ for judging dominance in a vertical agreement
ˆÃÊ̅>ÌÊ>Ìʏi>ÃÌʜ˜iʜvÊ̅iÊ«>À̈iÃʅœ`ÃÊ>Ê`œ“ˆ˜>˜ÌÊ«œÃˆÌˆœ˜Êˆ˜Ê>ʓ>ÀŽiÌÊ­Îx¯®ÊœÀÊ̅>ÌÊ
similar agreements are widespread and this affects competition. However these are not
widely implemented in buyer power cases. Vertical integration leading to dominance
is particularly relevant in smaller economies where the impacts of agreements on
economic competition may be more keenly felt.41
Footnotes
40 Lee, C. (2005), “Model competition laws: The World Bank-OECD and UNCTAD approaches compared”,
Centre on Regulation and Competition Working Paper Number 96.
41 Dhanjee, R. (2004), “The tailoring of competition policy to Caribbean circumstances: some suggestions”,
Centre on Regulation and Competition Working Paper Number 79.
Page 19
3. Problems of jurisdiction
Competition policy requires modernisation if it is to adequately tackle the challenges
presented by globalisation. Supply chains increasingly involve actors from multiple
countries and companies themselves are increasingly transnational.
“A key feature of globalisation is that its economic and organisational ‘glue’
is increasingly associated with complex networks of suppliers who produce
in globally dispersed locations in accordance with the demands of lead
firms. These firms either dominate important national markets (such as the
principal supermarket chains in Britain), or more likely are TNCs with broad
international remits.” 42
This leads to a number of challenges when trying to use competition policy to tackle
buyer power. By definition the ‘victims’ of buyer power are suppliers and in today’s
supply chains the more powerful actors are likely to be located in developed countries
and the suppliers in developing countries. At present competition policies are applied
only against anticompetitive conduct which adversely affects markets in the country
or region where the competition authority concerned has competence. Thus, the
competition authority will assert competence over anticompetitive conduct by sellers
overseas which adversely affects buyers or consumers based within its territory. In
the case of the US, the competition authorities will also assert jurisdiction over
anticompetitive conduct by foreign buyers which adversely affects exports from
the US. However, no competition authority will take enforcement action against
anticompetitive conduct by national buyers which adversely affects sellers based in
another country or jurisdiction. Again there are some important exceptions to this rule
which are explored in the next section. While the unilateral application of competition
laws on foreign firms or in foreign territory has been a subject of intense debate in the
past, competition authorities in major developed countries (or the EU) routinely enforce
their laws in such situations – so there should be no insurmountable legal obstacles
to smaller countries acting in the same manner. In practice, however, given deficits in
enforcement capacity and power asymmetries, it can be expected that smaller countries
will face problems in the application and the likelihood of a successful prosecution of
anticompetitive practices by TNCs involved in commodity supply chains.
4. Capacity limitations
There have been very few prosecutions of buyer power – including in developed
countries – because investigating cases is difficult, time consuming and extremely
expensive. Access to information is often a problem. This is compounded when
companies lobby against such investigations or mount legal challenges. Capacity
problems are particularly an issue in relation to buyer power, because by definition
the buyers tend to be very powerful. In some developing countries the situation may
be compounded by the fact that competition laws are relatively new and authorities
are under-resourced. Because of this, the success of developing countries in detecting
and sanctioning anticompetitive behaviours has been poor to date, but there are some
notable exceptions outlined in Section Three.
Footnotes
42 Henderson, J. (2005), ”Global Production Networks, competition, regulation and poverty reduction: policy implications”,
Centre on Regulation and Competition Working Paper Number 115.
Page 20
5. Climate of fear at the macro and micro levels
In today’s markets where developing countries are often engaged in fierce competition
to attract foreign direct investment, multinational companies have great power.
Investigations into buyer power at whatever level may frighten away potential
investors or multinational companies may threaten to move if their dominant position
or potentially unfair practices are questionned. This is a real disincentive to developing
countries to use competition law as a way of tackling buyer power. Similarly at the
micro level, producers or suppliers often fear to make official complaints to authorities
about abusive buying practices for fear that they may be delisted or blacklisted by
other competitors. The OECD found that insufficient protection for complainants was a
problem in buyer power cases:
“Often, as with many other sectors of antitrust law enforcement, official
complaints to authorities are not made as individual producers often fear
that they may be delisted from their major buyer and blacklisted by other
competitors.” 43
Most current competition law relies heavily on complaints by those affected by anticompetitive behaviour or abuse of dominance. This is a real problem in applying
competition policy to buyer power cases as those affected may be unwilling to come
forward. This ‘complaints-driven’ system does not work and many argue that proactive
regulation is the only realistic way of addressing this climate of fear. Some interesting
attempts to tackle this issue are outlined in the next section.
6. Weak consideration of public interest or developmental objectives
As has been described, competition policy, particularly in the OECD tradition, is
focused on economic efficiency and consumer welfare. The OECD’s model competition
law states its objectives as follows: “This law is intended to maintain and enhance
competition in order ultimately to enhance consumer welfare”. This narrow focus
is increasingly accompanied by the involvement of economists and formal economic
models in an attempt to quantify competitive and anti-competitive effects.44
This narrow scope of competition policy is a relatively recent phenomenon. Both in
the US and European Union competition policy was initially established with wider
considerations of public interest. In the UK it was as recently as the 2003 Enterprise Act
that the test applied to mergers was changed from one premised on “public interest”
to “significant lessening of competition”. This trend limits the usefulness of competition
law as a way of tackling buyer power, as this would require greater consideration of
suppliers. On this point the European Economic and Social Committee concluded that
“One area of competition law that should be looked at is the definition of public
interest. It should not be confined to prices and market forces only.”
Today some countries and institutions are reclaiming the space for pro-development
competition policy objectives. For example South Africa’s post-apartheid competition
law includes wide-ranging social objectives, including employment generation, support
for small enterprises and empowerment of previously disadvantaged communities.
Similarly the UNCTAD model competition law has the broader aim of ‘economic
development’ rather than ‘economic efficiency and consumer welfare’. These examples
are discussed further in Section Three.
Footnotes
43 OECD (2006), “Competition and regulation in agriculture: monopsony buying and joint selling”.
44 Cubbin, J. (2003), “Competition policy and food”, presentation at City University.
Page 21
Section 3:
Examples of competition policy being used to tackle buyer power
This section outlines some recent innovative examples where competition policy has
been successfully used by developing and developed country authorities to tackle buyer
power and its impacts down the supply chain.45 Some of these case studies show how
existing competition policy has been used to tackle buyer power – for example the EU’s
use of merger controls, other examples show how countries are tightening or adapting
existing policies to take into consideration the growing phenomenon of buyer power
particularly at the retail level (Thailand, Taiwan, Korea, UK), and at the processor
level (South Africa). Other examples point to where competition authorities have
deliberately tackled some of the weaknesses identified in the preceding chapter, these
include the EU’s use of extra-territoriality, South Africa’s use of leniency programme and
Germany’s consideration of economic dependency.
1. Retailer power accumulation prevented
Almost all attempts to curb buyer power have addressed the symptoms rather than
the key cause of the problem – that is the concentration itself. European Union
competition authorities have on occasion taken action against retail mergers, for
example the European Commission prohibited the proposed merger between Kesko
and Tuko in Finland which would have offered the combined enterprise a national
“>ÀŽiÌÊÅ>ÀiʜvÊÈ䯰Ê7…i˜Ê,iÜi½ÃÊ>VµÕˆÀi`ÊՏˆÕÃÊiˆ˜Êˆ˜ÊÕÃÌÀˆ>]Ê̅iÞÊÜiÀiÊÀiµÕˆÀi`Ê
̜Ê`ˆÛiÃÌÊÃ̜ÀiÃʈ˜ÊÀi}ˆœ˜ÃÊ܅iÀiÊ̅iÊVœ“Lˆ˜i`Êi˜ÌiÀ«ÀˆÃiÊܜՏ`ÊVœ˜ÌÀœÊÈx¯ÊœÀʓœÀiÊ
of sales. However the European Commission has also allowed mergers that have had
a significant concentrating effect to proceed unhindered, notably Metro/Makro and
Carrefour/Promodes.46 These examples show merger control being used to tackle
seller, rather than buyer power, but in doing so they have the impact of reducing the
significance of the players’ buyer power too.
2. Competition authorities tackle multinational retailer buyer
power
Thailand: Following a number of complaints relating to unfair trade practices in the
wholesale and retail trade in Thailand, the competition authorities assessed whether
the Thai Trade Competition Act was able to address these unfair practices. The Act’s
lack of clarity became evident and a specialized Commission was established to study
the issue of buyer power. The Commission drafted guidelines of what practices should
be regarded as unfair and explicitly brought buyer power abuses under the remit of
competition authorities. The Commission also provided a clear definition of which
business practices are deemed to constitute abuse of buyer power making it easier to
undertake litigation against cases of this nature in the future.47
Taiwan: The Taiwanese fair trade law was enacted in 1991 and implemented in 1992.
The law covers a wide range of antitrust as well as unfair competition practices. The
law established a Commission which clearly set out what are considered as prohibited
practices. This was updated following a survey of relationships between retailers
and suppliers in which six types of unfair practice were identified including charging
of improper fees and unreasonable penalties for supply shortages. In response to
continued complaints by suppliers regarding improper ‘additional fees’, the Commission
has now established guidelines for additional fees charged by chain stores.48
Korea: Korea has guidelines for establishing market dominance, clear benchmarks for
what constitutes the abuse of buyer power and prohibits certain practices even when
a retailer is not in a dominant market position.49 This clear legal framework enabled
the Korean Fair Trade Commission (KFTC) to establish and prosecute anti-competitive
behaviour by the powerful multinational companies Wal-Mart and Carrefour.
Wal-Mart-Korea was found guilty of unfair acts including refusal to receive products,
unfair return of products, unfair price reductions after purchase and unfairly passing
on advertising fees to suppliers. The KFTC ordered Wal-Mart-Korea to suspend these
activities and imposed a US$1.6 million fine. KFTC also ordered Wal-Mart-Korea to
announce publicly (in the form a two major newspaper advertisements) that it had
violated the fair trade law. In a similar case the KFTC tackled buyer power involving
Korea-Carrefour. In 2001 Korea-Carrefour was found to have unreasonably reduced
the price for relevant products of 112 suppliers by approximately US$1 million. The
KFTC ordered them to desist from this activity and imposed a US$63,000 fine and also
ordered it to publicise this in the newspapers.50
Footnotes
Footnotes
45 This section is based on a paper prepared by Tsegay, Y. (2008), “Good practices in tackling buyer power using
competition policy”, South Centre and Traidcraft.
46 Dobson, P. (2003), “Buyer Power in Food Retailing: the European Experience”, paper for Conference on Changing
Dimensions of the Food Economy, The Hague.
Page 22
47 Thailand contribution (2004), “How enforcement against private anti-competitive practice has contributed to economic
development” OECD Global Forum on Competition.
48 Lin, G. (2003), “Taiwan’s Competition Law Enforcement Experience and Cases in Retailing Business” paper for APEC
Training Program on Competition Policy.
49 The criteria for the prohibition against abuse of market dominating positions includes: Unreasonably fix, maintain, or
alter the price of a good or service fees; Unreasonably control the sale of goods or rendering of services; Unreasonably
interfere with the business activities of other enterprises; Unreasonably hinder the entry of new competitors. Unfair trade
practices include Unreasonably refuse to transact with or discriminate against a certain transacting partner; Unreasonably
engage in activities to eliminate competitors; Unreasonably induce or coerce customers of competitors to deal with
oneself; Unreasonably take advantage of one’s bargaining position in transactions with others; Transact with others on
terms and conditions which unreasonably restrict or disrupt their business activities; Use advertisements or make
representations that are false or which may deceive or mislead consumers with respect to the enterprise or its goods or
services.
50 Jhong, K. S. (2003), “Anti-competitive practices at the distribution sector in developing countries”.
Page 23
3. Tackling buyer power of processors
4. First steps in tackling the problem of global supply chains
In 2005 the South African Competition Commission began investigations into eight
dairy processors (including a number of subsidiaries of multinational companies)
for alleged price fixing. In December 2006 the case was referred to the Competition
Tribunal for prosecution and a date in September 2008 has been set for the hearing.
The processors are accused, either together or individually, of various infringements
of South African Competition Law, including abuse of their dominant position with
suppliers and colluding to fix purchase prices. Thus the case involves a group displaying
both buyer and seller power simultaneously.
EU: In a number of instances the EU has applied its competition law to actors outside
of its market, although not in clear cases of buyer power. In 1985 the European
Commission imposed fines on wood pulp producers situated outside the region (in
the United States, Canada and Scandinavia) for price fixing arrangements despite the
fact that some of the companies had no subsidiaries in the EU, on the basis that the
arrangement was ‘implemented’ in the EU market and that the effect of the parties
activities on trade between the EU member states was “not only substantial, but
intended, and was the primary and direct result of the agreement and practices.” 53
In 1999 the EU successfully challenged a merger between two South African platinum
companies (Gencor and Lonrho) despite the fact that the South African Competition
Authorities had allowed it. The EU argued that the merger would have created
disruption in the European market.54 This clearly shows that extraterritorial application
of competition laws is possible. It also poses a potential threat to developing country
suppliers who may work together to counter buyer power, as they could be prosecuted
as an export cartel.
The tribunal will assess the following allegations that:
Ê UÊ Vœ“«>˜ˆiýÊiÝV…>˜}i`ÊÃi˜ÃˆÌˆÛiʈ˜vœÀ“>̈œ˜Êœ˜Ê«ÀœVÕÀi“i˜ÌÊ«ÀˆViÃʜvÊÀ>ÜʓˆŽÊ
and this enabled competitors to co-ordinate their pricing strategies to fix the
purchase price of raw milk.
Ê
UÊ ÌܜʜvÊ̅iÊVœ“«>˜ˆiÃÊ>LÕÃi`Ê̅iˆÀÊÀiëiV̈ÛiÊ`œ“ˆ˜>˜ÌÊ«œÃˆÌˆœ˜Ãʈ˜ÊiÝVÕÈÛiÊ
agreements that compelled producers to supply them their total milk production.
Producers were prevented from selling surplus raw milk at competitive prices to
third parties or consumers directly. This practice also prevents the entry of smaller
milk processors and distributors into the market.
Ê
UÊ Vœ“«>˜ˆiÃÊi˜ÌiÀi`ʈ˜ÌœÊœ˜}‡ÌiÀ“Ê“ˆŽÊÃÕ««ÞÊ>˜`ÊiÝV…>˜}iÊ>}Àii“i˜ÌÃÊ̜ÊÃiÊ
their surplus milk to each other rather than at lower prices to end users.
This arrangement enabled colluding firms to maintain the price of milk at
artificially high levels.
Ê
UÊ ÌܜÊVœ“«>˜ˆiÃÊÀi>V…i`Ê>˜Ê>}Àii“i˜ÌÊÀi}>À`ˆ˜}Ê̅iÊÃiˆ˜}Ê«ÀˆViʜvÊ1/ÊÊ
“long life” milk ultimately resulting in the consumer paying higher prices for
UHT Milk.
Ê
UÊ ÌܜÊVœ“«>˜ˆiÃÊ>}Àii`Ê̜ÊwÝÊ̅iÊÃiˆ˜}Ê«ÀˆViʜvÊ1/ʓˆŽÊ>˜`Ê>œV>Ìi`
geographic areas in which they would not compete in selling UHT milk.
This eliminates price competition resulting in consumers paying more.
Ê
UÊ Ì…ÀiiʜvÊ̅iÊVœ“«>˜ˆiÃÊVœ‡œÀ`ˆ˜>Ìi`Ê̅iÊÀi“œÛ>ÊœvÊÃÕÀ«ÕÃʓˆŽÊvÀœ“Ê̅iÊÊ
market. Surplus removal of milk, decreases supply and this keeps prices high.
It therefore constitutes indirect price fixing.
Ê
5. Tackling capacity constraints through leniency programmes
Ê
The Competition Commission is seeking to impose a fine which could be up to 10 per
cent of the companies’ turnover.51 The Milk Producers’ Organisation of South Africa
has since lodged a complaint against several major South African supermarket chains,
alleging fixing of milk prices.52
Footnotes
51 South African Competition Commission (February 2008), “Milk Cartel Hearings Set”.
52 Irvine, H. (2008), “South African Competition Commission Cracks Down on Cartels”, Mondaq.com
Page 24
UK: Suppliers based outside the UK can seek redress under the existing UK
Supermarkets Code of Practice. This is because the legal obligations to comply with
the Code falls on UK supermarkets and is therefore clearly under the Competition
Commission’s jurisdiction. The same principle applies to the ombudsman that the
Commission is proposing as part of its latest investigation into the grocery sector.
This is a unique example and demonstrates that existing legal frameworks can allow
governments of countries in which global sourcing companies are headquartered to
establish binding rules that would protect overseas suppliers.
Competition law investigations are complex and costly. In particular finding substantial
and credible evidence on issues such as price-fixing behaviour is difficult. Incorporating
leniency programs into competition laws can be important as this encourages those
with hard evidence – that is those who were engaging in the antitrust activity – to
receive amnesty from government penalties if they admit the illegal activity and
provide evidence that enables a case to be established against other firms. This can
be particularly important in developing countries where capacity limitation is a
critical constraint to the enforcement of competition law. Scott Hammond, Deputy
Assistant Attorney General for Criminal Enforcement in the Antitrust Division of the
US Department of Justice characterizes, leniency program as “the most effective
competition policy tool”. In South Africa’s investigation of the previously mentioned
milk processors, the Competition Commission benefited from one of the firms which
applied for the corporate leniency program. The firm is due to give evidence in
exchange for immunity in upcoming court hearings. However leniency only works when
coupled with strong enforcement, otherwise those engaging in antitrust activity have
no incentive to seek it. Developing countries’ limited enforcement capacity and other
constraints therefore reduce the effectiveness of any leniency programmes they adopt.
Footnotes
53 Decision of the Commission of the European Communities, Wood Pulp [1985] OJ L 85/1, 15.
54 Sachse, T. (2006), “Extra-territorial application of competition laws in the US and European Union” CUTS Briefing Paper.
Page 25
Section 4: Conclusions and recommendations
6. Using public scrutiny as a deterrent
Conclusions
The remedy that the Korean Fair Trade Commission took against Wal-Mart-Korea
and Carrefour-Korea is interesting in that it involved bringing the unfair and abusive
act to public attention. In both cases, the KFTC ordered that the violation of the fair
trade law by the retailers be acknowledged publicly through statements in two major
newspapers. They hope that the negative publicity may serve as deterrent for further
violations by these or other organisations with buyer power. It also gives the KFTC
credibility in the eyes of the public and could encourage other suppliers to bring cases.
Competition policy is to some extent a contested field, with different bodies trying
to mould it to fit their wider vision and different countries having different needs at
different stages of development. It is therefore important that Governments are able
to retain the flexibility and policy space to ensure that their competition policy can
contribute to their wider economic development and industrialisation strategies.
7. Tackling the ‘climate of fear’
The UK Competition Commission has proposed measures as part of its most recent
investigation which would help to tackle the ‘climate of fear’ felt by suppliers through
the establishment of an ombudsman for the supermarket sector. The proposed
ombudsman would monitor the trading relationships between retailers and their
suppliers against a new Groceries Supply Code of Practice (GSCOP). It is envisioned that
suppliers at all levels of a supply chain serving the UK market can raise a complaint
anonymously with the ombudsman. The ombudsman would then investigate the
complaint and if appropriate produce guidance to prevent further bad practice before
it is repeated more widely. They would also be able to prosecute retailers of breaches
of the GSCOP. If a supplier’s complaint is related to behaviour that only they have
experienced however, they will be required to initiate a ‘dispute’ in order to pursue
compensation. At this point their complaint will have to become attributable.
8. Designing competition policies to promote the public interest
There are some interesting exceptions to the dominant model of competition policy
favouring consumer protection.
South Africa: South Africa’s competition policy was developed through a three-year
consultation process with industry and trades unions. Its Competition Act allows (and
in some cases demands) that issues such as empowerment, employment and impact
on small and medium enterprises (SMEs) be taken into consideration in decisions.
Consumer interests are also included not only in terms of price, but also in terms of
product choice.55
Germany: Amendments to Germany’s Act against Restraints on Competition (ARC) have
enabled authorities to protect small and medium sized businesses against aggressive
competition by those in a dominant position. The Act now prevents dominant
firms from using their position to demand preferential terms “without objective
justification”. This law is instructive and unique in that it explicitly acknowledges
problems created in situations of “economic dependence” where suppliers lack
reasonable opportunity to resort to others sources. This approach is part of a wider
German policy by which companies are held accountable to shareholders, but also
to employees, customers and suppliers.56 There are no cases yet where this economic
dependence law has been implemented, but it may be the case that it acts as a
deterrent. There are similar provisions in Australia, Portugal and France.
Buyer power is just one problem that developing country commodity producers face
and there are many other policy interventions that can be employed to support them
that are not covered in this paper, for example corporate responsibility legislation,
diversification and value-addition, exploration of niche markets, contract law and
industrial and agricultural policy. However it is clear that competition policy does
merit serious consideration by Governments (whether in developed or developing
countries) who want to tackle the impacts that the exercise of buyer power has on
vulnerable actors in agricultural commodity supply chains. There is clearly a need
for modernization so that competition policy overcomes the constraints outlined in
this paper and comes up to date with the realities of international trade. But the
examples given show that where Governments recognize and tackle these weaknesses,
competition policy can be a responsive and useful tool in tackling the growing
phenomenon of buyer power.
What competition policy can do
Where competition policy needs work
Tackle the build up of power through
monitoring and blocking mergers
and acquisitions and reorganizing or
breaking up companies
To enable competition authorities
to take action against buyer power
affecting suppliers at home, but exerted
by companies elsewhere
Stop and punish abuses of dominant
position
Ensure available instruments and
definitions adequately take into
consideration impacts on suppliers as
well as consumers
Set up regulators, watch dogs,
adjudicators etc.
To tackle the problems of climate of fear
Tackle buyer power if the effects are felt
in the home market
Most competition authorities need
additional authority and capacity,
particularly when tackling powerful and
well-resourced companies
Footnotes
55 CRC Policy Brief (2005), “Designing competition policy”.
56 Kampel, K. (2004), “Competition law and SMES: Exploring the competitor/competition debate in a developing democracy”
Centre of Regulation and Competition Working Paper Number 109.
Page 26
Page 27
Recommendations
Towards international action on buyer power
Competition policy makers and experts around the world should consider:
Ê UÊ Ì…iʈ`i>ʜvÊ>˜Êˆ˜ÌiÀ˜>̈œ˜>ÊVœ“«ï̈œ˜Ê>}Àii“i˜ÌÊ܈̅ʫÀœÛˆÃˆœ˜ÃÊ̅>ÌÊܜՏ`Ê
be able to tackle the transnational effects of the exercise of buyer power
Ê
UÊ …œÜÊ̜Êi˜ÃÕÀiÊVœ“«ï̈œ˜Ê«œˆVÞÊ>ˆ“ÃÊ>ÀiÊLÀœ>`i˜i`ÊLiޜ˜`ÊVœ˜ÃՓiÀÊÜiv>ÀiÊÊ
to include consideration of suppliers’ concerns
Ê
UÊ …œÜÊ̜ÊLiʓœÀiÊ«Àœ>V̈ÛiÊ>˜`Êi˜ÃÕÀiÊ«ÀœÌiV̈œ˜Êˆ˜ÊLÕÞiÀÊ«œÜiÀÊV>ÃiÃ
Developed country governments should consider:
Ê UÊÊÃÕ««œÀ̈˜}ʈ˜ÌiÀ˜>̈œ˜>Ê>V̈œ˜Ê̜ÊÌ>VŽiÊLÕÞiÀÊ«œÜiÀ
Ê
UÊÊ՘`iÀÌ>Žˆ˜}Ê>ÊÀiۈiÜʜvʘ>̈œ˜>Ê>˜`ÊÀi}ˆœ˜>ÊVœ“«ï̈œ˜Ê«œˆVˆiÃÊ̜Ê>VVœÕ˜ÌÊvœÀÊ
changes in national and international market structures and allow greater
recognition of supplier interests
Ê
UÊ LÀœ>`i˜ˆ˜}ÊVœ“«ï̈œ˜Ê>ÜÃÊ̜ÊVœÛiÀÊ̅iÊLi…>ۈœÕÀʜvÊiVœ˜œ“ˆVÊ>V̜ÀÃÊL>Ãi`Ê
in their country which have impacts elsewhere
Ê
UÊ Ài뜘`ˆ˜}Ê«œÃˆÌˆÛiÞÊ̜ÊÀiµÕiÃÌÃÊvœÀÊVœ‡œ«iÀ>̈œ˜ÊvÀœ“ÊÃÕ««ˆiÀÃʈ“«>VÌi`ÊÊ
by buyers within their market
Ê
Ê
UÊ ÀivÀ>ˆ˜ˆ˜}ÊvÀœ“ÊÌ>Žˆ˜}Ê>V̈œ˜Ê>}>ˆ˜ÃÌÊVœœ«iÀ>̈œ˜ÊLÞÊ`iÛiœ«ˆ˜}ÊVœÕ˜ÌÀÞÊÊ
producers in response to buyer power
Ê
An international legal framework for competition policy could be critical to address the
issue of buyer concentration in global commodity value chains. In this regard, Singh has
suggested the establishment of an independent international agreement or institution.
This would require full consultation with developing countries and the involvement of
relevant civil society organisations. The 1980 UNCTAD’s Set of Multilaterally Agreed
Equitable Principles and Rules for the Control of Restrictive Business Practices (the
UNCTAD Code), which is supportive of the issues facing developing countries could be
used as a reference for starting discussions on this.57
“...to secure development gains in the developing world, it may be necessary
under some circumstances to intervene in the home bases of lead companies
and their intermediaries. In this sense competition and regulation policies
developed by the British government and applied to, say, British supermarket
chains, may be at least as important as policy initiatives taken in the
countries that supply them with their produce.” 58
“if competition
policy is to serve
the developing
nations in meeting
their international
trade objectives
then it must be
applied to trade
between nations.
Deployed in this
way it would
complement the
efforts of South
Africa and other
developing nations
to challenge new
protectionist
measures usually
pioneered by
industrialised
countries.” 59
Developing country governments should consider:
Ê UÊ ÃÕ««œÀ̈˜}ʈ˜ÌiÀ˜>̈œ˜>Ê>V̈œ˜Ê̜ÊÌ>VŽiÊLÕÞiÀÊ«œÜiÀ
Ê
UÊ Àiۈi܈˜}ʘ>̈œ˜>ÊVœ“«ï̈œ˜Ê>ÜÃÊ̜Êi˜ÃÕÀiÊ̅>ÌÊ̅iÞÊ>ÀiÊ>LiÊ̜Ê`i>Ê܈̅Ê
the buyer power phenomenon. In particular through:
- incorporating a clear definition of buyer power and its abuses
- providing for sufficient protection for those wanting to bring buyer
power cases
- extending the scope of competition law to cover firms outside its
own jurisdiction, as appropriate
Ê
UÊ `iÛiœ«ˆ˜}ʜÀÊÃÌÀi˜}̅i˜ˆ˜}ÊVœ“«ï̈œ˜Ê>ÜÃÊ>ÃÊ«>ÀÌʜvÊ̅iˆÀÊiVœ˜œ“ˆVÊÊ
development or industrialization plan
Ê
Ê
UÊ >««Àœ>V…ˆ˜}ÊVœ“«ï̈œ˜Ê>Õ̅œÀˆÌˆiÃʈ˜ÊVœÕ˜ÌÀˆiÃÊ܅iÀiÊLÕÞiÀÃÊ>ÀiÊÊ
situated to request co-operation in cases affecting their suppliers
Ê
Ê
UÊ `iÛiœ«ˆ˜}ÊÀi}ˆœ˜>ÊÀi뜘ÃiÃÊ>ÃÊ>ÊÜ>ÞʜvʜÛiÀVœ“ˆ˜}Ê̅iÊ`ˆÃ>`Û>˜Ì>}iÃÊÊ
of being a small or vulnerable economy
Ê
Ê
Footnotes
57 Singh, A. (2002), “Competition and competition policy in emerging markets: international and development dimensions”,
University of Cambridge.
58 Soludo, C. Ogbu, O. Chang, H. eds (2004), “The politics of trade and industrial policy in Africa: Forced Consensus?”
International Development Research Centre.
59 Henderson, J. (2005), “Global Production Networks, competition, regulation and poverty reduction: policy implications”,
Centre on Regulation and Competition Working Paper Number 115.
Page 28
Page 29
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