Learning and Teaching Resources for
Integrated Humanities
Core Module II:
Characteristics of Hong Kong Society
1.
What are some of the pluses and
minuses of Hong Kong society?
b.
Economic development and
wealth distribution
Suggested question for enquiry:
What is the economic policy of
the HKSAR government?
Supplementary material on
competition policy of the HKSAR government
Background information
Importance of competition

Competition is the driving force for improvement and innovation.
For consumers, the lack of competition will limit choices and lead to
higher prices. For example, in order to compete for more business,
providers of goods/services will strive to improve the quality of the
existing products/services, develop new products/services and
reduce or refrain from increasing the prices. If the providers of
goods/services do not need or do not have much pressure to compete,
there will be less or little incentive for them to improve the quality of
the existing products/services, develop new products/services or
reduce/refrain from increasing the prices.

For the economy, the lack of competition will lead to higher
operating costs for businesses, discourage local and foreign
investment and affect economic growth. Hence, promoting free
competition has been the cornerstone of the Government’s trade and
economic policy.
Anti-competitive practices

While competition among businesses is good to consumers, traders
(so that any interested parties can enter into the market where they
see business potential) and the economy as a whole, some incumbent
business operators may wish to prevent or restrict the extent of
competition among incumbent operators or competition from new
operators. This is because competition may affect the market share
of an incumbent operator, exert pressure for a price reduction or
reduce the scope for a price increase. Practices which aim to or
have the effect of restricting competition are anti-competitive
practices.

The following is an non-exhaustive list of examples of
anti-competitive practices:
(a) price-fixing agreements (e.g. different suppliers of ice-cream
agreeing on the prices to be charged for different types of
ice-cream so that they can avoid competing with each other on
prices);
(b) preventing or restricting the supply of goods or services to
competitors (e.g. Restaurant A purchases beef from Supplier A
and requests the latter not to supply beef to Restaurant B in
order to drive Restaurant B out of business);
(c) agreements to share any market sector between participants on
agreed geographic or customer lines (e.g. there are five
suppliers of cars in Country A. These suppliers divide Country
A into five areas, assign an area to each supplier and agree with
each other not to operate beyond the boundary of one’s assigned
area);
(d) 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 (e.g. doctors in Country A requires
a license from the Doctors’ Association before they can practice.
To reduce the number of doctors entering the market, some
incumbent members of the Doctors’ Association propose that
from now onwards, to obtain a license for private practice, an
applicant should first work in a hospital in other countries for
ten years) ;
(e) bid-rigging (e.g. a bus company advertises in the newspaper to
invite bids for a contract for the supply of 10,000 tyres. Four
suppliers agree on the bidding prices beforehand to jack up the
prices and share the profits afterwards); and
(f) abuse of dominant market position (e.g. a dominant firm in the
mobile phone market sets very low prices or selling below the
firm’s incremental production costs so as to drive competitors out
of business. Once the predator has successfully driven out
existing competitors and deterred entry of new firms, it can raise
prices and earn higher profits).
Means to safeguarding competition

Many countries safeguard competition through a comprehensive
competition law covering all sectors: it is illegal to enter into
agreements which have the effect or purpose of substantially
restricting competition. At present, 86 World Trade Organisation
Members (out of a total of 146 Members) already have such laws.

For example, in the United States, a practice is illegal if it restricts
competition in some significant way and has no overriding business
justification, such as price-fixing, bid rigging, and agreements to
limit output and market allocations.

Whether a practice or contract constitutes “unreasonable restraint of
trade” or have the effect of “substantially lessening competition” is to
be decided by the court having regard to court decisions in specific
cases over the past 100 years.

Any individual or entity “injured in its business or property by reason
of anything forbidden in the anti-trust laws” may initiate claims for
damages through the court.

Exemptions may be granted on ground of public interest or other
public policy consideration. For example, the federal government
and its agencies are immune from suit under the anti-trust laws.
Certain activities of agricultural cooperatives, insurance business, air
carriers and shipping companies are also exempted.
Market-driven, sector-specific approach

The Hong Kong government believes that competition is best
nurtured and sustained by allowing the free play of market forces
and keeping intervention to the minimum. That is why Hong Kong
maintains no restriction on trade, capital flow and foreign investment.
For example, as long as the market is open so that any interested
parties can enter the market, unreasonably-priced products/services
will lose out to those charging lower prices.

Hong Kong has been ranked as the freest economy in the world:

the Heritage Foundation for the 10th year in a row (January
2004)

Canada’s Fraser Institute in conjunction with the Cato Institute
in the US (April 2001, June 2002, July 2003 and July 2004)

The Government recognizes that not all practices that limit market
accessibility or contestability impair economic efficiency or free
trade. Only those that do, and are not in the overall interest of Hong
Kong, should be attended to.

A comprehensive competition law will not address the special
circumstances and needs of individual business sectors;
heavy-handed regulation through legislation will risk stifling
innocuous economic activities and, in some cases, lead to protracted
and abortive litigation.

Hence, the Government adopts a sector-specific approach:

take appropriate measures to promote competition in different
sectors having regard to the actual circumstances of the
respective sectors

measures range from licensing conditions, contractual
provisions, codes of practice, administrative means, public
censure and anti-competition provisions in specific legislation
Data for discussions
Data I
There is a strong case for government to take proactive action in order
to minimize the economic impact of the gradual decline of wet markets
through re-engineering the government's involvement in the wet market
sector and retraining of the workforce.
Whilst wet markets currently have a significant share of the fresh food
sector, there are indications of a gradual decline in consumer patronage
due to a concern with the shopping environment, in terms of cleanliness
and comfort that can be addressed. In the absence of appropriate
measures there will be a difficulty for this sector to counter the
increasing market share by supermarkets offering similar products and
services.
There is a prima facie concern with the market share held by the two
largest supermarket chains in the packaged foodstuffs and household
necessities sector.
Citation from: Consumer Council, “Competition in the FoodStuffs and
Household Necessities Retailing Sector Findings and Recommendations”
(August 2003)
http://www.consumer.org.hk/website/ws_en/competition_issues/competit
ion_studies/20030811supermkt.html
Data II
The Consumer Council considers that, under the present market
structure with the supermarket chain stores being the dominant
players, competition is not vigorous enough to prevent their price
increases even when overall product prices are undergoing
downward adjustments. This is evident from the fact that
supermarket prices showed an upward trend from January to June
2002 with an increase of 3.6% and 1.5% for the average list prices
and average prices (with discount factor taken into account)
respectively. As for the first six months of 2003, there was a rise
of 1.5% for the former and a drop of 0.8% for the latter.
This is a reverse of the relationship of cause and effect. Before
the advent of supermarkets, traditional markets were the only
giants around. Later, when supermarkets came to exist, their
services, choice of products, reliability and shopping environment
all gain them competitive edges over traditional markets. The
best proof of consumers’ preference of supermarkets over
traditional ones is their vote with their wallets. Therefore, the
“culprit” for the current retail market structure of foodstuff and
household necessities is none other than the consumers themselves.
In other words, the current market structure is a result of
competition, not a lack of it. Conversely, if supermarket prices
keep on rising with no corresponding benefits being offered, will
consumers continue their patronage for the supermarkets and not
turn back to markets? Is the Consumer Council not casting
doubts on consumer wisdom?
Even if Consumer Council’s assertion that anti-competition
practices do exist in retail market of foodstuffs and household
necessities is true, will the enactment of a competition law be a
solution?
The answer is no. As an example, take the case of the familiar
Microsoft. An article published in a financial and economic
periodical reveals that from 1991 to 1997 every lawsuit brought by
the Antitrust Division of the US Department of Justice a against
Microsoft was followed as expected by a drop in its share price.
What interests us is: besides Microsoft, the overall share prices of
other companies in the computer industry and related sectors also
fell at the same time! If Microsoft had really acted against the
Competition Law, companies in the same sector other than
Microsoft should have had benefited. Why didn’t their share
prices rise? If antitrust legislation can truly help in promoting
market competition, why didn’t the share prices of these companies
rise but dropped?
In fact, once a competition law is introduced, under-performing
enterprises may survive for the time being on the higher costs of
successful counterparts, thereby indirectly undermining the
interests of consumers and leading to a waste of resources. It
provides a non-market means for these soon-to-be-driven-out
enterprises against their popular competitors. With this feature of
suppressing the strong and helping the weak, a competition law has
the undetected effects of bringing policy risks and uncertainties to
the market, weakening the expectation of investors in long-term
investment return, discouraging investment sentiment as well as
undermining market development.
Citiation from: Gary SHIU, Research Programme Director of Hong Kong
Institute of Asia-Pacific Studies, Chinese University of Hong Kong:
“Competition Law: More Harm than Good” (Apple Daily, 18 September
2003)
Data III
As for packaged foodstuffs and household necessities, the Consumer
Council considered that there is a prima facie concern with the market
share held by the two major supermarket chains and that the level of
market concentration of the two chains would have reached the
threshold level of the mergers or acquisitions guidelines in countries
where there are competition authorities.
However, in arriving at this conclusion, the Council has only had regard
to the turnover shares and number of outlets of supermarket chain
stores (including those in department stores) and convenience stores,
and vertical integration into the convenience store sector. The analysis
has not taken into account household product stores chains (which are
getting increasingly popular), drug stores (which are popular places for
the purchase of toiletries, shampoos and other cleansing products),
hardware stores, groceries shops and many other small retail outlets.
This raises doubts on the validity of the Council’s claim that there is a
prima facie concern with the market share held by the two supermarket
chains in the packaged foodstuffs and household necessities sector.
The Commerce, Industry and Technology Bureau (CITB) suggests that
the Council should include household product stores chains, drug stores,
hardware stores, groceries shops and other small retail outlets in its
analysis of market share for the packaged foodstuffs and household
necessities market in the future.
CITB notes that competition in the retail market is fierce and that there
is no need for Government intervention in the operation of the retail
market. There are a large number of players in the market, including
supermarket chains, supermarkets in department stores, convenience
shops, food stores and household product stores. Even if only the
number of supermarkets, chain stores and convenience stores are taken
into account, the number of outlets of the two large supermarket chains
account for 17 % and 15% of the market share (Note 1) respectively.
In addition, competition exists in the form of price and non-price
competition. To cater for the preference of consumers, apart from
reducing the selling price of products, many retail market operators try
to gain a competitive edge by providing longer operating hours, cleaner
environment and the convenience of one-stop shopping. Others strive
to maintain their niche by providing personal and flexible services to
cater for the specific needs of their customers. As a result, consumers
benefit from having a wider choice of goods and service which are of
better quality and offered at more competitive prices.
Citation from: Competition Policy Advisory Group, “The
Administration’s Response to the Consumer Council’s Report on
Competition in the Foodstuffs and Household Necessities Retailing
Sector” (November 2003)
http://www.compag.gov.hk/reference/cc.pdf
Data IV
In a speech during his visit in March 2004 to Hong Kong, Mr Pascal
Lamy, Trade Commissioner of the European Union, expressed that there
seemed to be several areas in Hong Kong, including supermarkets and
petrol filling stations, where anti-competitive behaviour was prominent.
He was disappointed that the Hong Kong government had again
reiterated the sector-specific approach to competition and that it had
apparently completely ruled out comprehensive competition law.
Summarized from:South China Morning Post, 13 March 2004
(Note 1)
Data extracted from page 46 of the Consumer Council’s report on “Wet Markets vs.
Supermarkets: Competition in the Retailing Sector”.
Data V
There have been concerns that the sole agent status of Ng Fung Hon has
resulted in virtual monopoly of the fresh pork market.
However, it should be noted that although NFH does not face any
competition as an importer of live pigs from Mainland, it still faces
competition in the larger pork market as Mainland live pigs are not the
sole source of pork for local people. There is also pork from local
pigs, chilled pork and frozen pork, although the preference of some
household consumers for buying pork from freshly-slaughtered pigs has
given live pigs an edge over chilled and frozen pork. Nevertheless,
consumers have the choice of turning to other sources for pork if the
price of fresh pork from Mainland pigs becomes excessively high. In
fact, other consumer groups including restaurants, Siu Mei shops,
younger families and families with westernized habits have turned to
use much more frozen or chilled pork in lieu of fresh pork in the recent
years.
Citation from: Competition Policy Advisory Group, “Competition in the
Supply Chain of Pork” (December 2002)
http://www.compag.gov.hk/reference/pork.doc
Suggested questions for discussions for Data I to V

Can you identify some objective indicators of the existence or the
lack of competition in the packaged foodstuffs and household
necessities market?

Do you agree that, besides supermarkets, household product stores
chains, drug stores, hardware stores, groceries shops and other small
retail outlets should also be included in the analysis of the packaged
foodstuffs and household necessities market? Why?

Do you agree that the government should take proactive action to
help wet markets compete with other retail outlets of fresh produce?
Why?

Do you agree that fresh pork, frozen pork and chilled pork are
different markets and should be considered independently in a
competition analysis? Why?

What is the role of consumers in the competition in the fresh
produce, packaged foodstuffs and household necessities markets?
Data VI
The Government considers competition is best nurtured and sustained
by allowing the free play of market forces and keeping intervention to
the minimum. We will not interfere with market forces simply on the
basis of the number of operators, scale of operations, or normal
commercial constraints faced by new entrants. We will take action only
when market imperfections or distortions limit market accessibility or
market contestability, and impair economic efficiency or free trade, to
the detriment of the overall interest of Hong Kong. We will strike the
right balance between competition policy considerations on the one
hand, and other policy considerations such as prudential supervision,
service reliability, social service commitments, safety, etc., on the other.
There is no international standard or consensus on what is the best
approach to achieve competition in order to enhance economic
efficiency and free flow of trade. Some economies have competition
laws which differ widely in scope of control, enforcement mechanisms
and remedies available. Other economies shun the legislative route. The
choice is heavily influenced by the characteristics, development history
and socio-economic background of an economy.
Citation from: Competition Policy Advisory Group, “Statement on
Competition Policy” (May 1998) http://www.compag.gov.hk/about/
Data VII
With respect to market competition, many people are worried about
the possibility that the merger will lead to market monopolization.
I would like to stress that our policy is to maintain a public
transportation system which is balanced and well-complemented.
We also encourage healthy competition so that passengers can be
given choices and limited resources put to their best uses. The
modes of public transport in Hong Kong are diversified, besides the
railways, there are also franchised buses, estate coaches, minibuses,
taxis, trams, and so on. The diversity of these modes of transport
will provide extensive choices to passengers and promote market
competition.
One of the major premises of the proposed merger of the two
railways is that the merged corporation will be subject to proper
supervision. We will enact laws to provide for such matters. The
operation agreement will clearly lay down other important
requirements in respect of service quality and safety. The merged
corporation will not become a so-called independent kingdom, for it
will have to face competition from other modes of public transport.
Citation from: Speech of the Secretary for the Environment, Transport
and Works at the Legislative Council motion debate on merger of two
railway corporations (3 March 2004)
http://www.legco.gov.hk/yr03-04/chinese/counmtg/floor/cm0303ti-confir
m-c.pdf
Data VIII
On 3 January 2000, the Telecommunications Authority ("TA") noticed
from the press that all mobile telephone services operators had
simultaneously adjusted their prices on 2 January 2000.
He
immediately launched an investigation into whether the simultaneous
price adjustments were in compliance with the competition conditions
of the licences held by the mobile operators, which prohibit the
licensees from entering into any agreements or arrangements which
shall in any way prevent or restrict competition in relation to the
operation of the mobile telephone service.
As a result of the investigation, the TA was satisfied that between the
six licensees there had been contacts, exchanges or "soundings out" at
senior level of the respective licensees; and during these contacts
discussions had taken place relating to state of the market, which could
remove in advance uncertainty as to the future behaviour of the others.
Taking into account that the price changes were the same or very
similar, in particular the increase in monthly subscription of $20; and
that in nearly all cases the operators knew a few days before any formal
announcement by their competitors of price changes that the others
would effect, the TA formed the opinion that some kind of
"arrangement" must have existed which led to the simultaneous price
adjustments that took place on 2 January 2000.
Following the TA’s investigation, all the operators agreed to rescind the
price adjustments made on 2 January 2000 and to revert back to the
pre-January prices for both new and existing customers.
Citation from: Office of the Telecommunications Authority,
“Simultaneous Price Changes of Mobile Telephone Operators” (January
2000) http://www.ofta.gov.hk/frameset/home_index_eng.html
Suggested questions for discussions for Data VI to VIII

Can you identify any instances of anti-competitive business
practices in your daily lives?

There have been criticisms that the bus companies enjoy monopoly
in Hong Kong and that bus fares are high because of the lack of
competition. Do you agree to such criticisms? Why?

Do you support the merger of the two rail companies in Hong Kong?
Why?

Which approach you think is more suitable for Hong Kong in
dealing with anti-competitive practices and promoting competition, a
comprehensive competition law for all sectors or specific measures
(which can be legislation, licensing requirements or other
administrative measures) for individual sectors?
Economic Development Branch
Economic Development and Labour Bureau
August 2004
L:\B-UNIT\Competition Policy\Brief\ForUseInIntegratedHumanities.doc