Study Notes: Anti‑competitive Behaviours & Competition Policy

Hey everyone! Welcome to the exciting world of competition. Think about why you can choose between different brands of bubble tea, smartphones, or sneakers. It's because of competition! Competition is great for us (consumers) because it usually means lower prices, better quality, and more choices.

But what happens when companies decide not to compete fairly? What if they secretly team up to keep prices high? That's what this chapter is all about. We'll explore the sneaky tricks firms use to avoid competition, the harm this causes, and how Hong Kong's laws try to keep the market fair for everyone. Don't worry if it sounds complex; we'll break it down with simple examples!


What are Anti-competitive Behaviours?

In simple terms, anti-competitive behaviours are actions taken by one or more firms to reduce, prevent, or distort competition in a market. The main goal is usually to increase their own profits at the expense of consumers and other businesses.

Analogy Time: Imagine a school sports day running race. Fair competition is when everyone runs their fastest to win. Anti-competitive behaviour would be if the three fastest runners secretly agree to run slowly so their friend can win, or if they team up to block other runners. It ruins the spirit of the race and leads to an unfair result.

We can group these behaviours into two main types: Horizontal Agreements (between competitors) and Vertical Agreements (between suppliers and their customers).


Quick Review Box

Competition: When different companies rival each other to sell goods and services.
Benefit of Competition: Lower prices, higher quality, more innovation, more choice for consumers.
Anti-competitive Behaviour: Actions by firms to cheat or eliminate competition.



Horizontal Agreements (Teaming up with your Rivals)

Horizontal agreements are made between firms that operate at the same level of the market. They are direct competitors. Think of them as rivals who are supposed to be competing head-to-head.

Memory Aid: Think of the horizontal line of the horizon. All the boats on the horizon are at the same level, just like competing firms.

These agreements are considered very serious because they directly harm competition. Here are the most common types:

1. Price Fixing

This is the most classic and obvious form of cheating. Competitors secretly get together and agree on what price to charge for their products.

  • What it is: An agreement to set prices, raise prices, or maintain prices at a certain level.
  • Example: All the major petrol stations in Hong Kong secretly agree to set the price of unleaded petrol at $20 per litre. No matter where you go, the price is the same, and you have no cheaper option.
2. Collusive Bidding / Bid Rigging

This happens when companies are supposed to be submitting secret, competitive bids for a contract (e.g., a government construction project).

  • What it is: Competitors agree in advance which company will win the bid. The "winner" submits a high-priced bid, while the others either submit even higher bids (to make the winning bid look reasonable) or don't bid at all.
  • Example: Three construction companies are bidding to build a new school. They secretly agree that Company A should win. Company A bids $100 million. Company B bids $110 million, and Company C bids $115 million, ensuring Company A gets the contract at an inflated price. They might even agree to take turns "winning" future contracts.
3. Market Division / Market Allocation

Instead of competing everywhere, firms agree to carve up the market and create their own mini-monopolies.

  • What it is: Competitors divide the market by territory or customer type.
  • Example: Two large air-conditioner installation companies agree that one will only serve customers on Hong Kong Island, and the other will only serve customers in Kowloon. This way, they never have to compete with each other on price or service.
4. Customer Allocation

This is very similar to market division, but instead of splitting up territories, competitors agree not to poach each other's existing clients.

  • What it is: An agreement not to pursue or accept business from customers who are already served by a competitor in the group.
  • Example: Two corporate cleaning companies agree on a list of clients. Company A will not offer its services to Company B's clients, and vice versa. This stops them from having to lower their prices to keep their customers.
5. Sales and Production Quotas

By limiting the supply of a product, firms can create artificial scarcity and drive up the price.

  • What it is: Competitors agree to limit how much they produce or sell.
  • Example: A group of luxury watchmakers agree to only produce 1,000 units of a popular watch model per year, even though they could easily make 10,000. This limited supply keeps the price extremely high.

Key Takeaway for Horizontal Agreements: These are agreements between direct competitors to stop competing. They are like a secret club designed to make more money by cheating consumers.


Vertical Agreements (Rules between Suppliers & Sellers)

Vertical agreements are made between firms at different levels of the supply chain. For example, an agreement between a manufacturer (supplier) and a retailer (seller).

Memory Aid: Think of a vertical ladder. You move up or down the rungs, from one level to another, just like moving from a supplier to a retailer.

These can sometimes be harmless or even efficient, but they can also be used to harm competition.

1. Resale Price Maintenance (RPM)

This is when a supplier dictates the price at which a retailer must sell its product.

  • What it is: The supplier sets a minimum, fixed, or maximum resale price. The most common concern is a minimum RPM, which stops retailers from offering discounts.
  • Example: A high-end handbag brand tells all department stores that they are not allowed to sell its new bag for less than $15,000. This stops the stores from competing on price to attract customers.
2. Tie-in Sales

This is when you are forced to buy something you don't want just to get the thing you do want.

  • What it is: A seller makes the sale of one product (the "tying" product) conditional on the purchase of a second, different product (the "tied" product).
  • Example: To buy a very popular new video game console (the tying product), the store forces you to also buy three of its unpopular games (the tied products).
3. Exclusive Dealing

This is when a supplier or retailer agrees to only deal with each other, shutting out competitors.

  • What it is: A retailer agrees to only purchase products from one specific supplier, OR a supplier agrees to only sell its products to one specific retailer in an area.
  • Example: A popular coffee shop chain signs a contract with a shopping mall, stating that it will be the ONLY coffee shop allowed to operate in that mall. This prevents other coffee brands from entering and competing.

Key Takeaway for Vertical Agreements: These are agreements between a supplier and a seller that can restrict how the seller operates, potentially harming competition by limiting choice or fixing prices.


Mergers (Joining Forces Permanently)

A merger is when two or more separate companies join together to become a single, larger company. While many mergers are fine, some can be anti-competitive if they significantly reduce the number of competitors in a market.

  • Horizontal Merger: A merger between direct competitors. (e.g., if MTR and Citybus merged). This type is most likely to harm competition.
  • Vertical Merger: A merger between a firm and its supplier. (e.g., if a pizza chain bought a cheese factory).
  • Potential Competition Merger: A merger where a company buys another company that could have become a future competitor. (e.g., if a dominant social media giant buys a small, fast-growing new app to eliminate a future threat).

The Impact of Anti-competitive Practices

So, why do we care about all this? Because these practices hurt almost everyone except the companies involved. The negative impacts are predictable and serious.

If firms succeed in reducing competition, the result is often:

  1. Higher Price: This is the number one impact. With no competition, firms can charge you more for the same product.
  2. Lower Output: Cartels (groups of firms acting together) often restrict production to create artificial scarcity and justify the higher prices.
  3. Lack of Choices for Consumers: When markets are divided up or exclusive deals are in place, your choices become limited. You can't switch to a different company because there aren't any!
  4. Reduction of the Number of Competitors: Anti-competitive behaviour can drive smaller, honest businesses out of the market because they can't compete with a powerful cartel or a dominant firm's unfair tactics.

Key Takeaway on Impacts: Anti-competitive behaviour is bad news for consumers. It almost always leads to paying more for less choice and lower quality.


Fighting Back! The Competition Ordinance in Hong Kong

To prevent all these problems, Hong Kong, like most modern economies, has a competition law. It's called the Competition Ordinance. It's the official rulebook designed to protect competition and punish those who play unfairly.

Did you know? The Competition Ordinance came into full effect in December 2015. It is enforced by the Competition Commission.

Objectives of the Ordinance

The main goal is simple: to prohibit conduct that prevents, restricts or distorts competition in Hong Kong. By doing this, the law aims to promote a competitive environment that benefits both consumers and businesses through greater efficiency and innovation.

The Two Main Rules

The Ordinance has two key "Conduct Rules" that you need to know.

1. The First Conduct Rule: No Anti-competitive Agreements

This rule targets the agreements between businesses that we discussed earlier (both horizontal and vertical). It prohibits agreements, concerted practices, or decisions that have the object or effect of harming competition.

  • This rule directly covers things like price fixing, bid rigging, market division, and RPM.
  • Remember: This rule is about companies working together to harm competition.

2. The Second Conduct Rule: No Abuse of Market Power

This rule targets a single business that is already very powerful in its market.

  • Market Power: A business has a substantial degree of market power if it can act without worrying too much about what its competitors or customers will do. Think of it as being the "king of the hill".
  • Abuse: This rule does NOT make it illegal to be big and powerful. It makes it illegal to ABUSE that power to harm competition.
  • Example: A massive supermarket chain with 90% of the market (market power) starts selling bread for just $1 per loaf – far below its cost. It does this for months to drive all the small local bakeries out of business. Once they are gone, it raises the price of bread to $30. This is an abuse of its power.
Exclusions and Exemptions

The law is not designed to stop all agreements. Some are allowed if they don't harm competition or even if they generate benefits.

  • What are they?: Situations where the Conduct Rules do not apply.
  • Simple idea: The law allows for exceptions for things like agreements that enhance overall economic efficiency (e.g., improving production or promoting technical progress), or for certain government bodies and statutory bodies.

Key Takeaway for the Ordinance: The Competition Ordinance has two main pillars: The First Conduct Rule stops firms from ganging up, and the Second Conduct Rule stops a single powerful firm from acting like a bully. Its goal is to keep the market fair for all.