A complaint that four bottled gas steel bottle inspection companies in southern Chinese Taipei-He Hsing Enterprises Ltd., Co., Jung Shun Hsing Ltd., Co., Safeway Gas Company Ltd., Co.'s Kaohsiung facility, and Ch'un An Engineering Ltd., Co.-had raised bottle inspection fees in concert in violation of the Fair Trade Law

Chinese Taipei


Case:

A complaint that four bottled gas steel bottle inspection companies in southern Chinese Taipei-He Hsing Enterprises Ltd., Co., Jung Shun Hsing Ltd., Co., Safeway Gas Company Ltd., Co.'s Kaohsiung facility, and Ch'un An Engineering Ltd., Co.-had raised bottle inspection fees in concert in violation of the Fair Trade Law

Key Words:

concerted price fixing, cartel, secretive collusive acts, uniform action, circumstantial evidence, bottled gas steel bottle inspection market, cost structure, changes in costs, uniform market appearance [concerted action], production capacity, tacit understanding not to poach customers, customer allocation, market share, oligopolistic markets, conscientious parallelism, intelligence exchange

Reference:

Fair Trade Commission Decision of September 1, 1999 (the 408th Commissioners' Meeting); Disposition (88) Kung Ch'u Tzu No. 124

Industry:

Other Industrial and Commercial Services (7909)

Relevant Laws:

Articles 7, 14 and 41 of the Fair Trade Law

Summary:

  1. Twenty-three bottled gas retailers from Fengshan City, Kaohsiung County filed a complaint to the effect that Safeway Gas Company Ltd. ("Safeway Gas Company") acted in concert with the other southern Chinese Taipei steel bottle inspection centers to raise the fee that they charged to inspect steel gas bottles by more than 50% in a few short months between 1996 and 1997. The inspection fee for 16-kilogram and 20-kilogram bottles, for example, increased from NT$120/bottle to the current NT$180. This imposed a heavy burden on retailers. In the investigation, the parties and six gas bottlers testified and the Bureau of Standards, Metrology, and Inspection (BSMI), Ministry of Economic Affairs, supplied market information.
  2. In order to regulate restrictive competition (cartels) effectively, the Commission deems that when businesses act collusively or uniformly, their actions can result in a meeting of the minds. Such acts are considered a violation of Article 7 of the Fair Trade Law ("the Law") and constitute what the Law calls "consent by other means" in Article 5(2) of the Enforcement Rules of the FTL. When "uniform acts" are to be proved in cases where evidence cannot be obtained for a "meeting of the minds", it is allowable to deduce the existence of such a "meeting of the minds" between the respondents by using circumstantial evidence to show that in the absence of a prior "meeting of the minds," the respondents cannot explain their market acts reasonably. Such circumstantial evidence includes the respondents' motivation to participate, incentives, financial interest, the timing and size of price increases, the possibility of substituting different acts, the number of occurrences, the duration of the occurrence, the [temporal] concentration of the acts, and other uniform acts of market competition .
  3. The four inspection firms raised inspection fees successively beginning in October 1997. Moreover, after they raised their prices, the prices were highly consistent (around NT$180/bottle). Although the firms stated that they did not raise prices in concert, Jung Shun Hsing Ltd., Co. ("Jung Shun") admitted that it "had considered the pricing of its three competitors when it raised prices and was aware that its three competitors planned raise prices to NT$180/bottle so as to simplify payment. Nonetheless, since the company felt that it should charge reasonable, pragmatic fees, it only increased its fee to NT$176.4." With the facts cited below, this is already sufficient to determine that the respondents violated the provisions prohibiting concerted action.

    3.1 Between March and April 1997, Safeway Gas (Kaohsiung branch), He Hsing Enterprises Ltd., Co. ("He Hsing Enterprises"), and Jung Shun raised their inspection fees for steel gas bottles from NT$120/bottle to NT$150/bottle (Each firm raised its prices within a period of two weeks. Jung Shun's price was NT$7.5 more expensive than the others because it did not include taxes). In October and November of the same year, these three inspection firms and Ch'un An Engineering Ltd., Co. (Ch'un An Engineering), a new entrant, increased their inspection fees from NT$150 to NT$180 (Each company increased prices within one month; Jung Shun increased its price to NT$176.4, NT$3.6/bottle cheaper than its competitors' prices). Since these four firms maintained a price of around NT$180 through June 1999, inspection fees in the southern Chinese Taipei market were uniform for 26 months without price competition. Although the two price increases were not entirely uniform, the fact that the four competitors raised their fees twice in six months to nearly identical amounts is sufficient to deem that there was, objectively speaking, uniform pricing if we take into account that the steel bottle inspection industry, which charges customers each time a bottle is inspected, is fundamentally different from those product markets in which an annual flat fee is secured in advance.

    3.2.1 The primary costs in the bottle inspection business are inspection equipment upgrades, maintenance, materials, and labor. Because inspection companies must do regular inspections according to the inspection process for steel household liquid gas bottles set by the BSMI, inspection procedures and services are quite similar. Consequently, firms in this industry have similar cost structures and cost expenditures. In 1992, when the Vocational Assistance Commission for Retired Servicemen's Office of Liquefied Petroleum Gas Supplies still managed distribution and sales, inspection fees for 20-kilogram bottles were approximately NT$100. If we take this figure as the benchmark for a reasonable price and add the Consumer Price Index's annual rate of increase, the price in December 1997 should have been NT$120.59, and the price in May 1999 should have been NT$122.46. There is a gap between this price and the current industry price of NT$180. Consequently, it is difficult to believe that the industry increased prices purely to reflect consumer price increases.

    3.2.2 The disposed maintained that they increased prices in October and November 1997 because of cost considerations. However, when the Commission investigated, it found that individual firms made investments in inspection equipment that varied by millions of NT dollars and also that certain firms were using powdered enamel coats as much as ten months before the others. Although these fixed costs were different and equipment or cost changes occurred at different time, the fact that price increases occurred at nearly the same time makes it clear that the disposed did not independently raise their prices to reflect their costs. What is more, when Safeway Gas's Kaohsiung facility began to inspect bottles using powdered enamel, its cost per bottle fell in comparison with the cost of using liquid enamel. Over the long term average costs are clearly falling; the installation of powder enamel equipment is not why the firms increased their prices.

    3.2.3 Bottle inspection bottle, capacity, and price strategy: At the time of the October 1998 investigation, the four inspection firms were already predicting that bottle inspection volume and demand would decrease. By May 1999, volume at the companies was only about 30 or 40 percent of capacity. Despite the fact that they were underutilizing their equipment, the disposed did not lower prices to win customers. The four firms also stated that NT$180 per bottle did not reflect their costs fully and that they were operating at a loss. The Commission, however, found that after a oil tanker truck exploded on February 27, 1998 at Safeway Gas's Lin Yuan facility, fire fighting agencies throughout Chinese Taipei cracked down on the inspection of overdue bottles during March and April of the same year. As a result, the number of bottles sent for inspection increased dramatically and inspection volume at the four firms reached 80 to 150 percent of capacity. Nonetheless, none of the four firms responded by adjusting pricing. Clearly, these pricing strategies circumvented market competition and cannot be understood in terms of normal economic phenomenon.

    3.2.4 Customer allocation and the tacit understanding not to poach customers: He Hsing Industries Ch'un An Engineering, and Safeway Gas largely limited themselves to the existing, stable bottling market. They could not-or would not-compete for customers in southern Chinese Taipei because doing so would certainly affect market equilibrium. This strategy of solidifying relationships with existing customers was the same even at times when sales were poor. The Commission's investigation also found that one large bottler in Taliao Hsiang, Kaohsiung Country, which had been having its bottles inspected by Safeway Gas, planned to change to Jung Shun because of Jung Shun's lower fee. However Jung Shun was unwilling to transport the bottles, indicating that if the bottler wanted to change to Jung Shun, it would have to pay to have the bottles transported. This arrangement differed from the arrangement Jung Shun had with its existing customers whereby Jung Shun was willing to transport the bottles itself. Consequently, the Commission believes that Jung Shun was deliberately obstructing the bottler's efforts to switch. (Jung Shun is based in Tungkang, Pingtung County. One of the bottlers for which it transports bottles is Yi Ch'un, located in Kangshan, near the Kaohsiung County seat. The distance between Jung Shun and Yi Ch'un is several times greater than distance between Jung Shun and the bottler located in Taliao. In terms of proximity, Jung Shun could have picked up bottles from the Taliao bottler on the return trip from Yi Ch'un, yet despite a lack of customers, Jung Shun was unwilling to accept business from the Taliao bottler.) This refusal to do business clearly went against Jung Shun's own business interests, and it is difficult to believe that it would have made this decision had it been doing business independently. Consequently, it may be deduced that the disposed firms allocated customers among themselves and had tacitly agreed not to poach customers from one another.

    3.2.5 Price changes and static market share: The Commission investigated and found that powdered enamel products were superior in quality to liquid enamel. Nonetheless, He Hsing Industries, which continued to use liquid enamel until July 1997, retained its customers and continued to do the highest volume of business. Even though He Hsing Industries did not change to powdered enamels until July 1997 and therefore did not incur what its competitors claimed was a major increase in costs, He Hsing Industries raised its prices along with its competitors at the same time in 1997 and yet did not see any impact on its volume. He Hsing argued that it raised prices in order to keep volume below the level that the BSMI mandated for each inspection center. These market conditions are clearly contrary to those prevailing in normal competitive markets.

    3.2.6 Abnormality of new markets entrants increasing prices first: Normally, the largest or most well-known businesses will lead price hikes in cases when enterprises in a closed market engage in copy-cat or parallel acts. In this case, however, the smallest business raised prices first-a phenomenon which is economically abnormal.

    3.2.7 Difficulty of new competitors to enter industry creating incentive and motivation not to engage in price competition: Between 1995 and 1997, the BSMI, Ministry of Economic Affairs liberalized the qualifications for inspection licensing. The Ministry licensed five inspection firms in 1995, five in 1996, and three in 1997. Since new enterprises can enter the market only if the BSMI licenses them, it is difficult for new competitors to break in. Existing enterprises need not worry about new entrants engaging in price competition and disrupting the consensus to adjust pricing in concert. Subjectively, the disposed had no incentive or motivation to price competitively, and so they knowingly maintained higher prices and also expected their competitors act uniformly.

    3.2.8 Price increases did not occur in the high season: March to June 1988 was a period of relatively high volume for the four disposed. (These three months are normally the high season and coincided with the crackdown on overdue bottle inspection after the explosion of a gas tanker truck at Safeway Gas's Lin Yuan facility.) According to tax statements and sales figures that the disposed made for July 1997 to December 1997, supply and demand in the bottle inspection market were still stable. This was neither the high season nor was it a high volume month for Jung Shun or Ch'un An Engineering. When the four inspection firms raised their prices uniformly, the timing of the price increase and market supply and demand factors were clearly unrelated.

    3.2.9 Prior contact and intelligence exchange: After raising its prices in November 1997, Jung Shun's inspection fee was NT$176.4/bottle. Although this was lower the other three firms' inspection fee of NT$180/bottle, Jung Shun was aware that He Hsing Industries, Safeway Gas, and Ch'un An Engineering were planning to raise their inspection fee to NT$180/bottle before Jung Shun adjusted its inspection fee on November 1, 1997. Jung Shun also understood that He Hsing industries and Ch'un An Engineering had chosen the round figure of NT$180/bottle to simply payment. It may be deduced that the four enterprises had already reached a prior meeting of the minds to adjust prices in October 1997. Subsequently, Safeway Gas, Jung Shun, and He Hsing Industries delayed their price increase until November 1, 1997 because of objections from downstream customers. Ch'un An Engineering raised its prices first because its primary customers were downstream gas companies associated with Ch'un An Engineering and because the other inspection firms in southern Chinese Taipei had already announced that they would raise inspection fees to NT$180/bottle. This can also explain why no changes occurred in their customer base despite the fact that the inspection firms adjusted their prices at different times and significant price discrepancies existed.

    3.3 In sum, the four disposed household liquefied petroleum gas bottle inspection firms had a meeting of the minds on inspection fees that resulted in concerted action in the form of uniform price increases. This is a violation of Article 14 of the Law. In accordance, therefore, with the provisions of the fore part of Article 41 of the Law, the Commission orders these four enterprises halt their concerted action immediately as of the day following service of the disposition.

    Summarized by Luo Mei-hsia
    Supervised by Tso T'ien-liang

Appendix:
Safeway Gas Company Ltd., Co.'s Uniform Invoice Number: 16433448
He Hsing Industries Company Ltd., Co.'s Uniform Invoice Number: 89247441
Ch'un An Engineering Company Ltd., Co.'s Uniform Invoice Number: 20225294
Jung Shun Hsing Ltd., Co.'s Uniform Invoice Number: 89222504


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