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:
- 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.
- 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 .
- 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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