Presidential Chain Store Corporation was complained for monopolizing in-store collection service of telecom related bill payment by signing exclusive contract with private telecommunications companies

Chinese Taipei

Case:

Presidential Chain Store Corporation was complained for monopolizing in-store collection service of telecom related bill payment by signing exclusive contract with private telecommunications companies

Key Words:

exclusive dealing, in-store collection service of telecom bill payment

Reference:

Fair Trade Commission Decisions of August 18, 1999, November 10, 1999, December 8, 1999 (the 406th, 418th, and 422nd Commissioners' Meetings); Letter (88) Kung Yi Tzu No. 8802567-14

Industry:

Other general retailing (5319)

Relevant Laws:

Articles 19 (vi) of the Fair Trade Lawof the Fair Trade Law

Summary:

The complainant alleged that on March 2, 1999, the Economic Daily News reported that Presidential Chain Store Corporation ("Presidential") would expand its in-store collection service of Chunghwa Telcom telecommunication-bill payment to 10 other private telecommunications operators including Taiwan Cellular Corporation beginning on March 1, 1999. The contracts between Presidential and the 10 telecom operators were exclusive in that they barred the telecom operators from entering into similar agreements with other convenience store chains.
After a series of hearings and consultations and cross-debate in writing, the Commission takes consideration of Presidential's intents, goals, market position, market structure, the effects of the act to Presidential, other convenience stores, private telecom operators and consumers, and consults with the guidelines of Japan, the U.S., European Commission to rule that at present, Presidential's one year exclusive contract did not constitute a violation of Article 19(vi) of the Fair Trade Law.
The complainant made the further arguments alleging that:
(1) Convenience store chains are the sole retail outlet capable of providing in-store collection services for telecom related bill payment because it is not easy for the traditional grocery stores, wholesalers, or supermarkets to enter the market due to the lack of sufficient stores to make their service popular, and the difficulty in integrating the relevant computer operating systems. The relevant market in this case should be defined as convenience store chain. Further, in its March 1999 issue, Convenience Store Magazine reported that Presidential had a total of 1,958 stores, accounting for a 39% overall market share. Additionally, Presidential was perfectly aware that aside from the products on shelf, consumers' purchase decisions were more likely to be influenced by the services that would actually meet their demands and the degree of diversity of the provided services. Therefore, after acquiring the licensing from Chunghwa Telecom to collect in-store telecom related bill payments in June 1998, Presidential further signed a one-year exclusive dealing contract with the other nine telecom operators to offer their in-store payment services beginning from March 1, 1999. Those exclusive agreements restricted other convenience stores from providing similar service and were entered into by Presidential with the intention to squeeze its competitors out of the market.
(2) By monopolizing the collection service of in-store telecom related bill payments, Presidential could not only increase its ability to cluster consumers, it could also attract patronage from consumers who made additional purchases after paying their telecom bill.
In its response, Presidential argued that the average customer visits per store had grown modestly (8%) since March of 1999. Moreover, it was unlikely to measure precisely the percentage of the consumers who paid their telephone bills would also made additional purchases at the store and the average amount of such purchases. Presidential also stated that it had made significant investments in providing the in-store payment services including the installation of copying machines, computer software, new payment receipts and the hiring of related personnel. The main purpose of providing the service is to maintain Presidential's corporate image of being a "helpful neighbor" to the customers. If by doing that, more customers were attracted to its stores and thereby increased its overall profits, it was purely coincidental. Presidential also argued that its in-store telephone bill payment services accounted for only a small part of the market for telephone bill payment services because consumers could also pay their telephone bills at financial institutions and telecom operators' retail outlets. They should be included as competitors to Presidential. On that basis, Presidential believed that it held only a 3.4% to 6.4% market share, incapable of affecting market competition. Furthermore, the one-year exclusive agreement has the beneficial effect of promoting competition among competitors by encouraging other chain-store operators to improve their software and hardware equipments.
In sum, Presidential did not hold the market share large enough to monopolize the market for telephone-bill payment collection service. Neither had Presidential deterred other chain-store operators from entering the market. Accordingly, Presidential had not violated the FTL.
In response to Presidential's reply, the complainant asserted that:
Presidential's investment in its collection service for telecom-bill payment included only the expenses incurred to develop new software. Moreover, the use of exclusive dealing arrangements having the effect of restraining competition can not be justified by a firm's cost-sharing consideration. In its May 18,1999 edition, The Commercial Times reported that "Presidential General Manager stated...that apart from earning the service fees from the 800 thousand monthly transactions by providing the collection service, Presidential could also realize an even larger potential profit from the 20% of customers who also make additional purchases while they are in the store. This increases store revenues." Only 10 percent of Chinese Taipei's 5,574 financial institutions (branches) collect telephone-bill payments for private telecom operators compared to President's more than 2,000 stores.
The Directorate General for Telecommunication reported that there are seven mobile phone operators and six paging service operators in Chinese Taipei. There are no plans to license new operators in the near future.
The telecom operators reported that 5.1% of telephone bill payments were made at Presidential stores. Some of the private telecom operators accepted the same exclusive contractual arrangement after taking into account this advantage of dealing with Presidential. Only one operator stated that Presidential offered a commission 60 percent lower than financial institutions, a five-day processing period, and a more convenient, faster querying system.
Presidential again responded by arguing that it had in fact made an enormous investment in its in-store payment system and that it had accumulated significant know-how through its contract with Chunghwa. It entered into an exclusive contract with the private telecom operators not to share costs, but to protect its large investment and intellectual property. Presidential countered the argument that it enjoyed substantial profits from customers who made additional purchases after paying their telephone bills by claiming that only 0.7 percent of the customers had made the alleged additional purchases while paying their telephone bills at Presidential stores.
Presidential also asserted that if the logistic expenses for chain store operations were deducted from its revenues from the collection service for telephone bill payment, the net profit was insufficient to cover its research and development costs within one year. Businesses, Presidential argued, cannot accurately predict when they will see a return on their investments. The one-year exclusive arrangement was the only feasible way for Presidential to protect its intellectual property and business secrets.
On October 1, 1999, the Commission held a public hearing on the issue regarding the legality of providing in-store collection services for telephone bill payments by convenience stores. Representatives from convenience store chains, industry groups, convenience store franchisees, telecom operators, Taipower, and experts were invited to attend the hearing.
Based on the hearing, the Commission made the following findings of facts:
Presidential executed a "Telecom Bill Billing Service Agreement" with ten private mobile phone and beeper operators including Taiwan Cellular Corporation. Article 4(5) of this agreement provided that "Party A (the telecom operator) agrees that Party B (Presidential) has the exclusive right to offer in-store collection service for its telephone-bill payments exclusively (in other words, telecom operators could not offer in-store bill payment in conjunction with other convenience store operators) during the period of this Agreement." Enumerated in Article 5 is the term for the agreement would be from March 1, 1999 to February 28, 2000. Unlike most other exclusive agreements that include territorial-restriction or resale-price-maintenance arrangements, this agreement did not contain any other potentially anti-competitive provisions. Neither was Chunghwa Telecom's agreement with Presidential exclusive, nor did it contain any other anti-competitive provisions.
The Commission found that the private telecom operators entered in to this agreement for purely business reasons. 90 percent of the telecom operators either stated that Presidential had not abused its dominant market position to force them to accept an exclusive arrangement or did not express their opinions on this matter. But this was irrelevant to the issue of whether Presidential had abused its market position to pressure telecom operators into accepting the exclusive agreements. Furthermore, the Commission agreed with the testimony of the telecom operators that they negotiated the agreements with Presidential on equal basis. The Commission also found the testimony credible that the arrangement of in-store collection service for telephone-bill payment was a long-term partnerships between Presidential and the telecom operators that required mutual cooperation and trust. There was no concrete evidence to support the allegation of the abuse of market power in this case.
Very few entry barriers exist for the convenience-store market. In addition, in-store collection service for telephone-bill payments was only one of the two to three thousands products and services typically offered by convenience stores. Currently, consumers have several other alternatives to pay their telephone bills such as paying through banks, post offices, telecom operators' retail outlets as well as by transferring funds electronically. In conjunction with expert testimony, the Commission found that there was insufficient evidence to prove that Presidential had been gaining monopoly profit or that it had intended to impede market competition.
While the Commission considered five positive and five negative effects of the exclusive contract, it found that the negative effects were quite limited in terms of their market impact. The five positive effects were (1) that the alleged exclusive dealing arrangement helped Presidential complete certain investments, (2) that it made more bill collection channels available to private telecom operators, (3) that it enabled Presidential to create a highly effective business plan in advance, (4) that it reduced administrative and management costs, and (5) that it helped increase informational advertising. While the negative effects were (1) that it restricted private telecom operators from entering freely into collection services arrangements with other convenience stores; (2) that it excluded other convenience stores from providing the collection services; (3) that it disabled other convenience stores to reduce their operation costs through more efficient uses of their equipment and personnel; (4) that it made it less convenient for consumers to pay their telephone bills, and (5) that it increased the searching cost telephone-bill payments.
Presidential charged a lower commission for each collection service than did the financial institutions that also offered collection services for telecom operators. Presidential's commission was also lower than the commission that other convenience stores offered to private telecom operators. In particular, given its quite limited negative market impact, the potential anti-competitive effects of the exclusive dealing arrangements were indeed stronger before the exclusive arrangement was imposed.
Presidential's in-store collection services accounted for about 5.1% of all indirect telephone bill payments. The 10 private telecom operators collectively account for about 13 percent of the market. With Chunghwa not a party to the exclusive arrangement between Presidential and the private telecom operators, only 13 percent of the market in question was affected by the exclusive agreement. This agreement, therefore, did not constitute a restraint on or an impediment of fair competition.
The Commission found the one-year period of the exclusive agreement to be reasonable as well. When businesses invest, they cannot accurately project when they will see a return due to inherent risks. Consequently, when a business takes a conservative stance towards when it will see a return on investment, it is acting rationally in business terms. In this light, a contractual period of one year is a normal business practice. Moreover, in Guideline 1984 (1983) the European Commission ruled that exclusive procurement contracts for irregular periods or periods of more than five years are not subject to the collective exemption for which Guideline 1 provides. This ruling supports the Fair Trade Commission's view that the one-year period of the agreement in this case is reasonable.
In sum, the exclusive agreement between Presidential and the private telecom operators to offer in-store collection of telephone-bill payment does not meet the threshold set in Article 19(vi) of the Fair Trade Law.

Summarized by Lin Yi-chao
Supervised by Hung Teh-ch'ang

Appendix:
President Chain Corporation's Uniform Invoice Number: 22555003
Chunghwa Telecom Corporation Limited's Uniform Invoice Number: 96979933
Taiwan Cellular Corporation Limited's Uniform Invoice Number: 97176270
Mobitai Communication Corporation's Uniform Invoice Number: 16088614
TransAsia Telecommunications Corporation's Uniform Invoice Number: 16086398
Hoyard Communications Industry's Uniform Invoice Number: 16087137
Taiwan Paging Network Corporation's Uniform Invoice Number: 16085139
Southern Telecommunications Corporation's Uniform Invoice Number: 16085139
First International Telecommunications Corporation's Uniform Invoice Number: 16080042
China International Paging Service Corporation Limited's Uniform Invoice Number: 97178777

**: For information of translation, click here