An investigation initiated by the Fair Trade Commission and a letter of complaint from the Taiwan Provincial Service Station Association stating that National Petroleum Corporation’s franchise stations in the central region had reduced the retail price on their petroleum products in violation of the provisions of Articles 19(iii) and 24 of the Fair Trade Law, and that there were concerted actions by the three major oil suppliers through adjustment of prices for petroleum products following national liberalization of the market for petroleum products
Chinese Taipei
An investigation initiated by the Fair Trade Commission and a letter of complaint from the Taiwan Provincial Service Station Association stating that National Petroleum Corporation’s franchise stations in the central region had reduced the retail price on their petroleum products in violation of the provisions of Articles 19(iii) and 24 of the Fair Trade Law, and that there were concerted actions by the three major oil suppliers through adjustment of prices for petroleum products following national liberalization of the market for petroleum products
Key Words:
petroleum price adjustment, monthly discounts, yearly discounts
Reference:
Fair Trade Commission Decision of January 9, 2003 (the 583rd Commissioners' Meeting); Letters (92) No. Kung Er Tzu 092000385, 092000386, 092000387, 092000388 and 092000289
Industry:
Other Petroleum and Coal Products Manufacturing (1990)
Relevant Law:
Summary:
1. The Fair Trade Commission (FTC) initiated an investigation of reduction of retail prices, at 19 service stations in the central region from 2 September 2002, by National Petroleum Corporation (National Petroleum). Gasoline prices were lowered by NT$2 per litre while diesel fuel was lowered by NT$0.8 per litre which, in turn, caused downstream service stations of Chinese Petroleum Corporation (CPC), Formosa Petrochemical Corporation (FPCC), and Esso Taiwan Petroleum Incorporated (Esso) to make downward price adjustments. Subsequently, the Taiwan Provincial Service Station Association issued a letter of complaint to the FTC on 4 September 2002 stating that National Petroleum engaged in price undercutting in order to attract consumers to their service stations in violation of the provisions of Articles 19(iii) and 24 of the Fair Trade Law (FTL). In addition, the three major oil suppliers CPC, FPCC and Esso were incorporated into the investigation due to a possible concerted action regarding consecutive gasoline and diesel fuel prices hikes in August, September, and October of 2002.
2. Article 19(iii) of the FTL states, “an enterprise shall not cause a competitor's trading counterpart to trade with itself by coercion, inducement with profit or other improper means, thereby restraining or obstructing fair competition.” The phrase “inducement with profit” in that provision refers to situations where companies secure clients or customers (in this case service stations) by taking advantage of the customer’s gambling or profiteering mentality to influence them to choose their products or services and thereby inducing customers to trade with themselves, rather than by providing better quality, price, or services. The FTC is the competent authority for competition law, and most crucial in interpreting Article 19(iii) of the FTL is how to distinguish “proper competition for trade opportunities” from “inappropriate inducement with profit,” and how to allow businesses to wield their competitive advantages without crossing the line into unfair competition. Through investigation, the FTC found that National Petroleum used “price” to secure trading counterparts, which constitutes a reasonable method of competition in the market. The “monthly discount” and the “yearly discount” it offered through volume purchasing were different than those enjoyed by small-scale service stations, and in addition, an incentive bonus scheme was employed in sales promotions. The flexibility and range of its adjustments in retail price also differed in comparison with most small service stations, therefore it was inappropriate to use the NT$2.583 mark-up of the smaller stations as a basis for estimation. Secondly, although National Petroleum lowered their retail price for gasoline, pricing still retained its effect as a cash consideration, and using price as a competitive tool is a common strategy in the industry in competing for trading opportunities. National Petroleum’s price reduction did not target any specific customers of their competitors, and thus it was difficult to establish that these actions constituted “inducement with profit” as referred to in Article 19(iii) of the FTL. Furthermore, it was also difficult to establish that these acts violated Article 24 of the same law by employing deceptive or obviously unfair means.
3. In order to meet the criteria for “concerted action” as referred to in Article 7 of the FTL, the enterprises involved must have a horizontally competitive relationship, an agreement must be reached to restrict activities of enterprises, and finally, consideration must be given as to whether or not the agreement is sufficient to impact upon market functions of production, trade in goods, or supply and demand of services. The FTC's investigation found that the three consecutive price increases in August, September, and October of 2002 were due mainly to international fluctuations in crude oil prices and the tense situation in the Middle East. The price increases, therefore, merely reflected costs. On all three occasions CPC took the lead by announcing it was raising its oil prices. FPCC also stated that it anticipated that the volatile situation in the Middle East would cause international oil prices to climb and announced price hikes to reflect the market trend and to offset increased purchasing costs; Esso made similar announcements. In comparing the degree of price adjustment by the three major suppliers and considering their pricing actions, factors such as crude oil prices, exchange rates, and the difficulties of achieving product differentiation for products such as gasoline and diesel fuel have to be taken into account, and there is in addition no direct evidence to prove any concerted action between the oil companies to raise prices, either by “agreement” or “other form of consent” in violation of the relevant provisions of the FTL. However, according to information compiled by the FTC from September 2000, it was found that the timing and range of petroleum price adjustments by these oil providers were all comparable. As such, a warning was issued, by resolution, to the relevant enterprises reminding them to engage in fair competition and base price adjustments on cost estimates, import prices and reserves in order to avoid violation of the law through engaging in concerted action.
Appendix:
Chinese Petroleum Corporation’s Uniform Invoice Number: 03707901
Formosa Petrochemical Corporation’s Uniform Invoice Number: 86522210
Esso Taiwan Petroleum Incorporated’s Uniform Invoice Number: 70453292
Summarized by Yang, Chia-Hui; Supervised by Lin, Kin-Lan