Case:
Investigation initiated by the Fair Trade Commission into whether Chinese Petroleum Corp. and Formosa petrochemical Corp. violated the Fair Trade Law by jointly determining the prices of petroleum products
Keywords:
game theory, promotion behavior
Reference:
Fair Trade Commission Decision of October 14, 2004 (the 675th Commissioners' Meeting); Disposition (93) Kung Ch'u Tzu No. 093102 of October 21, 2004
Industry:
Other Petroleum and Coal Products Manufacturing (1990)
Relevant Laws:
Articles 7 and 14 of the Fair Trade Law
Summary:
| 1. | Two domestic oil suppliers, Chinese Petroleum Corp. (hereinafter referred to as "CPC") and Formosa Petrochemical Corp. (hereinafter referred to as "FPCC") continued to simultaneously adjust the wholesale prices of 92 and 95 unleaded gas and premium diesel oil. The two oil suppliers might involve in jointly determining the wholesale prices of the petroleum products. In accordance with Article 26 of the Fair Trade Law, the Fair Trade Commission (FTC) initiated the investigation on January 20, 2003. | ||||||||
| 2. | The domestic gas and diesel oil market was long monopolized by CPC in the past. However, after FPCC, which was established by the No. 6 Naphtha Project of Formosa Plastics Group, started supplying domestic gas and diesel petroleum products in September 2000, the monopolistic position of CPC on the domestic oil market has come to an end. Although another American company, ESSO, joined the domestic market competition in 2002, after less than two years of difficult operation, it retreated from the Taiwan oil market. At present, there are only two oil suppliers on the domestic oil market, CPC and FPCC. According to the sales volume of gasoline and diesel oil, FPCC has a market share of 30%, while CPC retains 70%. In this situation, the domestic oil market has in fact become a duopoly market. Therefore, the competition situation of the two oil suppliers, especially the price competition, has drawn the attention of the public, the FTC, and the relevant government units. | ||||||||
| 3. | Based on the FTC's continuous investigation during the past two years,
it was found that the said two oil suppliers had simultaneously adjusted
the price for 20 times (at the same time and with the same range). The
decision making mode of the price adjustment is concluded as follows:
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| 4. | According to the analytical conclusion of the game theory, with the mechanism of public announcement, the price decision-making process, affected by each other, forms a "dynamic game." By utilizing backward induction to analyze the said decision-making mechanism, the decisions made by the two oil suppliers will deviate from the balanced result of the market competition mechanism. The two oil suppliers will choose the strategy of adjusting the price to the greatest amount of the increase, and the trading counterparts will relatively pay more for the oil expenditure. This will lead to an adverse effect on entire consumers'rights and interests. | ||||||||
| 5. | The oil suppliers claimed that their behavior of simultaneous price adjustments originated from the binding of guarantee price prescribed under the oil supply term. The FTC respects the freedom of contract formation between the respondents and gas station operators. However, with the influence of the oil supply term alleged by the respondents, it obviously enhanced the effect of the "advance announcement of price adjustments." After one party announced the raising of oil prices, it can detect whether the competitor chooses to follow or not. If the competitor chooses not to follow, the initiator will withdraw the original adjustment in the name of the binding of the oil supply term. From such an operation, the respondents may gain profits by raising the price together and constrain each other by lowering the price together. Therefore, by detecting the competitor's response or exchange information through the advance announcement, along with the binding of the oil supply term as admitted by the respondents, it causes the result that two oil supplies simultaneously adjust the oil prices at the same time with the same range. The two oil suppliers employed the promotion behavior by releasing the announcement of price adjustments to reduce the delay of detecting the opponent's response or the risk of incorrect information, to form a common understanding of the adjustment, and to jointly determine unanimous wholesale prices of petroleum products. | ||||||||
| 6. | Moreover, when the oil suppliers announce the adjustment of wholesale prices in advance, most gas station operators are affected and therefore adjust the resale list prices at the same time. The oil suppliers are also familiar with this market reaction. The aforesaid advance announcement not only causes both parties to publicly negotiate for the price adjustments on the media platform, but also affect most gas station operations to simultaneously adjust the prices. Such a conduct undoubtedly limits the space for gas station operators to compete in terms of price and finally affects consumers. It obviously affects the whole sales and resale market prices and the supply and demand function of petroleum products. | ||||||||
| 7. | The FTC also weighed two oil suppliers'cost structures, which involve with the crude oil prices, refining costs, miscellaneous expenses of importation, various expenses of domestic taxation, operating cost, surplus, etc. The ratio of each item in the cost structures of the two oil suppliers is not the same. They also have different profit-making degrees from each unit price. Moreover, it is obvious that both supplies have different cost structures in terms of the importation sources, capacity utilization, refinery capacity, degrees of depreciation/amortization of machinery and equipment, proportions of import and export, and the costs of transportation. On January 13, 2003, the FTC sent a letter to warn the two oil suppliers not to jointly adjust the oil prices and shall decide on the price adjustments and range respectively by themselves based on their own operating conditions. Nevertheless, the two oil suppliers continued the adjustments of prices simultaneously with the same range more than once afterwards. After analyzing the motivations, inducement, economic benefits, time or range of the adjustments, and the number of occurrence, with regard to the coherent conducts of the twenty simultaneous price adjustments, it proves that the two oil suppliers must have had a meeting of minds to rationally explain their market behaviors. | ||||||||
| 8. | In conclusion, the two oil suppliers employed the meeting of minds by publicly disseminating the information of the price adjustments in advance to raise the prices simultaneously with the same range. It was sufficient to affect the prices and supply/demand function of the domestic oil market, in violation of Article 14 (1) of the Fair Trade Law prohibiting concerted actions. An administrative fine of NT$ 6,500,000 was imposed separately on the two respondents. Meanwhile, in its press release, the FTC stated that any high or low oil price determined by an enterprise shall not be considered as a violation of the Fair Trade Law, if it is based on free and fair competition. On the contrary, the Fair Trade Law prohibits any conducts, such as joint monopoly and abuses of monopolistic power, which impede the development of market competition mechanism. Moreover, due to enormous capital and technology required by the specific industry, large oil refinery factories have obvious entry barriers. Also, since the petroleum refinery industry has strong economy of scale and economy of scope, the market structure is highly centralized and causes insufficient market contestability. Therefore, to ultimately resolve the current competition problems in the petroleum refinery industry, the relevant competent authorities shall continue the promotion of the petroleum products liberalization policy to build a free and fair competition environment. |
Summarized by Yang, Chia-Hui;
Supervised by Lin, Kin-Lan
Appendix:
Chinese Petroleum Corp.'s Uniform Invoice Number: 03707901
Formosa Petrochemical Corp.'s Uniform Invoice Number: 86522210