Taiwan Tobacco and Liquor Corporation and Two other Enterprises

Case:

Key Words:

tobacco products, health and welfare surcharge

Reference:

Fair Trade Commission Decision of November 5, 2009 (the 939th Commissioners' Meeting), Letter Kung Er Tzu No. 0980010291, Letter Kung Er Tzu No. 0980010292

Industry:

Tobacco Manufacturing (1000)

Relevant Laws:

Article 14 and 18 of the Fair Trade Law

Summary:

1. This case originated from a newspaper report stating that Taiwan Tobacco and Liquor Corporation (hereinafter referred to as TTL), JT International S.A. (hereinafter referred to as JTI), and Philip Morris Taiwan S. A. (hereinafter referred to as Philip Morris) were to simultaneously increase the price of their tobacco products along with the DOH's decision to increase the health and welfare surcharge starting from June 1, 2009 where a pack of cigarettes is now subject to a health and welfare surcharge of NT$20 instead of NT$10. An ex officio investigation was therefore initiated by the FTC to see if said enterprises had violated the laws or regulations governing concerted actions.

2. Findings of FTC after investigation:
   (1)After investigating TTL, JTI, and Philip Morris, the FTC discovered that not only inter-brand competition but also intra-brand competition lies within all tobacco enterprises. Consumers take into account not only the price but also the brand loyalty, flavors, etc when selecting the tobacco products. Additionally, these three tobacco enterprises decided to increase their product price at different times and for different reasons. The timings when these three enterprises informed their downstream retailers also varied. Though all three enterprises used NT$5 as the pricing unit, each decided on different increments. Based on the previous experience and convenience, there was no adjustment via fractional prices. Each company provided different discount numbers and wholesale prices to their respective downstream retailers. Furthermore, the FTC conducted a market impact analysis from the perspective of economic model and price increase and could not exclude the possibility that the price adjustment by these three tobacco enterprises was independent and consistent with the economic rationality. Based on the existing evidence, the FTC could not determine that these three tobacco enterprises indeed violated the Fair Trade Law by engaging in the prohibitions of concerted actions.
   (2)Furthermore, the increase of the retail price should directly affect the consumers' benefits. The FTC therefore conducted an investigation on President Chain Store Corporation, Taiwan FamilyMart Co., Ltd., and HiLife Co., Ltd. to see if they had jointly increased the prices. It was found that these three chain stores received the notifications about the price increase from the upstream tobacco enterprises at different times. Based on the past trade experience and custom, when the upstream manufacturers raise the prices, normally the downstream retailers will also adjust the prices at the time when notified by the upstream manufacturers to reflect the cost increase in the retail pricse. This case was no exception. The act to increase the retail prices of the tobacco products by the three chain stores was based on their objective observation and judgment about the market. It was a rational strategy taken based on their rational considerations and their need for the competition.

3. Resolution of the Commissioners' Meeting:
   Article 14(1) of the Fair Trade Law provides that "no enterprise shall have any concerted action." Article 18 of the same law further provides that "where an enterprise supplies goods to its trading counterpart for resale to a third party or such third party makes further resale, the trading counterpart and the third party shall be allowed to decide their resale prices freely; any agreement contrary to this provision shall be void." After the investigation, it was difficult to say that these three tobacco enterprises and three chain stores violated Article 14 of the Fair Trade Law. However, the act of increasing the retail prices of the tobacco products along with the increase of the health and welfare surcharge by the three chain stores might be considered an act of taking a free ride. In order to maintain the trading order of the tobacco product market and consumers' benefits, FTC issued a letter to these three chain stores to be attentive to the relevant regulations of the Fair Trade Law to avoid future violation. Moreover, it was also found that all the three tobacco enterprises provided a suggestive retail price list to the downstream retailers as reference. This action might possibly lead to concerted resale prices. As a result, the FTC also issued a letter to request these three tobacco enterprises' attention to the law.

Summarized by Huang, Hsiao-Yin; Supervised by Yang, Chia-Hui