Wei Chuan Corporation

Case:

Key Words:

raw milk, fresh milk, suggested sales price list

Reference:

Fair Trade Commission Decision of October 19, 2011 (the 1041st Commissioners' Meeting), Disposition Kung Ch'u Tzu No. 100204

Industry:

Dairy (0850)

Relevant Laws:

Article 14 of the Fair Trade Law

Summary:

1. Newspapers reported in August 2011 that the Central Animal Husbandry Association's Milk Pricing Evaluation Committee passed a resolution approving a rise in the purchase price of raw milk of NT$1.9 per kilogram, effective October 1. Given that the purchase price of raw milk is closely related to the sales price of fresh milk products, in order to monitor and prevent upstream dairy operators from taking advantage of the situation to institute a concerted adjustment of the price of fresh milk, an ex officio investigation was initiated by the Fair Trade Commission.
2. Findings of the FTC after investigation:
   (1) Upon investigation the FTC found that a low degree of flexibility for milk substitutes, and given that in general adjustments to fresh milk prices are not sufficient to affect sales, substitution is fairly limited. The specialized market concerning this case is defined as the "domestic fresh milk market." Wei Chuan Corporation (hereinafter referred to as Wei Chuan), Uni-President Enterprises Corporation (hereinafter referred to as Uni-President), and Kuang Chuan Corporation (hereinafter referred to as Kuang Chuan) currently claim market shares of 37 percent, 30 percent, and 18 percent, respectively, constituting an oligopolistic market structure.
   (2) In the past, the Wei Chuan, Uni-President, and Kuang Chuan dairy companies customarily issued a price adjustment notification prior to engaging in renegotiation of pricing with downstream enterprises, following up by providing a comparative table of suggested retail prices before and after the price adjustment as well as a comparison of purchase prices for various items before and after adjustment, simultaneously listing a balance sheet of profits for channel retailers.
   Appearance of consistent conduct in the adjustment of suggested pricing by the three concerns:
   (3) Consistent excessive adjustment of suggested pricing:
   i. taking the example of a one-liter package of fresh milk, Wei Chuan's Lin Feng-ying brand was adjusted upward from NT$77 to $83, Uni-President's Ruisui brand from NT$76 to $82, and Kuang Chuan's Milk Family brand from NT$76 to $82, for a uniform price rise of NT$6. In addition, all three parties were consistent in the upward adjustment of two-liter packages of fresh milk.
   ii. Three competing products maintained uniform price range: The three parties raised the price of one liter of fresh milk from between NT$77 to $83; from NT$149 to $160 for two liters, and from NT$210 to between $230 and $240 for three liters. Notably, the Kuang Chuan brand, which had been a more discount
   brand, moved closer to the others with the adjustments.
   iii. Uniform excessive adjustment setting rate: comparison of post-adjustment pricing to previous suggested retail pricing among the three main brands' products clearly shows that the three parties adjustment rate is highly consistent.
   iv. Consistent timing of pricing negotiations and raises: Despite slight differences in the timing of the three parties' price negotiation notifications, downstream enterprises provided evidence that notifications of price adjustments were received via e-mail from Wei Chuan on September 27, Uni-President on September 27, and Kuang Chuan on September 26, confirming the consistency of price adjustment timing.
3. Grounds for Disposition:
   (1) In addition to prohibition of "concerted action" demonstrated by means of contract or agreement, the FTC may also draw inferences upon evidence conforming to empirical and rational bases for determining unlawful conduct. Notably, the FTC has disposed of numerous concerted action cases in the past through indirect evidence, earning the support and recognition of the highest administrative court. Consequently, on the basis of related evidence it can be ascertained that the uniformity of milk price adjustments by the three dairy companies concerned in this case constitute concerted action, thus the three parties are responsible for presenting evidence for concerted price adjustments due to increased costs.
   (2) It is reasonable to suspect collusive intent among the three dairy enterprises in their uniform upward adjustment of suggested retail prices. Moreover, the three concerned parties are unable to provide evidence demonstrating objective reasonable market factors to justify such price adjustments. Absent collusive intent over price adjustments, the aforementioned consistent price adjustment conduct cannot be reasonably explained.
   i. The market structure is an incentive that facilitates concerted collusion: the domestic fresh milk market is an oligopolistic market not contended by the three concerned parties, and the two key factors related to concerted action in an oligopolistic market are discovering transgressions and instituting reliable checks. Furthermore, corroboration of the suspected uniform conduct in the fresh milk market is found in "ancillary factors" related to the agreement of the parties involved.
   ii. Each of the three parties considered different factors for price adjustments, and failed to produce reasonable explanation and supporting evidence for the uniform price hike: Over the course of investigation, the three parties were asked to produce favorable evidence such as policy-making meeting reference materials or price adjustment analysis. None of the parties produced such items, and each gave different justifications for the upward price adjustments. Further, the three parties all claimed that the price increases were made separately with individual cost considerations in mind, and that they were completely unaware of price adjustments in the industry. Given the three parties' failure to provide proof of uniform price adjustments, the possibility of joint collusion over uniform price adjustments cannot be discounted.
   iii. Correlation among suggested retail prices is extremely high, and would not be as consistent absent joint agreement: Similarity among suggested retail prices obtained following the three parties' calculations shows clear discrepancies; moreover, each price ended in an odd number, calculated to complete lack of discrepancy. Price differences before and after adjustments were so close as to be impossible absent agreement. In particular, given the timing as winter began, a
   steady decrease in market demand could be anticipated, yet no enterprise was willing to make a "micro adjustment" or merely "reflect" purchase prices and claim market share, counter to standard commercial competition.
   iv. Excessive price increase decision-making demonstrates joint agreement: investigation showed that there was an increase in the purchase price of raw milk of NT$3 in 2007, and that the price for fresh milk increased by NT$7-8 per liter for a twofold increase in fresh milk over raw milk. However, the increase in the purchase price of raw milk in this case was just NT$2, yet all concerned parties enacted price adjustments of over NT$6 per liter for a threefold increase. Isolated conduct not made out of agreement would go against economic rationality, consequently it is evident that the three parties engaged in concerted action over excessive price adjustments and avoided price competition.
   v. The stabilizing effect of public date related to fresh milk products on concerted action: investigation showed media reports with relevant information between August 15 and October 9. On September 6 the media reported "increased fresh milk prices next month," followed on September 23 with information on "a milk price increase of 12%," and on September 26 that "from next month the price of fresh milk will increase by more than NT$6 per liter," which was corroborated by subsequent price adjustments. This information reduced the risks of detecting price adjustments among competitors and of not following suit, facilitating the cohesiveness of concerted action.
   (3) The three dairy firms command an eighty-percent share of the fresh milk market. A joint price increase among the three is sufficient to influence the fresh milk market function, to the harm of consumer interests. Excluding price leadership and following from the milk firms' price adjustment, the FTC found the three dairy companies' joint increase to fresh milk prices in violation of the prohibitions of joint conduct in the terms of Article 14-1 of the Fair Trade Law, and levied fines of NT$12 million to Wei Chuan, NT$10 million to Uni-President and NT$8 million to Kuang Chuan.

Appendix:
Wei Chuan Corporation's Uniform Invoice Number: 11347802
Uni-President Enterprises Corporation's Uniform Invoice Number: 73251209
Kuang Chuan Corporation's Uniform Invoice Number: 04313172

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