Nestle Taiwan & Orient EuroPharma

1338th Commissioners' Meeting (2017)

Case:

Nestle Taiwan and Orient EuroPharma was complained for violation of the Fair Trade Law by raising baby formula price

Keyword(s):

Baby formula, lock-in effect

Reference:

Fair Trade Commission Decision of June 28, 2017 (the 1338th Commissioners' Meeting)

Industry:

Manufacture of Dairy Products (0850)

Relevant Law(s):

Articles 15 , 19 and 25 of the Fair Trade Law

Summary:

1. On Mar. 1, 2017, Nestle Taiwan Ltd. (hereinafter referred to as Nestle Taiwan) raised the retail prices of six of its baby formulas while Orient EuroPharma Co., Ltd. (hereinafter referred to as Orient EuroPharma) also increased the retail prices of its 13 baby formulas. The FTC staff obtained the approval to initiate an ex officio investigation to see whether the price raises made by the two companies were in violation of the Fair Trade Law.
2. Findings of the FTC after investigation:
   (1) To find out whether the two companies had achieved a mutual understanding on the price raises, the FTC sent a written request for the two companies to give their statements at the FTC. At the same time, the FTC also requested the competent authority to provide information regarding the two companies' costs to import their baby formulas while some FTC staff members were sent to inspect pharmacies and related retail outlets to collect evidences. After examining the two companies' internal assessments, approval records, emails and price raise notices sent to retailers, the FTC thought the time points of the two companies' price raise decisions and the amounts of raises had no consistency. In addition, there were no evidences indicating the two companies had achieved a mutual understanding on the price raises. As a result, it was impossible to conclude the price adjustments made by the two companies were a concerted action. Furthermore, the FTC's investigation, statements from retailers, and the contracts signed between the two companies and their distributors also showed that the two companies had not imposed any resale price restrictions.
   (2) Article 25 of the Fair Trade Law provides that "in addition to what is provided for in this Law, no enterprise shall otherwise have any deceptive or obviously unfair conduct that is able to affect trading order." If an enterprise has a lock-in effect on its trading counterparts as a result of the particularity of its product and the trading counterparts thus become dependent on the enterprise, the enterprise has its relatively dominating market status. Under such circumstances, if the enterprise improperly takes advantage of such market status and engages in obviously unfair conduct that is able to affect the trading order on the marketplace, it is in violation of Article 25 of the Fair Trade Law.
   (3) Baby formulas are the main source of food and nutrition for infants under one year old. All the baby formulas in the country are imported and importers are required to apply to the competent authority for inspections of the formulas and specifications in order to acquire importation permission. Therefore, importers of other products are unable to bring in similar products to compete with existing importers without going through such time-consuming procedures. After acquiring the permission to import baby formulas, businesses will define their own market position and set the prices of their products. Once infants get used to the formula of a certain brand, it is quite unlikely for the parents to switch to any other brand. This was proven true by the statements offered by the pharmacies and other retailers selling baby formulas. In other words, consumers would need to take into account the cost of formulas of other brands and the possibility of their babies being unable to adapt to new formulas. Once the lock-in effect kicks in after a certain brand of baby formula is chosen and consumers get used for it for some time, it would be rather unlikely for such consumers to switch to other brands. Hence, the FTC concluded Nestle Taiwan and Orient EuroPharma indeed had their relatively dominating market status.
   (4) Nestle Taiwan and Orient EuroPharma did not improperly take advantage of their market status to engage in deceptive or obviously unfair conduct in this baby formula price adjustment incident. However, in light of the dependence of consumers who have chosen baby formulas from the two companies, the FTC specifically warned the two companies to abide by the Fair Trade Law when making their price adjustments.