A 2015 surge in beef prices across the Jakarta conurbation raised suspicions that 32 feedlot owners (Parties) were interfering with the live cattle imports market. The Parties faced cartel and market control allegations, which if proven would respectively constitute breaches of Articles 11 and 19(c) of Law No. 5 of 1999 on the Prohibition of Monopolistic Practices and Unfair Business Competition (Competition Law).
Companies are prohibited under:
- Article 11 from entering into agreements with competitors regarding the production or marketing of goods or services, with the intention of influencing prices; and
- Article 19(c) from engaging in any activity, either individually or in concert, which limits the distribution or sale of goods or services,
if either harms competition in the relevant market.
It was reported on 4 September 2015 that the KPPU Secretariat (Secretariat), the entity responsible under the Competition Law for investigations and prosecutions, began investigating the Parties on its own initiative. The Secretariat focused on the Parties’ conduct between 2013 and 2015.
At the conclusion of its investigation, the Secretariat submitted to the KPPU Commissioners (Commission), the entity responsible at first instance for determining alleged breaches of the Competition Law:
- an Indonesian Association of Beef Producers and Feedlot Owners (Association) invitation letter, which suggested that it was agreed during an 11 August 2015 Association meeting that the Parties intended to reduce their sale prices;
- a 6 August 2015 Association announcement of a four night strike to be held by various butchers and slaughterhouses, which suggested that the Parties had attempted to pressure the Agriculture and Trade Ministries to increase live cattle import quotas. The Commission alleged that the Parties pressured the butchers and slaughterhouses into striking by arguing that live cattle prices would increase unless live cattle quotas were increased;
- a 10 August 2015 Association invitation to a meeting, the agenda of which included live cattle sales. This Commission alleged that this invitation showed that the Parties coordinated delays to cattle sales, which reduced supply and increased prices; and
- a Benford’s Law analysis of beef sale prices (as further discussed below), which suggested that imported beef prices had been fixed.
The Commission determined that the evidence was sufficient to prove the allegations. Specifically, the Commission determined that an agreement was reached over the course of several meetings between the Parties, as members of the Association, which effects were breaches of Articles 11 and 19(c) of the Competition Law.
- promote the local live cattle market, in preference to the imported live cattle market, so as to boost self-sufficiency;
- only renew live cattle import quotas annually; and
- pay closer attention to the relationships between relevant stakeholders, including those like the Parties.
The nature of the evidence relied on by the Commission was relatively uncontroversial, except insofar as the Benford’s Law analysis was considered probative.
Benford’s Law posits that in any list of numbers – including imported cattle prices – ‘leading digits’ will not be distributed evenly. Instead, the ‘leading’ or first digit in a number (e.g. ‘1’ in ‘1,267’) will not appear the same number of times as other first digits in numbers (e.g. ‘3’ in ‘3,891,203’ or ‘6’ in ‘69’). Instead, there will be a pattern, such that ‘1’ will most frequently be the leading digit, while ‘9’ will least frequently be the leading digit.
This example from The Economist may assist:
[T]ake an imaginary country with a population that doubles every year, starting at 1m people. After a year with ‘1’ as the leading digit, it hits 2m and the leading digit changes to ‘2’. Fast forward another year and the population is 4m. But this means the leading digits ‘2’ and ‘3’ have both passed by in less than a year, occurring for fewer days than ‘1’. The pattern continues, with digits ‘4’ to ‘9’ spending progressively less time in the lead position. After a little over three years the country’s population is 10m, so that ‘1’ is the leading digit again, where it stays for another year. And so on.
As The Economist observes, Benford’s Law “can be used to test economic data: if numbers have been manipulated to give the appearance of randomness, the distribution of the digits will almost certainly violate Benford’s predictions.”
This was the first time the KPPU applied Benford’s Law. By contrast, in the 2015 tyre cartel case (as considered in an earlier Client Update), the KPPU relied on Joseph Harrington’s academic research (which the KPPU erroneously referred to as the ‘Harrington Method’).
The Parties could have appealed the Commission’s determination to a District Court within 14 days of being notified of the determination or of the determination being published on the KPPU website, lest it were to become final and finding.
14 feedlot-owners have appealed to District Courts. If more than one District Court received an appeal, the KPPU must request that the Supreme Court appoint one District Court to hear all appeals.
It is likely that if the Commission’s determination is appealed, the District and Supreme Courts will be less comfortable in applying Benford’s Law than the KPPU, although they may still find the remaining evidence probative.