On August 12, 2009, the Department of Price Supervision and Inspection (DPSI) of the National Development and Reform Commission of the PRC (NDRC) published the Provisions Against Monopolistic Pricing (Provisions) for public comments. This draft regulation is the first set of NDRC’s implementing regulations intended to facilitate the enforcement of the Anti-Monopoly Law of the PRC (AML). The DPSI is open to public comments on this draft until September 6, 2009, and we will officially submit our comments before that time. In this edition of China Antitrust Update, we will brief you on the highlights of the draft regulation and outline our observations. An English translation of the full text of the draft regulation is attached for your reference.

Background

As authorized by the AML, the State Council of the PRC has designated NDRC, the State Administration for Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM) to serve as the three anti-monopoly enforcement authorities (AMEAs) in China. While MOFCOM is the sole pre-concentration anti-monopoly review authority, NDRC and SAIC share responsibility for regulating abuse of dominant market positions, monopolistic agreements, and administrative powers depending on whether a monopolistic act involves pricing. Specifically, NDRC oversees pricing-related monopolistic acts, while SAIC regulates non-pricing-related monopolistic acts. In this article, references to abuse of market dominant positions and monopolistic agreements only include situations concerning pricing.

Highlights of the Rules on Pricing-Related Monopolistic Agreement

DETERMINATION OF MONOPOLISTIC AGREEMENTS

The AML prohibits monopolistic agreements in general without defining or providing rules for the determination of what constitutes a monopolistic agreement. Under the Provisions, monopolistic agreements may consist of written or oral agreements or decisions, or collaborative acts. In determining whether an act constitutes a collaborative act, the authorities will consider whether the business operators’ pricing acts are concerted, and whether they have engaged in communication. Specifically, a concerted action occurs when business operators fix or alter the price of the same product at the same or approximately the same time with identical or similar standard and range.

PROHIBITED MONOPOLISTIC AGREEMENTS

The Provisions prohibit several types of horizontal monopolistic agreements in relation to pricing beyond what is included in the AML. Specifically, while the AML only covers one type of prohibited pricing-related monopolistic agreement - agreements fixing or altering the various rates of a product - the Provisions offer additional examples of prohibited agreements, including various types of horizontal agreements. These horizontal agreements fix or alter the range of price fluctuation; fix or alter the transaction fees or discounts that affect the prices; use a fixed price as the base of a negotiation; agree to adopt a standard formula to calculate the prices; provide that price not be altered without other parties’ consent; or fix or alter prices of products by restricting output or quantity of sales or by dividing the distribution or procurement market.

As for vertical monopolistic agreements relating to pricing, the Provisions reiterate the rules contained in the AML. The AML and the Provisions prohibit vertical agreements that fix prices or set minimum prices at which products are resold to a third party, or any other vertical agreements which the authorities determine to be monopolistic pricing agreements.

INDUSTRY ASSOCIATIONS INVOLVED IN MONOPOLISTIC AGREEMENTS

Under the AML, industry associations are generally prohibited from engaging in monopolistic agreements, and the Provisions describe the means by which industry associations may get involved with pricing-related monopolistic agreements. Specifically, an industry association may make and issue rules, decisions, or circulars that fix or alter price, call for its members to form agreements, enact resolutions, issue meeting minutes, or formulate memorandums that fix or alter price, or facilitate business operators’ communications so as to allow them to reach a pricing-related monopolistic agreement. The Provisions explicitly prohibit industry associations from engaging in these acts.

Highlights of the Rules on Abuse of Market Dominance Provisions

DEFINITION AND DETERMINATION OF DOMINANT MARKET POSITIONS

The AML generally prohibits abuse of dominant market positions without clearly defining what constitutes a dominant market position. The Provisions define dominant market positions to mean situations in which a business operator or business operators has or have control over a product’s price, quantity, or other trading conditions in the relevant market, or has or have market positions which enable them to hinder or affect the ability of other business operators to access the relevant market. The Provisions further specify the meanings of “other transaction conditions” and “being able to hinder or affect other business operators from accessing the market”.

In addition, the Provisions attempt to expound the meaning of the factors which NDRC usually will consider in determining whether market dominance exists, such as market share of the business operator in the relevant market and the competition conditions of the relevant market, which are generally listed under the AML. For example, the Provisions specify that market share refers to a business operator’s sales revenue of a specific product in the relevant market. In addition, according to the Provisions, “ability to control the sales market, or the market for raw material procurement” includes the ability to control the procurement or sales channels, the ability to influence or determine the price, quantity, contract term, or other trading conditions, or the ability to have priority on raw material procurement.

ABUSE OF DOMINANT MARKET POSITION(S)

The AML specifically prohibits certain monopolistic pricing acts considered to be abuse dominant market position(s) without justification. Consistent with the AML, the Provisions further specify the rules for each type of prohibited act. For instance, the AML prohibits business operators with dominant market positions from selling products at unfairly high prices or purchasing products at unfairly low prices, but the AML does not address what constitutes “unfairly high prices” and “unfairly low prices.” The Provisions enumerate certain circumstances which NDRC will take into consideration in determining “unfairly high prices” and “unfairly low prices”:

 

  1. Selling prices obviously higher than the costs, or the purchasing prices obviously too low, or lower than the products’ costs;
  2. Raising sales prices or lowering purchase prices out of an ordinary range while the costs are generally stable;
  3. An increase in sales prices obviously exceeding an increase in costs, or a decrease in purchase prices obviously exceeding a decrease in the costs of the counterparties to a transaction;
  4. Selling or purchasing products at prices obviously higher or lower than those of comparable products sold or purchased by other business operators.

Under the Provisions, however, if the buyer is able to purchase identical or substitute products from other business operators at a reasonable price, the authorities will not find the existence of an “unfairly high price” or “unfairly low price.”

In addition, while the AML states the general rule that without legitimate reasons, a business operator with a dominant market position is not allowed to sell products at prices lower than their costs, the Provisions elaborate on the key elements of this rule. According to the Provisions, if a business operator continuously sells products at a loss with the purpose of eliminating competitors or potential competitors, the acts will constitute “selling products at prices lower than their costs.”

The Provisions also clarify the “legitimate reasons” which business operators under investigation may invoke to defend themselves. Typical “legitimate reasons” include:

  1. selling products at lower prices because the products are perishable, seasonal, reaching their expiration dates, or overstocked;
  2. a price cut implemented during a period of debt liquidation, changing the line of production, or suspension of business;
  3. a price cut relating to a promotion carried out for a short period of time or for a limited quantity in order to attract customers;
  4. a price cut forced by other business operators’ acts of selling products below costs;
  5. an economy of scale may be effected to reduce the costs, and consumers may share the resulting benefits; and
  6. any other legitimate reasons as determined by NDRC.

In addition to the above, the Provisions provide specific rules for other prohibited monopolistic pricing acts through abuse of market dominance, such as refusing to trade by setting excessively high or low prices and price discrimination against counterparties to a transaction.

Observations

COORDINATION WITH SAIC’S IMPLEMENTING REGULATIONS

As stated above, the authority to regulate and enforce against abuse of dominant market position(s), monopolistic agreements, and administrative powers is divided between NDRC and SAIC depending on whether a monopolistic act relates to price. However, it is a daunting, if not impossible, task to draw a clear line between pricing-related issues and non-pricing-related issues. Observers have expressed their concerns as to how these two AMEAs will cooperate with each other. Officials from both NDRC and SAIC have indicated at various official occasions that they will work together closely to ensure consistency in certain fundamental issues that both agencies must face, such as the definition and determination of market dominance.

On April 27, 2009, the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau (CEB) of SAIC published two draft anti-monopoly regulations for public comments, which are entitled Provisions on Prohibiting Abuse of Dominant Market Positions (Abuse of Market Dominance Provisions), and Provisions on Prohibiting Monopolistic Agreements (Monopolistic Agreement Provisions). These two draft regulations of SAIC and the Provisions drafted by NDRC touch upon several common issues, such as the determination of what constitutes a monopolistic agreement and a dominant market position or positions, and rebuttable presumptions of dominant market positions. Certain rules of the Provisions are similar or identical to those of SAIC’s draft regulations, in particular the provisions concerning the determination of dominant market positions.

One difference between the Provisions and the two draft regulations of SAIC is that while the latter set forth specific rules on delegation of enforcement power and application of leniency policy, the Provisions are silent in these regards.

To avoid redundancy and discrepancies between their respective rules, NDRC and SAIC may consider integrating the common rules into one single regulation, which could be issued by the Anti-Monopoly Commission (AMC) of the State Council. As a higher authority in enforcing the AML, AMC has responded to public concerns and made some progress in centralizing relevant legislative work. For example, MOFCOM took the lead earlier this year in drafting the Guidelines on Defining the Relevant Market, which was released by AMC on July 7, 2009 to apply to all of the three AMEAs’ enforcement of the AML.

UNCHANGED FRAMEWORK WITH ADDITIONAL DETAILED RULES

As the AML’s implementation rules, the draft regulation provides detailed rules on matters related to monopolistic agreement acts and abuse of market dominance, offering clear pointers to interested market players. As discussed above, the Provisions define key elements relating to the prohibited acts involving abuse of dominance and monopolistic agreements, such as monopolistic pricing agreements, dominant market position, and below cost pricing. In addition, the Provisions provide typical examples to help market players better understand the prohibited acts under the AML, such as prohibited horizontal and vertical cartels, unfairly high and low prices, and legitimate grounds. These specific rules are expected to offer market players clearer guidance and help them better assess their business practices under the AML.

CERTAIN MUCH-ANTICIPATED RULES REMAIN ABSENT

It may disappoint some keen observers of the development of China’s anti-monopoly regime that the Provisions do not address certain matters to which the business community has been looking forward. For example, many business operators think that the AML is inadequate in addressing the relationship between the AML and intellectual property (IP), and had hoped that NDRC’s implementing regulations would shed more light on this. Nevertheless, like the two draft regulations of SAIC, the Provisions only reiterate the general rule prescribed in the AML and does not make additional rules for intellectual property in the anti-monopoly context.

Conclusion

Compared with the previous drafts, the Provisions have streamlined their language and made considerable substantive changes. Also, the Provisions are in accord with SAIC’s two draft regulations, providing substantially the same rules covering certain common issues. As the NDRC and SAIC may cooperate closely with each other in enforcing the AML, such consistency in enforcement rules will help reduce unnecessary conflict between their respective enforcements. By publishing the Provisions for public comments, the rule makers appear to be receptive to public reaction, but it remains to be seen how the final rules will read. We will closely follow the development in these rule-making processes and keep you updated.

Click here to view the Provisions Against Monopolistic Pricing