The relationship between antitrust and equitable growth

By Francisco Beneke*

The title of this post describes, according to the Washington Center for Equitable Growth, an under-researched area of economic policy. Therefore, the Center is opening a conversation on the subject “through a series of essays, reports, and future events that lay the groundwork for debate and informed solutions”.

The latest publication is “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter“. I highly recommend that you check it out as well as the other publications that can be found under the series entitled “Making antitrust work in the 21st century“. Commentary on each publication to follow.

*Co-editor, Developing World Antitrust

Interesting links for this week

Global cartel enforcement report – Key findings: Mid-year 2017: http://www.lexology.com/library/detail.aspx?g=4b99f432-eab4-4b46-9244-dc54af20801c

China will amend its merger control regime: http://www.jdsupra.com/legalnews/china-to-amend-the-merger-control-regime-16815/

The Commission is only a part of Google’s problems. The company has faced and faces antitrust investigations around the globe: https://www.bloombergquint.com/business/2017/07/11/googles-anti-trust-woes-whats-next-in-europe-and-india

According to the Washington Post, Google finances scholarship favorable to it as part of a sophisticated lobbying operation: https://www.wsj.com/articles/paying-professors-inside-googles-academic-influence-campaign-1499785286 To which Google responds: http://www.zdnet.com/article/google-no-we-dont-fund-biased-research-and-just-look-whos-paying-our-accusers/

Yandex, the “Google of Russia,” and Uber have agreed to merge their ride-sharing businesses in Russia and five neighboring markets with Yandex as leading partner: http://fortune.com/2017/07/13/uber-yandex-russia/ and the competition authority may not like it: http://tass.com/economy/956203 

The shipping industry’s competitive landscape is going to change substantially with this mega merger: https://www.worldfinance.com/markets/chinas-cosco-to-buy-rival-shipper-orient-overseas-for-6-3bn

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Why We Need Antitrust Law to Work: Some Thoughts on South Africa and El Salvador

By Francisco Beneke*

South Africans appear to be enraged by the prospect of having had to pay a higher price for cancer drugs. The Competition Commission of South Africa is currently undertaking three separate investigations on excessive pricing by three drug manufacturers: Aspen, Pfizer, and Roche. In El Salvador, the final word from the Supreme Court is finally out on the proceedings regarding a cartel of two wheat flour producers who conspired to raise the price of this product. In these two countries, which have a relatively high poverty rate (as defined by local authorities), antitrust cases that involve access to health and nutrition have an extra component that makes them special. Indeed, cases like this have the potential of generating social unrest. Why? The image of a cancer patient who cannot afford a needed drug or a malnourished child evokes a feeling that other cases do not.

Before going any further, one distinction between the situations in the two countries has to be made. In South Africa, we are talking about three ongoing investigations where guilt has not been yet established, while in El Salvador, the case that concerns us has already been decided. The two flour producers were found guilty and rightfully so. The case is the only instance where the Salvadoran authority has conducted a dawn raid, in which it found conclusive evidence of the agreement to allocate market shares. The point of this article is not to advance a judgment in the case of the South African investigations but to point out why a correct competition law enforcement policy is crucial in developing countries. Cartels and abusive dominant firms can be extra harmful in the sense that poor consumers do not simply forgo a part of their welfare but the harm extends to their daily struggle to survive.

I have picked these two examples as the basis of this post because they are recent developments. However, we can find similar situations in other countries in the past. When the farmacies cartel was uncovered in Chile, the population was so enraged by having had to pay more for their medicines that protests erupted and all of this served as a catalyst for reforms that strengthened the Chilean competition authorities.

Developing countries have a particular need for a working competition policy. They do not only have to ensure markets that promote productivity growth but also protect consumers in vulnerable situations. As a consequence, it is important to ensure that the deterrence effects are maximized in markets strategic to this purpose. I say this because it is a common problem in developing countries that competition authorities are underfunded and understaffed. As a result, their investigation and case-resolution capabilities are limited, which decreases the expectation of companies of being caught and punished for competition law infringements. In such a situation, the authority can nevertheless create such an expectation in important industries––for example, health and food products––by focusing its scarce resources on this industries. The deterrence effect of antitrust will not work in the whole economy but at least in an essential part.

The case of El Salvador also shows an important area where the advocacy efforts of the authority should be directed: judicial efficiency. The wheat flour cartel case spent almost nine years under judicial review after the date of the Competition Superintendence’s decision. Such prolonged court battles significantly hamper the deterrence effects of the competition law since the final payment of the fine and, perhaps more importantly, the enforceability of the injunction is postponed. Therefore, the companies can significantly discount the potential losses of an adverse judgment (though they have to pay substantial litigation costs, which nevertheless shows the value they place on delaying the final judgment). In addition, the lengthy proceedings tie up important personnel of the antitrust authority, which affects its enforcement activities.

Competition policy in developing countries faces more difficulties than in developed economies. But more is at stake. It is important that the policies achieve maturity and gain sufficient importance in the eyes of the public so that their funding can become a priority and the authorities can have a better chance of achieving their purpose.

*Co-editor, Developing World Antitrust

 

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Predatory pricing in India’s telecommunications market? The Competition Commission says no

By Francisco Beneke*

Some facts:[1]

  1. India is the second largest mobile telecommunications market in the world;
  2. Last September, it witnessed the entry of Reliance Jio Infocomm, which invested 20 billion USD to deploy a 4G network in India;
  3. This company is a part of a corporate group owned by India’s wealthiest individual—Mukesh Ambani;
  4. As part of its entry strategy, the company offered voice and data services for free until March this year, which allowed it to quickly capture just over 6 percent of the market in terms of users; and
  5. This led incumbent Bharti Airtel, number 1 operator in terms of both revenue and users, to sue Reliance Jio for abuse of dominance through predatory prices.

The Competition Commission of India (CCI) ruled last Friday that there was no prima facie case of predatory pricing,[2] which Bharti Airtel still has the opportunity to contest under article 26 (6) of the Competition Act. My guess is, however, that such efforts would be futile. Seeing the facts listed above it might be your guess too. After reading the short 17-page decision, one can clearly see that the CCI has a favorable view concerning the competition dynamics in India’s mobile telecommunications market, which may also foreshadow how it will decide the mergers under its review (it already okayed Bharti Airtel’s merger with Telenor India, but other transactions are still pending).

The decision may be summarized as follows: if winning a predatory pricing case against an incumbent is difficult, winning one against an entrant is next to impossible, considering that the complainant is arguably the dominant player. Bharti’s strategy was what one would expect. It tried to put forward a very narrow definition of the relevant market––4G services––where it argued Reliance Jio had, within less than a year, acquired a dominant position. The CCI did not buy it. It defined the market as the provision of wireless telecommunications services to end consumers, including 2nd, 3rd and 4th generation technologies. Jio’s 6 percent share in this broader market made it unnecessary to enter into the analysis on whether prices were predatory.

It strikes me as odd that Bharti would have considered pursuing this suit in the first place. It might have thought that the CCI could have been impressed with the fact that Jio is a part of a massive conglomerate with vast resources. Then again, it is hard to believe that the authority could have been persuaded that incumbents were in a disadvantageous position in this respect, as it rightfully was not.

From an economic standpoint, Bharti’s case was shaky, at best. It does not fit, at least with the information at hand, with the common assumptions that have to be made for a realistic price predation case.[3] It is hard to argue that Reliance Jio had such a cost advantage that it could have endured a lengthy price war to drive enough operators away from India’s market. The country is also experiencing fast growing incomes which will increase the size of the broadband markets, a trend that plays against a price predation strategy being effective. A growing market that can accommodate more entrants is not easy to monopolize. Being an entrant, it is also impossible to argue that Jio is in a position of having a low cost predator reputation that could keep companies away from the market once it becomes the dominant operator and raises its prices.

This is just a quick, though I hope illustrative, review of the case and its circumstances. The takeaways are: few incumbents like Jio’s strategy of giving away everything for free, the case was rightly decided, and it appears that Bharti’s legal advisers were either bored, not heard or have little clue on what a successful predatory pricing claim looks like. India’s telecommunications market is undergoing many changes, which I hope, will give us more interesting material to analyze in the future.

*Co-editor, Developing World Antitrust

@DWAntitrust

[1] See Competition Commission of India, Order under Section 26 (2) of the Competition Act, case No. 3 of 2017, available at http://www.cci.gov.in/sites/default/files/3%20of%202017.pdf; D’Monte, L (2017, April 30). It’s the survival of the biggest in India’s telecom industry. Live Mint. Available at http://www.livemint.com/Industry/n02lQV04A2ui4x37XKVzmL/Its-the-survival-of-the-biggest-in-Indias-telecom-industry.html; and Williams, C. (2017, January 14). How the Ambani family feud hit Vodafone’s Indian mobile empire. The Telegraph. Available at http://www.telegraph.co.uk/business/2017/01/14/ambani-family-fued-hit-vodafones-indian-mobile-empire/.

[2] Competition Commission of India, Order under Section 26 (2) of the Competition Act, case No. 3 of 2017, available at http://www.cci.gov.in/sites/default/files/3%20of%202017.pdf.

[3] See Carlton, D.W. & Perloff, J.M. (2005). Modern Industrial Organization, pp 352–357. United States of America: Pearson/Addison Wesley.

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Concrete Antitrust Economics

By Francisco Beneke*

Last week I read a book called Concrete Economics by two Berkeley professors, Stephen Cohen and Bradford DeLong. The general theme of the book is simple and straightforward: economic policy redesign throughout US history has been successful to the extent that it has been pragmatic, not based on abstract theories of how markets behave but on concrete thinking of what the economy needed. The authors argue that it had been that way until the last redesign of the 1980s when ideology prevailed and nobody had a good idea about the supposed benefits of moving the US away from manufacturing and toward what were believed to be higher value-added activities (finance, insurance, and real estate).

The point applies to the debate on some issues in antitrust analysis. Competition policy can take many shapes within the same country during different periods of times, as in the US, and also differ to a significant degree across important jurisdictions––say, the EU, US and China. The discussion of what is the right approach turns sometimes ideological. Take the debate surrounding digital markets for example. Some people advocate for a loose stance on big tech companies because of the fragility of their position. Google’s competition is one click away and Facebook took the field that was already dominated by other social networks. We can describe a position to be ideological if it’s based on a myopic view of the facts. What about the companies’ jaw-dropping share in online-advertising or the fact that true challengers only appear to succeed in certain niche markets? (think of the success of Snapchat with teenagers in the US). Some commentators like to oversimplify the discussion and throw general arguments such as that intervention dampens innovation. If only things were so simple. The question we should ask is which specific type of intervention we are talking about in order to make an educated guess on the effects we may expect to see.

Another topic on which the debate is highly ideological concerns my main area of research: do we need to adjust competition policy and analysis to the different characteristics and needs of developing countries? A big point of the discussion is about keeping consumer welfare as the north of the compass and ditch other considerations that would make antitrust an instrument of industrial policy. There are good points on both sides, and I must confess that my own research does not depart from the consumer welfare paradigm. What is certainly true is that purists, as professor Ariel Ezrachi calls them, claim a higher intellectual ground. Theirs is the economic approach. In that way, the debate turns ideological too.

There are good questions to ask around the purpose of competition policy in countries ridden with poverty and weak institutions. They are not populist and they are grounded in economic concepts. The desirability of focusing on consumer welfare rests on assumptions that look shaky, to say the least, in the case of developing countries. One such assumption is the flexibility of the workforce. If imports take a market by storm, the displaced workers will have a harder time being relocated to new activities because of their lower average education and skills development. Does that mean that developing countries should close their borders to imports? The point of this post and the book I read is that this is the wrong question to ask. It sounds ideological, not concrete because it is formulated too generally.

Concrete Economics has some important lessons for moving away from this ideology trap. First, in applying the book’s approach to tech markets or adjusting competition policy to unique economic and social contexts requires us to borrow some techniques from the medical profession. We can’t prescribe a treatment without a diagnosis (a point advocated by Jeffrey Sachs in his book “The End of Poverty: Economic Possibilities of Our Time”). That means not only compiling information but the right kind of it. Second, we have to paint a clear picture of the results that we are aiming for––in the authors’ words, what you see is what you get. And third, Cohen and DeLong favor a pragmatic approach of trying the policies that seem to have the best chance of succeeding, observing their results, ditching what does not work and keeping what does. This is what they argue happened during Franklin Roosevelt’s administration amid the Great Depression.

Granted, all of this is easier said than done, but worth the effort. A good start is asking the right questions. In the case of developing countries, for example, an important one is the following: what are the most pressing matters for the well being of the population and on which competition policy can make a significant contribution? Poor countries have an urgent need of education reform, but it is hard for me to picture a way in which antitrust can have a significant impact on the subject. On the other hand, vital infrastructure such as energy and telecommunications have important competition components that determine their coverage rate. Finally, we should come up with good evaluation methods––a practice that is scarce in competition policy––to be able to see what works and what doesn’t. As Cohen and DeLong admit, no one has the right formula, but that does not mean that we should not do anything.

Co-editor, Developing World Antitrust

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Regional integration and antitrust policy: Bigger markets are harder to threat

By Francisco Beneke*

I was talking to a friend at the Max Planck Institute for Innovation and Competition with whom I share an office, and he pointed out to me a risk to which antitrust authorities in developing countries are exposed and a good way of protecting them from it. His point was simple but brilliant. Let me tell you briefly what our conversation was about.

Haris pointed out to me that in the course of the proceedings, a multinational could subtly (or not so subtly) make the threat that, should it be enjoined from a certain conduct and imposed a fine, it would find it necessary to cease operations in the country in question adducing any business justification, such as unprofitability. Let’s say a pharmaceutical company is being tried for impeding parallel imports in a country where this is perfectly legal. If it were enjoined from entering into contractual provisions that make these imports harder in order to sustain a higher price for its medicines, the company may say that it would be forced to leave the market. If operation with the lower price due to competing imports would still be profitable, this hardball tactic could still make sense if the size of the market is so small as to render any effects on global profits negligible. The purpose would be to send a message and actually carrying out the threat would signal that the company means business.

The practical implications could put the antitrust authority in an awkward situation. The central government may not be so happy with losing a source of tax revenue. Workers will certainly not like their sudden unemployment. To make things worse, consumers will lose some of their welfare because of the supply contraction. It is easy to see how the antitrust authority may have more at stake than the multinational corporation.

On the other hand, what if this country suddenly becomes a part of an economic union with a common competition policy? The firm will be enjoined from sustaining price differences that are based solely on its market power and not in different costs in each country (in practice that would translate to the ones it can prove to the authority). Now the threat of leaving would have to involve a bigger market, and if such new market is large enough to offset the benefits of sending a message then the company cannot make a credible commitment to cease operations. It is simply not in its best interest. In short, Haris’ argument was that integration of markets and competition policy protects smaller member countries of such threats.

I am aware that the example raises some other issues, such as the desirability of addressing price discrimination within antitrust proceedings, but the point applies to any kind of anticompetitive behavior too. Less controversially, we could imagine the same kind of threat involving a cartel. Integration is not easy, but there are good reasons to pursue it.

*Co-editor, Developing World Antitrust

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Network Effects and the Assessment of Market Power in the Sharing Economy

By Francisco Beneke*

You may have heard of unicorns and venture capital in the Silicon Valley. Unicorns are companies that have not generated a single cent in revenue but are able to marshal multimillion-dollar amounts of capital from investors. Why? Their potential, of course. Venture capital firms don’t want to miss on the next Facebook. But in what exactly does this potential consist? In the particular case of platforms like the one just mentioned, the hope of the investors is that the company will have an exponential growth in consumers and providers, which in itself will make the product more attractive to other buyers and sellers, which in turn generates a virtuous circle in the company’s growth. That is, investors covet companies that can generate network effects or demand-side economies of scale, which makes them able not only to monetize customers but also to get their hands on the data they generate.

In some markets, sharing economy platforms like Uber and Airbnb have grown so much that they are attracting lawsuits of abuse of dominance. That is, plaintiffs consider that these firms have become the main players in their markets. If these companies have already generated a critical mass of providers and customers, their position may be entrenched just for the fact that they are big. Providers will choose a given platform because the potential demand is bigger and customers will rather buy services through it because there are more options (in the case of Uber, for example, more drivers means shorter wait times and wider geographical coverage for passengers within a city).

There is much to be said about network effects and market contestability. However, I will focus just on one aspect. An important point in the case of sharing economy platforms is the geographical scope of these effects.[1] More Lyft drivers in San Francisco mean nothing to a customer in Munich. More Airbnb listings, on the other hand, are a different story.

You may have already guessed the direction of the argument in this post. The global (or at least transnational) character of Airbnb’s network effects makes it a more powerful company against its competitors than Uber. The battle for passengers is fought city by city, which means that companies have to attain a lower critical mass of consumers and providers to contest Uber or Lyft’s foothold. There can still be, to a certain extent, an international component in ride-hailing apps’ network effects. A part of their demand is composed of tourists. However, if we expect the bulk of passengers to be city residents then network effects will tend to be more local.  If any of these companies is being scrutinized for monopolization/abuse of dominance, this factor has to be taken into account.

That is not the same as saying that the geographical location of the market has to be correctly assessed. I’ll give you an example. If you are analyzing a short-term accommodation market you may define the relevant geographical dimension as that of a city. The company in question, however, may have a global reach, which makes it likelier that a tourist or a business traveler will use its platform to search for a place to stay.

I admit that network effects are a complicated issue from an antitrust perspective. The source of concern is something that benefits consumers in the first place. If the platform is attractive, among other things, because of its size, then all the better for it. That should lead to view mergers in any such markets with less suspicion, right? My bet is that it will not be that way except in the cases when national champions, like Didi in China, buy foreign threats, like Uber.

*Co-editor, Developing World Antitrust

[1] Sundararajan, A. (2016). The Sharing Economy–The End of Employment and the Rise of Crowd-Based Capitalism, p. 20. Cambridge, MA: MIT Press.

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3D printing and the future of sunk costs in antitrust analysis

By Francisco Beneke*

I have heard about 3D printing before but never thought about its antitrust implications until now. After having a revelation-like moment, I decided to write a short post. I did some research (googled and did not go beyond the first results page, I confess) on this relationship but could not find much. Let me share what I think my revelation is.

Some futurists predict that 3D printing will soon take manufacturing industries by storm. What is so fundamentally disruptive about this technology is that it allows the same machine to manufacture/print all kinds of different products. As the technology evolves and we are able to print more and more goods instead of producing them in traditional factories, manufacturing across industries will be performed by machinery that is not market- or firm-specific. That means, sunk costs in physical assets will stop being a consideration.

If the same machine can print toothbrushes, glasses, shoes, and furniture, the risk of entering this activities will disappear and in theory we should see more competitive markets. 3D printing is already used in the production of auto and spacecraft parts and there have even been instances of house printing. In addition, this multi-purpose technology will free up resources to invest in other activities within the firm. We may see a lot more (or better) advertising, more R&D investment, or both.

According to Arun Sundararajan of NYU, in the future, we may see the average household owning a 3D printer that can print any type of physical product of a small enough size and printer shops for bigger, more complex goods. We will buy designs from a freelancer but we will have no more need of big factories and retail chains. This will be a world with easy hit-and-run entry and exit in almost all economic activities. A brave new world.

*Co-editor, Developing World Antitrust

@Paco_Beneke

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Riding the M&As wave in India’s telecommunications industry: The ambiguity of market concentration

By Francisco Beneke*

One can write either loud praise or a strong critique about the work of the Competition Commission of India (CCI) and the Competition Appellate Tribunal (Compat). However, it must be agreed that their influence on global affairs is growing at a fast pace. Now, the authorities must choose how to deal with a wave of consolidations in the world’s second largest mobile telecommunications market.

The industry was shaken up by the disrupting entry of Reliance Jio Infocomm, a company backed by India’s wealthiest man, Mukesh Ambani. It quickly captured an astonishing 100 million subscriber base in less than three months by basically giving all services for free for a limited period of time (ending in June this year). This was a hard blow to the industry, which had to enter into a profit-damaging price war, but fantastic news for consumers. In the aftermath, most of the main players have followed a consolidation strategy. In short, the deals may leave the mobile telecommunications market with three companies controlling at least 80 percent of subscribers and revenue.

Should these concentration figures raise concerns? A sensible answer is that the matter is complicated. Common thinking within antitrust authorities is that market concentration does not tell the entire story but that other factors, such as entry barriers, have to be examined. This, however, is not an interesting point because of two reasons: first, antitrust authorities tend to easily conclude the existence of barriers to entry in highly concentrated markets; and second, it is hard to find concentrated markets without some sort of entry impediment.

The more interesting question is how to interpret different market structures given certain industry characteristics. Under certain conditions, fewer firms can mean tougher competition. The reason is a commonly overlooked factor by antitrust authorities, which is the game being played in the industry. In other words, how firms adjust their behavior to that of their competitors. Here is where the work of John Sutton has made an invaluable contribution to our understanding of market structure.[1]

The game the author contemplates with the lowest concentration given a market size of a homogenous good is that of a cartel.[2] When firms collude to achieve the monopoly price, more firms can enter and share the market because of higher profits. When the game is more competitive—for example, with any form of uncoordinated behavior such as a Cournot or Bertrand setting—lower industry profits cause fewer competitors in equilibrium. In the most competitive game (Bertrand) the steady-state number of firms is one.

The bad news is that research on the determinants of the game in each market is still inconclusive.[3] As a practical matter, an antitrust authority like the CCI can conduct an investigation to obtain evidence on collusion and ensure that the strategies followed by market participants are at a minimum not the least competitive ones. But another important question still remains and is that of whether an increase in concentration will favor a game that leads to lower consumer welfare. An additional factor to consider in this matter is that of endogenous sunk costs, which can help understand how the existence of a few big players can actually be good news for consumers.

In markets like mobile telecommunications, firms usually choose how much they invest in the quality of their products (which in a broad sense includes advertising as well). That is, sunk costs are not exogenous. This is why, according to Sutton, we can see similar levels of concentration in the Indian market and that of my home country, El Salvador, even if the difference in size is abysmal. In such scenarios, Sutton’s model predicts that the biggest firms are expected to be the ones that offer the best quality and capture demand away from inferior products, which could mean greater concentration but is not necessarily detrimental to consumer welfare. The result will depend on how much value consumers place on superior quality.

We can easily imagine that preference for quality will be dictated in part by income. Here is where an important feature of the Indian market—and that of some developing countries—comes into play. India is an economy with rapidly rising incomes. If we can expect this trend to hold in the future, the mobile telecommunications market will be able to introduce better quality products for more demanding consumers. This could mean that the ideal market structure is one with a few firms with the resources to invest in the infrastructure needed (say, a 20 billion USD LTE network like the one deployed by Reliance Jio).

A final word of caution is in order. This article attempts only to shed light on factors that can be useful in understanding the consequences of the wave of consolidations in the telecommunications industry in India. However, a claim is not put forward that increased concentration is necessarily a good thing for consumers (it can lead to other overlooked problems already analyzed in this blog). Sutton’s theories rely on a set of assumptions that may or may not hold in this specific case. Their analysis can, nevertheless, help the CCI and the Compat to make a more educated guess (because merger control is nothing more than that) on the likely effects of the mergers that are currently taking place.

*Co-editor, Developing World Antitrust

[1] Sutton, J. (1991). Sunk Costs and Market Structure. Cambrige, MA: MIT Press; and Sutton, J. (1991). Technology and Market Structure. Cambrige, MA: MIT Press. For a discussion of Sutton’s work see Carlton, D.W., and Perloff, J.M. (2005). Modern Industrial Organization. USA: Pearson/Addison Wesley.

[2] With differentiated products, the theories predict only a lower bound of market concentration, but anything over it is possible.

[3] Carlton and Perloff (2005), supra, n. 1.

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Lock them up: A quick look at Chile’s new antitrust regulation

By Benjamin Gomez*

So it took a bit longer than originally predicted on my previous contribution to DWA [1], but it came as tough as expected. I am referring to the new amendments to Decree Law 211 – the antitrust statute in Chile – which entered into force by Law 20.945 on August 30th, 2016, bringing unprecedented punishments for cartels and an overall strict regulation of other relevant antitrust issues. In an effort to be critical yet pragmatic, I will keep the informal tone that has been encouraged by the founders of this blog.

We need to begin with the big shocker of this new law: the reinstatement of criminalization for an anticompetitive conduct. Prison time for cartels is no novelty; until 2003, Chilean Antitrust legislation contemplated up to 5 years of prison for these anticompetitive conducts (although no one was ever sentenced) [2]. But the new statute raises the criminal bar and now contemplates up to 10 years of prison time for individuals. Just to give a better idea, this is the same prison time that could potentially apply to a rape or murder case. Although it is difficult to imagine any high-society Chilean billionaire (as has been the tone for most recent cartel cases in the country) doing any effective jail time it is still a big deal, the fact that this new sanction is out there will definitely make the big players think twice.

Still on the cartel trail, we can see once again (as the previous amendments back in 2008) a significant increase in economic fines, this time doubling up the cap from USD $25 million to USD $50 million approximately. In addition, a new predominant criteria was inserted to determine the amount of the fine. The Antitrust Tribunal (Tribunal de Defensa de la Libre Competencia – TDLC) shall calculate and apply first 30% of the gains for each of the colluding parties during the breaching period, or alternatively up to twice the economic benefit gained by such party. Only if those benefits cannot be determined, the TDLC can apply other factors to freely decide on the amount of the fine, with the aforementioned USD $50 million cap.

All of these measures seem to be directly inspired by the Sherman Act, one of the main federal antitrust statutes in the United States, and maybe the harshest from a comparative perspective. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million [3]. The new law already equalized the US on the jail time aspect, and if a new double-up is made by the Chilean Congress on economic penalties, Decree Law 211 will then be among the toughest antitrust regulations in the planet.

The Sherman Act imposes an exponential increase of fines, aimed at some of the world’s largest corporations, and that is a factor to be considered. To continue doubling-up the fines in Chile would lead to a potential punishment-victim disproportion. Furthermore, it is difficult to imagine a scenario where the Chilean criminal system would end up imposing effective imprisonment as the general rule, both from a logistics and cultural standpoint. On the other hand I understand that this has become a necessary effort to fight the growing recklessness by the major economic groups engaging in high-impact collusive agreements. Just as the year 2016 came to a close, the Chilean media exposed a cartel on the baby diaper market carried out by the same companies involved in the “Toilet Paper Cartel”, CMPC and Kimberly-Clark. Yes, you read correctly: a “Diaper Cartel” that systematically coordinated to increase prices between 2002 and 2009 (as if an agreement to fix prices of toilet paper was not outrageous enough!).

Moving past cartels, another interesting amendment to Decree Law 211 is the now mandatory control of all mergers and concentration operations. Just recently, the new thresholds were set by the National Antitrust Prosecutor of Chile (Fiscalia Nacional Economica – FNE) by means of Resolution 667 dated November 24, 2016, requiring all potential mergers where combined national sales by the intended merging parties are equal to or higher than USD $70 million approx. for the previous commercial year or at least USD $11 million approx. separately considered, to have prior antitrust clearance by the FNE. The effects of this new amendment will need to be assessed in time, but it is definitely positive to have the FNE thresholds already in place early in the game.

Finally worth mentioning, the new statute brings some positive novelties by imposing restrictions to different actors involved in the antitrust universe. For company board members, there will be interlocking restrictions in place, while members of the TDLC shall now have exclusive dedication to their role. This last one always puzzled me; how some members of such tribunal were acting as active law firm partners and gave advice to private parties on antitrust matters. Incompatibility and ethics must go both ways, and this is definitely a smart move to improve the current statute and prevent conflicts of interest.

All things considered, the new amendments to DL 211 come just in time to tackle the cartel explosion going on in Chile, which has reached new levels of shameless anticompetitive conducts –involving public health basic goods such as toilet paper and diapers – and is giving no signs of stopping. Higher fines and harsher punishments are seen with welcoming eyes by both government and the public, but at the same time there must be some serious consideration of how legislation is going to move forward and how convenient will it be to continue imitating some of the Sherman Act’s criteria for determining punishments by the TDLC. For now, locking up the bad guys seems to be a move in the right direction.

* Attorney at Law, Pontificia Universidad Católica de Chile

LL.M, University of California, Berkeley, School of Law

[1] https://developingworldantitrust.com/2016/01/18/the-chain-reaction-of-the-poultry-cartel-in-chile.

[2] Idem.

[3] https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.

 

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