You may see many kinds of sales promotions such as “Zero -dollar ($0) down for Cell phones", "$1 One-Dollar Start-up packages" and "Closing Down Sales" becoming an everyday marketing event used by many companies in sales of its products to consumers. Recently, Tesla a car manufacturer angered Tesla owners by drastically cutting prices on many of its Tesla vehicles in Taiwan, resulting in many vehicle owners filing a petition against Tesla with the Fair-Trade Commission of Taiwan ("FTC"). Just a few years ago, many legislators in Taiwan questioned the promotional sales tactics used by e-commerce platform trader - Shopee who had violated the Taiwan Fair Trade Act ("FTA") as it had used anti-competitive strategies, such as free shipping, a no handling fee, etc. when it entered the Taiwan market. Do low-sales price promotions benefit customers? And how does the use of low – sales price competition in Taiwan market bring into effect the use of the FTA to control the balance in trade between competing market operators?
The FTA has regulated many situations where an enterprise has used low- price to compete with competitors. The regulations of the FTA can be approximately divided into two clauses: "predatory pricing of monopolies" in Article 9 of the FTA, and "hindering competition by low price inducements" in Subparagraph 3, Article 20 of the FTA. However, it is not easy to constitute "redatory pricing of monopolies", and the FTC has not yet made any firm policies on how to deal with aftermarket tie-ins which are designed to lock-in consumers to the primary product sellers and exclude all other competitors unfairly. "Hindering competition by low price inducements" was introduced into the FTA in 2015. This clause regulates situations that do not constitute predatory pricing but cause restricting competitions in the market. The FTC has imposed fines on many enterprises for their low-price inducements accordingly. However, Shopee was not subject to any penalties for its free shipping policy. We ask ourselves, how does low-sale prices cross the line of the FTA? This article will analyze the application standards of "hindering competition by low-price inducements." Subparagraph 3, Article 20 of the FTA Legislation will look at the FTC's position on dealing with companies who use unfair trade practices to increase its market share within an established market economy.
Case 1: A pharmaceutical company won the tender by offering NTD 1 bid
Company A and Company B both are selling medicines for curing depression. Company A sells proprietary drugs that already entered into Taiwanese market in the early stage and many domestic medical centers use its drugs. The market share of Company A's drugs is very high. Company B is a new entrant and sells first generic drugs having the same ingredients as the proprietary drugs. Company A and Company B received notices to attend a tender for procurement of medicines of a medical center, and Company A won the tender by offering a price of NTD 1 for each pill sold.
The decision of the FTC:
In Taiwan, proofs of being used by medical centers are required for attending tenders for procurements of medicines of medical centers, regional hospitals and large regional hospitals. That is, being used by a medical center as a vital threshold to obtain the trading opportunities with large hospitals and increase sales volume. The purchase cost for each pill of Company A is around NTD 12, but it bid at NTD 1, a price that is far below the purchase cost. Obviously, Company A tried to block Company B's opportunity to enter the market of domestic medical centers and avoid Company B becoming qualified for attending procurement tenders of large hospitals in Taiwan. By doing so, Company A can continue supplying medicine to large domestic hospitals as the exclusive supplier and maintain its competitive edge. Therefore, the FTC imposed a fine of NTD 3 million on Company A for it excluding other suppliers from competition (Reference: Disposition Kung Chu Tzu No. 100163 of the FTC).
Case 2: A cable tv operator launched a “NTD 0 for one-year subscription” plan
Company C is an existing cable tv operator at certain areas in New Taipei City. It charged NTD 500 per month on normal subscribers, which is equal to the cap amount set up by the New Taipei City government. After the government relaxed restrictions on new entrants and cross-district operations, Company D, a new entrant, entered the market competition by low price. Then, company C launched a "NTD 0 for one-year subscription" plan.
The decision of the FTC:
NTD 0 is obviously lower than the average variable cost of Company C. In addition, Company C did not offer the "NTD 0 for one-year subscription" plan to the existing subscribers nor promote or advertise the special plan to the public. Thus, this special plan is not a normal business activity for obtaining trading opportunities. The FTC ruled that the motivation of Company C was to impede or exclude new entrants since it only provided the special plan to the subscribers of Company D. This activity has limited competition in the market, as such, is illegal. Company C was imposed a fine of NTD 2.5 million by the FTC (Reference: Disposition Kung Chu Tzu No. 106102 of the FTC).
The analysis of the law
Subparagraph 3, Article 20 of the FTA provides that "No enterprises shall engage in any of the following acts that is likely to restrain competition… (3) preventing competitors from participating in the market or engaging in competition by low price inducements or other improper means". This clause is the legal basis for the FTC to regulate low prices. Accordingly, an enterprise would violate the FTA if its act breaches three vital elements: "the act is likely to restrain competition", "it is a low-price inducement", and "the act prevents competitors from participating in the market or engaging in competition". We will explain the three elements separately in the next section.
1. What is "likely to restrain competition?" In principle, the FTC uses "market share" as the threshold test.
The element, "likely to restrain competition", is an uncertain legal concept. Paragraph 2, Article 27 of the Enforcement Rules of FTA ("Enforcement Rules") provides that "In determining whether a low price inducement is likely to restrain competition or not, the competent authority shall take the following factors into consideration: the intention of the enterprise, the purpose of the enterprise, the market position of the enterprise in the market place where the enterprise belongs, the characteristics of the goods or services, that impact on the market competition and the implementation of the act, if applied to rectify any imbalances in the free market. However, this clause only explains the factors that the FTC should consider when deciding how this clause would apply to each specific case.
Based on the legislative explanation of Subparagraph 3, Article 20 of the FTA, expressly regulates the situation where an enterprise with substantial market position engages in improper low-price competition or any other act(s) to impede free-market competition. Even though the act does not constitute predatory pricing, such act may cause competition restraints in the free market. Accordingly, we have learned that not all low-price competitions by an enterprise would violate the FTA, the offender must have substantial market position to do so. This is because when a market share of an enterprise is not high enough to be a monopoly, its low price would not violate the predatory pricing policy in Article 9 of the FTA. However, its improper low-price competition is likely to prevent competition and cause adverse effects to the marketplace. It would than violate Subparagraph 3, Article 20 of the FTA. Therefore, the element of "market share" as the screening threshold would come into play as the company's act is "likely to restrain competition".
How to determine if an enterprise has an unfair market dominance?
The FTC thinks that when the market share of an enterprise does not exceed 15% and there is no difference between enterprises, it can be presumed that the enterprise does not have market power, and the enterprise's act, in general, is not likely to restrain competition in the market place. However, if the market share of an enterprise is higher than 15%, then the FTC will take into consideration such unfair conduct, as whether the characteristics of the goods form any barriers to entry of other competitor. Whether the low-price sales will exclude other competitors from entering the same market. For example, In the abovementioned two cases the market shares of the two companies being fined were found to be over the 15 percent threshold as allowed by the FTC. On the other hand, the media questioned why the FTC did not impose any fines on Shopee. In that case, the FTC found that Shopee's market share was not over the 15% threshold as allowed by the Legislation.
(please see: https://tw.appledaily.com/new/realtime/20180322/1319853/)
2. What is “low- price inducement?” In principle, it is determined by whether the price is lower than average variable cost.
Paragraph 1, Article 27 of the Enforcement Rules of the FTA provides that the low-price inducement under Subparagraph 3, Article 20 of the FTA refers to offering the price lower than then the cost of producing it. Was obviously designed to exclude competition or prevent competitors participating in the market or engaging in competition. The legislative explanation clearly points out that in determining whether an act constitutes low-price inducement, the competition authority should, in principle, adopt average variable costs as the standard. And in exceptional circumstances, the competition authority should consider factors such as the structure of the market and the characteristics of the industry. In Case One above, the FTC adopted the purchased costs of the drug as the standard, while the FTC adopted average variable cost as the standard for Case Two. This involves the concepts of economics and the questions regarding what costs will be considered as variable costs. We will explain this further below.
Accordingly, to the general economic principal, total cost is made up of fixed cost and variable cost. The so-called variable cost refers to the cost varies with changes in product output. Take cable TV operators for example, their variable costs vary with changes in the numbers of subscribers. The operating cost structure of cable tv operators can be divided into copyright costs of programs (i.e., the paid or amortized costs of the purchase of right to broadcast programs), installation and maintenance costs from the subscribers (i.e., the cost generated from installing and maintaining systems for subscribers), the costs of broadcasting program (i.e., the cost of using broadcasting equipment to present pictures to viewers), and others (e.g., personnel costs, the rents of offices and computer rooms, etc.). The copyright costs of programs and the installation and maintenance costs from the subscribers would change as the number of subscriber's change. The average variable cost is calculated as the sum of the two costs, which is the variable cost, divided by the average numbers of the subscribers.
3. Preventing competitors from participating in the market or engaging competition
There are many reasons for low-price sales. For example, new entrants make promotions to enter the market or introduce new products, shops make promotions to stimulate buying desires in low seasons, or shops run closing down sales, expiring items sales or inventory clearance sales, etc. Not all of them would impede competitors from participating in the market or engage in anti- competitive conduct. The FTC determines whether a low-price promotion forms barriers to competition. Take Case One for example, whether a drug can be used by the first domestic medical center is the key to participate in the competition. Company A blocked the opportunity of Company B to enter the market of domestic medical centers by using low price bidding. Therefore, the FTC ruled that this act has hindered the competition.
In fact, Case One had a follow-up development. Company B sold the drugs to another domestic medical center at a price of NTD 1.3 for each pill after being blocked. Although the price of Company B was also far below its purchase cost, the FTC did not impose penalties on it. The reasons for the FTC's decision are not only based on Company B's market position, but also Company B being able to obtain the qualification of providing medicines to domestic medical centers by the low-price, which would promote competition. In addition, Company B can reduce its inventory risks of carrying drugs with short expiry dates by low-price sales of the drug to the marketplace. Therefore, the FTC held that the low -price promotion of Company B was for reasonable economic grounds for selling the drug at a lower price point to the marketplace, rather than finding that company B had acted unfairly in the market- place in the sale of its product (see the extracted part of the statement of the FTC in the Taipei High Administrative Court's judgement of Case (103)-Su-Keng-Yi-No.15).
As we can see from the above cases and explanation, the FTA focuses not only on the low-price promotion itself, but also on the reasons why low-price promotion cause negative effects on competition. This is because the legislative purpose of the FTA is to protect competition. According to Article 4 of the FTA, the term "competition" refers to enterprises compete for trading opportunities in the same market with competitors by offering more favorable prices, quantity, quality, services, or other conditions. Therefore, in general, competing by more favorable prices does not violate the FTA and even the FTA would be glad to see it. However, when an enterprise adopts a super low -price promotion which is even lower than its purchase costs to eliminate competitors, consumers seem to get advantages in the short term. It may cause competitors to withdraw from the market in the long run, and eventually deprive consumers of the opportunity to choose multiple trading partners in the future, which has negative impacts on market competition and consumers' interests. At this point, the super low- price promotion violates the FTA.
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.