Chasing cartels for the benefit of consumers
by Atty. Johannes Benjamin R. Bernabe
June 12, 2018

Putting a halt to cartels and other collusive acts lies at the heart of the Philippine Competition Commission’s (PCC) effort to improve consumer welfare.

The review of mergers and acquisitions, often involving large corporations, while gaining the lion’s share of attention, is perceived by many as mainly affecting competitors in the market who may be eased out because of the monopolization or dominance by the merged entity.

On the other hand, the PCC’s mandate to curtail abuse by an entity of its market power is seen as more directly impacting suppliers, distributors and other entities involved in the production or marketing chain of a good or service.

However, all consumers bar none, look at price-fixing, bid rigging, output limitation and market allocation —the last two in the sense that they result in increased prices—as a bane of their existence. Hence, agreements to fix prices are regarded as acts characteristic of “hard-core cartels.” These types of agreement are by their nature inherently bad, such that no analysis is needed of their effect on competition.

Under the Philippine Competition Act (PCA), price-fixing and bid rigging are per se prohibited, which means that there is no defense or circumstance that could ever justify their commission. Market competitors found by the PCC to have committed these acts are not only subject to administrative fines of up to P100 million for a first offense and between P100 million and P250 million for a second offense; moreover, if found guilty by the regular courts, these competitors are liable for criminal penalties in the form of imprisonment of two to seven years, and a fine ranging from P50 million to P250 million. If committed by corporations, the penalty of imprisonment shall be imposed upon their corporate officers and directors.

Cartel agreements between or among competitors, which have the object or effect of substantially preventing, restricting or lessening competition by restricting output, technical development or investment are subject to the same administrative and criminal penalties. The same goes for agreements that divide or allocate markets among competitors. These kinds of agreements are similarly seen as egregious and, as such, penalized heavily.

The difference, however, with the first type of agreements that seek to fix prices or rig bids is that unlike the latter, the PCC must prove that an agreement, for instance restricting output, has the “object” or “effect” of substantially lessening competition. As such, the PCC must not only prove that an agreement, formal or informal, tacit or explicit, exists; in addition, it must necessarily conduct an analysis of the agreement to determine whether it substantially lessens competition in the market.

Does it, for example, have the purpose of dividing the geographic market such that an entity is only allowed to supply its services in Metro Manila, while its competitor supplies the rest of Luzon? Even if the agreement does not expressly provide for this purpose, if examined in its overall legal or commercial context, can there be no other inference but that the agreement has the object of restricting competition in the market?

Alternatively, if this object is not apparent, the PCC can look at the likely or actual effect of the agreement on the market. In this case, the Commission will use economic analysis to prove the pernicious effects a market allocation or an output limitation agreement has on competition and on consumers. Since economic analysis will be availed of to establish liability, it behooves the Commission to ensure that its conclusions on the effect of the agreement are robust and evidence-based.

The third category of anticompetitive agreements prohibited under the PCA is meant to catch all other kinds of collusive acts and need not even be among competitors.

For instance, an agreement between a government-owned or controlled medical insurance corporation and an association of health professionals that limits payments to the latter to services that are provided under certain discriminatory conditions may be caught by this prohibition. Its criterion is that entities collude or otherwise agree to engage in acts that have the object or effect of substantially preventing, restricting or lessening competition.

Due to its very broad coverage, this type of agreement is balanced by the so-called ‘rule of reason’ such that the PCC must consider any economic efficiency gains, which allow consumers a fair share of the resulting benefits that may be raised by the parties complained against. While this efficiency argument does not afford the parties an automatic exemption from prohibition, it does provide them a potential defense or justification against liability.

The PCC’s ability to navigate and hurdle the conditions for successfully prosecuting cartels and various types of anticompetitive agreements described above will make a marked difference in the Commission’s goal of directly improving the lives of Filipino consumers.

***

Commissioner Johannes Benjamin R. Bernabe served as adviser to the Senate and the House of Representatives in the drafting of, and deliberations on the Philippine Competition Act. A lawyer by profession, he was a senior fellow at the Geneva-based International Centre for Trade and Sustainable Development and served as the Philippines’s lead trade negotiator on select issues at the World Trade Organization, also in Geneva, Switzerland.

(Originally published on Business Mirror’s Competition Matters column on June 12, 2018 here.)