Since the institutional reforms last year, the State Administration for Market Regulation (SAMR), China’s newly formed antitrust agency, has been working hard on both enforcement and legislation. On the legislative level, following the promulgation of two procedural rules at the end of 2018, the SAMR published another three antitrust rules on 1 July 2019: The Interim Provisions on Prohibiting Monopoly Agreements; Interim Provisions on Prohibiting Abuse of Market Dominant Position; and Interim Provisions on Restraining Abuse of Administrative Power to Restrict Competition.
This article highlights the most important changes in the rules on monopoly agreements and abuses of market dominance.
Q: Should ‘illegal per se’ and ‘rule of reason’ be applied in deciding vertical monopoly agreements? A: Although there was a lot of debate over this issue, the Interim Provisions on Prohibiting Monopoly Agreements implied a clear position that those listed conduct for horizontal and vertical monopoly agreements in the Anti-Monopoly Law (AML), including fixing prices, restriction of sales, market partitioning, collective boycott and restriction of new technology, equipment or product between competitors, as well as vertical resale price maintenance, will be determined as illegal per se, without further checking the purposes and anti-competitive effects of relevant conducts.
Other conduct not listed by the AML can only be determined as the monopoly agreement when there exists evidence proving that conduct eliminates or restricts competition, which is the rule of reason approach as a matter of fact.
Q: What is the applicable scope of settlement? A: Settlement is a special instrument that antitrust authorities use in their enforcement, with the intent of making the antitrust enforcement more efficient in specific cases. When the investigated submit rectification measures to the authority for the purpose of eliminating anti-competitive effects of the investigated conduct, and if the authority accepts, the antitrust authority will suspend the investigation and ultimately terminate the investigation after some period of supervision.
Through the settlement treatment, the investigated can avoid being penalized. In the previous rules, the types of conduct that settlement applies to in China was not clearly articulated. But the Interim Provisions on Prohibiting Monopoly Agreements now make it clear that horizontal monopoly agreements between competitors, taking the form of price-fixing, market partitioning and restriction of sales, cannot apply for the settlement treatment.
Q: What are the considerations for determination of collective dominance? A: The provision of collective dominance in the AML has been long criticized for being too arbitrary without limiting its application scope in the legislation. Taking the chance of enacting the Interim Provisions on Prohibiting Abuse of Market Dominant Position, the SAMR elaborated on those factors regularly to be considered when finding the collective dominant positions enjoyed by more than two competitors. Those factors include market structure, transparency of the relevant market, homogenization degree of relevant products, and the consistency of the behaviour of competitors. Normally, collective dominance is apt to be found in an oligopolistic market with few competitors, a high degree of transparency and a high homogenization degree of relevant products.
Q: What is the test for predatory pricing? A: The AML prohibits firms from selling below the cost (predatory pricing), but does not elaborate on pricing below “what cost” will be determined as predatory. Firms therefore didn’t know for a long time what course to follow when assessing internally whether their pricing ran the risk of being determined as predatory under the AML. The Interim Provisions on Prohibiting Abuse of Market Dominant Position has provided more clarity in this regard, which stipulates that the average variable cost will be the main test for judging whether pricing is predatory or not. Meanwhile, the special feature of the frequently used free-fee modal for basic service in the digital market, which makes application of the “average variable cost test” necessary to be adjusted, is also well recognized in this provision.
Q: How is dominance in digital markets determined? A: It is observed that the digital market has attracted broader attention from both the academic and enforcement practice of China in recent years. This tendency is also reflected in the Interim Provisions on Prohibiting Abuse of Market Dominant Position. Specifically, this new rule encloses a specific provision addressing how to determine the market dominance in internet markets. Factors to be mainly weighed include industry competition features, business models, number of users, network effects, foreclosure effects, technological features, market innovation, the capability of controlling and processing relevant data as well as market power of firms in related markets, etc.
It should be recognized that this provision only provides guidance for self-assessment in a very general way, and complexity in the real internet world makes the assessment far more sophisticated and difficult.
Q: What about dominance related to the intellectual property (IP) arena? A: Although the long-awaited antitrust guidelines for IP misuse have not been finalized, the Interim Provisions on Prohibiting Abuse of Market Dominant Position specifically institute one provision to address the determination of dominance related to the IP field, although in a very broad way.
Similar to the above-mentioned internet-specific provision, multiple factors to be considered are also clarified, including the substitutability of IP, the degree of reliance of the downstream market on those products manufactured by exploitation of relevant IP, the countervailing power of trading parties, etc. Although this provision provides limited detailed guidance, it at least reflects that the new agency pays attention and attaches importance to issues related to interface between antirust and IP. Therefore firms with a lot of IP should be alert to these types of potential risks.
Q: What is the purpose of the new rules? A: The purpose of these new legislations are threefold: First, to unify the trivial rules previously made by the previous different antitrust authorities; second, to reflect the enforcement experience in the new legislation so as to better guide future enforcement, including the enforcement on a provincial level; and third, to increase the transparency of the antitrust enforcement environment.
New rules frequently mirror new views of the new agency, which matter a lot for companies wanting their internal compliance to keep pace with the times. Meanwhile, some issues that are not fully clarified in these new rules are worth continuing observation during the evolving enforcement period.
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