The Competition Commission of Pakistan (CCP) has unearthed a downstream or horizontal cartel, raising concerns that Pakistani consumers may be suffering due to collusion between certain companies and their dealers/retailers to deprive them of the available discounts and price margins. A CCP enquiry has revealed that a paint company, by reaching a distribution/dealership agreement with its dealers, imposed an obligation of "Resale Price Maintenance (RPM)" on dealers for the sale of its products.
For the first time, the CCP has unearthed a cartel of a company and its dealers/retailers to cause loss to consumers. Expanding the scope of investigation, the Commission may detect similar kind of collusion between corporate entities and their dealers/retailers operating in Pakistan.
"This agreement introduced a restrictive trading condition that appeared to facilitate a downstream cartel of dealers with the object or effect of restricting competition in the relevant market. The agreement between the dealers fixed the maximum discount that a dealer may offer to the customers. This is a violation of Section 4 of the Competition Act, 2010," a senior CCP official told Business Recorder.
The official told Business Recorder that during a search and inspection carried out in the Lahore and Multan offices of the said paint company, the CCP's search team got hold of the agreement between the paint company and its dealers.
The dealers shall be bound not to offer further discounts to the consumers. This is for the first time that such a cartel agreement has been detected by CCP, signaling towards such collusive practices in a number of other industries harming the consumers' interests.
As per the CCP's enquiry report available with this scribe, the Organization of Economic Cooperation and Development (OECD) defines RPM as: "RPM specifies the final price that retailers charges consumers. Variants of this restriction include specifying only a price ceiling or a price floor. Practices that encourage the maintenance of resale prices but that do permit price competition, e.g. non-binding "recommendations" for a retail price or a price floor and recommended prices advertised by the upstream firm, are generally not considered to be RPM."
As per this definition, RPM specifies the final price that a retailer charges a consumer, and this restriction include specifying a price ceiling or a price floor.
In Pakistan, Section 4 of the Competition Act clearly prohibits any undertaking or association of undertakings to enter into any agreements with respect to production, supply, distribution, acquisition or control of goods that have the object or effect of preventing, restricting or reducing competition within the relevant market unless exempted under Section 5 of the Act. Such agreements include but are not limited to restrictive trading conditions with regard to the sale or distribution of any goods. According to the CCP's enquiry report, RPM is generally prohibited in almost all OECD countries, subject to a few exemptions, mostly for books, newspapers and medicaments. Some countries though do have a procedure for authorizing the practice if the beneficial effects can be shown to outweigh the detrimental ones.
In Australia, RPM is treated as a per se offence irrespective of whether it has any impact on competition as it is prohibited under the Trade Practices Act, 1974 ('TPA'). New Zealand has also retained the per se treatment of RPM. The European Union while acknowledging the potential efficiencies from vertical restraints in its Vertical Restraints Block Exemption Regulation and Guidelines of Vertical Restraints that took effect in 2010 has nevertheless retained the 'hard core' designation for RPM.
While the foregoing suggests that RPM may also have pro-competitive benefits, which is why some Competition Jurisdictions such as the United States have only very recently started treating the matter of RPM under the rule of reason and that too with a lot of controversy between various competition authorities at the state and federal level, there are circumstances where the practice of RPM can result in serious anticompetitive harm. One such situation has been described as where an RPM arrangement ends up facilitating a manufacturer or retail level cartel.
The enquiry report states that in the instant case, no arguments have been furthered by the said paint company regarding any pro-competitive benefits of entering the RPM arrangement, as it has maintained its stance of not being involved in the agreement.
With regard to any reasoning provided by the dealers as motivation behind the agreement, it does not apply to the specific case of RPM - a vertical price restraint, as the action of the dealers falls under and has been evaluated by the enquiry committee for a collusive or cartel arrangement violation.