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General Questions on Competition Defense

by admin published May 07, 2016 07:38 AM, last modified Jun 15, 2016 06:58 PM

What is the Brazilian Competition Defense System – SBDC in its acronym in Portuguese?

The Brazilian Competition Defense System (SBDC), as foreseen in Article 3 of the Law 12.529/2011, is comprised by the Administrative Council for Economic Defense (CADE) and the Secretariat for Economic Monitoring (SEAE) of the Ministry of Finance.

CADE is responsible for analyzing mergers, investigating anticompetitive conducts and, if applicable, imposing penalties on infringers, and advocating for the free competition culture. In turn, SEAE is responsible for the so-called “competition advocacy” before governmental bodies and the society.

What is an economic agent?

An economic agent is any individual or legal person (either privately- or publicly-held, profit or non-profit, industries, commerce, freelancer, etc.) participating as an agent of the economic activity, working individually or collectively, formally organized or not.

What is free competition?

The principle of free competition is foreseen by Article 170, item IV of the Brazilian Constitution, and is based on the assumption that economic agents with market power cannot restrain competition.

In a market where the producers of a good or service compete against each other, the prices charged tend to be maintained at the lowest levels possible and the companies need to constantly seek ways of becoming more efficient so as to raise profits.

To the extent that such efficiency gains are achieved and distributed among producers, the prices are adjusted, a fact that benefits consumers. Hence, on one hand, free competition assures lower prices for consumers and, on the other hand, inspires companies to be creative and innovative.

What is a relevant market?

Relevant market is the analysis component used to determine the market power. It defines the competition boundary between companies.

The definition of relevant market considers two dimensions: the product dimension and the geographic dimension. The idea behind such concept is to define a place where it is not possible to replace one product for another, either because the product has no substitute or because it is not possible to obtain it.

Hence, a relevant market is defined as a product or a group of products and a geographic area in which such product(s) is(are) produced or sold, so that a monopolist company could impose a small, but substantial and not transitory price increase, without consumers starting to consume another product or buying it in another region. This is the so-called hypothetical monopolist test and the relevant market is defined as being the smaller market possible where such criterion is met.

What is the importance of defining a relevant market?

The definition of relevant market is critical to the analysis of the cases submitted to CADE, since the relevant market is the space where the market power can be determined. It is only possible to discuss the existence of market power if it is previously defined in which place such power is exercised. Hence, in order to characterize the possibility of exercise of market power, it is firstly necessary to define which relevant market is affected by a merger or a conduct, in order to conclude whether there is a probable abusive exercise of such power in this market.

When a dominant position takes place?

The Brazilian Competition Law determines that a dominant position occurs when a company or a group of companies controls a substantial share of a relevant market as a supplier, intermediary, buyer or financer of a product, service or technology related to it so that the company or the group of companies is capable of changing the market conditions on a deliberate and unilateral manner.

A substantial share of relevant market prescribed by the Law is presumed when the company or the group of companies controls 20% of the relevant market in question. However, depending on the case, the Law authorizes CADE to change such percentage rate for specific economic sectors - Article 36, §2 of the Law No 12.529/11.

What is market power?

A company (or a group of companies) has market power when it is capable of maintaining its prices systematically above the competitive level in the market without losing all customers. In an environment where no company has market power, a company cannot fix its prices above market prices. If this company would do so, the consumers would evidently look for another company offering the product they wish, at a competitive market price.

When a company has substantial market share, does it necessarily hold market power?

No. If a company has a dominant position in a relevant market, it does not necessarily hold market power. Since the concept of market power is based on the company’s capacity of raising prices without losing customers, the existence of dominant position is not necessarily sufficient for the company to be able to unilaterally raise prices. Therefore, the existence of dominant position is a necessary condition, but it is not sufficient for the existence of market power.

How is the market power characterized?

 In order to verify the existence of market power, it is necessary to conduct a complex analysis based on the existence of dominant position, but also on other variables, such as the existence of barriers to the entry of competitors in that market, the possibility of import transactions or also the effective competition between the company in dominant position and its competitors. If, even in a dominant position in a relevant market, the company’s unilateral decision to raise prices can be challenged by the reaction of effective or potential competitors, then such company has no market power.

What is abuse of economic power?

Abuse of economic power is the behavior of a company or a group of companies that use their market power to damage free competition, using anticompetitive conducts. The existence of market power, strictly speaking, is not considered a violation of the economic order.

What is horizontal merger?

A horizontal merger occurs in transactions involving distinct economic agents that offer substitute products between each other.

What is vertical merger?

A vertical merger (or integration) consists of a transaction involving distinct economic agents that offer products or services belonging to different stages of the same production chain.

What is monopoly?

A Monopoly takes place when there is only one supplier for a given product or provider for a given service in the market. In this case, the monopolist can lower production to raise prices until reaching the point where the output multiplied by the price charged generates the maximum profit for the company. Artificially high prices exclude potential consumers of a good or product and, since there are no other companies competing in the market, the monopolist does not have many incentives to seek technological innovations and more efficient operational methods.

What is natural monopoly?

In some cases, a monopoly can be the most efficient way to produce a good or a service. This situation, known as natural monopoly, is generally observed when there are high economies of scale or scope in relation to the market size. Under these conditions, it is inefficient to have two or more companies operating and the market must be regulated in order to prevent the monopolist from taking advantage of its position. This is one of the roles played by regulatory agencies (Anatel, Aneel, ANP, etc.), together with CADE.

What is monopsony?

Monopsony is a situation similar to monopoly, but on the consumer side. In other words, a monopsony occurs when there is only one buyer for a given good or service and numerous suppliers or providers. In this case, such as in the monopoly, the market power, which is currently exercised by the single buyer, can give rise to the loss of the economic welfare by the society.

Why may monopoly be prejudicial?

Monopoly means the existence of only one offeror for a given good or service. Monopolist companies may determine market prices by controlling the quantity offered. Since there are no competitors, the monopolist may restrain production and, consequently, raise market prices until it obtains the higher profit possible. Compared to a competitive market, the monopoly will produce smaller quantities of goods or services at higher prices than those that would prevail in a competitive situation, in detriment of the society’s wellbeing.

Without competitors, the monopolist may also incur production inefficiencies. Moreover, monopolies are less encouraged to pursue innovations and raise the quality of their products. The existence of other competitors leads to the need to invest and innovate in order not to lose market share. This entails greater technological innovation and, consequently, benefits for the society.

However, the monopoly can be an efficient way to organize production when there are high economies of scale and scope, in relation to the size of the market where the monopolist operates. When this occurs, the presence of another producer in the market would be inefficient; it represents a situation called natural monopoly. In this case, since the presence of competitors will be eliminated by competition itself, the control of the monopoly power requires market regulation.

How can competition help small and micro companies?

The protection to competition not only causes prices and quantities to converge towards the highest benefit for the end consumer, but it also offers equal opportunities in market disputes.

Therefore, competition defense is not only interesting for consumers, but also for companies of any size, especially small and micro companies. The agencies defending competition must prevent big companies from using their economic power for anti-competition purposes, thus protecting the right to enjoy market opportunities.

Will the confidential information from companies that file complaints or are investigated by CADE be disclosed during the proceeding?

In the case of proceedings investigating infringements to the economic order, the preparatory procedures and administrative investigations may be confidential in order to prevent that cases in the initial stage of investigation and collecting of evidence are compromised by the disclosure of information. In turn, administrative proceedings are public, but some documents may be considered confidential.

Merger cases are all confidential until the General Superintendence publishes the public notice for the operation. In this case, the information disclosed is considered as sufficient to begin the analysis process and the notification was accepted. After such procedure, transactions are public, but some documents may be considered confidential.

The interested party must request confidentiality with respect to the documents it intends to maintain confidential; such request will be analyzed by the technical experts and, finally, by the General Superintendent, within the scope of the General Superintendence, and the Reporting Commissioner, within the scope of the Administrative Tribunal, as set forth in CADE’s Internal Statute, in accordance with the section addressing confidentiality and restricted access.