Glossary of Hong Kong Competition Law Key Terms
A glossary of terms commonly used in Hong Kong competition law. The glossary will be updated from time to time.
A
ABUSE – Abuse is an objective concept relating to the behaviour of an undertaking with a substantive degree of market power which, through recourse to methods different from those which condition normal competition in products or services, harms competition. The Competition Ordinance (Cap 619) (“CO“) mentions 2 particular examples of abusive conduct:-
– Predatory behaviour; and
– Conduct limiting production, markets or technical development to the prejudice of consumers.
However, the categories of abusive conduct are non-exhaustive. Common categories of abusive conducts include exclusive dealing, margin squeeze, predatory pricing, refusal to deal, and tying and bundling.
AGREEMENT – Agreement includes any agreement, arrangement, understanding, promise or undertaking, whether express or implied, written or oral, and whether or not enforceable or intended to be enforceable by legal proceedings.
The central component in the concept of agreement is whether there is a meeting of minds or a concurrence of wills between at least 2 parties. The form in which it is manifested is not important so long as it constitutes the faithful expression of the parties’ intention. It is not essential to have direct evidence of express communication. The existence of an agreement can be deduced from the parties’ conduct.
The inclusion of ‘understanding’ in the statutory definition shows that tacit dealings suffice and that there can be an agreement even if there is nothing to prevent either party from going back on it.
The CO provides unless the context otherwise requires, a provision of the CO which is expressed to apply to, or in relation to, an agreement is to be read as applying equally to, or in relation to, a concerted practice and a decision by an association of undertakings (but with any necessary modifications).
B
BID-RIGGING – There are 4 basic elements in establishing bid-rigging:-
– There is an agreement;
– The agreement must be made between 2 or more undertakings;
– There is a submission of, refrainment from submitting or withdrawal of bids or tenders that are arrived at by the agreement; and
– The agreement is not made known to the person calling for or requesting the bids or tenders at or before the time when a bid or tender is submitted.
Bid-rigging is considered to be serious anti-competitive conduct.
C
COMPETITION RULE – Competition rule means:-
– The first conduct rule;
– The second conduct rule; and
– The merger rule.
CONDUCT RULE – Conduct rule means:-
– The first conduct rule; and
– The second conduct rule.
CONCERTED PRACTICE – A concerted practice is a form of coordination between undertakings by which, without it having been taken to the stage where an agreement has been concluded, practical cooperation between them is knowingly substituted for the risks of competition.
The coordination and cooperation between the undertakings do not require the working out of an actual plan, and must be understood in the light of the concept that each economic operator must determine independently the policy which he intends to adopt on the market.
Although this requirement of independence does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors, it does however strictly preclude any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market.
CONDITIONAL REBATE – Conditional rebate involves the grant of a rebate to consumers that is conditional on the consumer’s purchasing behaviour. A rebate that is linked solely to the volume of purchases from the manufacturer concerned (quantity rebate), is not, in principle, an abuse. However, a rebate that is conditional on the consumer’s obtaining all or most of their requirement exclusively from the manufacturer (loyalty or fidelity rebate) has the potential to foreclose competition by denying competitors access to the market and therefore can amount to an abuse.
Determination of whether a loyalty or fidelity rebate is abusive requires the analysis of the extent of the undertaking’s market power on the relevant market, the share of the market covered by the rebate, the conditions and arrangements for granting the rebates in question, their duration and their amount and the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the undertaking with a substantial degree of market power.
COUNTERFACTUAL – Counterfactual refers to the market situation that would have arisen had it not been for the anti-competitive agreement or conduct at issue (ie, but for world). Counterfactual is usually used to assess the effect of the anti-competitive agreement or conduct. To show that competition has in fact been prevented or restricted or distorted to an appreciable extent, the competition in question must be understood within the actual context in which it would occur in the absence of the anti-competitive agreement or conduct at issue.
D
DECISION BY AN ASSOCIATION OF UNDERTAKINGS – The prohibition in under the first conduct rule of an undertaking making or giving effect to an anti-competitive decision of an association of undertakings is intended to prohibit indirect anti-competitive cooperation between undertakings through an association. Examples of associations of undertakings include, trade associations, cooperatives, professional associations or bodies, societies, associations without legal personality, and associations of associations.
A decision of an association of undertakings include, but not limited to, the constitution of the association, rules of the association, resolutions, rulings, decisions, guidelines or recommendations of the association, whether made by the board, members, a committee or an employee of the association. A decision of an association may fall within the first conduct rule even if it is non-binding. The undertakings concerned and the association may all be liable.
E
EXCLUSION INVOLVING AGREEMENTS ENHANCING OVERALL ECONOMIC EFFICIENCY – The first conduct rule does not apply to any agreement that enhances overall economic efficiency.
There are 4 conditions to be satisfied for this exclusion to apply:-
– The agreement generates efficiencies;
– It allows consumers a fair share of the resulting benefit;
– It does not impose restrictions that are not indispensable to the attainment of the objectives; and
– It does not afford the undertakings concerned the possibility of eliminating competition.
Although not provided in the CO, the Competition Commission does not rule out the possibility that this efficiency exclusion can also apply to the second conduct rule.
EXCLUSION INVOLVING COMPLIANCE WITH LEGAL REQUIREMENTS – The conduct rules do not apply to any anti-competitive agreement made or conduct engaged in for the purpose of complying with a legal requirement, which means a requirement that is:-
– Imposed by or under any enactment in force in Hong Kong; or
– Imposed by any national law applying in Hong Kong.
EXCLUSION INVOLVING SERVICES OF GENERAL ECONOMIC INTEREST – The conduct rules do not apply to an undertaking entrusted by the government with the operation of services of general economic interest in so far as the conduct rules would obstruct the performance, in law or in fact, of the particular tasks assigned to it.
EXCLUSION INVOLVING MERGERS – The conduct rules do not apply to agreements or conduct which result in, or agreements if carried out or conduct if engaged in, would result in, a merger.
EXCLUSION INVOLVING AGREEMENTS OF LESSER SIGNIFICANCE – The first conduct rule does not apply to:-
– An agreement between undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed HK$200,000,000;
– A concerted practice engaged in by undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed HK$200,000,000; or
– A decision of an association of undertakings in any calendar year if the turnover of the association for the turnover period does not exceed HK$200,000,000;
Unless the agreement, concerted practice, or decision of an association of undertakings, involves serious anti-competitive conduct.
EXCLUSION INVOLVING CONDUCT OF LESSER SIGNIFICANCE – The second conduct rule does not apply to conduct engaged in by an undertaking if the turnover of which does not exceed HK$40,000,000 for the turnover period.
EXCLUSIVE PURCHASING OBLIGATION – Exclusive purchasing obligation occurs when an undertaking with a substantial degree of market power ties its purchasers to obtain all or most of their requirements exclusively from the said undertaking.
EXCLUSIVE DEALING – Exclusive dealing refers to arrangements whereby an undertaking with a substantive degree of market power either requires or incentivises its customers to buy all or most of their requirements from the said undertaking. It therefore has the effect of foreclosing competitors by hindering them from selling to customers. Exclusive dealing can take the form of exclusive purchasing obligation or conditional rebate.
F
FIRST CONDUCT RULE – The first conduct rule prohibits an undertaking from:-
– Making or giving effect to an agreement;
– Engaging in a concerted practice; or
– As a member of an association of undertakings, make or give effect to a decision of the association,
if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.
G
GENERAL EXCLUSION FROM THE CONDUCT RULE – The following agreements or conduct are excluded from the application of the conduct rules:-
– Agreements enhancing overall economic efficiency;
– Compliance with legal requirements;
– Services of general economic interest;
– Mergers;
– Agreements of lesser significance; or
– Conduct of lesser significance.
GUIDELINE – The Competition Commission published 6 guidelines under the CO:-
– Guideline on the First Conduct Rule;
– Guideline on the Second Conduct Rule;
– Guideline on the Merger Rule;
– Guideline on Complaints;
– Guideline on Investigations; and
– Guideline on Applications for a Decision under ss 9 and 24 (Exclusions and Exemptions) and s 15 Block Exemption Orders.
These guidelines are not subsidiary legislation but the Legislative Council must be consulted before they the guidelines are issued or amended. They represent the Competition Commission’s views and policies and provide guidance to the public, but have no binding legal effect on the Tribunal or the Hong Kong courts.
H
HORIZONTAL AGREEMENT – A horizontal agreement is an agreement made between undertakings at the same level of commercial operation. Horizontal agreements have generally been regarded as more serious in harming competition than vertical agreements.
I
INFRINGEMENT NOTICE – If the Competition Commission has reasonable cause to believe that:-
– Either a contravention of the first conduct rule (and the contravention involves serious anti-competitive conduct) or a contravention of the second conduct rule has occurred; and
– The Competition Commission has not yet brought proceedings in the Competition Tribunal in respect of the contravention,
the Commission may, instead of bringing proceedings in the Competition Tribunal in the first instance, issue an infringement notice to the person against whom it proposes to bring proceedings, offering not to bring those proceedings on condition that the person makes a commitment to comply with requirements of the notice.
M
MARGIN SQUEEZE – There is a margin squeeze when an undertaking with a substantial degree of market power on the upstream market is also active on the downstream market and the difference between the retail prices charged by an undertaking and the wholesale prices it charges its competitors for comparable products is negative, or insufficient to cover the product-specific costs to the undertaking of providing its own retail products on the downstream market. The abusive nature of such conduct derives from the unfair nature of the price spread and the fact that the undertaking’s wholesale products are indispensable to enabling a competitor to enter into competition with the undertaking on the downstream market in retail access products.
MARKET – The main objective of defining a market is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings’ behaviour and of preventing them from behaving independently of effective competitive pressure. Market definition has 3 dimensions:-
– The relevant product market;
– The relevant geographical market; and
– The relevant temporal market.
A frequently used method of assessment of the relevant market is to use the ‘SSNIP’ test.
MARKET SHARING – Market sharing agreements are agreements between competitors to divide or allocate markets (geographic markets or product markets). Common examples include allocating customers by geographical area or product types, agreeing not to poach each other’s existing customers and refraining from entering each other’s market. Market sharing agreements are considered to be serious anti-competitive conduct.
MERGER RULE – The merger rule prohibits undertakings from carrying out mergers that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. A merger takes place if:-
– 2 or more undertakings previously independent of each other cease to be independent of each other;
– 1 or more persons or other undertakings acquire direct or indirect control of the whole or part of 1 or more other undertakings. The creation of a joint venture to perform, on a lasting basis, all the functions of an autonomous economic entity also constitutes a merger within this category; or
– An acquisition by 1 undertaking (“Acquiring Undertaking”) of the whole or part of the assets (including goodwill) of another undertaking (“Acquired Undertaking”) has the result that the Acquiring Undertaking is in a position to replace the Acquired Undertaking, or to substantially replace the Acquired Undertaking, in the business or in part of the business concerned (as the case requires) in which the Acquired Undertaking was engaged immediately before the acquisition.
At present, the merger rule only applies to mergers involving carrier licence holders within the meaning of the Telecommunications Ordinance (Cap 106).
O
OUTPUT LIMITATION – Output limitation means competitors agreeing to restrict the volume of their supply or production capacity. Output limitations agreements are considered to be serious anti-competitive conduct.
P
POLICY – The Competition Commission has adopted the following policy documents:-
– The Enforcement Policy;
– The Leniency Policy for Undertakings Engaged in Cartel Conduct;
– Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct; and
– Policy on Recommended Pecuniary Penalties.
PRICE FIXING – Price fixing occurs when the price is directly or indirectly fixed. Price includes any determining components of the price such as pricing formulas, discounts, rebates, allowance, promotions or credit terms. Price fixing agreements are considered to be serious anti-competitive conduct.
PREDATORY PRICING – Predatory pricing occurs when an undertaking with a substantial degree of market power, deliberately incurring losses in the short-run by lowering its prices to a level that other suppliers cannot compete and are therefore forced to leave the market. Once the competitors are excluded, the undertaking can then increase their prices to monopoly levels.
Setting prices below average variable costs (ie, those which vary depending on the quantities produced) is prima facie abusive, since such an undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position, since each sale generates a loss.
On the other hand, setting prices below average total costs (ie, fixed costs plus variable costs), but above average variable costs, is abusive if they are determined as part of a plan for eliminating a competitor.
R
REFUSAL TO DEAL – Refusal to deal happens when, an undertaking with a substantial degree of market power in an upstream market refuses to supply a competitor in a neighbouring or downstream market with products which are indispensable to carrying on the competitor’s business, provided that:-
– The refusal is likely to eliminate all competition on the market on the part of the person requesting the product;
– The refusal is incapable of being objectively justified; and
– The product is indispensable to carrying on the competitor’s business, in the sense that there is no realistic possibility of creating a potential alternative.
RELEVANT GEOGRAPHICAL MARKET – The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area.
RELEVANT PRODUCT MARKET – The relevant product market includes products which are substitutable or sufficiently interchangeable with the product in question, not only in terms of their objective characteristics, by virtue of which they are particularly suitable for satisfying the constant needs of consumers, but also in terms of the conditions of competition and/or the structure of supply and demand on of the market in question.
RELEVANT TEMPORAL MARKET – Time is sometimes a relevant factor in defining the market definition. This is because competitive conditions may vary from time to time. Examples of how timing can affect markets include the same service during peak versus off-peak services and the same product during summer versus winter months.
RESTRICTION BY EFFECT – An anti-competitive agreement or conduct can be regarded as having the effect of harming competition where the existence of the agreement or conduct have a negative impact on competition within that market. The effect is determined using a counterfactual analysis, which essentially compares the impact of the agreement or conduct on existing and potential competition and the competition situation in the absence of the same.
If an agreement/conduct has more than 1 effect, it has the effect of preventing, restricting or distorting competition.
RESTRICTION BY OBJECT – The anti-competitive agreements or conduct can be regarded as having the object of harming competition where, by their very nature, they are so harmful to the proper functioning of normal competition in the market that there is no need to examine their effects.
Determining the object of an anti-competitive agreement or conduct requires an objective assessment of its aims, having regard to the content of the agreement, the way it is implemented and its economic and legal context. Evidence of subjective intention may also be taken into account, although this is not a necessary factor.
Where it is established that the anti-competitive agreements or conduct has the object of preventing, distorting or restricting competition, it can be concluded that there is an infringement of the first conduct rule without having to consider the actual effects of the agreement on competition.
An anti-competitive agreement or conduct can be regarded as having the object of harming competition where it reveals a sufficient degree of harm to competition, so that there is no need to examine its effects, as the same can be regarded, by its very nature, as being harmful to the proper functioning of competition.
There must however be sufficiently reliable and robust experience for the
view to be taken that that it is by its very nature, harmful to the proper functioning of competition.
In order to determine whether it reveals a sufficient degree of
harm to competition to be considered a restriction of competition by object, regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms a part. When determining that context, it is also necessary to take into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market or markets in question.
Although the parties’ intention is not a necessary factor in determining whether an agreement or conduct is restrictive, there is nothing prohibiting the same from being taken into account.
The concept of restriction of competition ‘by object’ must be interpreted restrictively.
S
SECOND CONDUCT RULE – The second conduct rule prohibits undertakings with substantial degree of market power in a market from abusing that power by engaging in conduct that has the object or effect of harming competition in Hong Kong.
There are 2 examples of abuse provided in the CO, namely predatory behaviour towards competitors and limiting production, markets or technical development to the prejudice of consumers.
Other common examples of abuse include tying and bundling, margin squeeze, refusal to deal; and exclusive dealing.
SERIOUS ANTI-COMPETITIVE CONDUCT – Serious anti-competitive conduct means any conduct that consists of any of the following or any combination of the following:-
– Fixing, maintaining, increasing or controlling the price for the supply of goods or services;
– Allocating sales, territories, customers or markets for the production or supply of goods or services;
– Fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services; and
– Bid-rigging.
If the Competition Commission has reasonable cause to believe that a contravention of the first conduct rule has occurred and the contravention does not involve serious anti-competitive conduct, the Competition Commission must, before bringing proceedings in the Competition Tribunal, issue a warning notice to the relevant undertaking. In case of serious anti-competitive conduct, the Competition Commission can bring proceedings directly to the Competition Tribunal without issuing a warning notice.
The general exclusion involving agreements of lesser significance does not apply in cases of serious anti-competitive conduct.
SINGLE AND CONTINUOUS INFRINGEMENT – Where there are 2 or more agreements and/or concerted practices, the same would be regarded as a single and continuous infringement if the following conditions are met:-
– The agreements and/or concerted practices share an overall plan pursuing a common objective;
– Each undertaking intends to contribute by its own conduct to the common objective pursued by all the participants; and
– Either each undertaking is aware of the offending conduct of the other participants in pursuit of the same objective or each undertaking could reasonably have foreseen that offending conduct would occur and was prepared to take the risk that it would.
SINGLE ECONOMIC UNIT – The first conduct rule does not apply to conduct between entities where they constitute a ‘single economic unit’. The question has arisen in the cases with regard to a parent company and its subsidiary, a principal and his agent, and a firm and its commercial representative. Various factors may be relevant to the question and different factors may attract different weight in different types of situations. Thus, in the context of a parent and subsidiary, an important factor is whether the parent exercises ‘decisive influence’ over the relevant activities or policies of the subsidiary. In relation to principal and agent, where the agent bears no financial risk, even if it might look like a separate entity, it is to be treated as an ‘auxiliary organ’ of the principal. On that basis, arrangements such as the principal dictating pricing to the agent are not caught as price fixing agreements because they are between 2 parts of the same undertaking.
SSNIP TEST – SSNIP stands for a ‘small but significant non-transitory increase in price’. The test considers whether on the assumption that there was a monopoly in the supply of the focal product, would a small but significant (eg, 5–10%) non-transitory increase in price lead sufficient purchasers to switch to another product such that the increase was not profitable because of the loss in sales?” If it would, then that other product is to be included in the product market, and the exercise is repeated, incrementally.
STATUTORY BODY – Statutory body means a body of persons, incorporated or unincorporated, established or constituted by or under an ordinance or appointed under an ordinance, but does not include:-
– A company;
– A corporation of trustees incorporated under the Registered Trustees Incorporation Ordinance (Cap 306);
– A society registered under the Societies Ordinance (Cap 151);
– A co-operative society registered under the Co-operative Societies Ordinance (Cap 33); or
– A trade union registered under the Trade Unions Ordinance (Cap 332).
Statutory bodies are generally exempted from the application of the competition rules. A reference to a statutory body includes an employee or agent of the statutory body, acting in that capacity. However, this exemption does not protect the trading partners of the statutory bodies.
SUBSTANTIAL DEGREE OF MARKET POWER – Factors determining whether an undertaking has a substantial degree of market power include (but are not limited to):-
– The market share of the undertaking;
– The undertaking’s power to make pricing and other decisions;
– Any barriers to entry to competitors into the relevant market; and
– Any other relevant matters specified in the guideline on the second conduct rule, ie, countervailing buyer power, bidding markets, vertical integration and capacity restraints.
T
TURNOVER – Turnover of an undertaking means the total gross revenues of the undertaking whether obtained in Hong Kong or outside Hong Kong.
Where an association of undertakings is concerned, turnover means the total gross revenues of all the members of the association whether obtained in Hong Kong or outside Hong Kong.
TYING AND BUNDLING – Tying occurs when the undertaking with a substantial degree of market power is prepared to supply the product in respect of which it has a substantial degree of market power (“Tying Product”) only if the customer also agrees to buy another product (“Tied Product”). The undertaking may not have a substantial degree of market power in the supply of the Tied Product, the mischief often being the attempt to extend its market strength into the market for the Tied Product, to the detriment not only of its customer but also of its competitors in the supply of the Tied Product.
Bundling is similar to tying but refers more strictly to the case where products are effectively offered only as a package, whereas for tying the undertaking may supply the Tied Product (but not the Tying Product) on its own.
U
UNDERTAKING – Undertaking means any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity.
V
VERTICAL AGREEMENT – A vertical agreement is an agreement made between undertakings at a different level of commercial operation. Vertical agreements have generally been regarded as less serious in harming competition than horizontal agreements.
W
WARNING NOTICE – If the Competition Commission has reasonable cause to believe that a contravention of the first conduct rule has occurred; and the contravention does not involve serious anti-competitive conduct, the Competition Commission must, before bringing proceedings in the Competition Tribunal against the undertaking whose conduct is alleged to constitute the contravention, issue a warning notice to the undertaking. After the expiry of the warning period, if the Competition Commission has reasonable cause to believe that the contravening conduct continues or is repeated after the expiry, the Competition Commission may bring proceedings in the Competition Tribunal against the contravening undertaking in respect of the contravening conduct.