Friday, July 27, 2007

Where Art Thou, Chinese Anti-trust Law?

Ok, I know that is a rhetorical question. Here, I blogged about the legislative progress in China’s Anti-Monopoly Law. But the recent chain of events in China only highlights the urgent need for the promulgation of a comprehensive antitrust law in China.

Collusions in price fixing in beef noodles and milk products caught people’s attention and caused quiet a few controversies.

Now, instant Raman noodles are the most recent consumer product that fell prey to, as I suspect, price fixing by major producers in China. Leading producers like Master Kang and President have lifted prices of their noodles by about 20%. Others are following the lead. They blamed the price hike on rising food material costs.

Behind the façade of inflation, in the form of food price increases, is a more culpable factor—horizontal price fixing. And this got me plenty concerned for very personal reasons.

1. Raman noodles are the staple food for college students. When I was getting my undergraduate degree in China, I lived on that stuff of various flavors: spicy beef, fresh seafood, comforting chicken…Poor and cheap students cannot afford to buy noodles that cost more than 1.5 yuan. I am talking about empathy here.

2. Raman noodles are a source for many small business owners. I sold Raman noodles in my dorm to make money, and many others too. For a cent on the dollar, we made a little cash enough for occasional movies and date nights. If the prices of all brands rose for more than 20%, fewer people could afford to buy a package to stave off late-night hunger. That would potentially kill the dormitory grocers' opportunity for entertainment and romance. Serious consequences!!

So, what is horizontal price fixing? Under the U.S. federal law, it is defined as:

Horizontal price fixing is any arrangement among competitors that interferes with the setting of price by open market forces. These price fixing claims arise from competitors’ concerted action to charge pre-set minimum or maximum prices for their goods or services. Horizontal price fixing can violate Sections 1 and 3 of the Sherman Act, which proscribe concerted action in restraint of trade, as well as Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition in or affecting commerce, and Section 2 of the Sherman Act, which prohibits conspiracies or combinations to monopolize.

To prove an antitrust claim, the plaintiff must show evidence of agreement between or among manufacturers. And uniform price increases could be one result of such an agreement in restraint of trade.

China Anti-trust Law, you can help this situation (at least cause a serious investigation into the noodle monsters’ pricing hikes). Would you come out soon?

Until then, eat more rice.


Peter Macmillan said...

Brad - Changing the business culture in China will be hard, as it will be in Hong Kong where there has also been no history of comprehensive competition or anti-trust laws. Do you think the Ramen noodle suppliers believe they're doing anything wrong/unethical/unlawful (under existing pricing laws)? A big challenge will be ensuring there's enough education to accompany the new anti-trust laws. Then there's the challenge of finding experienced investigators to check out Ramen noodle suppliers and others. How much can we expect in the next couple of years, assuming the Anti-Monopoly Law gets passed later this year?

China & Hong Kong Competition Law

Brad Luo said...

I see what you are saying. It is true anti-monopoly law is a relatively new thing and it is very complicated (even counter intuitive at times). Until recently, people generally stomached gov't-backed monopoly (i.e. rail service, utilities). Passage of the law is just the first step. How will it be enforced? How will it be enforced effectively? Overall, consistently effectively enforcement of this type of laws does not seem to be the government's strength.

No doubt about it, the antimonopoly law sill pass in the very near future. But,I don't expect much in terms of enforcement, especially against large state-owned companies.

How about private Chinese companies(i.e. milk, Ramen noodle manufacturers)? Will they be the sacrificial lamb with which the gov't educate the public about anti-trust? Or do you think foreign companies will be the first ones to get popped? It has to start from somewhere.

What do you think?

bobby fletcher said...

Brad, is China's inflation not real?

This is an exteremely narrow, personal experience:

Until couple years ago my favorit snack in SZ was those short fat "Taiwanese sausage" that goes for one Yuan a piece.

Last November I find myself searching but not finding them anymore. Matter of fact most of the street fares are not "that cheap" anymore.

Instant ramens, as bottom staples in China, is very likely due for a price adjustment.

Brad Luo said...


Inflation is no doubt real, and rising quickly as we speak.

However, inflation is not and should not be the justification for price "fixing." Note, I am talking about fixing not just price "raising."

Market forces, i.e. inflation might force certain market players to raise or lower prices, which is normal. But, when these players act in concert/agreement to fix prices at a uniform or substantially similar level, they interfere with forces of market mechanism. That in turn injures consumers.

Actually, China currently has two laws/regulations that deal with such price fixing/collusion:
Price Law, Article 14
《关于制止价格垄断行为暂行规定》(promulgated by the powerful Reform and Development Commission)

Apparently, these players don't care about the law in the face of inflation; neither does the gov't yet...

In short, individual player's price adjustment for market reasons is legal; but concerted efforts to control price is and should be illegal in the best interest of consumers.