Italian Pasta Makers: Under Investigation for Price Fixing

This title has nothing to do with Chinese law, but it does resemble a previous post here on noodle price fixing in China.

According to a BBC report, the Italian authorities have initiated an investigation into suspected price collusion on pasta by Italian pasta makers. Microscope has been placed on the “members of the Industrial Union of Pasta Makers, which represents about 85% of the market, [allegedly] colluded to fix the price of spaghetti, fettuccine and other favourite pasta dishes.” A sharp rise of about 20% in pasta price and angry consumer reactions to the price surge prompted the government to take regulatory action.

Responding to suspected price collusion, the pasta makers blame rising cost of durum wheat for the surge of price in pasta. Ramen noodle makers in China presented similar arguments while under investigation for price fixing, claiming that rising cost of flour and cooking oil was to blame.

Never thought a low profile food like noodles could be in the spot light like this, in China and Italy.

Ramen Noodles, Price Fixing, and Beyond

After a month-long investigation into complaints of price fixing, the National Development and Reform Commission of China (“NDRC”) delivered its verdict for the China Ramen Noodle Association (“Association”)—guilty (report in Chinese only).


Investigation:

Governmental investigations revealed that the Association organized three meetings in a span of about 6 months (from 2006 to 2007). During the meetings, the Association and its members strategized on uniform price increases across the Ramen noodle industry in response to price hikes in raw materials, such as oil and flour. Of particular importance in the investigation was that the Association published minutes of its meetings in its industry magazine, and the news of price increase caused a panic among consumers who rushed to buy large quantities of Ramen noodles.

The NDRC acknowledged that higher production cost could lead to an increase in price in Ramen noodles, but price fixing by an industry association violates the Price Law of China, specifically Article 7, 14, and 17.

Current Law on Price Collusion:

Article 14 of the Price Law of P.R.China [full text of the law in English] provides:

Business operators must not act whatsoever in the following ways to effect abnormal price behaviors:

1. To work collaboratively with others to control market prices to great detriments to the lawful rights and interests of other business operators or consumers;

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3. To fabricate and spread price rise information for pushing up the prices to
excessively high level;

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6. To disguisely raise or lower prices at irrational ranges by artificially raising or lowering grades of merchandises or services;

7. To seek exorbitant profits in violation of laws and regulations; and

8. To effect other illicit price behaviors that are forbidden by law or administrative decrees

Furthermore, the NDRC charged that the Association breached Article 4 of the Interim Provisions on Preventing the Acts of Price Monopoly (Text in Chinese; subscription required for English text) which states:

Business operators shall not fix, maintain, or modify prices through agreement, resolution, coordination or any other means of collusion.

Agency Order:

Since the NDRC found the Association guilty of violating the law (and price regulations), it ordered the Association to immediately “change its wrongful ways, make public notices to rectify negative impact of the price fixing, and to delete from its minutes contents regarding collective price increases…”

While at it, the NDRC sent a warning to other industry associations too, admonishing them to enhance their “sense of the rule of law.”

Other Remedies:

Curiously enough, no consumers sued either the Association or Ramen noodle companies that colluded in price fixing. Article 41 of the Price Law provides a private right of action to injured consumers, to wit:

Whereas business operators have caused overpayment by consumers or other business operators in violation of price law, the part in excess of the due payment shall be returned. If damages are done, the business operators shall undertake to compensate for the losses.

If a suit were to be filed, a plaintiff could invoke the NDRC’s administrative order as evidence of wrongdoing. Upon a showing of actual damages, victory in such a suit would be reachable. But lawsuits in China are costly, as are in the United States. Chinese consumers, however, could turn to class action as a way to pool their resources in order to seek their justice and redress for damages. See Class Action Litigation As a Means of Enacting Social Change in China, 75 UMKC L. Rev. 227 (2006); Class Action Litigation in China, 111 Harvard Law Review 1523 (1998).

In the present situation, class action does not seem to be a viable option for probably two reasons: 1) the damages are not great enough; 2) Chinese courts’ unwillingness to hand out large amounts in damages.

China Anti-Monopoly Law Research Paper

If you have not read Professor ELEANOR M. FOX 's resent paper on China's Anti-Monopoly Law, I highly recommend you read it.

Her paper focuses on administrative monopoly in China, and she puts the topic in the context of how the U.S., Europe, and the WTO dealt with it. Truly illuminating. Without further compromising her superb scholarship, I'd direct you to read the full article.

An Anti-Monopoly Law for China – Scaling the Walls of Protectionist Government Restraints

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.

China’s Anti-monopoly Law: A Second Look

The Standing Committee of the People’s Congress read the draft anti-monopoly law for the second time on June 24, 2007. Six new proposals (Chinese only) have been added onto the draft law. Since there is so much hype about the much anticipated law, I will detail what was added in the 2nd read.

1. The central government shall formulate and implement regulations to strengthen and improve macro control, and to effect a unified, open, competitive, and orderly market system.

国家制定和实施与社会主义经济相适应的竞争规则，加强和完善宏观调控，健全统一、开放、竞争、有序的市场体系。

The overall policy concern underlying this addition is to achieve a balanced and coordinated relationship between anti-monopoly and other economic policies.


2. Operators can legally combine and merge through fair competition and voluntary association to expand the scale of operations, and improve their market competitiveness.

经营者可以通过公平竞争、自愿联合，依法实施集中，扩大经营规模，提高市场竞争能力。

This addition is aimed at achieving a balance between combating monopoly and allowing Chinese companies to join forces against global competition. However, in order to accomplish large scale mergers, operators must face a proposed western-style legislative hearing in order to effectively prevent monopoly.


3. Operator in dominant market positions may not abuse their position to exclude or restrict competition.

具有市场支配地位的经营者，不得滥用市场支配地位，排除、限制竞争

This new rule corresponds with # 2. As many developed countries allow companies to gain dominant market positions yet at the same time regulate against the manipulation of such position to the detriment of trade, China sees that it should adopt similar antimonopoly rules that keep companies in check once they become big enough to be able to abuse its market power. During the 2nd read session of the law, the issue of price fixing was also raised.


4. State-owned companies with a national franchise are to be scrutinized in their pricing.

专营专卖将被严格监控

There has been growing dissatisfaction in China with state-owned companies in many industries, i.e, telecom, oil & gas, and other utilities. These companies seem to be immune from market forces in that they charge unreasonable fees for their products and services. This new provision represents an attempt to keep state-owned companies in strategic industries on the national pedestal yet scrutinize their commercial activities relative to consumer protection.


5. Industry associations should strengthen self regulation to guide the operators to compete legally, and to maintain the market competition order.

行业协会应当加强行业自律，引导本行业经营者依法竞争，维护市场竞争秩序。

Industry associations wear a semi-governmental hat. It has been given the responsibility of guiding players in relevant industries to play by the rules of the Pricing Law fair competition regulations.


6. Foreign mergers and acquisitions may not endanger national security

外资并购不得危及国家安全

This provision places national security checks on acquisitions of domestic firms. Mr. Paul Jones has a very interesting comment on this, and I quote here in full:

The draft has been amended since the first reading to include provisions regarding a review of mergers and acquisitions with regard to security considerations. The Chinese version of the article on this topic specifically mentions the concern expressed in the U.S. regarding the proposed acquisition of Unocal by a Chinese company. This aspect does not appear in the English language news stories that I have seen.