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Thursday, 31 July 2014

Monopoly money

China price probes may be too much of a good thing

China’s trustbusters have found their mojo. Last month, the National Development and Reform Commission fined six milk companies including Danone and Fonterra for fixing prices. Petroleum groups, telecom operators, banks and auto makers may be next to feel the heat. China needs stronger watchdogs, as long as what motivates them is a hunger for good, not a taste for glory.

The NDRC has been homing in on manufacturers who set minimum prices for distributors. China, like Europe and some U.S. states, has taken the view that price floors, even in markets with many competing suppliers, hinder competition by making consumers pay more than they otherwise would. The practice, known as “resale price maintenance”, is forbidden by the monopoly law that took effect in China five years ago.

Price-setting is low-hanging fruit for regulators eager to show their mettle. It’s easy to identify, and common: many manufacturers in China set minimum prices so that retailers won’t compete away their profit margins, then come back demanding a better deal. Moreover, there’s a political appeal in anything that brings lower prices. Inflation is a bugbear for China’s leaders, and it may be no coincidence that recent actions have targeted products that shoppers care about a lot, such as pharmaceuticals and baby milk.

Foreign firms aren’t the only ones receiving tough treatment. In February, two provincial arms of the NDRC fined state-owned liquor makers $70 million for setting their prices high. Still, a clean-up taken too far may be too much of a good thing. China’s market has more fundamental flaws - like chronically inefficient allocation of capital - that need attention too. Artificially high prices should stimulate competition by encouraging new entrants to offer cheaper alternatives. Yet even in fragmented markets like milk, that hasn’t happened.

China’s political system means regulators may also have other incentives to get tough. Antitrust responsibility is split between three agencies, who must all compete for the limelight, and for funding. At a time when China’s new leaders are still working out where loyalties lie, the desire to claim a few choice scalps must be irresistible.

 

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Context News

China’s price regulator may target the petroleum, telecoms, banking and auto sectors in its investigations over violations of the country’s anti-trust laws, according to state media.

The National Development and Reform Commission fined six milk producers a combined $110 million in August for price monopoly practices, including setting minimum prices for distributors. The companies were Mead Johnson, Danone, Abbott, Fonterra, FrieslandCampina and Hong Kong-listed BIOSTIME. All the companies were also required to modify their sales practices, and some offered to cut prices.

Two subsidiaries of Johnson & Johnson were ordered by a Shanghai court to compensate a distributor after it was found that a pricing agreement restricted competition in the market. J&J had set a minimum price below which distributors agreed not to sell its products.

Antitrust in China is overseen by three agencies: the NDRC, which focuses on prices, the Ministry of Commerce, which has jurisdiction over mergers and acquisitions, and the State Administration for Industry and Commerce, which targets non-price abuses.

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