2--balancing the supply chain
TRANSCRIPT
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REBALANCING THE SUPPLY CHAIN:
buyer power, commodities and competition policy
April 2008
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About the South Centre
n August 1995, the South Centre became a permanent
ntergovernmental organization o developing
ountries. In pursuing its objectives o promoting
outh solidarity, South-South co-operation, and
oordinated participation by developing countries
n international orums, the South Centre prepares,
ublishes and distributes inormation, strategic
nalyses and recommendations on international
conomic, social and political matters o concern to
he South.
he South Centre enjoys support rom the
overnments o its member countries and o other
ountries o the South and is in regular workingontact with the Group o 77 and the Non-Aligned
Movement. Its studies and publications benet rom
echnical and intellectual capacities existing within
outh governments and institutions and among
ndividuals o the South. Through working group
essions and consultations that involve experts rom
ierent parts o the South, and also rom the North,
ommon challenges aced by the South are studied
nd experience and knowledge are shared.
About Traidcrat
raidcrat Exchange is the UKs only development
harity specialising in making trade work or the
oor. In collaboration with local partners we work to
reate opportunities or poor people to harness the
enets o trade, helping them to develop sustainable
velihoods. Traidcrat also aims to use the experience
its sister air trade company, Traidcrat plc, to
mprove wider trade p ractices. Traidcrats Policy Unit
onducts research and advocacy work to improve trade
ules and the practice o companies.
Acknowledgements
This report was written by Liz Dodd rom Traidcrat
and Samuel Asaha rom the South Centre.
Background material or the case studies was
researched by Yared Tsegay. The authors would like
to thank Sophia Murphy, Myriam Vander Stichele,
Dominic Eagleton, Eline Demey, Fiona Gooch and
Luisa Bernal or their comments. Traidcrat and the
South Centre would also like to thank the European
Commission or its support.
This report is a contribution to the work o the
Responsible Purchasing Initiative, a pan-European
initiative led by IDEAS (Spain), Oxam-Wereldwinkels
(Belgium) and Traidcrat (UK). For more inormationvisit www.responsible-purchasing.org.
Glossary o terms
FAO Food and A griculture Organisation
Monopoly When a single rm has selling power
Monopsony The buying orm o monopoly, when a
single rm has buying power
OECD Organisation or Economic Co-operation and
Development
Oligopoly A market dominated by a ew sellers
Oligopsony A market in which there are ew buyers
Own-label Range o products carrying the retailers
label and produced to retailers specication; typically,
but not necessarily, sold at lower price than main
brand competition (UK Competition Commission)
Transnational corporation (TNC) An enterprise with
activities in two or more countries with an ability to
infuence others (UN denition)
Vertical integration A single rm undertaking
successive stages in the chain o a products production
UNCTAD United Nations Conerence on Trade andDevelopment
Contents
Summary Page 4
Introduction Page 5
Section 1 Buyer power, corporate concentration and commodities Page 6
What is buyer power? Page 6
What gives companies buyer power? Page 7
Transmission o risk and shiting power Page 8
How companies maintain buyer power Page 9
Buyer power and the commodity problem Page 10
Impact o buyer power case studies Page 13
Section 2 Competition policy and buyer power Page 15
Introduction to competition policy Page 15
Principles and practice o competition policy Page 16
Competition policy and buyer power Page 17
Competition policy opportunities Page 17
Competition Policy limitations Page 18
Section 3 Examples o competition policy being used to tackle buyer power Page 22
1. Retailer power accumulation prevented Page 22
2. Competition authorities tackle multinational retailer power Page 23
3. Tackling buyer power o processors Page 24
4. First steps in tackling the probem o global supply chains Page 25
5. Tackling capacity constraints through leniency programmes Page 25
6. Using public scrutiny as a deterrent Page 26
7. Tackling the climate o ear Page 26
8. Designing competition policies to promote the public intrest Page 26
Section 4 Conclusions and recommendations Page 27
Reerences Page 30
over Photograph: Rajendra Shaw
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Rebalancing the supply chain: buyer power, commodities andcompetition policy
Introduction
This paper is an attempt to explore the extent to which competition policy can be
used to address problems caused by corporate concentration and the exercise o
buyer power1 in agricultural commodity markets.2 It assesses the conceptual and
practical opportunities o current competition policy to tackle this phenomenon and
also highlights its limitations. This is a dicult and complex area. Many studies that
have looked into the adverse aects o buyer power and corporate concentration
on commodity producers have suggested that competition policy may oer a useul
avenue or investigation.3 This study is thereore an attempt to do this and should be
seen as a contribution to the debate.
For many policy makers international negotiations on competition policy are now
unortunately associated with the Singapore Issues debate at the World Trade
Organisation (WTO). The Singapore Agenda on competition policy was an attempt
to achieve multilateral agreement on competition law. It was not the rst attempt todo so, the Havana Charter o 1947/48 contained provisions which would have bound
each member to prevent practices aecting international trade which restrained
competition, limited access to markets, or ostered monopolistic control, and in 1980
the United Nations agreed the Set o Multilaterally Agreed Equitable Principles
and Rules or the Control o Restrictive Business Practices (the UNCTAD Code). The
Singapore Agenda contained provisions more similar in content and approach to US
Anti-trust law than to the relatively developing-country riendly UNCTAD Code and
also omitted many o the more pro-development aspects o the Code. The approach
taken by the Singapore discussions would not have addressed problems o market
concentration in the hands o a ew transnational companies and may in act have
exacerbated problems by emphasising market access aspects and reducing the policy
options available to developing country governments. Thereore, its successul dismissal
by developing countries at the Cancun Ministerial in 2003 was commendable.
This paper takes a dierent approach. It assesses the extent to which governments
could use competition policy instruments as a way o regulating the power and
practices o powerul transnational and national retailers and ood processors.
As discussed in the subsequent sections, it is clear that there are high levels o
concentration in these sectors and there is real concern that some companies may be
abusing their dominant position more requently than the number o cases suggests
and that these practices may have impacts right down the supply chain. These nodes
o concentration may be amongst sellers (or example o inputs such as seeds and
ertilisers to producers) or amongst buyers (processors or retailers who buy a armers
produce). Both can be a problem or primary producers o agricultural products, but
this paper will ocus exclusively on buyer power.
Footnotes
1 According to the OECD (1981), buyer power is a situation which exists when a rm or a group o rms, either because ithas a dominant position as a purchaser o a product or service or because it has strategic or leverage advantagesas a result o its size or other characteristics, is able to obtain rom a supplier more avourable terms than those availableto other buyers.
2 This paper denes agricultural commodities airly broadly as undierentiate d, largely unprocessed agricultural products,including tropical beverage crops (tea, cocoa, cotton), sugar, cereals, meat, dairy products, rice, grain, rubber, bres(cotton, jute, sisal) oil crops, ruits and horticulture crops. These products can be traded either in bulk or increasingly aspart o buyer driven supply chains involving the same products, but with a greater degree o retailer-led standardisation.See Vorley 2004 or a uller explanation o these terms.
3 See Asaha 2005, Vorley 2002, Murphy 2005, ActionAid 2008.
Summary
The power o increasingly concentrated retail and processor buyers in global
agricultural supply chains allows them to exert p ressure on their immediate suppliers,
which can then be passed down the supply chain to vulnerable commodity producers
and their workers. Traidcrat and the South Centre are concerned about the impacts
o this on some o the most vulnerable producers in the world, particularly as their
ability to organise and respond collectively is being increasingly limited. In assessing the
potential o competition policy to act as a check on the exercise o this buyer power,
the paper nds clear opportunities, in particular or tackling the accumulation o power
which is one o the root causes o the problem. However there are also clear limitations
(both conceptual and practical) which need to be addressed i competition policy is to
be eective, these include: competition policys consumer ocus; its lack o dedicated
instruments to assess and deter buyer (as opposed to seller) power; the ear associated
with buyer power, resource constraints and most undamentally the need to recognise
the global nature o trade either through expanding the scope o national laws orthought the establishment o an international competition agreement or authority.
Section 1 o this paper will outline the problems that buyer power and corporate
concentration present or commodity producers in developing countries. Section 2
outlines dierent approaches to competition policy and assesses its useulness and
weaknesses in tackling buyer power. Section 3 presents a series o case studies outlining
successul attempts to use competition policy to tackle buyer power and Section 4 oers
conclusions and recommendations.
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What gives companies buyer power?
As the denitions imply, buyer power stems rom a number o actors, including a
companys size, lack o competition in a particular market or the suppliers relative
dependent position which allows the buyer to play a gatekeeper role between
the supplier and the consumer. I a company is the only buyer in a market it is in a
monopsony position. This rarely occurs in practice and more oten there are small
numbers o concentrated buyers who dominate a particular market. This is known as
oligopsony. Buyer power can also be created when a group o buyers who in other
aspects are competitors agree to collaborate in their purchasing. This can take the orm
o buying groups or buying alliances. The power o a buyer is situationspecic.
It relates not only to market power, but to the relative position o the supplier.
Even a small retailer with tiny market share can exercise buyer power i it takes hal a
suppliers output.
Suppliers o dierentiated products or those with recognised brands are betterable to withstand the pressure o dominant buyers. In contrast, producers supplying
undierentiated bulk commodity products are extremely vulnerable. In buyer-driven
supply chains the supplier is kept vulnerable by having to comply with buyer-specic
standards, which reduces their ability to sell elsewhere and thereore increases their
dependence on that particular buyer.
Small producers, in particular, are likely to suer when they are unable to
resist retailer buyer power, orcing them to cut prices to the point where only
the most ecient can survive. The longer-term eect will be to threaten the
viability even o ecient producers when investments are undermined by
inability to recover xed costs as a result o being orced to price at (short-
term) marginal cost.8
Footnotes
8 Dobson, P. (2002), Retailer Buyer Power in European Markets: Lessons rom Grocery Supply,University o Loughborugh Business School Research Series.
Footnotes
4 OECD (1981) Buying Power: The Exercise o Market Power by Dominant Buyers,Report o the Committee o Experts on Restrictive Business Practices.
5 Dobson, P.W., Waterson, M., Chu, A., (1998) The Welare consequences o the exercise o buyer power,Oce o Fair Trading.
6 European Union DG Competition Glossary o Terms (2003).
7 UK Competition Commission (2000) Supermar kets: A report on the supply o groceries rom multiple stores in theUnited Kingdom.
What is buyer power?
There are various dierent denitions o buyer power.
AccordingtotheOECDbuyerpowerexistswhenarm,eitherbecause
it has a dominant position as a purchaser o a product or service, or
because it has strategic or leverage advantages as a result o its size or
other characteristics, is able to obtain rom a supplier more avourable
terms than those available to other buyers. 4
AsimilardenitionofbuyerpowerisproposedbyDobsonetal.who
state that buyer power is exercised when a rm or group o rms obtain
rom suppliers more avourable terms than those available to other buyers
or would otherwise be expected under normal competitive conditions.5
TheEuropeanCommissiondenesbuyerpowerasthebargaining
strength that the buyer h as vis--vis the seller in commercial negotiations
due to its size, its commercial signicance to the seller and its ability to
switch to alternative suppliers.6
When buyer power is exercised suppliers accept terms that they would not normally
and in addition, may not complain, or ear o commercial retaliation by the buyer.
The existence o a climate o apprehension amongst suppliers was clearly ound by
the UK Competition Commissions enquiry into the behaviour o the UKs our largest
supermarkets:
Overall, there was a general climate o apprehension. Some suppliers
expressed what appeared to be very real ears that any hint o involvement
in our inquiry would threaten the existence o their commercial operations.7
As well as squeezing on price there are non-price aspects o buyer power which involve
extracting more avourable treatment in terms and conditions. Buyer power practices
include:
threateningde-listing
retrospectivelydeductingorchangingprices
demandingloyaltypaymentsfromsuppliers
keepingpricingopaque
usingshorttermornocontracts
demandingregional/globalsupplieragreements
paying late
demandingglobalpromotionsatshortnotice
demandingstandardscomplianceatsuppliersexpense
Section 1: Buyer power, corporate concentration and commodities
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There seems to be a shit in buyer power towards the retail end o the supply chain
and away rom the traditionally dominant processors.11 However it is also clear that
increasing consolidation at the retail level is in turn driving consolidation at the
manuacturing level as well. For example Planet Retail observes that the pressure
rom the likes o Wal-Mart, Tesco and Carreour are thought to be a motivating actor
behind the 2005 link up between Procter and Gamble and Gillette. 12 Retailer power
is also accelerating the drive towards vertical integration in particular supply chains,
or example the banana giant Doles move into processing is thought to be in part a
response to supermarket price pressures. It also seems to be the case that consolidation
at the retail level with growing demands or private standards and traceability
requirements is driving consolidation amongst suppliers oten in avour o large
exporting rms whilst pushing smallholder armers out o supply chains.13
How companies maintain buyer power
Large companies are able to maintain and increase their power by virtue o their size.This enables them to negotiate larger volume related discounts, which means in turn
that they are able to oer lower prices than those oered by smaller rivals, which
in turn increases the dominant buyers market share and so on. Firms also engage in
behaviour described below which has the eect (intended or not) o increasing and
sustaining their ability to exercise buyer power.
Mergers and acquisitions:
The growth in mergers and acquisitions (or example SuperValus acquisition o
Albertsons in the United States in 2006 and Edeka acquiring SPAR Germany in 2005)
has contributed to an increase in market share and buyer power amongst retailers.
This shit is also occurring in the developing world where aggressive investment in the
retail sector in Latin America, South East Asia, and to some extent in Arica has lead to
increased market concentration at the retail end o commodity value chains.14
Sourcing globally:
Purchasers can increase their power by buying their raw materials rom multiple
sources. This allows them to avoid dependence on a single or a ew suppliers and
enables them to extract the lowest possible prices, orcing suppliers to compete ercely
both within and between countries. This practice is particularly seen where the buyer
(or example a brand or a processor) is sourcing undierentiated commodity products.
In the tea industry or example, certain types o tea used or particular blends are
substitutable. This allows the buyer to play suppliers o against each other. Farmers do
not possess the reciprocal power to play one agribusiness giant o ag ainst another.
Footnotes
11 Planet Retail (2006), Global Retail Concentration.
12 Planet Retail (2006), Global Retail Concentration.
13 Brown O. with Sander, C. (2007), Supe rmarket Buying Power: Global Supply Chains and Smallho lder Farmers, IISD.
14 Dobson, P. (2002), Retailer Buyer Power in European Markets: Lessons rom Grocery Supply,University o Loughborough Business School Research Series.
15 Tickell . S. (2004), Fairtra de in perspective Sustainabi lity Radar.
Transmission o risk and shiting power
Buyer power can be exercised at any point in a supply chain. In particular it seems to
be prevalent at the ag ricultural processing, manuacturing and retail levels. This may
be because these are the more capital-intensive parts o the chain and entry costs are
high, leading to high levels o concentration. The impact o buyer power can also be
transmitted along long and complex supply chains and elt by primary producers. So
buyer power exerted by a retailer in France, can aect a powerul brand manuacturer
who passes the pressure and risk onto their primary suppliers. The UKs Competition
Commission enquiry in the grocery sector conrmed this:
...the evidence that has been presented to us during this inquiry by suppliers
to intermediaries and processors, especially primary producers, strongly
suggests that supply chain practices transerring excessive risks and uncertain
costs up the supply chain are suciently prevalent in many sectors to justiy
greater scrutiny o the nature o these commercial relationships.9
Footnotes
9 UK Competition Commission enquiry into the groceries market, (February 2008) Provisional decision on remediesrelating to supply chain practices.
10 Oxa m (2004), Trading away our rights: Women working on global supply chains.
Sector analysts
predict that it is
not unrealistic to
imagine uture
global markets in
which the sale o
ood is controlled
by our to ve
global rms with a
handul o regional
and national
companies, andin which ood
manuacture is
dominated by some
ten companies
using only about 25
brand names.15Shareholder pressure or
high returns
Consumers expectations
o low prices
Retailers and brand owners
ofoad costs and risks down the supply chain
Mid-chain suppliers
seek low-cost producers
Producers
arms and actories pass the pressures on to workers
Sub-contractors Employees
Sub-contracted and
home-based workers
Retailers and brand owners push or:
lowerpricesfromproducers
fastandexibleproduction
hightechnicalandqualitystandards
betterlabourconditionsbutwithouta
long-term commitment
Precariously employed workers,
mostly woman and migrants, are:
insecure,oncontractswithfewbenets
exhaustedbylonghoursandhightargets
underminedinorganisingfortheirrights
Producers, as employers:
hirewomanandmigrants
useshort-termcontractsandevadebenets
undermineorganising
hidelabourrightsviolations
Supply chain pressures create precarious employment
10
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Rise o own-label products:
By developing own-label products, retailers are able to capture more o the value on
those products and are increasingly displacing traditional brands. In doing this they
become a competitor, as well as a buyer, in relation to their suppliers. This increases
their buyer power in several ways. They can reuse to buy products rom suppliers
because they can oer an own-label product, the development o their product with
manuacturers gives them critical inormation about the cost make-up behind that
product, and because they are the nal decision makers in the retail pricing o products
they can price their own-label product below that o branded competitors.
National and cross border collaboration:
By strategically collaborating (which companies do to improve economies o scale,
reduce transactional costs etc.) rms are able to reinorce their dominant position.
This may take the orm o buyer groups or buying alliances. Buyer groups purchase
collectively on behal o members that remain independent retailers while buying
alliances tend to have only one member rom any country (i.e. generally they are notdirect competitors). This practice has the eect o redu cing options or suppliers and so
increases the buyer power o those participating.17
Seen in this light, it is not just the activity o international expansion by the
leading multinational retailers that is driving greater integration o markets
on the procurement side, but also alliances o nominally independent
retailers.18
Buyer power and the commodity problem
Two and a hal billion people make their living by producing primary agricultural
commodities.19 As many as 43 developing countries depend on a single agricultural
commodity export or more than 20 percent o their total export revenues.20
Commodity production is characterised by large numbers o producers, producing
largely undierentiated products. They are oten vulnerable and the high costs o
exiting commodity production and lack o alternative livelihoods means that they may
continue to produce even when the market price is below their cost o production. They
will compensate or low prices by producing more, exacerbating oversupply.
Despite recent price rises or some commodities (especially those used in the
manuacture o bio uels and also minerals), there is debate about how long thispeak will last, and or many tropical products the long term price trend continues to
be downwards, punctuated by increasingly volatile short term price fuctuations. The
ormer reduces producers living standards while the latter makes it very dicult or
them to plan. In addition, commodity producers also appear to be receiving a low and
declining proportion o the nal product price (see gure below).
Footnotes
16 Planet Retail (2006), Global Retail Concentration.
17 Dobson, P. (2002), Retailer Buyer Power in European Markets: Lessons rom Grocery Supply,University o Loughborugh Business School Research Series.
18 Dobson, P. (2002), Retailer Buyer Power in European Markets: Lessons rom Grocery Supply,University o Loughborugh Business School Research Series.
19 Tickell , S. (2004), Fairtra de in perspective Sustainabi lity Radar.
20 FAO (2004) , The State o Agricultural Commodity Markets.
Footnotes
21 Kapli nsky or UNCTAD (2004), Compet ition Policy and the Global Coee and Cocoa Value Chains.
22 Green , D. (2005), Conspiracy o Silence: Old and new directions on Commodities Conerence paper presente d toStrategic Dialogue on Commodities, Trade, Poverty and Sustainable Development.
23 Asaha , S. (2008) Commodities dependence and development: some suggestions on how to tackle the commoditiesproblems. South Centre, ActionAid 2008.
24 Sources: Vorley (2003), CUTS (2005), Planet Retail (2007), ActionAid International (2005),UK Competition Commission (2007).
Losing market
share to private
abels is now
a key problem
aced by brand
manuacturers in
developed retail
markets, not
east as a result
o strong price
dierentials.16
100%
80%
60%
40%
20%
0%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Proportiono
fnalretailprice
Year
value added in consuming country
transport costs and weight loss
value added in producing country
grower price
There are many reasons or the long term price declines and low proportion o the nal
retail price or tropical agricultural commodity producers, including oversupply and the
collapse o international supply agreements. However the combination o corporate
concentration and increased armer disorganisation is particularly o interest in terms
o competition policy.22 The relationship between concentration and lower prices is
complicated, but ActionAid and the South Centre have recently traced the trends and
linked levels o corporate concentration directly with declining prices in the coee
market.23
Examples o corporate concentration in commodity supply chains
Processor concentration
4internationalcoffeeroastersaccountfor45%oftotalcoffeeroasting
2companiesaccountfor74%ofcottonginningcapacityinZambia
3companiescontrol50%ofcocoaprocessingglobally
5companiescontrol80%oftheworldmarketforbananas
Retailer concentration
ThetoptenretailersintheEUnowaccountforover30percentofsalesofall
ood and daily goods
IntheUKthetopfourretailersaccountfor75percentofthegrocerymarket
Wal-Martaccountsfor6.1percentofglobalretailsales24
Distributionofnalretailpriceinthecoffeevaluechain
21
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Various actors have exacerbated the trend towards corporate concentration. Economic
liberalisation has accelerated cross border mergers and acquisitions (usually between
companies headquartered in rich countries), which have now reached unprecedented
levels. This is not likely to lead to the stated aim o liberalisation which is more
competitive markets. The push towards privatisation in many developing countries has
had similar eects, replacing public monopolies with private ones instead o ostering
greater competition. In agriculture this has impacted on the ability o producers to
counter corporate concentration as state marketing boards have been abolished
and there has been strong opposition to producer or armer organisations in both
the developed and developing worlds. For example in the late-1990s co-operatives
processedtwothirdsofCanadianmilk;todaythatisdownto42%.Thesituationismore
striking in Sub-Saharan Arica where the advent o neo-liberalism under the IMF/World
Bank-led structural adjustment programmes swept many state marketing boards rom
the continent. The weakening or abolishing o the marketing boards has let producers
isolated, disorganised and has limited their ability to bargain collectively. So while
upstream stages o the supply chain have become more concentrated, competitionamongst suppliers has intensied at national and international levels, allowing buyers
to play producers o against each other, extract better terms and transer value rom
South to North.
Control o commodity value chains by a small number o powerul
corporations can also drive down commodity prices and erode the share o
the nal product price that goes to producers. When markets bring together
large numbers o competing suppliers against a handul o large-scale
buyers, the buyers are likely to have most leverage in setting prices. When
the buyers are also linked to processors and retailers in vertically integrated
commodity chains, they are in a strong position to capture a greater share o
the value o the nal product or traders, processors and retailers.26
This has important implications or global income inequality when those armers
are located in developing countries, while the processors, international traders and
retailers are mostly located in developed coun tries. A World Bank report estimated that
divergence between producer and consumer prices may have cost commodity-exporting
countries more than $100 billion a year. 27
Buyer power has many negative impacts which can be transmitted through the supply
chain. They include increased costs or suppliers, uncertainty which reduces incentives
or investment and innovation, nancial distress including high levels o debt and
insolvency, as well as transer o commercial pressures onto workers in the orm o low
wages, short term contracts and delayed wage payments.
Footnotes
25 FAO (200 1), Report o the Panel o Eminent Experts on Ethics in Food and Agriculture.
26 FAO (2004) , The State o Agricultural Commodity Markets.
27 Morrise t, J. (1997), Unair Trade? Empirical Evidence in World Commodity Markets Over the Past 25 YearsWorld Bank.
Footnotes
28 Quo ted in Fox and Vorley (2004), Concentration in ood supply and retail chains DFID.
29 Vorle y, B. et al (2004), Food Inc , Bill Vorley at al UK Food Group.
30 Henderson , J. (2005), Global Production Networks, competition, regulation and poverty reduction: policy implications,Centre on Regulation and Competition Working Paper Number 115.
31 Henderson , J. (2005), Global Production Networks, competition, regulation and poverty reduction: policy implications,Centre on Regulation and Competition Working Paper Number 115.
An FAO panel o
experts concluded:
there are serious
power imbalances
arising rom the
concentration o
economic power
n the hands o a
ew.25 The global banana bottleneck -rom Latin America/Caribbean to the UK
Consumers
Retailers
Ripeners/distributors
Transnational banana companies
Smallholders & Plantation
workers
60 million
5 retailers = 70% o UK grocery market
5 companies or alliances (Fyes, Del Monte,
JP/Dole, SH Pratts, Keelings/Chiquita)
= 88% o UK market
5 companies (Dole, Chiquita, Del Monte,
Fyes, Noboa) = 80% o global market
2,500 plantations, 15,000 small-medium
scale armers, 400,000 plantation
workers involved in
export sector
The Banana Split -
how much o 1.00 retail value o loose
Ecuadorian bananas stays with each chain
actor to cover costs and margin.
Plantation workers 1.5p
Plantation owners 10p
Ripener/Distributer 17p
Retailer 40p
International
trading company 31p
(includes 5p EU tari)
Impact o buyer power case studies
Bananas
In 2002 Asda Wal-Mart negotiated with supplier Del Monte and dropped the price
o loose bananas in the UK rom 1.08 to 94p/kg. Within days Tesco, Saeway,
Sainsburys and Morrisons all ollowed, and by 2005 Asdas price had allen to 79p/
kg. Banana Link claim that at a retail value o 81p/kg it is impossible or a grower
in Costa Rica to be paid the legal minimum price or a box o bananas and in turn
impossible or that grower to pay workers a legal minimum wage.28
Wine
Foursupermarketchainscontrol80%oftheUKsmarketforSouthAfricanwine.
Each is able to exert signicant buyer power on their suppliers.
In this context, the supermarkets have the wineries in almost a vice-like grip such
that they are not only able to demand adherence to quality and health standards
(typically at the wineries own cost) but in particular are able to bear-down o n the
prices the wineries are paid.30
In turn this has contributed to increased casualisation o the workorce.
Specically the power that British supermarkets are able to exert by virtue o their
oligopolistic nature as the single most important market or South Arican wine, is
orcing down prices or producers. This, in turn, is resulting in a downward pressure
on direct and indirect labour costs that is having negative consequences or poverty
alleviation among the industrys black workers.31
29
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Footnotes
32 Lee, C. (2005) , Model competition laws: The World Bank-OECD and UNCTAD approaches compared ,Centre on Regulation and Competition Working Paper Number 96.
33 Singh, A. (2002), Compet ition and competition policy in emerging markets: international and development dimensions ,University o Cambridge.
34 Europea n Economic and Social Committee, Bulletin, March 2005.
The buying
power o the large
multiples in the
ood market must
continue to be a
matter o concern
or the competition
authorities.34
Introduction to competition policy
Competition policy is one aspect o an overall policy ramework. History, legal traditions
and social and economic needs dier among countries and also over time. Competition
policy regimes around the world refect these dierent realities. This makes it dicult
to generalise about competition policy. However broadly speaking the purpose o
competition policy has historically included a notion o public good or public interest.
Recently amongst certain countries, especially those ollowing the OECD model, there
has been a narrowing o the aims o competition policy to ocus on the promotion o
economic eciency and consumer welare. Most competition laws cover a ew central
issues: mergers (which can produce anti-competitive eects or example by preventing
the entry o smaller players); anti-competitive practices (such as price xing and cartels)
and abuse o dominance. Not all countries have competition policies, but there was a
rapid rise in this number during the 1990s structural adjustment period, in response
to the wave o privatisation (and its ailure to lead to a competitive environment) and
in response to the Asian nancial crisis. Those countries that have introduced lawshave been infuenced variously by US, EU, Germany, Japan, but also South Korea and
multilateral bodies including the OECD, World Bank and UNCTAD.32
Number o developing countries that have adopted competition laws,
as o June 2000
Pre-1950s
1950s 1960s 1970s 1980s 1990sUnder
preparationTotal
Asia/Pacic 0 0 2 2 2 14 6 26
Central/Eastern Europe 0 0 0 0 1 16 1 18
Latin America &Caribbean
1 2 1 1 0 6 10 21
Arica 0 1 0 1 2 14 10 28
Total 1 3 3 4 5 50 27 93
Section 2: Competition policy and buyer power
Where does buyer power happen?
Primary Producer
Primary buyer
(Agent/co-operative/
marketing board)
Importer/exporter
Food service company
Increasingly buyerpower is exertedhere as the retailsector becomesmore concentrated
Buyer power otenoccurs here or example4 coee roastersaccount or 45% oglobal processing
Buyer power can occurhere, or example atea actory or cottonginnery which may be
the only processor in aparticular location
Processor/
manuacturer/brand
Primary processing
acility
Retailer
33
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Principles and practice o competition policy
Jurisdiction
The implementation o competition policy is limited by jurisdiction which is usually
national. Although there are bilateral and regional competition agreements and some
broader regional and bilateral trade ag reements include sections on competition, the
aim o these is usually limited to voluntary co-operation and acilitating market access
or rms rather than providing instruments that would allow regulation or sanction.
Sometimes there is tension between the national and regional levels and occasionally
there are disputes about which level has authority. At the multilateral level the rst
attempt to introduce competition rules was the Havana Charter, which was negotiated
in 1947/8 to lay down the blueprint or the International Trade Organization (ITO). This
did include regulatory aspects, requiring nations to take appropriate measures against
transnational restrictive business practices including price-xing and market access
limiting restraints.
35
However, the Havana Charter was never adopted because theUnited States withdrew support. In 1980 the United Nations Conerence on Trade and
Development (UNCTAD) presented a Set o Multilaterally Agreed Equitable Principles
and Rules or the Control o Restrictive Business Practices (the UNCTAD Code) to the
United Nations General Assembly. The General Assembly accepted the UNCTAD Code
as a non-binding recommendation. The rules provided or in the code have the explicit
objective o urthering the trade and development o developing countries. However
support to the Code was short-lived due to a shit o approach by the US. 36
Exemptions
In some countries certain sectors are completely exempted rom the remit o
competition policy. These are called carve outs and one o the most common has
been agriculture. Traditionally this has been to help armers and to protect the non-
economic gains rom agriculture including ood security and environmental protection.
For example, Article 36 o the Consolidated Treaty o the European Union states that
provisions on competition law shall apply to production o and trade in agricultural
products only to the extent determined by the Council within the ramework o
ensuring a air standard o living or the agricultural community, in particular by
increasing the individual earnings o persons engaged in agriculture.37 There are similar
provisions in the United States and Japan. However ew developing countries have such
carve outs, and the trend is turning against them, irrespective o their useulness or
countries at dierent stages o development.
Powers and resources
Competition authorities broadly judge cases against their remit (or example consumer
welare) and on whether they are likely to have anti-competitive eects. To do this
they normally rely on the party aected by the anti-competitive behaviour to make
a complaint to competition authorities, but authorities can also take the initiative to
set up regulatory bodies or watchdogs or to monitor particular markets. The sanctions
available to authorities vary rom country to country and can be quite wide-ranging
or example some can prevent an action or in rare cases order the reorganisation or
break up o a company (in merger cases or example), or they can impose nes on
companies ound guilty o abuse o dominance. In some instances nes are related to
the turnover o a company and can be signicant. However in practice investigating
and successully prosecuting cases can be very dicult and requires considerable time
and resources. In some situations investigation o an entire market is required. In many
countries, including developed ones, the resources available to competition authorities
are limited.
Competition policy and buyer power
The debate as to whether competition policy is capable o dealing with the problem
o buyer power in its present orm depends partly on the model o competition policy
chosen. The OECD model tends to be more consumer (rather than supplier) ocused
although it does speciy clear punishments or abuse o dominance, including in
situations o oligopsony. The UNCTAD model is more f exible and explicit about dealing
with TNC dominance. There is debate among competition policy experts as to whether
buyer power should be treated dierently rom seller power. Carstensen has argued
that similar analytical tools can be used, but that dierent metrics (benchmarks) are
needed to measure the dierent types o eect and that in terms o diagnosis rms
need a considerably smaller market share to exert buyer than seller power. In contrast
the OECD concludes that monopsony buying problems can be addressed using the
same basic antitrust and benchmarks or measuring eects as that used or addressing
monopoly selling problems.38
Competition policy opportunities
Competition policy as currently conceived can clearly be used to tackle a number o
the problems outlined as associated with buyer power, by restraining the ormation
o a dominant position through mergers and by preventing or circumscribing some
o the practices associated with abuse o that dominant position. Competition policyis thereore an important tool or policy makers. Section Three will provide examples
where competition policy has been used to tackle the exercise o buyer power in both
developed and developing countries.
Footnotes
35 Fox, E. (1999), Compe tition law and the millennium round, Journal o International Economic Law.
36 Fox, E. (1999), Compe tition law and the millennium round, Journal o International Economic Law.
37 Eur opean Union (2006), Consoli dated Versions o the Treaty on European Union and o the Treaty Establishingthe European Community.
Footnotes
38 Carte nsen, P. (2004), Buyer power and merger analysis: the need or dierent metrics, University o Wisconsin.
OECD (2006), Competition and regulation in agriculture: monopsony buying and joint selling.
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Competition policy limitations
In its current orm, competition policy has a number o limitations or dealing with
buyer power.
1. Buyer power versus seller power
Competition authorities tend to ocus on the problem o seller power rather than
buyer power. This is because usually they are tasked with ensuring that the consumer
is protected. This consideration is oten reduced in practice to achieving low consumer
prices rather than other actors such as ensuring choice or qu ality. As long as the
consumer is getting low prices, competition authorities have little reason to act. Indeed
the emphasis on consumer welare means that many o the practices carried out by
rms when exercising buyer power would be considered pro-competitive. Where there
is recognition o the existence o the problem o buyer power, the trend advocated
by powerul entities such as the OECD is to use the same tools as that used or seller
power. But some suggest that the low number o buyer power cases points to theweakness o the current instruments rather than the absence o the problem.
Both buyers and retailers are increasingly infuencing the process o
production, with the result that armers eel that not only are their margins
being reduced but their independence to govern their own commercial
activity is more limited than in the recent past. On occasion, price-xing
among buyers has been ound and prosecuted in many OECD jurisdictions.
Given the diculty o identiying local price-xing agreements, there may be
more price-xing activity by a gricultural buyers than has been prosecuted.39
Thus a narrow interpretation o the aim o competition policy limits its useulness in
tackling the problem o buyer power. There are some interesting exceptions to this
which are explored in the next section.
2.Problemsofmarketdenitionandmarketdominancemeasures
To prove an incidence o buyer power, it may be necessary to show that the rm
exercising the power is in a dominant position within a market. Thus how the relevant
market is dened and how dominance is measured are both o critical importance.
Markets are usually dened as geographic, (or example local), or as product markets
(or example the grocery sector). Dierent countries have d ierent approaches or
establishing market dominance. Some use quantitative measures, others qualitative
and there are wide disparities between the level o market share at which a rm is
consideredtobedominantfromaslowas20%toashighas70%.40 I a market is
dened too widely or the measure o market dominance is set too high this makes
it dicult to prove buyer power. This has resource implications or the competition
authorities too. For example it could be very dicult or very costly to prove that a
single rm is dominant across the entire EU market, but that does not mean it cannot
be exercising buyer power. It should be noted that most analysts agree that because o
the variety o ways that buyer power can be exercised as well as the issue o supplier
dependence, it is possible or a rm to exert buyer power at levels o market sharemuch lower than that o seller power.
Linked to this is another weakness o the current competition law approach when
trying to apply it to buyer power. Usually any assessment o market dominance takes a
horizontal approach that is it looks to see whether a rm or group o rms are able
to exert anti-competitive power at a certain point in a supply chain. There are also rules
governing vertical agreements that might have an anti-competitive eect or example
in the OECD model law the threshold or judging dominance in a vertical agreement
isthatatleastoneofthepartiesholdsadominantpositioninamarket(35%)orthat
similar agreements are widespread and this aects competition. However these are not
widely implemented in buyer power cases. Vertical integration leading to dominance
is particularly relevant in smaller economies where the impacts o agreements on
economic competition may be more keenly elt.41
Footnotes
39 OECD (200 6), Competition and regulation in agriculture: monopsony buying and joint selling.
Footnotes
40 Lee, C. (2005) , Model competition laws: The World Bank-OECD and UNCTAD approaches compared ,Centre on Regulation and Competition Working Paper Number 96.
41 Dhanje e, R. (2004), The tailoring o competition policy to Caribbean circumstances: some suggestions,Centre on Regulation and Competition Working Paper Number 79.
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3. Problems o jurisdiction
Competition policy requires modernisation i it is to adequately tackle the challenges
presented by globalisation. Supply chains increasingly involve a ctors rom multiple
countries and companies themselves are increasingly transnational.
A key eature o globalisation is that its economic and organisational glue
is increasingly associated with complex networks o suppliers who produce
in globally dispersed locations in accordance with the demands o lead
rms. These rms either dominate important national markets (such as the
principal supermarket chains in Britain), or more likely are TNCs with broad
international remits.42
This leads to a number o challenges when trying to use competition policy to tackle
buyer power. By denition the victims o buyer power are suppliers and in todays
supply chains the more powerul actors are likely to be located in developed countriesand the suppliers in developing countries. At present competition policies are applied
only against anticompetitive conduct which adversely aects markets in the country
or region where the competition authority concerned has competence. Thus, the
competition authority will assert competence over anticompetitive conduct by sellers
overseas which adversely aects buyers or consumers based within its territory. In
the case o the U S, the competition authorities will also assert jurisdiction over
anticompetitive conduct by oreign buyers which a dversely aects exports rom
the US. However, no competition authority will take enorcement action against
anticompetitive conduct by national buyers which ad versely aects sellers based in
another country or jurisdiction. Again there are some important exceptions to this rule
which are explored in the next section. While the unilateral application o competition
laws on oreign rms or in oreign territory has been a subject o intense debate in the
past, competition authorities in major developed countries (or the EU) routinely enorce
their laws in such situations so there should be no insurmountable legal obstacles
to smaller countries acting in the same manner. In practice, however, given decits in
enorcement capacity and power asymmetries, it can be expected that smaller countries
will ace problems in the application and the likelihood o a successul prosecution o
anticompetitive practices by TNCs involved in commodity supp ly chains.
4. Capacity limitations
There have been very ew prosecutions o buyer power including in developed
countries because investigating cases is dicult, time consuming and extremely
expensive. Access to inormation is oten a problem. This is compounded when
companies lobby against such investigations or mount legal challenges. Capacity
problems are particularly an issue in relation to buyer power, because by denition
the buyers tend to be very powerul. In some developing countries the situation may
be compounded by the act that competition laws are relatively new and authorities
are under-resourced. Because o this, the success o developing countries in detecting
and sanctioning anticompetitive behaviours has been poor to date, but there are some
notable exceptions outlined in Section Three.
5. Climate o ear at the macro and micro levels
In todays markets where developing countries are oten engaged in erce competition
to attract oreign direct investment, multinational companies have great power.
Investigations into buyer power at whatever level may righten away potential
investors or multinational companies may threaten to move i their dominant position
or potentially unair practices are questionned. This is a real disincentive to developing
countries to use competition law as a way o tackling buyer power. Similarly at the
micro level, producers or suppliers oten ear to make ocial complaints to authorities
about abusive buying practices or ear that they may be delisted or blacklisted by
other competitors. The OECD ound that insucient protection or complainants was a
problem in buyer power cases:
Oten, as with many other sectors o antitrust law enorcement, ocial
complaints to authorities are not made as individual producers oten ear
that they may be delisted rom their major buyer and blacklisted by other
competitors.43
Most current competition law relies heavily on complaints b y those aected by anti-
competitive behaviour or abuse o dominance. This is a real problem in applying
competition policy to buyer power cases as those aected may be unwilling to come
orward. This complaints-driven system does not work and many argue that proactive
regulation is the only realistic way o addressing this climate o ear. Some interesting
attempts to tackle this issue are outlined in the next section.
6. Weak consideration o public interest or developmental objectives
As has been described, competition policy, particularly in the OECD tradition, is
ocused on economic eciency and consumer welare. The OECDs model competition
law states its objectives as ollows: This law is intended to maintain and enhance
competition in order ultimately to enhance con sumer welare. This narrow ocus
is increasingly accompanied by the involvement o economists and ormal economic
models in an attempt to quantiy competitive and anti-competitive eects.44
This narrow scope o competition policy is a relatively recent phenomenon. Both in
the US and European Union competition policy was initially established with wider
considerations o public interest. In the UK it was as recently as the 2003 Enterprise Act
that the test applied to mergers was changed rom one premised on public interest
to signicant lessening o competition. This trend limits the useulness o competition
law as a way o tackling buyer power, as this would require greater consideration o
suppliers. On this point the European Economic and Social Committee concluded that
One area o competition law that should be looked at is the denition o public
interest. It should not be conn ed to prices and market orces only.
Today some countries and institutions are reclaiming the space or pro-development
competition policy objectives. For example South Aricas post-apartheid competition
law includes wide-ranging social objectives, including employment generation, support
or small enterprises and empowerment o previously disadvantaged communities.
Similarly the UNCTAD model competition law has the broader aim o economic
development rather than economic eciency and consumer welare. These examples
are discussed urther in Section Three.
Footnotes
43 OECD (200 6), Competition and regulation in agriculture: monopsony buying and joint selling.
44 Cubbin, J. (2003), Compe tition policy and ood, presentation at City University.
Footnotes
42 Henderson , J. (2005), Global Production Networks, competition, regulation and poverty reduction: policy implications,Centre on Regulation and Competition Working Paper Number 115.
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Section 3:Examples o competition policy being used to tackle buyer power
2. Competition authorities tackle multinational retailer buyerpower
Thailand: Following a number o complaints relating to unair trade practices in the
wholesale and retail trade in Thailand, the competition authorities assessed whether
the Thai Trade Competition Act was able to address these unair practices. The Acts
lack o clarity became evident and a specialized Commission was established to study
the issue o buyer power. The Commission drated guidelines o what practices should
be regarded as unair and explicitly brought buyer power abuses under the remit o
competition authorities. The Commission also provided a clear denition o which
business practices are deemed to constitute abuse o buyer power making it easier to
undertake litigation against cases o this nature in the uture.47
Taiwan: The Taiwanese air trade law was enacted in 1991 and implemented in 1992.
The law covers a wide range o antitrust as well as unair competition practices. Thelaw established a Commission which clearly set out what are considered as prohibited
practices. This was updated ollowing a survey o relationships between retailers
and suppliers in which six types o unair practice were identied including charging
o improper ees and unreasonable penalties or supply shortages. In response to
continued complaints by suppliers regarding improper additional ees, the Commission
has now established guidelines or additional ees charged by chain stores.48
Korea: Korea has guidelines or establishing market dominance, clear benchmarks or
what constitutes the abuse o buyer power and prohibits certain practices even when
a retailer is not in a dominant market position.49 This clear legal ramework enabled
the Korean Fair Trade Commission (KFTC) to e stablish and prosecute anti-competitive
behaviour by the powerul multinational companies Wal-Mart and Carreour.
Wal-Mart-Korea was ound guilty o unair acts including reusal to receive products,
unair return o products, unair price reductions ater purchase and unairly passing
on advertising ees to suppliers. The KFTC ordered Wal-Mart-Korea to suspend these
activities and imposed a US$1.6 million ne. KFTC also ordered Wal-Mart-Korea to
announce publicly (in the orm a two major newspaper advertisements) that it had
violated the air trade law. In a similar case the KFTC tackled buyer power involving
Korea-Carreour. In 2001 Korea-Carreour was ound to have unreasonably reduced
the price or relevant products o 112 suppliers by approximately US$1 million. The
KFTC ordered them to desist rom this activity and imposed a US$63,000 ne and also
ordered it to publicise this in the newspapers.50
Footnotes
45 Thi s section is based on a paper prepared by Tsegay, Y. (2008), Good practice s in tackling buyer power usingcompetition policy, South Centre and Traidcrat.
46 Dobso n, P. (2003), Buyer Power in Food Retailing: the European Experience , paper or Conerence on ChangingDimensions o the Food Economy, The Hague.
Footnotes
47 Thaila nd contribution (2004), How enorcement against private anti-competitive practice has contributed to economicdevelopment OECD Global Forum on Competition.
48 Lin, G. (2003), Taiwans Competition Law Enorcement Experie nce and Cases in Retailing Business paper or APECTraining Program on Competition Policy.
49 The criteri a or the prohibition against abuse o market dominating positions includes: Unreasona bly x, maintain, oralter the price o a good or service ees; Unreasonably control the sale o goods or rendering o services; Unreasonablyinterere with the business activities o other enterprises; Unreasonably hinder the entry o new competitors. Unair tradepractices include Unreasonably reuse to transact with or discriminate against a certain transacting partner; Unreasonablyengage in activities to eliminate competitors; Unreasonably induce or coerce customers o competitors to deal withonesel; Unreasonably take advantage o ones bargaining position in transactions with others; Transact with others onterms and conditions which unreasonably restrict or disrupt their business activities; Use advertisements or makerepresentations that are alse or which may deceive or mislead consumers with respect to the enterprise or its goods orservices.
50 Jhong, K. S. (2003), Anti-comp etitive practices at the distribution sector in developing countries.
This section outlines some recent innovative examples where competition policy has
been successully used by developing and developed country authorities to tackle buyer
power and its impacts down the supply chain.45 Some o these case studies show how
existing competition policy has been used to tackle buyer power or example the EUs
use o merger controls, other examples show how countries are tightening or adapting
existing policies to take into consideration the growing phenomenon o buyer power
particularly at the retail level (Thailand, Taiwan, Korea, UK), and at the processor
level (South Arica). Other examples point to where competition authorities have
deliberately tackled some o the weaknesses identied in the preceding chapter, these
include the EUs use o extra-territoriality, South Aricas use o leniency programme and
Germanys consideration o economic de pendency.
1. Retailer power accumulation prevented
Almost all attempts to curb buyer power have addressed the symptoms rather than
the key cause o the problem that is the concentration itsel. European Unioncompetition authorities have on occasion taken action against retail mergers, or
example the European Commission prohibited the proposed merger between Kesko
and Tuko in Finland which would have oered the combined enterprise a national
marketshareof60%.WhenRewesacquiredJuliusMeinlinAustria,theywererequired
todiveststoresinregionswherethecombinedenterprisewouldcontrol65%ormore
o sales. However the European Commission has also allowed mergers that have had
a signicant concentrating eect to proceed unhindered, notably Metro/Makro and
Carreour/Promodes.46 These examples show merger control being used to tackle
seller, rather than buyer power, but in doing so they have the impact o reducing the
signicance o the players buyer power too.
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3. Tackling buyer power o processors
In 2005 the South Arican Competition Commission began investigations into eight
dairy processors (including a number o subsidiaries o multinational companies)
or alleged price xing. In December 2006 the case was reerred to the Competition
Tribunal or prosecution and a date in September 2008 has been set or the hearing.
The processors are accused, either together or individually, o various inringements
o South Arican Competition Law, including abuse o their dominant position with
suppliers and colluding to x purchase prices. Thus the case involves a group displaying
both buyer and seller po wer simultaneously.
The tribunal will assess the ollowing allegations that:
companiesexchangedsensitiveinformationonprocurementpricesofrawmilk
and this enabled competitors to co-ordinate their pricing strategies to x the
purchase price o raw milk.
twoofthecompaniesabusedtheirrespectivedominantpositionsinexclusiveagreements that compelled producers to supply them their total milk production.
Producers were prevented rom selling surplus raw milk at competitive prices to
third parties or consumers directly. This practice also prevents the e ntry o smaller
milk processors and distributors into the market.
companiesenteredintolong-termmilksupplyandexchangeagreementstosell
their surplus milk to each other rather than at lower prices to end users.
This arrangement enabled colluding rms to maintain the price o milk at
articially high levels.
twocompaniesreachedanagreementregardingthesellingpriceofUHT
long lie milk ultimately resulting in the consumer paying higher prices or
UHT Milk.
twocompaniesagreedtoxthesellingpriceofUHTmilkandallocated
geographic areas in which they would not compete in selling UHT milk.
This eliminates price competition resulting in consumers paying more.
threeofthecompaniesco-ordinatedtheremovalofsurplusmilkfromthe
market. Surplus removal o milk, decreases supply and this keeps prices high.
It thereore constitutes indirect price xing.
The Competition Commission is seeking to impose a ne which could be up to 10 per
cent o the companies turnover.
51
The Milk Producers Organisation o South Aricahas since lodged a complaint against several major South Arican supermarket chains,
alleging xing o milk prices.52
4. First steps in tackling the problem o global supply chains
EU: In a number o instances the EU has applied its competition law to actors outside
o its market, although not in clear cases o buyer power. In 1985 the European
Commission imposed nes on wood pulp producers situated outside the region (in
the United States, Canada and Scandinavia) or price xing arrangements despite the
act that some o the companies had no subsidiaries in the EU, on the basis that the
arrangement was implemented in the EU market and that the eect o the parties
activities on trade between the EU member states was not only substantial, but
intended, and was the primary and direct result o the agreement and practices. 53
In 1999 the EU successully challenged a merger between two South Arican platinum
companies (Gencor and Lonrho) despite the act that the South Arican Competition
Authorities had allowed it. The EU argued that the merger would have created
disruption in the European market.54 This clearly shows that extraterritorial application
o competition laws is possible. It also poses a potential threat to developing country
suppliers who may work together to counter buyer power, as they could be prosecutedas an export cartel.
UK: Suppliers based outside the UK can seek redress under the existing UK
Supermarkets Code o Practice. This is because the legal obligations to comply with
the Code alls on UK supermarkets and is thereore clearly under the Competition
Commissions jurisdiction. The same principle applies to the ombudsman that the
Commission is proposing as part o its latest investigation into the grocery sector.
This is a unique example and demonstrates that existing legal rameworks can allow
governments o countries in which global sourcing companies are headquartered to
establish binding rules that would protect overseas suppliers.
5. Tackling capacity constraints through leniency programmes
Competition law investigations are complex and costly. In particular nding substantial
and credible evidence on issues such as price-xing behaviour is dicult. Incorporating
leniency programs into competition laws can be important as this encourages those
with hard evidence that is those who were engaging in the antitrust activity to
receive amnesty rom government penalties i they admit the illegal activity and
provide evidence that enables a case to be established against other rms. This can
be particularly important in developing countries where capacity limitation is a
critical constraint to the enorcement o competition law. Scott Hammond, Deputy
Assistant Attorney General or Criminal Enorcement in the Antitrust Division o theUS Department o Justice characterizes, leniency program as the most eective
competition policy tool. In South Aricas investigation o the p reviously mentioned
milk processors, the Competition Commission beneted rom one o the rms which
applied or the corporate leniency program. The rm is due to give evidence in
exchange or immunity in upcoming court hearings. However leniency only works when
coupled with strong enorcement, otherwise those e ngaging in antitrust activity have
no incentive to seek it. Developing countries limited enorcement capacity and other
constraints thereore reduce the eectiveness o any leniency programmes they adopt.
Footnotes
51 South Arican Competiti on Commission (February 2008), Milk Cartel Hearings Set.
52 Irvine , H. (2008), South Arican Competition Commission Cracks Down on Cartels, Mondaq.com
Footnotes
53 Dec ision o the Commission o the European Communities, Wood Pulp [1985 ] OJ L 85/1, 15.
54 Sachs e, T. (2006), Extra -territorial applica tion o competition laws in the US and European Union CUTS Brieng Paper.
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6. Using public scrutiny as a deterrent
The remedy that the Korean Fair Trade Commission took against Wal-Mart-Korea
and Carreour-Korea is interesting in that it involved bringing the unair and abusive
act to public attention. In both cases, the KFTC ordered that the violation o the air
trade law by the retailers be acknowledged publicly through statements in two major
newspapers. They hope that the negative publicity may serve as deterrent or urther
violations by these or other organisations with buyer power. It also gives the KFTC
credibility in the eyes o the public and could encourage other suppliers to bring cases.
7. Tackling the climate o ear
The UK Competition Commission has proposed measures as part o its most recent
investigation which would help to tackle the climate o ear elt by suppliers through
the establishment o an ombudsman or the supermarket sector. The proposed
ombudsman would monitor the trading relationships between retailers and their
suppliers against a new Groceries Supply Code o Practice (GSCOP). It is envisioned thatsuppliers at all levels o a supply chain serving the UK market can raise a complaint
anonymously with the ombudsman. The ombudsman would then investigate the
complaint and i appropriate produce guidance to prevent urther bad practice beore
it is repeated more widely. They would also be able to prosecute retailers o breaches
o the GSCOP. I a suppliers complaint is related to behaviour that only they have
experienced however, they will be required to initiate a dispute in order to pursue
compensation. At this point their complaint will have to become attributable.
8. Designing competition policies to promote the public interest
There are some interesting exceptions to the dominant model o competition policy
avouring consumer protection.
South Arica: South Aricas competition policy was developed through a three-year
consultation process with industry and trades un ions. Its Competition Act allows (and
in some cases demands) that issues such as empowerment, employment and impact
on small and medium enterprises (SMEs) be taken into consideration in decisions.
Consumer interests are also included not only in terms o price, but also in terms o
product choice.55
Germany: Amendments to Germanys Act against Restraints on Competition (ARC) have
enabled authorities to protect small and medium sized businesses against aggressive
competition by those in a dominant position. The Act now prevents dominantrms rom using their position to demand preerential terms without objective
justication. This law is instructive and unique in that it explicitly acknowledges
problems created in situations o economic dependence where suppliers lack
reasonable opportunity to resort to others sources. This approach is part o a wider
German policy by which companies are held accountable to shareholders, but also
to employees, customers and suppliers.56 There are no cases yet where this economic
dependence law has been implemented, but it may be the case that it acts as a
deterrent. There are similar provisions in Australia, Portugal and France.
Footnotes
55 CRC Policy Brie (2005), Designing competition policy.
56 Kampel, K. (2004), Competition law and SMES: Exploring the competitor/competition debate in a developing democracyCentre o Regulation and Competition Working Paper Number 109.
Section 4: Conclusions and recommendations
Conclusions
Competition policy is to some extent a contested eld, with dierent bodies trying
to mould it to t their wider vision and dierent countries having dierent needs at
dierent stages o development. It is thereore important that Governments are able
to retain the fexibility and policy space to ensure that their competition policy can
contribute to their wider economic development an d industrialisation strategies.
Buyer power is just one problem that developing country commodity producers ace
and there are many other policy interventions that can be employed to support them
that are not covered in this paper, or example corporate responsibility legislation,
diversication and value-addition, exploration o niche markets, contract law and
industrial and agricultural policy. However it is clear that competition policy does
merit serious consideration by Governments (whether in developed or developing
countries) who want to tackle the impacts that the exercise o buyer power has on
vulnerable actors in agricultural commodity supply chains. There is clearly a needor modernization so that competition policy overcomes the constraints outlined in
this paper and comes up to date with the realities o international trade. But the
examples given show that where Governments recognize and tackle these weaknesses,
competition policy can be a responsive and useul tool in tackling the growing
phenomenon o buyer power.
What competit ion policy can do Where competi tion pol icy needs work
Tackle the build up o power through
monitoring and blocking mergers
and acquisitions and reorganizing or
breaking up companies
To enable competition authorities
to take action against buyer power
aecting suppliers at home, but exerted
by companies elsewhere
Stop and punish abuses o dominant
position
Ensure available instruments and
denitions adequately take into
consideration impacts on suppliers as
well as consumers
Set up regulators, watch dogs,
adjudicators etc.
To tackle the problems o climate o ear
Tackle buyer power i the eects are elt
in the home market
Most competition authorities need
additional authority and capacity,particularly when tackling powerul and
well-resourced companies
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Page 28 Page 29
Recommendations
Competition policy makers and experts around the world should consider:
theideaofaninternationalcompetitionagreementwithprovisionsthatwould
be able to tackle the transnational eects o the exercise o buyer power
howtoensurecompetitionpolicyaimsarebroadenedbeyondconsumerwelfare
to include consideration o suppliers concerns
howtobemoreproactiveandensureprotectioninbuyerpowercases
Developed country governments should consider:
supportinginternationalactiontotacklebuyerpower
undertakingareviewofnationalandregionalcompetitionpoliciestoaccountfor
changes in national and international market structures and allow greater
recognition o supplier interests
broadeningcompetitionlawstocoverthebehaviourofeconomicactorsbased
in their country which have impacts elsewhere
respondingpositivelytorequestsforco-operationfromsuppliersimpacted
by buyers within their market
refrainingfromtakingactionagainstcooperationbydevelopingcountry
producers in response to buyer power
Developing country governments should consider:
supportinginternationalactiontotacklebuyerpower
reviewingnationalcompetitionlawstoensurethattheyareabletodealwith
the buyer power phenomenon. In particular through:
- incorporating a clear denition o buyer power and its abuses
- providing or sucient protection or those wanting to bring buyer
power cases
- extending the scope o competition law to cover rms outside its
own jurisdiction, as appropriate
developingorstrengtheningcompetitionlawsaspartoftheireconomic
development or industrialization plan
approachingcompetitionauthoritiesincountrieswherebuyersare
situated to request co-operation in cases aecting their suppliers developingregionalresponsesasawayofovercomingthedisadvantages
o being a small or vulnerable economy
Towards international action on buyer power
An international legal ramework or competition policy could be critical to address the
issue o buyer concentration in global commodity value chains. In this regard, Singh has
suggested the establishment o an independent international agreement or institution.
This would require ull consultation with developing countries and the involvement o
relevant civil society organisations. The 1980 UNCTADs Set o Multilaterally Agreed
Equitable Principles and Rules or the Control o Restrictive Business Practices (the
UNCTAD Code), which is supportive o the issues acing developing countries could be
used as a reerence or starting discussions on this.57
...to secure development gains in the developing world, it may be necessary
under some circumstances to intervene in the home bases o lead companies
and their intermediaries. In this sense competition and regulation policies
developed by the British government and applied to, say, British supermarket
chains, may be at least as important as policy initiatives taken in thecountries that supply them with their produce.58
Footnotes
57 Singh, A. (2002), Compet ition and competition policy in emerging markets: international and development dimensions ,University o Cambridge.
58 Solu do, C. Ogbu, O. Chang, H. eds (2004), The politics o trade and industrial policy in Arica: Forced Conse nsus?International Development Research Centre.
59 Henderson , J. (2005), Global Production Networks, competition, regulation and poverty reduction: policy implications,Centre on Regulation and Competition Working Paper Number 115.
i competition
policy is to serve
the developing
nations in meeting
their international
trade objectives
then it must be
applied to trade
between nations.
Deployed in this
way it would
complement the
eorts o South
Arica and otherdeveloping nations
to challenge new
protectionist
measures usually
pioneered by
industrialised
countries.59
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Page 30 Page 31
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