Glossary

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A

Abuse
Abuse is an objective concept relating to the behaviour of an undertaking with a substantive degree of market power which, through recourse to methods different from those which condition normal competition in products or services, harms competition.

The Ordinance mentions two particular examples of abusive conduct:-

  • Predatory behaviour; and
  • Conduct limiting production, markets or technical development to the prejudice of consumers.

However, the categories of abusive conduct are non-exhaustive. Common categories of abusive conducts include:-

  • Exclusive dealing;
  • Margin squeeze;
  • Predatory pricing;
  • Refusal to deal; and
  • Tying and bundling.
Agreement
Agreement includes any agreement, arrangement, understanding, promise or undertaking, whether express or implied, written or oral, and whether or not enforceable or intended to be enforceable by legal proceedings.        

The central component in the concept of agreement is whether there is a meeting of minds or a concurrence of wills between at least 2 parties. The form in which it is manifested is not important so long as it constitutes the faithful expression of the parties’ intention. It is not essential to have direct evidence of express communication. The existence of an agreement can be deduced from the parties’ conduct.

The inclusion of ‘understanding’ in the statutory definition shows that tacit dealings suffice and that there can be an agreement even if there is nothing to prevent either party from going back on it.

The Ordinance provides unless the context otherwise requires, a provision of the Ordinance which is expressed to apply to, or in relation to, an agreement is to be read as applying equally to, or in relation to, a concerted practice and a decision by an association of undertakings (but with any necessary modifications).

Ancillary restraint
If a given operation or activity is not caught by the first conduct rule, due to its neutrality or positive effect in terms of competition, a restriction of the commercial autonomy of one or more of the participants in that operation or activity would not be caught either if: –

  • That restriction is objectively necessary to the implementation of that operation; or
  • That activity and proportionate to the objectives of one or the other.

B

Bid-rigging
There are four basic elements in establishing bid-rigging: – 

  • There is an agreement;
  • The agreement must be made between 2 or more undertakings;
  • There is a submission of, refrainment from submitting or withdrawal of bids or tenders that are arrived at by the agreement; and
  • The agreement is not made known to the person calling for or requesting the bids or tenders at or before the time when a bid or tender is submitted.

Bid-rigging is considered to be serious anti-competitive conduct.

C

Competition rule
Competition rule means: –

  • The first conduct rule;
  • The second conduct rule; and
  • The merger rule.
Conduct rule
Conduct rule means: –

  • The first conduct rule; and
  • The second conduct rule.
Concerted practice
A concerted practice is a form of coordination between undertakings by which, without it having been taken to the stage where an agreement has been concluded, practical cooperation between them is knowingly substituted for the risks of competition. 

The coordination and cooperation between the undertakings do not require the working out of an actual plan, and must be understood in the light of the concept that each economic operator must determine independently the policy which he intends to adopt on the market.  

Although this requirement of independence does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors, it does however strictly preclude any direct or indirect contact between such operators, the object or effect whereof is either to influence the conduct on the market of an actual or potential competitor or to disclose to such a competitor the course of conduct which they themselves have decided to adopt or contemplate adopting on the market.

Conditional rebate
Conditional rebate involves the grant of a rebate to consumers that is conditional on the consumer’s purchasing behaviour. A rebate that is linked solely to the volume of purchases from the manufacturer concerned (quantity rebate), is not, in principle, an abuse. However, a rebate that is conditional on the consumer’s obtaining all or most of their requirement exclusively from the manufacturer (loyalty or fidelity rebate) has the potential to foreclose competition by denying competitors access to the market and therefore can amount to an abuse.

Determination of whether a loyalty or fidelity rebate is abusive requires the analysis of the extent of the undertaking’s market power on the relevant market, the share of the market covered by the rebate, the conditions and arrangements for granting the rebates in question, their duration and their amount and the possible existence of a strategy aiming to exclude competitors that are at least as efficient as the undertaking with a substantial degree of market power.

Counterfactual
Counterfactual refers to the market situation that would have arisen had it not been for the anti-competitive agreement or conduct at issue (‘but for world’).  Counterfactual is usually used to assess the effect of the anti-competitive agreement or conduct. To show that competition has in fact been prevented or restricted or distorted to an appreciable extent, the competition in question must be understood within the actual context in which it would occur in the absence of the anti-competitive agreement or conduct at issue.

D

Decision by association of undertakings
Examples of decision by an association of undertaking includes decisions binding upon the members of an association of  an undertaking, rules and regulations of the association of  an undertaking, codes of conduct and recommendation, whatever its legal status, if it constitutes the faithful reflection of a resolve on the part of an association of undertakings to coordinate the conduct of its members’ on the market in accordance with the terms of the recommendation.

E

Exclusion involving agreements enhancing overall economic efficiency
The first conduct rule does not apply to any agreement that enhances overall economic efficiency. There are 4 conditions to be satisfied for this exclusion to apply: –

  • The agreement generates efficiencies;
  • It allows consumers a fair share of the resulting benefit;
  • It does not impose restrictions that are not indispensable to the attainment of the objectives; and
  • It does not afford the undertakings concerned the possibility of eliminating competition.

Although not provided in the Ordinance, the Commission does not rule out the possibility that this efficiency exclusion can also apply to the second conduct rule.

Exclusion involving compliance with legal requirements
The conduct rules do not apply to any anti-competitive agreement made or conduct engaged in for the purpose of complying with a legal requirement, which means a requirement that is: –

  • Imposed by or under any enactment in force in Hong Kong; or
  • Imposed by any national law applying in Hong Kong.
Exclusion involving services of general economic interest
The conduct rules do not apply to an undertaking entrusted by the government with the operation of services of general economic interest in so far as the conduct rule would obstruct the performance, in law or in fact, of the particular tasks assigned to it.
Exclusion involving mergers
The conduct rules do not apply to agreements or conduct which result in, or agreements if carried out or conduct if engaged in, would result in, a merger.
Exclusion involving agreements of lesser significance
The first conduct rule does not apply to: –

  • An agreement between undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed HK$200,000,000;
  • A concerted practice engaged in by undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed HK$200,000,000; or
  • A decision of an association of undertakings in any calendar year if the turnover of the association for the turnover period does not exceed HK$200,000,000;

Unless the agreement, concerted practice, or decision of an association of undertakings, involves serious anti-competitive conduct.

Exclusion involving conduct of lesser significance
The second conduct rule does not apply to conduct engaged in by an undertaking if the turnover of which does not exceed HK$40,000,000 for the turnover period.
Exclusive purchasing obligation
Exclusive purchasing obligation occurs when an undertaking with a substantial degree of market power ties its purchasers to obtain all or most of their requirements exclusively from the said undertaking.
Exclusive dealing
Exclusive dealing refers to arrangements whereby an undertaking with a substantive degree of market power either require or incentivise its customers to buy all or most of their requirements from the said undertaking. It therefore has the effect of foreclosing competitors by hindering them from selling to customers. Exclusive dealing can take the form of exclusive purchasing obligation or conditional rebate.
Exemption on public policy grounds
The Chief Executive in Council may, by order published in the Gazette, exempt: –

  • A specified agreement or a specified class of agreement from the application of the first conduct rule; or
  • Specified conduct or a specified class of conduct from the application of the second conduct rule.
Exemption to avoid conflict with international obligations
The Chief Executive in Council may, by order published in the Gazette, exempt: –

  • A specified agreement or a specified class of agreement from the application of the first conduct rule; or
  • Specified conduct or a specified class of conduct from the application of the second conduct rule,

If he or she is satisfied that it is appropriate to do so, in order to avoid a conflict between this Ordinance and an international obligation that directly or indirectly relates to Hong Kong.

F

First conduct rule
The first conduct rule prohibits an undertaking from: –

  • Making or giving effect to an agreement;
  • Engaging in a concerted practice; or
  • As a member of an association of undertakings, make or give effect to a decision of the association,

if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.

G

General exclusions from the conduct rules
The following agreements or conduct are excluded from the application of the conduct rules: –

  • Agreements enhancing overall economic efficiency;
  • Compliance with legal requirements;
  • Services of general economic interest;
  • Mergers;
  • Agreements of lesser significance; or
  • Conduct of lesser significance.
Geographical market
The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area.
Group boycott
A collective boycott refers to the joint efforts by a firm or firms to disadvantage competitors by either directly denying or persuading or coercing suppliers or customers to deny relationships the competitors need in the competitive struggle.
Guidelines
The Commission published 6 guidelines under the Ordinance: –

These guidelines are not subsidiary legislation but the Legislative Council must be consulted before the guidelines are issued or amended. They represent the Commission’s views and policies and provide guidance to the public, but have no binding legal effect on the Tribunal or the Hong Kong courts.

H

Horizontal agreement
A horizontal agreement is an agreement made between undertakings at the same level of commercial operation or between competing suppliers of the same product or the same type of product. Horizontal agreements have generally been regarded as more serious in harming competition than vertical agreements.

I

Infringement notice
If the Commission has reasonable cause to believe that: –

  • Either a contravention of the first conduct rule (and the contravention involves serious anti-competitive conduct) or a contravention of the second conduct rule has occurred; and
  • The Commission has not yet brought proceedings in the Tribunal in respect of the contravention,

The Commission may, instead of bringing proceedings in the Tribunal in the first instance, issue an infringement notice to the person against whom it proposes to bring proceedings, offering not to bring those proceedings on condition that the person makes a commitment to comply with requirements of the notice.

L

Leniency agreement
The Commission may, in exchange for a person’s cooperation in an investigation or in proceedings under the Ordinance, make a leniency agreement with the person, on any terms it considers appropriate, that it will not bring or continue proceedings for a pecuniary penalty in respect of an alleged contravention of a conduct rule. The Commission must not, while a leniency agreement is in force, bring or continue proceedings for a pecuniary penalty in breach of that leniency agreement.

    M

    Margin squeeze
    There is a margin squeeze when an undertaking with a substantial degree of market power on the upstream market is also active on the downstream market and the difference between the retail prices charged by an undertaking and the wholesale prices it charges its competitors for comparable products is negative, or insufficient to cover the product-specific costs to the undertaking of providing its own retail products on the downstream market. The abusive nature of such conduct derives from the unfair nature of the price spread and the fact that the undertaking’s wholesale products are indispensable to enabling a competitor to enter into competition with the undertaking on the downstream market in retail access products.
    Market
    The main objective of defining a market is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings’ behaviour and of preventing them from behaving independently of effective competitive pressure. Market definition has 3 dimensions: –

    • The relevant product market;
    • The relevant geographical market; and
    • The relevant temporal market.

    A frequently used method of assessment of the relevant market is to use the ‘SSNIP’ test.

    Market sharing
    Market sharing agreements are agreements between competitors to divide or allocate markets (geographic markets or product markets). Common examples include allocating customers by geographical area or product types, agreeing not to poach each other’s existing customers and refraining from entering each other’s market. Market sharing agreements are considered to be serious anti-competitive conduct.
    Merger rule
    The merger rule prohibits undertakings from carrying out mergers that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. A merger takes place if: –

    • 2 or more undertakings previously independent of each other cease to be independent of each other;
    • 1 or more persons or other undertakings acquire direct or indirect control of the whole or part of 1 or more other undertakings. The creation of a joint venture to perform, on a lasting basis, all the functions of an autonomous economic entity also constitutes a merger within this category; or
    • An acquisition by 1 undertaking (“Acquiring Undertaking”) of the whole or part of the assets (including goodwill) of another undertaking (“Acquired Undertaking”) has the result that the Acquiring Undertaking is in a position to replace the Acquired Undertaking, or to substantially replace the Acquired Undertaking, in the business or in part of the business concerned (as the case requires) in which the Acquired Undertaking was engaged immediately before the acquisition.

    At present, the merger rule only applies to mergers involving carrier licence holders within the meaning of the Telecommunications Ordinance (Cap 106).

    O

    Oligopoly

    An oligopoly is a market structure with a small number of firms, who realize their interdependence in each others’ market behaviours.  Due to such mutual awareness, each firm takes into account the pricing behaviour of the others and as a result the firms have little incentive to compete with each other on price

    Output limitation
    Output limitation means competitors agreeing to restrict the volume or type of their supply or production capacity. Output limitations agreements are considered to be serious anti-competitive conduct. 

    P

    Predatory pricing
    Predatory pricing occurs when an undertaking with a substantial degree of market power deliberately incurring losses in the short-run by lowering its prices to a level that other suppliers cannot compete and are therefore forced to leave the market. Once the competitors are excluded, the undertaking can then increase their prices to monopoly levels.

    Setting prices below average variable costs (ie, those which vary depending on the quantities produced) is prima facie abusive, since such an undertaking ‘has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position, since each sale generates a loss.

    On the other hand, setting prices below average total costs (ie, fixed costs plus variable costs), but above average variable costs, is abusive if they are determined as part of a plan for eliminating a competitor.

    Price fixing
    Price fixing occurs when the price is directly or indirectly fixed. Price includes any determining components of the price such as pricing formulas, discounts, rebates, allowance, promotions or credit terms. Price fixing agreements are considered to be serious anti-competitive conduct.
    Product market
    The relevant product market includes products which are substitutable or sufficiently interchangeable with the product in question, not only in terms of their objective characteristics, by virtue of which they are particularly suitable for satisfying the constant needs of consumers, but also in terms of the conditions of competition and/or the structure of supply and demand of the market in question.

    R

    Refusal to deal
    Refusal to deal happens when, an undertaking with a substantial degree of market power in an upstream market refuses to supply a competitor in a neighbouring or downstream market with products which are indispensable to carrying on the competitor’s business, provided that: –

    • The refusal is likely to eliminate all competition on the market on the part of the person requesting the product;
    • The refusal is incapable of being objectively justified; and
    • The product is indispensable to carrying on the competitor’s business, in the sense that there is no realistic possibility of creating a potential alternative.
    Restriction by effect
    An anti-competitive agreement or conduct can be regarded as having the effect of harming competition where the existence of the agreement or conduct have a negative impact on competition within that market. The effect is determined using a counterfactual analysis, which essentially compares the impact of the agreement or conduct on existing and potential competition and the competition situation in the absence of the same.

    If an agreement/conduct has more than one effect, it has the effect of preventing, restricting or distorting competition.

    Restriction by object
    An anti-competitive agreement or conduct can be regarded as having the object of harming competition where it reveals a sufficient degree of harm to competition, so that there is no need to examine its effects, as the same can be regarded, by its very nature, as being harmful to the proper functioning of competition 

    There must however be sufficiently reliable and robust experience for the view to be taken that that it is by its very nature, harmful to the proper functioning of competition.

    In order to determine whether it reveals a sufficient degree of harm to competition to be considered a restriction of competition by object, regard must be had to the content of its provisions, its objectives and the economic and legal context of which it forms a part. When determining that context, it is also necessary to take into consideration the nature of the goods or services affected, as well as the real conditions of the functioning and structure of the market or markets in question.

    Although the parties’ intention is not a necessary factor in determining whether an agreement or conduct is restrictive, there is nothing prohibiting the same from being taken into account.

    The concept of restriction of competition ‘by object’ must be interpreted restrictively.

    S

    Second conduct rule
    The second conduct rule prohibits undertakings with substantial degree of market power in a market from abusing that power by engaging in conduct that has the object or effect of harming competition in Hong Kong.

    There are 2 examples of abuse provided in the Ordinance, namely predatory behaviour towards competitors and limiting production, markets or technical development to the prejudice of consumers. Other common examples of abuse include tying and bundling, margin squeeze, refusal to deal, and exclusive dealing. 

    Section 41 notices
    For the purpose of conducting an investigation, the Commission may by notice in writing require any person to produce to it any document or a copy of any document, or to provide it with any specified information, relating to any matter it reasonably believes to be relevant to the investigation.

    According to the Guideline on Investigations published by the Commission, section 41 notices will often include questions or other requests to provide the Commission with information in a particular format. This may involve the creation of new documents, such as: –

    • Written responses to Commission questions set out in the section 41 notice;
    • Lists of customers and suppliers;
    • Contact details of relevant persons;
    • Organisational diagrams and charts; and
    • Data extracted in various formats.
    Section 42 notices
    For the purpose of conducting an investigation, the Commission may, by notice in writing, require any person to attend before the Commission, at a time and place specified in the notice, to answer questions relating to any matter it reasonably believes to be relevant to the investigation.

    According to the Guideline on Investigations published by the Commission, any person required by the Commission to appear may be accompanied and represented by a legal adviser admitted to practice law in Hong Kong and, to the extent required by relevant professional regulations or rules of conduct, holding a current Hong Kong practising certificate. Further, recordings and any transcripts made of the interview will be provided to the person interviewed upon request when practicable. These recordings and transcripts will be subject to the person’s confidentiality obligations under the Ordinance.

      Section 48 warrant
      The Commission may apply to a judge of the Court of First Instance for a warrant authorising a person specified in the warrant, and any other persons who may be necessary to assist in the execution of the warrant, to enter and search any premises if there are reasonable grounds to suspect that there are or are likely to be, on the premises, documents that may be relevant to an investigation by the Commission.

      According to the Guideline on Investigations published by the Commission, the premises specified in the section 48 warrant need not relate to the party under investigation. For example, the premises may belong to the investigated party’s supplier or customer. Further, the Commission is not required by the Ordinance to wait for a person’s legal advisers to attend the premises before commencing its search. However, where parties have requested that their legal advisers be present during a search, and there is no in-house lawyer already on the premises, Commission officers will wait a reasonable time for external legal advisers to arrive.

        Serious anti-competitive conduct
        Serious anti-competitive conduct means any conduct that consists of any of the following or any combination of the following: –

        • Fixing, maintaining, increasing or controlling the price for the supply of goods or services;
        • Allocating sales, territories, customers or markets for the production or supply of goods or services;
        • Fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services; and
        • Bid-rigging.

        If the Commission has reasonable cause to believe that a contravention of the first conduct rule has occurred and the contravention does not involve serious anti-competitive conduct, the Commission must, before bringing proceedings in the Tribunal, issue a warning notice to the relevant undertaking. In case of serious anti-competitive conduct, the Commission can bring proceedings directly to the Tribunal without issuing a warning notice.

        The general exclusion involving agreements of lesser significance does not apply in cases of serious anti-competitive conduct.

        Single and continuous infringement
        Where there are 2 or more agreements and/or concerted practices, the same would be regarded as a single and continuous infringement if the following conditions are met: –

        • The agreements and/or concerted practices share an overall plan pursuing a common objective;
        • Each undertaking intends to contribute by its own conduct to the common objective pursued by all the participants; and
        • Either each undertaking is aware of the offending conduct of the other participants in pursuit of the same objective or each undertaking could reasonably have foreseen that offending conduct would occur and was prepared to take the risk that it would.
        Single economic unit
        The first conduct rule does not apply to conduct between entities where they constitute a single economic unit. The question has arisen in the cases with regard to a parent company and its subsidiary, a principal and his agent, and a firm and its commercial representative. Various factors may be relevant to the question and different factors may attract different weight in different types of situations. Thus, in the context of a parent and subsidiary, an important factor is whether the parent exercises ‘decisive influence’ over the relevant activities or policies of the subsidiary. In relation to principal and agent, where the agent bears no financial risk, even if it might look like a separate entity, it is to be treated as an ‘auxiliary organ’ of the principal. On that basis, arrangements such as the principal dictating pricing to the agent are not caught as price fixing agreements because they are between two parts of the same undertaking.
        SSNIP test
        SSNIP stands for a ‘small but significant non-transitory increase in price’. The test considers whether on the assumption that there was a monopoly in the supply of the focal product, would a small but significant (e.g. 5–10%) non-transitory increase in price lead sufficient purchasers to switch to another product such that the increase was not profitable because of the loss in sales?” If it would, then that other product is to be included in the product market, and the exercise is repeated, incrementally.
        Substantial degree of market power
        Factors determining whether an undertaking has a substantial degree of market power include (but are not limited to): –

        • The market share of the undertaking;
        • The undertaking’s power to make pricing and other decisions;
        • Any barriers to entry to competitors into the relevant market; and
        • Any other relevant matters specified in the guideline on the second conduct rule, i.e. countervailing buyer power, bidding markets, vertical integration and capacity restraints.

        T

        Temporal market
        Time is sometimes a relevant factor in defining the market. This is because competitive conditions may vary from time to time. Examples of how timing can affect markets include the same service during peak versus off-peak services and the same product during summer versus winter months.
        Turnover
        Turnover of an undertaking means the total gross revenues of the undertaking whether obtained in Hong Kong or outside Hong Kong.

        Where an association of undertakings is concerned, turnover means the total gross revenues of all the members of the association whether obtained in Hong Kong or outside Hong Kong.

        Tying and bundling
        Tying occurs when the undertaking with a substantial degree of market power is prepared to supply the product in respect of which it has a substantial degree of market power (“Tying Product”) only if the customer also agrees to buy another product (“Tied Product”). The undertaking may not have a substantial degree of market power in the supply of the Tied Product, the mischief often being the attempt to extend its market strength into the market for the Tied Product, to the detriment not only of its customer but also of its competitors in the supply of the Tied Product.

        Bundling is similar to tying but refers more strictly to the case where products are effectively offered only as a package, whereas for tying the undertaking may supply the Tied Product (but not the Tying Product) on its own.

         

        U

        Undertaking
        Undertaking means any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity.

        V

        Vertical agreement
        A vertical agreement is an agreement made between undertakings at a different level of commercial operation. Vertical agreements have generally been regarded as less serious in harming competition than horizontal agreements.

        W

        Warning notice
        If the Commision has reasonable cause to believe that a contravention of the first conduct rule has occurred; and the contravention does not involve serious anti-competitive conduct, the Commission must, before bringing proceedings in the Tribunal against the undertaking whose conduct is alleged to constitute the contravention, issue a warning notice to the undertaking. After the expiry of the warning period, if the Commission has reasonable cause to believe that the contravening conduct continues or is repeated after the expiry, the Commission may bring proceedings in the Tribunal against the contravening undertaking in respect of the contravening conduct.
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