Report on Developments and Enforcement of Competition Policy and
Laws in the Western Hemisphere
Submitted by the OAS Trade Unit to the FTAA Working Group on Competition Policies
Costa Rica: Report on Developments and Enforcement of Competition Laws and Policies (1995 - 1996)
This report seeks to outline briefly the features of some of the main cases settled by the Committee for Promotion of Competition in 1995 and 1996. The period covered by this report coincides with the first two years of activities by the Commission for Promotion of Competition. Therefore the case law on this matter is evolving, and it is far from reflecting consolidated interpretations. In this same regard, it is important to bear in mind that the Commission is a decentralized public administrative agency, and therefore the resolutions included in this report reflect jurisprudence at the administrative rather than the judicial level.
I. Recent Developments or Changes in Law or Policies
Costa Rica's legislation on competition consists of: (i) article 46 of the Constitution and Law No. 7472 of December 20, 1994 and (ii) the Law on Promotion of Competition and Effective Defense of Consumers, published in the Official Journal La Gaceta on January 19, 1995. Also in effect for contingencies are (i) Law 6227 of May 2, 1978, General Law on Public Administration, published in the Official Journal La Gaceta on May 30; (ii) Executive Decree No. 25235-MEIC of January 25, 1996, Regulations for the Law on Promotion of Competition and Effective Defense of Consumers, published in the Official Journal La Gaceta on July 1, 1996; and (iii) Law No. 3367 of March 12, 1966, Law Regulating Jurisdiction for Suits under Administrative Law, published in the Official Journal La Gaceta on April 17, 1966. The last change in legislation on competition was the Regulations of July 1, 1996, which repealed the former Regulations of September 4, 1995. At the present time there is no change at all proposed for legislation on competition.
II. Enforcement of Competition Laws and Policies
A. Anticompetitive Practices
The Committee for Promotion of Competition is responsible for preventing and sanctioning absolute and relative monopolistic practices as well as unlawful mergers, at the urging of a party or through an official investigation.
In 1995, four cases of relative monopolistic practices were settled through the lodging of complaints, and two cases of absolute monopolistic practices were settled through official investigations. As of November 1996, three cases of relative monopolistic practices had been settled through the lodging of complaints, and two cases of absolute monopolistic practices had been settled, one of them through an official investigation. Currently there are 30 active cases.
2. Significant Cases
a. Absolute Monopolistic Practices
1. CPC vs. Costa Rican Association of Parking and Related Enterprises. File 16-95, Resolution of October 24, 1995
Facts: The Costa Rican Association of Parking and Related Enterprises published an announcement of maximum rates suggested for its members.
Analysis: In consideration of the aforementioned announcement, and in view of its duty to prevent and constrain activities that would constitute impediments or problems for free competition, the Committee for Promotion of Competition advised the aforementioned association that the practice of fixing, raising, agreeing to or manipulating purchase or sale prices for which goods or services are offered or demanded by economic agents that are competing with each other is an absolute monopolistic practice punishable by heavy fines in accordance with the Law on Promotion of Competition and Effective Defense of Consumers (article 11 paragraph a) and 25 of the Law).
The Committee recognizes and is pleased with the existence of private chambers and associations constituted to defend the common interests of business groups, to improve the quality of the produces or services they offer, and to ensure compliance with ethical standards in the activity in question. Nevertheless, it notes that the self-regulatory task of these groups cannot go as far as price fixing, manipulation or recommendations because this goes against the law in reference, seriously hampers the process of free competition in the markets, and is detrimental to consumers.
Decision: In view of the preceding considerations, it was asked that the pertinent corrective measures be taken and that they be made known to the Committee.
2. CPC vs. Cinco Esquinas Ice Factory, Mazú Ice Factory, Hielo Industrial La Cruz, La Uruca Ice Factory, El Virilla Ice Factory, and San Joaquín de Flores Ice Factory. File 08-95, Resolution of November 28, 1995
Facts: A group of ice manufacturers published an announcement in a nationally circulated daily newspaper, in which it announced to the public its new prices, which were the same for all the signatory firms. The Committee decided officially to initiate an investigation and to open a proceeding for establishing the existence or nonexistence of monopolistic practices.
After the pertinent evidence had been gathered, it was determined that such fixing also occurred in practice. The businesses investigated did not deny the price fixing. Nevertheless, they alleged that their intention was not monopolistic and that they did not have substantial strength in the market concerned.
Analysis: The practice of fixing prices, since it is an absolute monopolistic practice, does not require any demonstration of the existence of substantial strength in the market concerned. On the other hand, the lack of such a dominant position, although it does not excuse the responsibility of the agents accused, can indeed be an extenuating factor in the penalty to be imposed. These reasons, together with the offenders' limited ability to pay, cause their penalty to be reduced.
Decision: In view of the foregoing factors, the Committee for Promotion of Competition declared the price fixing investigated null as a matter of law, ordered the businesses penalized to stop such practice, recommended an independent publication by each of them informing the public of the new prices, and fined the businesses the equivalent of one minimum wage.
3. Metalchem, S. A. vs. Químicas Holanda, S. A. and Transmerquin, S. A., File 3-96, Resolution of May 14, 1996
Facts: A chemical distribution company lodged a complaint against two other competing companies due to an alleged agreement between those accused to drop prices of caustic soda below the normal value in order to remove the former company from the market (predatory dumping).
The complainant alleged that the corporations accused reached an agreement to reduce prices of the product (sodium hydroxide) slowly, steadily, and with predatory purposes. The complainant asserted that such prices hardly covered fixed expenditures, not to mention financial expenditures, and that the national industry was familiar with the agreements of these two companies, not only at the level of sales prices, but also market allocation. In accordance with the complaint, the aforementioned acts were included under articles 10 and 11 paragraph a) for being absolute monopolistic practices, and article 17 of the Law on Promotion of Competition and Effective Defense of Consumers.
Analysis: The initial information presented by the companies accused did not lead to evidence justifying the opening of an administrative sanctioning procedure. Also, the investigation conducted by the Unit confirmed that the drop in prices by the companies accused was due to the decline in sodium hydroxide prices in the international market. The product's sales prices applied by one of the companies sued were above the product's CIF price. With regard to the alleged agreement between the companies to establish prices, it could be observed that their sales price differences ranged from 0.19% to 9.31%.
Despite the fact that the complainant did not allege relative monopolistic practices by the accused parties, an analysis should be made concerning whether the alleged sale of the product below cost can be included under one of the assumptions established in the Law, specifically in paragraph f) of article 12. This paragraph prohibits the production or marketing of goods and services at prices below their normal value, subject to confirmation of substantial strength in the market concerned by the economic agent, and subject to the fact that the purpose or effect of the practice is or can be undue displacement of other market agents, substantial hindrance of their access, or establishment of exclusive advantages in favor of one or several persons.
The information provided by the companies accused leads to the conclusion that marketing of the product at below cost by one of them is totally discarded. This is not so in the case of the other company accused because here it is actually confirmed that there are sales at below cost. Nevertheless, this behavior cannot be included under paragraph f) of article 12 because it grew out of the company's totally justifiable strategy to decrease its losses in the face of a drop in international prices that led to a trend toward inventories bought at above the actual price. Neither is there evidence that this temporary measure could have been enough to displace unduly the complaint concerning the sodium hydroxide market.
Decision: This complaint is rejected because there is no clear or adequate evidence that the accused corporations' behavior constitutes absolute or relative monopolistic practices, and because the Committee is not competent to take up matters related to acts of unfair competition.
b. Relative Monopolistic Practices
1. Sigma Dam Accesorios Eléctricos de Centroamérica, S. A. vs. Bticino Costa Rica, S. A., File 2-95, Resolution of November 28, 1995
Facts: The company is accused of lowering its products' prices to curtail competition, as it has substantial power in the market concerned. According to the complainant, the party accused committed the following violations: a) manipulating product prices; b) dividing, distributing and imposing market segments; c) imposing exclusive distribution by reason of subject; d) pressuring economic agents; e) offering exclusive advantages; and f) imposing prices on distributors.
In answer to the charge, the company accused asserted that it does not have substantial power over the market concerned, for which reason the accusation made against it that it engages in relative monopolistic practices is improper; that despite the reduction in its products' prices, they are still higher on average than the prices of the company lodging the complaint; that it has not imposed awards or penalties on its distributors, which in practice set their prices in a manner other than that indicated by the price list of the company accused; and that it has not made exclusive distributions by reason of subject, because its distributors also sell the competition's products. Therefore it asks that the complaint be dismissed and that the record be filed.
Analysis: The complainant's allegations of engaging in absolute monopolistic practices are improper in this case because such practices must be carried out with the concerted participation of two or more competitors. No fact or indication assessed in this case points to the possibility that there is any kind of arrangement, agreement, act, contract, convention or combination between the company accused and any other importer, manufacturer or marketer of electrical appliances.
Therefore all that remains is to evaluate the commission of relative monopolistic practices. In this case the following considerations were taken into account to determine substantial power in the market: a) The company accused has nearly an 80% share in the market. This, although it is not the same as power in the market, is a strong indication thereof. b) The market concerned in this case is limited to low-voltage electrical components. c) The possibilities for substitution of the goods are minimal. d) The tariff on electrical components is 14% or 19%, which is very high. e) The distribution channels are highly concentrated.
Decision: Taking as an aggravating factor the indications of intentionality and the way in which circulars have been sent throughout the market, and taking as an extenuating factor the fact that this is the first proceeding in which the law is applied, which causes expectation of certain unfamiliarity with the new rules of the market, and in view of the accused company's strong ability to pay, a fine equivalent to 60 base wages was imposed for imposition of the resale price, and a fine equivalent to 40 base wages was imposed for imposition of conditions to acquire products normally offered to third parties.
2. Asociación Costarricense de Expendedores de Combustible vs. Shell de Costa Rica, S. A., File 10-95. Resolution of November 14, 1995
Facts: An association of small dealers lodges a complaint against a fuel distribution company for conducting promotional raffles of automobiles to attract more customers. In this way, according to the complainant, the company accused is incurring substantial monetary losses, thereby engaging in monopolistic practices and consolidation to the competition's detriment. In its opinion, continuation of these practices could cause displacement of some competitors from the market.
Analysis: The complaint's mention of absolute monopolistic practices is of no interest because such practices are assumed to involve concerted conduct by two or more competitors among themselves. No fact or indication assessed in this matter points to possible confirmation of an agreement, contract or convention between the company accused and another fuel dealer.
To determine the existence of relative monopolistic practices it is necessary to assess the existence of substantial power in the market concerned. In this case, the number and location of the accused company's and other companies' service stations were determined. Thus a relevant market of 68 stations was established in which the corporation accused, with 11 stations, had a 16% impact.
In principle, promotions of the kind the company accused is currently conducting are not contrary to legislation on competition. They are included among the practices recognized as valid in a policy on competition, even though at times they can be hard and difficult to face by other competitors due to their being small or inefficient. These promotions' basic purpose is to move the individual seller's demand schedule to the right and to make it more elastic. This will enable him to sell a larger quantity at the same price because here price, the main factor in market competition, is frozen due to pricing stemming from the state's power. Each seller tries to take over the competitors' market by means of these promotions, rather than lowering prices, which would be the normal means of competition. When a firm conducts a clever and successful promotional program, some time will usually elapse before the rivals are able to launch similar programs, and during this interval there can be benefits. Promotion at an exaggerated cost causing the company to incur losses, and promotion for an unlimited period, are what would be unacceptable from the standpoint of legislation on competition. This would be the same as the sanctionable practice known as "disaster prices." From this standpoint it is even acceptable for companies temporarily to run the risk of setting up promotions that, in the event they are unsuccessful, will cause losses. What is unacceptable is for them to decide to continue such promotions even though they involve negative returns for an unlimited or unreasonable time.
Decision: A regular sanctioning proceeding to establish the actual truth of the facts that will at times become sanctionable conduct under the Law on Promotion of Competition and Effective Defense of Consumers is ruled out due to lack of indications leading to presumption of an illegal and uncompetitive interest by the company accused with implementation of a promotional program.
B. Mergers and Economic Concentrations
In 1995 and 1996 only one complaint concerning a consolidation was received, and therefore there is no sample that could be representative of administrative jurisprudence on this specific matter.