Law and Economics in Japanese Competition Policy [1st ed.] 978-981-13-8187-4;978-981-13-8188-1

Table of contents :
Front Matter ....Pages i-xiv
Framework of Japanese Antimonopoly Act (Koki Arai)....Pages 1-5
Front Matter ....Pages 7-7
Private Monopolization (Koki Arai)....Pages 9-38
Damages Calculations in Private Monopolization (Koki Arai)....Pages 39-48
Front Matter ....Pages 49-54
Cartel: Indirect Evidence in Japanese Cartel Control (Koki Arai)....Pages 55-71
Construction Industry and Competition Policy (Koki Arai)....Pages 73-91
Front Matter ....Pages 93-93
Regulation of Distribution and Trade Practices (Koki Arai)....Pages 95-99
Exclusive Contracts When Incumbent Can Establish Direct Retailer (Koki Arai)....Pages 101-111
Abuse of Superior Bargaining Position (Koki Arai)....Pages 113-126
Front Matter ....Pages 127-127
Outline of Merger Regulation (Koki Arai)....Pages 129-132
Merger Assessment in Japan: The Declining Importance of Market Shares (Koki Arai)....Pages 133-147
Ex-post Examination of Mergers: Effects on Retail Prices (Koki Arai)....Pages 149-168
Front Matter ....Pages 169-171
Administrative Performance and Legitimacy: An Elaboration Likelihood Approach to Competition Authorities in Japan and the United States (Koki Arai)....Pages 173-194
International Aspect of the Antimonoply Act (Koki Arai)....Pages 195-196
Next Stage of Japanese Competition Policy (Koki Arai)....Pages 197-199
Correction to: Next Stage of Japanese Competition Policy (Koki Arai)....Pages C1-C1

Citation preview

Koki Arai

Law and Economics in Japanese Competition Policy

Law and Economics in Japanese Competition Policy

Koki Arai

Law and Economics in Japanese Competition Policy

123

Koki Arai Faculty of Management and Administration Shumei University Yachiyo, Chiba, Japan

ISBN 978-981-13-8187-4 ISBN 978-981-13-8188-1 https://doi.org/10.1007/978-981-13-8188-1

(eBook)

© Springer Nature Singapore Pte Ltd. 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

This book is the product of many discussions, conversations, and exchange of views with so many people. However, I received an astounding number of intellectual suggestions for writing this book. Therefore, I unfortunately cannot list all the people here. Some of the chapters in this book were written with the effort of co-authors. I am indebted to Stephen Harris, Emi Morimoto, Hirosh Kitamura, Misato Sato, and Sayako Takizawa, at the time of writing each paper. I wish to thank them for revising and updating our papers and for agreeing to include such works in this book. From the bottom of my heart, I want to thank Akiko Hasegawa, Shuya Hayashi, Makoto Ikeya, Toshifumi Kuroda, Noriaki Matsushima and Naoki Ohkubo for regularly exchanging views with me on the debate on Japanese Antimonopoly Law and competition policy, each of whose discussions helped in formulating this book. In addition, I would like to thank Koki Kawashima, President and Chairman of Shumei University, where I belong, and all of my colleagues at the Faculty of Management and Administration. I am also grateful to my colleagues and friends at the Japanese Fair Trade Commission and Osaka University, which I used to be a part of. I would like to express my sincere appreciation for all the help they have given me. Of course, the views in this book are the author’s own and do not represent those of any organization. I would also like to express my gratitude to the editorial team, Yutaka Hirachi, Shinko Mimura, and Chandra Sekaran Arjunan for their dedication. Furthermore, I highly appreciate the contributions of Moriki Hosoe, who was the first to give me this opportunity. Finally, I would like to dedicate this book to my family. This work was supported by JSPS KAKENHI Grant Numbers 16K03649 and 19K01610. This research was supported by a grant-in-aid from Zengin Foundation for Studies on Economics and Finance. This research was also supported by a grant-in-aid from The Telecommunications Advancement Foundation.

v

Introduction

Competition policy is an exciting field of study. Competition policy, a study field of industrial organization theory and competition law/policy, explores the theory and reality of the activities of a company, which is one of the basic actors of economic activity in the world. It also considers policy recommendation and the formulation of management strategy. New developments can be seen daily in research methods, research subjects, and application fields. Moreover, the area of competition policy deals with market competition as the main subject and researches the system, operation, and results of competition laws. This book describes the current situation of Japanese Antimonopoly Act and comments on the author’s research results based on theoretical research and empirical analysis in the field of industrial organization theory. In principle, readers of this book are assumed to be those who are interested in Japanese Antimonopoly Law. The author is expected to be a reader who has studied microeconomics and industrial organization theory and learned the basics of statistics and econometrics. In addition, this book would be an easy read for individuals who want to study similar fields and wish to understand how to analyze Japanese Antimonopoly Law, competition policy, and empirical industrial organization theory. Moreover, this book would be suitable for researchers in other fields. This work includes viewpoints that can guide data processing personnel, marketing personnel, and policy makers, especially those involved in competition policy and antimonopoly law. The author believes that this book will introduce Japan’s competition policy to the country and the rest of the world. In the course of competition policy research, while there is an approach between law and economics, one that deepens analysis by each research method, and in addition to (i) theoretical viewpoints, (ii) historical perspective, and (iii) international perspective, is apparently needed. First, in order to analyze things, it is important to have a theoretical view. From the perspective of law, the accumulation of legal systems and precedents and of research results has progressed in each area of antitrust/competition/antimonopoly law. Furthermore, in the field of economics, economic analysis in various fields has developed from the economics of industrial organization theory and regulation vii

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Introduction

economics. In the conduct of research, scholars must pay attention to these concerns and take advantage of the accumulation of discussions in such fields. Second, the important things to analyze the situation is a historical point of view. In the formulation of laws and policies, backgrounds, events, and the interests of each party involved are required. For an analysis of this process, one must carefully look at the cause-and-effect relationship in addition to abstracting theoretical analysis. The main movement mechanism must be identified, and the policy for dealing with issues has to be considered. Third, the important things to analyze the situation is an international point of view. When formulating laws and policies, one may identify internationally leading models. In addition, there may be a need to formulate and change policies due to international needs, and in some cases, policies may be launched to lead international relations. In particular, international cooperation in the field of antitrust/competition/antimonopoly law has made remarkable progress in recent years. The perspective of international comparison is not only the current state of affairs and the level of comparison, but also the meaning of the policy’s spread, such as how policy effects actually occur. A deep discussion based on the kind of arguments made in the policy formulation should be analyzed. Thus, for those who wish to study antimonopoly law and economics with reality always in mind, being able to elucidate the mechanism of policy and theoretically analyze it would be a pleasure. In addition, a researcher can go beyond mere analysis and conduct research that goes into concrete measures, such as interpretation guidelines and policy recommendations. Thus, being able to do research that faces actual social and economic issues while considering the implications of theory would likewise be desirable. In doing so, research can be more closely linked to reality, if it is possible to explore theoretically based, practical legal frameworks by using the law and economics research methods. This book is based on papers I have written on empirical analysis of competition policy and industrial organization theory and is structured in a manner that allows for updating and detailing as appropriate. Some of the methods were developed with as much detail as possible, and some are described in a more in-depth manner than in their original papers. However, some of the original results and implications have been omitted. For this reason, readers of this book should consider touching on the analysis results in the original papers. Doing so will also make one feel more realistic about their research. For this reason, by understanding the methods in this book, interpreting the original papers, and conducting analyses, researchers of any kind of thinking can learn Japanese Antimonopoly Law and competition policy. The structure of this book is as follows: Chapter 1 entitles Framework of the Japanese Antimonopoly Act, this section provides an overview of, and the purpose, history, and key terms used in, the Japanese Antimonopoly Act. The book is subsequently divided into five parts, namely Part I (Private Monopolization), Part II (Cartel), Part III (Regulation of Unfair Trade Practices and Abuse of Superior Bargaining Position), Part IV (Merger), and Part V (Enforcement and Organization).

Introduction

ix

In Part I (Private Monopolization), Chap. 2 gives a detailed explanation of private monopoly, and Chap. 3 performs a case study of private monopoly damages. These chapters detail not only explanations about the requirements and commentaries regarding the precedents, but also the way of thinking about the calculation of damages based on the actual case. Consequently, Japanese private monopoly regulation can be grasped from various aspects. In Part II, the concept of cartel regulation is introduced. In Chap. 4, indirect evidence supporting the existence of cartels is explored. Then, Chap. 5 shows a case study of bid rigging in the construction industry. These chapters also explain the principles of unreasonable restraint of trade in Japanese Antimonopoly Law, the nature of regulations, and developmental thinking. Part III is about unfair trade practices including the abuse of superior bargaining position. First, the efforts of Japanese competition authorities for distribution are explained, and then, the distribution based on these efforts is discussed. In Chap. 7, a theoretical analysis is conducted for one of the aspects of the distribution. In Chap. 8, the abuse of superior bargaining position is explained in terms of requirements, guidelines, and recent cases. Theoretical economic analysis, legal thinking, and consideration are made about the efforts of competition authorities over practices and restrictions in business relations. In Part IV (Merger), Chap. 9 gives an overview of Japan’s merger control, and Chap. 10 describes the country’s merger restrictions. Chapter 11 is an empirical analysis of ex post facto verification of the merger behavior of business operators. For example, these chapters explain that the merger rules in Japan are not merely share-based, uniform, and rigid regulations, but are strict and competitive-oriented regulations that are based on the actual conditions of competition in the market. Part V, which is about enforcement and organization, first describes Japan’s competition authority, the Japan Fair Trade Commission, and its enforcement and organization. Then, Chap. 12 analyzes multifaceted execution power as a concept that is keyed by legitimacy. Chapter 13 deals with the idea of foreign transactions in recent Japanese Supreme Court cases. Finally, Chap. 14 concludes this book by proposing issues that need to be addressed by future competition policy in Japan. It shows simple and effective measures that are based on the analyses in the previous chapters. The data on which the analyses are based is the collection of aggregate data published through several means. Therefore, the data adopted in this book is different from the product range, etc., which were recognized in the actual cases, and the analyses in this book should not be used as evidence of a trial or as a trial. This document must instead be used as a reference for grasping the general tendency of, and finding problems in, such research methods and for presenting research results in the field of antimonopoly law. All opinions in this book are the author’s own and not of the organization to which the author belongs or used to belong. By clarifying the analysis methods discussed in this book, additional people can perform analyses, such as a business operator working with cartels who aims to adjust the indicators used for analysis to create the impression that cartels do not exist. Negative effects may also occur. However, most of the analysis methods that

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Introduction

are considered in this book will be applied for practical use in the future. In case a concern arises in the future about the occurrence of fraudulent methods after a practical use of the analysis methods in this book, a response may have to be developed. Meanwhile, there is a possibility that the deterrence effect will have a certain positive effect. Therefore, please enjoy this analysis and research from the perspective of law and economics about the exciting law and economics in Japanese competition policy.

Contents

1

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1 1 1 2 3 3 3 4 4

Private Monopolization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Overview of the AMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Requirements of Private Monopolization . . . . . . . . . . . . . . . . . 4 The 2009 AMA Amendment and the JFTC Exclusionary Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Nipro, Intel, and Usen and Nippon Network . . . . . . . . . . . 6 NTT East case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 A Brief Comparison of Japan’s Law of Private Monopolization with USA and EU Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 JASRAC Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Damages Calculations in Private Monopolization . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Rules and Facts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 39 40

Framework of Japanese Antimonopoly Act . . . . . . . . 1 Economic Fundamentals of Competition Law . . . . . . 2 Purpose of the Antimonopoly Act . . . . . . . . . . . . . . 3 History and Position of the Antimonopoly Act . . . . . 4 Framework of the Antimonopoly Act . . . . . . . . . . . . 5 Basic Terms and Concepts of the Antimonopoly Act 5.1 Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Public Interests . . . . . . . . . . . . . . . . . . . . . . . .

Part I 2

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Private Monopolization

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3 Model Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Discussion and Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part II

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Cartel

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Cartel: Indirect Evidence in Japanese Cartel Control . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Definition and Proof of Communication of Intention . 3 Proof Related to Communication . . . . . . . . . . . . . . . 4 Reporting Parallel Price Increases . . . . . . . . . . . . . . 5 Case Studies in Japan . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Construction Industry and Competition Policy . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Institutional Insight into Japanese Competition Policy . . 3 Japanese Public Procurement and Construction Industry 4 Bid-Rigging in Price . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Effect of Firm Entry . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part III 6

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Regulation of Unair Trade Practices and Abuse of Superior Bargaining Position

Regulation of Distribution and Trade Practices . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A Way of Thinking About the Legal and Illegality Judgment Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Procompetitive Effect That Can Be Caused by Vertical Restriction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Influential Enterprises in the Market . . . . . . . . . . . . . . . . . . . 5 Resale Price Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Non-price Ristricted Conduct . . . . . . . . . . . . . . . . . . . . . . . . 7 Economic Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exclusive Contracts When Incumbent Can Establish Direct Retailer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Two-Part Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Single Exclusive Offer . . . . . . . . . . . . . . . . . . . . . . . 3.2 Two Exclusive Offers . . . . . . . . . . . . . . . . . . . . . . . .

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4 Linear Wholesale Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 8

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Outline of Merger Regulation . . . . . . . . . . . . . . . . . . . . . . 1 Merger Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Limitation on Shareholding of Company . . . . . . . . . . . . 3 Business Combination Guidelines . . . . . . . . . . . . . . . . . 4 Notification/Reporting Obligation, Advance Consultation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Advance Consultation . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Outline of This Part . . . . . . . . . . . . . . . . . . . . . . . . . . .

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129 129 130 131

Abuse of Superior Bargaining Position . 1 Introduction . . . . . . . . . . . . . . . . . . . 2 Some Levied Cases . . . . . . . . . . . . . . 3 Similarities . . . . . . . . . . . . . . . . . . . . 4 Counterparty . . . . . . . . . . . . . . . . . . . 5 Superior Bargaining Position . . . . . . . 6 Abuse . . . . . . . . . . . . . . . . . . . . . . . 7 The Necessity of Orders . . . . . . . . . . 8 Conclusion . . . . . . . . . . . . . . . . . . . .

Part IV 9

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Merger

10 Merger Assessment in Japan: The Declining Importance of Market Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Recent Trends in Merger Assessment . . . . . . . . . . . . . . 2 The Iron Ore Case . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Steel Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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11 Ex-post Examination of Mergers: Effects on Retail Prices 1 Ex-post Examination of Mergers . . . . . . . . . . . . . . . . . . 2 Outline of the Market . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Estimation Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Estimation results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Part V

Contents

Enforcement and Organization

12 Administrative Performance and Legitimacy: An Elaboration Likelihood Approach to Competition Authorities in Japan and the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Relevant Literature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Analysis of Persuasion . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Description of Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Analysis of Japanese Case . . . . . . . . . . . . . . . . . . . . . . . . . . 6 U.S. Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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13 International Aspect of the Antimonoply Act . . . . . . . . . . . . . . . . . 195 14 Next Stage of Japanese Competition Policy . . . . . . . 1 An Increase in the Number of Cases . . . . . . . . . . 2 Growth of the Field . . . . . . . . . . . . . . . . . . . . . . 3 Advocacy, Practice, and Analysis . . . . . . . . . . . . . 3.1 Toward the next stage of competition policy References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 1

Framework of Japanese Antimonopoly Act

1 Economic Fundamentals of Competition Law The present situation has passed through experience, and it has certain rationality. In the situation, the reason why competition is necessary is (i) the function of achieving efficient allocation of resources (maximizing total welfare) through the execution of competition, (ii) the function of attracting innovation to win the competition (stimulation of ingenuity), (iii) the function to transmit and spread private information through the process of competition, and (iv) the function to realize right of freedom to provide freedom of choice. The role of competition law is to realize these necessity and carry out its functions smoothly. Therefore, through the operation of the competition law, to enhance economic growth and to rectify disparities can be aimed. For example, in Japan’s Antimonopoly Act (Act on Prohibition of Private Monopolization and Maintenance of Fair Trade (Act No. 54 of 1947)), EU competition law and the US Antitrust Law, there are differences in cooperation depending on the country, regarding the objectives, the former is the total welfare of society, the latter is consumer welfare; there are also indications that they are different.

2 Purpose of the Antimonopoly Act According to the Antimonopoly Act there is a purpose provision in Article 1 and it is stipulated as follows. Article 1 The purpose of this Act is to promote fair and free competition, stimulate the creative initiative of enterprise, encourage business activity, heighten the level of employment and actual national income, and thereby promote the democratic and wholesome development of the national economy as well as secure the interests of general consumers by prohibiting

© Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_1

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1 Framework of Japanese Antimonopoly Act private monopolization, unreasonable restraint of trade and unfair trade practices, preventing excessive concentration of economic power and eliminating unreasonable restraints on production, sale, price, technology, etc., and all other unjust restrictions on business activity through combinations, agreements, etc.

The restriction content is shown in the former part and the legislative purpose in the latter part. A common opinion relating to the objective is that the purpose of the Antimonopoly Act is “to promote fair and free competition”, and the portion below that is the meaning and existence reason of the competition policy. On the other hand, there is also a view that the ultimate goal of “promote the democratic and wholesome development of the national economy” is important. In addition, some advocate for the development of the national economy as a whole by promoting the profit of producers (consumers), securing equal rights of small businesses and consumers. The position of the precedents is that the direct protection and benefits of the Antimonopoly Act are said to be in the free competitive economic order, which is close to the theoretical view.

3 History and Position of the Antimonopoly Act The Antimonopoly Act of Japan is a regulation that regulates economic transactions that came into force in 1947. After that, active enforcement was not attempted in the period of Japanese high growth (1955–1970); however mainly since the 1990s, aggressive enforcement has been taken. The Antimonopoly Act is an economic law that is the law that governs the relationship of property. It restricts formal freedom and equality for the realization of substantial freedom and equality. Regarding economic freedom in the market, freedom of occupation (freedom of business) etc. are guaranteed by the constitution of Japan. However, as a constraint by public welfare, regarding active governing regulations, it is not unconstitutional unless it is clear that regulation is extremely irrational. The Antimonopoly Act can be positioned as a positive governing regulation trying to realize the free market principle. On the other hand, competition restrictive regulations aimed at active intervention in the market are likely to be constitutional constitution, and the Antimonopoly Act, which is the regulation of competitive restraint acts, is a rule for business execution, rather it is strictly enforced. There is also discussion about losing vested interests by introducing competition against regulations/customs. However, the implementation of such policies can meet the social demands for deregulation, the fact that there is a considerable grace period, the fact that policy change measures are introduced and policy content is sufficiently rational, therefore it is not the target of any government guarantee.

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4 Framework of the Antimonopoly Act The regulation of the Antimonopoly Act is mainly the four pillars. The four main regulations of banning private monopoly, prohibiting unreasonable trade restrictions, prohibiting unfair trade practices and regulating business combination. Besides this, as a method to supplement some of the regulations of prevention of collusive bidding at the initiative of government officials, the misleading representation law, and the subcontracting law, etc. As the composition of the requirements of the Antimonopoly Act, the subject of the violation is said to be “business entity”, etc. In addition, the extension of illegal acts is stipulated with roughly two kinds of requirements. • “Requirements for action” … actions that artificially restrict competition in the market • “Effect requirement” … the effect on the market of the action

5 Basic Terms and Concepts of the Antimonopoly Act 5.1 Enterprise The subjects subject to the Antimonopoly Act are primarily “enterprise” and their definition is stipulated in Article 2, para 1 as follows. Article 2(1) The term ‘enterprise’ as used in this Act means a person who operates a commercial, industrial, financial or other business. Any officer, employee, agent or other person who acts for the benefit of any enterprise is deemed to be an enterprise with regard to the application of the provisions of the following paragraph or of Chap. 3.

Regarding this definition, it is sufficient that it is “an entity who carries out economic activities that repeatedly receive counter-benefits in response to the supply of some economic interests”, and the legal nature of the subject does not matter. Also, if it is an economic project, it is said that it does not matter whether it is for profit or not. There were also claims that doctors and lawyers as professionals are not subject to the Antimonopoly Act as being not a company with a corporate character once, but nowadays there are arguments on the aspects of economic activity such as antitrust law Theories are consistent with theories, cases, and operations even when it is applied. In the case of actors and vocational athletes, it was clarified that when acting as an employee and acting as an independent business with no application of the Antimonopoly Act, it would become a subject or an object of infringement.

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5.2 Competition Under the Antimonopoly Act, regarding competition, as stipulated in Article 2, para 4, the following is stipulated. (4) The term ‘competition’ as used in this Act means a state in which two or more enterprises, within the normal scope of their business activities and without making any material change to the facilities for, or kinds of, such business activities, engage in, or are able to engage in, any act listed in the following items. (i) supplying the same or similar goods or services to the same user (ii) receiving supplies of the same or similar goods or services from the same supplier.

Regarding competition, as to the preliminary stage of considering the substantial restraint of competition in certain trading fields, whether or not it is necessary to individually examine the presence or absence of “competitive relationship” and the presence or absence of “competition” Despite some discussion, how to clarify the requirements and how to proceed with the judgment has been clarified. There, first, look at (1) possibility of supplying products (between suppliers). After that, (2) see if it is a substantial one company designation depending on the taste of consumers. We clarified the necessary conditions and the order of consideration on competition on the supply side and the demand side, and clarified the criteria on the judgment of “competition” and the order of inference is shown. Whether or not the ordering party’s response affects free competition in bidding is that even though it seemed to be problematic in response to orders’ side by long standing practices, the first orders leading to such correspondence It is said that the existence of coordinating act should be a problem.

5.3 Public Interests The main provision of the Antimonopoly Act regulates “certain acts of businesses or business associations” and “the impact on market competition” (private monopoly (Articles 2, 5), unjust restrictive transactions (Articles 2, 6)). Among these provisions there is a wish to say “contrary to the public interest.” As the doctrine, there are views that (1) maintain a free competitive economic order, (2) the benefits of the general national economy including producers and consumers, (3) economic vulnerable people such as small businesses and consumers. As a common opinion, “contrary to the public interests” of the Antimonopoly Act is the maintenance of a free competitive economic order of the market. In the precedent case, in principle, “contrary to the public interest” refers to contrary to the free competitive economic order, which is the direct protection profit, in light of the purpose and purpose of the legislation of the antitrust law and the course of its revision. In the exceptional case which is deemed not substantially contrary to the

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ultimate purpose of the Antimonopoly Act of “to secure the interests of general consumers and promote democratic and healthy development of the national economy.” It should be understood that it should be excluded from the “unfair trade restriction” act referred to in paragraph. In relation to administrative guidance, even when agreement among business operators on price seems to formally violate the antitrust law, even if it seems to be in violation of antitrust law, it was done in accordance with lawful administrative guidance and in cooperation with this. It is explained that it is considerable to understand that the illegality is blocked. Based on this, concerning the relationship between administrative guidance and Antimonopoly Act, the JFTC issued “Guidelines Concerning Administrative Guidance under the Antimonopoly Act” on June 30, 1994. Regarding the relationship between the Antimonopoly Act and public interest service, in cases of relationship with medical services, basically, in areas with special characteristics, improvements in products and services are aimed through the principle of free competition. It is claimed that it is subject to the Antimonopoly Act.

Part I

Private Monopolization

This part studies recent developments regarding private monopolization law in Japan. The private monopolization provisions in the Antimonopoly Act (AMA) were rarely enforced in Japan before the 1990s, but have been applied more frequently in recent years. First, this chapter explains the specific provisions of the AMA that deal with private monopolization, as well as the Exclusionary Guidelines promulgated by the Japan Fair Trade Commission (JFTC) in 2009. It also highlights the important differences between a private monopolization and an unfair trade practice offense and explores their policy and enforcement implications. This chapter then discusses three of the JFTC’s recent decisions and the Supreme Court of Japan’s recent landmark decision in NTT East. Finally, this chapter compares Japan’s, the USA’s, and the EU’s rules on anticompetitive unilateral conduct. Chapter 3 analyzes the decision of a Tokyo High Court case concerning the damage calculation in private monopolization of the Nipro Corporation. From an economic perspective, this chapter obtains the appropriate signs of the coefficients in the supply relationship and the demand function on the basis of a simple model and limited data. The model analysis, however, does not obtain a statistically significant coefficient for the violation conduct in the results of the structural model estimation and reduced form estimation. Therefore, the Nipro judgment, which states that it does not acknowledge that the price would be lower without the violation conduct, is affirmed by this chapter’s economic analysis. The method proposed in this chapter is useful for analyzing the judgment while avoiding raising the Type II error (the failure to reject a false null hypothesis).

Chapter 2

Private Monopolization

1 Introduction The Antimonopoly Act (AMA) was enacted in 1947, but its private monopolization provisions were rarely enforced before the 1990s. The Japan Fair Trade Commission 1 (JFTC) and the courts have applied those rules more frequently in recent years. This spurred several studies regarding Japan’s laws on private monopolization and unilateral conduct, which has encouraged still greater enforcement of private monopolization rules. A basic understanding of Japanese antitrust law is necessary to understand these recent developments. Accordingly, in Sect. 2 we review the AMA’s three main anticompetitive practices: (i) unreasonable restraints of trade; (ii) unfair trade; and (iii) private monopolization. Section 3 also discusses in detail the elements of a private monopolization offence. Subsequently, Sect. 4 covers amendments that the Diet enacted to the AMA in 2009, as well as the JFTC’s Exclusionary Guidelines issued in the same year. In Sect. 5 we discuss the JFTC’s decisions in Nipro, Intel and Usen and Nippon Network. Section 6 discusses the landmark Nippon Telegraph and Telephone East Corporation (NTT East) Supreme Court decision. Section 7 compares how competition law treats unilateral conduct in Japan, the USA, and the EU. Finally, Sect. 8 provides concluding remarks.

1 There are also provisions dealing with trade association activities, ‘monopolistic situations’ (which permit the JFTC to order the break-up of monopolies), and merger regulation.

This Chapter is based on Koki Arai and H. Stephen Harris, Jr. (2014) “Japan’s Antimonopoly Act—recent developments in private monopolization.” Journal of Antitrust Enforcement, 2(1): 69–99. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_2

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2 Overview of the AMA Japan’s general competition law statute is the Law Concerning Prohibition of Private Monopolization and Maintenance of Fair Trade (the ‘Anti-Monopoly Act’ or ‘AMA’). The AMA primarily addresses three types of anticompetitive conduct. First, ‘private monopolization’ involves entities causing substantial harm to competition by unreasonably controlling or excluding other entities. Second, ‘unreasonable restraints of trade’ involve anticompetitive horizontal or vertical agreements. Third, ‘unfair trade practices’ involve companies distorting competition using unfair methods. Under this provision, the AMA intends to stop companies’ unfair methods before they cause substantial harm to competition (see Footnote 1). (1) Private monopolization Before the recent JFTC and Japanese Supreme Court decisions in 2011, there was little guidance or case law on private monopolization. The few private monopolization court opinions to date have based their analysis closely on the text of the AMA. The AMA provides that ‘[n]o entrepreneur shall effect private monopolization …’ and defines ‘private monopolization’ as: Business activities, by which any entrepreneur, individually or by combination or conspiracy with other entrepreneurs, or by any other manner, excludes or controls other entrepreneurs’ business activities, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade. The following key elements will be discussed: (i) entrepreneur; (ii) conduct (made up of (a) exclusion; and (b) control); (iii) effect, and (iv) particular field of trade. (2) Unreasonable restraints of trade Article 3 of the AMA prohibits any entrepreneur from creating an unreasonable restraint of trade. The AMA defines unreasonable restraints of trade as: Business activities, by which any entrepreneur, by contract, agreement, or any other means irrespective of its name, in concert with other entrepreneurs, mutually restrict their business activities … to fix, maintain, or increase prices, or to limit production, technology, products, facilities, or counterparties, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade. This prohibits joint conduct, including horizontal and vertical agreements. In contrast, private monopolization primarily addresses unilateral conduct, though it can also be applied to joint conduct that causes substantial harm to competition. (3) Unfair trade practices Article 19 of the AMA prohibits ‘unfair trade practices’. The Antimonopoly Act lists the following items as unfair trade practices. (a) Joint refusing to supply; (b) Discriminatory pricing;

2 Overview of the AMA

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(c) Unjustly low price sales; (d) Resale price maintenance; and (e) Abuse of a superior bargaining position. Furthermore, the JFTC has issued a Designation of Unfair Trade Practices, which provides a list of unfair trade practices that includes the following:

(i) Concerted refusal to trade (ii) Other refusal to trade (iii) Discriminatory consideration (iv) Discriminatory treatment on trade terms, etc. (v) Discriminatory treatment, etc. In a trade association (vi) Unjust low price sales (vii) Unjust high price purchasing (viii) Deceptive customer inducement (ix) Customer inducement by unjust benefits (x) Tie-in sales, etc. (xi) Trading on exclusive terms (xii) Trading on restrictive terms (xiii) Unjust interference with appointment of officer in one’s transacting party (xiv) Interference with a competitor’s transactions (xv) Interference with internal operation of a competing company

Designation of Unfair Trade Practices (Fair Trade Commission Public Notice No. 15 of June 18, 1982) The unfair trade practices prohibition addresses any unilateral anticompetitive behaviour that is likely to substantially harm competition if unchecked, but may not yet have caused harm. Unilateral conduct may also be addressed under the private monopolization provision. Often, this causes confusion between these two provisions, and so it is particularly important to address the distinctions between them and their application. Private monopolization and unfair trade practices incur very different legal consequences. Private monopolization can incur penal sanctions of up to five years in prison, and a fine of up to 5 million yen. It can also incur administrative sanctions. In practice, the JFTC and courts impose substantial fines and administrative sanctions for private monopolization offenses, but have not yet imposed prison sentences. In contrast, Article 20 of the AMA sanctions unfair trade practices with: (i) injunctions that eliminate the violation, and prevent future violations; (ii) an order deleting the objectionable clauses from contracts that violate the prohibition on unfair trade practices; and (iii) an administrative surcharge. It is interesting to note that in the USA, parties have used the prohibition against unfair methods of competition in of the FTC Act less frequently than the monopolization prohibition in section 2 of the Sherman Act.

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In contrast, Japan’s unfair trade practices provision is used more frequently than the AMA’s private monopolization provision. As one commentator wrote2 : [The unreasonable restraint of trade and private monopoly provisions] should have been the core of antitrust regulation given the history and structure of American antitrust law, whereas [the unfair trade practices provision] was expected to play a supplemental role in antitrust enforcement in Japan. However, the [unfair trade practices provision] has long been considered the core antitrust provision in Japan [and] has caused substantial confusion regarding the application of the [AMA].

The JFTC has also pursued many more unreasonable restraint of trade cases than private monopolization cases, and has generally given higher importance to joint conduct than unilateral conduct. Perhaps this is because cartel behaviour produces more obvious harmful effects on consumers, whereas the harm caused by unilateral conduct is harder to analyse and may be outweighed by efficiencies. Arguably, weighing the procompetitive and anticompetitive effects of conduct can be highly subjective and is complicated by opinions of expert economists that often conflict. Also, cartel cases typically have clearer evidence than unilateral conduct cases, because of leniency programmes. Finally, one explanation may be found in one of the AMA’s goals, which set to avoid undue interference with businesses’ commercial freedom. Most unfair trade practices can also violate the private monopolization provision, but it is more difficult to prove private monopolization. To commit an unfair trade practice, the offending company must engage in conduct ‘which tends to impede fair competition’. An unfair trade practice therefore only requires proof of one of the types of conduct listed above and proof that it will likely impede ‘fair’ competition. In contrast, establishing private monopolization requires proof that conduct has already substantially harmed competition. In addition, although categories of conduct that the JFTC has designated as anticompetitive often form the basis of a private monopolization offense, one can prove private monopolization using other types of conduct. There is no exhaustive list of conduct that can amount to private monopolization.

3 Requirements of Private Monopolization (1) Entrepreneur ‘Any entrepreneur’ that ‘excludes or controls the business activities of other entrepreneurs’ is subject to private monopolization rules. The term ‘entrepreneur’ has the same meaning as ‘entity’, which includes a firm, a person, or an association. Only those entrepreneurs that are capable of excluding or controlling other entrepreneurs’ business activities can violate Article 3. Entrepreneurs must therefore have market power to commit a private monopolization offense. Though market 2 Commentary in Negishi and Funada (2006) suggests that conduct must be ‘highly likely’ to impede

fair competition to amount to an unfair trade practice.

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share is important, there is no ‘bright line’ market share percentage that leads to a presumption that an entity had sufficient market power to violate the AMA, unlike in some jurisdictions. Instead, any entity with the ability to ‘control’ or ‘exclude’ has sufficient market power to be able to violate the private monopolization prohibition.3 Indeed, in a few cases, entities with relatively low-market shares were found to have engaged in private monopolization.4 However, most JFTC private monopolization investigations have understandably focused on entities with high-market shares in a relevant product market. An entrepreneur need not have this market power itself. It can be guilty of private monopolization if it has sufficient market power in combination with other entrepreneurs. The ‘combination or conspiracy’ language in the AMA definition of private monopolization is similar to that used in section 2 of the Sherman Act in the USA, which uses the phrase ‘conspiracy to monopolize’. Even so, combinations or conspiracies would be considered joint conduct under the Sherman Act, rather than unilateral. In practice, the AMA approach is closer to the EU concept of ‘collective dominance’, particularly because tacit collusion falls within Article 102 Treaty on the Functioning of the European Union (TFEU’s) definition of collective dominance. Even though entrepreneurs, which coordinate, can violate the private monopolization provision, in practice, private monopolization rules are typically only applied where a single party acts unilaterally. Cases involving coordinating parties are generally treated as unreasonable restraints of trade. However, if a single entity has not clearly engaged in private monopolization on its own, then the JFTC or the court will consider whether the combined effect produced by all the entities involved in an activity constitutes private monopolization. For example, in Pachinko, the Association of Pachinko Patent Pool was the primary entity involved in exclusionary conduct, but Sankyo and nine other companies were also involved. (2) Conduct Private monopolization rules prohibit ‘business activities by which any entrepreneur … excludes or controls … other entrepreneurs thereby causing, contrary to the public interest, substantial harm to competition in a particular field of trade’. An entrepreneur must therefore also exclude or control others to infringe private monopolization rules. In the USA, the EU, and Japan, market power alone is insufficient to violate rules prohibiting anticompetitive unilateral conduct.5 All three jurisdictions acknowledge 3 The US Supreme Court has defined the comparable USA concept, monopoly power, as ‘the power

to control prices or exclude competition’. United States v E.I. DuPont de Nemours & Co, 351 US 377, 391 (1956). The European Court of Justice has defined the comparable EU concept of dominance as ‘a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of its consumers’. Case 85/76 Hoffmann-La Roche & Co AG v Commission [1979] ECR 461, at [38]; Case 2/76 United Brands v EC Commission [1978] ECR 207, at [65]. 4 See eg, Japan Fair Trade Comm’n v Noda Shoyu KK, 8 GYOSAI REISHU 2300 (Tokyo High Ct 20 September 1955). 5 Eg Verizon Communications v Law Offices of Curtis V. Trinko, LLP, 540 US 398, 407 (2004) (‘The mere possession of monopoly power, and the concomitant charging of monopoly prices, is

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that a high market share is often gained lawfully through aggressive competition, and therefore require an extra conduct element for unilateral anticompetitive conduct. What is more, all three jurisdictions are still clarifying this conduct element. For private monopolization in Japan, this conduct element is grounded in the terms ‘control’ and ‘exclude’. (3) Exclusion Under the AMA’s private monopolization provision, ‘exclude’ means to engage in conduct that: (i) goes beyond ‘normal’ competitive conduct; and (ii) either (a) makes it difficult for existing entities to continue to do business; or (b) deters new business entrants. There is no exhaustive list of potentially unlawful types of exclusionary conduct, and creative business people are constantly inventing novel competitive strategies. However, some types of activity often constitute unlawful exclusionary conduct. The Antimonopoly Act lists the following items as unfair trade practices. (a) (b) (c) (d) (e)

Joint refusing to supply; Discriminatory pricing; Unjustly low price sales; Resale price maintenance; and Abuse of a superior bargaining position.

Furthermore, the JFTC has issued a Designation of Unfair Trade Practices, which provides a list of unfair trade practices that referes above Sect. 2(3). Recent cases have developed this exclusion element of private monopolization. To establish exclusion, one must show that an entity made it more difficult for other entities to engage in normal business activities. However, Nipro shows that it is never easy to prove that an entity’s conduct caused other entities difficulty when engaging in normal business activity. The Supreme Court of Japan in NTT East decided that conduct will only be exclusionary if it goes beyond ‘normal’ (or ‘lawful’ or ‘legitimate’) competitive conduct and constitutes ‘artificial’ (or ‘unlawful’ or ‘illegitimate’) conduct.6 It remains uncertain, however, what the JFTC or the courts may decide is normal or artificial under any particular set of facts.7 not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.’); Faull and Nikpay (2007) (‘The holding of a dominant position is not in itself objectionable under Article 82. It is the abuse of that position which contravenes [Article 82].’). 6 Reliance on the distinction between ‘normal’ and ‘artificial’ business conduct introduces a significant degree of discretion into private monopolization analysis. Different fact patterns, and in particular the circumstances of different industries and markets, may engender different outcomes. Arguably, in practice, it may favour the status quo, above substantial changes in market structure or competitive dynamics. 7 The ambiguities and subjectivity inherent in those distinctions is not unique to Japan’s private monopolization law. In the United States, courts and agencies apply the ‘rule of reason’ to possible

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(4) Control ‘Control’, in the context of private monopolization, refers to one company forcing other companies to comply with its wishes using stock ownership, corporate governance rights, or other methods. For one entity to control another, it must have some awareness of the legal consequences of its actions. However, it is not necessary to show that the controlling company had any wrongful intent. It is presumed that an entity is aware of the consequences of its conduct, because companies generally know that their anticompetitive behaviour will restrain other market players. An entity can rebut this presumption that it acted knowingly by showing that the market results of its conduct were not foreseeable. To meet the control requirement, an entity’s behaviour must also have restrained another entity’s ability to freely make business decisions. This element of a private monopolization offense is often termed causation.8 This highlights how control is a different concept from ‘market power’ as used in other jurisdictions. Control in Japan concerns the actual exercise of power over another entity, not on the ability to adversely affect competition in a relevant market. This difference is highlighted by Japan’s recognition of an ‘abuse of a superior bargaining position’ as an unfair trade practice that could also form the basis of a private monopolization offense. In a few old cases, courts took a broad view of what may constitute unlawful control. For example, in Noda Shoyu in 1957, the JFTC found that people thought Noda Shoyu’s soy sauce was the best on the market. Noda Shoyu sustained this reputation in part by engaging in resale price maintenance. Competitors could not lower their prices without degrading their reputations among consumers. The JFTC also decided that the market for the highest grade of soy sauce was oligopolistic, with Noda Shoyu having the highest market share (37% in Tokyo) and being the price leader. The JFTC therefore concluded that Noda Shoyu indirectly controlled its competitors’ pricing, forcing them to engage in resale price maintenance to keep their prices comparably high. This ‘indirect control’ is unlikely to amount to control today, and those older decisions are out of step with current JFTC enforcement policy and international legal and economic thought.9 In summary, a ‘private monopolization’ violation requires proof that a company inhibited competition by controlling or excluding another entity, using conduct outside the realm of normal competition. It is an open question whether this formulation will protect competition, or will merely protect competitors. This is important because of the JFTC’s announced intention to protect competition through preserving current competitors and protecting potential entrants. offenses of section 2 of the Sherman Act, which in essence seeks to weigh the competitive benefits of conduct against its anticompetitive harm. The rule of reason introduces comparable uncertainties and subjectivity in US unilateral conduct law. This subjectivity provides courts and agencies with flexibility to accommodate changes in accepted business practices and economic theory. 8 The statute requires that, to constitute private monopolization, an entrepreneur’s business activities that control (or exclude) the business activities of another entrepreneur must ‘caus[e], contrary to the public interest, a substantial restraint of competition in any particular field of trade’. AMA, Article 2, s 5 (emphasis added). 9 See Inoue (2012) (discussing Noda Shoyu (n 17), and Toyo Seikan (n 29)).

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(5) Effect To engage in private monopolization, an entrepreneur’s activities must cause ‘contrary to the public interest, a substantial restraint of competition’. The Supreme Court of Japan construed ‘contrary to the public interest’ to mean contrary to maintaining free competition, which the AMA protects. This links private monopolization to the primary goal of the AMA: to protect consumers from substantial anticompetitive harm. Importantly, this requirement for anticompetitive effects means that conduct that may otherwise violate Article 3 may nevertheless be lawful if its public interest benefits outweigh its countervailing adverse effects. Secondly, the unlawful conduct must cause ‘a substantial restraint of competition’. The Tokyo High Court has interpreted this requirement to mean ‘causing a situation of lower competition where a specific firm or firms can control the market by determining freely, to some extent, prices, qualities, volumes, and various other terms on its or their own volition’. Companies may substantially restrain competition even during a period of price-cutting. Thirdly, the focus is on whether the conduct caused substantial harm to competition, rather than on any subjective intent to harm competition. In the USA, litigants are required to show that acquisition or maintenance of market power was wilful, whereas in Japan one only needs to show that the conduct caused substantial harm to competition. This was confirmed by the Supreme Court of Japan in NTT East. In short, one must show anticompetitive effects to establish a private monopolization offense. Merely excluding or controlling the conduct of another entity is insufficient without also causing substantial harm to competition. When assessing anticompetitive effects, one must consider market characteristics, such as size and concentration, the nature of the wrongful conduct, and product characteristics. (6) Particular field of trade Private monopolization finally requires that the anticompetitive conduct is in a ‘particular field of trade’. This term is used in the JFTC Merger Review Guidelines,10 which define a particular field of trade using demand-side substitutability and, to a lesser extent, supply-side substitutability.11

10 Guidelines for the Application of the Antimonopoly Act Concerning the Review of Business Combinations (2006). 11 Details of the methods used to assess substitutability are described in Part II of the Merger Review Guidelines. When examining demand-side substitutability, one assumes that a specific product is supplied exclusively by a specific producer in a specific region. One must then assess whether many users will purchase an alternative product when a small but significant non-transitory increase in price (SSNIP; generally a price rise with a rise ratio of 5–10% that persists for approximately one year) occurs. This ‘SSNIP test’ is also applied by other major antitrust authorities. See US Department of Justice and Federal Trade Commission Merger Guidelines § 4 (2010); and the European Commission notice on the definition of the relevant market for the purposes of Community competition law Official Journal C 372, 9.12.1997, pp. 5–13, 15–18, http://europa.eu/legislation_ summaries/competition/firms/l26073_en.htm.

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4 The 2009 AMA Amendment and the JFTC Exclusionary Guidelines The AMA was amended in June 2009 to require the JFTC to fine any entity guilty of private monopolization. The JFTC calculates the fine by multiplying the sales of relevant products during the period the offense took place, by a certain percentage depending on the type of business activity, and number of entrepreneurs involved. If the amount produced under this formula is less than one million yen, the JFTC shall not impose a fine. To help clarify its private monopolization enforcement policies, the JFTC issued a set of Exclusionary Guidelines.12 Part I of the Exclusionary Guidelines sets out the JFTC’s enforcement policy regarding private monopolization. It states that the JFTC will prioritize cases where an entrepreneur has a market share exceeding 50% and where the conduct has ‘a serious impact on the lives of the citizenry,’ in light of the entity’s market size, the conduct’s scope, and product characteristics. However, the JFTC reserves the right to investigate conduct that does not meet these criteria, and even if conduct does not constitute private monopolization, it may amount to an unfair trade practice. Part II provides guidance on the types of conduct the JFTC considers to be exclusionary. It states that merely supplying a cheaper, higher quality product is not exclusionary, even if inefficient competitors have difficulty competing with the product, because the AMA promotes fair and free competition in the public interest. To constitute private monopolization, conduct need not eliminate competitors from the market or preclude market entry. Instead, conduct constitutes private monopolization if it is highly likely to cause difficulties for existing competitors or new market entrants. Moreover, even if an entity thought its conduct was necessary, it may still be exclusionary. Entities do not have to intend to exclude competitors, but if they do intend to exclude competitors the JFTC may presume their conduct is exclusionary. Finally, a series of integrated acts may together be regarded as exclusionary. Part II of the Guidelines also explains that exclusionary conduct is a wider concept than unfair trade practices. Conduct designated as an unfair trade practice is generally exclusionary, but other types of conduct may also be exclusionary. Finally, in Part II, the JFTC provides a detailed explanation of how it assesses exclusionary conduct, with examples from previous cases. For example, subsection two on below-cost pricing states that entrepreneurs can freely decide their prices by adapting to market characteristics. Therefore, the JFTC will rarely intervene in price-cutting competition. However, setting prices below marginal cost lacks economic rationality except in extraordinary circumstances,’ because the company incurs greater losses the more products it supplies. The JFTC has expressed concerns that this would exclude an as-efficient competitor. Similarly, subsection four clarifies the anticompetitive effect of tying: 12 Guidelines for Exclusionary Private Monopolization under the Antimonopoly Act (2009) (Exclu-

sionary Guidelines). The introduction to the guidelines states that their purpose is ‘to ensure further transparency of law enforcement and to improve predictability for entities by clarifying, as far as possible, the requirements for Exclusionary Private Monopolization’.

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2 Private Monopolization [W]here an entrepreneur supplies one product (the tying product) only on the condition that the trade partners also purchase another product (the tied product) [this] may cause competitors difficulty if they are unable to easily find alternative trade partners in the tied product market, and therefore may undermine competition in the tied product market. Thus, supplying (or purchasing) only on the condition that trade partners also purchase (or supply) another product … may be exclusionary conduct.

The Guidelines cover a wide range of anticompetitive exclusionary behaviour based on precedent, theory, and global enforcement trends. Transparent and predictable enforcement of the AMA helps businesses confidently implement aggressive, but lawful, competitive strategies, while over-deterrence may hinder lawful procompetitive conduct. Accordingly, the Guidelines aim to minimize any ‘chilling effect’ on beneficial competitive behaviour caused by misunderstanding the AMA’s purpose or scope.

5 The Nipro, Intel, and Usen and Nippon Network (1) JFTC decisions Private monopolization was rarely enforced in Japan before the 1990s, but has been applied more frequently in recent years for two reasons. First, the JFTC aims to increase ex-post supervision of competition, instead of ex-ante regulation. Increased enforcement is deemed necessary to further this goal. Second, the JFTC seeks to bring its policies in line with those of other leading economies’ competition regimes, with which the JFTC collaborates on a regular basis. The three JFTC decisions discussed below illustrate this era of greater scrutiny of unilateral conduct. Nipro (1999) is a hearing decision, while Intel (2002) and Usen and Nippon Network (2004) are recommendation decisions. (2) Nipro case a. Facts The Nipro Corporation was charged with violating Chap. 2 of the AMA in the following ways: (a) offering to change transaction terms 56 only for the Naigai Corporation after 1 April 1999; (b) selling slim glass tubes to Shiotani Glass at a price below the total sales cost and almost equal to variable cost since February 2000; (c) refusing to accept orders from Naigai and Nippon Electric Glass for imported slim glass tubes; and (d) changing transaction terms only for Naigai, since 23 March 2003. The JFTC concluded that Nipro’s conduct violated the prohibition against private monopolization in Article 3 of the AMA. In particular, the JFTC found that the conduct described in (a), (c), and (d) above restricted Naigai’s and Shiotani Glass’s ability to sell imported slim glass tubes, although the conduct in (b) did not exclude Naigai. Additionally, the JFTC determined that Nipro created a substantial restraint of competition by refusing to deal with Naigai. Thus, the JFTC ordered Nipro to

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cease the types of conduct described in (a), (c) and (d), because it amounted to private monopolization. In accordance with the AMA and JFTC procedures, Nipro refused to accept this recommendation decision and made a timely request for a formal hearing. b. Main questions The JFTC discussed three separate issues at the hearing: (i) Did Nipro’s conduct restrict Naigai’s and Shiotani Glass’s ability to sell imported slim glass tubes and was it intended to sanction them?; (ii) Did Nipro’s conduct eliminate Naigai’s imported slim glass tubes business?; and (iii) Did Nipro’s conduct cause a substantial restraint of competition? c. Decision on the main questions (i) Did Nipro’s conduct restrict Naigai’s and Shiotani Glass’s ability to sell imported slim glass tubes and was it intended to sanction them? The JFTC found that the conduct set out in (b) above did not exclude Naigai, but that the conduct set out in (a), (c), and (d) restricted Naigai’s and Shiotani Glass’s ability to sell imported slim glass tubes and therefore was exclusionary. The JFTC further found that Nipro was the exclusive supplier of glass tubes manufactured by Nippon Electric Glass Co., Ltd. in the glass pipe supply market in western Japan and possessed market power in that market, and that its conduct towards Naigai prevented Naigai from competing through quality and price. Specifically, JFTC found that Nipro’s unlawful exclusionary conduct included: (a) proposing to change its commercial terms for dealings with Naigai that required increases in prices up to the “official” list prices, shortening of the terms of promissory notes, and the abolition of special price discounts; (b) refusing to accept orders from Naigai for slim glass tubes manufactured by Nippon Electric Glass Co., Ltd. Similar to imported glass pipes after August, 1997; and (c) further revising its commercial terms for dealings only with Naigai, by demanding security and cash settlement, on 23 March 1999. (ii) Did Nipro’s conduct eliminate Naigai’s imported slim glass tubes business? Nipro argued that by proposing to change Naigai’s transaction terms it merely proposed a change from its previous favourable treatment of Naigai to ‘normal’ treatment, which was a legitimate exercise of Nipro’s commercial freedom. However, the JFTC found that Nipro had not treated Naigai favourably in prior transactions. The JFTC did not accept Nipro’s claim that it was only engaged in normal business activities and found that Nipro intended to eliminate Naigai’s slim glass tube import business. Nipro argued that its refusal to accept orders from Naigai and Nippon Electric Glass was justified because there was a substantial inventory risk in holding several different types of glass tubes. However, the JFTC found that, although Naigai’s original order was too large for Nipro to fill, Naigai had modified its order in a

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reasonable manner, to include only common glass tubes and other similar products with sequential delivery. Nipro asserted that it imposed a collateral-or-cash-payment rule for Naigai because it lost trust in Naigai after Naigai made late payments, and stated that it intended to become an agent for a foreign firm. The JFTC found that these claims were false because Naigai had not made late payments, the amount Naigai owed Nipro was within Nipro’s normal credit policies, and Naigai’s statement about becoming an agent of a foreign firm had not destroyed its relationship with Nipro. Accordingly, the JFTC concluded that Nipro’s collateral-or-cash-settlement rule was not motivated by legitimate concerns about Naigai’s creditworthiness. Instead, it was designed to exclude Naigai from the market. (iii) Did Nipro’s conduct cause a substantial restraint of competition? The JFTC found that Nipro’s conduct restricted Naigai’s ability to sell imported slim glass tubes. Nipro’s conduct substantially reduced competition on price and quality by preventing competitors from importing slim glass tubes. The JFTC declared that Nipro’s conduct violated the AMA and ordered Nipro cease its conduct, but imposed no other sanctions. d. Economic evaluation Unlike in NTT East, here the JFTC only mentions consumers’ interests or welfare in passing.13 Nipro confirmed the JFTC’s increased willingness to address anticompetitive unilateral conduct, which demands detailed market examination. But the hearing decision does not engage in rigorous economic analysis to demonstrate that Nipro’s conduct substantially harmed competition itself, rather than individual competitors. The decision does not clarify whether Nipro’s conduct created procompetitive effects that offset its adverse effects. Accordingly, the decision does not provide guidance on how Nipro’s conduct would fare under the ‘effects-balancing test’.14 (3) Intel a. Facts Intel committed to give five Japanese computer manufacturers rebates, or funds, in exchange for each manufacturer’s agreement to increase its purchase of Intel processors by an agreed amount, or percentage. Depending upon the manufacturer and product category involved, each manufacturer agreed to:

13 Consumer welfare is mentioned while describing the increase in imported goods that serve as a competitive alternative and while discussing Nipro’s intent to block the wider availability of alternative products. 14 The effects-balancing test addresses whether conduct ‘reduces competition without creating a sufficient improvement in performance to fully offset the potential adverse effect[s] on prices and thereby prevent consumer harm’. See Salop (2006).

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(a) increase Intel’s market share within a given product category to 100% and refrain from adopting competitors’ processors for that category15 ; (b) increase Intel’s market share within a product category to at least 90% and reduce competitors’ shares to 10% or less; or (c) refrain from incorporating competitors’ processors into a specific redesign of a particular model of PCs that represented a high percentage of that manufacturer’s PC production.16 b. Decision In May 2002, the JFTC concluded that Intel used a rebate strategy that resulted in the five major Japanese computer manufacturers increasing their purchases of Intel processors at the expense of Intel’s competitors. Intel’s competitors’ share of the total Japanese processor market decreased from 24 to 11% during the affected time period. Therefore, Intel substantially restrained competition in the market for processors sold to Japanese manufacturers, and excluded its competitors. On 8 March 2005, the JFTC issued a recommendation decision that ordered Intel to: (i) Cease offering rebates or funds to Japanese computer manufacturers in return for commitments to refrain from using competitors’ processors; (ii) Notify Japanese customers that Intel would no longer offer rebates which exclude competitors, or require them not to adopt competitors’ processors; and (iii) Give its sales staff antimonopoly training, and conduct periodic audits to prevent anticompetitive conduct. Intel accepted the recommendation decision, and so, on 13 April 2005, the JFTC issued a legally binding order that imposed the above measures. c. Usen and Nippon network Usen Corporation was engaged in the cable music broadcasting business. Nippon Network Vision Corporation (NNVC) provided business services to Usen related to its music broadcasts. The JFTC investigated alleged joint exclusionary conduct by Usen and NNVC against CANSYSTEM Co, Ltd, a Usen competitor. The JFTC issued a recommendation decision, finding that Usen and NNVC offered more favourable fees or a complimentary period of service only to CANSYSTEM’s customers, if CANSYSTEM’s customers switched to Usen. This conduct substantially restrained competition in the market for music broadcasting services to ‘service stores’, and constituted private monopolization under Article 3 of the AMA. 15 The percentage of a manufacturer’s processor requirements for a category of PCs that it purchased from a particular processor manufacturer was referred to as that processor manufacturer’s ‘market segment share’ within that product category. 16 Redesigns of models take place every few years and are sometimes known as ‘refresh cycles’. A year or so before the release of new models, PC manufacturers accept bids for components for the updated model.

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6 NTT East case (1) Facts Under the Japan Telecommunications Business Act (TBA),17 NTT East obtained regulatory approval to install, maintain, and charge for access to the ‘local loop’ of fibre optic cable in eastern Japan. In that region, it competed in both the downstream retail market for internet access, and the upstream wholesale market for access to optical fibre facilities by other telecommunications companies. In the downstream retail market, NTT East offered Fibre to the Home (FTTH) service. This broadband service allows large volumes of high-speed data to be transmitted through stable connections, and allows for integrated audio and video communications through one communication circuit. NTT East offered retail FTTH services through both: (1) the branch method, under which up to 32 subscribers share one optical fibre cable core that connects their houses to a local telephone exchange station; or (2) the direct method, in which a single optical fibre core directly connects the local telephone exchange with a subscriber’s residence. The branch service could have lower connection speeds than the direct service if two or more subscribers simultaneously used the cable assigned for their joint use. Because of its speed, stability, and other advantages, FTTH services became popular and many subscribers switched from accessing the internet using a standard telephone line. Few users switched back from FTTH to other types of internet service. This is partly because switching from FTTH internet access involves substantial switching costs. Those wishing to use FTTH services must pay for construction work to install an optical fibre cable to their residence. That work must be done again if the subscriber changes service providers. NTT East owned 82–100% of the cables used for FTTH services in eastern Japan. There were only two other major telecommunications carriers in that region that provided FTTH services using their own optical fibre facilities. These carriers provided FTTH only in limited areas, and had limited physical infrastructure. The Supreme Court found that other telecommunications carriers had inadequate infrastructure to effectively provide FTTH services. It is difficult for telecommunications carriers to install their own pipelines or utility poles for optical fibre cables. In densely populated areas with high demand for FTTH services, companies could only install underground optical fibre cables at limited times and locations, at great cost. In addition, competitors were not guaranteed to be able to lease fibre optic facilities from their owners. The Ministry for Internal Affairs and Communications (MIAC) regulated the price for wholesale interconnection fees that telecommunication companies 17 Law

No 86 of 25 December 1984, as amended by Law No 125 of 24 July 2003. An unofficial English translation of the TBA is available at http://www.soumu.go.jp/main_sosiki/joho_tsusin/ eng/Resources/laws/2001TBL.pdf. The requirements for entering the regulated telecommunications business in Japan at the relevant time are explained in the Manual for Market Entry into the Japan Telecommunications Business, issued by the Japan Ministry of Internal Affairs and Communications, and available in English at: http://www.soumu.go.jp/main_sosiki/joho_tsusin/eng/Resources/ Manual/Entry-Manual/07.03.15HTMLversion.htm.

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could charge others to use their fibre optic systems. In accordance with the TBA, the MIAC specified the price at a certain price per optical fibre cable (not per subscriber). Accordingly, as the number of subscribers on a given cable core increased (using the branch method), the price per subscriber would decrease. For example, the price per subscriber would be 20,130 yen when only one subscriber used a cable core, but would be 2326 yen when 32 subscribers used the same core. However, the minimum regulatory charge under the direct method was 6328 yen per month per subscriber. NTT East set its retail subscription price for its FTTH service at 5800 yen for the first month and then at 4500 yen per month thereafter. This was below the approved 6328 yen access fee that NTT East charged wholesale companies for interconnection using one of its optical fibres. No law regulated the relationship between user charges and interconnection charges for FTTH services. NTT East’s business and pricing proposal for regulatory approval under the TBA was based on the assumption that each cable core would ultimately have on average approximately 19 subscribers, using the branch method. In fact, when NTT East built out the infrastructure for its retail FTTH service, it decided that, at least at the beginning, it would be cost-efficient to use only the direct method. As a result, only single-cable connections were available for wholesale interconnection to NTT East’s fibre optic system by potential competitors seeking to sell retail service. As a result, the approved wholesale interconnection price for a single cable line was above NTT East’s price of a user’s retail subscription for the use of that line. NTT East marketed the new FTTH service aggressively, using door-to-door marketing as well as conventional methods. It thereby obtained valuable information on subscriber optical fibre facilities, which it did not disclose to competitors. (2) JFTC’s recommendation decision and hearing decision The JFTC issued a recommendation decision in 2003 following an administrative hearing. NTT East did not respond to this recommendation decision, and so the JFTC commenced a formal hearing procedure in accordance with the AMA. In November 2003, the MIAC warned NTT East that its conduct would lead to unfair competition with other telecommunications carriers, in violation of the TBA. Accordingly, the MIAC recommended that NTT East switch to the branch method for existing subscribers to the greatest possible extent and set more flexible interconnection charges. However, the MIAC did not order any change. On 26 March 2007, the JFTC issued a hearing decision that found that NTT East engaged in private monopolization by excluding other entrepreneurs. The decision noted that NTT East set its retail direct-cable subscription fee at the level approved for retail provision of access using the branch method, though NTT East did not use the branch method. As a consequence, NTT East offered its retail direct-cable access at a fee lower than the interconnection fee charged to retail competitors for a single optical fibre cable of NTT East’s system. This made it difficult for NTT East’s retail competitors to sell direct-cable internet access services, because they could not pay NTT East’s interconnection fee for each individual cable and profitably resell access to that cable at retail in competition with NTT East.

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The JFTC concluded that there was extremely limited retail and wholesale demand substitutability between other types of broadband service and FTTH services. Therefore, the decision treated FTTH services as a distinct product market from other types of internet access services, even though other broadband services can provide highspeed, broad-capacity access and stable connections. Therefore, FTTH services were found to be a ‘particular field of trade’ under Article 2, section 5 of the AMA. (3) The Tokyo High Court decision NTT East appealed the JFTC hearing decision to the Tokyo High Court, seeking reversal on three grounds: (1) NTT East’s service did not exclude new entrants; (2) NTT East’s service did not cause a substantial restraint of trade; and (3) since the Ministry of Internal Affairs approved the price NTT East charged in accordance with the TBA, the AMA conflicted with the TBA. The court interpreted ‘substantial restraint of competition’ under Article 2, section 5 of the AMA to mean a state of significantly lower competition, in which a specific business or group of businesses controls the market by determining price, quality, volume, and other trading conditions. This definition combines elements of the US definition of market power,18 with the EU definition of dominance.19 In practice, it means that an entity’s wrongful conduct must create, maintain, or strengthen its market power or dominance to engage in private monopolization. The court found that NTT East’s exclusionary conduct substantially restrained competition for directcable services in eastern Japan, thereby maintaining and strengthening NTT East’s market power. The Tokyo High Court dismissed the appeal on 29 May 2009, because: (1) NTT East excluded other entities from competing at the retail level; (2) its conduct substantially restrained competition in a particular field of trade; and (3) the TBA did not automatically pre-empt the AMA’s application to conduct in telecommunications markets. (4) The Supreme Court decision NTT East appealed to the Supreme Court of Japan, which dismissed the appeal on 17 December 2010.20 The Supreme Court addressed three questions in detail: (i) Did NTT East’s products and pricing wrongfully exclude other telecommunications firms from competing in the retail internet access market?; (ii) Did FTTH services constitute a particular field of trade under private monopolization rules?; and (iii) Did NTT East’s conduct substantially restrain competition? 18 See n 38; NCAA v Bd. of Regents, 468 US 85, 109 (1984) (defining market power as ‘the ability to raise prices above those that would be charged in a competitive market’). 19 Case 27/76 United Brands v Commission [1978] ECR 207 (defining dominance as ‘a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers’.). 20 Higashi Nihon Denshin Denwa Corp v Fair Trade Commission, 64(8) Minshu 2067 (Sup Ct, 17 December 2010). An English translation of the Supreme Court’s judgment in NTT East is available at: http://www.courts.go.jp/english/judgments/text/2010.12.17-2009.-Gyo-Hi-.No..348.html

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(5) Exclusion The Supreme Court differentiated ‘normal’ business conduct from ‘artificial’ conduct, stating that: In light of [the AMA’s] purpose, whether or not [NTT East’s conduct] ‘exclud[es] the business activities of other entrepreneurs’… should be determined depending on whether [NTT East’s] independent and one-sided refusal to trade … is of an artificial nature to the extent that it goes beyond the bounds of normal means of competition …, and makes it difficult for its competitors to enter the FTTH service market. The Court identified five considerations when determining whether NTT East’s business activities constituted unlawful exclusionary conduct: (i) (ii) (iii) (iv)

The difficulty competitors have finding an alternative fibre optical system; The direct-cable service’s specific characteristics; The competitive circumstances in which the conduct took place; NTT East’s position in the direct-cable retail access market and the difference in competitive conditions facing NTT East and its competitors; and (v) The duration of the conduct. The court considered each of these points in turn and made the following findings:

(i) Competitors could not acquire interconnection facilities from companies other than NTT East. NTT East had the only significant fibre optic network in eastern Japan; (ii) Competing effectively in the market for direct-cable access services required economies of scale; (iii) Retail subscribers were locked into their internet providers, because NTT East had a leading position in the retail market, and excluded competitors from its fibre optic network. Also, switching internet providers involved high construction costs; (iv) MIAC authorized NTT East’s interconnection charges because it assumed NTT East would use the low-price branch system. This would have involved percable subscriber rates that were substantially in excess of the interconnection rates competitors paid NTT East. By using the direct method, NTT East substantially evaded the administrative guidance and regulations that were designed to prevent margin squeeze between the wholesale interconnection fee and the retail access fee; (v) NTT East was the leading telecommunications carrier in the market for retail direct-cable internet access services. It enjoyed an advantage over its retail competitors in that it used its own subscriber optical fibre facilities, and had exclusive knowledge of optical fibre cables not in use in the relevant geographical area. It used its knowledge to market its services more effectively than its competitors could; and (vi) NTT East’s conduct took place when the market for FTTH services was expanding rapidly, and continued for the relatively long period of one year and 10

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months. This allowed NTT East to capture a very large share of new subscribers, who would then have difficulty switching suppliers once NTT East’s objectionable conduct ended. As a result, the Supreme Court found that competition in the market for internet services in eastern Japan was artificial rather than normal. The court’s careful analysis of the upstream and downstream markets demonstrates when business activities constitute artificial conduct leading to unlawful exclusion in violation of the prohibition against private monopolization. (6) Particular field of trade Second, the Supreme Court decided that the conduct affected a particular field of trade, stating that: [D]uring the Period of the Action, there actually existed consumers who preferred the FTTH service to … other types of broadband services in terms of the connection speed, etc, irrespective of the price gap, and it is concluded that … other types of broadband services could hardly be substituted for the FTTH service.21

(7) Substantial restraint of competition Toho discussed how the term ‘substantial restraint of competition’ as used in the AMA is commonly understood: Substantially to restrain competition means to bring about a state in which competition itself has significantly decreased and … a specific business operator or a group of business operators can control the market by determining price, quality, volume, and various other terms with some latitude at its or their own volition.

In its Exclusionary Guidelines, the JFTC lists the factors below as considerations when assessing whether conduct has substantially harmed competition. Even so, the JFTC will not rely on certain specific criteria, but will comprehensively consider the following factors on a case-by-case basis to assess whether or not competition is substantially restrained: (i) Position of the entrepreneur and competitors: (a) Market share and ranking of the entrepreneur. (b) Conditions of competition in the market. (c) Conditions of competitors. (ii) Potential competitive pressure: (a) Degree of institutional entry barriers. (b) Degree of entry barriers in practice. 21 Ibid. See also Inoue (n 34) 113 (‘The scope of a particular field of trade is defined in terms of traded goods and services, trading areas, stages of trade, trading partners and other factors. Therefore, the goods traded in respect of all the businesses in which the company group is engaged are first enumerated, then the product ranges are defined in respect of the goods traded, and then geographic range is defined for each of the product ranges.’)

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(c) Degree of substitutability between the entrant’s and the entrepreneur’s products. (iii) Countervailing buyer power. (iv) Efficiency. (v) Extraordinary circumstances to ensure consumer interests. There are competing views about whether it is necessary to establish a substantial restraint of competition as a separate element of a private monopolization offence. One leading commentator argues that once the JFTC proves wrongful conduct, it has ipso facto established substantial harm to competition without the need for further inquiry.22 If a competitor is eliminated the surviving company usually strengthens its own market power, which generally constitutes a substantial restraint of competition.23 Okada extended this theory from unreasonable restraints of trade to private monopolization. Other commentators, however, believe that this theory cannot be applied in private monopolization cases. Unlike hardcore cartel cases, in private monopolization cases whether conduct substantially harmed competition depends on many marketspecific factors that are often difficult to assess and are typically not self-evident. For example, it is important to consider whether a rival has substantial countervailing power in a private monopolization case, but this is irrelevant in a hardcore cartel case. Also, private monopolization cases often do not fall into well-known patterns of activities. Finally, they may involve conduct that has procompetitive benefits that must be weighed against any anticompetitive effects. Courts and agencies must take these considerations into account before concluding that unilateral conduct has substantially restrained competition.24 In NTT East, the Supreme Court explained that NTT East’s conduct would establish, maintain or strengthen market power by substantially restraining competition if it prevented competitors from competing in the market for direct-cable access. This approach is consistent with the JFTC Exclusionary Guidelines. The Court concluded that existing and potential competitors could not exercise countervailing power because: (i) competitors’ optical fibre resources were too limited in scale and geographic scope to compete with NTT East’s facilities; (ii) new entrants faced difficulties because of the cost of capital; and (iii) competitors could not obtain a significant number of subscribers because users faced switching costs, and branch services and direct-cable services were not substitutable on the demand side. 22 This

is sometimes referred to as the ‘once it exists’ theory, and is comparable to the ‘per se’ in section 1 of the Sherman Act under US antitrust law. 23 See Okada (2012). 24 See Shiraishi (2011).

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(8) Causing a substantial restraint of trade The Supreme Court found that NTT East had caused a substantial restraint of trade because, after it ceased its exclusionary conduct by beginning to offer FTTH services using the branch method and therefore the one-sided refusal to trade or a bargaining sale through the wholesale and retail pricing ended, competitors for the retail FTTH service had been able to enter the market even though there were no changes in the competitive positions of the firms during that time. The Court stated that: [I]n view of the fact … that other telecommunications carriers entered the FTTH service [market] … after the appellant had stopped [its conduct] … it can be said that [NTT East’s conduct caused the] restraint on competition in the FTTH service market ….

Some commentators have criticized the Supreme Court’s finding of causation in NTT East.25 First, they argue that competitors would have been excluded even if NTT East sold access using the branch method instead of the direct-cable method, because users did not treat the branch method as substitutable with the direct-cable method. Second, even if NTT East had not engaged in the conduct in question, no other companies could have entered the market, because the Tokyo Electric Power Company (TEPCO; one of two upstream competitors with installed fibre optic infrastructure) held a cost and pricing advantage. TEPCO had reduced its prices, which may have restrained entry into the FTTH market irrespective of NTT East’s conduct. Therefore, NTT East’s conduct did not demonstrably harm competition. Proponents of the above argument must explain why other telecommunication companies entered the FTTH market after NTT East terminated its anticompetitive conduct. Shiraishi explains this increase in competition by saying that circumstances changed after NTT’s conduct ended, which eased market entry. In particular, new technology made it easier to offer internet services. In contrast, Okada supported the Supreme Court’s judgment. He wrote that new entrants could not connect to an optical fibre facility, with or without the branch method during the time in question. Okada noted that NTT East did not provide the FTTH service via a branch system and did not intend to do so. Therefore, decreasing connection prices and new connection methods were not realistic options for the new entrant. In any event, the fact that competition increased after NTT East terminated its conduct suggests NTT East’s conduct caused the reduction in competition. As noted above, during this period two major companies other than NTT East provided FTTH services using their own optical fibre facilities in eastern Japan. NTT East argued that it was forced to seek regulatory permission to lower its subscriber prices in January 2003, in response to TEPCO lowering its prices in December 2002, to continue to compete with TEPCO. However, Okada noted that TEPCO and other corporations did not make any significant technical changes that altered the competitive landscape, so it was difficult to prove that TEPCO’s conduct foreclosed entry even without NTT East’s exclusionary conduct. The Supreme Court deduced that NTT East’s conduct substantially lessened competition because competition increased after NTT East ceased its conduct. But this 25 See

Takizawa (2009).

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deduction was logically flawed. The increase in competition after NTT East ceased its conduct could have been caused by a number of things, including technical progress. It is therefore not correct for the Supreme Court to say that NTT East’s conduct caused the reduction in competition purely because competition increased after NTT East ceased its conduct. Okada makes the same mistake when he says that the increase in competition after NTT East ceased its conduct suggests that NTT East’s conduct substantially lessened competition. The Supreme Court ignored other factors that could have caused the increase in competition, and therefore there was insufficient evidence for it to conclude that NTT East’s conduct substantially lessened competition. (9) Forward-looking pricing The Supreme Court characterized NTT East’s conduct as a ‘unilateral refusal to trade and/or predation’. This refusal was artificial rather than ordinary competitive conduct through which an entrepreneur’s market power may be lawfully established, maintained, and strengthened. Commentators note that pricing should only be unlawful if it is predatory.26 Goods or services in high-tech markets such as telecommunications generally have high fixed costs (or sunk costs), and low variable or marginal costs, compared with many other industries. High-tech enterprises therefore sometimes use a ‘forward looking’ pricing strategy, where prices charged to early adopters of the product or service are below the cost of providing the service, while later prices are above cost. Under this strategy, the later price may be the same as the early price, since by the time the seller charges the later price, it has absorbed certain fixed costs. Even so, entrepreneurs’ pricing strategies are usually chosen based on their likely effect on market competition, rather than from the viewpoint of business reasonableness under the analysis required in an AMA private monopolization case. Therefore, these decisions are important business and legal decisions that must be made in light of the AMA’s criteria. (10) Relationship between the AMA and telecommunications regulation The Supreme Court also addressed the relationship between the AMA and telecommunication regulations under the TBA. NTT East alleged that the TBA, not the AMA, governed wholesale interconnection fees and retail subscription fees. NTT East also asserted that it had complied fully with the TBA and therefore its prices should not be regulated under the AMA. The Court held that NTT East could set an authorized fee level under the TBA. However, this did not mean that NTT East’s prices were exempt from review under the AMA. No other laws would be considered in evaluating whether the conduct violated AMA. Even if entry, withdrawal, prices, volume, equipment, or anything else, are regulated under separate regimes, the AMA still applies to determine whether a firm’s conduct constitutes private monopolization. This is consistent with recent decisions involving electricity companies, and with guidelines the JFTC has issued in the regulated fields of electricity, natural gas, and telecommunications.27 26 See 27 See

Negishi (2011). JFTC Guidelines for Proper Electric Power Trade (2001).

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(11) Economic evaluation There are very few agency or court decisions under the AMA that have discussed in any detail the effects of anticompetitive conduct on consumer welfare. As a consequence, it is often difficult to understand how, or even whether, the JFTC or court balanced procompetitive and anticompetitive effects of conduct in any given case. Both the JFTC’s hearing decision and the Supreme Court’s judgment in NTT East address the effect of NTT East’s conduct on consumer welfare, and appear to balance procompetitive and anticompetitive effects. NTT East argued that, to have sufficient economic incentive to establish a directcable internet access service, it must compete not only for subscribers at the retail level, but also for wholesale connection to optical fibre facilities. As such, NTT East asserted that if its conduct at the retail level was found to violate the AMA, it would lose its incentive to establish the infrastructure to support FTTH services. Furthermore, NTT East asserted that its conduct was procompetitive, because it made direct-cable FTTH services more widely available at lower subscription fees, and therefore promoted consumers’ interests. In its hearing decision, the JFTC concluded that NTT East should recover the cost of establishing optical fibre services for users from both its retail and wholesale customers (who were its competitors at the retail level). The JFTC also determined that, although incumbents competed on price and promoted consumers’ interests, new entrants could further increase consumer welfare in terms of price and service. Furthermore, the JFTC ruled that NTT East could not justify its anticompetitive conduct by demonstrating that it cut its prices for retail subscribers. Although the JFTC briefly balanced procompetitive and anticompetitive effects, it did not do so in any rigorous way. The Supreme Court affirmed the JFTC’s hearing decision and emphasized that the AMA protects consumer welfare, stating that: The purpose of the AMA is to promote fair and free competition, to stimulate the creative initiative of entrepreneurs, to encourage business activities, etc, and thereby to promote the democratic and wholesome development of the national economy as well as to assure the interests of general consumers. One of the AMA’s main themes is to eliminate artificial restraints to restrict competitive conduct … and to secure free business activity ….

(12) Significance of NTT East NTT East is the first private monopolization decision by the Supreme Court of Japan that addressed in detail the proper interpretation of the concepts ‘particular field of trade’ and ‘substantial restraint of competition.’ The decision is consistent with international competition law and economics, in particular because of its ‘effectsbased’ approach. The distinction between ‘artificial’ and ‘normal’ business conduct is useful because it highlights that aggressive competitive behaviour is lawful, even if it harms a competitor. Even so, the term ‘normal’, could deter businesses from adopting novel competitive strategies that are procompetitive, but are not ‘normal’ in the sense that they are commonly used. Hopefully, businesses will avoid this misinterpretation because the court emphasized that the AMA avoids ‘any artificial constraints

6 NTT East case

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restricting entrepreneurs’ competitive activities and guarantee[s] entrepreneurs’ free activities’. The Court also provided a more precise, and perhaps more helpful, analytical structure to private monopolization cases by delineating five factors it considered to decide whether conduct was ‘normal’ or ‘artificial’. Those factors are: (i) the difficulty the excluded party faces in finding an alternative means of competing effectively; (ii) the affected product market’s specific characteristics; (iii) the specific circumstances in which the conduct took place (including any intent to deceive or harm competition); (iv) the market structure; and (v) the length of time. It is consistent with international thought to transition to an effects-based and fact-specific approach in private monopolization regulation.

7 A Brief Comparison of Japan’s Law of Private Monopolization with USA and EU Laws Japan’s, the USA’s, and the EU’s competition laws all include statutory provisions to prevent a single firm’s unilateral conduct from improperly increasing its market power. These provisions’ form, substance, nomenclature, and practical application vary considerably across jurisdictions. We now compare elements of private monopolization under the AMA with the USA and the EU’s analogous approaches. We focus particularly on ‘margin squeeze’ (as arose in NTT East), and the related concept of ‘refusals to deal’. We have summarized key comparisons in a table. Under US antitrust law, unilateral conduct is addressed primarily under section 2 of the Sherman Act,28 which makes it unlawful to ‘monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations ….’ section 2 does not expressly address the types of conduct that may constitute a violation; however, as interpreted in modern US antitrust case law, conduct must be ‘exclusionary’ to violate section 2. The Supreme Court of the USA has explained that the question of whether certain conduct is exclusionary ‘cannot be answered by simply considering its effect on [the plaintiff] [but also requires consideration of] 28 15 U.S.C. s 2. Regarding the Supreme Court’s construction of the elements of section 2 see generally United States v Grinnell Corp, 384 US 563 (1966). In addition to sharing with the US Department of Justice authority to enforce section 2 of the Sherman Act, the US Federal Trade Commission has authority to address unilateral conduct using section 5 of the Federal Trade Commission Act, 15 USC s 45, (FTC Act), which declares unlawful ‘[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce’. There has long been debate over the extent, if any, to which section 5 of the FTC Act should be broader than section 2 of the Sherman Act.

32

2 Private Monopolization

whether it has impaired competition in an unnecessarily restrictive way’.29 Despite this distinction, deciding whether unilateral conduct is anticompetitive continues to be ‘one of the most vexing questions in antitrust law’. The comparable provision under EU law is Article 102 of the TFEU, which prohibits ‘[a]ny abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it … insofar as it may affect trade between Member States’.30 Article 102 provides a non-exhaustive list of activities that may constitute abuses under the provision, including imposing unfair prices, limiting production, markets or technical development, applying different conditions to equivalent transactions, or imposing commercially unrelated conditions in contracts. Nonetheless, ‘[i]t is still debated what [unilateral] conduct is, or should be, prohibited.’31 The European Court of Justice has defined abuse as follows32 : Abuse is an objective concept relating to the behavior of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.

In 2004, the US Supreme Court held that a company generally has no duty to deal with a competitor. Specifically, it rejected the essential facilities doctrine, pursuant to which a company might be required to provide a competitor access to its facilities, because otherwise the competitor could not compete in the relevant market.33 Similarly, the US Supreme Court decided that a company cannot be liable under antitrust law for a margin squeeze if it has no antitrust ‘duty to deal’ with the wholesale competitor at issue. Consequently, margin squeezes are no longer a viable stand-alone basis for liability under section 2 of the Sherman Act.34 In contrast, the EU continues to recognize both margin squeezes and refusals to deal as a way of establishing an abuse of dominance.35 Many commentators have pointed out the similarities and differences between the USA and EU approaches to margin squeeze.36 Though the EU competition authorities state that in general a competitor has no general duty to deal with another, the EU recognizes broad exceptions, and applies a form of the essential facilities doctrine. Also, in margin 29 Aspen Skiing Co v Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985). To an extent the requirement that, to be unlawful, conduct must impair competition in an ‘unnecessarily restrictive way’ is similar to the artificial-vs-normal distinction applied by the Supreme Court of Japan in NTT East, discussed above. 30 Treaty on the Functioning of the European Union (TFEU), Article 102. 31 J Faull and A Nikpay, The EC Law of Competition (2nd edn, 2007) paragraph 4.142. 32 Case 85/76 Hoffman-La Roche v Commission [1979] ECR 46, paragraph 91. 33 Verizon Communications v Law Offices of Curtis V. Trinko, LLP, 540 US 398 (2004). 34 Pacific Bell Telephone Co v Linkline Communications, Inc, 555 US 438 (2009). 35 See eg, C-280/08 Deutsche Telekom v Commission [2010] 5 CMLR 27; and C-52/09 Konkurrensverket v TeliaSonera Sverige AB, [2011] 4 CMLR 18. 36 For example, Hay and McMahon (2011) accessed 20 November 2013; Faella and Pardolesi (2010).

7 A Brief Comparison of Japan’s Law of Private Monopolization …

33

squeeze cases, EU competition law focuses more than US law does on the interactions between the upstream and downstream markets and on analyzing the conduct’s specific characteristics. The Japanese approach, as exemplified by the Supreme Court in NTT East, appears to be closer to the EU’s approach than the USA’s, but it is still evolving and greater clarification would be welcomed. It is clear, however, that in Japan and the EU, but not the USA, margin squeezes are themselves condemned by competition law. Japan focuses primarily on market foreclosure (or exclusion) and whether the conduct is ‘normal’ or ‘artificial’. The relationships and interactions between the upstream and downstream markets are more important in Japan and the EU than in the USA, whereas the primary focus in the USA is on the effects in relevant markets. The differences in these three jurisdictions’ approaches to margin squeeze highlight many of the important differences between their unilateral conduct laws. Below, we compare some of the primary aspects of those laws, with a focus on cases involving margin squeezes or refusals to deal:

Japan

USA

EU

Words of the Article

‘The term “private monopolization” … means business activities by which any entrepreneur, individually or by combination or conspiracy with other entrepreneurs, or by any other manner, excludes or controls the business activities of other entrepreneurs, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade’

‘Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony …’

Any abuse by one or more undertakings of a ‘dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States’

Recent cases

NTT East

Trinko; Linkline

Microsoft (continued)

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2 Private Monopolization

(continued) Japan

USA

EU

Conduct

The distinction between artificial and normal conduct provides sufficient guidance to business about what constitutes unlawful exclusionary conduct, and allows for legitimate forms of aggressive competition. The JFTC considers: (i) the degree of difficulty in finding an alternative; (ii) characteristics of the product; (iii) circumstances in which the conduct took place; (iv) the market structure and competitive circumstances; and (v) the duration of the conduct

There are certain well-recognized categories of conduct, such as tying, which violate section 2

A dominant company’s conduct is prohibited if it makes market entry very difficult or impossible for competitors, or makes it more difficult or impossible for its purchasers or suppliers to switch commercial partners, thereby strengthening the entity’s dominant position. The dominant company must use methods other than those that come within the scope of competition on the merits

Refusals to deal/denials of access/ margin squeezes

A firm that competes in two related markets engages in unlawful anticompetitive behaviour if it uses its advantageous market position in one market to substantially harm competition in the other (typically downstream) market. It could do so by refusing to deal with the competitor outright or by making an economically unreasonable offer that effectively precludes the competitor from the downstream market

Companies have no duty to deal with competitors Accordingly, except in very exceptional circumstances, 108 companies may refuse to deal without violating competition law, even if they have market power. Similarly, margin squeezes do not, by themselves, violate competition law

A dominant company may act anticompetitively by refusing to deal if it controls access to a facility that is essential to another entity competing on a separate downstream market, its refusal would eliminate competition on the downstream market, and (where IP rights are involved) its refusal prevents the creation of a new product. Margin squeeze is abusive under similar circumstances

(continued)

7 A Brief Comparison of Japan’s Law of Private Monopolization …

35

(continued) Japan

USA

EU

Judgment standard for refusal to deal in general and for margin squeezes in particular (Guidelines for the Application of the Antimonopoly Act Concerning the Review of Business Combinations (2006))

Conduct which is artificial rather than normal, and which causes substantial harm to competition is prohibited. For margin squeezes, this typically requires showing that the wrongful conduct made it difficult to enter the affected market

Refusals to deal and margin squeezes are prohibited if they change a long-standing course of dealing between the two competitors, or if they constitute predatory pricing in the affected market, under the test set forth by the Supreme Court in Brooke Group

Generally, companies have no affirmative duty to deal with a competitor. However, dominant companies commit abuses if they impair effective competition Refusals to supply are therefore prohibited if they eliminate effective competition. Margin squeezes are prohibited if they exclude an equally efficient competitor

Relationship with regulation

NTT East decided that the AMA applies even where sector specific regulation exists

In Trinko, the US Supreme Court regarded the 1996 Telecommunications Act as relevant to its antitrust analysis. The statute did not create new claims beyond existing antitrust standards

Generally, sector-specific regulation does not constrain a company’s ability to determine its own competitive strategy Companies can therefore generally freely adjust their deal terms or prices. This does not affect competition law review

8 JASRAC Case Thereafter, in April 2015, the Supreme Court ruled a private monopoly. This case was based on the assumption that actions such as establishing a method of collecting royalties for licensing use of music for copyright management by broadcasting rights was another requirement for “exclusion” referred to in Articles 2, 5 of the Antimonopoly Act It is a case that it has the effect of making entry of a person extremely difficult. The music copyright management service is a service wherein the management service provider concludes a management service agreement (Article 2, paragraph (1) of the Act on Copyright, etc. Management Service) with authors and music publishers holding music copyrights to undertake the management of music copyrights

36

2 Private Monopolization

as entrusted thereto, and also concludes a license agreement with persons who seek to use musical works under its management to grant authorization to them to exploit such musical works, and collects royalties specified in the latter agreement from users and distributes such royalties to authors, etc. Markets relating to the music copyright management service are roughly divided into those relating to management service and those relating to licensing service. The use of musical works under management as described above in the latter category of markets includes the use of musical works under management in broadcasting by a broadcasting organization. It should have been difficult in the relevant market for broadcasting organizations to think of not concluding a license agreement based on blanket authorization with the intervener, who has been entrusted with the management of the majority of music copyrights even after the change from the permission system to the registration system for the music copyright management service, and under such circumstances, the intervener’s practice functions to restrain broadcasting organizations from using musical works under the management of other management service providers because, as a result of the intervener adopting a method of calculating the amount of broadcasting fees to be collected from broadcasting organizations wherein the ratio of use in broadcasting is not reflected in the amount of broadcasting fees for licensing musical works under the management of the intervener, if broadcasting organizations pay broadcasting fees to other management service providers, the total amount of broadcasting fees payable thereby would increase, and also because musical works are basically replaceable when used for broadcasting. In light of the facts that almost all broadcasting organizations would be subject to the restraint caused by the practice, and that such situation has continued for an extended period of time, the practice is held to have the effect of making it extremely difficult for other management service providers to enter the Market. Whether or not this act falls under the act of “excluding the business activities of other business operators” referred to in Article 2, paragraph 5 of the Antimonopoly Act shall be based on the viewpoints of forming, maintaining or strengthening their own market power over this act It is an artification that departs from the range of normal competition means as seen from the viewpoint of whether or not it can be said that it can be said that it can be said that it can be said that it has an effect such as making it difficult for other management companies to enter the market in the market (Sect. 6(4) of this chapter). The Supreme Court ruling of this case can be considered to have faithfully reconstructed the idea indicated in the Supreme Court decision of this NTT case. According to this guidance, whether or not this action can be said to have the above-mentioned effect is based on the status of the market relating to the music copyright management business including the market, the position of the participants and other management companies in the market and the competition conditions, the characteristics of music work in broadcast use, the form and duration of this act, and other elements in a comprehensive manner. In this case, there were various discussions such as fact finding, its evaluation, plaintiff qualification etc. It can be seen that it is a judgment indicating that the stance of the Supreme Court is settled with regard to the exclusion of the private monopolization of the Antimonopoly Act.

9 Conclusion

37

9 Conclusion The recent JFTC decisions and the Supreme Court NTT East decision discussed in this chapter help clarify the range of conducts that amount to private monopolization under Article 3 of the AMA. These decisions, and other recent developments, help businesses assess whether their conduct is lawful, and bring Japanese law closer to that of other jurisdictions. They are also likely to lead to more and better enforcement by the JFTC and Japan’s courts. Finally, these developments in Japan emphasize that the overarching goal of antitrust law is to protect the competitive process, not competitors per se. Arguably, the recent aggressive enforcement of private monopolization may be linked to Japan’s economic deflation. Cartel conduct frequently occurs during a period of inflation, because it is easy for entities to work together to increase their prices, decrease output or allocate territory. In contrast, deflation can decrease cartel behaviour, because increasing prices is difficult and collusion gives more limited payoffs. Therefore, the JFTC is understandably focusing its efforts on private monopolization, rather than decreasing cartel activity. Private monopolization rules are being applied less along prescriptive ‘bright lines’, and more along evaluative standards.37 Further development is needed to help businesses predict how these standards are applied, as is reliance on empirical evidence and economic analysis. The JFTC’s and the courts’ approach should continue to evolve through assessment of specific cases, and Japan should continue interacting with other jurisdictions through the International Competition Network, and participate in academic debate about the proper approach to unilateral conduct in competition laws.

References Crane DA (2007) ‘Rules versus standards in antitrust adjudication’ 64 Wash & Lee L Rev 49 European Commission, Official Journal C 372, 9.12.1997, pp 5–13, pp. 15–18. http://europa.eu/ legislation_summaries/competition/firms/l26073_en.htm Faella G, Pardolesi R (2010) ‘Squeezing price squeeze under EC antitrust law’ 6 Eur Compet J 255–284; the articles in the Competition Policy International, Antitrust Chronicle, APR-09(1). https://www.competitionpolicyinternational.com/apr-091 Faull J, Nikpay A (2007) The EC law of competition 4.141, 2nd edn Guidelines for Exclusionary Private Monopolization under the Antimonopoly Act (2009) Guidelines for the Application of the Antimonopoly Act Concerning the Review of Business Combinations (2006) (Merger Review Guidelines). http://www.jftc.go.jp/e-page/legislation/ama/ RevisedMergerGuidelines.pdf Hay, McMahon (2011) The diverging approach to price squeezes in the United States and Europe. In: Cornell law faculty working papers. http://scholarship.law.cornell.edu/cgi/viewcontent.cgi? article=1094&context=clsops_papers Inoue A (2012) Antitrust enforcement in Japan. Dai-Ichi Hoki Co Ltd, pp 162–164 37 See

Crane (2007) and Luis (1992).

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JFTC Guidelines for Proper Electric Power Trade (2001), Guidelines for Proper Gas Trade (2000), and Guidelines for the Promotion of Competition in the Telecommunications Business Field (2001). http://www.jftc.go.jp/e-page/legislation/index.html Luis K (1992) ‘Rules versus standards: an economic analysis’ 42 Duke LJ 557 Negishi A (2011) ‘Hanrei Hyoshaku’ 144 Min-Sho-Ho Zasshi 802–815 (in Japanese)._808_ Negishi A, Funada M (2006) Dokusenkinshi-ho Gaisetsu, 3rd edn. Yuhikaku Okada Y (2012)‘Toki no Hanrei’ 1443 Jurist 78–87 (in Japanese) Salop SC (2006) Exclusionary conduct, effect on consumers, and the flawed profit-sacrifice standard’ 73 Antitrust Law J 311:341 Shiraishi T (2011) ‘NTT Higashi Nihon FTTH service Saiko-sai Hanketsu no Kento’ 52 Law Technol 14–23 (in Japanese) Takizawa S (2009) ‘Hanrei Hyoshaku’ 1381 Jurist 124–25 (in Japanese); Tadashi Shiraishi, Dokkinho no Kandokoro, ver. 2, (Yuhikaku 2010) 377–382 (in Japanese) US Department of Justice and Federal Trade Commission Merger Guidelines § 4 (2010). http:// www.justice.gov/atr/public/guidelines/hmg-2010.html

Chapter 3

Damages Calculations in Private Monopolization

1 Introduction Complex civil litigation, such as private monopolization and patent infringement, often involves monetary remedies that must be quantified. This chapter analyzes a Tokyo High Court case decision on damages calculation in the private monopolization of Nipro Corporation (Nipro). In the United States, there are many damages cases that involve section 2 of the Sherman Act, the treble damages rule, and the class action lawsuit that purportedly the European Union intends to introduce in its private damages system in the near future. Japan has a private damages system under its Antimonopoly Act (AMA) that has minimized the number of lawsuits filed in Japan. Through the analysis of this case, I suggest a simple yet significant damages calculation tool that can be applied in private monopolization and cartel or bid-rigging cases. Economic analysis in the courtroom, including antitrust damages calculation, has been discussed from various viewpoints. On the one hand, Eric Zitzewitz surveyed forensic economics (the contribution of economic analysis that classifies and 1 organizes the uncovered evidence of wrongdoing), Thomas Ireland reported on the Daubert decision and forensic economics (the damages analysis is impacted by the 2 Daubert rules in general), and Gregory Sidak overviewed the situation of neutral eco3 nomic experts. In particular, Andrew Gavil employed several case studies to examine 4 damages calculation in antitrust cases, and Joshua Wright discussed evidence-based antitrust (the integration of economic analysis into all stages of enforcement decision1 see

Zitzewitz (2012). Ireland (1997). 3 see Gregory Sidak (2013). 4 see Gavil (2000). 2 see

This Chapter is based on Koki Arai (2014) “Damage Calculation in Private Monopolization: A Case Study in Japan. “Journal of Competition Law and Economics, 10 (2), 505–516. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_3

39

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3 Damages Calculations in Private Monopolization

making is the first focal point).5 On the other hand, Peter Davis and Eliana Garces,6 and Frank Maier-Rigaud and Ulrich Schwalbe7 compiled a quantitative technique for antitrust cases. Further, Simon Vande-Walle analyzed the current situation of private damages in EU competition policy.8 The present study conducts a case analysis to highlight the usefulness of the structural model and reduced form estimation and identifies the price effect of private monopolization violation on the basis of the abovementioned analytic studies and standard empirical methods. Section 2 explains the rules and facts; Sect. 3 presents the model analysis; and Sect. 4 provides the discussion and concluding remarks.

2 Rules and Facts To conduct an economic analysis of a court case, it is necessary to understand the current rules and interpretations highlighted in the literature. Furthermore, when analyzing an actual case, it is essential to grasp the facts of the decision. In the Nipro case, the presumption of facts was disputed. The following facts were acknowledged on the basis of the evidence and testimonies. The Japan Fair Trade Commission (JFTC) ruled that a series of three actions taken by Nipro against Naigai and Naigai Glass (Naigai Group) for the purpose of the suspension or restriction of imported glass tubes was a private monopolization violation of the AMA. Nipro’s conduct fell under the law against the exclusion of competitors from conducting their business. Nipro, a company holding monopoly power in the glass tube market of western Japan (producing glass tubes under the name of Nippon Electric Glass Co. Ltd.), intended to place restrictions on and impose sanctions against Naigai Group’s extensions and expansions in regard to imported glass tube products. As a result of Nipro’s conduct, there was little to no room for competition in terms of price and quality in western Japan’s glass tube market. In the JFTC hearing process, Nipro was charged with the following violations from Chap. 2 of the AMA: (1) offering to change transaction terms (increasing the price of the corporation’s official, documented price, shortening payment terms, and abolishing special discounts) only for Naigai Corporation (Naigai) after April 1, 1999; (2) selling slim glass tubes to Shiotani Glass at a price below the total sales cost and almost equal to the variable cost since February 2000; (3) refusing to accept orders from Naigai for imported slim glass tubes and for the same types of goods made by Nippon Electric Glass; and (4) changing the transaction terms (pledge of collateral or cash settlement) only for Naigai, since March 23, 2003. The JFTC concluded that Nipro’s conduct violated the first part of Article 3 of the AMA. The JFTC found that the conduct set out in (1), (3), and (4) restricted 5 see

Wright (2012). Davis and Garces (2009). 7 see Maier-Rigaud and Schwalbe (2013). 8 see Walle (2013). 6 see

2 Rules and Facts

41

Naigai’s and Shiotani Glass’s ability to sell imported slim glass tubes. In addition, the JFTC determined that by excluding Naigai’s business, Nipro’s conduct imposed a substantial restraint on competition. On the other hand, the JFTC found that the conduct set out in (2) did not involve Nipro excluding Nagai. Thus, on June 5, 2006, the JFTC ordered Nipro to cease its anticompetitive conduct in violation of the first part of Article 3 of the AMA. Although the JFTC found that the conduct set out in (2) did not involve excluding Naigai, it did determine that the conduct set out in (1), (3), and (4) restricted Naigai’s and Shiotani Glass’s ability to sell imported slim glass tubes as well as their ability to enforce sanctions against Nipro. This conduct on the part of Nipro was part of a series of integrated behaviors that constituted excluding Naigai’s business. Nipro intended to prevent Naigai and other ampoule manufacturers from importing slim glass tubes. As Nipro’s conduct was likely to eliminate its competitors’ businesses, the company’s conduct was governed by the elimination clause found in Article 2, section 5 of the AMA. Nipro argued that the conduct set out in (1) was merely a change from favorable treatment in the transaction conditions between Nipro and Naigai Glass to normal treatment as part of the freedom of trade in business. However, the JFTC found that there had been no significant favorable treatment in the prior transactions between Nipro and Naigai. The JFTC also found that Nipro had failed to express any intention to make changes to the agreement, such as ending the treatment. Therefore, the JFTC did not accept Nipro’s claim of normal business matters and noted the company’s intention to eliminate Naigai’s glass tube import business. Regarding the conduct set out in (3), Nipro argued that there was a substantial stock risk in holding several different types of glass tubes, and that its conduct was lawful. However, the JFTC noted that Naigai’s original order had been too large to provide for Nipro, though Naigai’s modified order was amended to a reasonable number of common glass tubes and other similar products with sequential delivery. Therefore, Naigai’s request was not an unreasonable one. With regard to the conduct set out in (4), Nipro argued that it did not have a trustworthy relationship with Naigai. Therefore, Naigai’s statement about becoming an agent for a foreign firm did not destroy its relationship with Nipro. Furthermore, the JFTC found that “late payment was not the cause of the conflict.” In addition, Naigai’s note balance was in between Nipro’s credit and collection practice. Thus, the JFTC determined that Nipro’s conduct involved deposit security and not credit control.

3 Model Analysis In the following economic analysis considering the purport of the rule, I apply the findings and data to an economic model and then show the results by assessing the rationale of the judgment. In that litigation, the plaintiff alleged that Nipro’s conduct had not led to the exclusion of Naigai and that there was no violation or damages responsibility if the exclusion phase is the only possibility. The district court held

42

3 Damages Calculations in Private Monopolization

that the reason for the small effect on the profit and loss of Naigai Group until March 2009 was the result of Naigai’s countermeasures. Based on this acknowledgment, the court held that it was unable to recognize damages between the but-for price that would have hypothetically prevailed were it not for Nipro’s conduct and the actual price after Nipro’s conduct, while recognizing damages such as lost transactions caused by said conduct and its transaction costs. This model analyzes whether there are damages between the but-for price and the actual price. In this regard, the plaintiff alleged that the but-for price was 410 yen, due to the manufacturer’s offer, the sum of the import unit price and related costs, and the foreign price. The defendant argued that the allegation should be rejected because there was no reason to set the same price for domestic and imported products; furthermore, no measure had been taken by the JFTC, there had been no price fluctuation over the years in question, and there were no grounds for the plaintiff’s alleged price. The judgment did not recognize the price-related damages, since there were very few fluctuations in the product price and the reason given for not expanding the import market share was plausible. The court pointed out that the price increases brought about by an entity that can control transaction conditions are to some extent arbitrary—that is, the monopolist has the market power. In this regard, it is necessary to model the monopolist’s conduct, such as price setting and transaction rejection. (1) Supply Relationship I modeled the monopolization situation on the basis of studies by Robert Porter9 and Koki Arai.10 Theoretically, the marginal revenue of the product is equal to the marginal cost in the monopoly equilibrium, thus reflecting optimal pricing. Therefore, if the monopolist sets a higher price than the optimal price, that price is assumed to be the dynamic optimal price that balances the loss of departure from the static equilibrium with the gain of the exclusion of potential entrants. In this regard, I assume the supply relationship with dummy variables for the conducts in question on the basis that the monopolist sets the price artificially beyond the optimal price in the supply function. In fact, as regards the damages preventing Naigai Group from purchasing glass tubes at a fair price, due to the impossibility of dealing with imported foreign glass tubes resulting from Nipro’s conduct, I model the supply relationship with the artificial conduct. The supply relationship is as follows: Pricet = α1 + β1,1, Quantityt + β1,2 Tubept + β1,3 Firstt + β1,4 Secondt + β1,5 Thirdt + ε1,t ,

(1) where subscript t is the financial year, Price is the unit price of the product, Quantity is the product volume of the weight, and Tubep is the unit shipping price of the glass tubes, bars, and bulbs, except for electrical ones. First, Second, and Third are the dummy variables of the violation conduct: First is the first violation conduct in the 9 see

Porter (1983). Arai (2013).

10 see

3 Model Analysis

43

JFTC decision, Second is the third violation conduct, and Third is the fourth violation conduct. These dummy variables are equal to 1 when the conduct is engaged and equal to 0 otherwise. I consider the conduct dummy variable to be the factor of the shift of the constant term in the supply function, and ε is the error term. In this equation, α1 and β1,1, β1,2, β1,3, β1,4, and β1,5 are the coefficients sought through the regression analysis. Considering the normal supply function restraint from a general economic viewpoint, the coefficient of β1,1 is likely to be positive, since the relationship between the price and quantity is likely to be positive. In a similar fashion, the coefficient of β1,2 is likely to be positive, since the relationship between the price and the cost of components should be positive. In this discussion, I estimate not only the actual value of the data, but also the value of the logarithm of the actual data. The reason why I use both values is that I do not know the shape of the supply relationship of the product. Therefore, I take various types of functions into consideration and compare them in a variety of indices. (2) Demand Function I formulate the demand function simply as follows: Quantityt = α2 + β2,1, Pricet + β2,2 N _Salest + ε2,t ,

(2)

where the variables have the same meaning as in the supply function, and N_Sales is the total amount of Naigai Group’s sales. N_Sales is an appropriate variable of the demand situation, as it depends on the price and quantity of the glass tubes in the sample in question. Considering that the sales of the product in question represent a 5–20% share of Naigai Group’s total sales, the coefficients of the regressed equation have a bias to some extent in the analytic phase of the discussion. In this equation, α2 and β2,1 and β2,2 are coefficients sought through the regression analysis. Considering the normal demand curve restraints from a general economic perspective, the coefficient of β2,1 would be negative, since the relationship between the price and quantity is likely to be negative in the normal demand function. In a similar fashion, the coefficient of β2,2 would be positive, since the relationship between the quantity produced and overall demand is likely to be positive. In this discussion, I estimate not only the actual values of the data but also the values of the logarithm of the actual data for the demand function in accordance with the supply relationship. The data used in this chapter were derived from the case judgment and the Census of Manufactures of Japan. The descriptive statistics of the data and a sequential line graph of the data follow in Table 1 and Fig. 1, respectively. (3) Results The results of the estimation are displayed in Table 2. The system of Eqs. (1) and (2) forms the structural model of the market economy. In the estimation phase, I ensure that the data on price and quantity are represented as a result of the equilibrium of these functions. Regarding the determination of both parameters, there is no causation in their relationship. In accordance with all

44

3 Damages Calculations in Private Monopolization

Table 1 Descriptive statistics Price

Quantity

Tubep

N_Sales

First

Second

Mean

585.9200

587181.5

289.2214

2,616,802,513

0.6667

0.5000

Third 0.3333

Median

587.8070

473270.5

296.8460

2,507,517,236

1

0.5

0

Maximum

645.3385

1,273,354 318.5280

3,791,171,877

1

1

1

Minimum

560.1409

117,759

232.9489

1,469,394,791

0

0

0

Std. dev.

24.3206

371115.7

26.8198

872,078,315

0.4924

Sum

7031.0400 7,046,178 3470.6560 31,401,630,153 8

Observations 12

12

12

12

12

0.5222

0.4924

6

4

12

12

1999

650 640 630

unit price (Yen)

620 610 600

1996

2006

590

1995

580 570 560

2003 2001

550

quanƟty (Kg) Fig. 1 Sequential line graph

other factors, both parameters are determined simultaneously. The data observed are the equilibrium variables, which represent the trajectories of the intersection point between the demand function and the supply relationship. I address this simultaneity problem through an instrumental variable method or a two stage least squares method (2SLS) and a three stage least squares method (3SLS). According to these methods, the two original values and logarithm values do not correlate with the error terms; the instrumental variables correlate with the independent variables; and the instrumental variables do not have a linear dependent relationship. According to the results of the linear and log–log functions, both 2SLS and 3SLS have positive coefficients for quantity, as well as for Tubep in the supply relationship. These results correspond to what I expected for the sign, but are not statistically significant. Also expected with regard to the sign, in the demand function, the results have negative coefficients for price, and positive coefficients for N_Sales of the demand factor with some statistical significance. As for the violation period dummy, some (First and Third) of the coefficients are positive and not statistically significant in both 2SLS and 3SLS, as well as in both the linear and log–log functions,

3 Model Analysis

45

Table 2 Regression results Linear

Log–Log

OLS n = 12

OLS

2SLS

FIML

OLS n = 12

OLS

2SLS

FIML

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

6.5750*** (0.6493)

6.1075*** (0.8571)

6.1215 (2.3401)

Supply relationship C

504.2735*** 606.4307*** 500.5219*** 500.5219 5.4709*** (75.8362) (96.7027) (149.7474) (1135.0850) (0.6626)

Quantity

0.0000 (0.0000)

−0.0214 (0.0622)

0.0842 (0.1194)

0.0842 (0.5877)

0.0212 (0.0174)

−0.0375 (0.0369)

0.0237 (0.0635)

0.0204 (0.3124)

Tubep

0.2311 (0.2702)

0.0451 (0.2465)

0.0280 (0.3002)

0.0280 (1.6931)

0.1102 (0.1223)

0.0137 (0.1028)

0.0212 (0.1243)

0.0229 (0.4418)

First

6.5775 (36.2060)

60.5347 (64.5629)

60.5347 (358.5275)

0.0032 (0.0359)

0.0432 (0.0525)

0.0377 (0.1544)

Second

−52.5672** −37.1553 (30.9054) (22.8600)

−37.1553 (219.1893)

−0.0955** (0.0349)

−0.0746 (0.0449)

−0.0751 (0.5557)

Third

2.7842 (19.4981)

18.3188 (118.4753)

−0.0096 (0.0329)

0.0226 (0.0464)

0.0232 (0.2978)

−13.5932 (31.6936)

−13.5792 (181.1817)

18.3188 (27.3371)

Demand function C

1859.7250* 1711.1460 1711.1460 (905.5716) (4636.9410) (2297.9600)

−10.9994 (7.1183)

Price

−4.3218*** −4.0456 (8.6180) (1.6738)

−4.0456 (3.9593)

−5.2087*** −4.6598 (1.3943) (6.6824)

−4.6631 (37.0225)

N_Sales

0.0000*** (0.0000)

0.0000*** (0.0000)

2.3282*** (0.1636)

2.2867 (2.6056)

0.0000*** (0.0000)

2.2864*** (0.5241)

Supply relationship R-squared

0.2714

0.6359

0.4612

0.4612

0.2641

0.6910

0.5491

0.5625

Adjusted R-squared

0.1094

0.3325

0.0121

0.0121

0.1006

0.4334

0.1734

0.1979

S.E. of regression

22.9512

19.8708

24.1725

24.1725

0.0386

0.0306

0.0370

0.0365

DurbinWatson stat

1.9146

2.7207

2.0985

2.0985

1.8868

2.9462

2.2457

2.3164

Demand function R-squared

0.9385

0.9383

0.9383

0.9658

0.9653

0.9653

Adjusted R-squared

0.9249

0.9246

0.9246

0.9583

0.9575

0.9575

S.E. of regression

101.7213

101.8751

101.8751

0.1433

0.1445

0.1445

DurbinWatson stat

1.7083

1.7273

1.7273

2.1527

2.1635

2.1635

In the table, *, **, and *** indicate 10%, 5%, and 1% significance levels respectively

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3 Damages Calculations in Private Monopolization

Table 3 Reduced-Form results

Linear n = 12

Log–Log n = 12

Coefficient (Std. error)

Coefficient (Std. error)

C

503.8732*** 113.6634

5.2955* (2.4353)

Tubep

0.0348 (0.2334)

0.0190 (0.1096)

First

32.0742 (22.9631)

0.0366 (0.0353)

Second

−30.7510 (28.6588)

−0.0682 (0.0489)

Third

16.2768 (19.9115)

0.0206 (0.0376)

N_Sales

0.0000 (0.0000)

0.0449 (0.1065)

R-squared

0.6733

0.6481

Adjusted R-squared

0.4010

0.3548

S.E. of regression

18.8224

0.0327

Durbin-Watson stat

2.0198

2.2755

while others are negative in both 2SLS and 3SLS, as well as in both the linear and log–log functions. There is no positive coefficient for the violation period dummy with convincing statistical significance. (4) Reduced-Form Estimation I obtain the following Eq. (3) as a result of solving the system of Eqs. (1) and (2) with regard to the price: Price = −

α1 + α2 β1,1 + β1,2 Tubep + β1,3 First + β1,4 Second + β1,5 Third + β1,1 β2,2 N _Sales −1 + β1,1 β2,1

(3) Rearranging the equation to make it easily understandable yields the following Eq. (4): Pricet = A + B × Tubept + C × Firstt + D × Secondt + E × Thirdt + F × N _Salest + ε3,t ,

(4) where the same variables have the same meaning. In this equation, A, B, C, D, E, and F are the coefficients sought through the regression analysis. The results of the linear and log–log regressions are shown in Table 3. From an economic perspective, there is no restriction on the coefficients in the results. There is also no statistically significant coefficient for the violation conduct. In regard to the conduct trend, First and Third have a positive effect and Second has a negative effect.

4 Discussion and Conclusion

47

4 Discussion and Conclusion This chapter found the appropriate signs of the coefficients in supply relationship and demand function from an economic point of view, based on the simple model and limited data of the Nipro judgment. The model analysis, however, did not obtain the alleged violation conduct effect on the price in question with statistical significance. Therefore, the assumption that the price of the product without the violation conduct is no different from the actual price is not rejected with any statistical significance. The results regarding the structural model estimation are similar to those of the reduced form estimation. Basically, the estimation of models suggests that the violation conduct is not likely to have an effect on the product price. In conclusion, this chapter’s economic analysis affirms the judgment of the Nipro case that states that it does not acknowledge that the price would be lower without the violation conduct.11 This chapter dealt with the only case decision to highlight the usefulness of the standard structural method of supply and demand and identified the private monopolization violation price effect. One of the most meaningful contributions of this chapter is that it establishes a simple and moderate estimation method to determine whether there is a price effect in an alleged violation conduct. In particular, it is useful to check a judgment to avoid raising the Type II error (the failure to reject a false null hypothesis) in the judgment. In addition, enhancing the precision of discriminating the monopolization practice from the cost and demand movement remains a future challenge in the trend of seeking objectivity in antitrust damages litigation. It is not always easy for economists to explain economic results to lawyers, both in and out of the courtroom. It is necessary to use simple and conservative means to explain and advance a robustness check of this estimation technique of applicability to the findings. This chapter was conducted to provide a private monopolization case study, as the accumulation of such studies is needed in order to apply empirical economics to the courtroom. Furthermore, the method of this chapter—that is, comparing the results of the structural model estimation with those of the reduced form estimation and assuming the standard supply relationship with dummy variables for violation conduct—is exceptionally reliable and applicable on the grounds of simple and standard economic thinking. In particular, the tools are not only useful for identifying the effect of the violation but also for verifying the absence of the effect—that is, Type II error. Gavil posed the question, “Is Daubert, itself, testable?”12 The expense associated with the Daubert process, which has served as the gatekeeper of junk economics, posed a problem. Hence, the analysis of this chapter makes a meaningful contribution by providing an efficient and effective tool based on limited data.

11 see 12 see

Miwa and Mark Ramsever (2013). Miwa and Mark Ramsever (2005).

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3 Damages Calculations in Private Monopolization

References Arai K (2013) Cartel identification by price analysis at the Asian meeting of the econometric society Davis P, Garces E (2009) Quantitative techniques for competition and antitrust analysis. Princeton Univ. Press Gavil AI (2000) Defining reliable forensic economics in the Post-Daubert/Kumho tire era: case studies from antitrust. Wash Lee L Rev 57: 831 Gregory Sidak J (2013) Court-appointed neutral economic experts. J Compet Law Econ 9: 359 Ireland TR (1997) The Daubert decision and forensic economics. J Forensic Econ 10:121 Maier-Rigaud F, Schwalbe U (2013) Quantification of antitrust damages. IESEG working paper series, 2013-EOC-09. http://www.ieseg.fr/wp-content/uploads/2013-ECO-09_Maier-Rigaud.pdf Miwa Y, Mark Ramsever J (2005) Toward a theory of jurisdictional competition: the case of the Japanese FTC. J Compet Law Econ 1:247 Miwa Y, Mark Ramsever J (2013) Naigai/Nipro Songai Baisho Seikyu Jiken ni miru “Shiteki Dokusen” Kinshi Kitei no Houteki Yu-ko-sei [Legal effectiveness on the article of prohibition of “Private Monopolization” in the damages lawsuit of Naigai/Nipro]. Law Tech 1:60 Porter R (1983) A study of cartel stability: the joint executive committee, 1880–1886. Bell J Econ 14:301 Walle SV (2013) Private antitrust litigation in the European Union and Japan: a comparative perspective. Maklu Publishers Wright J (2012) Abandoning antitrust’s Chicago obsession: the case for evidence-based antitrust. Antitrust L J 78:241 Zitzewitz E (2012) Forensic economics. J Econ Lit 50:731

Part II

Cartel

Cartel bid-rigging is regulated under Article 3 as an unreasonable restraint of trade from the viewpoint of the Antimonopoly Act, and this definition provision is prescribed in Article 2, paragraph 6. 1. Provisions and Requirements for Unreasonable Restraint of Trade (1) Provision Private monopoly is prohibited at the end of Article 3 of the Antimonopoly Act, and definition provision of private monopoly is stipulated in Article 2(6). Article 3 “An enterprise must not effect private monopolization or unreasonable restraint of trade.” Article 2 Clause 6 “(6) The term ‘unreasonable restraint of trade’ as used in this Act means such business activities, by which any enterprise, by contract, agreement or any other means irrespective of its name, in concert with other enterprises, mutually restrict or conduct their business activities in such a manner as to fix, maintain or increase prices, or to limit production, technology, products, facilities or counterparties, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade.” (2) Requirements Unreasonable restraint of trade are carried out by business operators as actors, and further have action requirements and effect requirements, which are structured as follows. [conduct] “in concert with other enterprises”

50

Part II: Cartel

“mutually restrict or conduct their business activities in such a manner as to fix, maintain or increase prices, or to limit production, technology, products, facilities or counterparties” [effect] “a substantial restraint of competition in any particular field of trade” 2. About each Requirement Based on actual cases, these points can be summarized as follows. (1) Other Enterprises In the past, there was a case precedent was issued that “other enterprises” needed to be a business entity in a competitive relationship. However, the corresponding part of that time was changed in 1953 by the amendment to the law, and today it is understood that “other enterprises” should not be construed as limited to businesses with competing relationships. Therefore, as a fact to prove, regardless of the stage of the transaction, it is whether or not it is a business entity that is substantially competitive. ※ 1. Seal Rigging Case (1993) (Tokyo High Court, Heisei 5, December 14, 1993, Heisei 5 (No) No. 1, KouKeiShu 46 Vol. 3, p. 322). (2) In Concert With Whether “In Concert With” or not is required to be recognized as having a mutual intention between business operators. It is not necessary for the communication of intention to merely recognize and accept one of the price increases on the other side, but it is not necessary to clearly indicate that they are binding each other and agree on each other, It is said that it will be understood that it is sufficient to recognize the price hike and accept it implicitly. In addition, it is also agreed that it is agreed that even if it is an agreement of abstract and comprehensive contents, it is agreed to set a specific order acceptor by separately talking about individual transactions. It is said that the facts of establishment, prior consultation with intention to order, the disappearance of talks after the dissolution of the meeting, and the fact that the discussion was held among the participants in the meeting is said to be a powerful indirect fact. There is no contradiction between the fact that the meeting is a socializing personality and the establishment of an agreement there. For this reason, as facts to prove as to whether or not to “in concert with” a specific business entity, there is a fact that communication of intention was made (that there was a probable situation to be made). It is that he recognized and accepted what the business operator would raise. In other words, cooperativeness means not recognition and acceptance of the business operator, but it is unreasonable that it is recognized that the business operator would raise the price for another business operator because it was unjustly restricted. It is a sufficient condition to generate the effect of cooperativeness. For this reason, as a matter of what should be regulated as cooperativeness, other operators will recognize price hoisting behaviors of the business operator and implicitly acknowledge their

Part II: Cartel

51

behavior. Therefore, it is considered that the cooperativeness of a certain business operator is indicated by two points of (1) communication of intention and (2) recognition and acceptance by other business operators. At this time, as indirect facts indicating this, the long-term/short-term process leading to such a situation, the situation after a certain action, etc., can be considered. Regarding bid-rigging cases, there are (1) adjustment rules for prospective customers for bids exist with effectiveness, (2) that the business operator recognized the order adjustment rule, (3) the fact that they were acting in accordance with the order adjustment rule, such as not participating in the meeting for the order adjustment rule, and if the above three points are recognized, unjust restrictions on transactions in the bid-rigging case. There are some judgment criteria that the business criteria that it is sufficient to admit that the business operator participated in this was rational enough for practical operation. As a defense against these, even when the examiner indicated the existence of an agreement, even after recognizing the existence of the agreement itself, proved that the business person took own action in all cases. In case it is not an unreasonable restraint of trade. ※ 2. Toshiba Chemical Case (1995) (Tokyo High Court, Heise 7, September 25, 1995, Heisei 6 (Gyo-Ke) No. 144, Hanrei Times 906, p. 136). ※ 3. Kyowa Exeo Case (1996) (Tokyo High Court, Heisei 8, March 29, Heisei 6 (Gyo-Ke) No. 80, Hanrei Jihou 1581, p. 37). ※ 4. Newspaper Distribution Agreement Case (1953) (Tokyo High Court, Showa 28, March 9, Showa 26 (Gyo-Na) No. 10, KouMinShu 6, Vol. 9, p. 435). ※ 5. Giken System Case (2000) (Judgment Decision, Heisei 12, August 8, Heisei 11 (Han) No. 5, Shinketsu-Shu (trial decision collection)). ※ 6. Giken System Damages Case (2002) (Tokyo District Court, Heisei 14 December 26, Heise 13 (Wa) No. 13381, Hanrei Jihou 1822, p. 75). (3) Mutually Restrict … Their Business Activities With regard to whether or not they are binding on business activities mutually, there is no need for collateral or the like to aim for the effectiveness of the agreement, and employees of each business operator are required to implement the contents of the agreement, etc. It is said that it is binding on business activities to hold an agreement such as price hike as having an intention to strive toward other businesses and to comply with it. This is not limited to mutually symmetrical constraints, but if there is a common objective such as elimination of others, the activities of businesses are restricted, it falls under this. Facts to prove this are the existence of agreements, agreements, common recognition of fundamental rules, etc. This is the same as the content to be indicated “in concert with” above, but to decide the consideration and to detain the business activities mutually is a joint action. An enumerating examples that actually occur, and if the existence of a joint act is indicated, unjust restrictions on transactions will be accomplished at the time of the agreement, contents, unless it is clearly impossible, it is considered unnecessary to prove the detailed contents of the contents.

52

Part II: Cartel

※ 7. Petroleum Price Cartel Case (1984) (Supreme Court, Showa 59, February 24, Showa 55 (A) No. 2153, KeiShu 38 Vol. 4, p. 1287). ※ 8. Seal Rigging Case (1993) (Tokyo High Court, Heisei 5, December 14, 1993, Heisei 5 (No) No. 1, KouKeiShu 46 Vol. 3, No. 322) The same as above Note ※ 1. ※ 9. Shikoku Road Service Case (2002) (Recommendation Decision, Heisei 14, December 4, Heisei 14 (Kan) No. 19, Shinketsu-Shu). (4) By Or Conduct Unjust restrictions on transactions will be concluded as a mutual binding act as an agreement or the like, but will not be completed at that time but will continue until the results of actions where competition is substantially restricted disappear it seems to do. When an act to carry out the initial mutual binding act, etc., is made here, it becomes part of the act of conducting. When another mutually binding act, etc., is carried out, it is judged whether substantial restriction of new competition has occurred or not. ※ 10. Tokyo Metropolitan Water Meter Rigging Case (1997) (Tokyo High Court, Heisei 9, December 24, Heisei 9 (No) No. 1, KouKeiShu 50 Vol. 3, p. 181). ※ 11. Defense Agency Petroleum Products Bid Rigging Case (2004) (Tokyo High Court, Heisei 16, March 24, Heisei 11 (No) No. 2, Hanrei Times 1180, p. 136). (5) A Substantial Restraint of Competition Regarding the practical limitation of competition, it refers to a form in which a specific business operator, etc., can dominate the market by voluntarily influencing prices, quality, quantity, and other various conditions freely to a certain extent by its intention It is said. It is a requirement that expresses the effect in the market, and usually there are not many problems in cases of unreasonable restraint of trade. In the case of an unreasonable restraint of trade case, the effect requirement becomes a problem, for example, concerning a defense that there was competition in some markets even if there is an agreement or the like. To date, it has been said that competition in some markets has not affected the judgment of the substantial restraint of competition. The fact of proof of this is the existence of an agreement and the identification of the market that it actually covers. If cooperativeness is indicated, the target market is regarded as a problematic market, in general. In the situation of substantial restraint of competition, there is not often a problem. If the business enterprises acted at its own discretion and indicated that there was competition, in that case the competition was virtually unlimited, so there is no unreasonable restraint of trade case. ※ 12. Toho Subaru Case (1951) (Tokyo High Court, Showa 26, September 19, Showa 25 (Gyo-Na) No. 21, KouMinShu 4 Vol. 14, p. 497). ※ 13. Noda Soy Sauce Case (1957) (Tokyo High Court, Showa 32, December 25, Showa 31 (Gyo-Na) No. 1, KouMinShu 10 Vol. 12, p. 743). ※ 14. Ductile Cast Iron Pipe Share Agreement Case (2000) (Tokyo High Court, Heisei 12, February 23, Heisei 11 (No) No. 1, KouKeiShu 51 Vol. 1, p. 23). ※ 15. Defense Agency Petroleum Products Bid Rigging Case (2004) (Supreme Court, Heisei 17, November 21, Heisei 16 (A) No. 147).

Part II: Cartel

53

3. Other Issues Other issues concerning unreasonable trade restrictions include the time of violation, irreparable postcourse, grounds for illegal crackdown, and ideas on specific properties. (1) Timing of Violation Regarding the time when the Antimonopoly Act violation began, if it is agreed that the content of the violation is made, the achievement is reached immediately and the content is not actually put into practice. ※ 16. Petroleum Price Cartel Case (1984) (Supreme Court, Showa 59, February 24, Showa 55 (A) No. 2153, KeiShu 38 Vol. 4, p. 1287), The same as above Note ※ 7. (2) Impossible Punishment Postaction/Number of Crimes In addition, violation of the Antimonopoly Act will not be a punishable postincident act, and due to bid-rigging in each fiscal year, each new year’s infringement of legal interest is caused by unreasonable trade restrictions, so that each year’s sins are considered to be consolidated crimes. ※ 17. Tokyo Metropolitan Water Meter Rigging Case (1997) (Tokyo High Court, Heisei 9, December 24, Heisei 9 (No) No. 1, KouKeiShu 50 Vol. 3, p. 181) The same as above Note ※ 10. (3) Reasons for Illegal Crackdown It does not substantially conflict with the ultimate objective of the Antimonopoly Act, and if it was cooperated in accordance with lawful administrative guidance, illegality is restrained. However, for example, policies for protection of small and medium-sized enterprises shall be the subject of consideration of illegal crackdown grounds in application of penal provisions only if they superior to the legal value that the Antimonopoly Act admits. ※ 18. Petroleum Price Cartel Case (1984) (Supreme Court, Showa 5, February 24, Showa 55 (A) No. 2153, KeiShu 38 Vol. 4, p. 1287) The same as above Note ※ 7. ※ 19. Tokyo Metropolitan Water Meter Rigging Case (1997) (Tokyo High Court, Heisei 9, December 24, Heisei 9 (No) No. 1, KouKeiShu 50 Vol. 3, p. 181) The same as above Note ※ 10. (4) Whether It can be a Certain Field of Transaction with Only Property X Considering that the size of a property is nationwide and that the budget amount is also huge, it is indicated that it is reasonable to admit that it is a certain transaction field only with a certain X property. ※ 20. Japan Sewage Works Association Construction Ridge Case (1996) (Tokyo High Court, Heisei, May 31, Heisei 7 (No) No. 1, KouKeiShu 49 Vol. 2, p. 320). (5) Relationship with Bargaining Under Criminal Law Also in the Penal Code, the second paragraph of Article 96 (3) (obstruction of auction, etc.) stipulates that “a person who bid-rigged for the purpose of harming fair prices or obtaining unfair profits shall be the same as the preceding paragraph”

54

Part II: Cartel

(The provision of the preceding paragraph: imprisonment with work for not more than 2 years or a fine of not more than 2.5 million yen). In this chapter, “fair price” is not a fair price that should be measured objectively off the idea of bidding, but it was formed by fair and free competition in the bidding. It refers to the bid-winning bid price. The so-called bid-rigging is also controlled by this provision. Regarding the relationship between this clause and the Antimonopoly Act, the provisions of the Antimonopoly Act are those that have tried to control joint action against competition in a certain field of trade and which rigging for each specific transaction under a prescribed purpose. It is said that it should not be applied to the conduct. For this reason, the Antimonopoly Act will result in accreditation of competition for trade areas with a certain spread. Recently, it is pointed out that both bid-rigging crime and criminal offense against violation of the Antimonopoly Act are in ideological competition in one bid-rigging case and both sins are established (Negishi and Funada, 2003). ※ 21. Bidding Disturbance Case (1953) (Supreme Court, Showa 28, December 10, Showa 28 (A) No. 1171, KeiShu 7 Vol. 24, p. 2418). ※ 22. Bid rigging etc. Case (1957) (Supreme Court, Showa 32, December 13, Showa 30 (A) No. 2718, KeiShu 11 Vol. 13, p. 3207). 4. Outline of this Part Cartel control is a major issue in any economy with competition laws. Next chapter (Chap. 4) deals with the proof of cartel agreements based on indirect evidence from communications, which extends the interpretation of the term “mutually” in the Japanese judicial system. A case precedent has referred to the word “mutually” as indicative of the existence of a communication of intention, or a “liaison of intention.” The term “liaison of intention” is defined as an action that facilitates recognizing and predicting the implementation of the same or similar types of action by others. We incorporate economic insights into the discussion of indirect evidence, refer to the system of reporting parallel price increases, and examine four Japanese case studies to investigate recent developments concerning the proof of liaison of intention. Chapter 5 sheds light on the operation of Japanese competition policy by focusing on a public procurement bid-rigging case in the construction industry. The analysis demonstrates a firm-entry effect on the construction market and shows that the bidding and winning price levels before an investigation by the Japan Fair Trade Commission were higher than after the investigation. According to these results, price levels in the bid-rigging period were approximately 6% higher than with competition and the result is statistically significant. Firm entry is associated with an approximate 2% price reduction, an effect that comes from introducing competition into a coordinated setting.

Chapter 4

Cartel: Indirect Evidence in Japanese Cartel Control

1 Introduction Price fixing, bid rigging, and other hard-core cartel practices are major problems in any economy with competition laws. The effectiveness of cartel control in Japan has been improved by the introduction of the leniency system in the 2005 amendment of the Antimonopoly Act (AMA). The leniency system has enhanced the scope for 1 collecting direct evidence of cartel practices. The traditional means of tackling antitrust problems, which involves proving the existence of cartels with indirect (circumstantial) evidence, continues to be of importance, despite the introduction and extension of the leniency system. First, the competition authority has to overcome the challenge of insufficient information in an industry that thrives on collusive practices. In the case of several instances of anticompetitive conduct in the industry, the competition authority’s daring attack against cartel-like conduct may lead to the creation of fair and free competition. There is often no leniency in such cases, and it is difficult for the competition authority to identify habitual practices that are cartel-like as antitrust violations. Therefore, circumstantial evidence plays a significant role by triggering a specific investigation and complementing direct evidence. Second, in the case of differences among applicants (Some jurisdiction has multiple leniency system.) as to how leniency is applied, the competition authority may find it difficult to apply a rule consistently. In such situations, indirect evidence is likely to act as an effective guideline for integrating various applications and information. The use of circumstantial evidence can help create a plausible story because it considers the bigger picture. This chapter addresses indirect evidence as both an alternative means of comprehensively proving the existence of cartel agreements, as well as a method of complementing insufficient direct evi1 See

Nambu (2014).

This Chapter is based on Koki Arai (2015), “Indirect Evidence in Japanese Cartel Control.” IIC – International Review of Intellectual Property and Competition Law, 46(3), 340–357. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_4

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4 Cartel: Indirect Evidence in Japanese Cartel Control

dence, if applicable. In particular, we concentrate on the communication of intent in the cases of indirect evidence obtained from recent economics case studies in Japan. It is important for lawmakers in Europe to fully understand Japanese competition policy so Japan can be recognized, not only as an influential trading partner, but also as a competent enforcement authority. Analyzing Japanese cartel control can provide benefits for policy research on global competition, including that of European competition policy, in terms of the following aspects. The first merit of this chapter is that it provides a practical approach for analyzing communications. For example, an awareness of the points of view involving reasonable communication (with or without a link to coordinated conduct) is useful not only to academics but also to authorities and businesses conducting comparative studies of the European Union (EU) and Japan. The second merit of this chapter is that it provides an explanation of new legal developments in Japanese cartel law enforcement. For instance, regarding the legal interpretation of the word “mutually,” we explain in detail the definition of “liaison of intention” as an action that facilitates the recognition and prediction of the same or similar types of actions by others. Interpretations of the legal reasoning behind such phrases are useful for all concerned competitionrelated parties. The third merit of this chapter is that it discusses the actual results of enforcement of the AMA. Several cases cited in this chapter have had major impacts on the world economy; it is useful to understand the consequences as well as the predictability of business activities such as the manipulation of air freight charges and fees by cartels in the international air freight forwarding business. The remainder of this chapter is organized as follows. Section 2 discusses what constitutes indirect evidence in Japan by providing a definition of “communication of intention” and discussing its prominence. Section 3 analyzes evidence related to communication with respect to the opportunity for communication, as well as the function, content, and method of communication. Section 4 describes economic evidence related to the market situation, several examples of conduct, and recent empirical studies. Section 5 presents four recent case studies of Japanese litigation related to communication. Finally, Sect. 6 concludes the article.

2 Definition and Proof of Communication of Intention (1) Definition of communication of intention A cartel is defined as an unreasonable restraint on trade, and in Japan, cartels are regulated by the latter part of Article 3 of the AMA. Article 2(5) describes a cartel as “such business activities [which] … in concert with other entrepreneurs, mutually restrict or conduct their business activities in such a manner as to fix, maintain or increase prices … thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade.” In this chapter, we will focus on the legal interpretation of the word “mutually.” A case precedent defines “mutually” as indicating the possible existence of communication of intention. A cartel agreement

2 Definition and Proof of Communication of Intention

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can be defined as, “formation of a communication of intention among the companies to act in concert with the mutual understanding and acceptance to act based on the above mentioned agreement.” In a prominent case involving Toshiba Chemical Corporation, the Japanese High Court stated that, if an entrepreneur exchanges information about raising prices with other entrepreneurs and subsequently takes the same or similar actions as others, it is presumed that the parties had a relationship that assumed concerted actions by one another. Therefore, a liaison of intention exists unless there is evidence to prove that the adjustment of prices was decided individually based on the companies’ independent decisions that raising prices was necessary to address price competition in the market.2 A liaison of intention is a tacit agreement that is proven, not by direct evidence, but by various facts and evaluations. The definition of liaison of intention encompasses a wide range of mutual communications in relation to price fixing. Many commentators consider conscious parallel actions to be concerted actions, even if the violation of a cartel control law is not intended.3 Commentators further state that, because the definition can include conscious parallel actions, it is important to identify specific situation(s) that cause the same or similar price increases by entrepreneurs and action(s) and/or practice(s) that cause entrepreneurs to make the same or similar price increases.4 (2) Status of communication of intention After the Toshiba Chemical case, proof of communication of intention has been formulated in four ways: (i) ex-ante information exchange, (ii) content of the exchange, (iii) ex-post same and similar actions, and (iv) exceptions for special reasons. Previously, before moving to enforce the law, the Japan Fair Trade Commission (JFTC) required detailed evidence such as a concrete proposal in writing detailing the collusion, evidence of parties seeking out one another’s opinions and reaching common ground, and validations of the occurrence of an ex-ante information exchange and its content, as in one case involving the price fixing of elevator repair services.5 As long as the standard of law enforcement was based on these (over)strict rules, there was no difference between considering indirect evidence and proving the existence of direct evidence such as a memo, letter, or record of an interview. Previously, the difficulty 2 The

Tokyo High Court found that Toshiba Chemical Corporation knew that the other seven companies intended (and had agreed) to raise the price of paper phenol copper clad laminates. Based on the prediction that the other seven companies would raise the price of paper phenol copper clad laminate, Toshiba Chemical Corporation raised the price, which is equivalent to the decision at the committee on June 10, 1987. Therefore, the Tokyo High Court concluded that there existed a concerted action based on “liaison of intention” to raise the price of paper phenol copper clad laminate; Toshiba Chemical Corporation had an intention to follow the other seven companies’ price-raising, and the other seven companies were also aware Toshiba Chemical Corporation’s intentions. 3 One such study is by Kenji Sanekata, Dokusen Kinshi Ho (Antimonopoly Act), 182 (1998) (in Japanese). 4 For example, see Wada (1997) and Shiraishi (2009). 5 For example, proof of collecting opinions was required, and the conduct of confirming the collected opinion had to be proven as well. See Elevator Repair Services Case, JFTC case number Showa 59 (Han) No. 1, Date of the judgment; 28 July, 1994.

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of implementing rules prevented the development of a definition for “communication of intention” during the actual law enforcement process. However, these rules were clarified by the precedent-setting Toshiba Chemical case. Thus, the JFTC has extended the rules connected with the four methods mentioned above. For example, the JFTC has decided that it no longer requires accurate evidence of ex-ante information exchange and need not follow a rigorous process to establish that the parties involved had agreed to set up a cartel. This change in policy has been supported by a wide range of public opinion. Additionally, it is necessary to address two issues connected with the law: first, how should we upgrade the extended rule from the level of the Toshiba Chemical case, and second, is there any other applicable rule regarding the liaison of intention? To further examine these issues, we need to review the function and means of the communication of intention.

3 Proof Related to Communication (1) Function of communication The problem of the interpretation of “mutually” in Article 2(6) of the AMA, as well as the identification of a liaison of intention and conscious parallel actions, involves the identification of an illegal agreement with legal tacit collusion, as set forth in the United States (U.S.) antitrust discussion. This discussion sometimes begins with the hypothetical gas station price-fixing problem.6 The hypothetical situation involves two gas stations located across the street from each other, and the problem is the price setting of both stations. According to a popular theory in the U.S., this example is considered tacit collusion and cannot be applied to antitrust control because there is no action to merit reproach. The control of price setting for the purpose of maximizing profits is direct price regulation not covered by the principles of antitrust. In contrast, Posner (1976) pointed out that, if proof of agreement is a limitation on enforcing antitrust laws, proof of agreement based on market performance must be considered.7 Efficient cartel control should thus remain focused on communication, i.e., we need to examine the evidence related to communication with respect to the opportunity for communication, as well as the function, content, and method of communication. The discussion in Japan concerning liaison of intention needs to emphasize the situation in which an entrepreneur recognizes or predicts the same or similar price increases by other entrepreneurs. If the current control measures are to be made more effective, the applications of these measures should be less strict than they have been in the past. However, if the situational aspect is overemphasized, then the distinction between tacit collusion and conscious parallel action might become ambiguous. Here, liaison of intention is defined as an action that facilitates recognizing and 6 See 7 See

Hay (2006). Posner (1976).

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predicting implementation of the same or similar actions by others. It is clear that the definition of liaison of intention implies an action in order to ensure the foreseeability of businesses’ activities. (2) Function, content, and method of communication In the U.S., the proof of agreement is sometimes associated with the existence of “plus factors.” The observation of parallel actions raises the issue of what is required to constitute an illegal agreement. However, the “plus factors” that would constitute an illegal agreement have not been clearly defined, so decisions about their nature often have to be made by a judge and jury.8 Consequently, the content and consistency of these “plus factors” have come under criticism in recent years. Following the U.S. Supreme Court’s decision in the case of Twombly, the process to reach a trial in court presents a greater hurdle than ever before, and “plus factors” must be repositioned in the overall context of antitrust law in the U.S.9 In contrast, the issue in Japan revolves around the rigid rules associated with proof, which must be revised to reflect actual modernized measures for cartel control. Various aspects of evidence related to communication have been discussed, including opportunity, content, and method. The first aspect is the question of whether the presumed communication is reasonable only if it involves collusion. For example, suppose that evidence of a unilateral and nondisclosure communication is uncovered, after two companies have increased their prices by the same amount. This type of unilateral and nondisclosure communication is usually disadvantageous or unprofitable. A company that announces its intentions to a competitor without seeking to know the competitor’s intentions would be acting against its own interests. Therefore, evidence of unilateral and nondisclosure communication is usually reasonable only in situations involving coordination. The evidence specifically related to communication is thus likely to support the existence of an agreement. In contrast, there are communications that do not involve any mutual activity as a premise. One example is a public communication. A communication directed at consumers could have the merit of enhancing consumers’ understanding of price increases. At the same time, such communications could enhance coordination by causing a uniform approach in line with public information. Another example is an explanation of delivery conditions, including charges upon delivery and price guarantees. This management policy for the business field has worked well for environmental policy but leads to coordinated conduct. Sometimes, however, this special explanation is reasonable under other policy goals; attention must be paid to the background and impact of the explanation under the circumstances. Furthermore, the practice of gathering information (albeit historic and publicly available information) can both enhance coordination and improve competition. Therefore, with regard to communication reasonableness, we consider various aspects that include economics-related issues, as well as factors derived from case studies. 8 See

Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., 203 F. 3d 1028, 1033 (2000). The opinion stated that “an agreement is properly inferred from conscious parallelism only when certain ‘plus factors’ exist” (para. 10). 9 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007).

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The required proof of communication is more stringent in Japan than that required by EU competition law based on the “Anic presumption,” which states that “the fact that an undertaking gives instructions within its own organisation that clarify its wish not to align itself with competitors participating in a cartel … constitutes a measure of internal organisation which must be viewed positively.”10 Due to the lack of a similar precedent, evaluation of the content of communication is required in Japan, and thus, recent enforcement has focused on the reasonableness of communication with or without coordinated conduct. In this regard, the competition authority orchestrates comprehensive considerations such as reasonableness and economic evidence as indirect evidence in Japan as well as in the EU. (3) Evidence related to market situation A cartel usually has a deviation probability, and thus, a real-world cartel is often capable of punishing members who deviate from an agreement. Therefore, if a situation arises in which it is impossible for a deviant member to be punished, a communication does not prove the existence of the cartel. In particular, a small number of competitors (a high level of market concentration) constitutes a significant factor effecting deviation. Strengthening the function of communication and engendering the belief that those who break an agreement will be punished are necessary conditions for concerted action. A small number of competitors are associated with strengthened communication because of the absence of other relevant parties from whom mutual understanding and acceptance could be obtained. This is related to the creation of reciprocal trust as the premise of communication. Experimental research has shown that two parties can establish coordination without communication, but three parties cannot.11 A small number of competitors also contribute to the credibility of a punishment by making it feasible. In contrast, a cartel that involves many different competitors would not provide much benefit to each member; thus, it would lack an enforcement capability against those who deviate from its agreements.12 Even if an explicit agreement is concluded, the lack of a market condition conducive to cartel formation will lead to the agreement becoming unstable. Indeed, the market situation is a paradoxical aspect for cartel control. If concerted action is already prevalent within the market, the necessity for a cartel agreement would be de minimis, and any observed concerted action would imply only conscious parallel action. An examination of communication between competitors is one way to avoid this paradox.13

10 Case T-61/99 Adriatica di Navigazione SpA v Commission [2003] ECR II-5349, para 133. See also Case C-49/92 P, Commission v ANIC Partecipazioni SpA, [1999] ECR I-4125. 11 Various studies are summarized in Holt (1997). 12 See Page (2012). On the other hand, some cartel cases have many participants (ten or more) in Japan. The factors of these cases are the next study issue for us. 13 See Kaplow (2011).

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The discount factor is another issue. Theoretically, an economic boom tends to foster collusive conduct (Green and Porter 198414 ; Rotemberg and Saloner 198615 ; Ellison 199416 ). According to Arai (2012), the inflation ratio is correlated with the number of law enforcement measures against price fixing.17 Although these studies demonstrate the correlation between market situations and collusive conduct, the economic analysis that often results from such collusive conduct may require the use of alternative evidence in some cases. (4) Evidence related to conduct Economic evidence concerns not only the situation of a market but also conduct in the market. In general, it is difficult to infer an agreement based on only parallel economic actions observed within the market. However, the following hypothetical cases show how an agreement may be linked to a set of parallel actions in the antitrust law discussion. The first case involves the simultaneous adoption of exclusionary actions in the form of a concerted, indirect boycott. It is impossible to restrain trade in a concerted way without an agreement among the boycotters.18 If one business rejects the trade, then it loses out on the opportunities presented by that trade. Therefore, it is reasonable to assume concerted action as a premise of the boycott.19 The second case concerns individual bid-rigging actions that are repeated. A basic agreement in a bid-rigging case might well be found to have satisfied the condition of “restrict[ing] … their business activities” as set forth in Article 2, paragraph (6) of the AMA. The establishment of a basic agreement of bid rigging can also be considered a communication of intention among companies to act in concert with a mutual understanding and acceptance to act based on the agreement. Thus, in Japan, the existence of a basic agreement might also satisfy the conditions required to determine that companies have acted “in concert with other entrepreneurs, mutually.” Abnormal repetition during bidding is considered to indicate the presence of a basic agreement about parallel action. (5) Recent development of cartel identification by empirical method This subsection deals with the recent development of using economic methods to identify cartels. A study by Clark and Houde (2014)20 examines communication. They show that empirical results, in conjunction with evidence from the Canadian Competition Bureau documents, suggest that asymmetric price adjustments are part of a collusive mechanism. Further, they conclude that there is often no direct evidence of explicit communication taking place outside the target markets; thus, it is more 14 See

Green and Porter (1984). Rotemberg and Saloner (1986). 16 See Ellison (1994). 17 See Arai (2012). 18 Toys ‘R’ Us v. FTC, 221 F. 3d 928 (2000). 19 See Werden (2004), supra note 13. 20 See Clark and Houde (2014). 15 See

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difficult to attribute the observed changes in pricing entirely to collusive behavior. Instead, while firms do move sequentially, information about price changes is easily transmitted, and the time lag between price changes is an outcome of the collusive agreement rather than the result of market friction. The economics of auction and bid rigging has been surveyed by Hendricks et al. (2014).21 They summarize the literature on the theory and practice of bidding rings in one-shot auctions and in repeated auctions. From an economic perspective, the main focus of their study is how the type of auction, whether first-price or second-price, sealed bid or oral, affects the incentive of bidders to collude and the way in which they collude. In particular, the situation in Japan has been empirically monitored by the sequential works of Ishii (2009).22 Ishii (2009) analyzed an actual bid-rigging case and identified a favor exchange scheme. It is known that bid rigging within public-work auctions in Japan often takes the form of exchanging favors. In such a scheme, the winner is decided based on favors granted by the entity to other ring members. By explicitly modeling the “favor” as an explanatory variable, Ishii analyzed data from public-works auctions for consulting projects in Naha, Japan, to confirm that such a collusion scheme was in operation. The analysis is of importance for identifying coordinated practices as well as proving collusive conduct. In connection with this research, the JFTC issued cease-and-desist orders and surcharge payment orders against bid participants for construction work procured by the Okinawa prefecture. A similar mechanism was applied in another case, in which a number of bidders for civil works and construction works procured by the Okinawa prefecture jointly decided (in advance) the bid winners for each task to avoid price decline and equalize the opportunities for winning bids among participants. To reflect the recent rigorous law enforcement in Japan with regard to cartel cases, research has been conducted on the use of economic analysis for proving collusion that does not depend on the leniency system. Both theoretical studies and empirical research are important from the viewpoint of considering economic evidence as indirect evidence of cartel control. These developments, along with the case studies presented in the section five, show that indirect evidence such as proof of communication is being sought in various ways to help address cartel control. Before the case studies, in connection with parallel practices, we touch upon the unique system of reporting parallel price increases.

21 See

Hendricks et al. (2014). also Ishii (2014) that targeted the “roundness level” of bids, which is defined as the number of zeros at the end of the bid. She hypothesized that winners of bid rigging choose round numbers to avoid any miscommunication when they announce their planned bids to other ring members, and losers prefer round numbers when they make an arbitrary bid above the winning bid. Then, she identified a positive relationship between the roundness of a bid and its relative value as a fraction of the reserve price, and other interesting features.

22 See

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4 Reporting Parallel Price Increases This section discusses a mandatory scheme for reporting parallel price increases that was introduced in 1977 and abolished in 2005. Against the background of the discussion of administered price and the causation of oligopolistic market structure in the 1970s, the JFTC deliberated the system of disclosure of an oligopolistic firm’s initial cost by the competition authority. Some claimed that this approach was pragmatic in the price hiking situation under the oil crisis after 1973; however, others argued that the intervention in freedom of pricing conflicted with the fundamentals of competition policy. In the end, the cost disclosure system was not introduced because there was a lack of consideration for the firm’s confidential information. Hence, the mandatory scheme for reporting parallel price increases, which was analogic to the previously deliberated cost disclosure system, was introduced in 1977.23 The price reporting scheme aimed to prevent easy price hiking conducted by oligopolistic firms in which they were likely to establish the tacit collusion of price increases. 23 The

text is as follows:

Article 18-2 [Reporting requirement on parallel price increases] (1) If, in any particular field of business where the total value of goods (this term refers to the value of the goods concerned less amount equivalent to the amount of taxes levied directly on such goods) or the same description supplied in Japan (excluding those exported; hereinafter the same in this section) or the total value of services [this refers to the price of the services concerned less an amount equivalent to the amount of taxed levied on the recipients of such services with respect thereto) of the same description supplied in Japan during a one-year period designated by a Cabinet Ordinance, is in excess of sixty billion yen, the ratio of the total amount of such goods or services supplied by the three entrepreneurs, which rank among the three largest entrepreneurs in Japan in terms of volume of supply (this refers to the quantity of goods or services of the same description which one entrepreneur supplied during a given one-year period, and in case it is not appropriate to be calculated by the quantity, the quantity shall be represented in terms of the value; hereinafter the same meaning in this section) to the aggregate volume of such goods or services of the same description supplied in Japan during such one-year period (hereinafter referred to as “aggregate volume”) exceeds seven tenths, and if two or more major entrepreneurs (including the largest one) (this term means the five entrepreneurs each of which account for one twentieth or more of the aggregate volume and rank among the five largest entrepreneurs in Japan; hereinafter the same meaning in this section) raise the price they use as the basis of their transactions in such goods or services of the same description by an identical or similar amount or percentage within a period of three months, the Fair Trade Commission may ask such major entrepreneurs for a report, furnishing a statement of reasons for such a raise in the price of such goods or services: Provided, that this shall not apply to price increases effected by entrepreneurs whose price of such goods or services is authorized or approved by, or filed with the competent minister in charge of the business in which the said entrepreneurs are engaged (in case such price shall be filed with the competent minister, this shall apply only to such case where the competent minister has the authority to order a change in such price). (2) In the event any change has occurred in the economic conditions resulting in a drastic change in domestic industrial shipments and wholesale prices, the amount of prices as

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After the introduction of this rule, there were numerous flaws in regulation such as (i) requirements of the article (disjuncture between the “goods or services of the same description” and the actual product, and disjuncture between the “the price they use as the basis” and the actual transaction price) (ii) power of deterrence (not only enforcement but also recognition of firms), and (iii) cost of the compliance. For these reasons, the mandatory scheme for reporting parallel price increases was abolished of the 2005 amendment of the Antimonopoly Act. One of the critical evaluations of this regulation argues that its main failing was the late timing of the report justifying price increases, so it did not have a big impact on the firm’s behavior.24 This law sought to regulate parallel price increases without a focus on explicit communication. Therefore, it is not applicable to the regulation of cartels, because it could not be used to successfully identify collusion.

5 Case Studies in Japan In some recent Japanese cases, attempts have been made to prove a liaison of intention without determining how the liaison was established or its evident motivation. Few studies have systematically examined these cases thus far.25 Here, we will explain them based on the previously discussed theory and undertake a comparative study to analyze legal developments in the proof of liaison of intention. (1) Arai-Gumi Supreme Court case a. Case description This bid-rigging case was brought against the Tokyo New Town Development Corporation, a firm engaged in urban infrastructure projects, including the construction of public sewer systems in the Tama area of Tokyo. Beginning in October 1, 1997 (at the latest), 33 companies became party to an agreement (called the Basic Agreement) with the aim of preventing a decline in prices for specific civil engineering works ordered by the corporation. In cases where several of the 33 companies were designated as bid participants or as members of joint ventures (JVs) making bids to the corporation, if only one company had a close relationship with the work in question or the construction site or expressed a desire to receive the order for the work in question, that company would be appointed as the designated successful bidder. If there were two or more applicants who desired the order, the designated prescribed in the preceding subsection may be revised by virtue of a Cabinet Ordinance to reflect such change. 24 Hirabayashi,

H. “Dokusen Kinshi Ho no Rekishi (History of the Antimonopoly Act),” Shinzan Sha, Tokyo (2012) (in Japanese). 25 Except for the following studies: Marquis and Shiraishi (2013) report recent Japanese anti-cartel systems. Nambu (2014) deals with the progress of the Japanese leniency programs. See Nambu (2014), supra note 1.

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successful bidder would be decided by the applicants conducting negotiations for the order after taking their qualifications and other aspects into consideration. The price of the winning bid was pre-determined by the company that had been designated as the successful bidder, and the other companies cooperated to enable the designated successful bidder to receive the order at the chosen price. The JFTC initiated proceedings in September 2000 and issued a surcharge order in July 2008. The Tokyo High Court reversed and remanded the order in March 2010, but the Supreme Court reversed the judgment, agreeing with the JFTC’s order in February 2012. b. Analysis of the case From the perspective of communication, the relevant part of the judgment is as follows: The Basic Agreement was, as described in 2(5) B. above, an agreement where the companies decide the designated successful bidder and the target contract price for the bidding, through negotiations, etc. and provide cooperation to the designated successful bidder to win the bid. Therefore, although the companies designated as the bid participants or main members of the bid participant JVs are originally in a position to decide on the bidding price at their will, it is clear that such an arrangement shall result in the substantial restraint of the business activities of the companies, in that the decision making of such companies shall be restricted by the agreement. Accordingly, the Basic Agreement may well be found to have satisfied the condition to ‘restrict…their business activities’ as set forth in Article 2, paragraph (6) of the Act. At the same time, the establishment of the Basic Agreement may be considered to be a formation of a communication of intention among the companies to act in concert with the mutual understanding and acceptance to act based on the abovementioned agreement, and thus, the Basic Agreement may also be found to have satisfied the condition to have acted ‘in concert with other entrepreneurs, mutually’ as set forth in said paragraph. The judgment does not directly mention the issue of communication. However, it is clear that the formation of a communication of intention among companies to act in concert with a mutual understanding and acceptance to act based on an agreement is a requirement for mutuality. This case marks the first time that the Japanese Supreme Court discussed a basic agreement with regard to the term “mutually.” This bid-rigging case was brought against corporations involved in urban infrastructure projects, and it has become a precedent for the legal interpretation of “mutually” from the viewpoint that the basic agreement itself was a communication. Thus, the definition of “mutually” is verified as “a communication of intention among the companies to act in concert with the mutual understanding and acceptance to act.” (2) Tokyo High Court modifier cartel case a. Case description In this case, the JFTC found that two companies had agreed to mark up the selling price of modifiers used for polyvinyl chloride plastics. In December 2003, the JFTC

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issued a recommendation to eliminate the conduct, which violated Section 3 of the AMA, and later issued a hearing decision supporting the recommendation in November 2009. The Tokyo High Court upheld the decision, agreeing with the JFTC in December 2010 (certiorari denied in September 2011). Kaneka Corporation (Kaneka), Mitsubishi Rayon Co., Ltd. (Mitsubishi) and Kureha Chemical Industry Co., Ltd. (Kureha) substantially restricted the competition in the Japanese market of modifiers for polyvinyl chloride resin by making agreements as follows: (a) To raise the selling prices of their products shipped on or after November 21, 1999. (b) To raise the selling prices of products shipped on or after November 21, 2000 (for Kureha), the selling prices of products shipped on or after December 1, 2002 (for Mitsubishi), and the selling prices of products shipped on or after December 21, 2002 (for Kaneka). The companies mutually exchanged information verifying the amount and method of price increases for modifiers. Kureha decided to announce the release of price increases before the other two companies on November 8, and asked them to follow their conduct. The other two companies stayed in line with Kureha’s conduct such that Mitsubishi announced price increases on November 14, and Kaneka announced price increases on November 21. b. Analysis of the case The problem in this case is that communication linked to coordinated conduct is deemed reasonable in some cases. Given the circumstances of a sequential and continual coordinated relationship, a company’s press release is presumed to be its communication of price increases. A public communication stating a commitment to a price increase may have the effect of enhancing competition through a rival’s responsive competitive behavior; however, communication about price increases that includes the party’s nondisclosure information may have an anticompetitive effective by inducing similar behavior in a rival. In this case, the company’s press release was one of the factors that led to the term “mutually” being invoked. Therefore, a company’s public press release may be interpreted as evidence of a communication conveying a commitment to price increases if other communications can be verified as well, such as jointly arranged price increases and the exchange of information during price negotiations. (3) International air freight forwarding cartel case a. Case description In this case, which concerns air freight charges and fees in the international air freight forwarding business, companies concluded agreements to charge consignors and/or consignees fuel surcharges for shippers, certain Automated Manifest System charges, security charges, and explosive inspection charges. The JFTC issued ceaseand-desist orders and surcharge payment orders in March 2009, stating that such

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actions violated Article 3 of the AMA, and later issued a hearing decision supporting the cease-and-desist orders in July 2011. Fourteen international air freight forwarders concluded agreements to newly charge consignors and/or consignees a fuel surcharge for shippers, Automated Manifest System (AMS) charges, security charges, and explosive inspection charges as described below, thereby substantially restraining competition in the market of international air freight forwarding, contrary to public interest. (a) On September 18, 2002, the 14 companies agreed that, when they were charged a fuel surcharge by air career companies they use, they would charge an amount equivalent to the said fuel surcharge for the cargoes on which they issued house air waybills (HAWB) as of October 16, 2002 or after, under the name of fuel surcharge for shippers. (b) On November 22, 2004, each company except Airborne Express, Inc. (13 total companies) agreed that they would charge at least 500 yen per HAWB for all the cargo on which they issued HAWB as of December 13, 2004 in principle, or as of January 1, 2005 at the latest, and which will be delivered to the United States or delivered via the United States to third party countries except those in Europe, under the name of AMS charges. (c) On February 20, 2006, the 13 companies agreed that they would charge at least 300 yen per HAWB for all the cargo on which they issued HAWB as of April 1, 2006, under the name of security charges, and would additionally charge at least 1,500 yen per HAWB when the cargo was subject to explosive inspections, under the name of explosive inspection charges. b. Analysis of the case The problem in this case is that the reasonableness of communication is only linked to coordinated conduct. This communication creates the opportunity to share the company’s confidential trade information among competitors; therefore, it is determined that the situation would never have occurred in the case of free competition. In this regard, an anticompetitive agreement was likely to have been established. The companies alleged that the information about new surcharges was public; however, on the basis of detailed evidence such as disclosures by the companies about the names, content, status, and results of negotiations with their trading partners, the courts recognized that the information was not of the type that would usually be shared by companies and decided that the information exchange constituted indirect evidence. Comparing this case with the modifier cartel case (see subsection 5.2), the communication reasonableness represents one of the decisive factors for the linkage of coordinated conduct. If the profile of communication lacks reasonableness from a business perspective, then the presence of communication leads directly to problematic coordinated conduct. Reasonableness is characterized by the following aspects: (i) for consumers, (ii) for stakeholders, and (iii) for society and the public. For example, a press release about price increases can enhance accountability of the price

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setting for consumers, while it is difficult to justify why a firm exchanges its confidential trade information. This discussion provides a significant viewpoint in that the characteristics of communication may indicate the difficulty in proving coordinated conduct. (4) Automatic postal code sorting machine cartel case a. Case description In the case of a postal code sorting machine cartel, the JFTC issued a recommendation against Toshiba Corp. and NEC Corp. in November 1998 and a hearing decision in June 2003. The Tokyo High Court ruled in favor of the defendants in a procedural issue in April 2004, but the Supreme Court reversed and remanded that order in April 2007. The Tokyo High Court ruled in favor of the JFTC in December 2008 (certiorari denied in December 2010). Both the Toshiba Corporation and the NEC Corporation were registered as qualified bidders in the open competitive bidding for automatic postal code reading and sorting machines (postal sorting machines), which was placed by the Ministry of Posts and Telecommunications (Ministry). From fiscal years 1995 to 1997, the companies participated in the competitive bidding for postal sorting machines. During this period, these two companies received 70 orders among the total of 71 orders for postal sorting machines. In reality, prior to the opening of competitive bidding, Toshiba and NEC received information on the bidding (such as the type of postal sorting machine, number of units, the location of post offices where the machines would be deployed, the timetable for deployment, etc.) from the Ministry officials in charge. Only the company which received the detailed information would participate in the particular bidding, while the other company would not. Therefore, bids would be submitted only by the company that had received the information while the remaining company, which had not received the information, would decline to submit the bid. Therefore, the one company that had submitted a bid would receive the order. b. Analysis of the case The High Court’s second judgment describes the considerable barriers to entry in a duopoly and a historically segregated market. Although it is impossible to prove voluntary segregation, it can serve as weak evidence to prove a liaison of intention if the economic evidence is sufficiently strong. This judgment describes several points for consideration, including communication, and it highlights the following three items: (i) sustained coordinated action, (ii) approaching the procurement authority to inquire about its intention, which supported segregation, and (iii) abnormal ex-post conduct. In this case, (iii) is not direct communication. The evidence was determined to show the existence of a liaison of intention that was created by establishing and strengthening common knowledge about the risk of ending segregation. Economic consideration of the establishment and maintenance of the agreement played an important role in supporting direct evidence. In particular, increasing the shared awareness of each person of the firm at a specific meeting

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is analyzed by considering the plaintiff’s allegation using a repeated game theory approach. (5) Implications of the case studies One of the implications of these case studies is the clarification of a viewpoint in connection with the judgment of indirect evidence. The criterion of judgment extracted from these case studies is whether it is reasonable for the action in question to be taken by a firm under the competitive situation. In line with this judgment standard, the profile of communication must exhibit reasonableness for businesses under the competitive situation, and the presence of communication must not lead directly to problematic coordinated conduct. The firm’s conduct under the competitive situation may refer to the artificial aspect and the purpose of the communication. This viewpoint may harmonize the level of proof of communication in Japanese cartel enforcement with that of the Anic presumption that is used by the EU. In a recent article, Odudu (2011) elaborated on information exchange in terms of phase I (intention phase) and phase II (reliance phase)26 based on the concepts of the Office of Fair Trading. Communication reasonableness is included in this discussion in connection with the dialogue on commercially sensitive information. These two ideas are similar to each other, but differ in several aspects (e.g., reasonableness and business sensitiveness), and this is an issue that will require further exploration.

6 Conclusion Cartel control is a critical issue in any jurisdiction with competition laws. This challenge remains after the introduction of a leniency system, for example, in the cases of competition using habitual practices of cartel-like businesses as well as differences among leniency applicants. This chapter explores how indirect evidence from communications among businesses can be used to establish proof of cartel agreements. We focused on the legal interpretation of the term “mutually.” A case precedent describes “mutually” to be indicative of the existence of a communication of intention. A cartel agreement can be considered a communication of intention among companies to act in concert with the mutual understanding and acceptance to act based on the agreement; this situation is referred to as a liaison of intention in this chapter. In Japan, proof of communication of intention comprises four elements: (i) ex-ante information exchange, (ii) content of the exchange, (iii) same and similar expost actions, and (iv) exceptions for special reasons. The JFTC has recently extended its set of law enforcement rules in connection with these four elements. For example, it no longer requires the exact content of the ex-ante information exchange nor does it follow a rigorous process to establish that an agreement has been made. The problems in the interpretation of “mutually” in Article 2(6) of the AMA, and in the identification of liaisons of intention in connection with conscious parallel 26 See

Odudu (2011).

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actions, are related to the identification of illegal agreements with legal tacit collusion. In Japan, a liaison of intention is considered to be an action that facilitates recognizing and predicting the implementation of the same or similar actions by others. The definition of a liaison of intention implies an action. Furthermore, the malignancy of a communication can be evaluated by considering various hierarchies of opportunity, content, and method. These viewpoints, combined with other forms of evidence, serve as comprehensive proof of an agreement. Furthermore, economic evidence includes proof of how companies conduct themselves in a given market situation, and several economic viewpoints can be applied to cartel control through indirect evidence based on conduct. We presented four case studies to examine recent legal developments concerning the proof of liaison of intention in Japan. They included a case featuring the first mention of the term “mutually” by the Japanese Supreme Court concerning a basic agreement, two cases involving reasonable communication with or without a link to coordinated action, and a case evaluating evidence of the existence of a liaison of intention by establishing and strengthening common knowledge about the risks of breaking segregation rules. Another case in which the law was enforced involved the application of economic insights to the concept of communication. This chapter makes two important contributions to competition policy research. First, it provides actual case descriptions involving the control of Japanese cartels to provide comparative viewpoints. Such explanations can be useful in identifying common problems in controlling cartels. Second, it discusses issues related to international cartel control and international cooperation from the Japanese perspective. This discussion can facilitate the development of future cartel control measures and legal actions concerning international cartels.

References Arai K (2012) Administrative performance and legitimacy: an elaboration likelihood approach to competition authorities in Japan and the United States. Public Perform Manag Rev 36:54 Clark RC, Houde J-F (2014) The effect of explicit communication on pricing: evidence from the collapse of a gasoline retail cartel. J Ind Econ 62:191 Ellison G (1994) Theories of cartel stability and the joint executive committee. RAND J Econ 25:37 Green EJ, Porter RH (1984) Noncooperative collusion under imperfect price information. Econ 52:87 Hay GA (2006) Horizontal agreements: concept and proof. Antitrust Bull 51:877 Hendricks K, McAfee RP, Williams MA (2014) Auctions and bid rigging. In: Blair RD, Sokol DD (eds) The Oxford handbook of international antitrust economics, vol 2. Oxford University Press Holt CA (1997) Holt industrial organization: a survey of laboratory research. In: Kagel JH, Roth AE (eds) Handbook of experimental economics. Princeton University Press Ishii R (2009) Favor exchange in collusion: empirical study of repeated procurement auctions in Japan. Int J Ind Organ 27:137 Ishii R (2014) Bid roundness under collusion in Japanese procurement auctions. Rev Ind Organ 44:241 Kaplow L (2011) Direct versus communications-based prohibitions on price fixing. J Leg Anal 3:449

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Marquis M, Shiraishi T (2013) Japanese cartel control in transition. CEU San Pablo University Madrid, Working Paper No. 47/2014 (Competition Policy Series). Available at SSRN: http:// ssrn.com/abstract=2407825. Accessed 18 Dec 2013 Nambu T (2014) A successful story: leniency and (international) cartel enforcement in japan. J Eur Compet Law Pract 5:158 Odudu O (2011) Indirect information exchange: the constituent elements of hub and spoke collusion. Eur Compet J 7:205 Page WH (2012) A Neo-Chicago approach to concerted action. Antitrust Law J 78:173 Posner RA (1976) Antitrust law: an economic perspective. University of Chicago Press, Chicago, USA Rotemberg JJ, Saloner G (1986) A supergame-theoretic model of price wars during booms. Am Econ Rev 76:390 Sanekata K (1998) Dokusen Kinshi Ho (Antimonopoly Act) 182 (in Japanese) Schreiber T, Fernández PP (2013) Comment on: ‘Spanish Sugar Cartel’. IIC Int Rev Intellect Prop Compet Law 44:742–743 Shiraishi T (2009) Dokusen Kinshi Ho (Antimonopoly Act), 127 (in Japanese) Wada T (1997) Futo-na Torihiki Seigen no Seiritsu to Rissho (Formation and proof of unreasonable restraint of trade). Shogaku-Tokyu 47: 145, 149 (in Japanese) Werden GJ (2004) Economic evidence on the existence of collusion: reconciling antitrust law with oligopoly theory. Antitrust Law J 71:719

Chapter 5

Construction Industry and Competition Policy

1 Introduction The construction industry is a key industry in many countries, including Japan, where the industry accounts for nearly 20% of gross domestic product and employs approximately 10% of the workforce. The industry has evidenced many cases in which there have been transgressions of the Antimonopoly Act (AMA), and construction is well known in Japan for the use of ‘dango’, which is unfair trade restraint (Arai et al. 2011). The Japanese competition authority, known as the Japan Fair Trade Commission (JFTC), has been fighting this long-standing practice with increasing vigour since the beginning of this century. While economic analysis has featured more frequently in competition cases in Japan in recent years, the use of economics in competition policy analysis has not progressed significantly, unlike in Europe and the US, and there has been little emphasis on ex post evaluation of case decisions 1 (Nguyen et al. 2015). In the following study, we explain the economic perspective of Japanese competition policy through a specific case in the construction industry, and describe the competitive situation in this industry focusing on a firm entry. Before undertaking a forensic ex-post economic analysis of this construction case, we first provide some brief institutional insight into relevant aspects of Japanese competition law and its practice. This chapter mainly addresses a public procurement bid-rigging case involving 2 forty-four companies’ in the Shikoku region. This bid-rigging case appears to repre1 A recent Japanese specific industry study was conducted by Nguyen et al. (2015), which includes some of the competition policy standpoint. 2 See the JFTC’s website: http://www.jftc.go.jp/en/pressreleases/yearly-2012/oct/individual000503.html.

This Chapter is based on Koki Arai and Emi Morimoto, “Construction Industry and Competition Policy in Japan.” in the International Journal of the Economics of Business 24(3): 345–363, 2017. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_5

73

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5 Construction Industry and Competition Policy

sent the typical type of collusion in the general engineering and harbour engineering fields with oversight by the Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) through the Shikoku Regional Development Bureau. The dataset on public procurement was obtained from this regional development bureau. We also examine the effect of firm entry into the market from the viewpoint of competition policy. The analysis shows that firm entry causes an approximate 2% price reduction effect quantitatively and, when comparing coordination with competition situations, it appears that the effect comes from introducing competition. These results are demonstrated using the same dataset of public procurement of the Shikoku Regional Development Bureau. The remainder of this chapter is organized as follows. Section 2 provides some institutional insight into Japanese competition law and policy and draws attention to the extent to which economics plays a role in Japanese competition policy. Section 3 explains the notable features of the Japanese public procurement system as background to an examination of the construction case that provides the focus of the paper. Section 4 presents an economic analysis of the bidding and winning price levels before and after investigation by the Japanese competition authority. The effect of firm entry on the bidding or winning price is analysed in Sect. 5 and a comparison made between the situation under coordination and competition. Section 6 concludes.

2 Institutional Insight into Japanese Competition Policy The AMA, which is still Japan’s fundamental competition law, was inaugurated in 1947 and its original design was greatly influenced by US antitrust laws. The legislation deals with four types of anticompetitive conduct: unreasonable restraint of trade, mergers and acquisitions and monopolization (as in the US) as well as unfair trade practices, a fairness oriented regulation that is a specifically Japanese concept now adopted in other Asian countries (see, for example, Takigawa 2009 for a useful introduction to the development of Japanese competition law). As regards agreements between competitors, AMA Article 3 prohibits ‘unreasonable restraint of trade’ which is earlier defined as “business activities, by which any entrepreneur, by contract [or] agreement…in concert with other entrepreneurs,…fix, maintain, or increase prices, or …limit production,…, thereby causing…substantial restraint of competition in any particular field of trade.” Substantial restraint of competition is therefore the main criterion for identifying illegal restraints and adoption of this market power standard means all agreements, including price cartels, are not illegal unless they create market power. Although price cartels are not treated as illegal per se, unlike other types of cartels, the JFTC has established virtual per se illegality in practice. Under the AMA, bid rigging is an’ unreasonable restraint of trade’. Although the competition authorities need to show market power among the participants in bid rigging, this behaviour always satisfies the market power criterion because it raises prices. Illegal bid rigging can be punished with surcharges and bid rigging can be

2 Institutional Insight into Japanese Competition Policy

75

treated as a criminal case with possible criminal penalties. Bid rigging has been a major focus of the JFTC’s enforcement activity and has been pursued particularly vigorously since the beginning of this century. The evidence shows that bid rigging was a well-established practice in construction and other infrastructure industries and often involved public officials who supervised public bids. This led to a new law, the Bid Rigging Involvement Act of 2002, which specifically targeted public officials. This law was strengthened in 2007 when the possibility of criminal penalties against such officials was introduced.3 In addition, there was an increase in administrative fines and the introduction of a leniency program whereby penalties are reduced for companies that provide specific information on collusion to the antitrust authority, which is aimed at reducing the incentive to collude. Much research dealing with policy towards bid rigging has been published; see, for example, McMillan (1991), Ishii (2009, 2014), and Arai et al. (2011). In implementing the AMA, economic analysis is applied primarily in the field of merger control, where it now features in the examination of specific merger cases as well as in the process of making guidelines and ex-post case evaluations. One typical case occurred after the integration of the liquefied petroleum gas business among four parties in Japan in 2014. The case description referred to economic analysis based on difference-in-differences DID assessment used in reaching the decision and supporting qualitative considerations (Case No. 5 in the Major Merger Investigations in 2014).4 The case was cleared with no remedial measures. Several examples in the US or EU consider or mention a DID analysis, such as the case of INEOS/SOLVAN/JV5 or the case of Evanston Northwestern Healthcare Corporation.6 There are, however, additional areas in which economic analysis is explicitly used in the development and implementation of the AMA including: the provision of a theoretical background in considering and explaining policy planning (e.g., while integrating the leniency program into the AMA, game theoretic ideas were included in the discussion); case screening for cartel cases (the JFTC adopted an economic method, the ‘hypothetical monopolist test’, for market delineation in its 2007 Business Combination Guidelines),7 and the assembly of statements during investigations concerning the experimental investigation of private monopolization and unfair trade restriction cases as well as cartel cases (interfering with anticompetitive conduct and its method of implementation).

3 See

the JFTC’s website: http://www.jftc.go.jp/en/legislation_gls/aepibr.html. the JFTC’s website: http://www.jftc.go.jp/houdou/pressrelease/h27/jun/150610_1.files/ 150610_1.pdf (in Japanese). 5 See the Commission Decision. Case M.6905—INEOS/SOLVAN/JV (2014) para 704–710. http:// ec.europa.eu/competition/mergers/cases/decisions/m6905_20140508_20600_3967413_EN.pdf 6 In the Matter of Evanston Northwestern Healthcare Corporation (Docket No. 9315) Federal Trade Commission. https://www.ftc.gov/sites/default/files/documents/cases/2007/08/070806opinion.pdf. 7 See the JFTC’s website: http://www.jftc.go.jp/en/legislation_gls/imonopoly_guidelines.files/ 110,713.2.pdf. 4 See

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Overall, while the development and application of the economic analysis litigation process in Japan is less advanced than in some other competition regimes, it has advanced sufficiently to warrant attention. We now discuss the position of economic analysis in Japan’s competition policy from the supply side and demand side perspectives. The supply side refers to the employment of economists versus lawyers and the gaps and bridges between academics and authorities compared to other regimes. The demand side refers to the extent to which economic analysis is used, including the extent of ex-post analysis sponsored by competition authorities. On the supply side, the JFTC has many in-house attorneys (13 in 2013), but few Ph.D. economists (2 in 2013). It is difficult for those with special qualifications in law or economics to advance in their careers in Japanese public office and young economists are critical of the apparent lack of career opportunities. However, a Ph.D. economist fills one of the highest positions in the JFTC (one of the five Commissioners). Commissioner Hiroyuki Odagiri, serving from March 2012 to the present, was a professor of economics at Seijo University. Prior to Dr. Odagiri, the former Commissioner, Akira Goto, who served from 2007 to 2012, was an economics professor from the University of Tokyo. The small number of economists in the JFTC compared with the US or UK, for example, has affected the quantity and quality of economic analysis in case decisions and the extent of ex-post policy analyses. There is no specialized ex-post research office for competition policy in Japan. Looking now at the gaps and bridges between academics and policy makers, the JFTC established the Competition Policy Research Center (CPRC) in 2003 to strengthen its research functions, include ex-post evaluations, and build connections between academics and the competition enforcement authority. The CPRC aims to build and improve cooperative platforms between outside researchers’ and practitioners’ intellectual resources and JFTC staff members. However, the CPRC’s in-house research centre has been criticised as virtual and composed of part-time lecturers making for a less effective bridge.

3 Japanese Public Procurement and Construction Industry There are some notable features of the Japanese public procurement system. When the authority of the public procurement authority decides to carry out a project, a contract officer puts the contract out to tender in principle. The procurement authority uses a predetermined price that is like an engineer’s budget. This upper price limit is calculated in public procurement requests for construction bids in Japan before bidding based on the work specifications, design specifications, and construction drawings (Article 29-6, the Public Accounting Act). The procurement authority designates the biggest projects as grade A and others are ranked by size as B, C or D, the smallest projects. The Ministry of Land, Infrastructure, Transport and Tourism has a mandatory business evaluation system for construction companies who intend to take part in a tender for public construction works and each firm is graded from A

3 Japanese Public Procurement and Construction Industry

77

to D based on the firm’s technical capabilities and work performance. Grade A firms are only able to participate in bidding for grade A projects and so on to protect local entities who would otherwise be disadvantaged. The authority decides on a tender grade reflecting the size or difficulty of a project from the viewpoint of quality control and fairness for a disadvantaged entity. The tender grade regulates a participant firm rank (Rank A, B, C, and D) that is based on the firm’s technical capabilities and work performance. The procurement authority uses a predetermined price that is like an engineer’s budget. This upper price limit is calculated in public procurement requests for construction bids in Japan before bidding based on the work specifications, design specifications, and construction drawings (Article 29-6, the Public Accounting Act). One method of deciding on the award of a bid which has been used in Japanese procurement is to base the award solely on price and automatically accept the lowest bid, single-year budget, and total budget contract following the institutional mechanism of the bidding decision-making system (Article 29-6, the Public Accounting Act). The more recent method is to conduct a comprehensive evaluation whereby price and other elements are assessed inclusively allowing companies (which may operate as joint ventures) the possibility of obtaining more work if they have excellent technical strength. As mentioned earlier, bid-rigging is a longstanding problem in the construction industry. In Japan, this problem is called dango. In dango conduct, construction companies that are ostensibly competing for a government contract ferret out the secret predetermined ceiling price, and then conspire to decide which among the members of the ring will win the contract and therefore how much each member will bid. Japanese construction industry has been especially conducive to cartel behaviour as there has been a particularly low discount rate (not a high level of mobility of labour especially executives), a lower deviation payoff (not many big projects), and a higher coordinated payoff (long-term mutually beneficial relationships) than in many countries. However, in recent years, the climate has been changing due to the efforts of the competition authority.

4 Bid-Rigging in Price In 2012, the JFTC issued cease-and-desist and surcharge payment orders against enterprises bidding for general engineering and harbour engineering work ordered by the MLIT through the Shikoku Regional Development Bureau, as well as for engineering work ordered by Kochi Prefecture. On October 17, 2012, the JFTC determined that these enterprises substantially restrained competition in procurement by the Tosa and Kochi regional offices by jointly designating the bidders who would win. Once the JFTC recognized the enterprises’ practice of selecting a bidder and jointly securing its winning bid, the agency conducted an immediate investi-

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5 Construction Industry and Competition Policy

gation on December 6, 2011 to terminate such behaviour.8 The Shikoku Regional Development Bureau has 15 regional offices but Tosa and Kochi are the only regions where firms violated the competition law by bid-rigging in this case. Altogether 44 firms were involved and 37 firms were ordered to pay a surcharge. The total amount of the surcharge payment was 1755.48 million yen. (e.g. Mitani-KK: 262.09 million yen, Irimajiri Construction Co. Ltd.: 146.64 million yen, and Todoroki Corporation: 113.08 million yen) The JFTC also demanded that the MLIT implement improvement measures to ensure that involvement in bid rigging was eliminated in accordance with the Bid Rigging Involvement Act. In addition, the administrators were pursued for damages under the Act; such action can be expected to assist in making traditional anticompetitive practices less attractive. It is important to analyse this case because typically bid-rigging has a wide range of serious impacts on people’s lives; it involves not only the construction companies, but also administrative personnel who ordered the project and connived in the collusion (although this has no overt role in this chapter), and the data is available as a public resource. (1) Analysis method The following regression was performed to analyse several inferences regarding bidrigging. The statistical significance of the dummy variables with and without the identification issues was reviewed. This type of formulation stems from Porter and Douglas Zona (1993, 1999) and from an extension of their studies by De Silva et al. (2008). The regression describes an estimate in Eqs. (1) and (2) with a simple DID analysis from Arai and Morimoto’s (2013) concept, as follows: log(Bidi ) = α1 + β1,1 log(Predeterminedi ) + β1,2 log(Participantsi ) + β1,3 Kochii + β1,4 Tosai + β1,5 JFTCi + β1,6 JFTCi ∗ KOCHIi + β1,7 JFTCi ∗ Tosai + ε1

(1)

log(W INBIDi ) = α2 + β2,1 log(Predeterminedi ) + β2,2 log(Participantsi ) + β2,3 Kochii + β2,4 Tosai + β2,5 JFTCi + β2,6 JFTCi ∗ KOCHIi + β2,7 JFTCi ∗ Tosai + ε2 (2) where i is the project identification, Bid is a firm’s bid for the project, Winbid is the winning bid for the project, Predetermined is the bid price predetermined by the project’s procurement authority, and Participants is the number of bidders for the project. In addition, Kochi is a dummy variable for the Kochi highway office (which equals 1 for a project in the Kochi highway office and 0 otherwise), Tosa is a dummy variable for the Tosa highway office (which equals 1 for a project in the Tosa highway office and 0 otherwise), JFTC is a dummy variable for the investigation (which equals

8 See

the JFTC press release: http://www.jftc.go.jp/en/pressreleases/yearly-2012/oct/individual000503.html.

4 Bid-Rigging in Price

79

1 for projects conducted after the JFTC investigation date on December 6, 2011 and 0 otherwise), and ε is an error term. The coefficients α1 and β1.1–β1.7 were estimated. The focal parameters of interest were the signs and values of the coefficients β1.6 and β1.7, as well as their statistical significance and impact analyses. α2 and β2,1–β2,7 are the same. (2) Data The data set comes from the published data of the Shikoku Regional Development Bureau of the MLIT and includes the date of the bid, procurement office, project name, the names of the 44 bidding companies, bidding price of each company (in Japanese yen), and winning company’s name for the fiscal years 2006 to 2012. This public procurement was based on a first-price sealed auction, and the lowest bid was the winner automatically (see Sect. 3). The first part of thisis study used the bidding data for general and public engineering works under the Shikoku Regional Development Bureau of the MLIT for the fiscal years 2006 to 2012 from Rank C (the size range ¥60 million < C < ¥300 million) of the violation itself). The average, standard deviation, and number of observations for the bid price data were ¥131 million, ¥54 million, and ¥9283, respectively. In cases involving multiple bidding, the first bid prices were used (in general, the number making a second and third bid is under 10% of the total number bidding initially). Table 1 reports the descriptive statistics. Because Japan has had virtually no inflation over this time period, and because it is likely that the right-hand side variable (predetermined price) captures much of the movement over time, this might not be a big problem in this estimation. We made use of the time-series effect of the specific day of the spot investigation of the JFTC as the JFTC dummy, and others were omitted. (3) Results Tables 2 and 3 illustrate the estimated results of the bidding and winning price levels, respectively. These estimates were validated using the DID method. The coefficients of LOG(Predetermined) for the bidding and winning prices were positive and highly significant, and those of Participants for both prices were negative and highly significant. Thus, this implies that the bidding and winning prices were constructed using the predetermined price. The finding of increasing the number of participants being associated with decreasing winning prices is consistent with standard competition theory. The period before the JFTC’s investigation (i.e. during collusion) and the period after the investigation were compared. As shown in the second column in Tables 2 and 3, the coefficients of the JFTC variables in the bidding and winning tables were negative and highly significant. Moreover, regarding the effects of the bidrigging period and the related market, the third column in both tables shows that the coefficients of the cross-term variables JFTC × Kochi or JFTC × Tosa in the bidding and winning tables were negative and highly significant. In addition, these coefficients were smaller than the coefficients of the JFTC variables in the bidding and winning tables. Regarding the effects of the region and period, the fourth column in both tables shows that the coefficients for Kochi and Tosa are positive and highly

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5 Construction Industry and Competition Policy

Table 1 Descriptive statistics BID

Predetermined

Participants

JFTC

KOCHI

Mean

13,10,00,000

13,60,00,000

7.3739

0.1488

0.0695

TOSA 0.0971

Median

12,30,00,000

12,60,00,000

7

0

0

0

Maximum

66,60,00,000

69,60,00,000

25

1

1

1

Minimum

4,98,00,000

6,00,80,000

1

0

0

0

Std. dev.

5,42,76,482

5,71,05,486

3.1548

0.3559

0.2543

0.2961

Skewness

1.7405

1.7763

0.9710

1.9740

3.3863

2.7222

Kurtosis

11.7029

12.1214

Sum Observations

9,283

9,283

5.3598

4.8967

12.4669

8.4105

68,452

1,381

645

901

9,283

9,283

9,283

9,283

WIN

Predetermined Participants

JFTC

KOCHI

TOSA

Mean

12,10,00,000

13,20,00,000

5.9331

0.1826

0.0721

0.1001

COVAR 0.0366

Median

11,30,00,000

12,20,00,000

6

0

0

0

0.0309

Maximum

63,00,00,000

68,80,00,000

25

1

1

1

0.3520

Minimum

5,15,00,000

6,00,80,000

1

0

0

0

0

Std. dev.

5,01,06,196

5,54,44,993

2.9283

0.3865

0.2588

0.3002

0.0274

Skewness

1.7883

1.8244

0.8295

1.6432

3.3080

2.6655

2.5671

Kurtosis

12.8950

13.0961

4.5329

3.7002

11.9426

8.1047

19.7680

9,131

281

111

154

56.2762

1,539

1,539

1,539

1,539

1,539

Sum Observations

1,539

1,539

Notes BID: each bid price (in Japanese yen), Predetermined: the authority’s predetermined price of the project (in Japanese yen), Participants: the number of the participants of the project, JFTC: a dummy variable before or after the JFTC investigation, KOCHI: a dummy variable of Kochi office, TOSA: a dummy variable of Tosa office, WIN: each winning price (in Japanese yen), COVAR: coefficient of variance

significant, and the fifth column exhibits the cross-terms and the regional variables. These coefficients imply that the bid-rigging effect (pre-investigation) is positive and that the competition effect (post-investigation) is negative. According to these results, price levels in the bid-rigging period and regions increased by approximately 6%. Similar research on price movement in cartel cases has been conducted by Abrantes-Metz et al. (2006), Harrington (2007), and Bolotova and Connor (2008) and Tanno and Hirai (2012) among others. The price level during bid-rigging is higher than during competition and the price fluctuation during bid-rigging is lower than during competition. The evidence in this bid rigging case regarding price level and price fluctuation is consistent with the results of other studies of collusion—see, for example, Abrantes-Metz et al. (2006) and Tanno and Hirai (2012). However, the research on the bid-rigging case in this section is one of the earliest ex post studies of a bid rigging case in Japan. These results might affect policy decisions in Japan. It has been alleged by some defendants of damage suits that, in a predetermined price institution, bid-rigging does not cause price increases or fluctuations in Japan. However, the simple estimates

−0.0024*** (0.0003) −0.0205*** (0.0021)

0.3389*** (0.0344) 0.9808*** (0.0019) −0.0025*** (0.0003) −0.0252*** (0.0019)

0.4028*** (0.0344)

0.9770*** (0.0019)

−0.0019*** (0.0003)

C

Log(Predetermined)

Participants2

−2.3631

0.0747

−2.3496

S.E. of regression

Akaike info criterion

−2.3630

0.0742

−2.3882

0.0733

0.9644

−2.3913

0.0732

0.9645

0.9646

−0.0516*** (0.0060)

−0.0597*** (0.0054)

(0.0020)

0.0339***

0.0427*** (0.0027)

−0.0140*** (0.0022)

−0.0021*** (0.0003)

0.9770*** (0.0019)

0.4015*** (0.0349)

Coefficient (Std. error)

Notes The upper values in the cell are the estimated coefficients, and the lower values in the parentheses are the standard errors. In the table, *, **, and *** indicate 10%, 5%, and 1% significance levels respectively. The symbols used in the following tables are the same. The estimation software used was EViews 7.0, produced by HIS (CA, USA)

−2.3643

0.0742

0.9635

0.0742

0.9630

Adjusted R-squared

0.9635

0.9636

0.9630

R-squared 0.9635

−0.0649*** (0.0056)

−0.0189*** (0.0057)

JFTC*TOSA

0.9644

−0.0736*** (0.0050)

−0.0175*** (0.0047)

JFTC*KOCHI

0.9635

0.0360*** (0.0020)

0.0252*** (0.0021)

TOSA

0.9635

0.0448*** (0.0027)

−0.0019*** (0.0003)

0.9756*** (0.0019)

0.4235*** (0.0349)

0.0220*** (0.0027)

−0.0018*** (0.0003)

0.9728*** (0.0019)

0.4763*** (0.0348)

Coefficient (Std. error)

KOCHI

JFTC

0.9816*** (0.0019)

0.3239*** (0.0348)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

White heteroskedasticity-consistent standard errors and covariance

Coefficient (Std. error)

Method: least squares

n = 9283

Dependent Variable: Log(BID)

Table 2 Bidding price estimates

4 Bid-Rigging in Price 81

−0.0051*** (0.0006) −0.0146*** (0.0037)

0.2759*** (0.0686) 0.9826*** (0.0037) −0.0051*** (0.0006) −0.0203*** (0.0034)

0.3348*** (0.0674)

0.9790*** (0.0036)

−0.0046*** (0.0006)

C

Log(Predetermined)

Participants2

−2.8041

0.0599

−2.7891

S.E. of regression

Akaike info criterion

−2.7983

0.0596

−2.8352

0.0585

0.9771

−2.8365

0.0584

0.9771

0.9772

−0.0573*** (0.0080)

−0.0552*** (0.0089)

0.0285*** (0.0040)

0.0374*** (0.0060)

−0.0090** (0.0039)

−0.0048*** (0.0006)

0.9808*** (0.0038)

0.3032*** (0.0692)

Coefficient (Std. error)

Notes The upper values in the cell are the estimated coefficients, and the lower values in the parentheses are the standard errors. In the table, *, **, and *** indicate 10%, 5%, and 1% significance levels respectively

−2.8073

0.0593

0.9762

0.0595

0.9759

Adjusted R-squared

0.9764

0.9765

0.9760

R-squared 0.9763

−0.0658*** (0.0071)

−0.0296*** (0.0069)

JFTC*TOSA

0.9772

−0.0640*** (0.0081)

−0.0183*** (0.0068)

JFTC*KOCHI

0.9763

0.0301*** (0.0038)

0.0162*** (0.0041)

TOSA

0.9764

0.0391*** (0.0059)

−0.0046*** (0.0006)

0.9798*** (0.0037)

0.3187*** (0.0685)

0.0191*** (0.0054)

−0.0044*** (0.0006)

0.9761*** (0.0037)

0.3851*** (0.0686)

Coefficient (Std. error)

KOCHI

JFTC

0.9840*** (0.0038)

0.2495*** (0.0695)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error)

White heteroskedasticity-consistent standard errors and covariance

Method: least squares

n = 1539

Dependent variable: Log(WIN)

Table 3 Winning price estimates

82 5 Construction Industry and Competition Policy

4 Bid-Rigging in Price

83

imply that prices increase and stabilize under the predetermined system. Moreover, the estimates represent a meaningful subject for policy discussions, especially when designing institutional arrangements on competition policy and public procurement.

5 Effect of Firm Entry (1) Firm-entry Circumstances For bid-rigging to be effective, limited entry is necessary to maintain the cartel. Construction is a licensed industry in Japan. It is, however, easy to get a license, as the cost of arranging the notification form and providing notification is too low for businesses to have any difficulties in practice (see Kanemoto 1999). The number of licensed businesses is shown in Fig. 1. This evidence seems to show that the license system has not functioned as a barrier to entry in practice. We examined the firm-entry situation from several perspectives, such as the size of the project and the effects of the JFTC’s investigation. (2) Estimation We used the same data but this time from GradesLevels A, B, C, and D of general public engineering works from the Shikoku MLIT for the fiscal years 2006 to 2012. The average, standard deviation, and number of observations of the bid price data 650000

70,000 600,980 568,548

60,000 557,175

586,045

585,959

600000

571,388

564,849

558,857 552,210

562,661 542,264

50,000

40,000

30,000

33,223 25,298

498,806 483,639

40,482 37,995 37,171

31,201 31,059 18,902

18,220

24,280 24,949 23,875 23,481

20,192

400000

20,085 20,004 20,426 17,256 16,170

14,607 14,416

10,000 8,553

450000

32,854

21,254

27,525 25,549

500000 469,900

38,446

26,050

30,812

550000

509,174 507,528

39,970 31,224

20,000

513,196

524,273 42,659

18,464 16,034

17,320

350000

9,345

300000

0 1995

1996

1997

1998

1999

2000

2001

2002

Newentries

Fig. 1 Number of licensed businesses

2003

2004 Closures

2005

2006 PermiƩeds

2007

2008

2009

2010

2011

2012

84

5 Construction Industry and Competition Policy

were 180 million Yen (JPY), 316 million Yen (JPY), and 10,459, respectively. The average deviation and standard deviation of the number of bidders were 9.03 and 4.41, respectively. In cases involving multiple bidding, we used the first bid price. Table 2 reports the descriptive statistics. We defined an entity that participates in the bidding but has not participated in any bidding process within the last 3 years as a firm entry. In addition, if an entity participates in bidding, followed by non-participation in biddings within 3 years, followed by bidding, we termed the case a ‘re-entry’. Furthermore, we termed the residual portion of the firm entry a ‘new entry’. During the analysis period, there were 107 Newentry entities, and 27 Reentry entities (for total entries of 134). We applied the following regression to the previously mentioned data to analyse several inferences regarding firm entry. We reviewed the statistical significance of the dummy variables with and without the identification issues. The regression describes the estimation in Eq. (4) as follows (the basic idea is the same as in Sect. 4):   log Bidprice or W inprice = A + B ∗ identification_dummy  + C ∗ related _others + ε

(3)

where identification_dummy is a dummy variable for the existence of the firm entry, and related_others are related variables, such as predetermined price and the number of bidders in the bidding. ε is an error term. Coefficients A, B, and C are estimated. Our central interest is whether coefficient B is statistically significant and what its impact analysis is. Thus, we used several control variables to test the results for robustness. (3) Result of Analysis First, we tested the general thinking that firm entry causes a reduction in bidding and winning prices. In general, if there is a firm-entry bidder, the bidding and winning prices decrease because of intensified competition. To test this proposition, we estimated the bidding and winning prices based on related variables and a dummy variable for the existence of a firm entry. If the coefficient of the dummy variable is positive and significant, it is linked to an increase in the price, and is significant. If it is negative, the price decreases. We consider that if general thinking is true, the dummy variable for the existence of a firm entry is negative and significant. The estimation is as follows:    β5,k Rankki,t log Bidi,t = β5,0 + β5,1 log(Predeterminedt ) + k∈K

+ β5,5 Re_New_Bidt + ε5,i,t

(4)

5 Effect of Firm Entry

85

  log W ini,t = β6,0 + β6,1 log(Predeterminedt )  + β6,k W inRank_ki,t + β6,5 Re_New_Bidt + ε6,i,t

(5)

k∈K

where Bidi;t denotes bidder i’s bid in auction t, Wint denotes the winning bid in auction t, K denotes the set of ranks (Tokyu), that is, K = {A, B, C} (normalized by D), WinRankt denotes the winner’s rank in auction t, and 1;i;t and 1;t are error terms. In Eq. 1, Re_New_Bid is the variable of firm entry, which takes 0 when no firm entry exists and 1 when there is a firm-entry bidder in the project. In this chapter, we use discrete type analysis, although it is possible to extend the entry variable as an integer value referring to the number of business firm entries. Here, ε5 or ε6 is an error term. In this equation, β5,0, β5,1, β5,2, β5,3, β5,4, and β5,5 (β6,… are the same) are the coefficients sought through the regression analysis. In this regard, we made some changes to the variables to identify the new firmentry and/or re-entry effect. If Re_New_Bid changes to Newentrybid as the new firm entry dummy variable, it takes a value of 1 when there is a project including a new entrant and 0 when there is no new entrant. If Re_New_Bid changes to Reentrybid as the dummy variable of re-entry, it takes a value of 1 if there is a project including a re-entry entrant and 0 when there is no re-entry entrant. (i.e. we removed the variable of Re_New_Entry from Eq. (1) and inserted the variables of Newentrybid and Reentrybid). The data set is the same as that in Sect. 4. We used bid data from Levels A and B of general public engineering works [>300 million Yen (JPY)] from the Shikoku MLIT for the fiscal years 2006 to 2012. The average, standard deviation, and number of observations of the bid price data were 180 million Yen (JPY), 316 million Yen (JPY), and 10,459, respectively. The average deviation and standard deviation of the number of bidders were 9.03 and 4.41, respectively. In cases involving multiple bidding, we used the first bid price. Table 2 reports the descriptive statistics. We defined an entity that participates in the bidding but has not participated in any bidding process within the last 3 years as a firm entry. In addition, if an entity participates in bidding, followed by non-participation in bidding within 3 years, followed by bidding, we term the case a ‘re-entry’. Furthermore, we termed the residual portion of the firm entry a ‘new entry’. During the analysis period, there were 107 Newentry entities, and 27 Reentry entities (for total entries of 134). We applied the following regression to the previously mentioned data to analyse several inferences regarding firm entry. The results are shown in Table 4. According to the results, the coefficients of Re_New_Bid of both the bidding and winning prices are negative and statistically significant. The value of the coefficient is approximately 0.02, which shows that a firm entry causes an approximate reduction of 2% in the bidding price and 1.6% in the winning price based on the log–log regression with a dummy variable. Therefore, general thinking is generally true in both a new firm entry and in a re-entry.

−0.0384*** (0.0080) −0.0218*** (0.0068) 0.0154*** (0.0037)

−0.0430*** (0.0080)

−0.0217*** (0.0068)

0.0173*** (0.0037)

TOKYU_A

TOKYU_B

TOKYU_C

−2.3749

−2.3703

−2.7474

0.0612

−2.7495

0.0611

−2.7491

0.0611

0.9896

Notes The upper values in the cell are the estimated coefficients, and the lower values in the parentheses are the standard errors. In the table, *, **, and *** indicate 10%, 5%, and 1% significance levels respectively

−2.3772

0.0737

0.9896

Akaike info criterion

0.9874

0.9896

0.0740

0.9875

0.0738

0.9874

S.E. of regression

0.9896

Adjusted R-squared

0.9896

0.9875

0.9874

R-squared

0.9874

−0.0189 (0.0125)

−0.0418*** (0.0054)

0.0136** (0.0069)

0.0095 (0.0112)

0.0186 (0.0181)

0.9739*** (0.0035)

Reentrybid

−0.0159** (0.0067)

0.0137** (0.0069)

0.0094 (0.0112)

0.0183 (0.0181)

0.9738*** (0.0035)

−0.0164** (0.0075)

0.9896

0.0153** (0.0069)

0.0101 (0.0113)

0.0145 (0.0181)

0.9736*** (0.0035)

0.3907*** (0.0622)

Coefficient (Std. error)

−0.0128*** (0.0032)

0.0154*** (0.0037)

−0.0201*** (0.0068)

−0.0359*** (0.0080)

0.9765*** (0.0018)

0.3912*** (0.0622)

Coefficient (Std. error)

Newentrybid

−0.0204*** (0.0029)

0.9764*** (0.0018)

0.9762*** (0.0018)

Log(Predetermined)

RE_NEW_BID

0.3850*** (0.0324)

0.3863*** (0.0325)

C

0.3931*** (0.0623)

Coefficient (Std. error)

Coefficient (Std. error)

Coefficient (Std. error) 0.3830*** (0.0324)

n = 1748

Method: least squares Coefficient (Std. error)

Log(WIN)

Log(BID)

n = 10,459

Dependent variable:

Table 4 Results of effect on price

86 5 Construction Industry and Competition Policy

5 Effect of Firm Entry

87

The coefficients of Newentrybid and Reentrybid of both the bidding and winning prices are negative and statistically significant; furthermore, the coefficient of Reentrybid is larger than that of Newentrybid in the bidding price, and the coefficient of Reentrybid in the winning price is not statistically significant. Note two caveats in this chapter. The first one is asymmetric auctions in which one bidder is ‘stronger’ than the others. The intuitive idea that a stronger bidder’s competitors bid more aggressively (see Milgrom 2003, pp. 149–153). If there is an asymmetric auction, the estimation might have bias at the equilibrium of the first price auction. In response to the problem, we adopt two coping strategies. First, in terms of conditional independency and exchangeability for identification of collusion in Bajari and Ye (2003), we used predetermined price as a proxy for cost factor and ranking level to control the asymmetric factor of each bidder. Second, as the quantile estimators are more robust to outliers in the data than are the estimators (Hong and Shum 2002), we verify the estimation by using the median value of column 7 in Table 5. This is very similar to the raw data estimation, and we consider that there is little bias in our estimation. The second caveat concerns endogeneity, for example, a bid attracts new entrants and the project requires special skills to complete. This situation is typically observed by firms, but researchers cannot observe it, as the data do not provide this information. Due to this unobserved characteristic of the bid, other participants believe that the likelihood of having new entrants is high in this bid, and the participants might bid more aggressively than usual. In response to this problem, we check two points. First, the new entrants’ pricing is not low (1.8% higher than the average). Second, we use the number of participants of a bid as the instrumental variable. This is likely to be related to the probability of the existence of the firm entry, but is not likely to be related to the bidding level itself after the elimination of the project size effect. Then, the coefficient of Re_New_Bid is negative and statistically significant, which is the same as our estimation results. There might be problems of missing variables and specifications. However, given the overall high level of the coefficient of determination, it is likely that the problems of missing variables and specifications are not large in this estimation. (4) Firm Entry, Coordinated Practice, and Competition Situation Firm entry is especially likely to be effective in a coordinated situation, in which many firms do not undertake aggressive pricing in the bidding to avoid price competition with or without agreement. By contrast, a competitive situation is one in which firms undertake aggressive pricing in the bidding. The inference comes from the following consideration. If there is an entrant in a coordinated bid situation, a competitive atmosphere is introduced into the procurement. By contrast, if there is an entrant in a competitive bid situation, the procurement already includes the competitive conduct of participating bidders, and there is little room for improvement for the entrant to the competition. Therefore, we considered the following proposition. (Proposition) The effect of firm entry in a coordinated situation is larger than that in a competitive situation.

Coefficient (Std. error)

0.3885*** (0.0324) 0.9762*** (0.0018) −0.0422*** (0.0080) −0.0200*** (0.0068) 0.0155*** (0.0037)

0.3901*** (0.0325)

0.9761*** (0.0018)

−0.0381*** (0.0080)

−0.0212*** (0.0068)

0.0155*** (0.0037)

−0.0218*** (0.0030)

0.0159 (0.0092)

C

Log(Predetermined)

TOKYU_A

TOKYU_B

TOKYU_C

RE_NEW_BID

JFTC*RE_NEW_BID

0.0739 −2.3729

0.0738

−2.3750

S.E. of regression

Akaike info criterion

−2.7491

0.0611

0.9896

0.9896

0.0218 (0.0199)

−0.0183*** (0.0070)

0.0140** (0.0069)

0.0100 (0.0113)

0.0173 (0.0182)

0.9735*** (0.0035)

−2.7505

0.0610

0.9896

0.9896

0.0256 (0.0206)

−0.0202*** (0.0066)

0.0134* (0.0069)

0.0112 (0.0112)

0.0157 (0.0181)

0.9735*** (0.0035)

0.3982*** (0.0622)

Coefficient (Std. error)

−2.7514

0.0610

0.9896

0.9897

0.0224 (0.0206)

−0.0188*** (0.0066)

0.0180 (0.0200)

−0.0165** (0.0070)

0.0122* (0.0069)

0.0110 (0.0112)

0.0184 (0.0182)

0.9735*** (0.0035)

0.4005*** (0.0623)

Coefficient (Std. error)

Notes The upper values in the cell are the estimated coefficients, and the lower values in the parentheses are the standard errors. In the table, *, **, and *** indicate 10%, 5%, and 1% significance levels respectively

−2.3770

0.0737

0.9875

0.9875

0.9874 0.9874

0.9874

0.9874

Adjusted R-squared

0.0147* (0.0088)

0.0179** (0.0087)

JFTC*RE_NEW_NEXT

R-squared

−0.0148*** (0.0030)

−0.0164*** (0.0030)

RE_NEW_NEXT

0.0131 (0.0093)

−0.0205*** (0.0030)

0.0139*** (0.0037)

−0.0199*** (0.0068)

−0.0377*** (0.0080)

0.9762*** (0.0018)

0.3967*** (0.0624)

Coefficient (Std. error)

0.3910*** (0.0325)

n = 1748 Coefficient (Std. error)

Coefficient (Std. error)

Method: least squares

n = 10,459

Log(Bid)

Log(Bid)

Dependent variable:

Table 5 Firm entry, coordinated practice, and competition situation

88 5 Construction Industry and Competition Policy

5 Effect of Firm Entry

89

We examined the case mentioned in Sect. 4 and demonstrated that entry has a significant effect. Using this event, we hypothetically changed the situation from coordination to cooperation. Comparing the situation before the date of the investigation with that after the date, we analysed the effects of the event both before the date as coordination and after the date as competition. MLIT has several offices in Shikoku region, such as Kochi and Tosa offices; thus, the effect was extended to all of the Shikoku Regional Development Bureau. We used the following regression with a cross-term of a firm entry and a dummy variable of the situation change to test the proposition:    β7,k RANKuki,t log Bidi,t = β7,0 + β7,1 log(Predeterminedt ) + k∈K

+ β7,5 Participantst + β7,6 JFTCt + β7,7 RE_NEW _BIDt + β7,8 JFTCt × RE_NEW _BIDt + ε7,i,t   log W ini,t = β8,0 + β8,1 log(Predeterminedt ) +



(7)

β8,k W inRANK_ki,t

k∈K

+ β8,5 PARTICIPANTSt + β8,6 JFTCt + β8,7 RE_NEW _BIDt + β8,8 JFTCt × RE_NEW _BIDt + ε8,i,t (8) where the variable of JFTC is the dummy variable that takes a value of 1 when the project is after the date of the on-the-spot investigation, and 0 otherwise. Other variables are the same as previously mentioned. In this equation, β7,0, β7,1, …, β7,8, and β8, … are the coefficients sought through the regression analysis, and ε7 is an error term. We compare the differences between the entry effect in the bidding and the no-entry effect in the bidding with the differences between the entry effect in the bidding with the bid-rigging period and the no-entry effect in the bidding with the bid-rigging period. The results are shown in Table 5. According to the results, the coefficients of Re_New_Bid are negative and statistically significant in the bidding and winning prices. They show an approximate reduction of 2.1% in the bidding price and 1.8% in the winning price in the bid with an entrant in the coordination period. However, the coefficients of JFTC*Re_New_Bid are not negative. For instance, the coefficient of JFTC*Re_New_Bid in the bid price is even positive, slightly significantly. Thus, the effect of a firm entry on bidding and winning prices in the coordination situation emerges as a clear price reduction, whereas in the competition situation, it does not significantly affect prices. Therefore, the effect of firm entry in a coordinated situation in general is larger than that in a competitive situation. We demonstrate the firm effect comes from competition when comparing coordination and competition situations.

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6 Concluding Remarks This chapter provides institutional insight into Japanese competition law and authorities from the economist’s standpoint and examines a public procurement bid-rigging case in the Shikoku region. The bid-rigging and price-moving analyses showed that the bidding and winning price levels before the investigation were higher than they were after the investigation. The study deals with the effect of a firm entry on bidding and winning prices. The firm effect has the effect of approximately a 2% price reduction generally; the effect of firm entry in a coordinated situation is larger than that in a competitive situation. Studying a case and its implications ex post is important, not only for verifying the current perspective of competition research, but also for setting a new research agenda based on actual incidents. This type of research evidence is useful for the JFTC and other authorities.

References Abrantes-Metz R, Froeb LM, Geweke JF, Taylor CT (2006) A variance screen for collusion. Int J Ind Organ 24(3):467–486 Arai K, Ishii-Ishibashi R, Ikuo I (2011) Research and analysis on bid rigging mechanisms. Japan and the World Economy 23(1):1–5 Arai K, Morimoto E (2013) Effects of spreading mechanism of changes in examination trigger prices: analysis in terms of bidding behavior. JSCE F4 69(4) I_171-I_189 (in Japanese) Bajari P, Ye L (2003) Deciding between competition and collusion. Rev Econ Stat 85(4):971–989 Bolotova Y, Connor J (2008) The impact of collusion on price behavior: empirical results from two recent cases. Int J Ind Organ 26(6):1290–1307 Harrington JE Jr (2007) Detecting cartels. In: Buccirossi P (ed) Handbook of antitrust economics. The MIT Press, London, England Hong H, Shum M (2002) Increasing competition and the winner’s curse: evidence from procurement. Rev Econ Stud 69(4):871–898 Ishii R (2009) Favor exchange in collusion: empirical study of repeated procurement auctions in Japan. Int J Ind Organ 27(2):137–144 Ishii R (2014) Bid roundness under collusion in Japanese procurement auctions. Rev Ind Organ 44(3):241–254 Kanemoto Y (1999) Nihon no kensetsu sangyo, Nihon Keizai Shinbun, Japan McMillan J (1991) Dango: Japan’s price-fixing conspiracies. Econ Politics 3(3):201–218 Milgrom P (2003) Putting auction theory to work, Cambridge, UK Nguyen XD, de Vanssay X, Parsons C (2015) The Japanese automobile tyre industry under scrutiny. Int J Econ Bus 22(1):141–162 Public Accounting Act. Act No. 35 of March 31, 1947. Japanese Government. http://www. japaneselawtranslation.go.jp/law/detail/?id=2044&vm=04&re=02. Accessed 31 March 2017 Porter R, Douglas Zona J (1993) Detection of bid rigging in procurement auctions. J Political Econ 101(3): 518–538

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Porter R, Douglas Zona J (1999) Ohio school milk markets: an analysis of bidding. RAND J Econ 30(2):263–288 Silva D, Dakshina TD, Kankanamge A, Kosmopoulou G (2008) The impact of public information on bidding in highway procurement auctions. Eur Econ Rev 52(1):150181 Tanno T, Hirai T (2012) Collusion, breakdown, and competition in procurement auctions. http:// jlea.jp/2013zy_zr/ZR13-08.pdf. Accessed 22 Aug 2016 Takigawa T (2009) Competition law and policy of Japan. Antitrust Bull 54(3):435–513

Part III

Regulation of Unair Trade Practices and Abuse of Superior Bargaining Position

In addition to the typical competition law violations as we have seen so far, Japan’s Anti-Monopoly Act regulates unfair trade practices in business trading practices. At that time, the key idea is whether or not there is a risk of impeding fair competition. And this way of thinking is being analyzed economically from the viewpoint of the effect of restraint in vertical transactions. Today, at the time of this examination, it is also necessary to think about the prosperity of the online market that manufacturers can sell directly to consumers and the development of platformers like GAFA. Since January 2010, Japan introduced a surcharge system to abuse of superior bargaining position, which prohibits exploitation by the counterparty in relatively stronger bargaining position. This approach has given rise to case law in various sectors of the economy, and on that basis, there is a growing argument that it should be introduced in other jurisdictions.

Chapter 6

Regulation of Distribution and Trade Practices

1 Introduction Distribution and trading practices have been formed in historical and social contexts. Today, with the globalization of economic activities and technological innovation, it is becoming increasingly important for business operators to demonstrate their ingenuity. Therefore, the free entry of the enterprise into the market is not impeded, the choice of the business partner of the enterprise is made freely and voluntarily, and the setting of the price and other transaction conditions is made freely and voluntarily. Therefore, competition by fair means needs to be conducted. With regard to Japan’s distribution and trading practices, the Guidelines Concerning Distribution Systems and Business Practices (Distribution Guidelines) have been formulated and published to clarify what conduct acts against fair and free competition and violates the antitrust law, which can be highly appreciated. For example, as part of marketing, a business operator is involved in, and affects, the selling price of a distributor such as a wholesaler or a retailer, products handled, sales area, customers, etc., competition between brands and competition within brands may have the effect of reducing or eliminating. The inter-brand competition refers to competition between suppliers such as manufacturers and competition among distributors who handle products of different brands. The intra-brand competition is the competition among distributors who handle products of the same brand. In recent years, transactions using the Internet have become a useful tool for businesses and customers, for example, they can trade with wider areas and various customers, compared with the conventional transaction methods such as transactions in real stores. However, in the view of the Antimonopoly Act, the basic way of thinking does not differ depending on whether such a transaction using the Internet or a transaction at a real store is made. In addition, two or more different user groups such as a shopping mall, an online marketplace, an online travel reservation service, a home game machine, a consumer and a business that provides products are combined, and the degree of use of each group is mutually different. It is stated in these guidelines

© Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_6

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that the actions taken by businesses that operate and provide so-called platforms that affect and interact with each other do not differ in basic thinking. On the other hand, as seen in the relationship between a large-scale retailer and a supplier, etc., in a transaction between business operators, one party whose own trading position is superior to the other party is opposed to the other party of the transaction, unfair disadvantage in light of normal business practices by using the status would inhibit the transaction based on the free and voluntary judgment of the other party of the transaction, and the other party of the transaction and the competitor. The actor is likely to be competitively advantageous in relation to its competitors, while being disadvantaged competitively in the relationship. Such actions are regulated by the Antimonopoly Act as abuse of superior status, which is one of the unfair trade practices, because such acts may impair fair competition. This is discussed in Chap. 7. The act of a business operator restricting the sales price of a business partner business, the products handled, the sales area, the business customer, etc. affects the competition in various ways depending on the degree and mode etc. This is called vertical restriction. According to the Distribution Guidelines, vertical restriction acts to prevent business activities by the ingenuity of business operators, reduce or eliminate competition among brands and competition within brands, increase barriers to entry, and eliminate new entrants, consumption It is mentioned that there may be the effect of inhibiting the competition, such as the selection of goods by consumers being narrowed. In addition, it is stated that vertical restriction actions may have the effect of promoting competition, such as promoting the sale of new products, facilitating new entry, and improving quality and services.

2 A Way of Thinking About the Legal and Illegality Judgment Standards Vertical restriction acts, have various effects on competition, but if there is a risk of impeding fair competition, it will be prohibited as an unfair trade practices. In determining whether there is a risk of impeding fair competition by vertically limiting acts, depending on the specific act and the target, area, and mode of the transaction, the transaction pertaining to the act and the scope affected by it. It should be judged considering the following five items comprehensively. This idea is considered economically as well and considered to be a well. And, when examining actual cases, it will be necessary to analyze individual circumstances empirically. [1] Status of competition between brands (market concentration, product characteristics, degree of product differentiation, distribution channel, difficulty of new entry etc.) [2] Status of intra-brand competition (price fluctuation, business conditions of distributors etc. handling the product) [3] Market position (market share, ranking, brand strength, etc.) of the company performing vertical restriction action

2 A Way of Thinking About the Legal and Illegality Judgment Standards

97

[4] Impact on business activities of business partners subject to vertical restriction (degree of restriction, manner, etc.) [5] Number and market position of business partners subject to vertical restrictions. Also, network effects are mentioned. There are direct and indirect effects. For example, if the benefits and benefits of a user of a certain platform are improved by the increase of users belonging to the same user group as the user, it can be said that a direct network effect is working. Also, for example, as the number of users belonging to one user group increases between two user groups who perform transactions via the platform operator, the platform business operator can be selected for the users belonging to the other user group. In cases where the benefits and benefits of conducting transactions are improved, it can be said that an indirect network effect is at work. (2) Tend to impede fair competition Vertical restriction acts include resale price restraint acts and actions to restrict products, sales areas, and business partners of business partners. Since resale price maintenance acts reduce or eliminate price competition among distributors, it is usually an activity that has a large effect of preventing competition and, in principle, tends to impede fair competition. On the other hand, non-price-limiting actions generally have different effects on market competition depending on their action types and specific cases. That is, some of the non-price limiting acts are not judged to be illegal only from the action type, but depending on the individual case, the market closing effect arises from the market position of the business operator who performs the acts. In some cases, it may be judged whether or not there is a risk of impeding fair competition, such as “when the price maintenance effect occurs”. Furthermore, it is usually judged that price competition is likely to be hindered, and regardless of the market position of the business operator who carries out the act, in principle, there is a possibility of interfering with fair competition. A When market closing effect occurs. “If the market closure effect occurs”, non-price restriction acts will make it difficult for new entrants and existing competitors to secure alternative business partners, raising the cost of business activities. This means that there is a possibility that new entrants or existing competitors may be eliminated or such trading opportunities may be reduced, such as the loss of motivation for new entrants or new product development. When there is a price maintenance effect. “If the price maintenance effect occurs,” is a case where the non-price restriction act interferes with the competition between the other party of the action and its competitor, and the other party can freely influence the price to some extent by his intention. This is to take into five considerations comprehensively. Other competitors’ actions are also taken into consideration, for example, if restrictions are imposed in parallel, there is a high possibility that the market as a whole will have a price maintenance effect.

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3 Procompetitive Effect That Can Be Caused by Vertical Restriction In the case where vertical restriction acts promote the sale of new products, facilitate new entry, improve quality and services, etc., competition-promoting effects can be recognized. The distributor can sell the product without conducting the sales promotion activity when the demand is stimulated by the sales promotion activity performed on the product of the business of another distributor before the sales. In addition, in order to secure a reputation for high quality for new products from the company, supply the new products to retailers who have a reputation for handling high-quality products. However, it may be said that it is important for sales strategy. Or, in order to release a new product, the business operator may require the distributor to make a specific investment such as installation of a dedicated facility. At this time, if another distributor can sell the new product without making such an investment, the distributor who made the investment can not recover the investment, and as a result, such an investment Sometimes it does not happen. In such a case, it may be effective for the business operator to allocate a certain area to only one distributor, in order to request the distributor for a specific investment.

4 Influential Enterprises in the Market There are vertical restriction actions that may be illegal as an unfair transaction method when the action is performed by “an influential enterprise in the market”. With regard to whether or not it is recognized as “a leading business in the market”, it is a rule of thumb that the share in related markets exceeds 20%. However, just exceeding this standard does not make the conduct of the business operator illegal, and it becomes illegal when “the market closing effect occurs” or “the price maintenance effect occurs”.

5 Resale Price Maintenance It is the most basic matter in business activities of business operators that voluntarily determine their sales price according to market conditions, and by this, competition and consumption among business operators Selection of persons is secured. If the business operator binds the sales price of the distributor as part of marketing or at the request of the distributor, such act should reduce or eliminate price competition among the distributors. Such conduct is illegal as an unfair trade practives in principle. On the other hand, If the business operator simply investigates the actual selling price, sales destination, etc. of the distributor who handles his/her product, the economy such as suspension of shipping etc. to the concerned distributor when it does not

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sell at the price indicated by the business operator It does not usually pose a problem unless it involves limitations on the distributor’s selling price, such as imposing or declaring or imposing the above disadvantages.

6 Non-price Ristricted Conduct Whether a company’s non-price limiting behavior is illegal is determined by examining its effect on market competition for each activity type and specific case. It is not only in the case where the business operator limits contractors to contractors as to whether or not the business operator performs non-price limiting acts, and also to the economy of business partners who do not comply with the business operator’s request. It is also judged that the restriction act is being carried out even if the effectiveness of the restriction is ensured by using some artificial means such as imposing the above disadvantages. For example, as part of marketing, a business operator may restrict a business partner to a transaction with his/her competitor, and management advantages are also pointed out for these. However, depending on the market position of the business operator who carries out such restrictions, such restrictions may lead to a situation where the business activities of existing competitors may be impeded or barriers to entry may be raised. In the case where the market closing effect is produced by a leading business operator in the market, for example, performing an act of trading with a trading business operator with a condition binding so as not to trade with its competitor, such act falls under unfair trade practives and is illegal. Also, when multiple operators carry out such restrictions in parallel, the market closing effect is likely to occur as a whole market as compared with the case where only one company carries out restrictions.

7 Economic Analysis Next Chapter constructs a model of anticompetitive exclusive dealings with potential downstream competition. Unlike in previous studies, the incumbent can establish a direct retailer with some fixed payment and can offer an exclusive contract to a downstream buyer twice. We show that the existence of these two options helps the incumbent deter socially efficient entry and earn almost monopoly profit seven in the absence of scale economies and downstream competition.

Chapter 7

Exclusive Contracts When Incumbent Can Establish Direct Retailer

1 Introduction Exclusive contracts have long been a controversial issue. Once an exclusive contract is signed, it directly deters efficient entrants and reduces welfare. Therefore, exclusive contracts seem to have anticompetitive effects. However, the Chicago School argues that rational economic agents do not engage in anticompetitive exclusive dealings to deter socially efficient entry under the standard setting of a downward sloping 1 demand curve. The Chicago School argument remains highly influential. Using a game-theoretic model, economists show that rational economic agents may engage in anticompetitive exclusive dealings to deter socially efficient entry in the following two market environments that the Chicago School does not consider. First, Rasmusen et al. (1991) and Segal and Whinston (2000a) point out that anticompetitive exclusive dealings can arise in the presence of scale economies. Second, Simpson and Wickelgren (2007) and Abito and Wright (2008) describe how intense downstream competition can help anticompetitive exclusive dealings. The aim of this chapter is to explore a new framework of anticompetitive exclusive offers in the context of real economic situations and business practices. In the model of this chapter, an upstream incumbent offers an exclusive contract to a single downstream firm to deter an entrant that is more efficient than the incumbent. If the exclusive contract is signed, then socially efficient entry by the efficient entrant does not arise, and the exclusive dealing here is anticompetitive. However, because no scale economies and no downstream competition exist, the incumbent cannot deter socially efficient entry by using exclusive contract in the frameworks of previous studies. 1 see

Posner (1976) and Bork (1978).

This Chapter is based on Hiroshi Kitamura, Misato Sato and Koki Arai (2014) “ Exclusive contracts when the incumbent can establish a direct retailer.” Journal of Economics 112: 47–60. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_7

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This chapter adds two market elements to the model. First, the incumbent has an option to control downstream competition by establishing a direct retailer if it incur some fixed payments. Second, the incumbent can offer an exclusive contract to the downstream firm twice. The former idea is simple but requires the consumer goods manufacturer to have significant leverage, such as that possessed by a branded luxury fashion house or a leading local food manufacturer. For example, The Economist reports that “instead of selling at wholesale prices to a department store, the fashion house can use its directly owned store to sell at retail prices to the consumer.”2 This option is one of the credible options in down-to-earth business management. The latter idea is simpler and often arises during business negotiations. This chapter theoretically shows that the existence of these two options allows the incumbent to deter socially efficient entry even in the absence of both scale economies and downstream competition, and to earn close to monopoly profits. First, we show that for the case of a single exclusive offer, the option to establish a direct retailer allows the incumbent to deter socially efficient entry by using exclusive contracts. As previous studies point out, in the absence of scale economies and downstream competition, the incumbent cannot deter socially efficient entry with exclusive contracts and it earns zero profits. To induce the downstream firm to accept the single exclusive offer, the incumbent has an incentive to establish a direct retailer because generated downstream competition reduces deviation profits from an exclusive contract, as Simpson and Wickelgren (2007) and Abito and Wright (2008) point out. This is true even when theincumbent needs to incur a sufficiently large establishment fee. Second, we show that if the incumbent can make an exclusive offer twice, the incumbent can deter socially efficient entry more profitably and earn close to monopoly profits. When the incumbent can make an exclusive offer only once, the incumbent needs to establish a direct retailer before making the single exclusive offer in order to deter socially efficient entry. In contrast, when the incumbent can make an exclusive offer twice, the possibility of the second exclusive offer allows the incumbent not to establish a direct retailer before making the first exclusive offer. In the first exclusive offer, the downstream firm anticipates that if it rejects the offer, the incumbent will establish a direct retailer and earn close to zero profits. By using the credible threat of establishing a direct retailer, the incumbent will be able to induce the downstream firm to accept the first exclusive offer with a close to zero upfront transfer. Because the incumbent does not need to establish a direct retailer, it can earn close to monopoly profits. Our findings suggest that the establishment of a direct retailer becomes a credible threat under exclusive offers if entry into the upstream market takes a long time and where the establishment of a direct retailer is not costly and takes a short time. When we apply the model to antitrust policy, we need to pay attention to not only the actual degree of downstream competition but also the potential ability of the incumbent to control the downstream competition. If we ignore the potential degree of downstream competition, then we may obtain misleading predictions. 2 See

“Business sense” The Economist, Mar 4, 2004 (http://www.economist.com/node/2458055).

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By interpreting our findings differently, our analysis yields important policy implications when antitrust agencies evaluate the anticompetitiveness of exclusive dealings.3 First, anticompetitive exclusive dealings are more likely to be observed in an industry where downstream firms are labor-intensive or small companies, because the establishment of a direct retailer is not likely to be costly and is likely to take only a short time in such an industry. Second, anticompetitive exclusive dealings are more likely to arise in the case wherein the entrant is a foreign company or a capitalintensive company because the entry of such firm tends to take long because finding a business partner, raising funds, and making investments in plant and machinery take time. This chapter is related to the industrial organization literature concerned with anticompetitive exclusive dealings.4 The literature on naked exclusion has continued to grow.5 In the literature on exclusion with scale economies, Doganoglu and Wright (2010) show that exclusion arises in the presence of network externalities, which is one of the examples of scale economies. Fumagalli and Motta (2006) explore an extension of the model of Rasmusen et al. (1991) and Segal and Whinston (2000a) where buyers are competing firms.6 They show that the intense downstream competition reduces the possibility of exclusion. However, Abito and Wright (2008) point out that this result depends on the assumption that buyers are undifferentiated Bertrand competitors and they need to incur epsilon participation fees to stay active. They show that if buyers are differentiated Bertrand competitors, then the intense downstream competition enhances exclusion even in the presence of epsilon participation fees.7 In the literature on exclusion with downstream competition, Wright (2008) and Argenton (2010) explore extended models where the incumbent and a potential entrant, respectively, produce a horizontally and vertically differentiated product. Kitamura (2010, 2011) also explores the model in the presence of multiple entrants and in the presence of financial constraints, respectively. Johnson (2012) recently extends the models in the presence of adverse selection. These studies show that the resulting exclusive dealings are anticompetitive. In contrast, Gratz and Reisinger (2011) show that there is a possibility that exclusive contracts have procompetitive 3 Our results may be applicable when antitrust agencies construct guidelines for exclusive dealings.

See, for example, Federal Trade Commission’s website: http://www.ftc.gov/bc/antitrust/exclusive_ dealing.shtm, where exclusion with scale economies pointed out by Rasmusen et al. (1991) and Segal and Whinston (2000a) is discussed. 4 There also exist works on procompetitive exclusive dealings. Several studies argue that exclusive dealings have a role in encouraging noncontractible investments. See, for example, Marvel (1982), Segal and Whinston (2000b), De Meza and Selvaggi (2007), and De Fontenay et al. (2010). 5 Economists analyze anticompetitive exclusive dealings from not only a theoretical perspective but also an experimental perspective. See, for example, Boone et al. (2009), Landeo and Spier (2009), and Smith (2011). 6 Fumagalli andMotta (2008) also show that exclusion arises because of coordination failure among buyers even when the incumbent does not have a first-mover advantage in making exclusive offers. 7 Wright (2009) also points out that the equilibrium analysis of Fumagalli and Motta (2006) in the case of two-part tariffs contains some errors and shows that exclusion arises when scale economies are sufficiently large or when the entrant’s cost advantage is not too big.

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effects, if downstream firms compete imperfectly and contract breaches are feasible. The remainder of this chapter is as follows. Section 2 constructs the model. Section 3 introduces the analysis of two-part tariffs and Sect. 4 analyzes the case of linear wholesale pricing. Section 5 provides some concluding remarks.

2 Model This section develops the model. We first characterize an upstream market. Then, we characterize a downstream market. Finally, the timing of the game is introduced. The basic model structure in this chapter follows Abito and Wright (2008), which is the most relevant paper on the model of naked exclusion with intense downstream competition. Following Abito and Wright (2008), we call upstream firms manufacturers and downstream firms retailers. The upstream market is composed of an incumbent and a potential entrant. The incumbent (I) and the potential entrant (E) produce an identical product but with differing cost efficiencies. The incumbent has a constant marginal cost cI = 1/2. The potential entrant has marginal cost 0 < cE < 1/2. Upstream manufacturers sell to are tailer in the downstream market. The downstream market is composed of a single retailer. We call this retailer the existing retailer (R). We assume that the cost of transformation or resale is zero for simplicity and that the retailer sells to final consumers. We assume that the demand for the final product is given by a simple linear function: Q = 1 − p. The timing of the game is as follows (also see Fig. 1). The model contains two periods. In Period 1.1, the incumbent makes the first exclusive offer to the existing retailer. Following previous studies, we assume that the exclusive contract involves some fixed compensation x1 ∈ [0,∞). We assume that the incumbent is unable to offer wholesale prices at this stage.8 The existing retailer decides whether to sign an exclusive contract. If the existing retailer signs the exclusive contract, then the incumbent makes wholesale price offers consisting of two-part tariffs, denoted by (wI|t = 1, ψI|t = 1), to the existing retailer in Period 1.2. We analyze the case of linear wholesale pricing in Sect. 4. The incumbent starts production and the existing retailer sells to final consumers in Period 1.3. In contrast to the previous studies, if the existing retailer rejects the first exclusive offer in Period 1.1, then the game goes to Period 2. In Period 2.1, the incumbent

8 Rasmusen

et al. (1991) and Segal and Whinston (2000b) point out that price commitments are unlikely if the nature of the product is not precisely described in advance. In the naked exclusion literature, it is known that if the incumbent can commit to wholesale prices, then anticompetitive exclusive dealings are enhanced. See Yong (1999) and Appendix B in Fumagalli and Motta (2006).

2 Model

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Fig. 1 Time line

decides whether to establish a direct retailer that is identical to the existing retail store with fixed cost F.9 We assume that the establishment cost is not too high10 : 0 < F < 1/16.

(1)

In Period 2.2, the incumbent makes the second exclusive offer to the existing retailer with fixed compensation x2 ∈ [0,∞). The existing retailer decides whether to sign an exclusive contract. In Period 2.3, the potential entrant decides whether to enter the upstream market. We assume that the fixed cost of entry is zero for simplicity. In Period 2.4, the active manufacturer(s) makes(make) wholesale price offers to the active retailer(s). All manufacturers adapt to the two-part tariffs. Let the incumbent’s offer be (wI|t = 2, ψI|t = 2) to the existing retailer and (wD|t = 2, ψD|t = 2) to the direct retailer, and let the entrant’s offer be (wE|t = 2, ψE|t = 2) to the existing retailer. Following Abito and Wright (2008), we assume that each retailer is unable to observe the wholesale offer made to its rival.11 In addition, following 9 This

assumption implies that entry by the entrant takes a longer time than the establishment of a direct retailer. Therefore, we can interpret the entrant here as a foreign company or a capitalintensive company because these firms take more time to find a business partner, raise funds, and make investments in plant and machinery. 10 The establishment cost of a direct retailer tends to be small in an industry where downstream firms are labor intensive rather than capital intensive or small companies rather than large companies. 11 Katz (1991) points out that unobservable offers are more realistic than observable offers. This assumption avoids multiple equilibria. See Section III of Fumagalli and Motta (2006) and Section III of Simpson and Wickelgren (2007), wherein it is pointed out that if each retailer can observe the wholesale offer made to its rival, then there exist both an exclusion equilibrium and an entry equilibrium. Note that introducing differentiation between retailers also avoids multiple equilibria even

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Abito and Wright (2008), we assume the following structure of retailers’ beliefs about the contracts offered to their rivals. When both the incumbent and the entrant make wholesale offers in Period 2.4, retailers’ beliefs about the contracts offered to their rivals are passive: that is, each retailer has a fixed conjecture about the wholesale price offer offered to its rival retailer. In contrast, when only the incumbent makes wholesale price offers in Period 2.4, a retailer believes that the rival retailer receives the same offer from the incumbent.12 In Period 2.5, the manufacturer(s) starts(start) production and the retailer(s) competes(compete) in prices. We assume that when the existing retailer and the direct retailer compete, they become undifferentiated Bertrand competitors.

3 Two-Part Tariffs 3.1 Single Exclusive Offer In this subsection, we analyze the existence of an exclusion equilibrium in which the incumbent can make an exclusive offer only once. This analysis can be interpreted as part of the analysis in Sect. 3.2, where the incumbent can make an exclusive offer twice; i.e., the exclusive offer here can be the second exclusive offer after the existing retailer rejects the first exclusive offer. In Sect. 3.1.1, we first analyze the case where the incumbent does not have the option to establish a direct retailer. We then examine the case where the incumbent has the option in Sect. 3.1.2.

3.1.1

When the Incumbent Cannot Establish a Direct Retailer

Suppose that the establishment cost is too high: F > 1/16. In this market environment, the incumbent does not have an option to establish a direct retailer. Because of the absence of scale economies and downstream competition, the incumbent cannot deter socially efficient entry. Lemma 1 Suppose that the incumbent does not have the option of establishing a direct retailer and that upstream firms offer two-part tariffs. Then, in the absence

under observable contracts, though the analysis does become a bit complicated. See Simpson and Wickelgren (2007) who point out that if retailers are not perfectly homogeneous but differentiated, then only the exclusion equilibrium is robust. 12 Although the unobservable wholesale price offer solves the multiple equilibrium problem, it generates the commitment problem in Hart and Tirole (1990) that arises when a single upstream manufacturer sells to two competing retailers with two-part tariffs under unobservable wholesale contracts and passive beliefs. Following Rey and Verg (2004), Abito and Wright (2008) avoid the commitment problem when only the incumbent makes a wholesale price offer by assuming symmetric beliefs. We also follow this assumption.

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of scale economies and downstream competition, the incumbent cannot induce the downstream firm to sign an exclusive contract. The intuitive logic for this result is as follows. When the existing retailer rejects the single exclusive offer, the entrant enters the upstream market. The entrant makes a better wholesale price offer than the incumbent. This wholesale price offer leads to such large rejection profits that the incumbent cannot compensate the existing retailer profitably as the Chicago School argues.

3.1.2

When the Incumbent Can Establish a Direct Retailer

Suppose that the establishment cost is not too high: 0 < F < 1/16. In this market environment, the incumbent has the option of establishing a direct retailer. When the incumbent has the option of establishing a direct retailer, the incumbent can deter socially efficient entry even in the absence of scale economies and downstream competition. Lemma 2 Suppose that the establishment cost is not too high (0 < F < 1/16) for the incumbent to establish a direct retailer. Suppose also that the upstream firms offer two part tariffs. When the incumbent can make an exclusive offer only once, the incumbent establishes a direct retailer and the existing retailer accepts the single exclusive offer. The intuitive logic is as follows. When the incumbent establishes a direct retailer, downstream competition arises. As Simpson and Wickelgren (2007) and Abito and Wright (2008) point out, this additional competition reduces the rejection profits to zero. Therefore, the incumbent can profitably compensate the existing retailer and earns positive profits even when there exists an establishment cost. Because the incumbent earns zero profits when it does not establish a direct retailer, the incumbent hasan incentive to establish a direct retailer. Note that the analysis of a single exclusive offer corresponds to the subgame analysis after the existing retailer rejects the first exclusive offer in the following subsection, where the incumbent can make exclusive offers twice. Therefore, the result here implies that the establishment of a direct retailer becomes a credible threat when the incumbent makes the first exclusive offer. The existing retailer anticipates that if it rejects the first exclusive offer, the incumbent will establish a direct retailer before making the second exclusive offer. In the following subsection, we show that by using this credible threat, the incumbent can efficiently deter entry more profitably.

3.2 Two Exclusive Offers In this subsection, we analyze the existence of an exclusion equilibrium when the incumbent can make an exclusive offer twice. When the incumbent can make an

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exclusive offer only once, it becomes necessary to establish a direct retailer before making the single exclusive offer for the success of exclusion. In contrast, when the incumbent can make an exclusive offer twice, the possibility of the second exclusive offer allows the incumbent not to establish a direct retailer before making the first exclusive offer. This makes exclusion without establishing the direct retailer possible. Proposition 1 Suppose that the establishment cost is not too high (0 < F < 1/16) so that the incumbent can establish a direct retailer in Period 2.1. Suppose also that upstream firms offer two-part tariffs. If the incumbent can establish a direct retailer and make the exclusive offer twice, then there exists a unique exclusion equilibrium even in the absence of scale economies and downstream competition. Furthermore, in contrast to the single-offer case, on the exclusion equilibrium path, (i) the incumbent does not establish a direct retailer and (ii) the incumbent earns close to monopoly profits. The intuitive logic for this result is as follows. When the incumbent makes the first exclusive offer in Period 1.1, the existing retailer anticipates that if it rejects the first exclusive offer, then it will accept the second exclusive offer because the incumbent will otherwise establish a direct retailer in Period 2.1. Under exclusion with the second exclusive offer, the existing retailer earns almost zero profits. Therefore, by using the credible threat to establish a direct retailer, the incumbent can induce the existing retailer to accept the first exclusive offer in Period 1.1 even when transfer x1 is close to zero. Because the incumbent does not need to incur an establishment cost in exclusion with the first exclusive offer, the incumbent can deter socially efficient entry more profitably and earn close to monopoly profits. The result in Proposition 1 provides an important insight for antitrust agencies. We need to pay attention to not only the actual degree of downstream competition but also the potential degree of downstream competition. This chapter shows that the establishment of a direct retailer becomes a credible threat and the incumbent can deter socially efficient entry even when there is no actual downstream competition. If we ignore the potential degree of downstream competition, then we may obtain misleading predictions when we apply the model to antitrust policy in the real world. In addition, by interpreting the result differently here, the existence of the options of establishing a direct retailer and making the exclusive offers twice helps the incumbent deter socially efficient entry more profitably. The existence of these two options reduces the amount of x1 in the exclusion equilibrium. This increases not only the possibility of exclusion but also the level of exclusion profits, as compared to in previous studies.

4 Linear Wholesale Pricing In this section, we explore the case of linear wholesale pricing. We assume that the incumbent can choose a single exclusive offer or two exclusive offers in Period 0.

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We also assume that if the incumbent chooses a single exclusive offer, the game goes to Period 2. When compared to the case of two-part tariffs, the results basically do not change, but there exists a case where the incumbent prefers exclusion with the second exclusive offer by establishing a direct retailer. Proposition 2 Suppose that the establishment cost is not too high (0 < F < 1/16) for the incumbent to establish a direct retailer in Period 2.1. Suppose also that upstream firms offer linear wholesale prices. When the incumbent can establish a direct retailer and make an exclusive offer twice, there exists a unique exclusion equilibrium even in the absence of scale economies and downstream competition. On the exclusion equilibrium path, the following hold. 1. If the establishment cost is sufficiently low (0 < F ≤ 1/32), the incumbent chooses the single exclusive offer and establishes a direct retailer. 2. If the establishment cost is sufficiently high (1/32 < F < 1/16), the incumbent does not establish a direct retailer by choosing two exclusive offers and earns monopoly profits under double marginalization. The new dimension here is that linear wholesale pricing generates a double marginalization problem. The establishment of a direct retailer also solves the double marginalization problem. If the establishment cost of a direct retailer is sufficiently low, then the loss of profit from the establishment of a direct retailer is smaller than the loss of profit from double marginalization. In this case, the incumbent prefers exclusion with the second exclusive offer to exclusion with the first exclusive offer, and does not make the first exclusive offer in Period 1.1.

5 Concluding Remarks This chapter explored exclusive dealings when the incumbent can establish a direct retailer and make the exclusive offer twice. We show that the incumbent can deter socially efficient entry even in the absence of scale economies and downstream competition. In addition, we show that on the equilibrium path, the incumbent does not establish a direct retailer and earns close to monopoly profits. The result here provides an important policy implication for antitrust agencies. We need to pay attention to not only the actual degree of downstream competition but also the potential degree of downstream competition. If we ignore the potential degree of downstream competition, then we may obtain misleading predictions. The key features of our model are that entry into the upstream market takes long and that the establishment of a direct retailer is not costly and does not take long. Therefore, the discussion in our model can be applied to the evaluation of exclusive dealings in the industry where the entrant is a capital-intensive or foreign company and where downstream firms are labor-intensive or small companies. We suggest that antitrust agencies should consider these market elements when they evaluate the anticompetitiveness of exclusive dealings.

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There are several concerns requiring further work. First, there is concern about the generality of our results. Although the analysis is presented in terms of a parametric example, the results may extend to settings that are more general. Second, there is concern about vertical relationships in real situations. For example, it may be worth studying the roles of wholesale traders and the bargaining power of retailers. In addition, long-term buyer-seller relationships may be crucial in vertical relations.13 We hope this chapter will assist future research in applying the model to these situations.

References Abito JM, Wright J (2008) Exclusive dealing with imperfect downstream competition. Int J Ind Organ 26(1):227–246 Argenton C (2010) Exclusive quality. J Ind Econ 58(3):690–716 Baake P, von Schlippenbach V (2011) Quality distortions in vertical relations. J Econ 103(2):149–169 Boone J, MüllerW, Suetens S (2009) Naked exclusion: towards a behavioral approach to exclusive dealing. CEPR Discussion Papers 7303, C.E.P.R. Discussion Papers Bork RH (1978) The antitrust paradox: a policy at war with itself. Basic Books, New York De Fontenay CC, Gans JS, Groves V (2010) Exclusivity, competition, and the irrelevance of internal investment. Int J Ind Organ 28(4):336–340 De Meza D, Selvaggi M (2007) Exclusive contracts foster relationship-specific investment. RAND J Econ 38(1):85–97 Doganoglu T, Wright J (2010) Exclusive dealing with network effects. Int J Ind Organ 28(2):145–154 Fumagalli C, Motta M (2006) Exclusive dealing and entry, when buyers compete. Am Econ Rev 96(3):785–795 Fumagalli C, Motta M (2008) Buyers’ miscoordination. Entry and downstream competition. Econ J 118(531):1196–1222 Gratz L, Reisinger M (2011) Can naked exclusion be procompetitive? https://doi.org/10.5282/ubm/ epub.12733 Hart O, Tirole J (1990) Vertical integration and market foreclosure. Microeconomics, brooking papers on economic activity, pp 205–286 Johnson JP (2012) Adverse selection and partial exclusive dealing. Johnson, Justin P., Adverse Selection and Partial Exclusive Dealing (February 13, 2012). Available at SSRN: https://ssrn. com/abstract=2018933 Katz M (1991) Game-playing agents: unobservable contracts as precommitments. RANDJ Econ. 22(3):307–328 Kitamura H (2010) Exclusionary vertical contracts with multiple entrants. Int J Ind Organ 28(3):213–219 Kitamura H (2011) Exclusive contracts under financial constraints. BE J Econ Anal Policy 11(1):1–29. (Topics, Article 57) Landeo CM, Spier KE (2009) Naked exclusion: an experimental study of contracts with externalities. Am Econ Rev 99(5):1850–1877 Marvel HP (1982) Exclusive dealing. J Law Econ 25(1):1–25 Posner RA (1976) Antitrust law: an economic perspective. University of Chicago Press, Chicago Rasmusen EB, Ramseyer JM, Wiley JJS (1991) Naked exclusion. Am Econ Rev 81(5):1137–1145 Rey P, Vergé T (2004) Bilateral control with vertical contracts. RAND J Econ 35(4):728–746 13 See,

for example, Baake and von Schlippenbach (2011) for recent studies on vertical relations in the presence of long-term buyer-seller relationships.

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Segal IR, Whinston MD (2000a) Naked exclusion: comment. Am Econ Rev 90(1):296–309 Segal IR, Whinston MD (2000b) Exclusive contracts and protection of investments. RAND J Econ 31(4):603–633 Simpson J, Wickelgren AL (2007) Naked exclusion, efficient breach, and downstream competition. Am Econ Rev 97(4):1305–1320 Smith AM (2011) An experimental study of exclusive contracts. Int J Ind Organ 29(1):4–13 Wright J (2008) Naked exclusion and the anticompetitive accommodation of entry. Econ Lett 98(1):107–112 Wright J (2009) Exclusive dealing and entry, when buyers compete: comment. Am Econ Rev 99(3):1070–1081 Yong JS (1999) Exclusionary vertical contracts and product market competition. J Bus 72(3):385–406

Chapter 8

Abuse of Superior Bargaining Position

1 Introduction Under Japanese antitrust law, it is unlawful and prohibited for entrepreneurs to use their superior bargaining position to perform unreasonable acts to the disadvantage 1 of transaction partners (Abuse of Superior Bargaining Position). Such acts include late payment for subcontracted work due to unilateral reasons of ordering parties, forced sales, unjust return of goods, requests for dispatching employees, and requests for financial contributions. These acts often occur in subcontract transactions, and

1 The

related articles of the introduction of the surcharge system against abuse of the superior bargaining position in Japanese are Yu-etsu-teki Chi-i Ranyou Kisei no Kaisetsu (Commentary on Regulation of Abuse of Superior Bargaining Position), Kosei-Torihiki Kyokai (2011, in Japanese), Tetsuya Nagasawa, Yu-etsu-teki Chi-i Ranyou Kisei to Shitauke-Ho no Kaisetsu to Bunseki (Commentary and Analysis on Regulation of Abuse of Superior Bargaining Position and Subcontract Act), Shoji Homu, (2011, in Japanese) and special featured articles on Abuse of Superior Bargaining Position in Jurist No. 1442 (June 2012, in Japanese) and in Kosei Torihiki (Fair Trade) No. 757 (November 2013, in Japanese). The basic commentaries of the Articles in Japanese are Akira Negishi Ed. Chushaku Dokusen Kinshi Ho (Commentaries on Antimonopoly Act) Yuhikaku, (2009, in Japanese) Tadashi Shiraishi, Dokusen Kinshi Ho (Antimonopoly Act) 2nd Ed., Yuhikaku, (2009, in Japanese) and Tadashi Shiraishi, Dokkin Ho Kougi (Lecture on Antimonopoly Act) 7th Ed., Yuhikaku (2014, in Japanese). This chapter is based on Takizawa Sayako ‘Kacho-kin Dounyu-go no “Yu-etsu-teki chi-i no Ranyo” Jirei no Ken-to (A study on cases of “Abuse of Superior Bargaining Power” after the introduction of a surcharge)’ Jurist No. 1442, 33–37 (2012, in Japanese). This Chapter is based on Sayako Takizawa and Koki Arai (2014) “Abuse of Superior Bargaining Position: the Japanese experience.” Journal of European Competition Law & Practice, 5(8), 557–562. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_8

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are regulated in detail by the Subcontract Act,2 a complementary law of the Antimonopoly Act in Japan. The amending Act of the Japanese Antimonopoly Act (AMA, Heisei 21, Law No. 51), which introduces a surcharge system (fine) to prevent abuse of a superior bargaining position, was enacted on 1 January 2010.3 The main amendments are as follows4 : (i) Introduction of a surcharge system for exclusionary private monopolisation5 and certain unfair trade practices, such as abuse of a superior bargaining position; (ii) Increase of the surcharge rate applicable to entrepreneurs playing leading roles in unreasonable restraint of trade; (iii) Review of the Leniency Program to allow two or more violators within the same company group to jointly file an application; (iv) Increase of the maximum jail terms for crimes such as the unreasonable restraint of trade; (v) Revision of the Notification and Reporting System stipulated in Chap. 4 (merger control). In the amendment to the surcharge system (i), four types of unfair trade practices (concerted refusal to supply discriminatory pricing; unjust low-prices; and resale price maintenance, defined in Article 2(9)(i)–(iv)) are levied against the second offence of the same type within 10 years (Article 20-2 to 20-5). The abuse of superior bargaining position, defined in Article 2(9)(v), is levied against the same continuous offence (Article 20-6). Introduction of a surcharge system to the abuse of superior bargaining position was explained to prevent illegal conduct that was likely to link undue profit and strengthen the deterrence power in practice. The surcharge amount 2 The Subcontract Act regulates late or reduced payment of subcontract prices and ordering parties’

unreasonable treatment of subcontractors. It defines prohibited acts on the part of ordering parties in many business fields from manufacturing to service industries, and protects subcontractors by asking for simple and prompt remedial measures, when any illegal act is recognized. This Act does not introduce a surcharge system. 3 See Guidelines Concerning Abuse of Superior Bargaining Position under the Antimonopoly Act (30 November 2010, JFTC) available at http://www.jftc.go.jp/en/legislation_gls/imonopoly_ guidelines.files/101130GL.pdf (accessed 5 July 2014). See also Ito Kenji, Takamiya Yusuke (2013) ‘Yuetsuteki chi-i no Ranyo Jirei ni kakaru Ho-teki Risuku oyobi Konpuraiansu Taisei Kouchiku jo no Ryuiten’ (Risks for a case of abuse of superior bargaining position and caveats on establishment of compliance program), Kosei Torihiki (Fair Trade) No. 757, 2–12. (in Japanese), Kagami Kazuaki (2013) ‘Yuetsu-teki chi-i no Ranyo Kisei no Keizai Bunseki’ (Economic Analysis on Control of Abuse of Superior Bargaining Position), Kosei Torihiki (Fair Trade), No. 757, 23–29, (in Japanese), and Yokota Naokazu (2013) ‘Saikin no Yu-etsu-teki chi-i no Ranyo Kisei no Doko’ (Recent development of the control of abuse of superior bargaining position) Kosei Torihiki (Fair Trade) No. 757, 13–22 (in Japanese). 4 See the JFTC’s annual report available at http://www.jftc.go.jp/en/about_jftc/annual_reports/ 2009index.html (accessed 5 July 2014). 5 See Guidelines for Exclusionaly Private Monopolization under the Antimonopoly Act (28 October 2009, JFTC) available at http://www.jftc.go.jp/en/legislation_gls/imonopoly_guidelines.files/ guidelines_exclusionary.pdf (accessed 5 July 2014).

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is equivalent to multiplication by 1% of the amounts of transaction with trade partner(s) that suffered the abuse (Article 20-6).6 Since only the abuse of a superior bargaining position is levied against the first offence (even when levied only on the continuous offence), many have pointed out that entrepreneurs should be cautious of the possibly severe surcharge in the first levied case, which has now occurred.7 From the perspective of due process, there are protections for the claiming entrepreneur according to the AMA. Before issuing the cease and desist order (Article 20) and the surcharge payment order (Article 20-6), the Japan Fair Trade Commission (JFTC) shall give the entrepreneur who is to be the addressee an advance notification on the content of the order, the facts found by the JFTC, the application of laws and regulations thereto, an opportunity to express their opinions, and the opportunity to submit evidence (Article 49). After considering opinions and evidence from the entrepreneur, the JFTC issues above orders.8 A recipient who is dissatisfied with the order may request that the JFTC initiates a hearing regarding the order within 60 days of the date on which the transcript of the order was served.9 All of the four cases in this chapter are currently in this hearing process. The specific points at issue in these cases will be addressed during that process.

2 Some Levied Cases (1) Sanyo-Marunaka case10 The JFTC investigated Sanyo-Marunaka, which operates a retail business around Sanyo District, in accordance with the provisions of the AMA and found that it was in violation of Article 19 (abuse of a superior bargaining position) of the AMA. The 6 See

at http://www.jftc.go.jp/en/pressreleases/yearly-2009/jun/090603-1.files/090603-2.pdf (accessed 5 July 2014). 7 There has been no levied case so far on private monopolization. JFTC may have taken a cautious approach due to the possibly large surcharge amount. Therefore, after the amendment in 2009, there are only four levied cases in this chapter as to the recently introduced surcharge. 8 These procedures were introduced in the 2005 Amendment of the Antimonopoly Act. These procedures are common in a cease and desist order and a surcharge payment order. 9 The bill to amend the AMA was enacted on 7 December 2013. In this amendment, there are two main items: (i) The JFTC’s hearing procedure for administrative appeal will be abolished, and appeals against administrative orders issued by the JFTC (cease and desist orders, etc.) will be heard at the Tokyo District Court as appeal suits. (ii) Prior to issuing an administrative order by the JFTC, a procedure for hearing presided by an officer designated by the JFTC will be prepared, where inspecting and copying evidence to facts found by the JFTC are assured. See the JFTC’s press release at http://www.jftc.go.jp/en/pressreleases/yearly2013/Dec/ individual131209.html (accessed 5 July 2014). 10 As review of this case, Kentaro Hirayama (2011) Jurist 1430, 52–53 (in Japanese).

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JFTC issued a cease and desist order pursuant to Article 20 and a surcharge payment order pursuant to Article 20-6 against Sanyo-Marunaka on 22 June 2011.11 According to the JFTC’s findings, Sanyo-Marunaka, on and after January 2007, caused specific suppliers, who were in inferior bargaining positions, to conduct the following acts: (i) In the case of new openings, full-fledged refurbishing, and shelf-reshuffling, Sanyo-Marunaka requested that the specific suppliers selling and delivering goods in their stores, dispatch employees to engage in work that did not require their level of technique or skill (eg conveying goods) without any agreement with the specific suppliers and without bearing any costs normally required for the dispatch. These acts are regarded as unjust in light of normal business practices. (ii) In the case of new openings or self-producing events such as the ‘Kodomo Shogi Taikai’ or ‘Ladies Tennis Event,’ Sanyo-Marunaka required the specific suppliers to provide funding. (iii) In the absence of a reason attributable to the specific suppliers, Sanyo-Marunaka returned unsold and outdated goods to them. (iv) In the absence of a reason attributable to the specific suppliers, Sanyo-Marunaka reduced all of or part of the amount equivalent to the amount of the discount resulting in seasonal changing or full-fledged refurbishing by Sanyo-Marunaka, which was paid to the specific suppliers of the unsold goods subject to a discount. (v) In the case of sales of Christmas-related goods, including Christmas cakes, Sanyo-Marunaka forced the specific suppliers to purchase goods related to Christmas by writing their orders with minimum buying quantities at social gatherings or by designating specific quantities for specific suppliers. In this case, on February 22, 2019, the JFTC made a judgment decision on the trial hearing that a part of the cease and desist order was canceled and the other part violated the Antimonopoly Act. First of all, whether each of the actions in this case was unfair in light of normal business practice, using Sanyo Marnaka’s superiority of one’s own trading position over the other (Point 1), secondly, does each case correspond to abuse of one superior status under the Antimonopoly Act (Point 2); Thirdly, the period of infraction in this case (6) What is the period from the date of the act to the day when the act ceases? (Point 3), Fourthly, the legitimacy of the Exclusion Order (Point 4). As for Point 1, the following items are considered: (a) (b) (c) (d)

11 See

The purpose of abuse control of superior status Judgment criteria for abuse of superior status Does each of the above actions be disadvantageous? The history and the manner in which 165 companies have accepted the disadvantage.

the JFTC’s press release at http://www.jftc.go.jp/houdou/pressrelease/h23/jun/ 110622marunaka.html (accessed 5 July 2014) (in Japanese).

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From these points of view, the point was examined whether this case falls under abuse of superior status. It should be particularly described here that whether the trading position of Sanyo Marnakaka is superior to 165 companies or not, it is politely recognized as follows with respect to 165 companies identified as related companies in this case., As a result, it is said that the last three companies (e) have no evidence that they have a suitable place and that there is no violation. Specifically, with regard to Sanyo Marnaka’s market position, the relationship between Sanyo Marnaka and 165 companies is carefully and factually determined as the following (a)–(e). (a) With regard to 32 of the 165 companies, in addition to the fact of the above a and the fact that 32 companies have a large deal of dependence on transactions with Sanyo Marnaka etc., for 32 companies, the transaction with Sanyo Marnaka will be continued. It can be said that making it difficult will cause major problems in business management. (b) With regard to 28 of the 165 companies, given the fact that Sanyo Marunaka ranks high in the degree of dependence on transactions with 28 companies, in addition to the facts of (a) above, Sanyo Marunaka for 28 companies. It is believed that making it difficult to continue dealings with a company is a major obstacle to business management. (c) With regard to 51 out of 165 companies, in addition to the facts of (a) above, they are mainly in charge of transactions with Sanyo Marnaka in 51 companies, even if they are not in the same situation as (a) or (b) above. Considering the fact that the business base is highly dependent on transactions with Sanyo Marnakaka or that Sanyo Marunaka ranks high in the business dependency of the same business bases, Sanyo Marunaka for 51 companies. If it is difficult to continue trading with the company, it is expected that the sales base’s earnings will decline significantly, and business policies within the Okayama prefecture area will have to be revised. It can be seen that it will cause major problems. (d) With regar to 16 out of 165 companies, in addition to the facts of (a), capital amount, annual total sales, number of employees, etc. Considering the fact that the business scale of 16 companies is considered to be extremely small, it is still difficult for 16 companies to continue trading with Sanyo Marnaka even in view of the small degree of trade dependence on Sanyo Marnaka Is said to be a major obstacle to business management. (e) With regard to 38 out of the 165 companies, the fact that they were identified in Appeal Schedule 5 is not considered to be in the same situation as (a)–(d) above. If these circumstances are comprehensively considered, it is likely that, for the 38 companies, it will be difficult to continue the transaction with Sanyo Marnakaka, which will cause a major problem in business management even if the fact of the above a is taken into consideration. unacceptable. As for Point 2, in light of the regulation purpose of abuse of superior status, the act corresponding to Antimonopoly Act Article 2 Clause 9 No. 5 or Old General

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Designation Clause 14 No. 1–4, Even if this is seen more than once, or if it is done for more than one business partner, it is an acter such as it is being implemented as a systematic and planned series of things. If it can be evaluated as an abuse of superiority status in one place, it is considered appropriate to be considered to be regulated as abuse of one superiority status under the antitrust law. As for the point 3 of the issue, in light of the regulatory purpose of abuse of superior status (the above a(a)), the day on which the unfair conduct was first carried out is referred to in Article 20-6 of the Antimonopoly Act. It is appropriate that the day when it is recognized that the inconvenient acts have disappeared is referred to as the “the day the firm did it.” As for Point 4, the exclusion order in this case is a factor to consider whether or not it falls under a specified supplier and to what extent Sanyo Marunaka has specifically acted with respect to a specified supplier to what kind of behavior. The facts that cause and the specific suppliers that are the counterparts to the above actions have not been specifically identified. However, in this case, the Fair Trade Commission will deliver a document to Sanyo Marnakaka stating “the content of the planned exclusion order” etc. based on the provisions of Article 49, paragraph 5 etc. of the Antimonopoly Act At the same time, it enclosed a list of 165 companies listed as counterparts to this violation by Sanyo Marnakaka, and based on the provisions of Article 49, paragraph 2 etc. It is clear that, even in the case of delivering Kushimoto to Sanyo Marunaka, it was clear that it had gone through the pre-procedure which enclosed the above list of contents, and it could not be said that there was a defect that could not avoid rescission did. The total amount of the surcharge payment is about 17.39 million yen, which is reduced from the original surcharge payment 222.16 million yen. (2) Toys ‘R’ Us-Japan case The JFTC issued a cease and desist order and a surcharge payment order against Toys ‘R’ Us-Japan, a large toy retailer, on 13 December 2011.12 In line with the JFTC’s findings, Toys ‘R’ Us-Japan, on and after 6 January 2009, performed the following acts with respect to some of the suppliers in inferior bargaining positions: (i) In the absence of a reason attributable to the specific suppliers, Toys ‘R’ UsJapan returned unsold goods to them. (ii) In the absence of a reason attributable to the specific suppliers, Toys ‘R’ UsJapan reduced all of or part of the amount equivalent to the amount of the discount by Toys ‘R’ Us-Japan from consideration to be paid to the specific suppliers of unsold goods subject to a discount. In this context, the unsold goods are the ones that had sold sluggishly, remained unsold, or seasonal goods that remained unsold after the sales period. In this case, on June 4, 2015, the JFTC made a judgment decision on the trial hearing that a part of the cease and desist order was canceled and the other part 12 See the JFTC’s press release at http://www.jftc.go.jp/en/pressreleases/yearly2011/dec/individual-

000456.html (accessed 5 July 2014).

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violated the Antimonopoly Act. The issue in this case was that, first, after Toy ‘R’ Us-Japan received the goods related to the transaction from 5 out of 14 companies, the goods were taken over to the other party of the transaction, as well as: The fact that the amount of consideration for the transaction has been reduced for 13 out of 14: Whether Toys ‘R’ Us-Japan has made it unfair in light of normal business practices by taking advantage of its superiority in trading position to 14 companies (point 1), second, whether there is a risk of impeding fair competition on the conduct or Returns and Decline of the Case (Point 2), Third, How to determine the period of violation in this case is the issue (Point 3). As for point 1, (a) with regard to the purpose of abuse control of superior status, (b) with regard to superior status, (c) after examining the act of abuse of this case, as a review in this case, Toys R Us is considered to be deemed to have carried out this act as a series of systematic and systematic acts for the purpose of securing the company’s profit. As for point of contention 2, with regard to when it is recognized that there is fair competition inhibition, it should be judged for each individual case, taking into consideration the extent of the disadvantage in question, the spread of actions, etc. Among the specified suppliers who are the counterparts of this violation that the order has been recognized, there is no recognition of the fact that Toys ‘R’ Us-Japan took advantage of its superior position in the transaction and carried out misuse For businesses other than the two companies, at least for a period of two years or more from January 6, 2009 to January 31, 2011 at the latest, systematic and planned of Toys ‘R’ Us-Japan Assumed that this act was used as a series of acts. As for Point 3, in the light of the purpose of the abuse control of superior status, such as being implemented as a systematic and systematic series, when those actions can be evaluated together as abuse of superior status of the actor, under the prohibition of the Antimonopoly Act, it will be regulated as abuse of one superiority position, and also regarding the period of infraction that is the basis of the calculation of surcharges, based on that, the day on which abuse was first performed. “The day the firm did it” and the day when it is recognized that the act of abuse has been. The total amount of the surcharge payment is about 222.18 million yen, which is reduced from the original surcharge payment of 369.08 million yen. (3) EDION case The JFTC issued a cease and desist order and a surcharge payment order against EDION, a large-scale retailer on consumer electrical appliances, on 16 February 2012.13 According to the JFTC’s fact findings, EDION caused the specific suppliers, who were in inferior bargaining positions, to dispatch their employees to engage in work that did not require their level of technique or skill (eg conveying goods) in the light of normal business practices. In this case, the specific suppliers are enterprises that sell and deliver the goods sold in stores such as ‘Deodeo’, ‘EIDEN’, ‘Midori’ and ‘Ishimaru,’ which are directly 13 See the JFTC’s press release at http://www.jftc.go.jp/en/pressreleases/yearly2012/feb/individual-

000465.html (accessed 5 July 2014).

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and continuously linked to EDION. The suppliers engaged in a series of preparations for the grand opening and remodelling of EDION. Their staff members helped, under instruction from EDION, to unpack goods carried onto the sales floor, to position and display them, and to make the floor and the goods attractive by positioning the decorations and sales promotion goods as ordered by EDION. The total amount of the surcharge payment is about 4.05 billion yen. (4) RALSE Case The JFTC issued a cease and desist order and a surcharge payment order against RALSE Company, Limited (RALSE), which operates a retail business in Hokkaido, on 3 July 2013.14 According to the JFTC’s fact findings, RALSE forced its suppliers that are in trade positions relatively inferior to it, for example, to dispatch their employees and make the employees engage in such works at RALSE’s stores as displaying, restocking, and removing the merchandize part of which were not supplied by the suppliers without concluding advance agreements on the dispatch terms with the specific suppliers, and to provide monetary contribution under the circumstance where the amounts were unilaterally set regardless of such benefits as promotion effect for the specific suppliers. In the case of Ralse, on March 2, 2019, the JFTC made a judgment decision on the trial hearing that dismissal with prejudice on the merits. The first issue is whether each action in this case was unfair in light of normal business practice, using the fact that the transactional status of one’s own trade is superior to that of the other (Point 1). Second is the period of violation in this case (Point 2). As for Point 1, (i) the purpose of abuse control of superior status, (ii) Judgment criteria for abuse of superior status, (iii) Whether the transactional status of the examinee is superior to 88 companies (—Taking into account the facts of the auditor’s market position,—relationship between the referee and the 88 companies, c history and manners of acceptance of the disadvantage, etc. It is difficult to continue the transaction, which causes serious problems in business management, and there are cases in which the referee is obliged to accept the request even if the referee makes a significant disadvantage, etc. The company is considered to have superior business status to 88 companies.), (iv) Whether each act is a disadvantage act (dispatch of employees; offering of co-sponsored funds; each act of purchase of the Goods is deemed to fall under the disadvantaged act, and (v) result that 88 companies were examined circumstances and aspects such as that led to accept the disadvantage act, the act was set to be deemed to fall under the abuse of dominant position. As for Point 2, in considering (i) regarding the way of understanding the period of the infringing act, (ii) the day of the act, and (iii) the day when the act ceases, and as a result, Article 20-6 of Article 20 of the Antimonopoly Act in this case, the day can be recognized as March 13, 2012. The total amount of the surcharge payment is 1,287.13 million yen. It is the same as the original one. 14 See

the JFTC’s press release at http://www.jftc.go.jp/en/pressreleases/yearly2013/july/130703. files/130703.pdf (accessed 5 July 2014).

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3 Similarities These cases are similar in terms of the buying-side abuse, the fact that only a certain period of violation was levied, and application of the Article. First, regarding the buying-side abuse, there are many such cases involving large retail stores.15 Article 20-6 of the AMA states that: In the case that an entrepreneur has committed an act in violation of the provisions of Article 19, the Fair Trade Commission shall order the said entrepreneur, …, to pay to the national treasury a surcharge of an amount equivalent to an amount obtained by multiplying by one percent the sales from the counterparty in the said act, … (in the case that the said act is performed against a counterparty that receives the supply of goods or services, the purchase amount from the counterparty in the said act, …). If a party on the sales-side conducts a violation, the calculation base is the total amount of sales, and if a party on the buy-side conducts a violation, then the calculation base is the total amount of purchases. Since the JFTC focused on the retailers’ abusing conduct in these four cases, the surcharges were calculated based on the total purchase amount from the counterparties, called the specific suppliers. In this regard, there is an increasing tendency for a buying-side retail firm in a superior bargaining position to abuse its power relative to suppliers. The second point is that only a part of the period was levied in all four cases because the amendment of the AMA was enacted during the period of violation. Even so, each case, especially the EDION case, showed high surcharge amounts.

4 Counterparty All of the above orders defined the specific suppliers, which fall within the definition of ‘the other party’ according to Article 2(9)(v) of the AMA. The definitions slightly differed among cases. Sanyo-Marunaka defined suppliers as companies engaged in directly delivering goods sold at Sanyo-Marunaka and in regular transactions. The JFTC defined such suppliers in inferior bargaining positions to Sanyo-Marunaka as the specific suppliers. Therefore, the term ‘specific’ means that the firm is in bargaining positions inferior to Sanyo-Marunaka, and the term ‘suppliers’ represents those that directly delivered goods and engaged in regular transactions. In contrast, in the case of Toys ‘R’ Us-Japan, the JFTC found that ‘suppliers’ meant companies that engage in delivering goods directly sold at Toys ‘R’ Us-Japan. The definition did not mention whether the transactions had to be regular. In the EDION case, the definition of specific suppliers included enterprises selling and delivering goods. Furthermore, the JFTC found it beyond the scope of the defini15 In order to regulate this problem adequately, JFTC made a special designation based on Article 2(9)(vi) called ‘Specific Unfair Trade Practices by Large-Scale Retailers Relating to Trade with Suppliers (Fair Trade Commission Notification No. 11 of 2005)’, which is now de-facto invalid.

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tion whether those suppliers had continuous transaction with EDION. This JFTC classification in EDION case is the same as that in RALSE case. In each case, the term ‘specific’ represents suppliers in inferior bargaining positions to the companies under investigation, which is the same as Sanyo-Marunaka case. In Article 2(9)(v) of the AMA, ‘the other party’ may well have delivered goods sold at the firm in question. In contrast, Article 2(9)(v) does not provide for regular transactions. Thus, even if there is no finding of regular transactions as in the case of Toys ‘R’ Us-Japan, there is no problem when identifying ‘the other party’ requirement. Therefore, it is reasonable for JFTC fact-finding to revise suppliers’ factors from the two factors in Sanyo Marunaka definition to the single factor in EDION’s and RALSE’s definition. When a parent company abuses a superior bargaining position over its affiliate company’s counterparty, is the parent company considered the violator ‘over the other party’ according to Article 2(9)(v) and thus responsible for the surcharge? In the EDION case, the relevant parties include franchisees and affiliate companies. However, the JFTC found that EDION, the parent company, directly dealt with suppliers on almost all goods which affiliate companies or franchisees needed. This point therefore did not raise problems.

5 Superior Bargaining Position The requirement of a superior bargaining position is explained in the Guidelines Concerning Abuse of Superior Bargaining Position under the Antimonopoly Act (Guidelines),16 based on precedents and JFTC past decisions, as follows: In order for one party to a transaction (Party A) to have superior bargaining position over the other party (Party B), it is construed that Party A does not need to have a market dominant position nor an absolutely dominant bargaining position equivalent thereto, but only needs to have a relatively superior bargaining position as compared to the other transacting party. When Party A has superior bargaining position over Party B, who is a transaction counterpart, it means such a case where if Party A makes a request, etc., that is substantially disadvantageous for Party B, Party B would be unable to avoid accepting such a request, etc., on the grounds that Party B has difficulty in continuing the transaction with Party A and thereby Party B’s business management would be substantially impeded.17 This requirement is considered as a transaction-necessity standard and corresponds to situations in which there is no competition in the market and Party A has market power.18 The Guidelines state that in determining the presence or absence of 16 Supra

note 3. p. 5. 18 A forerunner in this field is Tadashi Shiraishi, a professor at the Graduate School of Law and Politics at the University of Tokyo. For an important classic work, see Tadashi Shiraishi, “Torihiki-Jo no Chi-i no Futo Riyou” Kisei to “Shijo” Gainen (Regulation on “Unjustifiable Use of Bargaining 17 Ibid.,

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a superior bargaining position, the degree of dependence by Party B in transactions with Party A, the position of Party A in the market, the possibility of Party B changing its business counterparts, and other concrete facts indicating the need for Party B to carry out transactions with Party A are comprehensively considered. In examining these four cases, the JFTC found superior bargaining positions based on several concrete facts under the framework of the Guidelines. Fact-finding for these four cases overlapped to a large extent. Typically the position of the target firm in the market is investigated, followed by an examination of transaction dependence, the difficulty of switching to the other firm, and the necessity of the transaction. The Sanyo-Marunaka case involved a particular finding in comparison with Toys ‘R’ Us-Japan and EDION cases that a supplier put a high priority on transactions between Sanyo-Marunaka and its affiliate office, because the percentage of SanyoMarunaka sales at the affiliate office was high. This indicates that even if the supplier itself has bargaining power against Sanyo-Marunaka, its affiliate office may not. In this case, Sanyo-Marunaka is in a superior bargaining position over the affiliated office as reflected in ‘the purchase amount from the counterparty in the said act’ in Article 20-6 of the AMA. The Article therefore applies to sales at the affiliated office only. The RALSE case involved a similar but slightly different fact finding that a supplier has an important affiliated base of which the percentage of sales to RALSE was high. This does not clarify whether only an affiliated office or the supplier as a whole is inferior to RALSE on bargaining power. When the issue is limited to the validity of cease and desist orders according to Article 20 based on the requirements that fall under the category laid out in Article 2(9)(v), the fact-findings are sufficient as in past practice. Since surcharge orders were simultaneously issued in these four cases, more specific fact-finding should have been required. It is not sufficient to clarify determination standards and the general materials required for superior bargaining position. For a surcharge order, it is necessary for the JFTC to prove superior bargaining positions against each individual counterparty.

6 Abuse The requirement that the company acted ‘unjustly in light of the normal business practices’ in Article 2(9)(v) of the AMA refers to an ‘abuse’ of its position as reported in the Guidelines. The Guidelines state that the presence or absence of abuse is determined on a case-bycase basis from the viewpoint of maintaining/promoting fair competition and describe many precedents and case examples. Typical abuses are the following two: the first type is causing disadvantages that could not be foreseen and the second type is causing remarkable disadvantages even though it could be foreseen. Fact findings on abuse in all four cases satisfied these two types. Position” and the Concept of “Market”). 57:3 Tohoku University HoGakubu Kiyou 255–93 (August 1993, in Japanese).

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As to the ‘return of goods,’ a ‘request for [a] dispatch of employees,’ and ‘price reduction’ in the four cases examined in this chapter, the evidence does not demonstrate the culpability of specific suppliers. Thus the decisions of abuse are made by virtue of causing disadvantages that could not be foreseen at the beginning of the agreement or at the time of delivery. With regard to a ‘request for [a] dispatch of employees’ and ‘request[s] for payment of monetary contribution[s],’ the decisions of abuse are made by virtue of causing no direct benefit for sales promotion or resulting in obligations that outweigh the associated profit. Fact finding on abuse in the RALSE case is more detailed than the other three. The Sanyo-Marunaka and the RALSE cases differ slightly from the other two. In the Sanyo-Marunaka case, many actions were considered as abuse, including the request for employee dispatches, requests for the monetary contributions, the return of goods, price reductions, and forced purchases. The RALSE case also involved plural acts such as employee dispatches, requests for the monetary contributions and forced purchases. On the other hand, in the Toys ‘R’ Us-Japan case, the return of unsold goods and price reductions equivalent to the entire or partial amount of the discount were recognized as abuse. In the EDION case, only requests for employee dispatches were found to constitute abuse. With respect to the surcharge order, regardless of whether a firm commits a single or multiple acts to the same counterparty, the total amount of the surcharge is the same when the offence period is fixed. According to Article 20-6 of the AMA, the amount of surcharge is determined by multiplying the amounts of transaction from the counterparty, not the real damage caused by the act, by one percent. If there are multiple different acts of abuse to each counterparty, the surcharge is not taken in terms unless each specific abuse is recognised individually. Since the calculation formula is based on Article 20-6, the total amount of surcharge differs dramatically between finding multiple acts as one violation as a whole and recognizing those acts as a collection of more than one violation. As to the surcharge orders in four cases, JFTC treated multiple acts as one violation, which is easier for JFTC to calculate the amount of surcharge payment on the one hand, results in rather higher total surcharge amount on the other hand. This issue must be discussed at the hearing process.

7 The Necessity of Orders Since these four cases were evaluated based on Article 20-2 instead of Article 20-1, the JFTC showed the necessity of cease and desist orders. The relevant factors here are the duration of the violation and termination of the JFTC’s on-the-spot investigation. In the Sanyo-Marunaka case, despite the existence of a previous cease and desist order for similar acts, Sanyo-Marunaka engaged in further illegal transactions.19 In

19 The

JFTC issued a cease and desist order based on abuse of superior bargaining position to Sanyo-Marunaka on 15 April 2004.

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the case of Toys ‘R’ Us-Japan, JFTC pointed out that the company systematically addressed its violations. The central content of the cease and desist order aims not to stop the abusive conduct abstractly but rather to stop each act as described in the JFTC fact findings.

8 Conclusion There are few literature studies in English that examine abuse of superior bargaining position under the AMA except for Wakui20 and Choi and Fuchikawa.21 Wakui explains the rationale and several cases in relation to abuse of a dominant bargaining position and gives an introduction to scholars’ views. Choi and Fuchikawa examine the current application of the laws relating to buyer power in Korea and Japan and their implementation to discern the common issues arising from their similar regulatory structures. They argue that the distinctive approaches to buyer power under the competition laws of Korea and Japan reflect incentives different from those of other competition regimes with different legislative structures. The comparative study, ‘Report on Abuse of Superior Bargaining Position,’ that is arranged by the Task Force for Abuse of Superior Bargaining Position of ICN 7th Conference22 is a comprehensive and systematic analysis mainly intending to gain an insight into regulations on abuse of superior bargaining positions. Here, we examined recent law enforcement against abuse of superior bargaining positions focusing on the first four levied cases from the viewpoints of each requirement in the application of the law. The amendment to the AMA examined here introduced a surcharge system against abuse of superior bargaining positions on 1 January 2010. With reference to the Sanyo-Marunaka case, the JFTC issued a cease and desist order and a surcharge payment order against Sanyo-Marunaka on 22 June 2011. This was because Sanyo-Marunaka, on and after January 2007, caused the specific suppliers who were in bargaining positions inferior to it, to request dispatches of employees, request monetary contributions, return goods, reduce prices, and force purchases. As to the Toys ‘R’ Us-Japan case, the JFTC issued a cease and desist order on 13 December 2011. This was because Toys ‘R’ Us-Japan, on or after 6 January 2009, returned unsold goods and reduced prices in an amount that was sometimes equivalent to the discount awarded to certain suppliers who were in inferior bargaining positions. In the EDION case, the JFTC issued the cease and desist order and the surcharge payment order against EDION on 16 February 2012. EDION caused 20 Masako

Wakui, Antimonopoly Law—Competition Law and Policy in Japan (ASK House, Suffolk, UK 2008). 21 Yo Sop Choi and Kazuhiko Fuchikawa, ‘Comparative Analysis of Competition Laws on Buyer Power in Korea and Japan’ (2010) 33:3 World Competition 499–519. 22 Task Force for Abuse of Superior Bargaining Position of ICN 7th Conference (2008) ‘Report on Abuse of Superior Bargaining Position,’ that is arranged by the; see at http://www. internationalcompetitionnetwork.org/uploads/library/doc386.pdf (accessed 5 July 2014).

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the specific suppliers who were in inferior bargaining positions to dispatch their employees. Regarding the RALSE Case, the JFTC issued a cease and desist order and a surcharge payment order against RALSE on 3 July 2013. RALSE forced its suppliers to dispatch their employees and to provide monetary contribution unilaterally. The surcharge amounts in all four cases are quite high even though levied only a part of the period of violation. Application of each requirement of Article 2(9)(v) in these four cases was mostly followed by precedents and JFTC’s decisions, which are clarified in JFTC Guidelines. Even though the basic concept and structure of Article 2(9)(v) has not changed by the amendment of AMA enacted in 2010, more precise fact-findings are required according to the new surcharge requirements of Article 20-6. Especially as to the requirement of superior bargaining position, fact-findings need to correspond to each counterparty. In addition to this, whether finding multiple acts as one ‘abuse’ or recognising those acts as a collection of more than one ‘abuse’ is practically important because the total amount of the surcharge can dramatically change according to Article 20-6. These four cases are currently in hearings. The proper enforcement of cease and desist orders as well as surcharge orders will be strongly impacted by the results. In addition to that, it is important to watch Abuse of Superior Bargaining Position cases under the new procedural system by the 2013 AMA amendment which will be enforced in near future.

Part IV

Merger

Chapter 9

Outline of Merger Regulation

1 Merger Etc. Mergers, etc. of a company are prohibited in cases where it substantially limits competition in certain trading fields and when it is based on unfair trade practices. “A particular field of trade” is the meaning of the market, and its definition is made from the viewpoint of the scope of competition to which the merger will affect, according to concrete cases. Generally, it depends on the type of goods and services handled by the parties involved, the geographical range in which it is traded, the stage of the transaction (manufacturing, wholesale, retailing etc) etc. According to Toho Corporation (1950) (Tokyo High Public Show 19th September 19th, Showa 25 (Gyo-Na) No. 21, Takamado 4 vol. 14, p. 497) That is, when a large number of movie theaters are in close proximity to an area, they will naturally create groups of audiences to gather in that area, and these audience groups usually enter each cinema in the area and enter As a result, the entertainers in this area will be targeting this spectator group in common.

Yawata Fuji Merger Case (1969) (October 30, 1974, Showa 44 (Decision) No. 2, Trial Decision 16 vol. 46) Whether or not a market dominant position will be formed by the merger depends on the actual circumstances of the industry to which the parties concerned belong and the market occupation rate in each trading field, circumstances of the supplier side and the consumer side, It must be judged taking into consideration economic conditions such as substitutes and the difficulty of new entry.

The case where competition is substantially restricted by the merger is that the market structure changes due to the merger and certain companies freely influence price, quality, quantity and other conditions freely to their will, It is a condition that can be dominated. This judgment is carried out taking comprehensively into consideration various competitive factors such as the market occupation rate. About Toho Corporation (1950) © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_9

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…Substantial restraint of competition……the competition itself is declined, and a particular business enterprise or business group is able to control the price, quality, quantity, and other various conditions freely to some extent, with its own intention. It is a state where a form that can control is appearing, or at least has reached a level at which it is going to appear. Therefore, a decrease in competitors, or a decrease in the purpose of competition (in this case, a decrease in the number of movies or types of movies, etc.), or a decrease in competition (in the case, a decrease in advertising, etc.) etc. necessarily impose restrictions on competition, but if these individual facts do not immediately mean that restrictions would become substantial, it is not always necessary to further indicate these individual facts.

Yawata Fuji merger case (1969) A case of acquiring a dominant market position means that a certain business entity will monopolize the market or that it can sell to a certain extent freely to a certain extent price, quality, quantity and other various conditions It means that we will have the ability to influence ourselves, which means that competitors can not conduct voluntary business activities. Effective checking power on the merged company If there is a competitor, the merged company will not acquire the market dominant position. This Article 1, paragraph (1) means the case where the market structure changes noncompetitively as a result of the merger and the specific business operator acquires the dominant position in the market.

2 Limitation on Shareholding of Company Regarding other business combinations, it is regulated by possession of shares (Article 10), concurrent officers (13), division (Article 15-2), business acquisitions (Article 16), etc. The company holding the company’s shares is banned when it substantially limits competition in certain trading fields and when it is under the unfair trade practice law (Article 10). With regard to competition restraint, it is a problem that there is a binding relationship between companies by holding shares, and as a result, competition will be affected. It is prohibited to substantially restrict competition in certain trading fields by concurrently serving as officers of more than one company and to send officers to other companies through unfair trade practice laws (Article 13). The joint divestiture split that multiple companies jointly inherit the business to the new company and the absorption division that will inherit the business to the existing company both have substantially the same effect as the merger, so the Antimonopoly Law mergers. It is handled in the same way, and it is forbidden in cases where it substantially limits competition in a certain trading field and when it is based on unfair trade practice law (Article 15-2). The transfer of business between companies has substantially the same effect as the merger, so the Antimonopoly Act treats it like a merger (Article 16). Here, the acquisition of business is the acquisition of all or important part of sales, which corresponds to the case where sales department, factory, etc. are acquired. In addition

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to acquiring business, contracts that acquire fixed assets on business, rent business, accept management, and share common profit/loss on business are handled in the same way as mergers.

3 Business Combination Guidelines Regarding these business combination reviews, with respect to the idea of defining a certain trading field and thinking when it becomes a problem under the Antimonopoly Act, from the various viewpoints that further transparency of business combination review should be secured and further predictability should be further enhanced. In order to respond to the request, operational guidelines are released.

4 Notification/Reporting Obligation, Advance Consultation System In order to gather information for implementing these various regulations and ensure the effectiveness, the following notification and reporting system is set up. Regarding notification of the merger, it is said that it will notify the Fair Trade Commission and that it will not be possible to merge until 30 days have elapsed since it was accepted. (1) Business report of holding company etc.—Notification of new establishment The total amount of the total assets of the company and its subsidiaries (total assets of domestic companies) is (1) 600 million yen for holding company, (2) 8 trillion yen for insurance company or securities company (excluding holding company) ➂ If the companies other than ➀ and ➁ exceed 2 trillion yen, submit a report on the project within 3 months after the end of each business year (Article 9.5). (2) Report on the company’s shareholding If the company with total assets exceeding 20 billion yen acquires shares of companies with total assets exceeding 5 billion yen in excess of 20% or 50%, within 30 days, the shares in the Fair Trade Commission Submit ownership report (Article 10, paragraph 2, 3). (3) Notification of acquisition, merger, division, sales etc. When a company whose total assets exceed 20 billion yen tries to merger with a company whose total assets exceed 5 billion yen, regardless of the form of merger (newly established merger, absorption merger) We must notify the plan concerning the merger (Article 15, paragraph 2, 3). In addition, it is unnecessary to notify the merger between parent and child/sibling company (more than 50% of voting rights holding relationship).

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(4) Notification of division In the case of jointly establishing a new corporate split or absorption split, as in the case of the merger, notification must be made to the Fair Trade Commission in advance (Article 15, paragraph 2, 2, 5). (5) Notification of Acquisition of Business etc. Even if we intend to acquire business etc. of the company, we have to report to the Fair Trade Commission beforehand as well as in the case of the merger (Article 16(2), 3, 4).

5 Advance Consultation Regarding prior consultation concerning business combinations etc., as an official matter, if there is an inquiry about whether concrete plans will substantially limit competition in certain transaction fields from businesses, it is fair If the transaction committee conducts a business combination review in accordance with the investment guidelines and responds to the provisions of Chap. 4 of the Law and whether the business combination will substantially limit competition in certain transaction areas has been done. Informal preliminary consultation is also occasionally conducted.

6 Outline of This Part Around the globe, most authorities assess mergers on the basis, primarily, of the market shares held by parties. That approach has been set aside in two important cases adopted in the last years by the JFTC. The new attitude adopted by the JFTC mirrors a growing importance of economic analysis in the cases examined in Japan, as in other parts of the world. Merger control can be assessed simply by observing price movements of the product in question. In this chapter, three ex-post merger evaluations show statistically significant price increases. Thus, in each case, the change in market power is analyzed in terms of changes in market sales and market share. The analyses indicate that market sales values increased but market share decreased significantly. Although several studies showed the market price situation before and after a merger, this chapter is the first to analyze the appropriateness of merger control in terms of market sales and market share. In addition, one of the merging parties was likely to reposition its production lines, indicating that mergers and acquisitions may be used as a tool for strategic product differentiation. That is, under such merger regulations, leading examples of a merging party developing a marketing strategy are indicated.

Chapter 10

Merger Assessment in Japan: The Declining Importance of Market Shares

1 Recent Trends in Merger Assessment In this chapter, we explore recent developments of antimonopoly law in relation to 1 merger control in Japan. Arai (2004) states that Japan’s merger control policy is competition oriented, systematically designed, and transparent but that the policy is 2 regulatory. In March 2007, the Japanese Fair Trade Commission (JFTC) revised the Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination (Business Combination Guidelines) based on three factors: (i) international consistency, (ii) enforcement experiences, and (iii) economic theory. The JFTC amended the notification rules and Business Combination Guidelines in July 2011, which canceled the earlier consultation system and gave early signs of how 3 the reforms would influence the JFTC’s merger practices. There seems to be three dominant trends in global merger control. First, it has become common practice to use economics and econometrics to seek objectivity in the enforcement. The European Union (EU) established the Office of the Chief Economist, and the United States (US) issued sophisticated merger guidelines in

1 Recent developments in EU are discussed in Drauz et al. (2013). See Gotz Drauz, Paul McGeown, and Benjamin Record, ‘Recent Developments in EU Merger Control’ (2013) 4 Journal of European Competition Law & Practice 146. 2 Koki Arai, ‘An Airline Merger in Japan: A Case Study Revealing Principles of Japanese Merger Control’ (2004) 4 Journal of Industry, Competition & Trade 207. 3 Etsuko Kameoka and Mel Marquis, The Sun Also Sets: Trending Away from Japanese Exceptionalism in Merger Control and Closer to Global Standards, https://www.competitionpolicyinternational. com/assets/Free/cpiasiakameokamarquis.pdf, accessed 23 July 2014.

This Chapter is based on Koki Arai (2015) “Merger Assessment in Japan: the Declining Importance of Market Shares.” Journal of European Competition Law & Practice, 6(5), 337–345. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_10

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2010.4,5 Second, the use of an alternative behavioural instead of a structural remedy, which remains the basic principle, has become widespread. The 2011 US Policy Guide to Merger Remedies,6 which updated the anti-trust division’s 2004 guidance, does not mention a structural remedy, and the use of behavioural remedies (as well as combined structural and behavioural remedies) are increasing to be used not only in the US but also in the EU.7,8 We refer to this trend in section III.D. Third, global merger regulations have become more common among emerging economies, such as China and India; this is discussed in sections II.E and III.F9,10,11 Merger control in Japan has also developed in accordance with these global trends. First, the JFTC has been focusing on the reality of market competition instead of market share. For example, in the case of the proposed merger between Nippon Steel Corporation (NSC) and Sumitomo Metal Industries (SMI) Ltd. (the steel case), the JFTC determined that competition in steel sheet piles might not be substantially restricted even if the parties’ market share was 65%. Another example is the acquisition of Toyo Fibre stock by Hokuetsu-Kishu Corporation Ltd. (the vulcanised fibre case); in this case, the JFTC determined that the vulcanised paper market might not be substantially restrained even if the resulting market share was 100%. Although the JFTC had frequently deemed a 10% market share to be a constraining power, it ruled that a market share of 25–30% would not create an influential competitor in the ore fines market in the case of a proposed joint venture (JV) for iron ore production by BHP Billiton PLC and BHP Billiton Limited (BHP Billiton) and rival Rio Tinto PLC and Rio Tinto Limited (Rio Tinto) (the iron ore case). Despite the competitor’s 40% market share in the steel case , its constraining power was not deemed strong enough

4 Budzinski

Oliver, Impact evaluation of merger control decisions, Ilmenau Economics Discussion Paper No. 75, http://www.econstor.eu/bitstream/10419/67109/1/722215983.pdf, accessed 23 July 2014. 5 Anne C. Witt, ‘From Airtours to Ryanair: Is the More Economic Approach to EU Merger Law Really about More Economics?’ (2012) 49 Common Market Law Review 217. 6 Department of Justice, Antitrust Division (2011) Antitrust Division Policy Guide to Merger Remedies. Retrieved from the Department of Justice website: http://www.justice.gov/atr/public/ guidelines/272350.pdf, accessed 23 July 2014. 7 Daniel Crane, ‘Has the Obama Justice Department Reinvigorated Antitrust Enforcement?’ (2012) 65 Stanford Law Review 13 http://www.stanfordlawreview.org/sites/default/files/online/articles/ 65_Stan._L._Rev._Online_13.pdf, accessed 23 July 2014. 8 Spencer W. Waller, ‘Access and Information Remedies in High-Tech Antitrust’ (2012) 8 Journal of Competition Law & Economics 575. 9 Neil Campbell and Sorcha O’Carroll, ‘Merger Control in India: Partial Implementation of the ICN Recommended Practices’ (2011) 7 Antitrust Chronicle 7. 10 Karel Cool, Nicolas Harle, and Philippe Ombregt, Merger Control and Practice in the BRIC Countries versus the EU and the US: The Facts, SSRN: http://papers.ssrn.com/sol3/papers.cfm? abstract_id=2163437, accessed 23 July 2014. 11 Ping Lin and Jingjing Zhao, ‘Merger Control Policy under China’s AntiMonopoly Law’ (2012) 41 Review of Industrial Organization 109.

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in the non-oriented magnetic steel sheet market because of an increased difference in the market share between the proposed merging parties and the competitor. Second, the JFTC has shown its economic thinking. The JFTC pays significant attention to the safe harbour standard12 and applies it effectively as triage. The JFTC uses this standard as a screening tool to examine the competitiveness of a planned merger and as a criterion for assessing the proposed remedies in two proposed merger cases in the hard disc drive sector after reviewing the acquisition of shares, the JFTC stated that competition in any particular field of trade might not be substantially restrained given the remedies, which reduced the share of the merging parties below the level of a safe harbour. The safe harbour standard is based on experimental knowledge supported by empirical market research. These developments seem to decrease the importance of market share as a factor in competitive assessments in merger control, while the second development demonstrates the usefulness of a market standard tool in merger investigations. There is an intense discussion on the need for and the importance of the market definition process. Some claim that this process has no coherent basic on economic principles and should thus be abandoned entirely.13 Others contend that the market definition process is important in the application of economic models and it has a role in the narrative of presenting anti-trust cases.14 Our modest inferences from recent enforcement in Japan are that market definition is not a sufficient but necessary condition in the merger investigation process. This chapter adopts an empirical approach by analysing a few important cases. Considering recent merger cases in other jurisdictions, we engage in pragmatic as well as theoretical studying to typify merger regulations. These analysis is important not only for getting diversified perspectives on merger control in the world but also for international cooperation between regulators especially in the field of defining the market and remedy fixing processes.

12 The Business Combination Guidelines does not mention safe harbour directly. It mentions: ‘… it is normally considered that the effect of a horizontal business combination may not be substantially to restrain competition in a particular field of trade and consequently, … and the specific number of the Herfindahl-Herschman Index and its increments are as follows:

(a) The Herfindahl-Herschman Index after the business combination is not more than 1,500. (b) HHI after the business combination is more than 1,500 but not more than 2,500 while the increment of HHI is not more than 250. (c) HHI after the business.’ (The parentheses are omitted.) 13 L

Kaplow, ‘Why (Ever) Define Markets?’ (1982) 124 Harvard Law Review 437–517.

14 Gregory J. Werden, Why (Ever) Define Markets? An Answer to Professor Kaplow, SSRN: http://

ssrn.com/abstract=2004655, accessed 23 July 2014.

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2 The Iron Ore Case (1) Case proceedings In this case, BHP Billiton and Rio Tinto, which both engage in the mining and selling of iron ore, planned to establish a JV to produce iron ore in Western Australia. Article 10 of the Antimonopoly Act (AMA) was applied to this case. In this JV, BHB Billiton and Rio Tinto would have commissioned the control and management of the iron ore production business to a management company established with capital contributions from the parties concerned. The parties alleged the amount of capital contributions exceeded USD$250 billion, and if one party desired the expansion of production capability while the other did not, the desirous party would be able to do so at its sole discretion. After receiving a request from BHP Billiton and Rio Tinto for prior consultation in accordance with ‘policies dealing with prior consultation regarding business combination plans’,15 the JFTC reviewed the proposed iron ore production JV between the parties. On 27 September 2010, the JFTC notified both parties of the competition problems noting that the proposed JV would substantially restrain competition in producing and selling iron ore lumps and fines in the global seaborne market. BHP Billiton and Rio Tinto then issued a press release announcing the cancelation of the JV plan, and the JFTC closed its review. (2) Analysis by JFTC The combined share of lump ore held by both parties in the world seaborne trade market was between 55 and 60%. The Herfindahl-Hirschman Index (HHI) after establishment of JV would be very high, reaching 3,750–3,850. The HHI increment would be as large as 1,750 through 1,850. The market share held by suppliers that ranked lower than both parties would remain at 10–15%, thereby creating an extremely large difference in the market shares of JV and other suppliers. The market share held by both parties in the world seaborne trade market was between 40 and 45%. The HHI of the JV would be 2,450–2,550 and the HHI increment as high as 750–850. According to the JFTC, East Asia is expected to continue to present the largest demand for iron ore in the world. The mines owned by both parties are in Western Australia, which is close to East Asia. Therefore, both parties are in a better position than their competitors with respect to maritime transportation costs. Both parties are equals in terms of iron ore quality and maritime transportation costs. Both parties have long competed and continue to compete with each other using different sales strategies. In such an environment, forming a coordinated relationship through a JV would have significantly affected competition between lump and powdered ore suppliers in the world seaborne trade market. Based on this reasoning, the JFTC stated that competition between lump and powdered ore suppliers in the world seaborne trade market would have been substantially restrained. 15 Retrieved

from the JFTC’s website: http://www.jftc.go.jp/en/pressreleases/yearly-2010/oct/ individual-000016.html, accessed 23 July 2014.

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(3) Particular field of trade JFTC focused on (i) lump ore, (ii) powdered ore, and (iii) pellets. As for pellets, both parties have small market share and thus JFTC found no competition problem in that market. There are large differences among the price levels and price fluctuations of three types of iron ore in the market. In addition to this situation, the JFTC stated as follows in line with the concept of small but significant and non-transitory increase in price (SSNIP) test: In term of users’ understanding and behavior, most of the steel companies keep the proportion of three types of iron ore steady … even in a case where the price of one of the three types of iron ore increases 5 to 10% in comparison with the remaining types of iron ore, users think that they do not need to change the rate of use of the iron ore in question to change the above proportion.16

Moreover, in consideration of the substitutability of supply, the JFTC pointed out that it was technically possible to crush lump ore to convert it to powder ore and pellets, but that such conversion required additional costs and is thus irrational from an economic standpoint. (4) Indirect combination The parties planned to establish a production JV, so it leaves a possibility for the parties to compete on sales level. The JFTC adopted a two-stage analysis on this problem. In the first step, the JFTC considered whether either party would lose the incentive to compete at the sales level and, in the second step, whether either party had an advantage when competing at the sales level. The JFTC stated that the JV would have resulted in decreased incentives for competitive behaviour between the parties. The JFTC also concluded that the parties lose their ability to compete because their supply costs would be the same and they would have shared the major costs of the iron ore business. (5) Delineation of the global market In this case, the relevant geographic market was delineated as the global seaborne market. In EU, it was delineated as ‘the worldwide market for iron ore transported by sea’.17 JFTC’s Business Combination Guidelines18 describes global or worldwide market as follows: if users, both inside and outside Japan, … are conducting business without segregating domestic and foreign suppliers, even if the prices have been raised in Japan, users in Japan will be able to substitute the purchase of products from overseas suppliers, which may 16 See

n 5, Part III 1. (1).

17 Retrieved from the European Commission’s website: http://europa.eu/rapid/press-release_IP-10-

45_en.htm, accessed 23 July 2014. 18 Retrieved from the JFTC’s website: http://www.jftc.go.jp/en/legislation_gls/imonopoly_ guidelines.files/110713.2.pdf, accessed 23 July 2014.

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obstruct price increases in Japan. In that case, a geographic range has been determined across the border.19

In this case, iron ore suppliers supply users in any region who procure iron ore through seaborne trade substantially at the same price level. Iron ore users procure iron ore from suppliers near their blast furnace light at the cost of seaborne trade. In reality, steel companies operating their business in East Asia and Western Europe, and whose procurement is dependent on seaborne trade, have been procuring their iron ore from a plurality of suppliers worldwide. In fact, the price fluctuations of iron ore for East Asia and Western Europe are not substantially different, and prices cannot be discriminated among regions. Therefore, geographic market was delineated as the world seaborne market. (6) Efficiency The JFTC fully considered efficiency claim by the party in this case. The parties alleged that the JV would increase efficiency by more than $10 billion. The JV would nearly monopolise the market. The JFTC thus concluded that in this market, it could not accept the efficiency justification. This ruling was based on the JFTC’s Business Combination Guidelines that ‘business combinations that create a state of monopoly or quasi-monopoly are hardly ever justified by their efficiency’.20 In the iron ore fines market, the JFTC concluded that the JV would not match all three efficiency consideration requirements: (i) efficiency should be specific to the business combination, (ii) efficiency should be noticeable, and (iii) efficiency should contribute to users’ interests. First, the efficiency should be specific to the business combination. The JFTC considered whether efficiency could be achieved by less restrictive means. The parties claimed that efficiency would be achieved by sharing best practices for adopting common procedures. The JFTC rejected this claim that it was not always clear whether one party’s best practices for a specific technique or expertise were adopted by the other party. This treatment of best claims about best practices is stated by the US Department of Justice and the US Federal Trade Commission (USFTC) (2006) as follows: In many cases, these efficiencies can be achieved without the proposed merger. The presence of other firms in the industry unilaterally adopting similar ‘best practices’ would suggest that such cost savings are not merger-specific.21

In addition, the JFTC recognised that the efficiency could be realised by implementing transactions short of merger between the parties. A similar consideration was given to blended iron ore market. The JFTC stated that if the blending had been beneficial, transactions could have been agreed between the parties before the establishment of JV. 19 Ibid.,

p. 15. n 7, p. 30. 21 Retrieved from the Department of Justice website: http://www.justice.gov/atr/public/guidelines/ 215247.htm, accessed 23 July 2014. 20 Ibid.,

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Second, the efficiency improvements should be noticeable. The JFTC denied the proposed plan to expand iron ore supply because it would be too costly to implement, and no previous effort had been made by the parties. Third, efficiency should be passed on to users. The JFTC pointed out that the proposed plan to cut costs mainly concerned with fixed costs. It is clear the reduction of fixed cost would not be realised in the form. These points of consideration are similar to the items of the EU guidelines, which mentioned (i) benefit to consumers, (ii) merger specificity, and (iii) verifiability.22 In consonance with the similarity, this case analysis is a considerable extension of the merger specificity with respect to the way of thinking about sharing infrastructures, purchase and sales of products between the parties concerned, and sharing best practices. Concerning the benefit to consumers, for example, the JFTC pointed out the reduction in capital expenditures was linked to mainly fixed costs for the party, and thus the measure was not of benefit to the consumers from the standpoint of economic analysis. The reduction of operational costs in the party should have been explained more concretely with detailed information based on the facts. With regard to the realisability, according to the JFTC, the production capability expansion plan after establishing the JV was far too high compared with the previous production capability plans which were implemented by the parties. The plan’s feasibility is doubtful both in light of the excess of the plan and the lack of a plan after reaching the excess capacity. If the production capability expansion plan is actually implemented by the party, according to the JFTC, it is not clear how demand and supply are balanced in the plan. In consonance with this decision, it is necessary to ensure that the plan matches the party’s own capacity establishment and the prospective market situation at that time. As reported by this consideration, it is not the breakdown of the plan for the party itself, but the comprehensive perspective with the pervasive effect such as demand and supply as well as payoff, strategy, and information domain for the equilibrium. (7) Enforcement in other jurisdictions This case was reviewed by multiple competition agencies around the world. Several authorities announced that they had cooperated in the analysis of the merger. The JFTC stated the following: The proposed JV was reviewed not only by the JFTC but also by the Australian Competition and Consumer Commission, the European Commission, the German Federal Cartel Office and the Korea Fair Trade Commission. The JFTC exchanged information with these competition authorities in the course of its prior consultation’s review on the proposed JV.23

In January 2010, the European Commission (EC) opened a formal anti-trust investigation on this JV under EU rules on restrictive business practices, specifically Arti22 European Commission, ‘Guidelines on the Assessment of Horizontal Mergers under the Council Regulation on the Control of Concentrations between Undertakings’ (2004) Official Journal C 031. 05/02/2004, pp. 0005–0018. 23 Id, n 7.

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cle 101 of the Treaty on the Functioning of the European Union (TFEU). The EC stated that it would investigate the effects of the proposed JV on the global market for iron ore transported by sea. Also, Germany’s Bundeskartellamt expressed concern on this JV. According to the Bundeskartellamt, the JV would created a competitive unit between BHP Billiton and Rio Tinto, and no relevant competition between the parties could be expected although they would have continued marketing separately. After notification was withdrawn on 18 October 2010, the Bundeskartellamt issued a statement of case closing. The Australian Competition and Consumer Commission (ACCC) issued a statement of objection on this JV. The statement highlighted changes of circumstances in iron ore markets since the ACCC had reviewed the proposed BHP/Rio merger in 2008. Additionally, on 28 December 2009, the Korea Fair Trade Commission (KFTC) reported that it had received notification of this JV. The KFTC found that the proposed JV could have an anti-competitive effect on the production and sale of iron ore lumps and fines in the global seaborne market. On 1 October 2010, the case examiner submitted an examination report asked the concerned companies present opinions on this report. Finally, the KFTC closed the review of the JV on 19 October 2010. Shiraishi (2011) points out that the JFTC needs to standardise the relevant market by exchanging information with foreign competition authorities.24 In this case, if the parties had not cooperated with the JFTC’s investigation, JFTC would have had to rely on information and analysis by foreign authorities.

3 The Steel Case (1) Case proceedings This case concerns a planned merger between NSC and SMI, both of which manufacture and sell steel products. The JFTC examined whether the question of competition was cured by the remedies proposed by the parties. The JFTC closed an investigation without issuing ceaseand-desist order. The merger between the NSC and SMI got a major social concern. The parties notified the JFTC of the planned merger on 31 May 2011, thereby JFTC initiated the primary review, and it requested reports and other documentation to begin the

24 Tadashi Shiraishi, ‘Heisei 22nendo Kigyo Ketsuho Jirei-shu no Kento’ (2011) 733 Kosei Tosihiki

(Fair Trade) 61 (in Japanese).

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secondary review on 30 June. The parties had to submit all reports by 9 November (the deadline for prior notice was 7 February 2012). On 14 December 2011, the JFTC notified the parties that it would not issue a cease-and-desist order. (2) Analysis by JFTC Upon examination of the goods and services markets in which the parties (including companies affiliated with the parties) compete, the JFTC identified approximately 30 fields of trade. In the non-oriented electrical steel sheets and high-pressure gas pipeline engineering business, the JFTC decided that the merger would not substantially restrain competition, given the remedies presented by the parties. The JFTC also determined that the merger would not substantially restrain competition in other fields of trade. NSC and SMI held market shares of 40 and 15%, respectively, in the domestic nonoriented electrical steel sheets market. They had one effective competitor; however, it did not have sufficient excess capacity. Therefore, the JFTC determined that even if the parties increased their prices, it would be difficult for a competitor to increase the volume of supply sufficiently. The parties proposed three remedies: (i) the products of all grades that SMI sells to domestic users would be supplied to the Sumitomo Corporation, up to SMI’s domestic annual sales volume over the past five years at a price equivalent to the average post-merger production cost (calculated on the basis of the full cost) for five years after the merger. (ii) SMI’s commercial rights for the sale of non-oriented electrical steel sheets to domestic users would be transferred to Sumitomo. (iii) The status of the implementation of the above measures would be reported to the JFTC once in an accounting term for five years after the merger. The JFTC judged that the merger would not substantially restrain competition in the field of trade of non-oriented electrical steel sheets, given the remedies proposed by the parties. In the domestic high-pressure gas pipeline engineering market, both NSC and SMI held a market share of around 30%. A combined market share would be 60%, ranking it first in the domestic market. After the merger, the HHI would increase by approximately 1,800 to around 4,900. The companies eligible to partici pate in bids was to be limited to the blast furnace-related engineering companies, and after the merger, the number of the companies which could participate in bids would decline from three to two. In addition, entry pressure would not be exerted in the market. A situation could easily arise in which the combined parties could solely control prices. The JFTC decided that the merger might substantially restrain competition. The parties proposed two remedies: (i) stable supply of UO pipes (large-diameter welded U-form and O-form pipes). If a newcomer requested the parties to supply UO pipes for use in domestic high-pressure gas pipeline engineering, the parties would supply UO pipes on the basis of reasonably the same conditions with regards to price, volume, delivery time, standard, size, special specifications as when supplying the parties’ own subsidiaries; and (ii) supply of automatic welding machines and technical guidance on their operation. If a newcomer requested this for use in an order, the parties would transfer or lease new or used automatic welding machines to the newcomer with reasonable conditions as to price, delivery, and settlement

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10 Merger Assessment in Japan …

equivalent to the actual cost. Considering these proposed remedies, the JFTC ruled that the merger would not substantially restrain competition in the field of highpressure gas pipeline engineering. (3) The problem of minor shareholding Regarding minor shareholdings, this case presents two different situations which showed similar percentages of stockholdings. NSC was the single largest shareholder with 15.7% of the voting rights in GODO Steel and Daido Steel Ltd. The JFTC decided that there were business combinations between NSC and GODO Steel because (i) NSC was the largest shareholder in GODO Steel and independently held more than 10% of the voting rights, (ii) an employee of NSC held an official role at GODO Steel, and (iii) NSC and GODO Steel had business alliances, including the manufacturing and consigning of some products. With regards to Daido Steel, the JFTC noted that NSC was the largest shareholder in Daido Steel and independently held more than 10% of the voting rights pertaining to each company but that NSC only had slightly over 10% of the voting rights in Daido Steel. The JFTC stated that despite the existence of a joint director for NSC and Daido Steel, users of Daido Steel’s products had a certain number of voting rights and did not share common interests with NSC, especially in exercising voting rights. Accordingly, the JFTC concluded that no business combination existed between NSC and Daido Steel. A comparison of them shows the JFTC’s enforcement was based on a substantial consideration of the relationship between the parties, not on an automatic numerical or formal standard. The JFTC adopted the substantial examination methodology not only in assessing the resulting relationship in the market but also in assessing the restraint on competition: As a result, we consider that the business combinations … between the NSC and GODO Steel are loose and not strong enough for the relevant parties to conduct business activities as a completely integrated business unit, and that certain levels of competitive relationships are maintained.25

Negishi (2012) points out that it might not be necessary to determine whether a relationship between entities can be regarded as a business combination. He insists that only the causal links between shareholdings and competition problems must be proved. However, as shown above, JFTC sets a safe harbour in merger regulation, so the recognition of business combination must be done prior to full market analysis.26 Of course, the formality or rigidity of the safe harbour standard should be alleviated by examining the reality of the business combination and thoroughly assessing the competition.

25 Retrieved

from the JFTC website: http://www.jftc.go.jp/en/pressreleases/yearly-2011/dec/ individual-000457.html, accessed 23 July 2014. 26 Akira Negishi, ‘Honken Hyoshaku’ (2012) 1438 Jurist 5 (in Japanese).

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143

(4) Competitive pressure from neighbouring markets Another interesting point is about the neighbouring market. The JFTC defined the market for steel products and then considered potential competitors from nonsteel products or alternative construction methods. For example, in the case of steel sheet piles, the JFTC acknowledged that: there is a possibility that, in the event of a relative rise in the price of steel sheet piles, the construction method using steel sheet piles will be change to the concrete wall method or other methods. Accordingly, the possibility that the product range will be determined as the overall method of earth retaining including these construction methods will not be denied.27

However, the JFTC determined that steel sheet piles were only one product range and deemed the concrete wall method and other alternative methods to be competitive pressure based on the characteristics of the domestic market and domestic users’ perceptions. It is critically different to quantity the portion of sales diversion precisely in the case of price increase by 5–10%. The analysis clearly showed that the JFTC sought to identify the specific field of competition accurately quantitatively and to the maximum extent possible. (5) The analysis of coordinated behaviour In regards to coordinated conduct, the JFTC pointed out that the two fields of trade (non-oriented electrical steel sheets and high-pressure gas pipeline engineering business) had a high likelihood of coordinated conduct. In arriving at this conclusion, the JFTC observed that the merger would decrease the number of companies from three to two in the domestic markets for nonoriented electrical steel sheets and for high-pressure gas pipeline engineering. In other market, a merger could lead to a decrease in the number of firms from four to three. The JFTC’s analysis is consistent with recent enforcements of merger control in the US. Coate (2011) reports that USFTC regulation possibility of the merger regulation is increasing significantly when mergers results in a decrease from three to two firms in a market than from four to three firms; the same inference applies when mergers would more likely result in a decrease from four to three firms than from five to four firms.28 But the JFTC stated that although the number of leading blast furnace steelmakers that supply H-section steel would fall from three to two as a result of the merger, two competing, independent electrical furnace steelmakers existed, and this competition would continue after the merger. The determining factors in the JFTC’s consideration of substantial restraint of competition through coordinated conduct were the number of competitors in the market and the history of prior coordination in the market. 27 Ibid.,

n 13, p. 21. B. Coate, ‘The Use of Natural Experiments in Merger Analysis’ (2011) 1 Journal of Antitrust Enforcement 1. Retrieved from SSRN: http://ssrn.com/abstract=1853705, accessed 23 July 2014. 28 Malcolm

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10 Merger Assessment in Japan …

(6) Remedies The parties proposed remedies regarding the nonoriented electrical steel sheets and high-pressure gas pipeline engineering markets. Based on these remedies, the JFTC decided that the merger would not substantially restrain competition. These remedies stimulate three discussion points. The first is the terms of the commercial rights transfer. The remedy for non-oriented electrical steel sheet products establishes a term of five years, but it appears long because competition authority including JFTC ordinarily assesses the possibility of market change such as an early within two years. However, in this case transferring commercial rights will establish a new competitor in the market before the twoor five-year terms elapse. Therefore, the term of the commercial rights transfer would not be an issue. The second point concerns the transfer costs. In remedies for non-oriented electrical steel sheet products, the price is equivalent to the average production cost (calculated on a full-cost basis). However, the supply is based on substantially the same and reasonable conditions for the high-pressure gas pipeline engineering business. The remedy for non-oriented electrical steel sheet products is premised on the planned measure of creating a new company that is more effective than the merging party. The third point is that the purchaser was not decided in the remedy for the highpressure gas pipeline engineering business. Therefore, it was believed that this remedy would add a contestable pressure in the market, as expressed in the assessment: accordingly, if the above measures are made fully known to the public, the probability of new entries will be increased. It is considered that such entry pressure will become an effective means of restraining price increases by the parties.29

(7) User hearings and questionnaires The parties asserted that the geographic range was East Asia because of the domestic users’ policy of local procurement in each East Asian country and their awareness of the prices of overseas manufacturers’ products. The JFTC rejected this assertion for the following reasons: first, according to the hearings, domestic users at both domestic and overseas bases procured most non-oriented electrical steel sheets from domestic manufacturers. Industrial experts stated that overseas products would not be changed even if the prices increased by 5–10%. Second, according to interviews with domestic users, market conditions, including prices, differ between Japan and East Asian countries, and therefore, prices in East Asia economies are not linked to prices traded in Japan. Negotiations with domestic manufacturers on procurement prices in domestic bases, compared with procurement from overseas, are not realistic. Finally, domestic manufacturers have a high market share in Japan while that of domestic manufacturers in East Asia is low. The distribution of market share is also completely different between Japan and East Asia.

29 Ibid.,

n 6, p. 20.

3 The Steel Case

145

This case presents the JFTC’s typical manner of conducting hearings, interviews, and questionnaires in investigations. The use of stated preferences for future choice is supported by current economic thinking and economic evidence, as shown in the EC’s guidance on economic evidence.30 (8) Steel sheet piles A particular field of trade in the case provides a useful suggestion for comparing Japan and EU merger control. We focus on the steel sheet piles, which are a type of shaped steel that is manufactured by rolling slabs or blooms using a rolling machine with a rolling mill roll. The EC has ultimately concluded that sheet piling and other retaining structures are substitutable for the vast majority of their end applications in the Mittal/Arcelor case.31 This is because since the previous case, sheet piling is increasingly facing competition from alternative solutions involving competing materials such as coldrolled sheet piles. Therefore, the EC concluded that sheet piling belongs to a broader product market for retaining structures. Furthermore, the EC stated that the precise definition for this retaining structure market could be left open in that case. The JFTC described that although it was difficult to measure the specific portion quantitatively, by using the results of questionnaires there was a certain portion where the alternative methods would be used in place of the steel sheet pile method in response to the price increase. According to the JFTC, the steel sheet pile method accounts for about 20% of the total methods used for earth retaining. Based on these circumstances, the JFTC acknowledged that the party would have a market share of 65% in the steel sheet piles; however, there was a little possibility to raise the price level because (i) there were effective competitors with excess capacity, (ii) there were certain competitive pressures from alternative methods, and (iii) there was competitive pressure from users in the situation of decreasing the demand. Therefore, the JFTC stated did not consider that the merger might not substantially restrain competition. The description of the JFTC in relation to the questionnaire completed by the users contributes to improving the accountability of the merger investigation and helps establish and maintain coherent enforcement in the economic thinking. (9) Enforcement in other jurisdictions The merger of the parties was approved by the competition authorities in ten countries, including India, China, and other emerging countries. Under subsection (2) of Section 6 of the Competition Act of 2002, the Competition Commission of India (CCI) received a joint notice of the proposed combination from NSC and SMI. The CCI stated as follows:

30 DG Competition, European Commission, (2011) Best Practices for the Submission of Economic Evidence and Data Collection in Cases Concerning the Application of Arts 101 and 102 TFEU and in Merger Cases. 31 See Mittal/Arcelor, Case No COMP/M.4137 (2006).

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10 Merger Assessment in Japan …

(T)he parties to the combination are engaged in the business of manufacture of various types of steel products in Japan with operations across different parts of the world. In India, the parties to the combination have turnover mainly through exports of various types of finished steel products to India. It is also observed that the combined sales volume of both the parties in India is very low when compared to not only the apparent consumption of finished steel products in India but also to the volume of imports of finished steel products in India.32

In December 2011, the CCI approved the merger without conditions. In March 2012, the Ministry of Commerce of the People’s Republic of China notified that it would not prohibit the merger.

4 Conclusion This chapter examined recent developments in anti-monopoly law regarding merger control in Japan. As a result of examination, we could find that the JFTC focuses on the reality of market competition rather than market share. That is, the JFTC might not consider whether a company with more than 25–30% market share was an influential competitor nor, despite a 40% market share, whether the competitor’s constraining power was sufficient to keep the market competitive. The iron ore case was reviewed by multiple competition agencies around the world. We gave attention to three issues: indirect combination, delineation of the global market and efficiency. In the discussion on indirect combination, we pointed out that the case resulted in the first finding of indirect combination of two parties via JV. Regarding delineation of the global market, the iron ore case offers a typical global market example as described in the Business Combination Guidelines. We also discussed the JFTC’s efficiency assessment, which is based on specificity, realisability, and benefit for users. The steel case was very high profile case in Japan, and the JFTC’s investigation attracted much more attention in the media. We analysed five issues: business combinations by minor stockholding, competitive pressure from related markets, determination of substantial restraint of competition through coordinated conduct, proposed remedies, and user hearings and questionnaires. In the discussion on business combinations by minor stockholding, we explained that the JFTC’s enforcement is based on actual relationship between the parties rather than on an automatic numerical standard. In addition, we observed that if it is unclear whether a product or method should be included in a product range, the JFTC deems the problematic product or method to be a competitive pressure from a neighbouring market. Referring to user hearings and questionnaires, we found that the steel case indicated the actual using the tools for gathering information, such as hearings, interviews, and questionnaires. We further noted that the use of stated preferences for future choice is supported by current economic thinking and based on economic evidence. 32 Retrieved

from the CCI website: http://www.cci.gov.in/May2011/OrderOfCommission/ CombinationOrders/C-2012-11-93.pdf, accessed 23 July 2014.

4 Conclusion

147

We also identified the three global merger control trends reflected in the JFTC’s enforcement. The JFTC implemented the economic thinking described in section III.E in the iron ore case, although it also supplemented this thought with qualitative evidence. The JFTC will use economic research evidence alongside qualitative evidence with increasing frequency. The JFTC has used quantitative evidence, such as point-of-sales data, in previous cases, and such evidence needs to be used more frequently for credible and persuasive merger control. With regards to remedies, the JFTC uses a behavioural remedy in the steel case. This is a cutting-edge phenomenon in merger control. In a horizontal merger, a standard structural remedy is employed while the complementary behavioural remedy has been attracting interest in the US (Phoebe Putney case, 22 August 2013; Tyson Foods case, 4 November 2011) and the EU.33 In a vertical merger, many antitrust authorities undertake several behavioural remedies. From the perspective of Japanese experiences, an in-depth examination of proposed mergers from the user’s viewpoint seems to be needed for sound merger control.

33 Thomas Hoehna, ‘Structure Versus Conduct—A Comparison of the National Merger Remedies Practice in Seven European Countries’ (2010) 17 International Journal of the Economics of Business 9–32.

Chapter 11

Ex-post Examination of Mergers: Effects on Retail Prices

1 Ex-post Examination of Mergers Merger control can be assessed simply by observing price movements of the product in question. In this chapter, a post-examination of mergers involved an analysis of the 1 changes in the retail prices of goods in a given market after a merger. This practical and testable research question has been recently developed. In recent years, the ex-post evaluation of mergers has attracted significant attention, including attention from the perspective of antitrust economic analyses. At the U.S. Federal Trade Commission (FTC), Coate and Heimert (2009) analyzed the expost examination of mergers focusing on efficiency. The European Commission also conducted an ex-post examination of regulations on mergers through LEAR (2006). Thus, the authorities of various countries have evaluated policies for merger regulations. Kovacic (2009) pointed out that the ex-post examination of mergers, yet to be conducted, is important in determining policies that regulate the efficiency of merg1 In

this chapter, the term “merger” includes all types of business combinations, such as stock acquisitions, establishing a holding company, and others. 2 See “Retrospective Analysis of Agency Determinations in Merger Transactions Symposium,” 28–29 June 2013, American Bar Association. http://www.americanbar.org/calendar/2013/06/ antitrust_retrospectivemergeranalysissymposium.html (checked on 2014/8/5). 3 Angrist and Pischke (2010), who conducted an overview of the progress of positive economics following the criticism of Leamer (1983), argued for the importance of studies based on research design. Because a systematic examination of cause-and-effect relations using collected data could identify true effects, these ex-post examination arguments are important to the development of policies that regulate mergers. However, on this point, Nevo and Whinston (2010) provided criticism of the following various aspects: (i) random examinations are difficult in an oligopolistic market, (ii) a merger is endogenous as companies attempt to respond to a change in the market, thus the advantage of structural estimation is significant, and (iii) data availability remains problematic. This Chapter is based on Koki Arai (2017) “Ex-post Examination of Mergers: Effects on Retail Prices.” Asia-Pacific Journal of Accounting & Economics, 24(1–2): 145–162. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_11

149

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11 Ex-post Examination of Mergers: Effects on Retail Prices 2

ers. Several attempts have been made at a conducive policy discussion ; however, accumulating further research for such policy discussions is necessary. The ex-post evaluation of mergers has gained attention from the perspective of the 3 quantitative analysis of the theory of industrial organization. The effect of mergers should be analyzed through a simpler and easier-to-understand method. For example, using an analysis of price trends based on the appropriate selection of a control group for the merger of BP Amoco/ARCO, Hastings’ analysis (2004) of the effect of a longterm lease of 260 ARCO gas stations with its competitor Thrifty concluded that prices increase as the market becomes more competitive. This type of research is strongly expected in the field of empirical industrial organization. In a previous study with a similar perspective in the same jurisdiction, Fukamachi et al. (2003) explained that, although data availability may be a challenge, using prices from actual transactions is preferable wen analyzing price data. Therefore, their survey on trends in the market used aggregated data. Izumida et al. (2006) implemented a market definition analysis of butter and margarine using scanner data. The results of this chapter suggested significant price elasticity in a single market that is broader than that in a combined butter and margarine market. However, the study addressed a limited hypothetical situation. Other than these points, and despite the fact that merger regulations are a major achievement in the execution of antitrust laws, a review of research in the USA indicated that analysis of estimations of the impacts of mergers on prices has been conducted in comparatively few studies (Ashenfelter and Hosken 2010). A study on bank mergers by Focarelli and Panetta (2003) concluded that an increase in efficiency results in the disappearance of the anticompetitive effects of mergers in three years.4 The major industries for which the influence of mergers on prices has been examined are oil related, including a study by Hastings and Gilbert (2005). More recently, Winston, et al. (2011) examined the long-run effect of the merger of two western US railroads. Their retrospective assessment found that the mergers had negligible effects on grain transportation prices and consumer welfare in the long term. The price effects of mergers have been studied from various viewpoints, such as that of minimal consumer benefit with respect to deposit services in bank mergers (Ashton 2012). In particular, difference-in-difference (DID) analysis of the price effects of a merger has become widely used. For example, horizontal mergers in the US supermarket industry can result in significant increases in consumer prices, such as increases in grocery prices that frequently occur in highly concentrated markets (Hosken et al. 2012). However, the merger of two major retail book chains in the UK did not result in an increase in prices at either the local or the national level, but may have reduced the number of titles being offered (Duso et al. 2013). A merger in the US beer industry led to a 2% price increase and a nearly equal and opposite efficiency effect (Ashenfelter et al. 2015). To analyze consumer goods manufacturers, Ashenfelter and Hosken (2010) examined five mergers, including the acquisition of Tambrands (a manufacturer of female 4 The influence of mergers on prices was discussed using upward pricing pressure and revised merger

guidelines from the US.

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151

sanitary goods) by Proctor and Gamble, the acquisition of the breakfast sirup business of Kraft’s Log Cabin by (Mrs. Butterworth’s) Aurora Food, the acquisition of Quaker State automotive oil by Pennzoil, the acquisition of the branded cereal business of Ralcorp by General Mills, and the merger of the distilled liquor businesses of Guinness and Grand Metropolitan. Although the study involved seminal empirical work on industrial organizations, developing a systematic approach through which to analyze comprehensive market power and price changes is necessary. This chapter adopts the evaluation method to assess the effect of horizontal mergers in the US by Ashenfelter and Hosken (2010) and uses retail scanner data to measure price changes. Additionally, this chapter applies this evaluation method to the changes in sales and market share of the merging party, thereby examining the effect resulting from mergers from various perspectives. This chapter also analyzes the mergers of the following three consumer goods companies. The first analysis includes the acquisition of the shares of Yamaki Co., Ltd. (Yamaki) by Ajinomoto Co., Inc. (Ajinomoto).5 The second analysis is of a sugar company (Mitsui Sugar Co., Ltd.).6 The third analysis is of the acquisition of the stock of Myojo Foods Co., Ltd. (Myojo) by Nissin Foods Co., Ltd. (Nissin) for instant noodles (including pillow-type and cup-type noodles).7 These three mergers were selected because they are recent major mergers of consumer goods companies in Japan, making the collection of data relatively easy. Moreover, the analysis uses a better control group by focusing on search goods and by excluding experience goods. Section 2 outlines the Japanese flavored seasonings, sugar, and instant noodle mergers under examination. Section 3 explains the estimation model, and Section 4 presents the estimation results for the three ex-post merger evaluations that showed statistically significant price increases. Moreover, market sales values increased, but market share values decreased significantly. In addition, one of the merging parties was likely to reposition its production lines, indicating that mergers and acquisitions can be a strategic tool for product differentiation. Section 5 provides a summary and the conclusions of the study.

5 According

to the company website, a capital and business alliance was concluded between the two companies on 1 February 2007. Ajinomoto was to acquire 33.4% of the outstanding shares of Yamaki around March 2007 by an increase in capital through a subscription for new shares based on the allocation of new shares to a third party and a transfer of shares. http://www.ajinomoto.co. jp/press/2007_02_01.html. 6 New Mitsui Sugar, Taito, and Keiesu announced that they concluded a merger agreement with a merger date of 1 April 2005. http://www.mitsui-sugar.co.jp/investor/pdf/20040408_gappei.PDF. 7 Nissin acquired all of the shares of Myojo in December 2006. See the following website: http:// www.nissinfoods-holdings.co.jp/english/corp/history.html.

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11 Ex-post Examination of Mergers: Effects on Retail Prices

2 Outline of the Market (1) Japanese merger control Chapter IV of the Antimonopoly Act (Act on Prohibition of Private Monopolization and Maintenance of Fair Trade [Act No. 54 of 1947]) prohibits a merger of companies or other business combinations in cases in which such activity creates a business combination that may substantially restrain competition in any particular field of trade, or in which an unfair trade practice is used to create a business combination. Prohibited business combinations are subject to elimination measures pursuant to Article 17–2 of the Act. The framework of the merger control is the same as that of the US and the European Union; the characteristics are competition-oriented, systematically designed, and transparent (Arai 2004). Recently, Japanese mergers have been declining; however, some large mergers have occurred, such as mega steel mergers and two mergers of large hard disc drive businesses. Japanese merger guidelines establish the framework and procedures for the market definition on the basis of economic factors, such as small but significant nontransitory increases in price (Part-II 1 of the Guidelines to Application of the Antimonopoly Act Concerning Review of Business Combination (tentative translation) (JFTC 2004). Although some problems exist regarding market definition, we do not address them in this chapter; instead, we adopt the Japan Fair Trade Commission (JFTC’s) market definition for each product. (2) Household flavored seasoning The merger to be analyzed in the household flavored seasoning market was the plan by Ajinomoto to acquire the shares of Yamaki in March 2007.8 The subject transaction areas for the screening of this merger using the JFTC included (1) flavored seasonings and liquid flavored seasonings and (2) sauces for noodles, among others.9 The combined entity both manufactured and sold flavored seasonings; consequently, this merger was characterized as a horizontal combination. In addition, Ajinomoto sold Yamaki’s “monosodium glutamate” and “nucleic acid seasonings” (inosinic acid + guanylic acid sodium salt), which are used (as umami 8 Screening business combinations is governed by Article 10 of the Anti-Monopoly Act. This section

is based on the information posted on the JFTC website: http://www.jftc.go.jp/ma/jirei2/H18jirei1. html. 9 The product description is as follows (quoted from the previous JFTC website): “Flavor seasonings refer to the product that was produced by the needs seeking to easily create flavors close to natural soups without taking time to make soup stock and for which flavor materials such as dried bonito flakes are pulverized and flavors such as salt, etc., are mixed. Both flavor seasonings and liquid flavor seasonings are seasonings to make soup stock. Flavor seasonings are granules or powders, and therefore, turned into soups in the hot water, while liquid flavor seasonings are liquid so they can be used as liquid soup in unchanged form. Accordingly, in cooking foods, liquid flavor seasonings have higher workability than flavor seasonings but their cost per unit used is high. Sauces for noodles, etc., are liquid flavors produced by adding soy sauce and sweet cooking rice wine to materials used for flavor seasonings. They are used mainly for sauces for soba and udon noodles, as well as Japanese boiled foods and sautéed foods.”

2 Outline of the Market

153

seasonings and tasty seasonings) in the flavored seasonings and sauces for noodles and other items. Therefore, this combination was also characterized as a vertical merger. Therefore, when screening this merger, the discussion included both a horizontal and a vertical combination. As a result of the screening, the JFTC concluded that this merger would not substantially restrict competition in these transaction fields.10 Therefore, the commission concluded that the independent actions of the combined companies and/or the coordinated actions between the combined companies and their competitors would not restrict competition in the given field. In this market, the merged companies held the top market share of approximately 70%. Following this merger, the HHI rose to approximately 5200, for an increase of approximately 900 points. (3) Sugar Although New Mitsui Sugar, Taito, and Keiesu merged in April 2005, examples of JFTC major mergers do not refer to this transaction. The degree of sugar shipment concentration (CR5–CR10) has tended to decrease but is at a comparatively high level.11 In the analysis of this merger, New Mitsui Sugar, Taito, and Keiesu prepared price indexes for 90, 26, and 10 product items, respectively. (4) Instant noodles Regarding instant noodles, Nissin acquired the stock of Myojo in December 2006. The JFTC concluded that this merger would not substantially restrict competition in this particular transaction field.12 In the pillow-type instant noodle market, the combined companies held the largest market share of approximately 35%. Following this merger, the HHI amounts rose to approximately 2400, or an increase of approximately 500 points. In the cup-type instant noodle market, the combined companies 10 Specifically, in the field of trade, other than household flavored seasonings, Yamaki held only a small percentage of the market share, and the increase in its share attributable to business integration was minimal. Regarding the market definition, we do not focus on the details of the method; a particular field of trade denotes the scope for determining whether the effect of the business combination may be to restrain competition and is determined, in principle, in terms of substitutability for users, such as the product range that is the subject of a particular trade and the range of trading areas. Further, when necessary, substitutability for suppliers is also considered. 11 CR4, for the cumulative share ratio of the top four companies, is 75.8 (2003) and 62.3 (2008). See the following website: http://www.jftc.go.jp/katudo/ruiseki/ruisekidate1920.html. 16 K. Arai Downloaded by [Professor Koki Arai] at 22:38 24 July 2015 Regarding the purpose of this merger, the company announced the following in its briefing materials: “The best measure to respond to severe environment is to strengthen corporate competitiveness as a solid company which jointly uses a spoon brand, for example the establishment of an effective production structure on a nationwide scale through the enhancement of nationwide sales channels and unification of sales policies. We have concluded that this great integration of the Mitsui Group will lead to the creation of a true order and stability in the industry and, therefore, have decided on this merger.”. 12 Regarding product forms, the specific fields of trade for the screening of mergers by the JFTC included: (1) pillow-type instant noodles, (2) cup-type instant noodles, (3) cup-type soup with noodles, (4) chilled noodles, and (5) frozen noodles. The competitive conditions in markets related to the particular field of trade received consideration. In determining the substantial restraint of competition through both unilateral and coordinated conduct, the JFTC considered the merger from the perspective of various factors.

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Table 1 Descriptive statistics of household flavor seasoning Percent (%) P

Q

Ajinomoto Yamaki

Control

Hokkaido

Mean

119.8967

135.0541

0.0722

0.0510

0.0049

Tohoku

Maximum

3080

36396

1

1

1

Kitakanto

8.8

Minimum

0

0

0

0

0

Shutoken

14.4

Std. Dev.

187.2843

657.8055

0.2588

0.2200

0.0699

Hokuriku

Skewness

2.7741

14.9205

3.3054

4.0822

14.1621

Tokai

12.0

Kurtosis

17.5841

374.9959

11.9255

17.6645

201.5649

Kinki

12.2

35280

24912

2400

Tyugoku

12.6

488544

488544

488544

488544

Kyushu

13.0

Sum Observations 488544

7.8 12.6

6.6

Table 2 Descriptive statistics of sugar Percent (%) P

Q

Mitsui

Taito

Keiesu

Control Hokkaido

7.6

Mean

607.6337 325.2329

0.1214

0.0315

0.0046

0.0761

Tohoku

Maximum

7849

121418

1

1

1

1

Kitakanto 10.4

Minimum

0

0

0

0

0

0

Shutoken 14.6

Std. Dev.

566.6861 1887.6140 0.3266

0.1747

0.0674

0.2651

Hokuriku

Skewness

0.9297

16.2747

2.3184

5.3624

14.7113 3.1977

Tokai

12.1

Kurtosis

5.4818

454.1103

6.3749

29.7554 217.4212 11.2255 Kinki

10.2

11508

2988

432

7212

Tyugoku

12.2

94788

94788

94788

94788

94788

Kyushu

13.3

Sum Observations 94788

12.0

7.6

held the largest market share of approximately 60%, and the HHI was approximately 3500, representing an increase of 800 points.13 The descriptive statistics for the data are provided in Tables 1, 2 and 3.

3 Estimation Model The measurement model used in this chapter compares monthly changes in the retail prices of merging groups because the target period covers four years, and the years both before and after the date of the mergers are based on the model by Ashenfelter and Hosken (2010). The issue of concern regarding prices when estimating the effects of a merger is the method to control for factors other than those related to mergers that change depending on the time needed to evaluate an effect using quantitative 13 See

the JFTC’s website: http://www.jftc.go.jp/ma/jirei2/H18jirei2.html.

3 Estimation Model

155

Table 3 Descriptive statistics of instant noodles Percent (%) P

Q

Nissin

Myojo

Control

Hokkaido

Mean

162.0458

812.9972

0.235581

0.084301

0.043619

Tohoku

Maximum

3360

74158

1

1

1

Kitakanto 12.6

Minimum

18.15385

0

0

0

0

Shutoken

13.4

Std. Dev.

152.6307

2527.841

0.424363

0.277839

0.204246

Hokuriku

9.1

Skewness

7.234342

9.054219

1.246198

2.992386

4.468952

Tokai

9.4

Kurtosis

80.63372

127.1494

2.553009

9.954376

20.97153

Kinki

7.9

36818

13175

6817

Tyugoku

13.0

156286

156286

156286

156286

Kyushu

13.7

Sum Observations 156286

7.6 13.4

data, such as an inflation effect. We do not address merger endogeneity, which affects the potential for the market situation to induce a merger; instead, we focus on the merger effect.14 One method to control for these factors is to estimate a DID and focus on the changes in both the subject and the control group.15 The key hypothesis being tested is whether an accepted merger established market power through an ex-post merger evaluation. To test this hypothesis, we examine after a merger (i) whether the merging party increases their prices and (ii) whether the merging party obtains additional market sales and/or market share.16 We used the following regression to make estimations: pi, j,t = αi, j +

11 

    z k ki, j + β11 postmergeri, j,t + β12 postmergeri, j,t

k=01

∗ (Merging Party Productt ) + εi, j,t ,

(1)

where i refers to a product number and j and t represent a regional number and a time period number, respectively. αi, j represents the effect of a product, a specified product in the region, and a period. ki,j represents an index (dummy variable) of 1 14 We check the parallel trends between the targeted party and control group in subsequent figures. Both the price and the output regressions are reduced forms of a potentially complex demand system, cost function, and equilibrium specification. A homothetic AID’s model would lead to log price and revenue share as the appropriate specifications for price and quantity in these reduced forms, and other demand systems would lead to other specifications. 15 As pointed out by Hosken et al. (2002), price changes for weekly data may not be evaluated appropriately given special sales at retail stores or for other reasons. Considering this issue, in this chapter, we defined the price calculation period as one month and the price of certain goods in a certain month as a monthly average unit price. The monthly average unit price is obtained by dividing the total sales amount by the total sales quantity of the product. 16 The standard and formal theory of a horizontal merger in a Cournot oligopoly indicates that any merger not creating a synergy effect increases price (Farrell and Shapiro 2004).

156

11 Ex-post Examination of Mergers: Effects on Retail Prices

in the relevant month and 0 in other months. Postmergeri,j,t indicates an index of 0 before the merger and 1 after the merger. The Merging Party Producti represents an index of 1 for a producer’s product and 0 for others. εi,j,t represents an error term. The dependent variable price pi,j,t represents a price index (a proportion of price) weighted by sales. The fixed-effect term (αi,j ) considers a product that remains at a price level that is permanently different in a different region. Therefore, a specific price change in a certain month is controlled by an effect in each month (zk). The coefficient β11 provides a price change trend of each product after the merger, and the coefficient β12 provides the price changes of each product of the combined company after controlling for its price change trend. The key terms of this equation are β11 * postmerger and β12 * postmerger * Merging Party. The former term describes the overall market effect after the merger and the latter term picks up the specific effect of the merging party after the merger. Using the following regression, we estimated the trends in sales (sales amount) both before and after the merger: Ti, j,t = αi, j + αi, j +

12 

    m k ki, j,t + β21 postmergeri, j,t + β22 postmergeri, j,t

k=2

∗ (Merging Party Producti ) + ζi, j,t .

(2)

The explanatory variables αi,j , ki,j,t , postmergeri,j,t , and Merging Party Producti are the same as those in estimate (1). ζi,j,t represents an error term. The coefficient β21 provides a trend in the change in sales of each product after the merger and the coefficient β22 provides price changes for each product of the combined company after controlling for price change trends. The dependent variable price pi,j,t indicates a sales index (a proportion of sales) weighted by sales. Using the following regression, we estimated the changes caused by a merger in the amount-based market share of each company:     si, j,t = αi, j + β31 postmergeri, j,t + β32 postmergeri, j,t ∗ (Merging Party Producti ) + η3i, j,t .

(3)

The explanatory variables αi,j , postmergeri,j,t , and Merging Party Producti are the same as those in estimate (1). ηi,j,t represents an error term. Because the market share of each company is divided by the total monthly volume, a specific effect in a certain month is considered to be removed in advance. Therefore, the panel estimate does not include a monthly dummy in the model. The coefficient β31 provides a trend in the share changes of each product after the merger and the coefficient β32 provides price changes in each product of the combined company after controlling for the trend in these products’ price changes. The dependent variable price si,j,t indicates the market share.

3 Estimation Model

157

By extracting the development of the combined company before and after the merger, both estimates (2) and (3) allow us to analyze the development of sales and market share of the combined companies throughout the entire market period under analysis. In this chapter, we assumed that the mergers affect all markets at a similar time. (Although a lag between the merger and its purported effect may be considered, some goods experience a lag before the merger and some goods experience a lag after the merger; therefore, we assume that the lag is, on average, cancelled.) To emphasize the effect, we allowed ourselves to make this assumption. The data utilized are the total point-of-sales data of more than 600 large major stores in nine regions (Hokkaido, Tohoku, North Kanto [KITAKANTO], the Tokyo metropolitan area [SHUTOKEN], Hokuriku, Tokai, Kinki, Tyugoku, and Kyusyu; these stores are used for the representative samples in the regions). The data consist of weekly sales and quantities, and integrating weekly sales into monthly sales provided an estimate. Household flavored seasonings include more than 3000 items, out of which Ajinomoto and Yamaki had 106 and 131 items, respectively, from the beginning of January 2006 to the end of December 2009 for each Japanese Article Number (JAN) code.17 The data for sugar are similar to the list of 850 items from January 2004 to December 2007. For instant noodles, we integrated the pillow-type instant noodles and the cup-type instant noodles and analyzed the monthly data of 2200 items from January 2005 to December 2008 for each JAN code. Several new product entries to the market Asia-Pacific Journal of Accounting & Economics 7 Downloaded by [Professor Koki Arai] at 22:38 24 July 2015 and exits from the market occurred. We targeted last year’s goods in the market, enabling new entry goods and regular products to be analyzed. To identify the price effect of a merger (the treatment effect), a good forecast of how prices would have changed but for the merger is critical. In a DID model, the control group provides an estimate of how prices or output would have evolved but for the mergers. In principle, the control group should not contain products that are substitutes for the merging firms’ products (see Deneckere and Davidson 1985). On the basis of this principle, Ashenfelter and Hosken (2010) used private-label goods as a control group, and this chapter also used private-label goods as the control group. However, one of the problems is that the timing of mergers is endogenously determined; we checked the parallel trends between the targeted party and the control group in subsequent figures.

17 Data were purchased from a private data provision company (KSP and Ryutu Keizai Kenkyu-jo).

158

11 Ex-post Examination of Mergers: Effects on Retail Prices

4 Estimation results (1) Household flavored seasonings We elucidated the estimate methods on the basis of data for household flavored seasonings relating to this merger as follows. Table 4 shows the price level estimate of Ajinomoto and Yamaki products using the fixed-effect model (appropriately based on the Hausman test). Because the products aggregate observations of individual panel estimates, the number of observations is proportional to the number of items. However, this proportion does not reflect the difference between the sales of goods. Therefore, we estimated the panel during the observation period. Furthermore, we use a monthly dummy and a regional dummy and show the results in separate columns. Table 4. Panel estimation of ex-post mergers in household flavor seasoning. The dependent variable (Pijt) is the average price of the month from January 2006 to December 2009, goods by goods, area-by-area. The variables z01–z11 are month dummies that refer to December and the post-merger dummy takes the value of 1 after the merger. The cross-term variable is an estimator of the difference-in-difference effect from the merger on retail prices. The dependent variable (Pijt) is the average price of the month from January 2006 to December 2009, goods-by-goods, area-by-area. The variables z01–z11 are month dummies that refer to December and the post-merger dummy takes the value of 1 after the merger. The cross-term variable is an estimator of the difference-in-difference effect from the merger on retail prices.

Table 4 Panel estimation of ex-post mergers in household flavor seasoning Dependent variable: price (in yen) Method: least squares

n = 488544 Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Postmerger

−0.9218 (1.1276)

−1.4206** (2.4190)

−0.9218 (1.1276)

−1.4206 (2.4190)

Crossterm

39.8455*** (1.4618)

39.8244*** (1.4427)

Ajinomoto

72.8464*** (1.5055)

72.6214*** (1.5009)

Yamaki

−6.8899 (2.1626)

−6.6262 (2.1386)

Control

−32.9728*** (8.5657)

−39.7187*** (8.3502)

−32.9728*** (8.5657)

−39.6776*** (8.3508)

C

122.4664*** (1.2628)

110.1722*** (1.6383)

122.4664*** (1.2628)

110.0558*** (1.6324)

Other variables: omitted

Month dummy

Area dummy

Month dummy

Area dummy

4 Estimation results

159

Note: The upper values in the cell are estimated coefficients and the lower values in the parenthesis are standard errors. *** Significant at the 1% level. ** Significant at the 5% level. * Significant at the 10% level. The symbols have the same meaning as those in the following tables. Table 4 indicates that the post-merger coefficient is negative, that of the cross-term is positive and statistically significant, and that of the control variable is negative and statistically significant. After the merger of Ajinomoto and Yamaki in March 2007, the trend in the market price of the goods of each company has no clear direction; however, the price of the goods of the merging party increased, whereas that of private label goods decreased. This outcome supports the short-run pricing increase effect found by Focarelli and Panetta (2003). The economic interpretation of the magnitude of the price effect is that the change in the average price of the merging party is 32.5% when compared with the previous market price. This value is significant compared with the value for private-label goods of −26.9%. The movement in the price level for the following brand-by-brand products also confirms these results. Figure 1 illustrates the estimate of the price index of Ajinomoto products compared with all other products. Figure 2 illustrates the estimate of the price index of Yamaki products. The coefficient of Ajinomoto times the post-merger is positive and statistically significant, whereas that of Yamaki times the post-merger is negative and statistically significant. Ajinomoto increased its price level to higher than the price level of all products, whereas Yamaki decreased its price level to lower than that of all products. One possibility implied by these findings is that the merging parties reviewed the product positioning and differentiated their products to avoid cannibalization and to generate new consumers (see Gandhi et al. 2008; Sweeting 2010). In particular, among the differentiated products, the less expensive product (Yamaki) was obviously less expensive; in contrast, the more expensive product (Ajinomoto) was obviously more expensive. This merger may cause the parties to obtain more consumer surplus (because post-merger sales are positive) rather than—as was previously done—by extending the differentiated product lineup. We checked our findings against an alternative price measure, such as simple rowlevel price data and not weighted price data, and then we obtained the negative cross-term coefficient. Therefore, obtaining the sales price data generated by the raw level price times the market sales quantities is an important process in this chapter. The black line represents the overall Laspeyres price index of household flavor seasoning, and the gray line represents the Laspeyres price index of products provided by Ajinomoto (the left axis scale). Both begin in the January 2006 base period. The bar graph describes the trend in market share in the monthly sales of Ajinomoto (right axis scale). The black vertical line indicates the timing followed in the making of the merger. Figure 1. Laspeyres price index and monthly share of sales (Ajinomoto). Notes: The black line represents the overall Laspeyres price index of household flavor seasoning, and the gray line represents the Laspeyres price index of products provided

11 Ex-post Examination of Mergers: Effects on Retail Prices

Monthly sales share 0

.9

.1

.2

1

Laspeyres index

1.1

160

2007m3

month

Monthly sales share 0

.9

.1

.2

1

Laspeyres index

1.1

Fig. 1 Laspeyres price index and monthly share of sales (Ajinomoto)

2007m3

month

Fig. 2 Laspeyres price index and monthly share of sales (Yamaki)

4 Estimation results

161

by Ajinomoto (the left axis scale). Both begin in the January 2006 base period. The bar graph describes the trend in market share in the monthly sales of Ajinomoto (right axis scale). The black vertical line indicates the timing followed in the making of the merger. Figure 1 illustrates a comparison of price indexes between all products and Ajinomoto products. Figure 2 illustrates a comparison of price indexes between all products and Yamaki products. These figures illustrate the trends in the total price weighted by the share of the price index of each product to the company’s total sales for each product in the base month.18 As Fig. 1 indicates, the relative price level of Ajinomoto products in the base time declined compared with all products, or was maintained shortly after the merger but increased several months after the merger. Thereafter, the price level also remained higher than 1 (relatively higher). The relative price level of Yamaki products began to decline shortly after the merger and, thereafter, remained lower than 1 (relatively lower). The strategic behavior of the merging parties caused this gap in timing between Ajinomoto’s price increase and Yamaki’s price decrease. The result is consistent with the conclusion in Sweeting (2010), which analyzed the merger of two radio stations. He explained that, in particular, common owners differentiate their stations from each other and make them more like stations owned by their competitors.19 Our case study found that one of the merger partners (Ajinomoto) increased its price, whereas the other (Yamaki) decreased its price, suggesting a change in the product-positioning strategy. This change implies that some consumers may benefit and others may be hurt by the strategy. The black line represents the overall Laspeyres price index of household flavor seasoning, and the gray line represents the Laspeyres price index of the products provided by Yamaki (the left axis scale). Both begin in the January 2006 base period. The bar graph describes the trend in the market share of the monthly sales of Yamaki (right axis scale). The graph legends are the same as those in Fig. 1. Figure 2. Laspeyres price index and monthly share of sales (Yamaki). Notes: The black line represents the overall Laspeyres price index of household flavor seasoning, and the gray line represents the Laspeyres price index of the products provided by Yamaki (the left axis scale). Both begin in the January 2006 base period. The bar graph describes the trend in the market share of the monthly sales of Yamaki (right axis scale). The graph legends are the same as those in Fig. 1. The trends in the retail price levels of the merging party were previously indicated. In addition, Ashenfelter and Hosken (2010) assessed the implications on the price level through an ex-post examination. In this chapter, in addition to an examination of this price level, we used the same method to evaluate the trends in market sales and market share of the merging party. For example, using this method, we indicated 18 We prepared the following price index. For example, first, for the monthly price index of a certain company (for example, Ajinomoto), the weekly average prices are transformed into monthly average prices; subsequently, the price of the base month for each item and the price of the comparison month are indexed. These indexes represent those of the month. Then, at approximately the end of the year, the base month is revised each January of the following year. 19 Song (2012) provided the post-merger repositioning evidence for the personal computer market.

162

11 Ex-post Examination of Mergers: Effects on Retail Prices

Table 5 Panel estimation of sales and share of sales on ex-post mergers in household flavor seasoning Dependent variable: market sales (in thousand yen) Method: least squares

Market share

n = 488544 Coefficient (Std. Error)

Coefficient (Std. Error)

(Std. Error)

Postmerger

−3.2487*** (1.0988)

−3.2423*** (1.6210)

0.00075*** (0.00001)

Crossterm

39.5848***

39.8267***

−0.00013*** (0.00001)

Control

−7.3714*** (3.3407)

−9.7418*** (3.3312)

0.00101*** (0.00003)

C

35.0739*** (2.1523)

21.7487*** (1.0034)

−0.00022*** (0.00013)

Other variables: omitted

Month dummy

Area dummy

–

(1.2713)

(1.2702)

whether or not the combined companies have the market power to increase their sales by increasing the retail price level and the change in market share from the merger.20 Table 5 provides the estimate results. Table 5 indicates that the post-merger coefficient of market sales is negative and statistically significant, that of the cross-term is positive and statistically significant, and that of the control variable is negative. Thus, we find that the market sales of the merging parties increased, in contrast to those of the private label, which did not increase. Furthermore, when assessing the change in market share, the market share coefficient of each good is positive and statistically significant, that of the cross-term is negative and statistically significant, and that of the control variable is positive and statistically significant. Accordingly, in a situation in which the number of brands is constant during the years in question, we point out that the share of the merging parties decreased after the merger. That is, the merger leads to an increase in the market sales of goods of the merging party rather than that of the private label and a decrease in the market share of the merging party rather than that of the private label. Although the price of the product of the merging party increased, its quantity decreased. This finding is reasonable from the viewpoint of economics, such as when considering the consequent of Salant et al. (1983). (2) Sugar Table 6 indicates the results of these panel estimates.21 A fixed-effect model is adopted that is also based on the Hausman test. The post-merger coefficient is negative and statistically significant, that of the cross-term does not indicate a clear direction, and that of the control variable is positive and statistically significant. In-depth com20 We use the White standard errors and covariance treatment for the heteroskedasticity problem. The serial correlation of these estimations was not a serious problem. See the Durbin–Watson statistics in Table 4. 21 As noted, we estimated the weighted sales values for household flavored seasoning.

4 Estimation results

163

Table 6 Panel estimation of ex-post mergers in sugar Dependent variable: price (in yen) Method: least squares

n = 94788 Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Postmerger

−167.1656*** (30.3946)

−148.7798*** (38.4277)

−167.1656*** (30.3950)

−148.8902*** (38.4433)

Crossterm

−2.3170 (6.6934)

2.1946 (6.5552)

Mitsui

72.6813*** (6.2396)

74.7762*** (6.1557)

Taito

−241.4477*** (35.9872)

−236.9306*** (35.9775)

Keiesu

−503.3534*** (30.9710)

−434.7522*** (31.3263)

Control

55.0636*** (13.9867)

63.9319*** (13.9972)

55.0636*** (13.9868)

64.1613*** (14.0276)

C

734.3771*** (27.9048)

642.4531*** (37.3013)

734.3771*** (27.9051)

648.1205*** (37.4203)

Other variables: omitted

Month dummy

Area dummy

Month dummy

Area dummy

Table 7 Panel estimation on sales and share of sales on ex-post mergers in sugar Dependent variable: market sales (in thousand yen) Method: least squares

Market share

n = 94788 Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Postmerger

−22.8408*** (3.1125)

−20.2250*** (4.6654)

0.0049*** (0.0001)

Crossterm

22.3002*** (1.0654)

23.5910*** (1.0678)

−0.0019*** (0.0001)

Control

7.0418***

6.4505***

0.0019*** (0.0002)

C

76.4898*** (3.5481)

47.7073*** (4.2099)

0.0015 (0.0002)

Other variables: omitted

Month dummy omitted

Area dummy

–

(1.3090)

(1.3170)

pany by company analysis shows that the coefficient of Mitsui (New Mitsui Sugar) is positive and statistically significant, whereas those of Taito and Keiesu are negative and statistically significant (Table 6). After several months to within approximately one year of the merger, the prices of New Mitsui Sugar’s products increased more than did the prices of all other products. In contrast, the prices of Taito’s and Keiesu’s products decreased. Table 7 indicates the trends in market sales and market share.

164

11 Ex-post Examination of Mergers: Effects on Retail Prices

Table 7 indicates that the coefficient of post-merger market sales is negative and statistically significant, that of the cross-term is positive and statistically significant, and that of the control variable is positive and statistically significant (but smaller than that of the cross-term). Regarding changes in market share, the post-merger coefficient is positive and statistically significant, that of the cross-term is negative and statistically significant, and that of the control variable is positive and statistically significant. According to the results, the post-merger market sales of each product decreased in general. On the one hand, the market sales of the merging party increased, whereas on the other hand, the market sales of the private label increased to a lesser degree than that of the merging party after the merger. The signs of the coefficient for market share are the same as those of flavored seasoning, which are negative for the merging party’s products and positive for private-label products. (3) Instant noodles Table 8 indicates the results of these panel estimates.22 A fixed-effect model is adopted that is also based on the Hausman test. The post-merger coefficient is positive and statistically insignificant, that of the cross-term is positive and statistically significant, and that of the control variable is negative and statistically insignificant. Regarding the trends in the price index of all instant noodle products and the price of Nissin and Myojo, after several months and up to approximately one year after the merger, Nissin product prices increased more than the prices of all other products.

Table 8 Panel estimation on ex-post mergers in instant noodles Dependent variable: price (in yen) Method: least squares

n = 252540 Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Postmerger

0.9977 (1.8221)

1.3280 (1.9487)

1.0095 (1.8209)

1.3280 (1.9482)

Crossterm

16.1197*** (1.1118)

16.5138*** (1.1237)

Nissin

25.0664*** (1.4967)

25.1765*** (1.5168)

Myojo

−6.1784*** (1.4989)

−5.1022*** (1.4161)

Control

−1.6665 (2.0800)

−3.4416 (2.1344)

−1.6629 (2.0810)

−3.5229 (2.1376)

C

163.7968 (5.0542)

152.4892*** (1.1340)

163.6500*** (5.1235)

152.3560*** (1.1245)

Other variables: omitted

Month dummy

Area dummy

Month dummy

Area dummy

22 As

with household flavored seasoning, we estimated the weighted sales values.

4 Estimation results

165

Table 9 Panel estimation on sales and share of sales on ex-post mergers in instant noodles Dependent variable: market sales (in thousand yen) Method: least squares

Market share

n = 252540 Coefficient (Std. Error)

Coefficient (Std. Error)

Coefficient (Std. Error)

Postmerger

−66.2595*** (3.0484)

−64.6491*** (3.9907)

−0.0018*** (0.0000)

Crossterm

31.8186*** (2.9673)

32.3769*** (3.0076)

0.0006*** (0.0000)

Control

−7.2977*** (2.4277)

−7.3958*** (2.4376)

−0.0002*** (0.0001)

C

127.7454***

101.8849***

0.0026*** (0.0000)

(3.6441)

(13.6948) Other variables: omitted

Month dummy

Area dummy

–

In contrast, Myojo prices decreased. Table 9 indicates the trends in market sales and market share. According to the market sales table, the post-merger coefficient is negative and statistically significant, that of the cross-term is positive and statistically significant, and that of the control variable is negative and statistically significant. In the market shares table, the post-merger coefficient is negative and statistically significant, that of the cross-term is positive and statistically significant, and that of the control variable is negative and statistically significant. The results show that the market sales of each product after the merger decreased in general. On the one hand, the market sales of the merging party increased and, on the other hand, the market sales of the private label decreased after the merger. The signs of the coefficient for market share are the same as those of flavored seasoning and sugar, which are negative for the merging party’s products and positive for the private-label products.

5 Conclusion The estimation results include the following facts. (i) In the flavored seasoning and instant noodles markets, the merging party’s prices after the merger increased from their pre-merger level by 14–33%, and the increase was higher than the increase for private-label goods and for the retail price of each market good. However, in the sugar market, the merging party’s prices after the merger did not show a clear direction; the prices of private label goods increased and those of each of market good decreased. (ii) The details of each merger put the spotlight on the product-repositioning strategy. This fact, also pointed out by Ashenfelter and Hosken (2010) in their oil example, exemplified all three mergers: household flavored seasonings, sugar, and instant noodles. These merger analyses demonstrated that the merger

166

11 Ex-post Examination of Mergers: Effects on Retail Prices

increased the price of the corporate brand of one of the merging parties, but did not change—or somewhat decreased—the price of the other combined company. In particular, an increase was shown in the price of the brand of the company with a large market share, which is generally deemed to be influential, whereas the tendency existed to maintain the price of the other company’s products.23 (iii) The merger increased the market sales of the merging party in all three markets and resulted in a decrease in sales of the private label in the flavored seasoning and instant noodle markets (except for the sugar market private label). In contrast, the merger decreased the market share of the merging party in the flavored seasoning and sugar markets, and increased that of the private label in the flavored seasoning and sugar markets. We considered that the study by Ashenfelter and Hosken (2010) focused primarily on price trends, whereas our results reflect the fact that an examination of market sales and market share before and after the merger allowed us to comprehend the effect on the entire corporate strategy in the wake of the merger and, thus, gain an additional understanding of the other factors affected by the merger. The central message of this chapter stated that three ex-post-merger evaluations show statistically significant price increases and that the change in market power in each case is, thus, analyzed in terms of changes in market sales and market share. The analysis indicated that the market sales values increased but the market share values decreased significantly. Although several studies showed the market price situation before and after a merger, this chapter’s major contribution is that it is the first to analyze the appropriateness of merger control in terms of market sales and market share. The other contribution of this chapter is that it sheds light on repositioning production lines, indicating that a merger and an acquisition are strategic tools for product differentiation. This chapter also assesses merger control. As we know, taking a measure from randomized controlled trials in the area of merger control is difficult; therefore, an ex-post evaluation is critical in antitrust enforcement. This chapter considers not only price increases but also market share and market sales, which act as indicators of market power in business combinations. Examples of this type of analysis include (i) the study by Silvia and Taylor (2013), which indicated that FTC enforcement is competitively neutral in terms of price increases; and (ii) Weinberg, Ashenfelter, and Hosken (2013), who addressed market share in their analysis of a large merger of manufacturers. The present study enriches the merger-control literature by considering key new points (DID in price, market share, and market sales). Analyzing the situation before and after a merger cannot account for the accomplishment of increasing efficiency. Merger endogeneity is a significant issue for identifying the assumption of estimation. Although we checked this issue in this chapter using the market trend, we must recognize that the issue of efficiency in the long run is not considered. Another caveat is that this chapter was designed to 23 A need is suggested to exist for merger control to examine the effects caused by a merger on product composition and positioning because some consumers may benefit but others may be hurt by the merger.

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analyze retail prices, which are not the trading prices of producers; therefore, the analysis may reflect the price strategies of wholesalers and retailers. Although such effects are considered to have been randomized or averaged through a collection of weekly price information from many large-scale retailers across Japan, the process should be noted as not handling direct trading data. If a merger indicates that market share may decline, why do companies attempt to combine their businesses? The reason may be the expectation that efficiency will be enhanced, as cited in press releases on mergers in the area of sugar. In an expost examination, considering in one way or another the enhancement of efficiency through a merger and seeking to develop a measure to understand quantitatively the effect on public welfare provided by a merger may be significant challenges. By including this concept and considering the availability of the data, this chapter focuses on the analysis of three mergers of consumer goods manufacturers. In the future, expanding the analysis to the fields of consumer durable goods, intermediate goods, capital goods, and so on is desirable.

References Angrist JD, Pischke JS (2010) The credibility revolution in empirical economics: how better research design is taking the con out of econometrics. J Econ Perspect 24(2):3–30 Arai K (2004) An airline merger in Japan: a case study revealing principles of Japanese merger control. J Ind Compet Trade 4(3):207–222 Ashenfelter O, Hosken D (2010) The effect of mergers on consumer prices: evidence from five mergers on the enforcement margin. J Law Econ 53(3):417–466 Ashenfelter O, Hosken D, Weinberg M (2015) Efficiencies brewed: pricing and consolidation in the US beer industry. RAND J Econ 46(2):328–361 Ashton J (2012) Do depositors benefit from bank mergers? An examination of the UK deposit market. Int J Econ Bus 19(1):1–23 Coate MB, Heimert AJ (2009) Merger efficiencies at the federal trade commission 1997–2007. Federal Trade Commission, Bureau of Economics, Washington, DC Deneckere R, Davidson C (1985) Incentives to form coalitions with Bertrand competition. RAND J Econ 16:473–486 Duso T, Aguzzoni L, Argentesi E, Ciari L, Tognoni M (2013) Ex-post merger evaluation in the UK retail market for books, Beitrage Zur Jahrestagung Des Vereins Fur Socialpolitik 2013: Wettbewerbspolitik Und Regulierung in Einer Globalen Wirtschaftsordnung – Session: Mergers and Competition Policy, No. B13–V12. http://hdl.handle.net/10419/80025. Accessed 25 Sept 2013 Farrell J, Shapiro C (2004) Horizontal mergers: an equilibrium analysis. Am Econ Rev 80:107–126 Focarelli D, Panetta F (2003) Are mergers beneficial to consumers? Evidence from the market for bank deposits. Am Econ Rev 93:1152–1172 Fukamachi M, Takahashi Y, Makino M (2003) Economic analysis on efficiency of merger and impact on market, CR 02–03. Competition Policy Research Center, Tokyo Gandhi A, Froeb L, Tschantz S, Werden G (2008) Post-merger product repositioning. J Ind Econ 56(1):49–67 Hastings JS (2004) Vertical relationships and competition in retail gasoline markets: empirical evidence from contract changes in Southern California. Am Econ Rev 94(1):317–328 Hastings J, Gilbert R (2005) Market power, vertical integration and the wholesale price of gasoline. J Ind Econ 53(4):469–492

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Hosken D, O’Brien D, Scheffman D, Vita M (2002) Demand system estimation and its application to horizontal merger analysis. FTC Working Paper. Washington, D.C. Hosken D, Olson LM, Smith LK (2012) Do retail mergers affect competition? Evidence from grocery retailing. FTC Working Paper, 313. https://www.ftc.gov/sites/default/files/attachments/ economics-best-practices/wp246.pdf. Accessed 16 July 2015 Izumida S, Ishigaki H, Kimura Y, Igarashi T (2006) Economic analysis on product differentiation and merger, CR 05–06. Competition Policy Research Center, Tokyo JFTC (Japan Fair Trade Commission) (2004) Guidelines to application of the antimonopoly act concerning review of business combination. http://www.jftc.go.jp/en/legislation_gls/imonopoly_ guidelines.files/110713.2.pdf. Accessed 12 July 2015 Kovacic WE (2009) Assessing the quality of competition policy: the case of horizontal merger enforcement. Compet Policy Int 5:128–150 Leamer E (1983) Let’s take the con out of econometrics. Am Econ Rev 73:31–43 LEAR (2006) Ex-post review of merger control decisions, a study for the European Commission prepared by Lear—Laboratorio Di Economia, Antitrust, Regolamentazione. http://ec.europa.eu/ competition/mergers/studies_reports/lear.pdf Nevo A, Whinston MD (2010) Taking the dogma out of econometrics: structural modeling and credible inference. J Econ Perspect 24:69–82 Salant SW, Switzer S, Reynolds RJ (1983) Losses from horizontal merger: the effects of an exogenous change in industry structure on Cournot-Nash equilibrium. Q J Econ 98(2):185–199 Silvia L, Taylor C (2013) Petroleum mergers and competition in the Northeast United States. Int J Econ Bus 20(1):97–124 Song M (2012) A hybrid discrete choice model of differentiated product demand with an application to personal computers. ftp://carnegie-rochester.rochester.edu/fac/MSONG/papers/Song-hybrid. pdf. Accessed 14 April 2013 Sweeting A (2010) The effects of mergers on product positioning: evidence from the music radio industry. RAND J Econ 41(2):372–397 Weinberg M, Ashenfelter O, Hosken D (2013) The price effects of a large merger of manufacturers: a case study of Maytag–Whirlpool. Am Econ J Econ Policy 5(1):239–261 Winston C, Maheshri V, Dennis SM (2011) Long-run effects of mergers: the case of U.S. Western Railroads. J Law Econ 54(2):275–304

Part V

Enforcement and Organization

1. Outline of the Enforcement The Fair Trade Commission has been established as an administrative body operating the Antimonopoly Act (Article 27). The Japan Fair Trade Commission (JFTC), which belongs to the jurisdiction of the Prime Minister of the Cabinet, is positioned as a foreign office of the Cabinet Office in terms of administrative organization and is an independent administrative committee (administrative body). As the reason for being the Administrative Committee, the Antimonopoly Act defines the basic rules of business activities of business operators in a free economy society; therefore, it is neutral without being influenced by politics in its operation. This is because it must be managed fairly by, in addition, in order to be applied to constantly changing economic events, the Antimonopoly Act requires abundant legal knowledge and economic knowledge for its operation, and there are also cases where a high degree of expertise is required. For this reason, it has been stipulated that the JFTC carries out its duties independently without being commanded and overseen by others regarding the operation of the Antimonopoly Act (Article 28). The chairman and the four members are appointed by the Prime Minister with the consent of the Diet for a term of five years (Article 30). Information that the JFTC initiates examination, “investigation,” (which calls for investigation of specific cases that may cause a violation) about an activity that violates the Antimonopoly Act is as follows: When the JFTC gets following: • Report from the general public (called declaration. Article 45) • Authority detection of the Fair Trade Commission (if the Fair Trade Commission finds a violation by itself) • Use of leniency system • Request for investigation from the Director of Small and Medium Enterprise Agency

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These pieces of information are called the beginning of the case (a clue to a violation). It is the report from the general public that plays an especially important role in this beginning. If anyone thinks that there is a fact that violates the Antimonopoly Act, anyone can report it to the JFTC and ask them to take appropriate action. This may be a victim of a violation or a consumer, but anyone who has found a violation. However, this provision does not give the reporter the right to request specific measures. Ebisu Food and Enterprise Association Case (1972) (Supreme Court, Showa 47, November 16. Showa 43 (Gyo-Tu) No. 3, MinShu 26 Vol. 9, p. 1573). “Article 45 (1) is only a provision on the start prompting the approving person’s Fair Trade Commission’s examination procedure to be launched, requiring the Reporter to take appropriate measures for the Fair Trade Commission.” It is not understood that it has given the specific claim right to. In 2019, introduce a mechanism to increase the incentive to cooperate with the investigation of the JFTC, expand the area to conduct efficient and effective factual elucidation and case processing by the cooperation of the business operator and the JFTC, and the economy becomes complicated to revise the Antimonopoly Act to impose appropriate penalties depending on the environment. The details will be handed over to the explanation of the revised law, but this is going to abolish the calculation rate by industry, or set the calculation period to 10 years, and in addition to the reduction in surcharges by reduction application. In addition to introducing a mechanism (the investigation cooperation subtraction system) in which the JFTC reduces the amount of the surcharges when submitting materials, etc. In order to respond to the client’s secrecy privilege, make the new surcharge deduction system work more effectively and substantially protect the secret about the legal opinion, etc. pertaining to the consultation with an external lawyer, and secure the appropriate procedure would be going to be included. 2. Private Complaint (1) Damage Compensation For victims of business operators who have made unfair trade restrictions (cartels), private monopolies, unfair trade methods, etc. that are prohibited under the Antimonopoly Act and business organizations that have prohibited business of business organizations. One can claim damages. The victims include not only business owners but also general consumers. The claim for damages may be sought based on ordinary tort liability under Article 709 of the Civil Code, but in the case of the Antimonopoly Act, the enterprise and the association of enterprises did not knowingly or become negligent and cannot escape the liability for damages (No negligence liability) (Article 25). This system can be regarded as an attempt to restore the order of competition and deter deterrence by ensuring that business damage caused by an antitrust violation is properly and promptly recovered.

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However, it is said that this damages claim can only be filed after the decision of the Fair Trade Commission has been decided, and this right of claims for damages shall be three years after the decision of the decision has been made. It is decided to disappear by Article 26 (Article 26). (2) Injunction Request Consumers, businesses, etc. who may receive significant damage or are likely to receive significant damage due to antitrust violation (due to unfair dealing methods) may file a lawsuit in the court and request for suspension of the violation (Article 24). When an injunction suit is filed, the court may notify the JFTC to that effect, and ask the JFTC for its application, etc. regarding the application of the antimonopoly law in that case. In addition, the JTC, with the permission of the court, can give an opinion to the court on the application of the antitrust law, etc. in the case (Article 83-3). In addition to filing a petition for an injunction in the district court of the place of damage, etc. in accordance with the principles of the Civil Procedure Law and also in the district courts of the high courts having jurisdiction over these district courts and Tokyo district courts. And, if the courts deem it appropriate, they may transfer cases to these courts (Article 84-2, 87-2). 3. Organization Analysis The next chapter examines the factors that affect the administrative performance of competition authorities, using a legitimacy framework as well as the authority’s resources or political effects. It applies persuasion theory to analyze the legitimacy framework and ranks each element of concern based on the elaboration likelihood approach. Taking the enforcement of the Antimonopoly Act by the Japan Fair Trade Commission as an example of specific analysis, a regression analysis is conducted on some of the elements that influence enforcement. The results show that resources and reflection have a significant influence on the number of legal actions and that one factor of legitimacy—results—influences them, while other factors of legitimacy, such as recognition and professionalism, have weaker but acceptable relevance. This approach is extended to the Antitrust Division of the US Department of Justice.

Chapter 12

Administrative Performance and Legitimacy: An Elaboration Likelihood Approach to Competition Authorities in Japan and the United States

1 Introduction What determines the number of legal actions taken by competition authorities in Japan and the United States? The administrative performance of government agencies has been analyzed from a wide variety of perspectives. The present article uses a framework of legitimacy as well as the authority’s resources or political effects to examine the factors that affect the administrative performance of a competition authority. It analyzes the legitimacy framework using persuasion theory from social psychology and ranks each element of concern and nonconcern based on the elaboration likelihood approach. On this basis, the discussion that follows examines enforcement of the Antimonopoly Act by the Japan Fair Trade Commission, the competition authority, and conducts a regression analysis using variables that influence this enforcement. The same approach is then extended to the Antitrust Division of the U.S. Department of Justice. More specifically, the discussion explores the relationship between the legitimacy of the Fair Trade Commission and the Justice Department as competition authorities and their enforcement of the laws. Analyzing competition authorities is appropriate because they are charged with specific administrative goals and demonstrably achieve these goals by means of measures that are legal under the relevant competition laws, such as Japan’s Antimonopoly Act. The results of the empirical analysis show that resources (personnel) and reflections (political effects) have a strong influence on the number of legal actions engaged in by an authority, and that one factor of legitimacy, achievement of results (inflation control), is influential, while other factors of legitimacy, such as recognition (newspaper articles) and professionalism (professional articles), have a smaller effect. Each factor is related to the results of enforcing the law. This Chapter is based on Koki Arai (2012) “Administrative Performance and Legitimacy: An Elaboration Likelihood Approach to Competition Authorities in Japan and the United States.” Public Performance & Management Review, 36(1): 54–78. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_12

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This chapter suggests that “legitimacy” is the key concept connecting the various factors of law enforcement in administrative agencies, in addition to the authorities’ resources or political effects. The main concept is simply that improving an administrative agency’s legitimacy leads to effective administration. Using the theory of persuasion, certain elements are examined from the standpoint of whether the link between the authority and the recipient of the law enforcement is strong or weak. The incentives on the enforcement side and on the enforced side are taken into consideration. The study was guided by the following research question: How does the legitimacy of an authority affect its administrative performance, and what key factor of the legitimacy component is necessary to achieve the outcomes? This question is answered by applying elaboration likelihood theory to analyze legitimacy. Using competition authorities in Japan and the United States as examples, the extent to which the factors affect administrative performance is estimated based on the links of each factor to regulatory stringency. In the context of previous studies, this approach is based on a micro-level process of behavioral analysis providing variables in relation to administrative performance. The study moves on from the reduced-form model established by Moran and Weingast (1982) to a structural estimation model. In the context of antitrust studies, this approach is the first step in studying an authority’s mechanism beyond case interpretation or its taxonomy. Furthermore, using regression analysis of the aggregated policy variables, this chapter fills in the gap between politician/bureaucracy interactions that describe “conditional” behavior (Banks and Weingast 1992; Epstein and O’Halloran 1994) and diffusion of the selected policy.1 The focus in what follows is on the proposition that law enforcement is affected by the resources/political effects of attribution (the authority side) and legitimacy formed through the factors listed under the heuristic approach (the recipient side). The former is a necessary condition for enforcing a law, and the latter a sufficient condition. Attitudes toward law enforcement are formed and changed by persuasion in two ways—detailed study and heuristic decision—both of which are based on the elaboration likelihood model. A detailed study of closely related people is made through the factors of resources and reflections. Heuristic decisions are made because of marginal phenomena in indications of legitimacy. Legitimacy affects both sides, the authority and the recipient, through its incentive for steady enforcement and compliance. In particular, improvements make the recipient comply, and thus enforcement goes smoothly (in other words, the authority does not have to be harsh in some way or there are no obstacles to compliance). Providing a good administrative performance is important. This chapter captures the fact that persuasion is a mechanism of legitimacy. An authority that is persuasive can easily achieve a policy goal when the recipient cooperates. Moreover, legitimacy has a feedback effect on authority—the higher the legitimacy, the more intense the motivation of the authority’s staff. 1 Thanks for the mention of the theories of politician/bureaucracy interaction by anonymous referees.

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2 Relevant Literature Moran and Weingast (1982, 1983) analyzed various influences on the Federal Trade Commission’s enforcement of the U.S. Antitrust Law and showed that Congress has considerable influence.2 However, their analysis of congressional control is based only on legal punishments and bureaucratic subsidiarity, and is not sufficient in terms of the meaning of control and the nature of the control mechanisms. Their studies have been criticized on the grounds that a quantitative analysis focusing on committees and agenda setting is not a systematic study; elements such as the president and the courts should also be discussed (Moe 1987). In addition, the Justice Department’s antitrust policies during the Reagan administration showed that before the 1980 election, bureaucratic influence was stronger than the political influence of Congress and the president. Wood and Anderson (1993), who criticized such theories as reflecting earlier bureaucratic practices and practices based on economic conditions, emphasized the influence of political appointees as overhead democracy. This theory explains the Justice Department’s cases of civil investigation demand and legal action, citing as explanatory factors the influence of such players as the president (who appoints the chief of the Antitrust Division and a number of associated personnel), Congress (which enacts important legislation and budgets), and the Supreme Court (which ultimately decides important cases). Similar analyses of the influence of the president, Congress, and the judiciary (Krause 1996; Wood and Waterman 1993) are not limited to antitrust matters, and some also consider popularity and complexity (Ringquist et al. 2003). The present study supports Gordon et al. (2009) conclusion from the perspective of the aggregated data and the national-level authority’s work. They pointed out that organizational structures of domination are embedded, and that not all dominant structures align with those that are normatively presented as legitimate and authoritative. Gordon et al. further examined the relationship between power, rationality, and legitimacy by showing how structures of domination recursively constitute, and are constituted by, legitimacy that may not be authoritative. In relation to these analyses, the theory of overhead democracy states that elected officials should control the bureaucratic system by establishing procedures whereby explanations for actions can be requested. Whether this principle is achieved has been directly considered by practitioners, using the relationship between certain parameters related to such practices as the process of increasing the budget, and examining the relationship between personnel and productivity, or between economic conditions and productivity, as well as the practices themselves. Although this approach may approximate a comprehensive explanation if sufficient parameters are considered, the relationships among the parameters must be considered. The difficulty of systematically predicting actual practices might lead to a patchwork. Actual authority in administration is assumed to be organically influenced not only by factors related to

2 Muris

(1986) criticized the FTC for its lack of marketability.

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the main administrative body but also by recognition of the practices of the principal industrial body and of social trends.3 However, analyses of the enforcement of the Antirust Law by the Federal Trade Commission and the Justice Department conducted in the 1980s and 1990s recognized differences between the policies of the two agencies and the factors that influence them. The introduction of leniency and aggressive control under the Clinton administration shifted the focus from analysis of organizational theory to analysis of actual law enforcement. Analyses of the economics of practices under certain economic conditions were extended to consider attempts to find the most appropriate methods and measures of implementation (Besanko and Spulber 1989; Cyrenne 1999; Harrington 2005; Souam 2001). Nathalie Lenoir’s related work is mentioned in Rey (2003), which deals with the costs and benefits of the independence of competition authorities. Scholars have also examined administrative enforcement from the viewpoint of constitutional design to demonstrate the major advantages and drawbacks of making public officials accountable (Aghion et al. 2004; Maskin and Tirole 2004).

3 Analysis of Persuasion (1) Theory of Persuation The models of the process of persuasion in communication theory include attribution theory, the heuristic model, and the elaboration likelihood model. Attribution theory deduces the reason for persuasive actions, the consistency of the sender’s behavior, correspondence with other information sources, and the reliability of the content of the persuasion in forming attitudes (see Heider 1958). The heuristic model holds that people do not fully discuss persuasive messages in their daily lives and sometimes judge such messages using nonessential and marginal hints, mainly by technical checks and impressions based on likes or dislikes (see Petty and Cacioppo 1981). The elaboration likelihood model states that the content of persuasive communication is subjected to detailed study when there is high motivation to process such content, and that heuristic information processing takes place when the motivation is insufficient. This model, which integrates attribution theory and heuristic theory, is currently the basic analytical model of attitude formation. The elements of persuasion have been discussed from many viewpoints, including the process of messages to be learned, the logic of possibility and expected value, and the theory of the inconsistency of recognition (Petty and Wegener 1998). The idea that people reduce their effort on matters of little concern to them and expend costs on those of great concern when they form attitudes is economically reasonable, because such choices equalize the marginal costs and marginal benefits. 3 The

basis of this systematic analysis is seen in Krause (2008), whose analysis was based on the main administrative body’s risk preference (preference for risk/avoidance of risk).

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The main proposition of this chapter is that the elaboration likelihood model can be used to consider the influence of legitimacy and how it affects attitudes toward law enforcement agencies. Attitudes toward law enforcement are formed and changed by persuasion in two ways, detailed study and heuristic decision, both of which are based on the elaboration likelihood model described above. Detailed study occurs when the motivation to process content is high (resources and reflections). Heuristic decision takes place when an attitude is changed by marginal phenomena (indications of legitimacy). (2) Relationship Between Legitimacy and Administrative Performance Actual administrative authorities are organically influenced by factors related to the main administrative body and by recognition of the practices of the principal industrial body and of social trends. The former factors are constructed by a strong link between the authority and the recipient in terms of the leverage of the highcommitment entity. The latter elements—recognition of practices and social trends—create a weak link through elements that are minor for the recipient and together form the concept of legitimacy. Note that the approach here is not a macro-level (umbrella) process of a straight causal link from legitimacy to administrative performance. One must seek micro-level legitimacy components (factor by factor) and their trends to explain the regulatory outputs. When administrative implementation is a major concern of the parties involved, resources and reflection are the main factors affecting attitude change. If the administrative authority has significant resources, then it has the power to increase its law enforcement capacity. From the recipient’s viewpoint, those who are deeply committed to current policies examine the related content carefully and investigate it in detail, forming an attitude after fully considering the content’s merits and the amount of resources required. The other factor related to attitude change, including the overhead democracy theory or the principal/agent model, is “reflection” by politicians, the governing party, and pressure groups. Among the influential factors, political trends (i.e., the impact of the top person, such as the chairman) have a larger elasticity value, according to Wood and Anderson (1993). In addition, it is assumed that if the opinions of recipients who desire to be positively involved in some way are included in the process, this will significantly affect their support for enforcement of the law. As factors affecting the group with a high commitment for law enforcement, implementation by resources and influence by reflection play an important role in the formation of attitudes toward law enforcement. Although these two factors are important from the recipient’s viewpoint, they are of greater significance in relation to the enforcer’s attributes in an analysis of the impact of administrative performance. However, in connection with an agency’s administrative practices, the elements leading to a marginal change in attitude toward legitimacy among those who are not greatly concerned about policy implementation include professionalism, recognition, and results. Through these elements, people form attitudes toward phenomena that they see as marginal, based not on the message content but on the sender’s professionalism, attractiveness, and volume of discussion. The influence of administrative

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performance is constructed in part based on the favor of the unconcerned people (informational advantage is discussed in Banks and Weingast 1992). People do not expend costs to make judgments in connection with matters that are not of great concern to them and are likely to form an attitude toward the object based on easily available information. Wood and Anderson (1993) analyze factors using the recipient’s viewpoints on administrative performance, such as inflation or unemployment variables.

4 Description of Factors In addition to these two factors, this chapter also addresses three other factors that contribute to forming legitimacy. The two factors already discussed, based on attribution theory, relate to an authority’s power source; the three other factors relate to the recipient’s mind-set parameters, based on the heuristic model. (1) Attribution Theory Approach “Resources” means that the amount of human and monetary capital influences people’s belief in the stakeholders’ opinions. In addition to the main elements of legitimacy, a government agency may attempt to increase its size (seek to expand its resources) either to increase its ability to process information or to further individual interests and incentives (Epstein and O’Halloran [1994] refer to discretion). However, in this chapter the amount of resources is considered to be the element that secures orthodoxy. In cases where the amount of resources creates an adverse impression, inefficient conditions or image may have a negative impact on legitimacy. “Reflection” means that politicians influence the authority and that people determine their attitudes toward a policy based on whether it reflects their individual opinions. This factor concerns politicians’ ability to yield to public opinion and the conditions for arranging procedures to adopt such opinions. Politicians attempt to adopt the idea of a “public” model in which the feedback effects of positive opinions lead to further legitimacy, in the sense that the positive opinions of those who feel themselves to be in the majority play an important role in forming public opinion. Previous studies have identified certain political actors, including the president, Congress, and courts (see Ghosal and Gallo 2001; Moran and Weingast 1983). (2) Heuristic Model Approach “Professionalism” is widely recognized because professional activities contribute to the public interest, and because professionalism has an independent existence and can result in consistent action. Being the subject of discussion by professionals or having a respected reputation is an important factor in the heuristic aspect of legitimacy. Banks and Weingast (1992) state that the information advantages of bureaucrats may over or understate the extent of the public problem (Whitford [2008] tests and supports this hypothesis). In the traditional literature on politics, scholars examine such elements as charismatic control, long-term existence, and manipulation using

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the symbols of an authoritative government or country to analyze legitimacy. All of these factors are applicable to this category.4 “Recognition” means that the existence and actions of an administrative agency are recognized by the public. The volume of information and discussion forms people’s attitudes. For the purposes of this chapter, it is assumed that a basic constituent element of legitimacy is the rate of information throughput in light of psychological recognition by society (recognition of the present evaluation, future expectations, and a change in the majority or public opinion), in concurrence with the attribution theory approach. (Dubnick [2005]; Goddard and Mannion [2004] refer to accountability.) These aspects can involve two situations: One is positive—the improvement in legitimacy when many people recognize achievements—and the other is negative—mainly through the exposure of scandals. “Results” (achievement of objectives) means considering legitimacy from the heuristic viewpoint, in accordance with whether the activities of the administrative agency have achieved appropriate results, and at the same time, whether desirable outcomes are realized in the general economic and social environment that may not have a direct connection to the agency’s activities (see Feldman 1982). This means good governance,5 and it corresponds to cases where legitimacy is confirmed by the results of growth through fair reward. This factor includes formation of recipient attitude and the authority’s consideration of the economic environment during law enforcement. Of course, there may be interaction with substitutability among the elements in the enforcement process. For example, reflection may decrease as professionalism increases. The elements are correlated and complementary, but each can be clearly distinguished and identified. Because the elements can generally be treated as mutually independent variables, they are used as the constituent elements of legitimacy, in principle. (3) Characteristics of Competition Authorities The target of this chapter is to determine how the legitimacy of a competition authority affects its administrative performance, and what factors of the legitimacy component are necessary to achieve the desired outcomes. This question is answered by arranging the proposition that improving the legitimacy of the competition authority leads to effective enforcement of the competition law. When the legitimacy of a competition authority increases, then, internally, the motivation of its staff will improve, and their productivity will increase because of the increased incentives to get a good result. Externally, aid in collecting and accumulating information on cartels will lead to earlier yielding by violators of the law and a further increase in resources. All these actions will lead to positive enforcement of the competition law. 4 Max Weber divides control supported by legitimacy into three categories: legal control, traditional

control, and charismatic control (Inokuchi 2000; Weber 1972). 5 Some authors support one of three related views: correspondence with the established rules, public

acceptance of the rules, and realization of the public interest (Sasaki 1999).

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Before proceeding to the analysis, it will be helpful to briefly describe the Japanese, U.S., and European competition authorities. The Japan Fair Trade Commission, the only body responsible for enforcing the Antimonopoly Act, has attracted more attention since the Japan/U.S. Structural Impediment Initiative talks commenced in the 1990s. This is partly because the Japan Fair Trade Commission’s prestige has risen among foreign governments as a result of repeated strengthening of the Antimonopoly Act, leading to strict enforcement of the law and the successful prosecution of major cases. In 1996, the Japan Fair Trade Commission Secretariat was admitted to the General Secretariat, a highly prestigious organization. However, in the discussion of the reform of Japan’s central government (a reshuffle of ministries and agencies), there was “no time to discuss” the positioning of the commission (Tanaka and Okada 2000, p. 166), which consequently became an extraministerial bureau of the Ministry of Public Management, Home Affairs, Post, and Telecommunications in 2001. Then, in 2003, when the Japan Fair Trade Commission struggled to implement the competition policy, the commission was made an external organization of the Cabinet Office. In terms of implementing policies, together with appropriately enforcing the Antimonopoly Act, the commission has sought to become the standard-bearer of competition policy, promoting market principles amid the trend toward relaxing regulations. The same situation is likely to be reflected in competition policy worldwide. The Antitrust Law, the competition law in the United States, has historically been enforced by two agencies, the Justice Department and the Federal Trade Commission (FTC), whose responsibilities overlap (this chapter deals only with the Justice Department). Although 90% of antitrust claims in the United States are brought by private plaintiffs, the focus here is on administrative enforcement by the FTC and the Justice Department. The FTC was more prominent in 1994 and 1995, but in the recent rise and fall of antitrust-related government agencies, the Justice Department has since come to the forefront. This shift occurred because the FTC held public hearings in 1994 and 1995 to review antitrust policies and promoted these hearings as a reflection of public opinion. While the Justice Department pursued major cases like the one against Microsoft, which enhanced its public profile, the FTC gave priority to privacy issues and shifted its focus from antitrust work to other fields. In addition, the FTC’s proactive approach toward antitrust issues was weakened under the Bush administration after 2001. Antitrust enforcement during the Bush years was relatively weak overall compared with the preceding administration.6 Another recent locus of antitrust enforcement is the EU. The European Commission’s Directorate General for Competition, the competition authority in Europe, derives its power from its stated objective, which is related to the formation of the European Community to promote trade within the region. At the same time, the Commission for Competition has authority as a supranational organization to regulate companies within the region without involving each member country. Therefore, 6 For further details, see the Senate hearings at http://judiciary.senate.gov/hearings/testimony.cfm? id=3700&wit_id=7670/. The settlement between the Justice Department and Microsoft may have lessened the antitrust authority’s legitimacy.

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the commissioner for competition’s authority is linked to recognition of the importance of competition policies in the European Commission.7 The commissioner for competition has adopted a different attitude from that of the United States in some very important cases that have made the headlines, although there have not been very many of these. Important cases of this kind, including the case against Microsoft, have continued to make major news in recent years. From transnational to worldwide perspectives, the International Competition Network (ICN), established in October 2001, is a worldwide network of around 100 competition authorities that undertakes practical antitrust enforcement and cooperation. The ICN has analyzed competition policy practices around the world and discussed their effectiveness.

5 Analysis of Japanese Case The relationship between legitimacy and administrative performance, as outlined above, will now be addressed in connection with Japan’s competition authority. The analysis is a basic model of the relationship between an administrative agency and its implementation policy. It states that improvement in the legitimacy of the competition authority, whether the Japan Fair Trade Commission or the Justice Department, leads to effective enforcement of the competition law. In connection with this proposition, using the elements presented earlier, the influence of each element is confirmed based on the estimated model.8 (1) Variables The variables representing the elements of legitimacy, as presented above, will now be discussed in connection with the proposition that improving the legitimacy of the competition authority leads to effective enforcement of the competition law. The measures of administrative performance based on these elements will also be discussed in the context of law enforcement. The following proxy variables are used in terms of the main elements for legitimacy. Detailed Study (i) Reflection (public hearings, guidelines, chairman dummy) (ii) Resources (budget, personnel, legal means) —(Heuristic decision) 7 In addition, the European Parliament has greater influence on the European Commission and plays

an important role in determining policies because it is elected and thus legitimately reflects public opinion. 8 The discussion here does not deal with the voluntary motivation effect, namely, that the high level of legitimacy an organization has in its administration creates “motivation,” improves the power of persuasion, increases internal productivity, contributes externally to the accumulation of information, and leads to earlier yielding by the opponent. It is important to study the authority’s behavior, but the focus here is on an outer index of related factors.

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(iii) Professionalism (independence, history, and professionalism of the administrative agency, demographics of the legal professionals, nobility and faithfulness of purposes) (iv) Recognition (volume of newspaper articles, agreements with third parties, volume of speeches, theoretical support) (v) Achievement of results (number of cases, GDP growth rate, GDP deflator [inflation control index], amount of penalties, consumer price index, rate of unemployment) With regard to the dependent variables described above, the analysis treats the number of legal actions, the number of cases handled, the monetary value of penalties or surcharges, and the number of personnel as indices of administrative practices resulting from increased legitimacy. Among these variables, the number of legal cases each year will be ascertained by examining Antimonopoly Act policies.9 The monetary value of penalties and surcharges is inadequate to the variables because they are reflected only from the restraint of trade, not from private monopolization or unfair trade practices. Likewise, the number of personnel-related cases fluctuates considerably based on the case character (restraint of trade tends to be large). Thus, the number of legal actions is appropriate for the dependent variable. Ghosal and Gallo (2001) take cases initiated by the Justice Department as the primary indicator of antitrust enforcement (see Posner [1970] for cases and cases initiated). The following proxy variables are considered: (i) Reflections: Political trends and the number of guidelines for hearing public comments in the current administrative procedure. However, rather than employ this comparatively new method, the focus here is on the use of a dummy variable for the chairman of the commission, because every chairman’s factor significantly affects enforcement. Many previous studies, such as Moe (1987) and Ringquist (1995), analyzed how the leader of an agency can influence the way the agency is perceived. In many interviews, staff of the Japan Fair Trade Commission refer to the importance of the commission’s leadership (Takase et al. 2001). They describe Chairman Yokota as virtuous and successful at typical functions, and Chairman Sawada as giving great attention to detail and for passing difficult amendments to the law. (ii) Resources: The number of Japan Fair Trade Commission personnel. This is one of the most important elements in enforcing competition law. More specifically, historical data are to examine the number of personnel each year.10 (iii) Professionalism: The degree to which the enforcement agency of the Antimonopoly Act is institutionally independent from other administrative bodies, the age of the agency, and whether the agency’s purposes have been accepted as articles of faith. However, the study focuses on the number of academic 9 The data are from Japan Fair Trade Commission annual reports and Japan Fair Trade Commission

(1997). Japan Fair Trade Commission (1997); annual reports of Japan Fair Trade Commission; and www.jftc.go.jp/pressrelease/01.may/01051604.pdf, accessed October 4, 2001.

10 See

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citations as a measure of professionalism because this is one way to measure the quality and quantity of professional studies and research. The accumulation of studies can lead to increased respect from a recipient whose activities have marginal interest.11 More specifically, the total number of citations of the Antimonopoly Act or the Japan Fair Trade Commission each year are examined, using the information database (books) in the information search service list of the National Institute of Informatics.12 (iv) Recognition: The number of newspaper articles mentioning the authority. The level of recognition may also include the number of speeches by officials of the relevant agency, and the amount of exposure in magazines and books. Another reference is how often the Japan Fair Trade Commission is cited by legislators in debates in the Diet. More specifically, the total number of articles in which the Antimonopoly Act and the Japan Fair Trade Commission are cited each year, based on the Nikkei search service covering four newspapers through Nikkei Telecom 21 (http://telecom21.nikkeidb.or.jp/home and http:// telecom21.nikkeidb.or.jp/pub/guide2/skill/vol_04.shtml). For example, a symbolic event occurred in 1968 when a group of economics professors issued a policy statement against the proposed merger of Fuji Steel and Yahata Steel. The statement had a meaningful impact on the discussion of the merger process, suggested some points of dispute, and raised awareness of the need for a sound competition policy. (v) Results: The authority’s success rate in achieving its stated aims, the legitimacy of the economic agency, the increase in authority activities during economic booms, and the decrease during recessions. Ghosal and Gallo (2001) take real GNP and unemployment rates as common business cycle indicators. They also take stock prices (the Dow Jones industrial average, S&P 500) as economic activity measures. The discussion here considers the influence of a GDP deflator (or GDP at a constant price) regardless of the vague relationship between law enforcement and the business situation.13 (The real GDP index is not significant and thus is omitted.)

11 Indeed, although many cases are the subject of scholarly articles, the total number of professional studies can create respect for the specific field of law enforcement. Legal professionals’ demographics are an index of professionals; however, it is difficult to estimate the ratio of antitrust lawyers. 12 This database in Japan records the details of books, including title, author, publisher, the names of libraries and bookrooms of universities that keep the books, as well as call numbers and other information. See http://webfront.nii.ac.jp and www.nii.ac.jp/ir/dbmember/bcat-j.html, accessed October 4, 2001. 13 The Antimonopoly Act states that “the purpose of this Act is, by prohibiting private monopolization, the unreasonable restraint of trade and unfair trade practices … to promote fair and free competition, to stimulate the creative initiative of entrepreneurs, to encourage business activities, to raise the level of employment and actual national income, and thereby to promote the democratic and wholesome development of the national economy as well as to assure the interests of the general consumers.”

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12 Administrative Performance and Legitimacy: An Elaboration …

Table 1 Japan descriptive statistics (1975–1999) Personnel (persons)

Books (copies)

Newspaper Articles (number)

GDP Deflator

Legal Actions (cases)a

Average

460.8

24.24

948.12

92.97

19.64

Standard deviation

(50.56)

(8.86)

(530.11)

(11.98)

(9.96)

t-Statistic of ADF test

0.358

−3.311**

−1.935

−2.495

−2.210

KPSS unit root test LM-statistic

0.736**

0.403*

0.593**

0.671**

0.377*

a

For legal actions 1976–2000, * 10% significance, ** 5% significance

The elaboration likelihood model is used to consider the influence of legitimacy and how it affects attitudes toward law enforcement agencies. An expected effect of this theory states that there are two ways, detailed study and heuristic decision. The effect predicts that enforcement results are significant when the motivation to process content is high (resources and reflections) and when the attitude is changed by marginal phenomena (indications of legitimacy). Note that the theory does not discuss a direct link between a factor and administrative performance. Each factor is a component of legitimacy, and legitimacy then has an effect on performance. The timing of the data as well as the limitations of the sample number are a concern in making a conclusive assertion; however, the directional property can be found under this consideration. These databases were used to calculate estimates of the number of legal actions (Legal Actions) for the following year based on the number of personnel in the Japan Fair Trade Commission (Personnel),14 the number of professional books (Books), the number of newspaper articles (Newspaper Articles), and the inflation rate (GDPD: GDP deflator) in a given year (See Eisner and Meier 1990). Because the articles were limited in terms of the amount of data, Japanese data were used for the period from 1975 to 2000.15 See Table 1 for the descriptive statistics. (2) Granger Causality Test The Granger causality test was used to check the relevance of the variables. Although this test does not demonstrate a logical causal relationship, it can indicate a variable’s suitability in terms of the time lag between cause and effect. The results in Table 2 show that Personnel, Books, Articles, and GDPD have Granger causality with Legal Actions, and Legal Actions have Granger causality 14 On the other hand, the coefficient for Budget is very similar to that of the Personnel variable, so it was omitted. 15 It is important to test for nonstationarity of picking up the econometric specification. The ADF test and the KPSS test were used for the nonstationarity. Some variables do not have a unit root, but others do not have a clear indication due to sample number limitation.

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Table 2 Pairwise granger causality tests Null hypothesis

Obs

F-statistic

Probability

PERSONNEL does not Granger-cause Legal Actions

24

5.94822

0.00986

1.65718

0.21707

2.98972

0.07432

*

3.72456

0.04318

***

8.10058

0.00286

***

0.70013

0.50889

3.96662

0.03634

**

2.85478

0.0824

*

1.00596

0.38436

0.31842

0.7311

0.06925

0.93333

1.46711

0.25556

2.61488

0.09928

0.90171

0.42255

2.46655

0.1116

1.16215

0.33408

0.22922

0.79732

8.00651

0.00301

0.38017

0.68883

1.64814

0.21875

Legal Actions does not Granger-cause PERSONNEL BOOKS does not Granger-cause Legal Actions

24

Legal Actions does not Granger-cause BOOKS ARTICLES does not Granger-cause Legal Actions

24

Legal Actions does not Granger-cause ARTICLES GDPD does not Granger-cause Legal Actions

24

Legal Actions does not Granger-cause GDPD PERSONNEL does not Granger-cause BOOKS

24

BOOKS does not Granger-cause PERSONNEL PERSONNEL does not Granger-cause ARTICLES

24

ARTICLES does not Granger-cause PERSONNEL PERSONNEL does not Granger-cause GDPD

24

GDPD does not Granger-cause PERSONNEL BOOKS does not Granger-cause GDPD

24

GDPD does not Granger-cause BOOKS BOOKS does not Granger-cause ARTICLES

24

ARTICLES does not Granger-cause BOOKS ARTICLES does not Granger-cause GDPD GDPD does not Granger-cause ARTICLES

24

***

*

***

* 10% significance, ** 5% significance, *** 1% significance. GDPD: GDP deflator, ARTICLES: Newspaper Articles

with Books, Articles, and GDPD. This result suggests that there are bi-directional relationships among these variables. A reduced-form equation was constructed based on the proposed theory in order to estimate the relationship between an enforcement index and resources/legitimacy using predetermined variables of resources and predetermined variables of legitimacy, such as Books, Articles, and GDPD. (3) Estimation Structure With reference to these pairwise relationships, consider the following reduced form equation estimated by ordinary least squares:

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12 Administrative Performance and Legitimacy: An Elaboration …

ln Legal Actions(+1) = A + B1ln Personnel + B2ln Books + B3ln Newspaper Articles + B4ln GDPD + B5Chairman_dummy + E. (Each of the terms B1–B5 is an estimated coefficient, and E is the residual.)16 If this type of reduced-form estimation is estimated with ordinary least squares, the result is not unbiased and is consistent because of simultaneous equation bias. Therefore, all the independent variables are predetermined variables with a oneyear lag, and the accumulated effect of the legitimacy component is realized in the legal action of this year. There are few autocorrelation problems based on the Durbin-Watson statistics, and multicollinearity can also be brushed off. Thus, there are several estimations with and without control variables. The statistics for each variable are given in Table 3. (4) Results of the Analysis Based on Table 3, the coefficient of determination, after correction for the degrees of freedom, changes from 0.528 to 0.665, and the F value becomes significant at the 1% level. Judging from this, one may assume that each independent variable influences the legal actions of the following year, when the independent variables become the dependent variables. The coefficient for Personnel is significant at the 1% level, and its sign (positive) and magnitude (a large elasticity) are as expected. The GDP deflator is also significant statistically, while the real growth rate is insignificant. The factor “results” (such as achieving inflation control) is the legitimacy factor with the greatest impact on law enforcement. The variable Newspaper Articles has less impact on the coefficient than elasticity but does have a role in legitimacy. Finally, the significance level for Professional Books is not high, but it has a small positive coefficient similar to that of Newspaper Articles. Next examined are the political effects reflected in the principal policies of the chairman of the Japan Fair Trade Commission. To analyze these principal policies, a dummy variable is used for each of the six Japan Fair Trade Commission chairmen. Two chairman dummies (for Mr. Sawada and Mr. Takahashi) had a significant negative value in the regression; the others were insignificant. Also examined were the number of cases initiated and the total amount of surcharges (penalties imposed) after 1978, instead of the number of legal actions, as dependent variables. However, these variables had little influence on the total number of initiated cases or the total amount of surcharges, because the coefficient of determination was low and the significance of F was large. The variables did not perform well in the regression and did not meet the economic conditions. The estimation of the coefficients of the proxy variables may be summarized as follows: The factors that contribute to legitimacy, as listed above under the elaboration likelihood model, have a certain amount of influence on administrative performance. In particular, achieving results (inflation control) has a strong influence, while recognition (newspaper articles) and professionalism (professional books) are weaker but have a degree of legitimacy. Because the dependent variables for legal actions use 16 The log-linear type equation performs better than log-log, hyperbolic, and is a simple multinominal

equation from the viewpoint of adjusted R2 and AIC.

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187

Table 3 Japan estimation results (dependent variable: number of measures) Estimate without Chairman’s dummy

Estimation with Chairman Sawada dummy

Estimation with Chairman Takahashi dummy

Estimation with Chairman Umezawa dummy

Estimation with Chairman Kogayu dummy

α: (Intercept)

−9.708 (6.514)

−3.891 (5.796)

−9.296 (6.198)

−13.549 (6.786)

−9.756 (6.722)

β1 :(Personnel)

4.217*** (1.461)

4.419*** (1.232)

2.619 (1.650)

5.196*** (1.551)

4.223** (1.500)

β2 : (Books)

0.456 (0.327)

0.568* (0.278)

0.436 (0.312)

0.489 (0.318)

0.460 (0.340)

β3 : (Articles)

0.687** (0.292)

0.800*** (0.249)

0.253 (0.368)

0.448 (0.323)

0.691** (0.308)

β4 : (GDPD)

−4.295*** (1.445)

−6.080*** (1.346)

−1.535 (2.061)

−4.460*** (1.403)

−4.300*** (1.483)

β5 : (Chairman dummy) (Sawada)

−1.065*** (0.343)

β5 : (Chairman dummy) (Takahashi)

−0.617*** (0.344)

β5 : (Chairman dummy) (Umezawa)

−0.431 (0.280)

β5 : (Chairman dummy) (Kogayu)

−0.0176 (0.294)

Adjusted R2

0.528

0.665

0.573

0.557

0.504

DurbinWatson

1.966

2.083

2.096

2.118

1.970

Significance F

0.000446***

0.000036***

0.000352***

0.000499***

0.00140***

* 10% significance, ** 5% significance, *** 1% significance

the number of legal actions, with each case assigned the same value regardless of its size, it is difficult to determine a causal correlation with a high degree of explanatory power. In terms of independent variables, for example, the number of articles is simply interpreted as having a positive influence on evaluations of the agency’s activities and thus improving legitimacy, but the possibility that the articles could have had a negative influence is ignored.

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12 Administrative Performance and Legitimacy: An Elaboration …

The results have three interpretations and implications. First, on the competition authority side (i.e., the Japan Fair Trade Commission), increasing the number of personnel and engaging in legitimacy determinants, including newspaper articles or professional books, are important for improving administrative performance. Second, for nationwide competition policy, increasing personnel is a key answer to eliminating anticompetitive behavior by strengthening the authority’s enforcement power. However, exposure in newspaper articles or professional books is also an effective way to maintain sound competition in Japan. Furthermore, a predicted countermeasure can be taken against anticompetitive conduct. For example, the results show that last year’s GDP deflator leads to this year’s low enforcement against anticompetitive behavior. Therefore, if there is a larger negative GDP deflator, the government can allocate additional resources to prevent anticompetitive behavior in the next year. Deterrence policies of this kind can be developed. Third, for the analytical method to capture the actual determinants and explain administrative performance based on the theoretical framework, it is necessary to address a new policy prioritization rule to prevent a future harmful effect. The predicted countermeasures are efficient policy implementations based on the elaboration likelihood model in communication theory. The theory’s applicability is illustrated in the next section by a consideration of the U.S. situation and the performance of the Justice Department.

6 U.S. Analysis Applying this method to the U.S. antitrust situation, the estimation equation is described as follows, where A and B1–B6 are proxies for legitimacy: ln Legal Actions = A + B1 ln Personnel + B2 ln Journal Articles + B3ln Newspaper Articles + B4ln GDP + B5ln GDP deflator + B6 ln President_ dummy + E. Public databases were used to estimate the number of legal actions (Legal Actions: criminal cases + civil cases, or cases initiated) for the following year, based on the number of personnel and the budget of the Antitrust Division of the Justice Department (Personnel), the number of professional articles (JSTOR), the number of newspaper articles (Newspaper Articles: average of New York Times and Washington Post), and the GDP at a constant price (GDP of the United States) and the GDP deflator of that year. Because the data in the articles are limited, U.S. data for the period 1975 to 2002 are used (for legal actions, the period from 1976 to 2003).17 It is difficult to proxy the reflection factor using any index of the Justice Department. 17 The number of Justice Department sources is available at www.justice.gov/atr/, accessed October

4, 2001. The ADF test and KPSS test are used for the nonstationarity. Some variables do not have a unit root, but others do not have a clear indication due to sample number limitation. See Table 4.

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189

Table 4 U.S. descriptive statistics (1975–2002) Personnel (persons)

JSTOR (copies)

Newspaper GDP at a Articles Constant (number) Price (B$)

GDP Deflator (%)

Legal Actions (cases)a

Legal Actions (initiated)

Average

756.43

494.43

536.18

5,529.33

75.24

80.89

223.89

Standard deviation

(127.75)

(62.59)

(160.65)

(2,709.89) (20.30)

(19.71)

(62.31)

t-Statistic of ADF test

−1.176

−1.212

−2.598

−7.108*** −3.500** −2.937*

−1.966

KPSS unit root test LMstatistic

0.165

0.170

0.133

0.671***

0.116

0.649**

0.451*

a For legal actions cases and initiated 1976–2003, * 10% significance, ** 5% significance, *** 1% significance

Table 5 U.S. estimation results (cases measured) (dependent variable: U.S. cases [= civil + criminal]) Estimation with All Factors

Estimation Without Journals and Newspapers

α: (Constant)

4.791 (4.764)

3.964 (2.056)

β1 : (Personnel)

0.287 (0.340)

0.238 (0.276)

β2 : (Journal Articles)

−0.125 (0.641)

β3 : (Newspaper Articles)

−0.048 (0.173)

β4 : (GDP)

3.485* (1.978)

3.141** (1.139)

β5 : (GDP deflator)

−1.898* (1.051)

−1.720** (0.623)

β6 : (Bush2)

−0.395* (0.195)

−0.390** (0.180)

Adjusted R2

0.333

0.388

Durbin-Watson

1.718

1.719

Significance F

0.020**

0.0036***

Note The other presidents’ dummies are omitted as insignificant. * 10% significance, ** 5% significance, *** 1% significance

The statistics for each description are given in Tables 4 and5. Based on Table 5, with the number of cases (criminal + civil) as the dependent variable, the GDP at constant prices (positive) and the GDP deflator (negative) are significant at the 10% level (and estimation without journals and newspapers at the 5% level). Both signs are as expected. As generally expected from the actions of the Bush administration, there is a negative correlation for the president dummy of Bush2 (Bush2 refers to George W. Bush, January 20, 2001–January 20, 2009).

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12 Administrative Performance and Legitimacy: An Elaboration …

Table 6 U.S. Estimation Results (cases initiated) (dependent variable: number of cases instituted) Estimation with All Factors

Estimation Without Journals and GDP c.p.

α: (Constant)

6.840 (3.357)

6.871 (1.939)

β1 : (Personnel)

0.438 (0.250)*

0.436* (0.238)

β2 : (Journal Articles)

0.052 (0.446)

β3 : (Newspaper Articles)

−0.199 (0.117)

β4 : (GDP)

−0.118 (0.733)

β5 : (GDP deflator)

−0.589 (1.342)

−0.759*** (0.171)

β6 : (Clinton)

0.659* (0.131)

0.631*** (0.098)

β6 : (Bush2)

0.341 (0.215)

0.292* (0.150)

Adjusted R2

0.720

0.752

Durbin-Watson

2.019

1.998

Significance F

0.000***

0.000***

−0.194* (0.111)

Note The other presidents’ dummies are omitted as insignificant. * 10% significance, ** 5% significance, *** 1% significance

Based on Table 6, with the number of cases initiated as the dependent variable, Personnel, Newspaper Articles, and the GDP deflator are significant at the 10% level without considering the journals or the GDP at constant prices. The Personnel sign is positive, and that of the GDP deflator is negative, as expected. Although the value is small and only just significant, the Newspaper Articles sign is negative, contrary to expectation. The political effects reflected in the principal policies of the president of the United States are examined because the Justice Department is an administrative organization controlled by the government. The principal policies were analyzed using a dummy index for each president. During the study period, the United States had six presidents. Two presidents (Bush2 and Clinton) have significant values (negative and positive, respectively) for the dummy index in the regression, while the others were not significant. The sign of the Clinton coefficient is within the scope of expectation, but that of Bush2 contradicts the generally prevailing negative expected value as well as the result from the dependent variable analysis. The small positive impact of the presidency does not conflict with related work. For example, “the most dramatic and ideologically coherent changes in the substance of antitrust regulation were those emanating from the presidency” (Wood an Anderson 1993, p. 35). These results are replicated and extended in Ghosal and Gallo’s (2001) statement that antitrust case activity is countercyclical. They examined the economic and political determinants of the Justice Department’s case-bringing activity over 1955–1994. The results in the negative parameter of B4 in Table 6 (cases initiated) were similar to their findings of countercyclical case activity. The theory of persuasion can be used to fill in the gaps between economic indicators and enforcement activity in their study’s low R2.

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191

A similar approach was used to analyze the Federal Trade Commission, but few proxy variables of the legitimacy coefficient are significant, including the president dummy. This may be because the FTC is responsible for both antitrust enforcement and consumer protection. Hence, identifying the impacts of the policies on each other is difficult. The analysis of resources/political effects and the legitimacy of law enforcement agencies described in the previous sections will be useful when administrative performance is analyzed by agencies or effective policy formulation is discussed. This positive influence can be seen from the changing characteristics of the competition authorities in each country. The Justice Department’s power to enforce the Antitrust Law clearly improves public recognition of the department, as seen from its prosecution of major cases, such as the Microsoft Antitrust Case. These cases had a positive influence on the rate of reflection and resources because of the heated debates across the United States that led to improvements in legitimacy and strengthened the general enforcement of the Antitrust Law at that time. This is (weakly) supported by the positive significance of the President Clinton dummy (a case-initiated variable). The legitimacy of the Justice Department type of enforcement authority may be linked to cases initiated rather than completed. In the analysis comparing the Justice Department with the Japan Fair Trade Commission, the commission has a clearer effect on factors of the elasticity of the variables (larger coefficient with certain significance) except for the U.S. GDP factor in the analysis of the U.S. case. In particular, the factors Personnel and GDPD in the Japan Fair Trade Commission have quite a high impact on the law enforcement variable in Japan. The two outcomes of the coefficient of the estimation in the U.S. analysis are quite interesting: Coefficients of Newspaper Articles in the United States, in both number of cases and number of cases initiated, are negative and do not have much significance, and the president dummy in the U.S.-initiated cases has both positive and negative signs. This outcome implies that the Justice Department is affected by politics but that its enforcement style is not affected by mass media. From the perspective of enforcement policy in both countries, the two authorities have a similar enforcement stance. Another difference between the United States and Japan derives from the differences between the countries’ legal frameworks, such as the positive attitude toward private lawsuits or treble damages. The policy implications of these results give a suggestion of predicted policy priorities. This research shows the importance of the policy determinants of the authority’s power (attribution theory approach) and legitimacy (heuristic model approach) based on the elaboration likelihood model in the antitrust enforcement sector. In the antitrust sector, one can address the new theoretical perspective of stabilized policy priority; for example, the framework that last year’s smaller GDP deflator leads to a larger number of personnel for the authority. This type of policy concept can be formulated for other sectors based on the relevant theoretical background and empirical evidence. Thus, studies based on empirical analysis or natural experiment are needed.

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12 Administrative Performance and Legitimacy: An Elaboration …

7 Conclusion The results of this chapter can be summarized as follows: (1) resources (personnel) and reflections (political effects) have a strong influence on enforcement; (2) one factor of legitimacy, achieving results (inflation control), has an influence; and (3) other factors of legitimacy, such as recognition (newspaper articles) and professionalism (professional articles), have a smaller effect. Based on the results, it was found that increased exposure and promotion of professional studies could heighten the legitimacy of competition authorities and have some relationship to the positive enforcement of competition law. However, the results of this chapter do not immediately lead to such a policy. Rather, correctly identifying the actual economic environment in regard to policy implementation and increasing available resources have a greater impact on law enforcement. In a more detailed future study, it would be necessary to further analyze how an authority can attain legitimacy. It would be useful, for example, to collect and organize descriptions of individual cases and to consider the possibility that debate concerning the restructuring of the Social Insurance Agency has influenced the Japan Fair Trade Commission’s administrative independence. However, as past anecdotal opinion has shown,18 improvements in legitimacy resulting from detecting and prosecuting major cases have had a positive influence on the enforcement of the Antimonopoly Act in many respects. Yet the relationship between administrative performance and legitimacy based on this result suggests that applying the rate of reflection to the legitimacy of an administrative agency may be difficult, because when an administrative agency and a legislative agency are compared, resources and professionalism, among the aspects of legitimacy noted above, are important for the administrative agency, and the rate of reflection is important for a legislative agency as the source of legitimacy, based on the agency’s raison d’être. The foregoing examination can be useful for a discussion of the effectiveness of the antitrust authority in the Working Group of the Competition Policy Implementation of the International Competition Network (ICN-CPI). The ICN-CPI considers agencies’ effectiveness by analyzing more thoroughly the relationship between the definition of priorities and resource allocation and agency effectiveness.19 The ICN is orchestrating a practical discussion among the world’s experienced competition authorities. Thanks to its analytical and empirical examination of two influential authorities, the Justice Department and the Japan Fair Trade Commission, the method and results of this chapter contribute to an ongoing discussion of competition policy. Future tasks may include further study of the constituent elements of legitimacy, a more detailed analysis of each element, and discussion on forming a model that includes a proactive approach, whereby the administrative agency takes action designed to expand its own legitimacy in administration. 18 See the remarks by Secretary-General Itoda in the roundtable discussion “On recent cases of violation of the Antimonopoly Act,” Fair Trade, No. 513 (July 1993). 19 See ICN-CPI Work Plan 2008–2009, mentioned in www.georgemasonlawreview.org/doc/17–1_ Sokol.pdf, accessed October 4, 2001.

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References Aghion P, Alesina A, Trebbi F (2004) Endogenous political institutions. Q J Econ 119(2):565–611 Banks JS, Weingast BR (1992) The political control of bureaucracies under asymmetric information. Am J Polit Sci 36(2):509–524 Besanko D, Spulber DF (1989) Antitrust enforcement under asymmetric information. Econ J 99:408–425 Cyrenne P (1999) On antitrust enforcement and the deterrence of collusive behaviour. Rev Ind Organ 14(3):257–272 Dubnick M (2005) Accountability and the promise of performance: in search of the mechanisms. Public Perform Manag Rev 28(3):376–417 Eisner MA, Meier KJ (1990) Presidential control versus bureaucratic power: explaining the Reagan revolution in antitrust. Am J Polit Sci 34(1):269–287 Epstein D, O’Halloran S (1994) Administrative procedures, information, and agency discretion. Am J Polit Sci 38(3):697–722 Feldman S (1982) Economic self-interest and political behavior. Am J Polit Sci 26(3):446–466 Ghosal V, Gallo J (2001) The cyclical behavior of the Department of Justice’s antitrust enforcement activity. Int J Ind Organ 19(1–2):27–54 Goddard M, Mannion R (2004) The role of horizontal and vertical approaches to performance measurement and improvement in the UK public sector. Public Perform Manag Rev 28(1):75–95 Gordon R, Kornberger M, Clegg SR (2009) Power, rationality and legitimacy in public organizations. Public Adm 87(1):15–34 Harrington JE Jr (2005) Optimal cartel pricing in the presence of an antitrust authority. Int Econ Rev 46(1):145–169 Heider F (1958) The psychology of interpersonal relations. Wiley, New York Inokuchi T (2000) Dictionary of politics. Kobundo, Tokyo (in Japanese) Japan Fair Trade Commission (1997) The history of 50 years of policies of the Antimonopoly Act. Kosei-Torihiki Kyokai, Tokyo (in Japanese) Krause GA (1996) The institutional dynamics of policy administration: bureaucratic influence over securities regulation. Am J Polit Sci 40(4):1083–1121 Krause GA (2008) A positive theory of bureaucratic discretion as agency choice. http://localgov. fsu.edu/papers/archive/krause_001.pdf Maskin E, Tirole J (2004) The politician and the judge: accountability in government. Am Econ Rev 94(4):1034–1054 Moe TM (1987) An assessment of the positive theory of “congressional dominance”. Legis Stud Q 12(4):475–520 Moran MJ, Weingast BR (1982) Congress as the source of regulatory decisions: the case of the Federal Trade Commission. Am Econ Rev 72(2):109–113 Moran MJ, Weingast BR (1983) Bureaucratic discretion or congressional control? Regulatory policymaking by the Federal Trade Commission. J Polit Econ 91(5):765–800 Muris T (1986) Regulatory policymaking at the Federal Trade Commission: the extent of congressional control. J Polit Econ 94(4):884–889 Petty RE, Cacioppo JT (1981) Attitudes and persuasion: classic and contemporary approaches. Wm. C. Brown, Dubuque Petty RE, Wegener DT (1998) Attitude change: multiple roles for persuasion variables. In: Gilbert DT, Fiske ST, Lindzey G (eds) The handbook of social psychology. McGraw-Hill, New York, pp 327–331 Posner R (1970) A statistical study of antitrust enforcement. J Law Econ 13:365–419 Rey P (2003) Toward a theory of competition policy. In: Dewatripoint M, Hansen LP, Burnovsky SJ (eds) Advances in economics and econometrics, vol 2. Cambridge University Press, Cambridge, pp 82–132 Ringquist EJ (1995) Political control and policy impact in EPA’s office of water quality. Am J Polit Sci 39(2):336–363

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Ringquist EJ, Worsham J, Eisner MA (2003) Salience, complexity, and the legislative direction of regulatory bureaucracies. J Public Adm Res Theor 13(2):141–164 Sasaki T (1999) Lecture on politics. University of Tokyo Press, Tokyo Souam S (2001) Optimal antitrust policy under different regimes of fines. Int J Ind Organ 19(1–2):1–26 Takase K, Kuroda T, Suzuki M (2001) Dokusenkinshiseisaku kunan no jidai no kaikoroku (Memoir during the difficult time of the Antimonopoly Law in Japan). Kosei-torihiki kyokai, Tokyo Tanaka K, Okada A (2000) Reform of central ministries and agencies. Nihon Hyoronsha, Tokyo (in Japanese) Weber M (1972) Wirtschaft und Gesellschaft (Economy and society). J.C.B. Mohr, Tübingen Whitford AB (2008) A test of the political control of bureaucracies under asymmetric information. Rationality and Society 20(4):445–470 Wood BD, Anderson JE (1993) The politics of U.S. antitrust regulation. Am J Polit Sci 37(1):1–39 Wood BD, Waterman RW (1993) The dynamics of political-bureaucratic adaptation. Am J Polit Sci 37(2):497–528

Chapter 13

International Aspect of the Antimonoply Act

In recent years, the Supreme Court case has been presented on the international aspect of antitrust enforcement, and this is briefly described. On December 12, 2017, the Supreme Court of Japan ruled on the Braun Tube Carte r case. This case is a price cartel case by a manufacturer of TV CRTs. Although this case is a cartel case, the idea of antitrust enforcement in relation to the international cases shown there is considered to be a basic guideline for Japan’s antitrust enforcement. ※ Japan Supreme Court. (2016 (Gyo-Hi) No. 233. Minshu Vol. 71, No. 10.) December 12, 2017. In this case, in order to stabilize sales prices for local production subsidiaries of Braun tubes, CRT manufacturers and dealers will continue to hold meetings with sales representatives of Braun tubes outside Japan by at least May 22, 2003 at the latest. And generally set quarterly target prices, etc., to be followed by sales prices for local manufacturing subsidiaries of CRTs, which are presented each company in negotiations with Japanese TV manufacturers in the next quarter, roughly every quarter It has been agreed. Among the total purchases of CRTs of local manufacturing subsidiaries from 2003 to 2007, the ratio of the total purchases from cartel members was about 83.5%. In this case, the cartel side said (i) the agreement was agreed abroad, and (ii) it was the local manufacturing subsidiary located outside the country who bought the CRT directly, thus they claimed that Japan is not subject to the Japanese Antimonpoly law. On the other hand, the Supreme Court has not set specific provisions as to whether or not the Antimonopoly law applies or does not apply to acts conducted abroad, but the law promotes fair and free competition, etc. In view of securing the interests of general consumers and promoting democratic and sound development of the national economy (Article 1), etc., even cartels agreed outside the country, When it violates Japan’s free competition economic order, it was recognized that it would be appropriate to interpret it as allowing the application of the provisions concerning the Cease and Desist Order and the Surcharge Order under the Act. Based on that, the Supreme Court clearly stated that the JFTC should be able to issue an order to the business entity etc. who has made the cartel if it satisfies the requirements prescribed in the Act. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_13

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And having “a substantial restraint of competition in any particular field of trade “ as defined in Article 2(6) of the Antimonopoly Act, which defines the definition of unreasonable restraint of trade, means that the competition function of the market pertaining to the relevant trading is impaired. It is understood that even if a price cartel like this case is agreed outside the country, the cartel would limit competition against persons located in our country, etc. If Japan is included in a market that will lose its function, it is possible that the cartel violates Japan’s free competition economic order. This way of thinking was applied. Although Japanese TV manufacturers transferred or commissioned production of CRTs to local manufacturing subsidiaries, etc., they continued to control the businesses conducted by the company and its subsidiaries as the main producer and market of CRTs, It is said that the company was carrying out, and it could be said that the local manufacturing subsidiaries were in a relationship of receiving instructions from Japanese TV manufacturers and distributors. And as a part of overall control and implementation of CRT production and sales business, Japan TV manufacturers and distributors decide important transaction conditions such as purchaser, purchase price and purchase quantity of CRT as its key component. The instruction was made to the local manufacturing subsidiary, etc., and the local manufacturing subsidiary was made to purchase the CRT. From these points of view, under the facts of this case, it can be evaluated that the transaction to purchase the CRT will be considered as a combination of Japanese TV manufacturers and local manufacturing subsidiaries as economic activities. The Supreme Court held that it could be said that the agreement was to undermine the competitive function of the market involved in the transaction with the Japanese television manufacturers located in Japan. In addition, enforcement cooperation with competition authorities around the world is underway in the actual enforcement of the Antimonopoly act, antitrust law, and competition law. For example, the Antimonopoly Cooperation Agreement and the provisions of the competition chapter in and the Economic Partnership Agreement are increasing, and in fact, after keeping in touch on the on-site inspection on the same day, the consultation on the remedy of the merger is also proceeding. In addition, discussions in the International Competition Network, exchange of opinions and technical assistance in competition policy have been promoted.

Chapter 14

Next Stage of Japanese Competition Policy

So far, we have described Japan’s antimonopoly law, explained competition policy, and conducted a legal/economic analysis. In light of these, this chapter concludes the book by listing three criteria that are currently considered necessary for the enforcement of competition policy in Japan.

1 An Increase in the Number of Cases In the field of antimonopoly law enforcement in Japan, there are many managers but few players. It is necessary to increase the number of players, meaning the number of actual cases, including civil, criminal, and/or administrative cases. Various methods have been explored for revising the system and facilitating law enforcement. In addition, various guidelines have been developed, and efforts have been made to educate the populace on antimonopoly law. However, among the major countries, Japan has an overwhelmingly low degree of enforcement of competition/antitrust laws, which needs to be reversed. This is particularly required for the control of mergers in Japan.1 Some critics say that the frequent occurrence of antitrust cases in a so-called ‘lawsuit society’ such as the United States is causing harm. There is also criticism of the political enforcement approach used in a bureaucratic society like the European Union. On the other hand, competition authorities in these areas are considered to have an advanced implementation and compared with these authorities, the level of antimonopoly law enforcement in Japan is very low. In order to improve this, such as in a case like Japan’s violation investigation, we sought ways to increase the number of actual cases, by collecting evidence from the notification of the submission orders

1 Shapiro (2019) has also made similar recommendations, particularly for the revitalization of merger

control in antitrust enforcement. Also see Baker (2019), who weighs the importance of the Microsoft case and recommends the antitrust revival to a competitive economy, especially Chap. 10. © Springer Nature Singapore Pte Ltd. 2019 K. Arai, Law and Economics in Japanese Competition Policy, https://doi.org/10.1007/978-981-13-8188-1_14

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like the European Union and through the strict handling of procedural violations like the United States. There would be room for consideration.

2 Growth of the Field It is necessary to include more expert testimony in the process of examination and dispute proceedings of antimonopoly law violations, and to make law enforcement more transparent, objective, and verifiable. For this purpose, related to the first criteria above, it is necessary to increase the number of experts and participants in the field. In the United States, there are many expert lawyers for plaintiffs, specialist law firms for defendants, and economics experts available for testimony. In the European Union, in addition to the enforcement done by the authorities, the legal profession plays a supporting role, and in recent years the analysis of economics experts has also been used. A similar situation is also developing in China; the activation of law enforcement for competition involving legal professionals and the use of economic analysis is increasing. Of course, it is desirable to have fewer legal disputes than more. However, it is an urgent task in Japan to enhance the expertise of lawyers who support the detection and execution of cases, as well as the expertise of empirical economists who support the basis. It is, so to speak, supply of human resources and the growth of field, and this is an appropriate means for restoring competitive economy, and it is considered to be a key for the Japanese economy reconstruction. Therefore, there is a need for an approach in Japan that can ensure the cooperation of legal counsel so that the introduction of attorney-client confidentiality privilege does not work against the enforcement of antimonopoly law. This is also true for research; while the number of people who are familiar with economic law has increased, there is room for further growth in the field of economic law research. In combination with that, further research support is necessary for theoretical and empirical research into industrial organizations.

3 Advocacy, Practice, and Analysis In the area of Japan’s antimonopoly law, further progress in structuring law enforcement and in the promotion of competition in the regulated area is necessary. For example, in order to show the communication of intention in the proof of commonality in cartels, it has been established that a correspondence between prior liaison and ex-post action should be made. Also, in order to indicate the exclusion of private monopolization, the law has been constructed so that entry into the market is extremely difficult and there are artificiality that deviate from the normal range of competition. Thus, in recent years, in particular, the points to be considered when enacting an antimonopoly law have been orchestrated. Furthermore, among these, refinement of the recognition method of prior liaison negotiations from indirect evidence, and refinement of artificiality, such as the degree of difficulty in finding other business partners, are also in progress.

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However, there are still few enforcement cases, such as discriminatory handling, and the field is scattered. In addition, with regard to competition in the regulated field, as can be seen in the discussions on regional banks and local bus routes, there may a need for competition without population decline. However, it has been shown theoretically, empirically, and experimentally that a certain level of competition is required to improve productivity, and it is persistent not only to the industry specific guidelines but also to the various actual cases that may develop in the future. Advocacy would also be necessary in this context. It is the foundation to support competition policy that a wide range of people recognize that the various functions of competition are important. The establishment of a suitable competition culture is required, especially in industries where subsidies are spent. Above all, it is important to conduct research and make evidence-based decisionmaking on what functions of competition should be emphasized. In other words, steady enforcement should be carried out based on carefully considered prioritization of the competition function. Japan’s Supreme Court has just shown that the competitive function is important (see below), and, as mentioned at the beginning of the book, as competition has various functions, it is time to think about policy management that is conscious of which functions should be emphasized. For that purpose, further theoretical and empirical research is needed, which is a very exciting subject. Moreover, in light of the fact that the purpose of the Act is to promote the democratic and wholesome development of the national economy as well as to assure the interests of general consumers, by promoting fair and free competition (Article 1), the “substantial restraint of? competition in any particular field of trade” as set forth in Article 2, paragraph (6) of the Act shall mean a situation where the competitive function of the market of the trade in question has been impaired. Japan Supreme Court. (2010 (Gyo-Hi) No. 278, Minshu Vol. 66, No. 2.) Feburuary 20, 2012.

3.1 Toward the next stage of competition policy The recommendations for the next stage of competition policy mentioned here are necessary for Japan’s antimonopoly enforcement and competition policy enforcement. At the same time, we are convinced that this is an issue for global competition authorities and those concerned with competition policy in the globalized world to pursue.

References Baker JB (2019) The antitrust paradigm. Harvard Univerity Press, pp 197–209 Shapiro C (2019) Protecting competition in the American economy: Merger control, tech titans, labor markets. http://faculty.haas.berkeley.edu/shapiro/protectingcompetition.pdf