2--balancing the supply chain

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REBALANCING THE SUPPLY CHAIN:

buyer power, commodities and competition policy

April 2008


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Page 2 Page 3

About the South Centre

n August 1995, the South Centre became a permanent

ntergovernmental organization o developing

ountries. In pursuing its objectives o promoting

outh solidarity, South-South co-operation, and

oordinated participation by developing countries

n international orums, the South Centre prepares,

ublishes and distributes inormation, strategic

nalyses and recommendations on international

conomic, social and political matters o concern to

he South.

he South Centre enjoys support rom the

overnments o its member countries and o other

ountries o the South and is in regular workingontact with the Group o 77 and the Non-Aligned

Movement. Its studies and publications benet rom

echnical and intellectual capacities existing within

outh governments and institutions and among

ndividuals o the South. Through working group

essions and consultations that involve experts rom

ierent parts o the South, and also rom the North,

ommon challenges aced by the South are studied

nd experience and knowledge are shared.

About Traidcrat

raidcrat Exchange is the UKs only development

harity specialising in making trade work or the

oor. In collaboration with local partners we work to

reate opportunities or poor people to harness the

enets o trade, helping them to develop sustainable

velihoods. Traidcrat also aims to use the experience

its sister air trade company, Traidcrat plc, to

mprove wider trade p ractices. Traidcrats Policy Unit

onducts research and advocacy work to improve trade

ules and the practice o companies.

Acknowledgements

This report was written by Liz Dodd rom Traidcrat

and Samuel Asaha rom the South Centre.

Background material or the case studies was

researched by Yared Tsegay. The authors would like

to thank Sophia Murphy, Myriam Vander Stichele,

Dominic Eagleton, Eline Demey, Fiona Gooch and

Luisa Bernal or their comments. Traidcrat and the

South Centre would also like to thank the European

Commission or its support.

This report is a contribution to the work o the

Responsible Purchasing Initiative, a pan-European

initiative led by IDEAS (Spain), Oxam-Wereldwinkels

(Belgium) and Traidcrat (UK). For more inormationvisit www.responsible-purchasing.org.

Glossary o terms

FAO Food and A griculture Organisation

Monopoly When a single rm has selling power

Monopsony The buying orm o monopoly, when a

single rm has buying power

OECD Organisation or Economic Co-operation and

Development

Oligopoly A market dominated by a ew sellers

Oligopsony A market in which there are ew buyers

Own-label Range o products carrying the retailers

label and produced to retailers specication; typically,

but not necessarily, sold at lower price than main

brand competition (UK Competition Commission)

Transnational corporation (TNC) An enterprise with

activities in two or more countries with an ability to

infuence others (UN denition)

Vertical integration A single rm undertaking

successive stages in the chain o a products production

UNCTAD United Nations Conerence on Trade andDevelopment

Contents

Summary Page 4

Introduction Page 5

Section 1 Buyer power, corporate concentration and commodities Page 6

What is buyer power? Page 6

What gives companies buyer power? Page 7

Transmission o risk and shiting power Page 8

How companies maintain buyer power Page 9

Buyer power and the commodity problem Page 10

Impact o buyer power case studies Page 13

Section 2 Competition policy and buyer power Page 15

Introduction to competition policy Page 15

Principles and practice o competition policy Page 16

Competition policy and buyer power Page 17

Competition policy opportunities Page 17

Competition Policy limitations Page 18

Section 3 Examples o competition policy being used to tackle buyer power Page 22

1. Retailer power accumulation prevented Page 22

2. Competition authorities tackle multinational retailer power Page 23

3. Tackling buyer power o processors Page 24

4. First steps in tackling the probem o global supply chains Page 25

5. Tackling capacity constraints through leniency programmes Page 25

6. Using public scrutiny as a deterrent Page 26

7. Tackling the climate o ear Page 26

8. Designing competition policies to promote the public intrest Page 26

Section 4 Conclusions and recommendations Page 27

Reerences Page 30

over Photograph: Rajendra Shaw


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Page 4 Page 5

Rebalancing the supply chain: buyer power, commodities andcompetition policy

Introduction

This paper is an attempt to explore the extent to which competition policy can be

used to address problems caused by corporate concentration and the exercise o

buyer power1 in agricultural commodity markets.2 It assesses the conceptual and

practical opportunities o current competition policy to tackle this phenomenon and

also highlights its limitations. This is a dicult and complex area. Many studies that

have looked into the adverse aects o buyer power and corporate concentration

on commodity producers have suggested that competition policy may oer a useul

avenue or investigation.3 This study is thereore an attempt to do this and should be

seen as a contribution to the debate.

For many policy makers international negotiations on competition policy are now

unortunately associated with the Singapore Issues debate at the World Trade

Organisation (WTO). The Singapore Agenda on competition policy was an attempt

to achieve multilateral agreement on competition law. It was not the rst attempt todo so, the Havana Charter o 1947/48 contained provisions which would have bound

each member to prevent practices aecting international trade which restrained

competition, limited access to markets, or ostered monopolistic control, and in 1980

the United Nations agreed the Set o Multilaterally Agreed Equitable Principles

and Rules or the Control o Restrictive Business Practices (the UNCTAD Code). The

Singapore Agenda contained provisions more similar in content and approach to US

Anti-trust law than to the relatively developing-country riendly UNCTAD Code and

also omitted many o the more pro-development aspects o the Code. The approach

taken by the Singapore discussions would not have addressed problems o market

concentration in the hands o a ew transnational companies and may in act have

exacerbated problems by emphasising market access aspects and reducing the policy

options available to developing country governments. Thereore, its successul dismissal

by developing countries at the Cancun Ministerial in 2003 was commendable.

This paper takes a dierent approach. It assesses the extent to which governments

could use competition policy instruments as a way o regulating the power and

practices o powerul transnational and national retailers and ood processors.

As discussed in the subsequent sections, it is clear that there are high levels o

concentration in these sectors and there is real concern that some companies may be

abusing their dominant position more requently than the number o cases suggests

and that these practices may have impacts right down the supply chain. These nodes

o concentration may be amongst sellers (or example o inputs such as seeds and

ertilisers to producers) or amongst buyers (processors or retailers who buy a armers

produce). Both can be a problem or primary producers o agricultural products, but

this paper will ocus exclusively on buyer power.

Footnotes

1 According to the OECD (1981), buyer power is a situation which exists when a rm or a group o rms, either because ithas a dominant position as a purchaser o a product or service or because it has strategic or leverage advantagesas a result o its size or other characteristics, is able to obtain rom a supplier more avourable terms than those availableto other buyers.

2 This paper denes agricultural commodities airly broadly as undierentiate d, largely unprocessed agricultural products,including tropical beverage crops (tea, cocoa, cotton), sugar, cereals, meat, dairy products, rice, grain, rubber, bres(cotton, jute, sisal) oil crops, ruits and horticulture crops. These products can be traded either in bulk or increasingly aspart o buyer driven supply chains involving the same products, but with a greater degree o retailer-led standardisation.See Vorley 2004 or a uller explanation o these terms.

3 See Asaha 2005, Vorley 2002, Murphy 2005, ActionAid 2008.

Summary

The power o increasingly concentrated retail and processor buyers in global

agricultural supply chains allows them to exert p ressure on their immediate suppliers,

which can then be passed down the supply chain to vulnerable commodity producers

and their workers. Traidcrat and the South Centre are concerned about the impacts

o this on some o the most vulnerable producers in the world, particularly as their

ability to organise and respond collectively is being increasingly limited. In assessing the

potential o competition policy to act as a check on the exercise o this buyer power,

the paper nds clear opportunities, in particular or tackling the accumulation o power

which is one o the root causes o the problem. However there are also clear limitations

(both conceptual and practical) which need to be addressed i competition policy is to

be eective, these include: competition policys consumer ocus; its lack o dedicated

instruments to assess and deter buyer (as opposed to seller) power; the ear associated

with buyer power, resource constraints and most undamentally the need to recognise

the global nature o trade either through expanding the scope o national laws orthought the establishment o an international competition agreement or authority.

Section 1 o this paper will outline the problems that buyer power and corporate

concentration present or commodity producers in developing countries. Section 2

outlines dierent approaches to competition policy and assesses its useulness and

weaknesses in tackling buyer power. Section 3 presents a series o case studies outlining

successul attempts to use competition policy to tackle buyer power and Section 4 oers

conclusions and recommendations.


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Page 6 Page 7

What gives companies buyer power?

As the denitions imply, buyer power stems rom a number o actors, including a

companys size, lack o competition in a particular market or the suppliers relative

dependent position which allows the buyer to play a gatekeeper role between

the supplier and the consumer. I a company is the only buyer in a market it is in a

monopsony position. This rarely occurs in practice and more oten there are small

numbers o concentrated buyers who dominate a particular market. This is known as

oligopsony. Buyer power can also be created when a group o buyers who in other

aspects are competitors agree to collaborate in their purchasing. This can take the orm

o buying groups or buying alliances. The power o a buyer is situationspecic.

It relates not only to market power, but to the relative position o the supplier.

Even a small retailer with tiny market share can exercise buyer power i it takes hal a

suppliers output.

Suppliers o dierentiated products or those with recognised brands are betterable to withstand the pressure o dominant buyers. In contrast, producers supplying

undierentiated bulk commodity products are extremely vulnerable. In buyer-driven

supply chains the supplier is kept vulnerable by having to comply with buyer-specic

standards, which reduces their ability to sell elsewhere and thereore increases their

dependence on that particular buyer.

Small producers, in particular, are likely to suer when they are unable to

resist retailer buyer power, orcing them to cut prices to the point where only

the most ecient can survive. The longer-term eect will be to threaten the

viability even o ecient producers when investments are undermined by

inability to recover xed costs as a result o being orced to price at (short-

term) marginal cost.8

Footnotes

8 Dobson, P. (2002), Retailer Buyer Power in European Markets: Lessons rom Grocery Supply,University o Loughborugh Business School Research Series.

Footnotes

4 OECD (1981) Buying Power: The Exercise o Market Power by Dominant Buyers,Report o the Committee o Experts on Restrictive Business Practices.

5 Dobson, P.W., Waterson, M., Chu, A., (1998) The Welare consequences o the exercise o buyer power,Oce o Fair Trading.

6 European Union DG Competition Glossary o Terms (2003).

7 UK Competition Commission (2000) Supermar kets: A report on the supply o groceries rom multiple stores in theUnited Kingdom.

What is buyer power?

There are various dierent denitions o buyer power.

AccordingtotheOECDbuyerpowerexistswhenarm,eitherbecause

it has a dominant position as a purchaser o a product or service, or

because it has strategic or leverage advantages as a result o its size or

other characteristics, is able to obtain rom a supplier more avourable

terms than those available to other buyers. 4

AsimilardenitionofbuyerpowerisproposedbyDobsonetal.who

state that buyer power is exercised when a rm or group o rms obtain

rom suppliers more avourable terms than those available to other buyers

or would otherwise be expected under normal competitive conditions.5

TheEuropeanCommissiondenesbuyerpowerasthebargaining

strength that the buyer h as vis--vis the seller in commercial negotiations

due to its size, its commercial signicance to the seller and its ability to

switch to alternative suppliers.6

When buyer power is exercised suppliers accept terms that they would not normally

and in addition, may not complain, or ear o commercial retaliation by the buyer.

The existence o a climate o apprehension amongst suppliers was clearly ound by

the UK Competition Commissions enquiry into the behaviour o the UKs our largest

supermarkets:

Overall, there was a general climate o apprehension. Some suppliers

expressed what appeared to be very real ears that any hint o involvement

in our inquiry would threaten the existence o their commercial operations.7

As well as squeezing on price there are non-price aspects o buyer power which involve

extracting more avourable treatment in terms and conditions. Buyer power practices

include:

threateningde-listing

retrospectivelydeductingorchangingprices

demandingloyaltypaymentsfromsuppliers

keepingpricingopaque

usingshorttermornocontracts

demandingregional/globalsupplieragreements

paying late

demandingglobalpromotionsatshortnotice

demandingstandardscomplianceatsuppliersexpense

Section 1: Buyer power, corporate concentration and commodities


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Page 8 Page 9

There seems to be a shit in buyer power towards the retail end o the supply chain

and away rom the traditionally dominant processors.11 However it is also clear that

increasing consolidation at the retail level is in turn driving consolidation at the

manuacturing level as well. For example Planet Retail observes that the pressure

rom the likes o Wal-Mart, Tesco and Carreour are thought to be a motivating actor

behind the 2005 link up between Procter and Gamble and Gillette. 12 Retailer power

is also accelerating the drive towards vertical integration in particular supply chains,

or example the banana giant Doles move into processing is thought to be in part a

response to supermarket price pressures. It also seems to be the case that consolidation

at the retail level with growing demands or private standards and traceability

requirements is driving consolidation amongst suppliers oten in avour o large

exporting rms whilst pushing smallholder armers out o supply chains.13

How companies maintain buyer power

Large companies are able to maintain and increase their power by virtue o their size.This enables them to negotiate larger volume related discounts, which means in turn

that they are able to oer lower prices than those oered by smaller rivals, which

in turn increases the dominant buyers market share and so on. Firms also engage in

behaviour described below which has the eect (intended or not) o increasing and

sustaining their ability to exercise buyer power.

Mergers and acquisitions:

The growth in mergers and acquisitions (or example SuperValus acquisition o

Albertsons in the United States in 2006 and Edeka acquiring SPAR Germany in 2005)

has contributed to an increase in market share and buyer power amongst retailers.

This shit is also occurring in the developing world where aggressive investment in the

retail sector in Latin America, South East Asia, and to some extent in Arica has lead to

increased market concentration at the retail end o commodity value chains.14

Sourcing globally:

Purchasers can increase their power by buying their raw materials rom multiple

sources. This allows them to avoid dependence on a single or a ew suppliers and

enables them to extract the lowest possible prices, orcing suppliers to compete ercely

both within and between countries. This practice is particularly seen where the buyer

(or example a brand or a processor) is sourcing undierentiated commodity products.

In the tea industry or example, certain types o tea used or particular blends are

substitutable. This allows the buyer to play suppliers o against each other. Farmers do

not possess the reciprocal power to play one agribusiness giant o ag ainst another.

Footnotes

11 Planet Retail (2006), Global Retail Concentration.


13 Brown O. with Sander, C. (2007), Supe rmarket Buying Power: Global Supply Chains and Smallho lder Farmers, IISD.

14 Dobson, P. (2002), Retailer Buyer Power in European Markets: Lessons rom Grocery Supply,University o Loughborough Business School Research Series.

15 Tickell . S. (2004), Fairtra de in perspective Sustainabi lity Radar.

Transmission o risk and shiting power

Buyer power can be exercised at any point in a supply chain. In particular it seems to

be prevalent at the ag ricultural processing, manuacturing and retail levels. This may

be because these are the more capital-intensive parts o the chain and entry costs are

high, leading to high levels o concentration. The impact o buyer power can also be

transmitted along long and complex supply chains and elt by primary producers. So

buyer power exerted by a retailer in France, can aect a powerul brand manuacturer

who passes the pressure and risk onto their primary suppliers. The UKs Competition

Commission enquiry in the grocery sector conrmed this:

...the evidence that has been presented to us during this inquiry by suppliers

to intermediaries and processors, especially primary producers, strongly

suggests that supply chain practices transerring excessive risks and uncertain

costs up the supply chain are suciently prevalent in many sectors to justiy

greater scrutiny o the nature o these commercial relationships.9

Footnotes

9 UK Competition Commission enquiry into the groceries market, (February 2008) Provisional decision on remediesrelating to supply chain practices.

10 Oxa m (2004), Trading away our rights: Women working on global supply chains.

Sector analysts

predict that it is

not unrealistic to

imagine uture

global markets in

which the sale o

ood is controlled

by our to ve

global rms with a

handul o regional

and national

companies, andin which ood

manuacture is

dominated by some

ten companies

using only about 25

brand names.15Shareholder pressure or

high returns

Consumers expectations

o low prices

Retailers and brand owners

ofoad costs and risks down the supply chain

Mid-chain suppliers

seek low-cost producers

Producers

arms and actories pass the pressures on to workers

Sub-contractors Employees

Sub-contracted and

home-based workers

Retailers and brand owners push or:

lowerpricesfromproducers

fastandexibleproduction

hightechnicalandqualitystandards

betterlabourconditionsbutwithouta

long-term commitment

Precariously employed workers,

mostly woman and migrants, are:

insecure,oncontractswithfewbenets

exhaustedbylonghoursandhightargets

underminedinorganisingfortheirrights

Producers, as employers:

hirewomanandmigrants

useshort-termcontractsandevadebenets

undermineorganising

hidelabourrightsviolations

Supply chain pressures create precarious employment

10


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Page 10 Page 11

Rise o own-label products:

By developing own-label products, retailers are able to capture more o the value on

those products and are increasingly displacing traditional brands. In doing this they

become a competitor, as well as a buyer, in relation to their suppliers. This increases

their buyer power in several ways. They can reuse to buy products rom suppliers

because they can oer an own-label product, the development o their product with

manuacturers gives them critical inormation about the cost make-up behind that

product, and because they are the nal decision makers in the retail pricing o products

they can price their own-label product below that o branded competitors.

National and cross border collaboration:

By strategically collaborating (which companies do to improve economies o scale,

reduce transactional costs etc.) rms are able to reinorce their dominant position.

This may take the orm o buyer groups or buying alliances. Buyer groups purchase

collectively on behal o members that remain independent retailers while buying

alliances tend to have only one member rom any country (i.e. generally they are notdirect competitors). This practice has the eect o redu cing options or suppliers and so

increases the buyer power o those participating.17

Seen in this light, it is not just the activity o international expansion by the

leading multinational retailers that is driving greater integration o markets

on the procurement side, but also alliances o nominally independent

retailers.18

Buyer power and the commodity problem

Two and a hal billion people make their living by producing primary agricultural

commodities.19 As many as 43 developing countries depend on a single agricultural

commodity export or more than 20 percent o their total export revenues.20

Commodity production is characterised by large numbers o producers, producing

largely undierentiated products. They are oten vulnerable and the high costs o

exiting commodity production and lack o alternative livelihoods means that they may

continue to produce even when the market price is below their cost o production. They

will compensate or low prices by producing more, exacerbating oversupply.

Despite recent price rises or some commodities (especially those used in the

manuacture o bio uels and also minerals), there is debate about how long thispeak will last, and or many tropical products the long term price trend continues to

be downwards, punctuated by increasingly volatile short term price fuctuations. The

ormer reduces producers living standards while the latter makes it very dicult or

them to plan. In addition, commodity producers also appear to be receiving a low and

declining proportion o the nal product price (see gure below).

Footnotes




19 Tickell , S. (2004), Fairtra de in perspective Sustainabi lity Radar.

20 FAO (2004) , The State o Agricultural Commodity Markets.

Footnotes

21 Kapli nsky or UNCTAD (2004), Compet ition Policy and the Global Coee and Cocoa Value Chains.

22 Green , D. (2005), Conspiracy o Silence: Old and new directions on Commodities Conerence paper presente d toStrategic Dialogue on Commodities, Trade, Poverty and Sustainable Development.

23 Asaha , S. (2008) Commodities dependence and development: some suggestions on how to tackle the commoditiesproblems. South Centre, ActionAid 2008.

24 Sources: Vorley (2003), CUTS (2005), Planet Retail (2007), ActionAid International (2005),UK Competition Commission (2007).

Losing market

share to private

abels is now

a key problem

aced by brand

manuacturers in

developed retail

markets, not

east as a result

o strong price

dierentials.16

100%

80%

60%

40%

20%

0%

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Proportiono

fnalretailprice

Year

value added in consuming country

transport costs and weight loss

value added in producing country

grower price

There are many reasons or the long term price declines and low proportion o the nal

retail price or tropical agricultural commodity producers, including oversupply and the

collapse o international supply agreements. However the combination o corporate

concentration and increased armer disorganisation is particularly o interest in terms

o competition policy.22 The relationship between concentration and lower prices is

complicated, but ActionAid and the South Centre have recently traced the trends and

linked levels o corporate concentration directly with declining prices in the coee

market.23

Examples o corporate concentration in commodity supply chains

Processor concentration

4internationalcoffeeroastersaccountfor45%oftotalcoffeeroasting

2companiesaccountfor74%ofcottonginningcapacityinZambia

3companiescontrol50%ofcocoaprocessingglobally

5companiescontrol80%oftheworldmarketforbananas

Retailer concentration

ThetoptenretailersintheEUnowaccountforover30percentofsalesofall

ood and daily goods

IntheUKthetopfourretailersaccountfor75percentofthegrocerymarket

Wal-Martaccountsfor6.1percentofglobalretailsales24

Distributionofnalretailpriceinthecoffeevaluechain

21


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Page 12 Page 13

Various actors have exacerbated the trend towards corporate concentration. Economic

liberalisation has accelerated cross border mergers and acquisitions (usually between

companies headquartered in rich countries), which have now reached unprecedented

levels. This is not likely to lead to the stated aim o liberalisation which is more

competitive markets. The push towards privatisation in many developing countries has

had similar eects, replacing public monopolies with private ones instead o ostering

greater competition. In agriculture this has impacted on the ability o producers to

counter corporate concentration as state marketing boards have been abolished

and there has been strong opposition to producer or armer organisations in both

the developed and developing worlds. For example in the late-1990s co-operatives

processedtwothirdsofCanadianmilk;todaythatisdownto42%.Thesituationismore

striking in Sub-Saharan Arica where the advent o neo-liberalism under the IMF/World

Bank-led structural adjustment programmes swept many state marketing boards rom

the continent. The weakening or abolishing o the marketing boards has let producers

isolated, disorganised and has limited their ability to bargain collectively. So while

upstream stages o the supply chain have become more concentrated, competitionamongst suppliers has intensied at national and international levels, allowing buyers

to play producers o against each other, extract better terms and transer value rom

South to North.

Control o commodity value chains by a small number o powerul

corporations can also drive down commodity prices and erode the share o

the nal product price that goes to producers. When markets bring together

large numbers o competing suppliers against a handul o large-scale

buyers, the buyers are likely to have most leverage in setting prices. When

the buyers are also linked to processors and retailers in vertically integrated

commodity chains, they are in a strong position to capture a greater share o

the value o the nal product or traders, processors and retailers.26

This has important implications or global income inequality when those armers

are located in developing countries, while the processors, international traders and

retailers are mostly located in developed coun tries. A World Bank report estimated that

divergence between producer and consumer prices may have cost commodity-exporting

countries more than $100 billion a year. 27

Buyer power has many negative impacts which can be transmitted through the supply

chain. They include increased costs or suppliers, uncertainty which reduces incentives

or investment and innovation, nancial distress including high levels o debt and

insolvency, as well as transer o commercial pressures onto workers in the orm o low

wages, short term contracts and delayed wage payments.

Footnotes

25 FAO (200 1), Report o the Panel o Eminent Experts on Ethics in Food and Agriculture.

26 FAO (2004) , The State o Agricultural Commodity Markets.

27 Morrise t, J. (1997), Unair Trade? Empirical Evidence in World Commodity Markets Over the Past 25 YearsWorld Bank.

Footnotes

28 Quo ted in Fox and Vorley (2004), Concentration in ood supply and retail chains DFID.

29 Vorle y, B. et al (2004), Food Inc , Bill Vorley at al UK Food Group.

30 Henderson , J. (2005), Global Production Networks, competition, regulation and poverty reduction: policy implications,Centre on Regulation and Competition Working Paper Number 115.


An FAO panel o

experts concluded:

there are serious

power imbalances

arising rom the

concentration o

economic power

n the hands o a

ew.25 The global banana bottleneck -rom Latin America/Caribbean to the UK

Consumers

Retailers

Ripeners/distributors

Transnational banana companies

Smallholders & Plantation

workers

60 million

5 retailers = 70% o UK grocery market

5 companies or alliances (Fyes, Del Monte,

JP/Dole, SH Pratts, Keelings/Chiquita)

= 88% o UK market

5 companies (Dole, Chiquita, Del Monte,

Fyes, Noboa) = 80% o global market

2,500 plantations, 15,000 small-medium

scale armers, 400,000 plantation

workers involved in

export sector

The Banana Split -

how much o 1.00 retail value o loose

Ecuadorian bananas stays with each chain

actor to cover costs and margin.

Plantation workers 1.5p

Plantation owners 10p

Ripener/Distributer 17p

Retailer 40p

International

trading company 31p

(includes 5p EU tari)

Impact o buyer power case studies

Bananas

In 2002 Asda Wal-Mart negotiated with supplier Del Monte and dropped the price

o loose bananas in the UK rom 1.08 to 94p/kg. Within days Tesco, Saeway,

Sainsburys and Morrisons all ollowed, and by 2005 Asdas price had allen to 79p/

kg. Banana Link claim that at a retail value o 81p/kg it is impossible or a grower

in Costa Rica to be paid the legal minimum price or a box o bananas and in turn

impossible or that grower to pay workers a legal minimum wage.28

Wine

Foursupermarketchainscontrol80%oftheUKsmarketforSouthAfricanwine.

Each is able to exert signicant buyer power on their suppliers.

In this context, the supermarkets have the wineries in almost a vice-like grip such

that they are not only able to demand adherence to quality and health standards

(typically at the wineries own cost) but in particular are able to bear-down o n the

prices the wineries are paid.30

In turn this has contributed to increased casualisation o the workorce.

Specically the power that British supermarkets are able to exert by virtue o their

oligopolistic nature as the single most important market or South Arican wine, is

orcing down prices or producers. This, in turn, is resulting in a downward pressure

on direct and indirect labour costs that is having negative consequences or poverty

alleviation among the industrys black workers.31

29


8/17

Page 14 Page 15

Footnotes

32 Lee, C. (2005) , Model competition laws: The World Bank-OECD and UNCTAD approaches compared ,Centre on Regulation and Competition Working Paper Number 96.

33 Singh, A. (2002), Compet ition and competition policy in emerging markets: international and development dimensions ,University o Cambridge.

34 Europea n Economic and Social Committee, Bulletin, March 2005.

The buying

power o the large

multiples in the

ood market must

continue to be a

matter o concern

or the competition

authorities.34

Introduction to competition policy

Competition policy is one aspect o an overall policy ramework. History, legal traditions

and social and economic needs dier among countries and also over time. Competition

policy regimes around the world refect these dierent realities. This makes it dicult

to generalise about competition policy. However broadly speaking the purpose o

competition policy has historically included a notion o public good or public interest.

Recently amongst certain countries, especially those ollowing the OECD model, there

has been a narrowing o the aims o competition policy to ocus on the promotion o

economic eciency and consumer welare. Most competition laws cover a ew central

issues: mergers (which can produce anti-competitive eects or example by preventing

the entry o smaller players); anti-competitive practices (such as price xing and cartels)

and abuse o dominance. Not all countries have competition policies, but there was a

rapid rise in this number during the 1990s structural adjustment period, in response

to the wave o privatisation (and its ailure to lead to a competitive environment) and

in response to the Asian nancial crisis. Those countries that have introduced lawshave been infuenced variously by US, EU, Germany, Japan, but also South Korea and

multilateral bodies including the OECD, World Bank and UNCTAD.32

Number o developing countries that have adopted competition laws,

as o June 2000

Pre-1950s

1950s 1960s 1970s 1980s 1990sUnder

preparationTotal

Asia/Pacic 0 0 2 2 2 14 6 26

Central/Eastern Europe 0 0 0 0 1 16 1 18

Latin America &Caribbean

1 2 1 1 0 6 10 21

Arica 0 1 0 1 2 14 10 28

Total 1 3 3 4 5 50 27 93

Section 2: Competition policy and buyer power

Where does buyer power happen?

Primary Producer

Primary buyer

(Agent/co-operative/

marketing board)

Importer/exporter

Food service company

Increasingly buyerpower is exertedhere as the retailsector becomesmore concentrated

Buyer power otenoccurs here or example4 coee roastersaccount or 45% oglobal processing

Buyer power can occurhere, or example atea actory or cottonginnery which may be

the only processor in aparticular location

Processor/

manuacturer/brand

Primary processing

acility

Retailer

33


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Principles and practice o competition policy

Jurisdiction

The implementation o competition policy is limited by jurisdiction which is usually

national. Although there are bilateral and regional competition agreements and some

broader regional and bilateral trade ag reements include sections on competition, the

aim o these is usually limited to voluntary co-operation and acilitating market access

or rms rather than providing instruments that would allow regulation or sanction.

Sometimes there is tension between the national and regional levels and occasionally

there are disputes about which level has authority. At the multilateral level the rst

attempt to introduce competition rules was the Havana Charter, which was negotiated

in 1947/8 to lay down the blueprint or the International Trade Organization (ITO). This

did include regulatory aspects, requiring nations to take appropriate measures against

transnational restrictive business practices including price-xing and market access

limiting restraints.

35

However, the Havana Charter was never adopted because theUnited States withdrew support. In 1980 the United Nations Conerence on Trade and

Development (UNCTAD) presented a Set o Multilaterally Agreed Equitable Principles

and Rules or the Control o Restrictive Business Practices (the UNCTAD Code) to the

United Nations General Assembly. The General Assembly accepted the UNCTAD Code

as a non-binding recommendation. The rules provided or in the code have the explicit

objective o urthering the trade and development o developing countries. However

support to the Code was short-lived due to a shit o approach by the US. 36

Exemptions

In some countries certain sectors are completely exempted rom the remit o

competition policy. These are called carve outs and one o the most common has

been agriculture. Traditionally this has been to help armers and to protect the non-

economic gains rom agriculture including ood security and environmental protection.

For example, Article 36 o the Consolidated Treaty o the European Union states that

provisions on competition law shall apply to production o and trade in agricultural

products only to the extent determined by the Council within the ramework o

ensuring a air standard o living or the agricultural community, in particular by

increasing the individual earnings o persons engaged in agriculture.37 There are similar

provisions in the United States and Japan. However ew developing countries have such

carve outs, and the trend is turning against them, irrespective o their useulness or

countries at dierent stages o development.

Powers and resources

Competition authorities broadly judge cases against their remit (or example consumer

welare) and on whether they are likely to have anti-competitive eects. To do this

they normally rely on the party aected by the anti-competitive behaviour to make

a complaint to competition authorities, but authorities can also take the initiative to

set up regulatory bodies or watchdogs or to monitor particular markets. The sanctions

available to authorities vary rom country to country and can be quite wide-ranging

or example some can prevent an action or in rare cases order the reorganisation or

break up o a company (in merger cases or example), or they can impose nes on

companies ound guilty o abuse o dominance. In some instances nes are related to

the turnover o a company and can be signicant. However in practice investigating

and successully prosecuting cases can be very dicult and requires considerable time

and resources. In some situations investigation o an entire market is required. In many

countries, including developed ones, the resources available to competition authorities

are limited.

Competition policy and buyer power

The debate as to whether competition policy is capable o dealing with the problem

o buyer power in its present orm depends partly on the model o competition policy

chosen. The OECD model tends to be more consumer (rather than supplier) ocused

although it does speciy clear punishments or abuse o dominance, including in

situations o oligopsony. The UNCTAD model is more f exible and explicit about dealing

with TNC dominance. There is debate among competition policy experts as to whether

buyer power should be treated dierently rom seller power. Carstensen has argued

that similar analytical tools can be used, but that dierent metrics (benchmarks) are

needed to measure the dierent types o eect and that in terms o diagnosis rms

need a considerably smaller market share to exert buyer than seller power. In contrast

the OECD concludes that monopsony buying problems can be addressed using the

same basic antitrust and benchmarks or measuring eects as that used or addressing

monopoly selling problems.38

Competition policy opportunities

Competition policy as currently conceived can clearly be used to tackle a number o

the problems outlined as associated with buyer power, by restraining the ormation

o a dominant position through mergers and by preventing or circumscribing some

o the practices associated with abuse o that dominant position. Competition policyis thereore an important tool or policy makers. Section Three will provide examples

where competition policy has been used to tackle the exercise o buyer power in both

developed and developing countries.

Footnotes

35 Fox, E. (1999), Compe tition law and the millennium round, Journal o International Economic Law.

36 Fox, E. (1999), Compe tition law and the millennium round, Journal o International Economic Law.

37 Eur opean Union (2006), Consoli dated Versions o the Treaty on European Union and o the Treaty Establishingthe European Community.

Footnotes

38 Carte nsen, P. (2004), Buyer power and merger analysis: the need or dierent metrics, University o Wisconsin.

OECD (2006), Competition and regulation in agriculture: monopsony buying and joint selling.


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Competition policy limitations

In its current orm, competition policy has a number o limitations or dealing with

buyer power.

1. Buyer power versus seller power

Competition authorities tend to ocus on the problem o seller power rather than

buyer power. This is because usually they are tasked with ensuring that the consumer

is protected. This consideration is oten reduced in practice to achieving low consumer

prices rather than other actors such as ensuring choice or qu ality. As long as the

consumer is getting low prices, competition authorities have little reason to act. Indeed

the emphasis on consumer welare means that many o the practices carried out by

rms when exercising buyer power would be considered pro-competitive. Where there

is recognition o the existence o the problem o buyer power, the trend advocated

by powerul entities such as the OECD is to use the same tools as that used or seller

power. But some suggest that the low number o buyer power cases points to theweakness o the current instruments rather than the absence o the problem.

Both buyers and retailers are increasingly infuencing the process o

production, with the result that armers eel that not only are their margins

being reduced but their independence to govern their own commercial

activity is more limited than in the recent past. On occasion, price-xing

among buyers has been ound and prosecuted in many OECD jurisdictions.

Given the diculty o identiying local price-xing agreements, there may be

more price-xing activity by a gricultural buyers than has been prosecuted.39

Thus a narrow interpretation o the aim o competition policy limits its useulness in

tackling the problem o buyer power. There are some interesting exceptions to this

which are explored in the next section.

2.Problemsofmarketdenitionandmarketdominancemeasures

To prove an incidence o buyer power, it may be necessary to show that the rm

exercising the power is in a dominant position within a market. Thus how the relevant

market is dened and how dominance is measured are both o critical importance.

Markets are usually dened as geographic, (or example local), or as product markets

(or example the grocery sector). Dierent countries have d ierent approaches or

establishing market dominance. Some use quantitative measures, others qualitative

and there are wide disparities between the level o market share at which a rm is

consideredtobedominantfromaslowas20%toashighas70%.40 I a market is

dened too widely or the measure o market dominance is set too high this makes

it dicult to prove buyer power. This has resource implications or the competition

authorities too. For example it could be very dicult or very costly to prove that a

single rm is dominant across the entire EU market, but that does not mean it cannot

be exercising buyer power. It should be noted that most analysts agree that because o

the variety o ways that buyer power can be exercised as well as the issue o supplier

dependence, it is possible or a rm to exert buyer power at levels o market sharemuch lower than that o seller power.

Linked to this is another weakness o the current competition law approach when

trying to apply it to buyer power. Usually any assessment o market dominance takes a

horizontal approach that is it looks to see whether a rm or group o rms are able

to exert anti-competitive power at a certain point in a supply chain. There are also rules

governing vertical agreements that might have an anti-competitive eect or example

in the OECD model law the threshold or judging dominance in a vertical agreement

isthatatleastoneofthepartiesholdsadominantpositioninamarket(35%)orthat

similar agreements are widespread and this aects competition. However these are not

widely implemented in buyer power cases. Vertical integration leading to dominance

is particularly relevant in smaller economies where the impacts o agreements on

economic competition may be more keenly elt.41

Footnotes

39 OECD (200 6), Competition and regulation in agriculture: monopsony buying and joint selling.

Footnotes

40 Lee, C. (2005) , Model competition laws: The World Bank-OECD and UNCTAD approaches compared ,Centre on Regulation and Competition Working Paper Number 96.

41 Dhanje e, R. (2004), The tailoring o competition policy to Caribbean circumstances: some suggestions,Centre on Regulation and Competition Working Paper Number 79.


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3. Problems o jurisdiction

Competition policy requires modernisation i it is to adequately tackle the challenges

presented by globalisation. Supply chains increasingly involve a ctors rom multiple

countries and companies themselves are increasingly transnational.

A key eature o globalisation is that its economic and organisational glue

is increasingly associated with complex networks o suppliers who produce

in globally dispersed locations in accordance with the demands o lead

rms. These rms either dominate important national markets (such as the

principal supermarket chains in Britain), or more likely are TNCs with broad

international remits.42

This leads to a number o challenges when trying to use competition policy to tackle

buyer power. By denition the victims o buyer power are suppliers and in todays

supply chains the more powerul actors are likely to be located in developed countriesand the suppliers in developing countries. At present competition policies are applied

only against anticompetitive conduct which adversely aects markets in the country

or region where the competition authority concerned has competence. Thus, the

competition authority will assert competence over anticompetitive conduct by sellers

overseas which adversely aects buyers or consumers based within its territory. In

the case o the U S, the competition authorities will also assert jurisdiction over

anticompetitive conduct by oreign buyers which a dversely aects exports rom

the US. However, no competition authority will take enorcement action against

anticompetitive conduct by national buyers which ad versely aects sellers based in

another country or jurisdiction. Again there are some important exceptions to this rule

which are explored in the next section. While the unilateral application o competition

laws on oreign rms or in oreign territory has been a subject o intense debate in the

past, competition authorities in major developed countries (or the EU) routinely enorce

their laws in such situations so there should be no insurmountable legal obstacles

to smaller countries acting in the same manner. In practice, however, given decits in

enorcement capacity and power asymmetries, it can be expected that smaller countries

will ace problems in the application and the likelihood o a successul prosecution o

anticompetitive practices by TNCs involved in commodity supp ly chains.

4. Capacity limitations

There have been very ew prosecutions o buyer power including in developed

countries because investigating cases is dicult, time consuming and extremely

expensive. Access to inormation is oten a problem. This is compounded when

companies lobby against such investigations or mount legal challenges. Capacity

problems are particularly an issue in relation to buyer power, because by denition

the buyers tend to be very powerul. In some developing countries the situation may

be compounded by the act that competition laws are relatively new and authorities

are under-resourced. Because o this, the success o developing countries in detecting

and sanctioning anticompetitive behaviours has been poor to date, but there are some

notable exceptions outlined in Section Three.

5. Climate o ear at the macro and micro levels

In todays markets where developing countries are oten engaged in erce competition

to attract oreign direct investment, multinational companies have great power.

Investigations into buyer power at whatever level may righten away potential

investors or multinational companies may threaten to move i their dominant position

or potentially unair practices are questionned. This is a real disincentive to developing

countries to use competition law as a way o tackling buyer power. Similarly at the

micro level, producers or suppliers oten ear to make ocial complaints to authorities

about abusive buying practices or ear that they may be delisted or blacklisted by

other competitors. The OECD ound that insucient protection or complainants was a

problem in buyer power cases:

Oten, as with many other sectors o antitrust law enorcement, ocial

complaints to authorities are not made as individual producers oten ear

that they may be delisted rom their major buyer and blacklisted by other

competitors.43

Most current competition law relies heavily on complaints b y those aected by anti-

competitive behaviour or abuse o dominance. This is a real problem in applying

competition policy to buyer power cases as those aected may be unwilling to come

orward. This complaints-driven system does not work and many argue that proactive

regulation is the only realistic way o addressing this climate o ear. Some interesting

attempts to tackle this issue are outlined in the next section.

6. Weak consideration o public interest or developmental objectives

As has been described, competition policy, particularly in the OECD tradition, is

ocused on economic eciency and consumer welare. The OECDs model competition

law states its objectives as ollows: This law is intended to maintain and enhance

competition in order ultimately to enhance con sumer welare. This narrow ocus

is increasingly accompanied by the involvement o economists and ormal economic

models in an attempt to quantiy competitive and anti-competitive eects.44

This narrow scope o competition policy is a relatively recent phenomenon. Both in

the US and European Union competition policy was initially established with wider

considerations o public interest. In the UK it was as recently as the 2003 Enterprise Act

that the test applied to mergers was changed rom one premised on public interest

to signicant lessening o competition. This trend limits the useulness o competition

law as a way o tackling buyer power, as this would require greater consideration o

suppliers. On this point the European Economic and Social Committee concluded that

One area o competition law that should be looked at is the denition o public

interest. It should not be conn ed to prices and market orces only.

Today some countries and institutions are reclaiming the space or pro-development

competition policy objectives. For example South Aricas post-apartheid competition

law includes wide-ranging social objectives, including employment generation, support

or small enterprises and empowerment o previously disadvantaged communities.

Similarly the UNCTAD model competition law has the broader aim o economic

development rather than economic eciency and consumer welare. These examples

are discussed urther in Section Three.

Footnotes

43 OECD (200 6), Competition and regulation in agriculture: monopsony buying and joint selling.

44 Cubbin, J. (2003), Compe tition policy and ood, presentation at City University.

Footnotes



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Section 3:Examples o competition policy being used to tackle buyer power

2. Competition authorities tackle multinational retailer buyerpower

Thailand: Following a number o complaints relating to unair trade practices in the

wholesale and retail trade in Thailand, the competition authorities assessed whether

the Thai Trade Competition Act was able to address these unair practices. The Acts

lack o clarity became evident and a specialized Commission was established to study

the issue o buyer power. The Commission drated guidelines o what practices should

be regarded as unair and explicitly brought buyer power abuses under the remit o

competition authorities. The Commission also provided a clear denition o which

business practices are deemed to constitute abuse o buyer power making it easier to

undertake litigation against cases o this nature in the uture.47

Taiwan: The Taiwanese air trade law was enacted in 1991 and implemented in 1992.

The law covers a wide range o antitrust as well as unair competition practices. Thelaw established a Commission which clearly set out what are considered as prohibited

practices. This was updated ollowing a survey o relationships between retailers

and suppliers in which six types o unair practice were identied including charging

o improper ees and unreasonable penalties or supply shortages. In response to

continued complaints by suppliers regarding improper additional ees, the Commission

has now established guidelines or additional ees charged by chain stores.48

Korea: Korea has guidelines or establishing market dominance, clear benchmarks or

what constitutes the abuse o buyer power and prohibits certain practices even when

a retailer is not in a dominant market position.49 This clear legal ramework enabled

the Korean Fair Trade Commission (KFTC) to e stablish and prosecute anti-competitive

behaviour by the powerul multinational companies Wal-Mart and Carreour.

Wal-Mart-Korea was ound guilty o unair acts including reusal to receive products,

unair return o products, unair price reductions ater purchase and unairly passing

on advertising ees to suppliers. The KFTC ordered Wal-Mart-Korea to suspend these

activities and imposed a US$1.6 million ne. KFTC also ordered Wal-Mart-Korea to

announce publicly (in the orm a two major newspaper advertisements) that it had

violated the air trade law. In a similar case the KFTC tackled buyer power involving

Korea-Carreour. In 2001 Korea-Carreour was ound to have unreasonably reduced

the price or relevant products o 112 suppliers by approximately US$1 million. The

KFTC ordered them to desist rom this activity and imposed a US$63,000 ne and also

ordered it to publicise this in the newspapers.50

Footnotes

45 Thi s section is based on a paper prepared by Tsegay, Y. (2008), Good practice s in tackling buyer power usingcompetition policy, South Centre and Traidcrat.

46 Dobso n, P. (2003), Buyer Power in Food Retailing: the European Experience , paper or Conerence on ChangingDimensions o the Food Economy, The Hague.

Footnotes

47 Thaila nd contribution (2004), How enorcement against private anti-competitive practice has contributed to economicdevelopment OECD Global Forum on Competition.

48 Lin, G. (2003), Taiwans Competition Law Enorcement Experie nce and Cases in Retailing Business paper or APECTraining Program on Competition Policy.

49 The criteri a or the prohibition against abuse o market dominating positions includes: Unreasona bly x, maintain, oralter the price o a good or service ees; Unreasonably control the sale o goods or rendering o services; Unreasonablyinterere with the business activities o other enterprises; Unreasonably hinder the entry o new competitors. Unair tradepractices include Unreasonably reuse to transact with or discriminate against a certain transacting partner; Unreasonablyengage in activities to eliminate competitors; Unreasonably induce or coerce customers o competitors to deal withonesel; Unreasonably take advantage o ones bargaining position in transactions with others; Transact with others onterms and conditions which unreasonably restrict or disrupt their business activities; Use advertisements or makerepresentations that are alse or which may deceive or mislead consumers with respect to the enterprise or its goods orservices.

50 Jhong, K. S. (2003), Anti-comp etitive practices at the distribution sector in developing countries.

This section outlines some recent innovative examples where competition policy has

been successully used by developing and developed country authorities to tackle buyer

power and its impacts down the supply chain.45 Some o these case studies show how

existing competition policy has been used to tackle buyer power or example the EUs

use o merger controls, other examples show how countries are tightening or adapting

existing policies to take into consideration the growing phenomenon o buyer power

particularly at the retail level (Thailand, Taiwan, Korea, UK), and at the processor

level (South Arica). Other examples point to where competition authorities have

deliberately tackled some o the weaknesses identied in the preceding chapter, these

include the EUs use o extra-territoriality, South Aricas use o leniency programme and

Germanys consideration o economic de pendency.

1. Retailer power accumulation prevented

Almost all attempts to curb buyer power have addressed the symptoms rather than

the key cause o the problem that is the concentration itsel. European Unioncompetition authorities have on occasion taken action against retail mergers, or

example the European Commission prohibited the proposed merger between Kesko

and Tuko in Finland which would have oered the combined enterprise a national

marketshareof60%.WhenRewesacquiredJuliusMeinlinAustria,theywererequired

todiveststoresinregionswherethecombinedenterprisewouldcontrol65%ormore

o sales. However the European Commission has also allowed mergers that have had

a signicant concentrating eect to proceed unhindered, notably Metro/Makro and

Carreour/Promodes.46 These examples show merger control being used to tackle

seller, rather than buyer power, but in doing so they have the impact o reducing the

signicance o the players buyer power too.


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3. Tackling buyer power o processors

In 2005 the South Arican Competition Commission began investigations into eight

dairy processors (including a number o subsidiaries o multinational companies)

or alleged price xing. In December 2006 the case was reerred to the Competition

Tribunal or prosecution and a date in September 2008 has been set or the hearing.

The processors are accused, either together or individually, o various inringements

o South Arican Competition Law, including abuse o their dominant position with

suppliers and colluding to x purchase prices. Thus the case involves a group displaying

both buyer and seller po wer simultaneously.

The tribunal will assess the ollowing allegations that:

companiesexchangedsensitiveinformationonprocurementpricesofrawmilk

and this enabled competitors to co-ordinate their pricing strategies to x the

purchase price o raw milk.

twoofthecompaniesabusedtheirrespectivedominantpositionsinexclusiveagreements that compelled producers to supply them their total milk production.

Producers were prevented rom selling surplus raw milk at competitive prices to

third parties or consumers directly. This practice also prevents the e ntry o smaller

milk processors and distributors into the market.

companiesenteredintolong-termmilksupplyandexchangeagreementstosell

their surplus milk to each other rather than at lower prices to end users.

This arrangement enabled colluding rms to maintain the price o milk at

articially high levels.

twocompaniesreachedanagreementregardingthesellingpriceofUHT

long lie milk ultimately resulting in the consumer paying higher prices or

UHT Milk.

twocompaniesagreedtoxthesellingpriceofUHTmilkandallocated

geographic areas in which they would not compete in selling UHT milk.

This eliminates price competition resulting in consumers paying more.

threeofthecompaniesco-ordinatedtheremovalofsurplusmilkfromthe

market. Surplus removal o milk, decreases supply and this keeps prices high.

It thereore constitutes indirect price xing.

The Competition Commission is seeking to impose a ne which could be up to 10 per

cent o the companies turnover.

51

The Milk Producers Organisation o South Aricahas since lodged a complaint against several major South Arican supermarket chains,

alleging xing o milk prices.52

4. First steps in tackling the problem o global supply chains

EU: In a number o instances the EU has applied its competition law to actors outside

o its market, although not in clear cases o buyer power. In 1985 the European

Commission imposed nes on wood pulp producers situated outside the region (in

the United States, Canada and Scandinavia) or price xing arrangements despite the

act that some o the companies had no subsidiaries in the EU, on the basis that the

arrangement was implemented in the EU market and that the eect o the parties

activities on trade between the EU member states was not only substantial, but

intended, and was the primary and direct result o the agreement and practices. 53

In 1999 the EU successully challenged a merger between two South Arican platinum

companies (Gencor and Lonrho) despite the act that the South Arican Competition

Authorities had allowed it. The EU argued that the merger would have created

disruption in the European market.54 This clearly shows that extraterritorial application

o competition laws is possible. It also poses a potential threat to developing country

suppliers who may work together to counter buyer power, as they could be prosecutedas an export cartel.

UK: Suppliers based outside the UK can seek redress under the existing UK

Supermarkets Code o Practice. This is because the legal obligations to comply with

the Code alls on UK supermarkets and is thereore clearly under the Competition

Commissions jurisdiction. The same principle applies to the ombudsman that the

Commission is proposing as part o its latest investigation into the grocery sector.

This is a unique example and demonstrates that existing legal rameworks can allow

governments o countries in which global sourcing companies are headquartered to

establish binding rules that would protect overseas suppliers.

5. Tackling capacity constraints through leniency programmes

Competition law investigations are complex and costly. In particular nding substantial

and credible evidence on issues such as price-xing behaviour is dicult. Incorporating

leniency programs into competition laws can be important as this encourages those

with hard evidence that is those who were engaging in the antitrust activity to

receive amnesty rom government penalties i they admit the illegal activity and

provide evidence that enables a case to be established against other rms. This can

be particularly important in developing countries where capacity limitation is a

critical constraint to the enorcement o competition law. Scott Hammond, Deputy

Assistant Attorney General or Criminal Enorcement in the Antitrust Division o theUS Department o Justice characterizes, leniency program as the most eective

competition policy tool. In South Aricas investigation o the p reviously mentioned

milk processors, the Competition Commission beneted rom one o the rms which

applied or the corporate leniency program. The rm is due to give evidence in

exchange or immunity in upcoming court hearings. However leniency only works when

coupled with strong enorcement, otherwise those e ngaging in antitrust activity have

no incentive to seek it. Developing countries limited enorcement capacity and other

constraints thereore reduce the eectiveness o any leniency programmes they adopt.

Footnotes

51 South Arican Competiti on Commission (February 2008), Milk Cartel Hearings Set.

52 Irvine , H. (2008), South Arican Competition Commission Cracks Down on Cartels, Mondaq.com

Footnotes

53 Dec ision o the Commission o the European Communities, Wood Pulp [1985 ] OJ L 85/1, 15.

54 Sachs e, T. (2006), Extra -territorial applica tion o competition laws in the US and European Union CUTS Brieng Paper.


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6. Using public scrutiny as a deterrent

The remedy that the Korean Fair Trade Commission took against Wal-Mart-Korea

and Carreour-Korea is interesting in that it involved bringing the unair and abusive

act to public attention. In both cases, the KFTC ordered that the violation o the air

trade law by the retailers be acknowledged publicly through statements in two major

newspapers. They hope that the negative publicity may serve as deterrent or urther

violations by these or other organisations with buyer power. It also gives the KFTC

credibility in the eyes o the public and could encourage other suppliers to bring cases.

7. Tackling the climate o ear

The UK Competition Commission has proposed measures as part o its most recent

investigation which would help to tackle the climate o ear elt by suppliers through

the establishment o an ombudsman or the supermarket sector. The proposed

ombudsman would monitor the trading relationships between retailers and their

suppliers against a new Groceries Supply Code o Practice (GSCOP). It is envisioned thatsuppliers at all levels o a supply chain serving the UK market can raise a complaint

anonymously with the ombudsman. The ombudsman would then investigate the

complaint and i appropriate produce guidance to prevent urther bad practice beore

it is repeated more widely. They would also be able to prosecute retailers o breaches

o the GSCOP. I a suppliers complaint is related to behaviour that only they have

experienced however, they will be required to initiate a dispute in order to pursue

compensation. At this point their complaint will have to become attributable.

8. Designing competition policies to promote the public interest

There are some interesting exceptions to the dominant model o competition policy

avouring consumer protection.

South Arica: South Aricas competition policy was developed through a three-year

consultation process with industry and trades un ions. Its Competition Act allows (and

in some cases demands) that issues such as empowerment, employment and impact

on small and medium enterprises (SMEs) be taken into consideration in decisions.

Consumer interests are also included not only in terms o price, but also in terms o

product choice.55

Germany: Amendments to Germanys Act against Restraints on Competition (ARC) have

enabled authorities to protect small and medium sized businesses against aggressive

competition by those in a dominant position. The Act now prevents dominantrms rom using their position to demand preerential terms without objective

justication. This law is instructive and unique in that it explicitly acknowledges

problems created in situations o economic dependence where suppliers lack

reasonable opportunity to resort to others sources. This approach is part o a wider

German policy by which companies are held accountable to shareholders, but also

to employees, customers and suppliers.56 There are no cases yet where this economic

dependence law has been implemented, but it may be the case that it acts as a

deterrent. There are similar provisions in Australia, Portugal and France.

Footnotes

55 CRC Policy Brie (2005), Designing competition policy.

56 Kampel, K. (2004), Competition law and SMES: Exploring the competitor/competition debate in a developing democracyCentre o Regulation and Competition Working Paper Number 109.

Section 4: Conclusions and recommendations

Conclusions

Competition policy is to some extent a contested eld, with dierent bodies trying

to mould it to t their wider vision and dierent countries having dierent needs at

dierent stages o development. It is thereore important that Governments are able

to retain the fexibility and policy space to ensure that their competition policy can

contribute to their wider economic development an d industrialisation strategies.

Buyer power is just one problem that developing country commodity producers ace

and there are many other policy interventions that can be employed to support them

that are not covered in this paper, or example corporate responsibility legislation,

diversication and value-addition, exploration o niche markets, contract law and

industrial and agricultural policy. However it is clear that competition policy does

merit serious consideration by Governments (whether in developed or developing

countries) who want to tackle the impacts that the exercise o buyer power has on

vulnerable actors in agricultural commodity supply chains. There is clearly a needor modernization so that competition policy overcomes the constraints outlined in

this paper and comes up to date with the realities o international trade. But the

examples given show that where Governments recognize and tackle these weaknesses,

competition policy can be a responsive and useul tool in tackling the growing

phenomenon o buyer power.

What competit ion policy can do Where competi tion pol icy needs work

Tackle the build up o power through

monitoring and blocking mergers

and acquisitions and reorganizing or

breaking up companies

To enable competition authorities

to take action against buyer power

aecting suppliers at home, but exerted

by companies elsewhere

Stop and punish abuses o dominant

position

Ensure available instruments and

denitions adequately take into

consideration impacts on suppliers as

well as consumers

Set up regulators, watch dogs,

adjudicators etc.

To tackle the problems o climate o ear

Tackle buyer power i the eects are elt

in the home market

Most competition authorities need

additional authority and capacity,particularly when tackling powerul and

well-resourced companies


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Recommendations

Competition policy makers and experts around the world should consider:

theideaofaninternationalcompetitionagreementwithprovisionsthatwould

be able to tackle the transnational eects o the exercise o buyer power

howtoensurecompetitionpolicyaimsarebroadenedbeyondconsumerwelfare

to include consideration o suppliers concerns

howtobemoreproactiveandensureprotectioninbuyerpowercases

Developed country governments should consider:

supportinginternationalactiontotacklebuyerpower

undertakingareviewofnationalandregionalcompetitionpoliciestoaccountfor

changes in national and international market structures and allow greater

recognition o supplier interests

broadeningcompetitionlawstocoverthebehaviourofeconomicactorsbased

in their country which have impacts elsewhere

respondingpositivelytorequestsforco-operationfromsuppliersimpacted

by buyers within their market

refrainingfromtakingactionagainstcooperationbydevelopingcountry

producers in response to buyer power

Developing country governments should consider:

supportinginternationalactiontotacklebuyerpower

reviewingnationalcompetitionlawstoensurethattheyareabletodealwith

the buyer power phenomenon. In particular through:

- incorporating a clear denition o buyer power and its abuses

- providing or sucient protection or those wanting to bring buyer

power cases

- extending the scope o competition law to cover rms outside its

own jurisdiction, as appropriate

developingorstrengtheningcompetitionlawsaspartoftheireconomic

development or industrialization plan

approachingcompetitionauthoritiesincountrieswherebuyersare

situated to request co-operation in cases aecting their suppliers developingregionalresponsesasawayofovercomingthedisadvantages

o being a small or vulnerable economy

Towards international action on buyer power

An international legal ramework or competition policy could be critical to address the

issue o buyer concentration in global commodity value chains. In this regard, Singh has

suggested the establishment o an independent international agreement or institution.

This would require ull consultation with developing countries and the involvement o

relevant civil society organisations. The 1980 UNCTADs Set o Multilaterally Agreed

Equitable Principles and Rules or the Control o Restrictive Business Practices (the

UNCTAD Code), which is supportive o the issues acing developing countries could be

used as a reerence or starting discussions on this.57

...to secure development gains in the developing world, it may be necessary

under some circumstances to intervene in the home bases o lead companies

and their intermediaries. In this sense competition and regulation policies

developed by the British government and applied to, say, British supermarket

chains, may be at least as important as policy initiatives taken in thecountries that supply them with their produce.58

Footnotes

57 Singh, A. (2002), Compet ition and competition policy in emerging markets: international and development dimensions ,University o Cambridge.

58 Solu do, C. Ogbu, O. Chang, H. eds (2004), The politics o trade and industrial policy in Arica: Forced Conse nsus?International Development Research Centre.


i competition

policy is to serve

the developing

nations in meeting

their international

trade objectives

then it must be

applied to trade

between nations.

Deployed in this

way it would

complement the

eorts o South

Arica and otherdeveloping nations

to challenge new

protectionist

measures usually

pioneered by

industrialised

countries.59


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