Javier Berasategi Torices Chairman Basque Competition Authority Grocery Retailing: Competition, Oligopoly and Tacit Collusion A Report by the Competition Authority of the Basque Country (Spain) Javier Berasategi Torices Chairman Basque Competition Authority

Index Sources Relevant Markets Oligopoly = Collective Dominant Position Collusive Oligopoly in Spain Legal barriers and anticompetitive conducts Remedies Working Group of Spanish Competition Authorities (State/regions) 8/01/04 2

Sources Spanish Libre Competencia en los Servicios [urban land restrictions] (TDC, 1993) Informe sobre las condiciones de competencia en el sector de la Distribución Comercial (TDC, 2003) Informe preliminar sobre la Investigación de la cadena de distribución de determinadas frutas y hortalizas (SDC, 2004) International Buying Power of Multiproduct Retailers (OECD, 1999) Dobson Report for the European Commission (1999) FTC Reports on Slotting Allowances and Other Marketing Practices (FTC, 2001 and 2003) Avis n° 04-A-18 relative aux conditions de la concurrence dans le secteur de la grande distribution non spécialisée (Conseil de la Concurrence, 2004) Israel Competition Authority Decision on Commercial Arrangements between Food Suppliers and Retail Chains (2005) Nordic Food Markets, a taste for competition (Nordic Competition Authorities, 2005) Grocery Market Investigation (Competition Commission, 2000 y 2008) Land use restrictions as barriers to entry (OECD, 2008) Grocery enquiry report (Australia Competition Authority, 2008) Others 8/01/04 3

Relevant Markets Procurement Categories of daily consumer goods Self-service retail channel Geographic area: Spain Large retail outlets (> 1,000 m2) Weekly one-stop shopping Geographic area: 10-15 minute car ride Regional/National parameters: marketing, promotions, etc. Asymmetric competition between large and small outlets 8/01/04 4

Oligopoly – Collective Dominant Position Application of Article 82 to collusive oligopolies? Answer: preferable than merger control (ex ante uncertainty) but remedies have to promote competition on the merits (Nicolas Petit, Oligopoles, Collusion Tacite Et Droit Communautaire de la Concurrence, 2008). EC Case law is clearcut now: from Flat Glass to Airtours & Impala Spanish Case Law: Mobile telephony (2009) Telecoms Regulator considered mobile telephony market to be oligopolistic and ordered mobile network operators to open up their networks to virtual operators Court upheld the measure after an “Impala”-type competition analysis 8/01/04 5

Spanish Retail: High Concentración SPANISH REGIONS (17) 45% Castilla y León, Cataluña 45-50% Andalucía, Castilla-La Mancha, Madrid 50-60% Murcia 60-70% Aragón, Asturias, Baleares, Canarias, Cantabria, Extremadura, Galicia, Rioja, Valencia +70% Navarra, País Vasco 8/01/04 Source: Alimarket, 2008. 6

Spanish Oligopoly: Carrefour, Mercadona and Eroski Carrefour (5) + Eroski (5) + Mercadona (3) lead 13/17 regions (close to 100% of the population). Carrefour, Mercadona and Eroski occupy the 3 leading positions in 4 Regions and two of them occupy the 3 leading positions in 14 Regions. Servicio Defensa de la Competencia rejected cartel complaint against retailers in Valencia town in 2006: oligopolistic market fosters parallelism and supracompetitive prices. Price and margin studies (e.g., Caixa Catalunya savings bank Study: groceries price index in Spain above the equivalent EC-15 groceries price index in 2000-2008). 8/01/04 7

Legal Barriers Regional barriers: Establishment Opening hours & days Local barriers: zoning laws and urban agreements. Below-cost selling: The invoice price automatically becomes a minimum retail price and facilitates RPM and horizontal price collusion. Warning: The Service Directive will not solve the problem! Environment/urban planning exceptions Commercial land is a scarce resource! 8/01/04 8

Procurement: anticompetitive collusion COMPETITIVE SCENARIO NON-COMPETITIVE SCENARIO (INFLATION) PURCHASE PRICE 10 PURCHASE PRICE 12 COMMERCIAL PAYMENTS 0 COMMERCIAL PAYMENTS (-2) RETAIL PRICE +10 RETAIL PRICE +12 NON-COMPETITIVE SCENARIO + OWN BRAND (UPSTREAM) MONOPOLY PURCHASE PRICE IND. BRAND 12 PURCHASE PRICE OWN BRAND 10 COMMERCIAL PAYMENTS (-2) COMMERCIAL PAYMENTS (0) RETAIL PRICE +12 > RETAIL PRICE +10 8/01/04 9

Retail: land preemption and price parallelism New structuralist approach: if price collusion is likely, then promote a multi-player market structure (sufficient number of players to reduce price collusion incentives and ensure competition on other parameters). New approach to land & location for large outlets: scarce input = essential facility. Analogy with closed markets (mobile telephony)? Apply Article 81/82 CE to land rights (merger control?). Proactive merger control: Oligopoly assessment of procurement markets Oligopoly assessment of retail markets Retail divestitures in overlap/non-overlap areas Conduct and trustee/ombudsman remedies regarding procurement (Carrefour/Promodès voluntary commitments towards SMEs!) 8/01/04 10

Retail mergers: is the FTC more proactive? Source: FTC Horizontal Merger Investigation Data, Fiscal Years 1996-2003, Table 4.2 8/01/04 11

Procurement: remedies Prohibition of commercial payments & abusive terms: competitive downward pressure on purchase prices. Own v. third brands: Level Playing Field Light remedy: prohibition of discrimination in Category access & management Medium remedy: Chinese wall or structural separation of own brand unit & category management unit Extreme remedy: Prohibition (divestiture) of own brand: long term effects? Codes of Conduct (manufacturers/retailers) or agreements between manufacturers to enforce prohibition of commercial payments & abusive terms under supervision of independent trustee/ombudsman. Comfort letter from competition authorities? 8/01/04 12

Are we ready for a mindset change? Wrong assumptions: Competition law designed to address downward abuses (consumer welfare) Oligopolies are only dealt with under merger control Traditionally, manufacturers have enjoyed more bargaining power than distributors Own brands are always cheaper Case study: What if Unilever purchased Carrefour? Unilever would control competitor brands’ access to and pricing in its establishments. Would retailers’ response prevent Carrefour from discriminating against other manufacturers? Would retailers’/manufacturers’ response prevent Unilever from discriminating against other retailers? Would we impose structural and/or behavioural remedies? Is this scenario analogous to the scenario where retailers’ own-brand enjoys a high market share? Should the authorities wait until the own brand reaps a high market share or ensure a level playing field upfront? 8/01/04 13

Working Group of Spanish Competition Authorities: Proposed Agenda Hearings: Suppliers, Retailers, Consumers Economics, Industry and Agriculture Ministries Experts Subgroup A: Regulations Assist on Services Directive implementation Uncover and challenge anticompetitive regulations Subgroup B: Procurement Report on abusive conducts and remedies Subgroup C: Retail Identification of highly concentrated local markets Report on causes and remedies 8/01/04 14

End The Spanish and English (unofficial) versions of the Study are available at our website (“Estudios de Mercados”): www.euskadi.net/tvdc I can be contacted at: jberasategi@tvdc.es T. (34) 945 019000 F. (34) 945 018 965 Comments welcome! 8/01/04 15