Below-cost pricing guidelines offer Hong Kong businesses some reassurance

3 August 2015. By Yonnex Li.

A decision by Hong Kong’s Competition Commission, or HKCC, to publish a couple of examples where below-cost pricing won’t likely be deemed abusive has given the business community, particularly bigger companies, some reassurance about engaging this common commercial practice. Some lawyers, however, are demanding further clarity from the regulator.

The young antitrust agency published its long-anticipated guidelines under the Competition Ordinance last week. The six guidelines, jointly issued with the Communications Authority, spell out the authority’s approach to interpreting and enforcing the cross-sector antitrust law, which will come into full force on Dec. 14.

Heeding calls by the Hong Kong General Chamber of Commerce, one of the city’s largest trade bodies, the HKCC inserted in the final version two scenarios where below-cost pricing may be justified if the conduct “is indispensable and proportionate to the pursuit of some legitimate objective unconnected with the tendency of the conduct to harm competition.”

“Below cost pricing may not be abusive where the pricing policy is a genuine promotional offer of limited duration relating to the launch of a new product or entry into a new market,” the regulator said in its guideline for the second conduct rule, which prohibits abuse of market power. It is “also unlikely to be abusive if the practice is genuinely intended to minimize losses in respect of obsolescent or deteriorating products.”

Hong Kong antitrust lawyers generally welcome the latest version.

“It’s helpful that the commission provides its view when below-cost pricing by a firm with a substantial degree of market power isn’t abusive. The scenarios added are those that can be easily seen in Hong Kong’s retail sector,” a Hong Kong-based antitrust lawyer said.

The HKCC defines below-cost pricing, or predatory pricing, as when an undertaking with a substantial degree of market power lowers its price below an appropriate measure of cost, in a bid to harm the competitive effectiveness of rivals or fend off new market entrants.

Still, some lawyers argue that the examples included in the guideline aren’t sufficient to cover some other below-cost pricing strategies that they deem legitimate.

“The inference is that any other short-term discounting of prices, even if a genuine sale to try to increase brand image, etcetera, will be treated by the commission as an abuse of market power and prosecuted,” a lawyer in the competition practice said.

In an April 24 submission on the HKCC’s revised draft guidelines, the Hong Kong General Chamber of Commerce urged the regulator to include hypothetical examples to demonstrate when below-cost pricing won’t be regarded as abusive.

Retailers, it said, may wish to clear old stock to make way for new items, so that consumers would enjoy bargains and the benefit of new products more quickly. They may also introduce a new product or service at a specially discounted price or free of charge to stimulate demand, so that they can enjoy a return on future sales, or offer free gifts to generate sales of other products or services.

“Selling products or services below cost, or giving them away free, is a common everyday market practice, and is invariably pro-competitive, pro-consumer, and efficient,” said the trade body, which represents a broad range of sectors from retail and tourism to shipping and real estate. “The fact that the retailer in question is perceived to have a substantial degree of market power should not alter this.”

The HKCC released the first draft of the guidelines for public consultation in October last year. The revised draft was publicized in March for further public comment.

Other changes to the guideline for the second conduct rule that are drawing the attention of lawyers include the deletion of what had been paragraph 4.13 in the revised draft, which said that “the Commission is of the view that most conduct falling within scope of the Second Conduct Rule will be assessed by reference to the conduct’s actual or likely anti-competitive effects in the market.”

“It suggests that the commission may take a more expansive approach to when it will presume, without applying an effects analysis, that use of market power is anticompetitive,” an antitrust lawyer said. “This would put Hong Kong at the extreme boundaries of jurisdictions around the world in terms of how market power offences are looked at.”

The regulator didn’t provide any explanation for the amendments made in its final version of the guidelines.

It is noted that the agency also revised several parts of the guideline for the first conduct rule, including making the language consistent throughout the document in stating that trade associations and their members may be liable for contravention of the rule by making or giving effect to a decision of an association that is anti-competitive.

In addition, the regulator clarified how resale price maintenance, where a supplier fixes or sets floor prices for downstream players, wouldn’t be considered as having the object of harming competition for a distribution system that entails a uniform model of distribution, apart from a franchise distribution system.

	Eliot Gao