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On July 7, 2016, the European Commission (the Commission) closed its long-running investigation into potential anticompetitive practices in the container liner shipping sector after the companies under investigation offered to enter into binding commitments with the Commission regarding their future conduct. These commitments addressed the Commission’s concerns that publication of future pricing intentions for identified routes allowed competitors to coordinate pricing behaviour.
This investigation has important implications for this sector as the way shipping lines can announce pricing intentions has now changed to become less flexible. The case also highlights the Commission’s position that merely making price announcements can be construed as an invitation to collude - or “price signalling” – which can lead to illegal price coordination even without direct contact between competitors.
Cooperative arrangements have long been a feature in liner shipping – from liner conferences (i.e. arrangements between carriers enabling them to use common freight rates and agree capacity) to liner consortia (i.e. ship and capacity sharing agreements, and schedule coordination) – although regulatory approval of such cooperation has been subject to market share caps.1 Consortia arrangements have allowed the development of the current big four global liner alliances (2M, O3, G6, and CKYHE) without the need for fully-integrated mergers. However, while such alliances have allowed some stability in terms of liner capacity meeting global shipping demand, freight rates have continued to fluctuate wildly (see Fig 1), causing problems for certain lines – with the recent Hanjin insolvency a case in point.
Competition authorities have recognised the benefits of cooperation to ensure stability given the high fixed costs, large initial capital investments – and implications for global trade of disruption to shipping supply. However, the European Commission has been clear that competitors sharing strategic information, particularly intended future prices, is a serious breach of competition law.2
Under EU competition law rules, concerted practices which have as their object or effect the prevention, restriction or distortion of competition are unlawful – and this includes practices which reduce “strategic uncertainty”, as these can reduce lines’ incentives to compete against each other. However, there is a significant difference between lines communicating and coordinating intended price increases directly, and genuinely public price adjustment announcements intended to give customers notice of impending changes, e.g. through a newspaper. Public announcements will generally not constitute collusion, but what if there is evidence that the overriding intent in making these announcements was to “price signal” to competitors? If an announcement is followed by similar public announcements made by other competitors, could these be considered evidence of a collusive strategy? Is it illegal to follow the market leader on price? These questions were considered by the Commission in its investigation.3
In May 2011, the Commission conducted unannounced inspections at the premises of companies active in the container liner shipping sector because it had reason to believe that there had been a breach of competition law rules.
On 22 November 2013, the Commission opened formal antitrust proceedings against the 14 liner shipping companies alleging that regular announcements of intended future price increases on their websites, via the press, and in other ways since 2009, were part of a collusive strategy.4 The price announcements, known as General Rate Increases or GRI announcements, did not indicate the fixed final price for the service concerned, but only the percentage or amount of USD increase per transported container unit (twenty-foot equivalent unit (TEU)), the affected trade route and the planned date of implementation. These announcements were made several times each year, typically around a month prior to implementation. The Commission alleged that other lines had announced similar intended rate increases for the same routes with similar implementation dates. Although lines were not bound by the announced increases, the concern was that the announcements allowed alignment of behaviour through advance awareness of each other's pricing intentions.
In its preliminary findings, the Commission indicated that the price announcements could constitute signalling which, by reducing the lines’ level of uncertainty about competitor pricing behaviour, decreased incentives to compete. The Commission did not accept that the announcements were primarily for the benefit of customers because the announcements provided only partial information, and were not binding (meaning lines could subsequently adjust price in response to rivals’ announcements). The Commission’ s view was that the announcements were therefore too unreliable to be useful for customers, and harmful to the market as carriers would be able to adjust prices without the risk of losing customers. Overall, the Commission believed this was likely to lead to higher prices for liner shipping services.
To alleviate the Commission’s concerns, the lines offered commitments for a period of three years, starting from 7 December 2016, to:
The commitments brought the investigation to a close, meaning the Commission was not required to formally conclude the price announcements had breached competition rules. Arguably, this is a good solution for both sides with the burden on the lines manageable, and the Commission avoiding lengthy legal challenges to an infringement decision that would have provoked considerable controversy. The 14 lines are now bound to comply with the commitments, and could face considerable penalties for breach of the commitments (up to a hypothetical maximum of 10% of global turnover), without the Commission needing to conduct further analysis. However, the limited three year duration of the commitments begs the question as to how the Commission would respond if historic practices are re-introduced thereafter. Does it have the appetite to take on the lines again on the illegality of public price announcements? The burden of proof for the Commission is high in such cases, but equally shipping lines – and others in the sector – will now think twice about their price announcement strategies for fear of investigation.
See Margrethe Vestager, the EU Competition Commissioner, speech in October 2015 industry trends
See the Horizontal Co-operation Guidelines 2011.
These were CMA CGM (France), COSCO (China), Evergreen (Taiwan), Hamburg Süd (Germany), Hanjin (South Korea), Hapag Lloyd (Germany), HMM (South Korea), Maersk (Denmark), MOL (Japan), MSC (Switzerland), NYK (Japan), OOCL (Hong Kong), UASC (UAE) and ZIM (Israel).
Implications for cryptocurrency trading, smart contracts and AI
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