Wednesday, February 9, 2011

New anti-trust law should tackle the unfair practice of vertical price-fixing

Since there has been much buzz about the need to pass a tougher anti-trust law in the Philippines, our legislators should pay special attention to the issue of vertical price-fixing. Also known as vertical price restraints, this occurs when a manufacturer sets a minimum price for its distributors and retailers, coupled with the threat of refusing to deal with the manufacturer’s distributor or retailer when the latter fails to charge at least the minimum prices set by the manufacturer.

In these kinds of vertical arrangements, the manufacturer is, in effect, a playground bully who leaves the smaller, more helpless classmates with no choice but to turn over their lunch money. Naturally, in this scenario, the smaller, more helpless classmate is the Filipino SME who typically act as the distributors and retailers for large multinationals such as Nestle, P & G, Johnson & Johnson, and the like.

Vertical price agreements fall within the ambit of predatory pricing which is generally considered illegal across most countries since it obviously hampers free competition. In predatory pricing, prices are set by a company which are below previous rates and below average costs. Nestle Philippines, for instance, has existing agreements wherein a minimum price is set (which its distributors and retailers are supposed to follow when selling the Nestle products to the end users) which does not factor in the average costs it takes for the Filipino SMEs to distribute and get these products to the consumers in the first place.

Why then do these Filipino SMEs enter into such agreements in the first place? The answer is because there is often the promise of initial marketing and promotional support by Nestle or the multinational, and because these small Filipino companies have already put in much capital to lay down the infrastructure for the business. They hang on in the hopes of turning a profit. Given the obvious strength multinationals such as Nestle wields compared to Filipino SMEs, then the only way to deal with such “bullies” is to pass a tougher anti-trust law.

No comments:

Post a Comment