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Press releases 2002 -

OFT tells record companies to stay in line

CD report published

PN 59/02    18 September 2002

Record companies were given a clear warning by the OFT that they may face strong action if they breach competition law in the future.

An investigation into the CD market found some evidence of past anti-competitive behaviour - although this was not caught by the Competition Act 1998 - and the OFT has concluded that there is no current evidence that the law is being broken. (Download report Wholesale supply of compact discs - pdf file 157 kb.)

But the OFT warns it will keep a close watch on developments and may take action if evidence is found of unlawful anti-competitive behaviour in the future.

The investigation examined allegations that the major record companies were trying to stop parallel imports of CDs from other European countries into the UK, to keep prices higher. The OFT found that certain record companies had engaged in practices designed to slow down imports from mainland Europe. There is also evidence that wholesale prices were higher in the UK two years ago even though certain record companies were reducing wholesale prices in the UK. Combined with a reduction in value of the pound against the Euro, UK wholesale CD prices are now more in line with those elsewhere in Europe. And firm evidence has not been produced to show that retail prices for CDs are now systematically higher in the UK.

The record company practices identified by the OFT included:

  • agreements with some retailers not to import – some offered retailers discounts and/or marketing and promotional support
  • favourable terms being given to retailers who didn't import – such as volume discounts set at such a level that they could not be achieved if significant numbers of CDs were imported
  • threats to retailers who did import that they would lose their discounts and marketing and promotional support.

The OFT does not have evidence that these agreements or practices are continuing. No action can be taken on past vertical agreements (ie agreements between firms at different levels of trade such as suppliers and distributors). Many such agreements do not automatically infringe UK or EC competition law although there are some important exceptions to this (see Note 2).

If evidence was found that these agreements or practices were still occurring the OFT would, if appropriate, use its 'claw back' power which would allow it to consider action against the agreements under the Competition Act 1998. This could lead to fines being imposed for breaches of the Act.

Where agreements have the effect of hindering buyers from importing CDs for resale within the UK, the OFT takes the view that, in this market, those agreements are likely to have an appreciable effect on competition in the UK.

A reference could also be made to the Competition Commission if a 'complex monopoly' appears to be operating in the market. The OFT has concluded that there is not a strong case for a reference particularly if the majors are no longer putting pressure on retailers not to import.

John Vickers, Director General of Fair Trading, said: The major record companies - an international showcase for British talent - must not create barriers to international competition that harm British consumers. Free competition is the way forward, and the industry is on notice that the OFT will act if anti-competitive agreements are found in the future.'

NOTES

1. Powers under the Competition Act 1998
This Act gives the OFT powers to investigate suspected infringements of the Act's prohibitions and take action where it finds that infringements have taken place:

i) the Chapter I prohibition prohibits agreements between undertakings, decisions by associations of undertakings or concerted practices which have the object or effect of preventing, restricting or distorting competition within the UK (or any part of it) and which may affect trade within the UK (or any part of it)

ii) the Chapter II prohibition prohibits conduct by one or more undertakings which amounts to the abuse of a dominant position in a market in the UK (or any part of it) which may affect trade within the UK (or any part of it).

The OFT may impose a penalty of up to 10 per cent of relevant UK turnover for a maximum of three years for infringements of the Act.

2.  An agreement is exempt from the Chapter I prohibition if it is exempted from the equivalent prohibition in EC competition law because of an EC block exemption regulation ('a parallel exemption'). One such parallel exemption results from the EC verticals block exemption. This exempts, on certain conditions, agreements between suppliers and distributors which might otherwise be prohibited. Such agreements between businesses at different levels of trade are 'vertical' agreements. Vertical agreements are also excluded from the Chapter I prohibition by the UK verticals exclusion Order. This Order is similar to the EC verticals block exemption in most material respects for this case. There are important exceptions if a vertical agreement contains a price fixing clause (often called 'resale price maintenance'), for example.

3. Under section 2 of the Fair Trading Act 1973, the OFT has a general duty to keep under review commercial activities in the UK so that it can find and evaluate monopoly situations or uncompetitive practices. Inquiries into 'complex monopoly situations' examine markets that may be served by several companies which are not interconnected and which together account for 25 per cent or more of the supply or acquisition of any particular description of goods or services in all or part of the UK - and which engage in conduct (whether or not by agreement) which has or is likely to have the effect of restricting, distorting or preventing competition. The Enterprise Bill envisages replacing monopoly inquiries under the Fair Trading Act with potentially broader market inquiries using a competition rather than public interest based test.

4. In this press release the functions of the Director General of Fair Trading (DGFT) under the Act are for simplicity described as the functions of 'the OFT'. The Enterprise Bill proposes to replace the office of the DGFT with the OFT, to which would be transferred the DGFT's functions.




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