Why the Anti-Monopoly Law Can’t Cut Price of Infant Milk Formula in China?

未命名(By You Yunting) According to media reports, China’s National Development and Reform Commission (“NDRC”)’s anti-monopoly investigation into infant milk formula discovered that nine milk powder manufacturers, including Wyeth, announced one after another in early July that they would lower their prices, with an average discount of 11%. At the same time, Wyeth canceled its earlier decision to raise the price of Wyeth S-26 Progress GOLD product, a new product by 4 percent. Some consumers told reporters that salesclerks would first recommend Wyeth S-26 Progress GOLD product, and would only bring out the discounted, original milk formula when asked by the consumer with regards to the discount. The following points should be look at more carefully:

 

I. The Chinese government used Anti Monopoly Law in this case to crack down on the fixed retailing prices against foreign milk formula manufacturers, rather than using administrative order, which is an obvious progress for governmental administration. The Government may have realized that if it forced manufacturers to lower their prices, the manufacturers would have reduced its supplies to China because of reduced profitability. This would result in a vicious cycle where the prices of milk formula drops, but the supply becomes insufficient. Therefore, consumers may no longer be able to purchase milk formula even by paying a higher price, further worsening the problems.

 

II. Chinese government’s antimonopoly investigation achieved a certain fruits with regards to stabilizing the price of milk powders. After the NDRC’s investigation, the price did indeed decrease due to the following three reasons:

 

First, most milk powders manufacturers probably are involved in vertical monopoly of its retailing prices. Pursuant to China’s Anti Monopoly Law, any agreements without justified reason, including fixing a price for resale to a third party and restricting the minimum prices for resale to a third party, is in violation of the Anti-Monopoly Law. A feature of the Chinese market is that most people do not abide by the rules and regulation, and the governments also do not punish the violators in time. This results in a vicious cycle where the “bad money forces good money out of circulation.”  Those who follow the rules and regulations are the ones that get eliminated from the market. Where the market of infant milk products is fierce, if the manufacturers do not implement price control, they would lose control of the market. Therefore, it is very possible that every major milk powder manufacturer could be involved into illegal price control.

 

Second, milk powder manufacturers are afraid of punishment from the government. Giving “face” to the government was definitely one of the factors taken into consideration for manufacturers to cut the prices. As provided in the Anti Monopoly Law, fines for implementing a monopoly agreement are staggering, stating that “confiscate illegal earnings, and impose a fine between 1 to 10 percent of the previous year’s sales volume.” Concerning the fact that the government has wide discretion in deciding 1% or 2% of previous year’s sales volume without referred criterion, fines might be more severe if the enterprises do not cut the prices. This is the true reason why the milk powders successively cut the prices.

 

Furthermore, in the competing market of infant milk products, supply-and-demand relationship and consumer’s confidence are the two key fundamental elements in deciding the milk products price. Despite the limits of the Anti Monopoly Law and potential severe fines, the manufacturers could raise the prices by many legal methods.

 

On one hand, what the Anti-Monopoly Law solves is the acts that the operators use improper means to fix prices and to obtain excessive profits. So why are foreign infant milk products much more expensive in China? Milk powder manufacturers’ fixing retail prices is just a secondary reason, while the fundamental cause appears to be the lack of confidence Chinese consumers has in home produced infant milk products, resulting to a shortage of foreign-manufactured milk products. Therefore, Chinese government applied the Anti-Monopoly Law to solve the problems caused by milk powders’ fixing price, but does not solve the supply-demand contraction nor regain consumers’ confidence for domestically produced milk products. Anti-Monopoly Law is formulated with the goal of protecting market competition with openness, fairness, and impartiality, instead of bringing a long-term massive price cuts in Chinese milk formula.

On the other hand, about whether fixing retailing prices violates the Anti-Monopoly Law, there was a dispute between domestic scholars and the courts. Some suggested that manufacturers’ action of setting resale price is a business model that is legal, and the ultimate decision shall rely on whether the price set results in excessive profits. Or else, it would result in all players in the market to be in a legal dilemma. This is something that must also be taken into consideration when NDRC investigates and punishes other similar vertical monopoly.

 

Finally, the underlying reason why Wyeth resumes its original price for the new products is due to the confidence expressed by the consumers for its infant milk products, rather than the price. After all, inflation of the price is reflective of the basic principle of the market economy. If manufacturers would choose to raise the price, it should be taken as a byproduct of the market economy, such as voting with feet. And if the government forced suppliers to deliver price cut without improving the supply-demand relationship, no matter if Anti-Monopoly Law or other approaches are taken, the ultimate goals may still not be achieved.

 

Lawyer Contacts

You Yunting86-21-52134918  youyunting@debund.com/yytbest@gmail.com

Disclaimer of Bridge IP Law Commentary

 

 


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