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24 January 2013
The social unrest that erupted in the summer of 2011 changed the antitrust landscape, both in theory and in practice. Several amendments were made to the Restrictive Trade Practices Law 1988, increasing significantly the powers of the antitrust commissioner. The Antitrust Authority almost doubled in size and the new commissioner demonstrated a hawkish approach towards mergers and restrictive arrangements (for further details please see "Parliament approves administrative monetary payments amendment", "Winds of change? New commissioner reveals revised policy direction" and "Antitrust law introduces new measures to deal with oligopolies").
Now, more than a year after the protests wound down, the food sector - which was at the centre of public attention - is facing radical new legislation aimed at increasing competition between food suppliers and among supermarkets. This legislation, which was put forward by the government and currently awaits Parliament's approval, is based on a report drafted by a governmental committee that was assigned to examine the level of competitiveness and the prices in the food sector during the 2011 protests.
Among other things, the committee found that the local food sector is controlled by a small number of large and dominant suppliers. The committee argued that these suppliers employ practices that may stifle competition on the shelf with small and medium-sized competitors. The committee also found that the food retail sector is highly concentrated in several locations.
The proposed legislation attempts to increase competition by:
The legislation's regulation of supplier-retailer relations is based on the principles of the consent decree signed between the commissioner and the major food suppliers in 2005. However, while the consent decree applied to the major suppliers and the two largest retail chains, the legislation applies to virtually the entire food sector. More importantly, while the consent decree's provisions reflected well-established antitrust scholarship, the legislation contains radical provisions that deviate significantly from conventional antitrust wisdom.
The legislation includes several restrictions of actions that are unlawful and that may not be exempted by the commissioner or the Antitrust Tribunal, regardless of the relevant market characteristics or other circumstances:
The use of per se prohibitions in the context of vertical arrangements is questionable. The restriction on suppliers with respect to shelf layout is particularly puzzling, since while the commissioner never expressed any concern that small suppliers may physically exclude large suppliers, the prohibition applies to all types of supplier. Moreover, the consent decree seemed to settle the issue of possible exclusion by dominant suppliers more proportionally, and the commissioner presented no indication that it was ineffective in doing so.
The legislation imposes certain additional prohibitions, which apply to major food suppliers (ie, those whose annual turnover exceeds $50 million). Here too, the new legislation deviates from fundamental antitrust principles, which impose special behavioural duties on firms based on their market power (or their market share as a proxy), and not their aggregate annual turnover.
Under the legislation, major food suppliers will be prohibited from:
Not only are these prohibitions extremely broad and out of touch with antitrust principles, but the commissioner's power to exempt such practices is also very narrow (and some may not be exempted even in theory).
The proposed legislation further empowers the commissioner to restrict retailers with respect to their private labels if he or she believes this is necessary to prevent significant harm - either to competition or to the public. This is an extremely intrusive measure, especially in light of the relatively small market shares of private labels in Israel today.
The legislation attempts to increase competition among retailers by various means. Under the proposed legislation, the commissioner will be vested with the authority to define a catchment area for each branch of a large retailer and to identify the competitors in each catchment area. The commissioner will then send notification to any retailer whose share in a relevant catchment area exceeds 30% or 50%. Any expansion by such a retailer, including unilaterally (by starting a new shop in that location), will require the commissioner's approval. The legislation provides that such approval will be denied unless any danger to competition is refuted by the retailer (with the standard being higher for retailers whose market share exceeds 50%). Furthermore, the proposed legislation stipulates that the commissioner may recommend to the Antitrust Tribunal that a retailer whose share in a catchment area exceeds 50% and who operates at least three stores in that area cease operations in a certain store or sell the store to a third party.
Apart from these radical structural remedies, the proposed legislation includes behavioural directives aimed at increasing transparency for consumers. Under the proposed law, large retailers will be obliged to make public, online, the prices of all their products in each of their branches, as well as other details about the products (eg, product descriptions and applicable discounts).
A violation of the legislation is set to have criminal, administrative and civil implications, similar to a violation of the Restrictive Trade Practices Law.
The proposed legislation is arguably too intrusive and insufficiently in touch with sound economic principles. The legislation is based on broad, formalistic prohibitions, which are likely to preclude desired and even pro-competitive actions, with virtually no real balancing mechanisms to allow deviations from such prohibitions where appropriate.
The desire to increase competition is appropriate and justifiable. However, trading the flexibility of the antitrust regime and the checks and balances that it includes for a regulation that is founded on strict prohibitions imposed on vertical practices is a dangerous move that may well backfire on the interests of competition.
It can only be hoped that Parliament will review carefully the proposed legislation once it reconvenes after the February 22 2013 elections.
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