Marketing, Advertising and Product Safety I

BBA361 Business Ethics and Corporate Governance

Department of Business AdministrationS.Chan

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LectureLecture 6

Reference:

Chapter 10, “Ethics and the Conduct of Business”,John R. Boatright

Consumer Council website

Marketing EthicsMarketing Ethics

Ethical framework for marketing in American society (bill of rights for consumer):

• Fairness: The right to be provided with adequate

information about products

• Freedom: The right to have a voice in the marketing of

major marketing decision;

•Well-being:The right to be protected from harmful products

•Freedom & well-being: The right to be offered a choice that includes the products that consumers truly want.

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Marketing Ethics in Hong Kong IMarketing Ethics in Hong Kong I

Consumer rights in Hong Kong:

1. The right to satisfaction of basic needs;

2. The right to safety

3. The right to be informed

4. The right to choose

5. The right to be heard

6. The right to redress

7. The right to consumer education

8. The right to a healthy and sustainable environment 3

Marketing Ethics in Hong Kong IIMarketing Ethics in Hong Kong II

http://www.consumer.org.hk/website/ws_en/competition_issues/model_code/2006100401.pdf

• Trade Practice Rules

• Complaint Handling Rules

• Fair Competition Rules

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Marketing Ethics in Hong Kong IIMarketing Ethics in Hong Kong II

I) Trade Practice RulesI) Trade Practice Rulesfalse trade descriptions (虛假或誤導性商品說明 )

misleading omissions (誤導性遺漏 ), aggressive commercial practices (具威嚇性的營業行為 ),

bait advertising (餌誘式廣告宣傳 ), bait-and-switch (先誘後轉銷售行為 ),

and wrongly accepting payment (不當地接受付款 ) 5

False Trade Descriptions(虛假或誤導性商品說明 )

It is an offence if traders supply or offer to supply any goods or services to which a false trade description is applied, or apply a false trade description to any goods or services that are supplied or offered to be supplied to consumers.

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Misleading omissions (誤導性遺漏 )

It omits or hides material information, or provides material information in a manner that is unclear, unintelligible, ambiguous, or untimely, or fails to identify its commercial intent (unless this is already apparent from the context); and as a result, it causes or is likely to cause, the average consumer to make a transactional decision that he would not have made otherwise.7

Aggressive commercial practices (具威嚇性的營業行為 )

A commercial practice engaged by a trader in relation to a consumer is aggressive if, in its factual context, it significantly impairs or is likely significantly to impair the average consumer’s freedom of choice or conduct in relation to the product concerned through the use of harassment, coercion or undue influence; and it therefore causes or is likely to cause the consumer to make a transaction decision that consumer would not have made otherwise.

E.g. “We will not let you go unless you have paid for them!” 8

Bait advertising (餌誘式廣告宣傳 )http://www.legislation.gov.hk/blis_ind.nsf/CurChinOrd/54A907FC21D1E1F048257BAC002A556F?OpenDocument

Advertising by a trader of products for supply at a specified price is bait advertising if (having regard to the nature of the market in which the trader carries on business and the nature of the advertisement) there are no reasonable grounds for believing that the trader will be able to offer for supply those products at that price in reasonable quantities and for a reasonable period; or the trader fails to offer those products for supply at that price, for a reasonable period, and in reasonable quantities.

E.g. advertisement on the display window stating, “Huge sale on plane tickets, HK$999 direct flight to Hokkaido, for today only.” “We want to purchase the HK$999 direct flight ticket to Hokkaido.” The staff replied, “We’re sorry, the ticket was sold out.” “The travel agency has just opened for business for 5 minutes, the tickets run out this quickly?” The staff responded, “Well, that’s the case. We only offer 1 ticket at each outlet.”

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Bait-and-switch (先誘後轉銷售行為 )

The making by a trader of an invitation to purchase a product at a specified price is a bait and switch if, having made the invitation, the trader then, with the intention of promoting a different product, refuses to show or demonstrate the product; refuses to take orders for the product or deliver it within a reasonable time; or shows or demonstrates a defective sample of the product.

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Wrongly accepting payment (不當地接受付款 )

A trader wrongly accepts payment if at the time of accepting payment for the product, he intends not to supply the product or intends to supply a product that is materially different from the product, or there are no reasonable grounds for believing that the trader would be able to supply the product within the specified period or a reasonable period.

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Marketing Ethics in Hong Kong IIMarketing Ethics in Hong Kong II

II ) Handling Consumer ComplaintsII ) Handling Consumer Complaints

• Independency and Impartiality • Transparency• Visibility• Affordability• Speed and Timeless• Competence of Appropriate Officers• Accessibility/ Ease of use• Security

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Marketing Ethics in Hong Kong IIMarketing Ethics in Hong Kong II

III ) Fair Competition RulesIII ) Fair Competition Rules

• First Conduct Rule (Conduct substantially lessening Competition)

• Second Conduct Rule (Abuse of Dominant Position)

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First Conduct Rule( 第一行為守則 ) An undertaking (業務實體 ) must not:

1) Make or give effect to an agreement;2) Engage in a concerted practice (經協調做法 ); or

3) As a member of an association of undertakings, make or give effect to a decision of the association,

If the object or effect is to prevent (妨礙 ), restrict (限制 ) or distort (扭曲 ) competition in HK

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First Conduct Rule( 第一行為守則 )

Captures agreements/conduct and businesses outside HK if there is an object/effect in HK

Object restriction: the type of agreement is so harmful that it is not necessary to prove any effect on competition (e.g. “serious anti-competitive conduct”)

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First Conduct Rule – Non-Price Vertical RestraintsRestrictions on distributors

Non-price vertical restraints include

Product

Customers

territories

Distribution arrangement often include one or more of these restraints

These types of vertical restraints are generally not per se illegal – require assessment

High risk where company is dominant

Restrictions on suppliers

Vertical restraints may sometimes be imposed on a supplier by a customer

Restraints on selling to other customers at all

More limited restraints preventing supply to a customer’s competitors

Most likely to raise concerns where

Customer is in a dominant position

Access to supply of relevant product is limited16

First Conduct Rule – Territorial Restrictions

Brand owner wants to appoint exclusive distributor for different territories or for different customers/sales channels

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First Conduct Rule – 4 Cardinal Sins – Serious Anti-Competitive Conducts 嚴重反競爭的行為

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First Conduct Rule - PricingBrand owner wants to tell its

distributors/franchisee/retailers that they should sell at the “recommended retail price” or include a provision allowing for termination in the event that they do not comply

Effect on franchise, direct marketing?, e.g. 7-11 , Herbxlxfe, NxSkin… etc

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First Conduct Rule If conduct is classified as “serious anti-

competitive conduct”:1. The exclusion from the First Conduct Rule for

agreements of lesser significance does not apply. The exclusion would otherwise apply to:

Arrangements between undertakings whose combined annual worldwide turnover for the turnover period does not exceed HK$200M

Decisions of associations of undertakings if the turnover of the association for the turnover period does not exceed HK$200M

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First Conduct Rule2. The Commission does not have to issue a

Warning Notice before bringing proceedings in the Tribunal. If the Commission believes the First Conduct

Rule has been contravened and the conduct is not serious anti-competitive conduct, the Commission must issue a Warning Notice to the undertaking, giving it an opportunity to alter the conduct within a specified period.

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First Conduct RuleObject restrictionsThe four types of serious anti-competitive conductResale Price Maintenance (RPM)

Supplier sets fixed or minimum resale price charged by reseller

“You must charge HK$100”

“You must charge at least HK$100”

Information exchange – future price and quantitiesGroup boycotts

Effect restrictionsDoes the conduct in question have an anti-competitive effect? As a result of the agreement, can the parties profitably increase price, or reduce output, product quality, product variety or innovation?

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First Conduct Rule - RPM Resale price maintenance (RPM) is

illegal in nearly all countries General rule is that resellers must

be free to set their own resale prices Recommended resale prices are

usually allowed BUT:Must not be binding; andNo pressure or incentive or

“penalty” on reseller to comply Monitoring a distributor’s prices

legitimate: but cannot be used to implement indirect RPM

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First Conduct RuleExample : Fixing resale pricesNailCo, a manufacturer of nails and screws sells its products in HK through independent retail storesIt requires each of the stores to sell its products at a price stipulated by NailCoReason: this ensures an orderly market and avoids customer confusion as a result of differing prices across HK. NailCo claims the arrangement affords retailers a healthy profit margin

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First Conduct RuleAssessmentThe Commission considers this to have the object of harming competition. NailCo’s justifications would be unlikely to satisfy the Ordinance’s requirements for the economy efficiency exclusion to apply. Price is the key parameter of competition and price competition is central to the regime established by the Ordinance.

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First Conduct RulePractical tips on pricingRemember the rule covers:

Agreements and discussions

On prices, margins, discounts and rebates

×Discussion of pricing information with competitors

×Reach any agreement/informal understanding with competitors on any aspect of price policies

×Impose fixed or minimum resale prices

Issue to be aware of:Procurement (joint buying/selling)

Joint venture agreements

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First Conduct RuleExample : Information exchangeA trade association for junk owners collects and circulates information to its members on their respective proposed future prices. This includes information as to the proposed prices for specific journeys.The information is not made available to the public and is circulated in advance of a seasonal price review by the association members.

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First Conduct RuleAssessmentThe Commission would consider this arrangement as either an agreement or concerted practice with the object of harming competition. The information exchange allows the junk owners to adjust their future pricing to reflect the proposed pricing of competitors and thus reduces price competition in the market.The information exchange arrangement is an indirect form of price fixing.

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First Conduct Rule In determining whether there is an

agreement, the Commission will generally seek to determine whether there is a “meeting of minds” between the parties concerned.

Agreement under the First Conduct Rule may exist no matter whether there has been a physical meeting of the parties.

An agreement may be formed through, for example, an exchange of letters, emails, SMS, instant messages or telephone calls.

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First Conduct Rule An undertaking may be found to be

party to an agreement or, in the alternative a concerted practice, if it attended a meeting at which an anti-competitive agreement is reached and it failed to sufficiently object to, and publicly distance itself from, the agreement or the discussions leading to the agreement.

This may be the case regardless of whether it played an active part in the meeting or intended subsequently to implement the agreement.

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First Conduct Rule

A concerted practice is a form of cooperation, falling short of an agreement, where undertakings knowingly substitute practical cooperation for the risks of competition.

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First Conduct Rule The Commission will likely conclude

that there exists a concerted practice with the object of harming competition where competitively sensitive information such as an undertaking’s planned prices or planned pricing strategy is exchanged between competitors in circumstances where: The information is given with the

expectation or intention that the recipient will act on the information when determining its conduct in the market; and

The recipient does act or intends to act on the information.

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First Conduct RuleExample for concerted practiceEach calendar quarter, a number of private language schools in Hong Kong complete a survey, organised by one of the schools, which requests the schools to provide detailed information on their intended fee increases for the following quarter. The results of the survey are then distributed to each school that participated in the survey before the schools finalising their respective fee arrangements for the next quarter. The results of the survey show the proposed future fees for all participating schools by name.

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First Conduct Rule Assuming there is no evidence of an agreement, the

Commission would consider the language schools’ behaviour as evidence of a concerted practice.

In a competitive market, each language school would make its fee decisions independently.

Independence would result in a range of fee levels at the different schools, and a variety of options for students in terms of price.

But the concerted practice has the effect of removing all uncertainty between the schools as to their respective fee-setting policies. This conduct harms competition and leads to higher prices.

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First Conduct Rule

Group BoycottA group boycott is a type of secondary boycott in which two or more competitors in a relevant market refuse to conduct business with a firm unless the firm agrees to cease doing business with another competitor.

It is a form of refusal to deal, and can be a method of shutting a competitor out of a market, or preventing entry of a new firm into a market.

Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power.

E.g. rumours among Coca Cola, Park’n, 759 Shop 35

First Conduct RulePractical tips on information exchange×Confidential and commercially sensitive information should not be revealed to a competitor

Pricing and volume data (future particularly sensitive)

Capacity

Costs

Commercial strategy

You can gather publicly available data

Certain types of information considered less sensitive: Historic, aggregated or anonymized data

Issues of general industry interest

Information on lobbying36

First Conduct Rule

Practical tips on trade associationsTrade associations should have a well-defined items in the agenda

Consider the agenda before attending

Make sure minutes are kept

Do not volunteer any information regarding your likely future conduct to a competitor

If a competitor reveals competitively sensitive information to you:

Stop the meeting and note your concerns

If the conversation continues, leave and ask that your absence be noted

Inform the company secretary/legal team of your concerns37

First Conduct Rule

EU example: BananasBilateral weekly calls between importers on current market conditions

Forward looking information including quotation prices, weather conditions, and stocks

Dole - €45.6M fine; Del Monte - €14.6M fine

Appeal rejected (arguing this was merely market gossip, not part of broader price-fixing cartel and not serious restriction of competition)

UK example: RBS/BarclaysRBS unilaterally disclosed generic/specific future pricing information (relating to loan pricing) to Barclays employees over 6 month period

Barclays ‘blew the whistle’

£28.59M fine for RBS

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Second Conduct Rule( 第二行為守則 )An undertaking (業務實體 ) that:Has a substantial degree of market power (具有相當程度市場權勢 )In a market

Must notAbuse (濫用 ) that powerBy engaging in conduct

That has as its object or effect the prevention (妨礙 ), restriction (限制 ) or distortion (扭曲 ) of competition in HK.Market definition: each market has a product and geographic dimension 39

Second Conduct Rule - Assessment of SMP

A substantial degree of market power (SMP) arises where an undertaking does not face sufficiently effective competitive constraints in the relevant market.

Substantial market power may also be the ability profitably to charge prices above competitive levels, or to restrict output or quality below competitive levels, for a sustained period of time (2 years).

However, the relevant period may be shorter or longer depending on the facts, in particular with regard to the product and the circumstances of the market in question.40

Second Conduct Rule - Assessment of SMPThe definition of a substantial

degree of market power does not exclude the possibility of more than one undertaking having a substantial degree of market power in a relevant market, particularly if the market is highly concentrated with only a few large market participants.

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Second Conduct Rule - Assessment of SMP An undertaking in a competitive market

may be able temporarily to raise its price above the competitive level, but it will be unable to sustain such a price increase because customers will switch to cheaper suppliers or additional suppliers will enter the market.

If an undertaking can profitably charge prices above competitive levels over a sustained period (i.e. 2 years), it can be considered to have a substantial degree of market power.

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Second Conduct Rule – Assessment of SMP

Market power is a matter of degree. The degree of market power possessed by an

undertaking will be assessed based on the circumstances of the case.

An undertaking does not need to be a monopolist (壟斷者 ) to have a substantial degree of market power.

When assessing whether an undertaking has a substantial degree of market power, the Commission will consider the extent to which that undertaking faces constraints on its ability profitably to sustain prices above competitive levels.

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Second Conduct Rule – Assessment of SMP The Ordinance considers the following

non-exhaustive list in determining whether an undertaking has a substantial degree of market power:The market share of the undertaking;The undertaking’s power to make

pricing and other decisions;Any barriers to entry to competitors

into the relevant market; andAny other relevant matters.

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Second Conduct Rule – Market Share

Turnover or sales value data. Sales volume data. Capacity. Market shares may be

determined by measuring an undertaking’s capacity to supply the relevant market.

Other indicators. Market share might also be calculated by reference to, for example, product reserves held, customer base or share of new customers.

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Second Conduct Rule – Potential Entry or Expansion Regulatory and legal barriers

(such as licensing requirements); Structural barriers (such as

significant economies of scale and/or scope, or network effects); and

Strategic barriers intentionally created or enhanced by incumbent undertakings in the market.

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Second Conduct Rule

Competition rules apply to unilateral conduct by an undertaking with substantial market power (SMP)

No need for agreement with another party

Companies in a strong market position may be regarded as having substantial market power if they have the ability profitably: To charge prices above competitive levels; or

To restrict output or quality below competitive levels for a sustained period of time (normally 2 years)

In EU, a company is unlikely to have SMP if their market share is below 40% (no indicative thresholds in HK)

Have SMP is not itself unlawful but imposes special responsibilities 47

Second Conduct RuleExploitative abusesCause direct harm to the consumers/customersFor example, excessive pricing, i.e. charging customers a higher then normal price for a product or service which bears little or no relation to the economic value of the product/service provided

Exclusionary abusesSeen as most harmfulThis is conduct that aims at excluding actual competitors from expanding or deterring would-be entrants (e.g. anti-dumping) 48

Second Conduct Rule

Examples of exclusionary abusesPredatory pricing  掠奪性訂價 Tying and bundlingMargin squeezeRefusal to supply (arises only in limited circumstances)Exclusive dealing

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Predatory Pricing  掠奪性訂價Pricing strategy where a product

or service is set at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors, e.g. free to use IE10.0, free shipping for amazon.com

The Commission will consider whether there is pricing below average variable cost and pricing below average total cost

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Tying and Bundling Tying occurs when a supplier

makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product) from the supplier (i.e. the tying product is not sold separately)

Bundling refers to situations where a package of two or more products is offered at a discount (Each one sold at $10; while a package of 3 sold at $21)

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Margin Squeeze In order for a margin squeeze case to arise,

three elements must be present

First, an upstream firm must produce an essential or bottleneck input with no substitutes and no scope for other firms to provide the essential input themselves

Second, that firm must sell that essential input to one or more downstream firms which seek to use that input in the provision of some downstream product or service

Third, the upstream firm must itself use its own input to compete against those downstream firms in the market for that downstream product or service (with very thin margin)

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Refusal to Supply As a general matter, an undertaking, whether

or not it has a substantial degree of market power, is free to decide with whom it will or will not do business

The term “refusal to deal” describes a situation where an undertaking with a substantial degree of market power refuses to supply an input to another undertaking, or is willing to supply that input only on objectively unreasonable terms – known as a constructive refusal to deal

Constructive refusal could, for example, consist of unduly delaying or otherwise degrading the supply of the relevant input, or imposing a price for the input that is excessive

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Refusal to Supply In assessing whether a refusal to deal is a

contravention of the Second Conduct Rule, the Commission may consider as appropriate: Whether or not it is technically and

economically feasible for the undertaking with a substantial degree of market power to provide the input in question

The past history of dealing between the undertakings (the termination of an existing supply arrangement might more readily be characterised as abusive); and/or

The terms and conditions at which the products in question are generally supplied or are supplied in other contexts

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Exclusive Dealing Exclusive dealing is commonly used in

commercial arrangements and in most cases will not harm competition

An undertaking with substantial market power may, however, seek to foreclose competitors by preventing them from selling to customers though exclusive dealing arrangements

Exclusive dealing in this context includes arrangements requiring a customer to purchase, directly or indirectly, all or a substantial proportion of its requirements of a particular product from a particular undertaking

This may take the form of either an exclusive purchasing obligation or a conditional rebate

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Exclusive Purchasing Obligation An exclusive purchasing obligation

requires a customer to purchase its requirements of a particular product exclusively or to a large extent only from the undertaking with a substantial degree of market power

Other obligations, such as stocking requirements, may have the same effect as exclusive purchasing even though they do not, strictly speaking, entail exclusivity

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Conditional Rebates Conditional rebates, in particular loyalty or

fidelity rebates, involve the grant of a rebate to customers as a reward for particular purchasing behaviour

Typically, a loyalty rebate scheme involves offering a financial incentive to encourage the buyer to commit to purchasing more from the supplier

As a general matter, rebates of this kind are normal commercial arrangements intended to stimulate demand to the benefit of consumers

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Conditional Rebates However, rebates which are granted by an undertaking with

a substantial degree of market power can have foreclosure effects similar in nature to those caused by exclusive purchasing obligations. Usually a loyalty rebate involves the customer being awarded the rebate if the customer’s purchases over a defined period exceed a defined threshold

Loyalty rebates may be granted either on all purchases from the undertaking with a substantial degree of market power (retroactive rebates) or only on purchases above the relevant threshold (incremental rebates)

Retroactive rebates have the potential to foreclose the market significantly since buyers switching portions of their demand to an alternative supplier would lose the rebate in respect of all products purchased and not only the incremental amount for which the buyer is considering alternative suppliers

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Exclusive Purchasing ObligationExampleA large and popular rice noodle producer, LargeNoodle Co, offers significant rebates to local grocery stores in Hong Kong that agree to purchase a certain volume of rice noodles from LargeNoodle Co. LargeNoodle Co sets volume targets for each customer individually and these correspond roughly to the volume of noodles which the customer usually purchases. The targets are calculated over a period of one year and increase in size, year on year, for a period of 5 years. No rebates are received unless the grocery store hits the volume target, and after that point, the rebate is received in respect of all volumes purchased from LargeNoodle Co that year

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Exclusive Purchasing Obligation The effect of the rebate scheme is that

customers in practice purchase all of their rice noodle requirements from LargeNoodle Co, as to do otherwise would lead to them losing the entire rebate for a particular year

Other rice noodle producers are effectively “locked out” from supplying a large portion of the grocery market and can no longer compete effectively with LargeNoodle Co.

If LargeNoodle Co has a substantial degree of market power, this rebate scheme may amount to an abuse under the Second Conduct Rule

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