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Monopolistic Damages Classification and
Penalty Structure: Justice and Efficiency
Li Yu
December 16, 2017
1
Lingnan Competition Policy Forum—— Mainland China and Hong Kong， 2017
Questions
1. Why has been no case of confiscating the illegal gains since China’s AML was adopted in 2008?
2. Why should not delete the clauses of confiscating the illegal gains from the AML of China?
3. What are the differences between Compensation Principle and Punishment Principle?
4. Why is the optimal penalty (punishment) structure so important?
2
The AML of China
• Article 46 … monopoly
agreement,… the authority … shall
instruct it to discontinue the
violation, confiscate its illegal
gains, and impose on it a fine of
1-10% of its sales achieved in the
previous year.
• Article 47 … abuses its dominant
market position, the authority… …
shall instruct it to discontinue such
violation, confiscate its illegal
gains, and impose on it a fine of 1-
10% of its sales achieved in the
previous year.
3
• Article 48 … , implement
concentration, the authority … shall
instruct them to discontinue such
concentration, … to return to the state
prior to the concentration, …
impose … a fine of not more than
500,000 yuan.
• Article 49 To determine the specific
amount of fines … , the
authority …shall consider such factors
as the nature, extent and duration of
the violations.
• Article 50 … has caused losses to
another person, it shall bear civil
liabilities according to law.
Case 1—Public litigation: Qualcomm
• February 2015, US chipmaker
Qualcomm would pay $975m
(¥6b) to Chinese authorities
to end a 14 month anti-trust
investigation into its patent
licensing practices.
• The fine was the largest in
China's corporate history.
• The chip giant made about
half its global revenue of
$26.5bn in China in its last
fiscal year.
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Penalty Structure
Items Amount Percentage
Illegal Gains 0 0%
Fines $975m (¥6b) 100%
Total $975m 100%
A fine of 8% of its sales (in China market)
achieved in 2013
Case 2—Mixed Action: Samsung, LG and 4 Firms Fined for price fixing
• JANUARY 2013, NDRC levied
fines against Samsung and other
5 companies for fixing prices of
display panels.
• The total fine reached $56
million, $27 million was paid to
nine TV makers as a refund.
• This action was according to
The Price Law of China
(adopted in 1998), since the
AML of China was adopted in
2008 ( ten years later).
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Penalty Structure
Items Amount Percentage
Refund $27 m (¥172m) 48%
Illegal Gains
$6 m (¥36.7m) 11%
Fines $23 m (¥144m) 41%
Total $56 m (¥353m) 100%
Case 3—Private litigation: Ruibang versus J&J (RPM)
• August 2013, The Shanghai Higher
Court ruled that the RPM enforced
by J&J Medical (Shanghai, China)
violated China’s AML. J&J to
Ruibang Co Ltd damage reward for
$87k (¥530k).
• Ruibang, the downstream firm of
J&J sold medical supplies 5% lower
than the RPM set by J&J. J&J sued
Ruibang of violation of contract (i.e.
Jump-dealing)
• It was China’s first private antitrust
litigation involving vertical
monopolistic agreement (RPM) .
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Items Amount Percentage
Compensation $87k (¥530k) 100%
Fines 0 0%
Total $87k(¥530k) 100%
Penalty Structure
Penalty Structure Summary
Case NatureCompensation
Fines Confiscating
illegal GainsRefund
QualcommPublic
Litigation —— √
Samsung, LG, etc
Mixed Litigation? √ √ √
Ruibang vsJ&J
PrivateLitigation √ (Civil) ——
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Sad and Happy
• Emphasize the optimal penalty structure? Yes!
• Delete the clauses of confiscating illegal gains from AML? No!
• Difficult to calculate the economic damages (e.g. Illegal Gains)? Yes!
• NDRC. The Guide to the Determination of Illegal Gains and
Fines for Monopolistic Conduct of Undertakings (16th draft,
May 2017).
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Social Welfare under CompetitionSocial Welfare = Consumer Surplus + Producer Surplus
PS
Price
Quantity
Po
Qo
SCS
D
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Welfare Transfer & Efficiency Loss under Monopoly
——Price Cartel
Price
Quantity
10
P0
Qo
S
D
QM
PM
Transfer from consumer to producer
Loss of CS
Loss of PS
Deadweight Loss
Haberger’s Triangles
Monopolistic Infringement /Monopolistic Loss（Rectangle/Triangle）
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Price
Quantity
P0
Qo
D
QM
PM
Loss(Indirect Damage)
S （MC=P0）
Infringement(Direct Damage)
Structural Analysis
Rectangle（N years）
• Generally, Rectangle ≥ Triangle
• Illegal Gains (Refund) is a surplus
transfer. It is applicable to
Compensation Principle, aimed
at Justice
• Illegal Gains can be transfer from
consumer to producer, or from
weak producer to dominant
producer
• Duration may be N years
Triangle（Multiple times）• Triangle represents potential efficiency
loss, much more harmful than welfare
transfer. It is applicable to Punishment
Principle, aimed at Efficiency
• Sometimes, total net social welfare Loss =
2 triangles (CS + PS)
• For the purpose of deterrence and taking
the probability of detection into account,
the fine should be multiple times of illegal
gains
• China：imposing a fine of 1-10% of its
sales in the previous year. Whether it is
legal gain or not, even no gain at all
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A. Compensation Principle
D—Damage Compensation；G—Illegal Gains；P—Detection Probability.
(No time value)
Incentive Compensation or Incentive Punishment? Sometimes!
Transferable Illegal Gains are applicable to Compensation Principle——Neutral?
Confiscation of Illegal Gains should be returned to the infringed (direct damages)
companies and consumers, not go to the Public Finance (indirect damages)
Compensation Principle tends to Justice First
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Classification Low Criterion High Criterion
1 Incentive D<G D’<G /P
2 Neutral D=G D’=G /P
3 Punitive D>G D’>G /P
B. Punishment Principle
• The Sales (turnover) are the base, both for fine-calculating and damage-evaluating.
The Gross Premium Income is the equivalent term for Insurance industry
• Efficiency Loss (Net Social Welfare) is potential in nature, but more harmful to
society than welfare transfer
• The fine-calculating is simple ( such as 1-10%), but it is an art rather than a science
• Punishment Principle tends to Efficiency First
– The Harberger’s triangle issues: tiny (0.1% of GDP) or tremendous？
– The Efficiency Defense by using Williamson’s Trade-off Model
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Structural Summary——Basic Formulas
1Monopolistic
Damages
Economic Damages = Infringement damage + Potential Loss
= Rectangle（N years）+ Triangle（Multiple Times）
2Penalty
Structure
Penalty = Compensation + Fines
= Illegal Gains (Confiscation) + Fines
= Direct damages + Indirect damages
3 GoalsGoals = Justice + Efficiency
= Refunding Transfer Payments + Eliminating Efficiency Loss
4Combined
Punishment
Injunction + Confiscation + Fines + Civil + Criminal
AML of China
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The Optimal Penalty Structure (key points)
1. The differences between welfare transfer and potential loss needs to be clarified, and the model of Less-confiscation/more-fine is only a makeshift
2. The illegal gains and expected fines are the most important factors that shape business behaviors. The optimal combination of rectangle and triangle ( compensation and fine) should be pursued. More and deeper research is urgently needed
3. The balance between Justice and Efficiency can be achieved by using the Compensation Principle and Punishment Principle together
4. Private litigation, class action and public litigation have different rules and influences, and should be integrated.
5. Confiscating illegal Gains should not be deleted
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References
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