Perceptions and laws on unfair tradepractices in the Philippines

Kathrina G. Gonzales and Josef T. Yap

Philippine Institutefor Development StudiesSurian sa mga Pag-aaralPangkaunlaran ng Pilipinas No. 2012-19 (December 2012)ISSN 1656-5266

PIDS Policy Notes are observations/analyses written by PIDS researchers on cer-tain policy issues. The treatise is holistic in approach and aims to provide useful inputsfor decisionmaking.

The authors are Supervising Research Specialist and President, respectively, at thePIDS. This Notes is based on PIDS Discussion Paper Series No. 2012-39 titledUnfair trade practices in the Philippines written by A. Abad, K. Gonzales, M.Rosellon, and J. Yap. The authors gratefully acknowledge the excellent researchassistance of Kris A. Francisco, Research Analyst II at PIDS. The views expressedare those of the authors and do not necessarily reflect those of PIDS or any of thestudys sponsors.

Policy Notes

Defining unfair trade practicesUnfair trade practices (UTPs) are practices ofbusinesses or firms that are deceitful,misleading, and uncompetitive, andtherefore prohibited by law. They adverselyaffect consumer welfare and reduce theprofitability of businesses. UTPs cover awide spectrum of activities.

UTPs are normally associated withanticompetitive behavior which can becategorized into two general types:exclusionary abuse which is an act of a firm, ora group of firms, to prevent entry of potentialrivals; and exploitative abuse which refers toactual abuse of market power (Medalla 2002).Examples of exclusionary abuse are predatorypricing, arrangement to divide the market,unfairly raising rivals cost, and unjustifiedrefusal to deal with other firms. Examples ofexploitative abuse include cartel agreements

to fix prices at levels above those that resultwith competitive markets, and limitations onlevels of output.

In a World Bank and OECD (1998)classification of barriers to competition orbarriers to entry, UTPs relate to behavioralbarriers, which represent abuse of dominantposition where relatively large firms engage inanticompetitive conduct or restrictive businesspractices by preventing entry or forcing exit ofcompetitors through various kinds ofmonopolistic conduct, including predatorypricing. Under behavioral barriers is aclassification called horizontal constraints that

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include cartels or collusionwhich aremanifested in price-fixing arrangements,market-sharing territorial arrangements, andbid riggingand price discrimination. On theother hand, vertical restraints, which occur incontractual agreements between supplier andpurchasers/retailers in upstream anddownstream markets, include resale pricemaintenance, exclusive dealing, and tiedselling.

To investigate the prevailing situation of UTPsin the Philippines, PIDS conducted the UnfairTrade Practices study, which formed part of theUnfair Trade Practices in Selected ASEANCountries project conducted under theauspices of the Consumer Unity and TrustSociety (CUTS) Hanoi Resource Center. ThePIDS study reviewed the existing and pendingcompetition/antitrust related laws to examinetheir effectiveness and adequacy in addressingUTPs; conducted a perception survey withassistance from the National Statistics Office toanalyze respondents understanding andawareness of issues pertaining to institutionsand rules or laws; and held a focus groupdiscussion with various stakeholders. ThisPolicy Notes presents some of its key findings.

Current legal and institutionalframework on UTPsWhile a general competition law has not beenpassed in the Philippines, several laws andregulations related to antitrust issues, UTPs,

and uncompetitive behavior have been inplace for a long time. Antitrust enforcement isalso implicitly vested in various regulatoryagencies and bodies. However, theimplementation of these laws and regulationshas remained to be largely ineffectiveresulting in high prevalence of UTPs.

The following are some of the existing lawsand regulations in the Philippines that fallunder the area of competition/antitrust.1

Act No. 3815 (1930) as amended,otherwise known as the Revised Penal Code,punishes anticompetitive behavior that iscriminal in nature. Article 186 defines andpenalizes monopolies and combinations inrestraint of trade while Article 187 providespenalties.

The Revised Penal Code also penalizes otherfrauds in commerce and industry such asfalsely marking gold and silver articles andaltering trademarks (Republic Act No. 166,1947).

Republic Act (RA) No. 386 (1949) asamended, otherwise known as the Civil Code ofthe Philippines, took effect in August 1950. Itallows the collection of damages arising fromunfair competition in agricultural, commercial,or industrial enterprises or in labor (Article28). The Civil Code also allows the collection ofdamages arising from abuse in the exercise ofrights and in the performance of duties(Article 19), e.g., abuse of a dominant marketposition by a monopolist.

______________1 For other laws and regulations that either directly orindirectly affect competition, please refer to Abad et al.(2012) Appendix 3.1.

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Peculiarly enough, the Civil Code does notdefine unfair competition and merely liststhe means by which unfair competition canbe committed: force, intimidation, deceit,machination, or any other unjust,oppressive, or highhanded method.

RA 7581 (1991), otherwise known as thePrice Act, and RA 7394 (1932), otherwiseknown as the Consumer Act of the Philippines.

The Price Act defines and identifies illegal actsof price manipulation such as hoarding,profiteering, and cartels. Through pricecontrols and mandated ceiling mechanisms,the Price Act also seeks to stabilize the pricesof basic commodities and prescribes measuresagainst abusive price increases duringemergencies and other critical situations.

The Consumer Act of the Philippines providesfor consumer product quality and safetystandards. It also covers deceptive, unfair, andunconscionable sales acts and practices(including weight and measures, product andservice warranties), consumer credit transactions,and penalties for violations of the statute.

Executive Order (EO) No. 45, designatingthe Department of Justice (DOJ) as theCompetition Authority. This EO has effectivelygiven the DOJ full jurisdiction over matterspertaining to competition and fair trade practicesamong corporations operating in the country.

The highlight of EO 45 is the creation of theOffice for Competition (OC) under the DOJ, the

mandate of which is to investigate andprosecute all antitrust violations. In addition,the OC is charged to implement competitionpolicies and laws to protect consumers, tosupervise competition in the markets byensuring that prohibitions and requirementsof competition laws are adhered to, to monitorand implement measures to promotetransparency and accountability in markets,and to prepare, publish, and disseminatestudies and reports on competition to informand guide the industry and consumers.

Key findings

Survey2

The survey was intended to determinerespondents perception of UTPs and lawsrelated to UTPs and their implementation.Three sets of questionnaires were prepared,one for each targeted group of respondentsnamely, business firms, business andconsumer associations, and government.Forty respondents were interviewed. Twenty-five of them (62%) came from the businesssector, seven (18%) from businessassociations, four (10%) from the consumersector, and four (10%) from the governmentsector. Table 1 defines the UTP terms thatwere included in the survey.

Perception on UTPsThe majority of respondents (87%) consideredmisleading advertisement as the most prevalentUTP. Over 70 percent also perceived unfair______________2 The complete results of the survey are available in Abad etal. (2012).

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pricing, unreasonably high price, discriminatorydealings, and abuse of intellectual propertyrights (IPRs) as forms of UTP. Systematicobstruction of competition was alsoprominently identified by the respondentfirms and business associations. Practicesconsidered as major UTPs by each sector were:

Business firms: misleadingadvertisement Business and consumer associations:misleading advertisement Government sector: misleadingadvertisement, unfair pricing, tied selling,and abuse of IPRs

Table 1. Definition of terms: unfair trade practices

Unfair Trade Practices Definition

Predatory pricing Pricing of the product below the cost of production with the intention to drive out competitors from the market.Predatory pricing is something difficult to prove against any firm.

Tied selling Forcing customers to buy other products along with the desired product. Here the supplier sells a product(tying product), which is dependent on the purchase of some other product, usually a slowing product (tiedproduct). This tie-in arrangement is such that even if the customer does not want to buy the tied product, he hasto buy it to get the desired product. However, such behavior should not be considered abusive if the firm doesnot have market power in the tying goods.

Coercive/exclusive dealing A practice whereby a manufacturer or supplier of goods restrains his distributors from dealing in competingproducts and requires them to deal exclusively in the products manufactured and supplied by him. This dealingarrangement can act as a barrier for new entrants and hence affects competition adversely.

Misleading advertisement Refers to any false or unfounded representation related to products made to the public by a company. Therepresentation may be about the nature, character, or performance of a product, such as size, type of contents,or weight. It also includes warranties, statements, or guarantees that are not based on adequate and proper tests.

Refusal to deal A situation whereby a seller refuses to deal with a purchaser, usually when the purchaser has limited options ofalternative supply. The competitive effects of refusal to deal have to be weighed on a case-to-case basis.

Resale price maintenance A practice whereby a manufacturer and its distributors agree that the latter will sell products of the former atcertain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance), or ator below a price ceiling (maximum resale price maintenance).

Discriminatory dealing: When a manufacture or a supplier of goods charge, for the same or similar product, a higher price from oneprice discrimination dealer and a lower price from another, it is referred to as price discrimination. The discrimination in price can be

made either through fixing or charging different prices from different buyers or classes of buyers or by grantingdiscount, commission, allowance, or rebate at different rate to different buyers or class of buyers. Pricediscrimination can only be effectively exerted by businesses only when they are in dominant positions or haveconsiderable market power in the relevant product or geographical markets; thus it is considered a type ofabuse of dominance.

Discriminatory dealing: A distribution system whereby a supplier enters into (vertical) agreements with a limited number of selectedselective distribution dealers in the same geographic area. Selective distribution agreements, on the one hand, restrict the number of

authorized distributors. On the other hand, they prohibit sales to nonauthorized distributors: this leaves authorizeddealers only other appointed dealers and final customers as possible buyers. Selective distribution is almostalways used to distribute branded final products. The possible competition risks are a reduction in intrabrandcompetition, the facilitation of collusion between suppliers or buyers and the foreclosure of certain type(s) ofdistributors, especially in the case of cumulative effects of parallel networks of selective distribution in a market.

Unreasonably high price Also called excessive pricing. Please refer to unfair pricing. A price is often considered excessive if it has noreasonable relation to the economic value of the goods or service supplied.

Systematic obstruction This is a term used in the new German Act against Unfair Competition. Section 4(10) of this act renders it unfairof competition to systematically obstruct a competitors freedom to act within the market (obstruction of an individual competitor).

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A little over 50 percent of the total number ofrespondents identified unfair pricing as theirmost encountered UTP. It also obtained thehighest number of responses from both thebusiness firms and government agencies. Thiswas not unexpected as price changes caneasily be felt compared to other UTPs.

Fourteen of the 25 respondents from thebusiness sector considered UTPs in theirnormal operations as moderately widespread;nine considered them to be highly widespread.In the case of business associations, two of

the seven indicated UTPs to be extremelywidespread while 58 percent observed them tobe highly widespread. These responses clearlyshow business groups to be bolder thanindividual firms and they consider UTPs as amajor issue.

Meanwhile, one consumer group consideredUTPs as insignificantly widespread while twoof the four believed UTPs are moderatelywidespread. One out of the four respondentsfrom the government sector either was notaware of or could not comment on how

Unfair Trade Practices Definition

Examples of obstructive competition are boycotts, the alienation of customers or employees, the abuse ofmarket power on the demand side, obstructive use of trademarks, discrimination, and the systematicundercutting of prices. To be regarded as unfair, the obstructive act needs to be systematic, i.e., with the(primary) intent to obstruct or eliminate a competitor.

Fidelity rebates Also called loyalty discount (LD), this means discounts offered as a counterpart of a commitment from thepurchaser to place all or most of its orders to the seller granting the rebate, be they large or small. Fidelityrebates are generally seen as a horizontal exclusionary devices aiming at foreclosing competitors or impedingtheir expansion and thus prohibited by the competition laws of many countries in the world.

Margin squeeze Occurs when there is a narrow margin between an integrated providers price for selling essential inputs to arival and its downstream price that the rival cannot survive or effectively compete (OECD 2009 - http://www.oecd.org/dataoecd/30/17/46048803.pdf). Margin squeeze can arise only when (a) an upstream firmproduces an input for which there are no good economic substitutes, (b) the upstream firm sells that input toone or more downstream firms, and (c) the upstream firm also directly competes in that downstream marketagainst those firms.

Abuse of intellectual property The allegation or circulation of facts concerning the goods, the services or the business of a competitor, or therights, including harming other person of the proprietor or a member of the board, which are liable to damage the operation of the business orbusiness reputation the credit of the proprietor, unless those facts can be proved to be true.

The offer of goods or services that are imitations or replicas of a competitors goods or services where this might mislead customers and cause confusion in the market place as to the commercial origin of

those goods or services, in cases of the original manufacturers reputation being unfairly exploited or impaired, or where the necessary knowledge or required documents for the production of the imitation or replica have

been obtained by dishonest means.

Direct marketing activities, which are considered to be unacceptable nuisances and thus unfair

Source: Annex A (Abad et al. 2012)

Table 1 (contd.)

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widespread UTPs are in the Philippines; onehad no answer. This indicates that thegovernment does not consider UTPs as a priority.

A large majority of respondents (72.5%)believed UTPs are still prevailing or havenot been resolved yet. Interestingly, two ofthe four government agencies whichparticipated in the survey considered UTPsas an issue that has been resolved.

Laws related to UTPsand their implementationSeventeen of the 40 respondents identified theexistence of monopoly as the primary source ofUTP. Fifteen respondents also believed thatdiscrepancy in the bargaining power of relevantparties, information asymmetry, and absence ofrelevant laws and institutions cause UTPs.

Interestingly, business and consumer groupsalso cited the absence of relevant laws andinstitutions as a primary cause of UTPs.

Only four out of the 25 respondents fromthe business sector cited the absence of

relevant laws and institutions as a cause.One reason is that 21 of the 25 were notaware of rules, regulations, or laws related to

UTPs or simply answered do not know. Aswould be expected, business and consumerassociations were generally aware of thelaws with 100 percent and 75 percent ofthem, respectively, answering yes.

The respondents provided the laws or rulesthat they are aware of and these are listed inTable 2. It is clear from the responses thatrespondents from the business firms werenot aware of the important laws related toUTPs. Meanwhile, business and consumerassociations cited many of the relevant laws.

In addition, 11 out of the 25 business sectorrespondents expressed that existing rules,regulations, or laws are sufficient to check allUTPs. Some respondents commented thatmonitoring of these rules should beestablished and stricter implementationshould be followed. On the side of businessand consumer associations, all 11 respondentsrecommended having laws or regulationsenacted specifically to check UTPs and toprotect them more effectively.

When asked if they will be willing to signinvestigation reports as a third party whichdeals with UTPs in court, there appeared tobe a lot of hedging among business firms asonly one respondent from this group gavean outright yes. Nine of the 25 answeredno although 11 responded that itdepended on the circumstances.

Table 2. Rules, regulations, or laws respondents know

Business Business and Consumer Government Associations

no return no exchange COA rules Republic Act 7394 - price ceiling anticartel/antimonopoly Consumer Act of the everyone should follow Consumer Welfare Act Philippines

same standard or oil deregulation law IPO codeset price cheaper medicine law price tag law

price tag law IPO code Civil Code of the intellectual property law DOJ/DTI rules Philippines

revised penal code general banking law revised penal code

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The results also revealed the reluctance of theprivate sector to cooperate in investigationsagainst UTPs. Half of the 25 business firmssignified their refusal to cooperate. Whilethree of the seven business associationsindicated outright willingness, three alsostated that it depended on the circumstances.

Focus group discussionThis activity was intended to gather variousstakeholders reactions to the framework ofthe study and survey results. The discussionadopted the narrower concept of UTPs, i.e.,misdemeanors practiced by business firms thatcause an economic injury to other businessfirms or consumers. The representative fromthe Department of Trade and Industry (DTI)explained that existing laws such as theConsumer Act of the Philippines and Price Actadequately protect consumers by stabilizingthe prices of basic necessities and primecommodities and prescribing measures againstundue price increases during emergencysituations and like occasions.

Presently, there is a Consumer ComplaintsCenter which provides direct assistance toaffected consumers in line with the ConsumerProtection Law. However, there is no agency ordepartment that handles UTPs of the business-to-business type (B2B). This may be the majorreason why the survey shows that only oneout of the 25 business firms ever reported aUTP. The legal mechanisms to address B2Btype are clearly not yet firmly established. Asecond-best solution is for businesses that areadversely affected to complain as consumers.

However, this has limited applicationespecially if the transactions do not involvepurchase of the product of the offender (e.g.,coercive/exclusive dealing).

Summary and implicationsIn the mind of many respondents, UTPs aremoderately to highly widespread. UTPs arebelieved to have adverse impacts onbusiness transactions and consumer welfare.The most prevalent forms of UTPs in theconsciousness of economic agents aremisleading advertisement and unfair pricing.Between the two, it seems unfair pricing isthe one that is practiced more.

Only four of the 25 respondents from thebusiness sector were aware of any rules,regulations, or laws currently in effect in ourcountry to check these unfair tradepractices. Moreover, only one respondentactually reported a case to the DTI. Therespondents from the business group alsoexpressed reluctance to participate in legalaction. This may imply that support from thebusiness group is low in terms of advocacyin implementing existing laws or indemanding action against UTPs.

This type of behavior raises some questions asto whether the private sector in thePhilippines is its own worst enemy when itcomes to promoting fair competition(Rosellon and Yap 2010). This also relates tothe absence of a culture of competition in thecountry, as described in Chapter 1 of the fullsurvey results (Abad et al. 2012). The

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indifference of the business sector could meanthey are aware of the adverse impacts of UTPsyet they refuse to rock the boat. Hence, theadverse impacts of UTPs are normally passedon to consumers as higher prices. This is onereason why business and consumerassociations seem to be more active incountering UTPs as they are directly affectedby these unfair practices.

The reluctance to take legal channels mayalso imply that there are gaps in the legalinfrastructure to address UTPs. Firms whoare victims of UTPs are in a good position toidentify gaps in the legal infrastructure.

Some policy recommendationsIt is imperative for government to determinewhat kinds of UTPs are occurring in order toprotect local producers from these practicesand to assist vulnerable sectors. Thegovernment should include UTPs in its list ofpriorities to address. Capacity building of theDTI to handle UTP cases will help to enhanceconsumer welfare. Additionally, as the studyhas shown, a number of laws and regulationsthat directly or indirectly affect thecompetition in the country already exist. What

is needed is a thorough study of these lawsand regulations to investigate if they arebeing enforced effectively. The results couldform the basis for a comprehensivecompetition law. Broader informationdissemination of these existing laws is alsonecessary. The effectiveness of policies couldalso be enhanced by establishing structuresthat would facilitate closer coordinationamong business organizations, consumergroups, and government entities.

ReferencesAbad, A., K. Gonzales, M. Rosellon, and J. Yap.

2012. Unfair trade practices in the Philippines.Paper submitted to CUTS Hanoi, April 30.

Consumer Unity and Trust Society (CUTS). 2012a.Stakeholders perceptions on unfair tradepractices in the Philippines. CUTS HanoiResource Centre Policy Brief no. 10/2012.Hanoi: CUTS.

. 2012b. Unfair Trade Practices in thePhilippines. 2012. CUTS Hanoi ResourceCentre Policy Brief no 9/2012. Hanoi: CUTS.

Medalla, E., editor. 2002. Toward a nationalcompetition policy for the Philippines. MakatiCity: Philippine APEC Study Center Networkand Philippine Institute for Development Studies.

Rosellon, M. and J. Yap. 2012. The role of privatesector in regional economic integration: aview from the Philippines. In S. Basu Das,Achieving the ASEAN Economic Community 2015challenges for member countries and businesses,p. 249274. Singapore: ISEAS Publishing.

The Philippine Star. Young lawyers' group hail EO45. Business section. http://www.philstar.com/Article.aspx?publicationSubCategoryId=66&articleId=710498 [Accessed July 28,2011].

World Bank and Organization for Economic Co-operation and Development. 1998. A frameworkfor the design and implementation of competitionlaw and policy. Washington D.C.: World Bankand Paris: OECD.

For further information, please contact

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