Hub and Spoke Cartels

November 2021 Aslı Su Çoruk
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Introduction

Hub and spoke cartel is not a frequently encountered competition law violation due to its complex structure. Yet nowadays, it is one of the most pressing topics on the agenda of the Turkish Competition Board (“Board”). As it has been widely publicized throughout the media, the Board has recently announced its final decision[1] with regard to the investigation conducted to examine the pricing behavior of the market chains operating in the retail trade of food and cleaning supplies during the COVID-19 pandemic and the manufacturer and wholesaler undertakings which are their suppliers. The Board has imposed fines on the top five largest retailers in Turkey, in addition to a food supplier. The infringement determined by the Board in this case is that the enterprises were acting as a “hub and spoke cartel” for the purpose of determining the retail sales prices of many products. In this article, after laying out the criteria that define a hub and spoke cartel, hub and spoke examples under Turkish competition law will be examined through the Board’s two significant decisions.

Definition and Legal Basis

A hub and spoke cartel can be defined as the indirect exchange of information between two independent undertakings which are horizontal competitors on the supplier or retailer level (“spokes”), through another undertaking operating at a different level of the production or distribution chain (“hub”). The hub facilitates the coordination of competition between the spokes without direct contacts between the spokes.[2] Despite the lack of a direct exchange of information among the horizontal competitors, this indirect exchange of information can be considered to have the same negative impacts on the market as a horizontal hardcore cartel.

Hub and spoke cartels represent a relatively new type of violation within the scope of Turkish competition law.[3] While hub and spoke is not explicitly defined or regulated as a separate type of violation within the scope of the Law No. 4054 on the Protection of Competition (“Law No. 4054”) or the Guidelines on Vertical Agreements, the Guidelines on Horizontal Cooperation Agreements highlights that the exchange of information among undertakings can be realized in various manners, and that indirect exchange of information may also constitute a violation within the meaning of Law No. 4054.[4]

Taking into consideration that the information exchanged between suppliers and distributors may also occur for legitimate business purposes, it is not possible to conclude that each exchange of information on a vertical level constitutes a violation and therefore, enforcement agencies should scrutinize whether the conditions for a hub and spoke cartel which are set forth by jurisprudence have been fulfilled in every individual case.

Types of Hub and Spoke Arrangements

Hub and spoke arrangements may appear in three main ways:[5]

  • Between Retailers, Supplier Serving as a Hub

In this type of hub and spoke arrangement, it is possible for two competitor undertakings to exchange information indirectly through a supplier serving as a hub and operating in the upstream market.

  • Between Suppliers, Retailer Serving as a Hub

Hub and spoke arrangements can also occur in case the suppliers exchange information by means of a retailer serving as a hub and operating in the downstream market. This usually occurs when there are only a small number of players in the upstream market or downstream market, as the existence of only a few players increases the coordination between the undertakings during the information exchange process.

  • Between Retailers, Third Party Serving as a Hub

Under this scenario, the hub is a third party, completely independent from the market in which competitor undertakings operate. In other words, the hub is not an actor operating in the upstream or the downstream market of the competitor undertakings. For example, the hub may be an independent auditing company or an association. In this respect, despite the fact that the third-party hub does not have any activity in the relevant market, it may still be sanctioned due to its assistance to the indirect exchange of information.

Main Criteria of Hub and Spoke Arrangements

Unlike other competition law violations, hub and spoke arrangements occur at the intersection of horizontal and vertical competition law violations.[6] In this respect, hub and spoke has a more complex structure than other competition law violations and requires in-depth analysis. In order to set forth a framework for enforcement agencies, it is important to define the criteria to be fulfilled while deciding on the existence of a violation. In the UK, criteria have been established through landmark decisions[7] and they have been adopted by other competition authorities as well. These criteria, which include a combination of objective and subjective elements, are as follows:[8]

Under the scenario that undertaking A and undertaking C are retailers (the spokes) and undertaking B is a supplier (the hub):

  • A passes strategic information to B.

The first objective criterion is met in case A passes its competitively sensitive information to B. The term “competitively sensitive information” in this context refers to the situation where the uncertainty in the market decreases in case A’s competitors become aware of the information provided by A. For instance, information related to the future price policy of the undertakings may be considered as competitively sensitive information.[9]

  • B passes A’s competitively sensitive information to competitor C.

The second objective criterion is fulfilled when A discloses competitively sensitive information to the hub B and in return, B passes this information on to C. Subsequently, C uses this information in determining its own future pricing strategy on the market.

  • A knows that the information transmitted to B will be shared with its competitors.

A must communicate its competitively sensitive information to B, specifically with the intention or foresight that it will be passed on to C, which is a horizontal competitor to A. It should be noted that there is no common view in the case law as to whether A’s foresight that the information can be passed on to C by B is sufficient or whether A’s intention to pass the information to C by means of B needs to be taken as a basis in order to prove the existence of the subjective element.

Moreover, it is also noteworthy that reciprocal exchange of information is more likely to indicate the existence of a hub and spoke cartel. This situation occurs when A passes information to B while at the same time C provides information to B. In this case, it is more likely that A and C become aware of each other’s strategies. In this respect, proving the foresight or intention criterion becomes easier. In cases where the information flow is one-sided, it becomes difficult to prove that information was intentionally exchanged.

Another element to be taken into consideration within the scope of this subjective element is the timing of the act and the realization of the exchange of information due to the fact that disclosing commercially sensitive information is legitimate in the context of negotiating an agreement and fixing its terms.[10]

In addition, while evaluating this subjective element, it is also crucial to evaluate whether there is an economic justification for exchange of information as an economic justification may prevent the exchange of information to be considered as hub and spoke cartel.

  • C is aware that the information is obtained from A and C uses this information in determining its own behavior on the market.

In addition to the aforementioned criteria, C must know why and under which circumstances[11] B obtained the information from A. Otherwise, it can be argued that C did not have the purpose to impede competition. Furthermore, C must understand the reason why the information is being transferred and C must determine its own future behavior and pricing on the market by trusting to the accuracy of this information.[12]

The Board’s Relevant Decisions

The Board’s main decisions where allegations with regard to hub and spoke have been evaluated are the LSIAD[13] and Aral Oyun[14] decisions.

The LSIAD Decision

In this decision, the Board evaluated the allegations that Goodyear, Pirelli and Brisa which are undertakings operating in the tire sector, communicated their sales volume and future price increases. Subsequently, the Board found that the relevant undertakings exchanged information through mutual dealers. In this respect, the Board stated that the mutual dealer served as a hub and therefore, the information exchanged among the competitors through the hub consisted of future pricing strategies.

All in all, the Board decided that the dealers did not lead to a competition law violation. Despite the fact that the manufacturer competitors provided information related to their future pricing strategies and that the dealers determined their own prices accordingly, the Board decided that the reason why the dealers communicated this information to the competitor manufacturers was to use this information as a negotiation factor and to ensure buying tires for more affordable prices. For this reason, the Board decided not to launch a full-fledged investigation against the relevant undertakings.

The Aral Oyun Decision

In this decision, the Board evaluated allegations concerning price fixing agreements, hub and spoke arrangements and resale price maintenance in the computer and game console market and consumer electronics market.

The Board determined that the undertakings active in the computer and game console market complained to the dealer on the grounds that the prices of their competitors were low and they asked the dealer to intervene in increasing the competitors’ prices. Accordingly, the Board evaluated whether the third party whose price was manipulated by the supplier knew that the price increase request came from its competitors on the market or whether it was possible for the third party to have foreseen this situation. Other than one undertaking, the Board stated that this condition was not fulfilled. Based on these facts, the Board decided that there was no indirect communication between the competitor retailers and therefore the communication on the market did not reach a level of a horizontal agreement between competitors.

As for the consumer electronics market, the Board determined that the retailers (Teknosa and MS) complained to the supplier (LG) that their competitors’ prices had decreased and they asked the dealer to intervene in the prices. Subsequently, the supplier intervened in the competitors’ prices. Thus, the Board stated that the main purpose of the relevant retailers and the supplier was to determine the prices of supplier products outside of the market and to limit price competition in the consumer electronics market. Accordingly, the Board concluded that this constituted a vertical relationship and therefore the aforementioned acts concerned resale price maintenance. The Board also decided that there was no horizontal agreement as there was no evidence indicating a direct or indirect communication among retailers.

Conclusion

Hub and spoke cartels have been a subject of many discussions recently, as they represent a type of competition law violation which is not explicitly defined by legislation and which is not commonly evaluated in the Board’s decisions. The elements set forth by the British authorities constitute the principal framework for evaluating the existence of hub and spoke violations. Indeed, a combination of objective and subjective elements should be evaluated by the authorities, while also bearing in mind the conditions pertaining to the case at hand. All in all, while the LSIAD and Aral Oyun decisions as well as the market chain investigation indicate the Board’s basic approach to handling hub and spoke cartels, it is certain that the Board’s approach in its future precedents will further shed light on all the aspects of these violations.

[1]The announcement with regard to the Board’s decision dated 28.10.2021 and numbered 21-53/747-360, https://www.rekabet.gov.tr/Dosya/geneldosya/zincirmarketler_nihaikararduyurusu-pdf (Last accessed: 16.11.2021).

[2]OECD: Roundtable on Hub and Spoke Arrangements, Background Note (2019), https://one.oecd.org/document/DAF/COMP(2019)14/en/pdf (Last accessed: 16.11.2021).

[3]Aslan, Yılmaz: Rekabet Hukuku Teori ve Uygulama, 6th edition, Ekin (2021), p. 437.

[4]Guidelines on Horizontal Cooperation Agreements published by the Turkish Competition Authority (2013), para. 40, https://www.rekabet.gov.tr/Dosya/kilavuzlar/yatay-isbirligi-anlasmalari-hakkinda-kilavuz1.pdf (Last accessed: 16.11.2021).

[5]Aslan, p.437, 438.

[6]KleinBenjamin: Antitrust Analysis of Hub-and-Spoke Conspiracies (2017), p. 3, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2909341 (Last accessed: 17.11.2021).

[7]Competition Appeal Tribunal’s Argos Limited and Littlewoods Limited v. Office of Fair Trading, 2004 CAT 24 decision numbered 1014 and 1015/1/1/03, https://www.catribunal.org.uk/sites/default/files/Jdg1014Argos141204.pdf (Last accessed: 17.11.2021) and OFT’s Price-fixing of Replica Football Kit decision dated 01.08.2003 and numbered CA98/06/2003 , https://assets.publishing.service.gov.uk/media/555de4c5e5274a74ca00014b/replicakits.pdf (Last accessed: 18.11.2021).

[8]OECD: Roundtable on Hub and Spoke Arrangements, Background Note (2019), p. 22, 23, https://one.oecd.org/document/DAF/COMP(2019)14/en/pdf (Last accessed: 18.11.2021).

[9]Court of Appeal’s Argos Limited and Littlewoods Limited v. Office of Fair Trading and JJB Sports Plc v. Office of Fair Trading decision numbered 2005/1071, 1074 and 1623, 2006 EWCA Civ 1318, para. 126, https://www.catribunal.org.uk/sites/default/files/Jdg_CoA_1014Argos_Little_JJB191006.pdf (Last accessed: 17.11.2021).

[10]Odudu, Okeoghene: Indirect Information Exchange: The Constituent Elements of Hub and Spoke Collusion, European Competition Journal, No. 7 (2) (2011), p. 234.

[11]Court of Appeal’s Argos Limited and Littlewoods Limited v. Office of Fair Trading and JJB Sports Plc v. Office of Fair Trading decision numbered 2005/1071, 1074 and 1623, 2006 EWCA Civ 1318, para. 141, https://www.catribunal.org.uk/sites/default/files/Jdg_CoA_1014Argos_Little_JJB191006.pdf (Last accessed: 17.11.2021).

[12]Competition Appeal Tribunal’s Tesco Stores Limited, Tesco Holdings Limited, Tesco Stores Plc v. Office of Fair Trading, 2012 CAT 31 decision numbered 1188/1/1/11, para. 260, https://www.catribunal.org.uk/sites/default/files/1188_Tesco_Judgment_CAT_31_201212.pdf (Last accessed: 17.11.2021).

[13]The Board’s LSIAD decision dated 16.12.2015 and numbered 15-44/731-266, https://www.rekabet.gov.tr/Karar?kararId=bbc4b8ac-90fd-473d-ab4d-1d0052e72a11 (Last accessed: 16.11.2021).

[14]The Board’s Aral Oyun decision dated 07.11.2016 and numbered 16-37/628-279, https://www.rekabet.gov.tr/Karar?kararId=2386aaf0-f39a-4ac0-9e6c-cb5a3fcf0789 (Last accessed: 17.11.2021).

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