Most Read Contributor in Hong Kong, September 2016
Keywords: price fixing, output limitation
Last week we looked at the Cardinal Sin of price fixing. This
week we discuss Cardinal Sin No. 2 – output limitation.
Output limitation refers to agreements between
competitors to fix, maintain, control, prevent, limit or
eliminate the production or supply of products.
Why limit output?
To create a scarcity of supply to increase prices and therefore
maximise the profit margin.
What is output?
Output limitation can occur at any level of the production or
supply chain. The following are some examples of
Products or services; and
Future products or
What does "limitation" mean?
While businesses can independently determine their
individual levels of output, they cannot agree with
competitors to fix, maintain, control, prevent, limit
or eliminate output. This is the case even in times of
economic recession or crisis.
Consider this example of output limitation:
Due to the proliferation of competitive technology start-ups,
incumbent manufacturers of smart phones have been losing market
share and the price of smart phones have dropped significantly.
To counter this, the major manufacturers of smart phones enter
into a " one per year" agreement, where they commit to
limit the number of smart phones they introduce into market to no
more than one per year.
Even though the agreement concerns future smart phones which may
not have been manufactured or even designed, the manufacturers have
already limited their output to one per year, for the purpose of
dampening increasingly intense competition.
Without the "one per year" agreement, smart phone
producers would all have to "out-innovate" and
"out-price" each other to stay ahead of the competition
– the pace of introducing new smart phones into the market
would be determined by the speed of innovation, research and
development and market demand. The "one per year"
agreement is a blatant example of output limitation which limits
competition in the smart phone market and harms consumers.
Next week we will take a look at Cardinal Sin No.3, market
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issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
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As mentioned in our previous alert in this series, the Hong Kong Competition Commission's investigative process begins with an Initial Assessment to screen suitable cases for further investigation or other action.
The investigative process begins by the Hong Kong Competition Commission (the "Commission") identifying a potential contravention of a competition rule.
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