On June 30, 2003, the Japanese Fair Trade Commission ("JFTC") found implied agreement in a bid case. This decision would be progressive in antitrust practice in Japan, where ethnical tendency toward coordination has hindered entry into Japanese markets or government bids. Before this case, in the normal cartel or bid-rigging cases, the antitrust enforcers have found implied agreements based on some evidence of competitors’ explicit communications, followed by conduct that is consistent with an agreement having been reached as a result of the competitor communications. In this case, however, the JFTC inferred an agreement without direct finding that there had been meetings or information exchange between NEC and Toshiba.

I. Background

Respondents, Toshiba Corp. (Toshiba) and NEC Corp. (NEC) had been traditional suppliers to the Ministry of Posts and Telecommunications for automatic letter sorting machines for post offices. Under the Ministry’s "closed" bid system, the Ministry would tender a bidding article either to NEC, or to Toshiba, and whichever company received the advance bid information would become the designated supplier for that article. Beginning with the 1995 bid cycle, however, the Ministry switched to "open" bidding, where any qualified company had access to the bid packages in advance of the due date. Both companies objected to the open bid process, and in a joint meeting requested the procurement official to continue his practice of prior disclosure of bid information. At the companies’ request, officials in the Ministry reached an arrangement with them concerning prior disclosure, set a relatively short time for delivery of articles, and required qualified bidders to interface to the Toshiba or NEC machines already installed in the post offices. On each of the open bids in 1995, 1996 and 1997, the Ministry’s procurement officer continued the past practice of providing advance information either to Toshiba or to NEC. Only the company receiving the advance information submitted a bid, and therefore that company won the open bid for that article. The company not receiving the advance information declined to submit a bid.

II. Discussion

1. Lack of Competition between them as a Matter of Law.

1) Respondents argument

Respondents first argued that in each bid the ministry officials predetermined a winner by providing information to one of them prior to the bid. As a result of the Ministry’s behavior, they argued, the Ministry predetermined which company was to bid for the article, and therefore it was not in competition with the non-bidding company. Under this argument, there was not a "market" or competitive circumstance that could be affected by anticompetitive behavior.

2) Decision made by the JFTC

a. Conditions For Competitive Circumstance in a Bid Case

Under Japanese Competition Law, competition in a bid can be found where the following facts are satisfied:

  1. Each has eligibility for open bid.
  2. Little difference between each company’s machine in specification and quality.
  3. Each company could have asked to officials specification necessary for interfacing to pre-installed machine

b. Exception

In a bid case, competition among participants cannot be found where a participant cannot participate in bid at its will due to force made by others. It falls short of "due to force", where i) officials never promise to buy those articles in open bid, ii) the officials have not ordered one party not to participate in the bid, and iii) participants have positively accepted conducts made by officials.

In this case, the JFTC found the foregoing conditions for competitive circumstance and found the facts falling short of "due to force," concluding that respondents cannot use exception.

2. Lack of Agreement.

1) Respondents argument

The companies also argued that there was no evidence of any actual agreement between them as to which one would be the successful bidder.

2) Decision made by the JFTC

The JFTC cited a court decision in Toshiba Chemical v JFTC, see 1994 Gyo-Ke 144 Tokyo Appellate Court, stating as general rule that implied agreement can be found where participants predict and recognize others’ price increase and have intent to follow such conducts made by others. Based on this rule, the JFTC found an implied agreement from the following facts.

  1. Market Structure; Duopoly in market structure and high entry barrier
  2. Business Conduct (Past); Prior to the introduction of open bid, it was the customary conduct that only the information-acquiring company participated in and won the bid
  3. Business Conduct (At the time); Recognition made by both parties at a meeting that officials will continue to make prior disclosure only to either of them even after a change to open bid and anticipation made by both parties that possible participant in bid will be limited to them
  4. Business Conduct (Subsequent); Actual Continuous prior disclosure and adjustment for delivery made by officials even after change in bid method
  5. No Justification; Customary conducts was irrational after an open bid because these conduct are inconsistent with purpose of open bid and each of them won half of bids in 1995 and 1997
  6. Subsequent Changes; Price in subsequent bid went down strikingly after officials stopped disclosure and Hitachi entered a bid.

III. Review

1. Review of the decision

I imagine that both parties were surprised to see this decision. To me this decision seems to reflect change made by the JFTC in stance toward strict enforcement. I would describe details about the history and other facts, which seem to be related to implied agreement in order.

April 15 1994;

An official meeting among persons of NEC and Toshiba, and some officials. Report made by officials of prospective of open bid.

September 2;

An official meeting among three parties. Objections made by persons of both companies to official, and requests of continuing prior disclosure.

November;

Person of Toshiba requested stopping of open bid or continuing of prior disclosure. This request was not made in front of a person of NEC.

January of 1995;

Person of NEC requested stopping of open bid or continuing of prior disclosure. This request was not made in front of a person of Toshiba.

January 26;

An official meeting among three parties. Report made by official of continuing prior disclosure.

February;

Prior disclosure and adjustment for due date, including actual price negotiation.

July 3;

Open bid. Only the company receiving the advance information submitted a bid. The company not receiving the advance information declined to submit a bit.

Aug 7, 1996;

Open bid

Jan 30, 1997;

Open bid

Primarily based on hearing made by both companies of the report at the meeting on January 26, 1995, the JFTC found that both companies had made recognition that officials will continue prior disclosure under their perception that participants are limited to two companies, stating that implied agreement was formed.

However, I would point out two points seemingly confronting the JFTC finding.

1) Entry barrier

Entry barrier might not be high or both parties might not have the recognition that Hitachi would not enter a government bid at least in and after the year 1996.

The JFTC found the following facts but did not use as relevant and important facts for finding of implied agreement. Hitachi, in 1994, started research and development on this kind of machine with a German company, AEG, but this attempt failed. In 1996, it dissolved cooperation with AEG and began its research alone, and, in Oct of 1997, succeed in a machine at commercial level, and, finally in Feb of 1998, participated in a bid.

In response to these activities, internal discussions were made in each company. On June 14, 1994 a person of Toshiba made an internal memo on future action, which has not been shown to the other company. This memo says that, in the 1995 fiscal year, the company needs cooperation with NEC and avoids open bid to keep share and profit and, in the 1996 fiscal year, it needs cooperation with Hitachi as well as NEC. NEC also has recognized Hitachi as rival. A person of NEC made an internal memo on Sept. 5 and 30, 1994, which has not been shown to the other. This memo had pointed out possibility of entry of Hitachi/AEG after introduction of open bid and needs to hinder the entry.

Judging only from these internal memos, both companies have recognized Hitachi’s entry into open bid in and after 1996. Of course, both companies might have known failure made by Hitachi. This additional finding would be necessary to find recognition of entry barrier.

2) Customary conduct versus game theory

The JFTC found as one of reasons or factors irrational-ness of non-bidding made by the other on the basis that it could have joined a bid and earned profit. However, I would like have your opinion on whether less profitable customary conducts always make illegal coordination business conducts, especially in Japan.

As is often said, many Japanese companies would not decide their business plans only on numerical data and only for short-term profit, and they would not have corporate organizations, which enable immediate change. The US theory of conscious parallelism seems to be based a game theory in part. In analyzing strategic business conducts under a game theory, numerical profit maximization seems to be emphasized. Most of US companies have made business planning primarily based on numerical data for short term profit and have corporate structures, which make possible agile change.

Under such difference in business activities, more comprehensive finding and analysis seem to be necessary for finding implied agreement. I would like to hear economic or business administration analysis in this respect.

2. Two ways for Complaining about government bid.

If you have suspicion of illegal cartel made by Japanese companies in a government bid, you can file complaint with the JFTC and its local offices. You can also file a complaint with the special committee on government procurement, if such government bid violates the WTO Agreement on Government Procurement, especially rules on bidding procedure. The foregoing procedure might violate Article VII, Paragraph 2, which sets forth that "Entities shall not provide to any supplier information with regard to a specific procurement in a manner, which would have the effect of precluding competition." This WTO Agreement covers bids of central government entities, sub-central government entities, and public undertakings.

This article just shows author's private view and does not show the firm's view.