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COMPETITION LAW AND CONSUMER WELFAREIndonesian practices

Muhammad Nawir MessiChairman of KPPU – Indonesia

Commission for the Supervision of Business Competition (KPPU)Republic of Indonesia

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BACKGROUND Consumer welfare refers to the individual benefits derived from

the consumption of goods and services. In theory, individual welfare is defined by an individual's own assessment of his/her satisfaction, given prices and income. Exact measurement of consumer welfare therefore requires information about individual preferences (R. S. Khemani and D. M. Shapiro).

Competition policy often uses the term "consumer welfare" but rarely is clear about its meaning or role (Gregory J. Werden, US DoJ);

The discussion of consumer welfare may focus on: (i) what consumer welfare means in competition law enforcement, and (ii) on whether it can be quantified (Pieter Kalbfleisch, Chairman of the Board of the Netherlands Competition Authority);

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THE OBJECTIVE

Competition Law and Policy (CPL)

Consumer Protection (CP)

Well-functioning Market

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WELL-FUNCTIONING MARKET

Well-functioning market means:

Efficiency improvement, that lead to consumer welfare improvement;

Survived firms, which are those supplied what consumer want in-term of favorable price, quality, and quantity;

All price product attributes are easily to observe and analyze, which make consumer are enabled to make reasonable product choice;

Insignificant searching cost by consumer in finding suitable products.

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INTERFACE OF CPL AND CP

Anti competitive behaviors

Misleading (deceptive) marketing

Imperfection of market

information

Overcome by anti trust (CPL)

Overcome by consumer policy (CP)

OUTCOMES

Well-functioni

ng market;

that lead to efficiency (welfare

improvement) to

consumers

Factor preventing marketto produce good outcomes:

Market without complete product characters, that lead to increased searching cost by consumers

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OBJECTIVE OF CPL

Static efficiency

• Lower prices• Product choices• quality

Dynamic efficiency

• Long-term efficiency

• Research and development

• Product innovation

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OBJECTIVE OF CPL: Indonesian Context

Most of the main objective of competition law in the world is consumer welfare or total welfare.

Indonesian objectives: Protection of public interest (consumer welfare); (Static) efficiency.

Both as approaches to improve social welfare.

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OBJECTIVE OF CPL: Indonesian Context

There is no direct or specific objective to consumer welfare, but as part of its indirect objectives.

There are some provisions enable consumer welfare improvement, such: Prohibition of cartel (prices, market allocation, and bid-

rigging); Prohibition of resale price maintenance; Prohibition of actions to overuse company confidential

information; etc.

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THE CASE OF SMS CARTEL - Telecom Industry in the Past

Indonesian telecommunication use both GSM and CDMA network

Before 2006, Indonesian telecommunication was monopolize by state through her majority share 51.19%) in state-owned enterprises, Telekomunikasi Indonesia, Corp. for domestic services, and through Indosat, Corp. for international service;

During 1993-1996, three private business actors (Satelindo, Telkomsel, and XL) enter and create more competition in the market

There is cross ownership between Telkomsel and Indosat.

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THE CASE OF SMS CARTEL - Product Market

SMS is an additional service from voice service provided by cellular and FWA telecommunication service. For this service, operator sets a tariff which has to be paid by customer who sends the message.

The use of SMS is to send one-way short messages from one owner of handset to another handset owner. Voice communication has a different use because there is exchange of messages occurring directly or two-way at the same time; whereas in the use of SMS, the message is only one way.

Other features that are generally found in telecommunication services and may function identically to SMS are among others: voice mail, Multimedia Messaging Service (“MMS”) and push e-mail, all of which have functions to deliver one-way short messages

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THE CASE OF SMS CARTEL - History of SMS Tariff

1994-2004 2004-2007

SMS is limited only between subscriber

for the same operators

Tariff was similar (Rp 350)

No promotional tariff

New operators for GSM and CDMA market

Differentiation for off-net and on-net

Promotional tariff

2007-now

New operators

Intense promotional tariff (Rp 0 for same operator)

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THE CASE OF SMS CARTEL - Overview of the industry

• In terms of competition in the industry, during 1994-2003, there were only three cellular operators, which are Telkomsel, XL, and Indosat. The introduction of Fixed Wireless Access (FWA) created new players in the industry. Those players are PT. Mobile-8 Telecom, PT. Bakrie Telecom, Telkom, Star One, and PT. Sampoerna Telekomunikasi Indonesia. In 2007, there are three additional players in the industry, which are Hutchison, PT. Smart Telecom, and NTS.

• Market Share of Companies:

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THE CASE OF SMS CARTEL - Overview of the industry

SMS users in Indonesia are very sensitive to prices so that it may cause a spamming.

As the competition among firms in the industry increased, operators differed their text messages tariff between on-net tariff (within the same operators) and off-net tariff (across operators) in 2004-2007.

• To guarantee interconnection among operators, each operator made interconnection cooperation agreement with each other to avoid the possibility of traffic increase between operators.

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THE CASE OF SMS CARTEL - Findings

KPPU found several agreements in writing regarding off-net SMS price fixed by operators as one unity of Cooperation Agreement on Interconnection;

There are two types of clauses regarding the imposition of SMS rate as contained in the Interconnection Cooperation Agreement, i.e. the SMS rate of the operators searching for the access (a) shall not be lower than Rp 250 (US$0.023); (b) and than retail rate imposed by the access provider;

The clause on fixing minimum rate was set out to avoid excessive increase of SMS traffic from the new entrant operators to the incumbent;

Based on information from new entrant, in conducting interconnection negotiations, new entrant operators had no bargaining position to facilitate their interest in the said interconnection agreement.

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THE CASE OF SMS CARTEL - Findings Based on the calculation of competitive off-net SMS price , the

estimated competitive price of off-net SMS was Rp 114; Out of the range of off-net SMS cartel price between Rp 250 and Rp

350, the Commission has used the lowest cartel price as a norm (benchmark) in the calculation of consumer loss;

Using the difference between the revenue at cartel price and the revenue at competitive price from off-net SMS of the six operators, KPPU calculated CONSUMER LOSSES amounting Rp 2,827,700,000,000 in 2004-2007.

Year Telkomsel

XL M-8 Telkom

Bakrie SMART

Total

2004 311.8 53.4 2.6 12.2 5.8 385.8

2005 446.3 62.4 10.2 30.6 7.8 557.4

2006 615.5 93.7 15.9 59.3 17.5 801.9

2007 819.4 136.4 23.6 71.2 31.8 0.1 1,082.5

TOTAL 2193.1 346.0 52.3 173.3 62.9 0.1 2,827.7

In billion Rp

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CONSUMER WELFARE; calculation for SMS Cartel Case A survey on consumer welfare as a result from KPPU’s

actions in telecommunication sector is measured in 2010.

Using Compensating Variation methodology and several assumptions, KPPU estimated how much is consumer welfare due to KPPU’s decision on SMS cartel.

The survey is conducted through input from stakeholders and experts, as well as 308 retail consumers in Greater Jakarta regions. Respond and quantitative data (especially total consumer welfare) may have been under estimated, due to the fact that during 2007-2009 most of Indonesian had enjoyed significant increase on their income.

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PRICE TRENDS

After KPPU initiated investigation and issued its decision in 2007, tariff of SMS services declined significantly in 2008;

The decline occurred at all SMS level of services (pre and post paid);

This prices changes would have had positive impact on consumer welfare;

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CONSUMER SURVEY RESULT

More than 60% of respondent said that they increase their usage for text messaging services after the tariff have been decreasing;

This facts implies that end consumers have more welfare (or Consumer Surplus) to spent more on SMS, due to lower tariff.

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CONSUMER SURVEY RESULT

StatementStrongl

y agree

Agree Fairly agree

Fairly disagr

eeDisagr

eeStrongly

disagree

Do you think KPPU verdict (no 26/KPPU-L/2007) which canceled price fixing agreement between several mobile operators leads to significant increase in text message tariff competition

23.4 29.2 21.1 12.3 3.9 10.1

Do you think the increase competition on text message tariff leads to a higher consumer welfare of mobile phone users (less average monthly spending, more frequent use of features, etc)

28.7 32.6 17.9 13 4.9 2.9

Majority of Respondent (more than 60%) have positive perception about KPPU’s decision on SMS cartel and also its impact on their welfare;

Total consumer welfare is calculated for 1.8 – 1.9 Billion USD, during 2007-2009.

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In 2009 KPPU started investigation in the price fixing on fuel surcharge by aviation companies.

Fuel surcharge is a new cost component in the aviation industry that is charged to the consumer as a result of rising prices of aviation fuel, airplane fuel. The size of each airline's fuel surcharge vary depending on the volume of aviation fuel used and owned passenger capacity. Imposition of fuel surcharge began in early 2006.

There were written agreement on the determination of fuel surcharge price on 4 May 2006 signed by the Chairperson of Indonesia Aviation Company Association (INACA) and nine aviation companies. The agreement agreed upon the implementation of fuel surcharge from 10 May 2006 with certain amount (IDR 20,000/passenger) and impose by all flight schedule.

The agreement is officially cancelled on 30 May 2006 and thus, provides the opportunity by all aviation companies to fix their own fuel surcharge. Notwithstanding that being withdrawn, the agreement is still implemented by each aviation companies.

THE CASE OF CARTEL FUEL SURCHARGE

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Department Transportation issued a fuel surcharge reference calculation in March 2008, but the aviation companies apply fuel surcharge larger than the reference calculation. The fuel surcharge change among companies showed the same tendency. Moreover, when jet fuel prices go down, fuel surcharge was remain high.

Based on Based on that fact, commission concluded that application of fuel surcharge not only intended as compensation for the increased aviation fuel costs as approved by the Department of Transportation and companies has benefited from fuel surcharge.

Result of investigation in the case, the commission stated that airlines companies legally and convincingly guilty in price fixing cartel.

THE CASE OF CARTEL FUEL SURCHARGE (2)

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GREATER WELFARE MAY EXIST FROM POLICY HARMONIZATION

From 2001-2011, KPPU has issued 97 policy recommendations. Most recommendations related with regulations concerning transportation, telecommunication, energy and retail sectors.

The statistic showed that 44% of our recommendation received positive respond from Government by amending or withdrawing regulations, or creating larger business opportunity. The calculation of welfare in this regard, may difficult.

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2001 2002 2003 2004 20052006 2007 2008 2009 2010

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Initially, airline sector was a regulated industry.

Sector was restricted for new business actors, several aspects of its business were highly regulated by the Government, including the price.

Government handed over the authority to set the tariff to Indonesian National Air Carrier Association (INACA). In practice, INACA as business player association set the ceiling price and floor price of the tariff.

THE CASE OF ADVOCACY TO AIRLINE INDUSTRY

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Policy reccommendation offered by KPPU is followed by Government. Government abolished ministrial decree that gives INACA authority to set up the price.

The Growth of Airlines

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10

15

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25

2000 2001 2002 2003 2004 2005 2006

Quantity

THE CASE OF ADVOCACY TO AIRLINE INDUSTRY (2)