In April, the Administrative Tribunal of the Administrative Council for Economic Defense (CADE) reviewed a consultation submitted by two construction materials retailers that intended to implement a mechanism of joint negotiation with suppliers, by means of a purchasing committee composed of members of both companies.
Joint purchasing agreements aim at the acquisition, by more than one company, of goods and/or services on more favorable terms than those they would obtain when purchasing individually, as a result of a joint exercise of bargaining power.
The participants in these type of agreements can effectively purchase jointly, or can jointly negotiate prices, discounts or payment conditions with suppliers but acquire the goods and/or services individually.
Such agreements can be implemented by different mechanisms of business cooperation, such as joint venture, association, retailers’ alliance etc. There is usually some sort of common organization that facilitates the participants’ contact with the suppliers.
Although joint purchasing agreements do not amount to buyers’ cartels[1], and despite the fact that they can entail significant economic efficiencies – including cost savings such as lower purchase price or reduced transportation and storage costs – this type of agreement can also raise competition concerns, usually associated with the following issues:
- abuse of market power, given that, if the participants represent a relevant portion of the demand for the good or service, the agreement can lead to a market structure close to monopsony – where there would be only one buyer for a number of suppliers of a given good or service – with anticompetitive effects in the upstream market. These suppliers may incur in a large margin reduction and, as a result, lose incentives or even capital to invest in innovation, quality or diversification of products.
According to the recently revised rules on cooperation between competitors, the European Commission considers the issue above as unlikely if the companies’ combined market share does not exceed 15% on the buying or selling market. - creating difficulties for competitors that are not part to the joint purchasing agreement, who may be forced to purchase products and/or services at higher prices; and
- collusion or exchange of competitively sensitive information between competitors, given that, if the cost of inputs is a relevant factor in the formation of prices for final products, the joint purchasing agreement may become a mechanism for coordination of prices and market stabilization, and a consequent reduction of competition.
When analyzing the consultation, which only entailed a joint negotiation with suppliers, where the participants remained independent as to the execution of the purchase/supply agreements, the definition of the purchase price and the decisions on logistics, the Commissioner Rapporteur of the case stated that the agreement under review could lead to two competition concerns.
One of them referred to the exercise of monopsony power. The other referred to the exchange of competitively sensitive information between competitors that could allow the participants to coordinate their behavior in the market for retail of construction materials (although it was expected that a participant would have access to the purchase volumes on the other participants, in order to have access to greater discounts and bonus from the supplier).
The Commissioner Rapporteur highlighted that the consultants would not be able to exercise monopsony power, given that their purchase volume was not high.
As to the exchange of competitively sensitive information, he considered that, although there were no mechanisms to keep the exchange of information at a minimum level, the companies' low combined market share in the market for retail construction materials (lower than 10%) would mitigate any possible concerns.
The Commissioner Rapporteur also pointed out that the consultants would not be competitors in the market for retail of construction materials at the municipal level. Thus, he concluded that the agreement submitted to CADE was not in breach of the law.
In view of the above, companies planning to implement any type of joint purchasing agreement must assess the economic justifications for the cooperation, the competitive risks involved, and the adoption of measures to mitigate them.
[1] Buyers’ cartels restrain competition by means of a conduct between two or more companies who agree on how they will individually interact with common suppliers as to matters such as price, volume, and purchase terms and conditions.
