Welcome to the Latin Antitrust Chronicles – a series covering some of the most relevant developments in competition law in the region. Our comprehensive coverage will include decisions by authorities as well as relevant bills, advocacy efforts, and other initiatives pertinent to the debate. Our contributors alternating each quarter include Marcela Mattiuzzo, former Advisor and Chief of Staff at the Administrative Council for Economic Defense (CADE) in Brazil and current partner at VMCA, Carlos Ragazzo, former general superintendent at CADE and currently Professor at FGV Law School, and Bruna Cataldo, PhD in Economics and Consultant at RGZ. We trust you will find it an engaging read!
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The Latin American competition debate has seen significant early developments this year. In this inaugural edition of the Latin Antitrust Chronicles, we will delve into key cases from Brazil and Mexico to provide insight into the region’s current landscape. First, we will examine the Mexican competition authority’s proposal to apply structural remedies to Amazon and Mercado Libre. This recommendation stems from an investigation into the competitive dynamics within the e-commerce sector. Next, we will explore several decisions by Brazilian authorities. These include the approval of a Joint Purchasing Committee between Cassol and Todimo, the rejection of a merger between Knauf and Trevo in the drywall market, and the conclusion of the first final decision in one of the Car-Wash investigations. Finally, we will discuss the efforts led by the Ministry of Finance in Brazil to explore potential ex-ante regulation of digital markets.
1. COFECE Report on Marketplace Competition
The Comisión Federal de Competencia Económica (COFECE) published the preliminary findings of its investigation into the competitive landscape of the retail e-commerce sector, contributing to the ongoing debate around competition within digital markets as a whole, and marketplaces in particular, in three key aspects:
- definition of the relevant market;
- analysis of barriers to entry; and
- definition of remedies.
The report was prepared based on the authority granted by Mexican antitrust law, which allows COFECE to launch investigations and suggest corrective actions if it detects potential instances of inadequate competition. COFECE recommended implementing structural remedies for Amazon and Mercado Libre, pending final ratification. The outcome of this decision could significantly impact discussions surrounding platform and marketplace competition in Mexico.
1.1 Relevant market.
The initial contribution focuses on defining relevant markets. In examining the product dimension, COFECE’s Investigative Authority pinpointed two distinct markets: sellers and buyers:
- Sellers’ Market: marketplace services tailored for sellers, operating on a national scale;
- Buyers’ Market: services of marketplaces and multi-category online stores catering to buyers nationwide. This category includes both hybrid and non-hybrid marketplace business models, along with online stores offering various product categories[1].
Regarding geographical scope, both markets were defined as national. However, it is important to note that, according to COFECE, the potential presence of network effects between sellers and buyers would indicate significant interaction between these markets.
Based on this delineation, COFECE preliminarily concluded that effective competition conditions are lacking given that:
- Amazon and Mercado Libre collectively hold over 85% of sales in the seller’s market.
- Among the top three leaders in the buyer’s market (with Amazon and Mercado Libre being the first two), their combined market share is 61%, while other participants have negligible market presence.
- Identification of robust network effects among both buyers and sellers, as well as within these groups themselves.
- High barriers to entry.
These conclusions have drawn public criticism, notably in reports from the International Center for Law & Economics (ICL&E) and Competition Policy International (CPI). One key critique centers on COFECE’s decision to exclude physical stores from the buyer’s relevant market – they are not considered a close enough substitute. The authority also excluded certain types of online players, such as aggregators (considered mere intermediaries) and online retailers specializing in single product categories. In contrast, critics argue that consumers buy products instead of looking for types of stores, highlighting the OECD’s inquiry into whether products sold by the same retailer should be placed in different markets because of different sales channels. The debate for the sellers’ market is analogous.
The Mexican competition authority’s decision to ratify the recommendations hinges on the analysis of these aspects, especially considering that a possible expansion of the relevant market could alter the landscape on which the conclusions are based and result in significantly lower market concentration.
1.2 Barriers to entry
One of the report’s conclusions regards the existence of relevant barriers to entry. The report identified three types of barriers:
- Artificiality in loyalty programs: Specifically, the report highlights how loyalty programs incorporate services unrelated to transactions between buyers and sellers. These additional services, like those offered by streaming platforms such as Amazon Prime, serve as incentives for customer retention. COFECE argues that while consumers may initially subscribe to the loyalty program for non-marketplace-related services, they end up increasing their consumption within the platform’s ecosystem.
- Opacity of the Buy Box system: The practices of companies in selecting and recommending offers to buyers through the Buy Box system have been criticized for lacking transparency. Sellers are often left in the dark regarding how products are chosen, hindering their ability to devise effective commercial strategies.
- Foreclosure of the logistics market: Restricting access to logistics APIs of major platforms could lead to market foreclosure. This practice affects not only sellers, who may struggle to connect with alternative logistics providers, but also buyers, as Buy Box recommendations are often tied to logistic services offered within the same platform.
COFECE contends that these barriers raise the cost of entry, particularly for sellers aiming to establish themselves as viable alternatives. This conclusion has also been subject to criticism by experts at ICL&E and CPI, who argue that the barriers may not be as substantial and that simpler solutions could address most of the issues. In general, critics point out that COFECE has interpreted any entry costs as barriers to entry. Ultimately, the decision whether or not to ratify the report’s recommendations could shape the ongoing debate surrounding the definition of relevant barriers to entry in e-commerce.
1.3 Remedies
COFECE’s Investigative Authority proposed several recommendations for Amazon and Mercado Libre. First, they suggest removing streaming and any unrelated services from their loyalty program packages and stopping the promotion of these services on their marketplaces. They should, then, offer and charge for them independently.
Additionally, COFECE recommends that both companies provide sellers with detailed information about the Buy Box through the sellers’ portal. This information should include all variables used in the algorithms, any changes made, and instructions on reporting non-compliance to COFECE.
Regarding logistics, the authority advises enforcing changes in the Buy Box configuration to eliminate preferences for in-house solutions, favoring efficiency criteria instead. They also recommend allowing logistics companies to connect to their platforms via APIs to enhance the availability of logistics services from competitors. Moreover, they propose revising the criteria for awarding prominent labels to sellers, shifting away from exclusive contracts with platform-based logistics services in favor of independent efficiency and performance criteria.
Criticism of these measures by ICL&E and CPI centers on two concerns: whether they are the least restrictive means of meeting the proposed objectives and whether they benefit consumers. Critics answer both questions negatively. They point out that consumers favor bundled services at lower prices, so forcing unbundling would be detrimental. They also claim that forcing logistical interoperability could create a free-rider problem, stunting investment in service improvement due to the inability to benefit from infrastructure. This could also lead to consumer perception issues, with any logistics failures being attributed to the marketplace rather than the logistics provider.
COFECE’s forthcoming decisions on whether to deepen discussions and ratify these recommendations hold significant potential to shape debates and investigations concerning marketplaces and platform dynamics more broadly.
The Brazilian Conselho Administrativo de Defesa Econômica (CADE) recently reviewed a consultation submitted by two companies in the construction materials sector, Cassol and Todimo. This consultation sought guidance on the legality of a proposed commercial strategy involving the formation of a Joint Purchasing Committee. CADE’s review drew attention to the decision to authorize the implementation of this strategy solely based on the consultation, raising questions about whether it is necessary to file a formal merger request for such situations.
2.1 Facts
Cassol and Todimo, both active in the construction materials retail market, aimed to collaborate on defining a purchasing strategy and establishing relations with suppliers, particularly focusing on negotiating supply conditions. To ensure the legality of their collaboration, they formally consulted CADE to assess the proposed cooperation, which would involve forming a Purchasing Committee. They emphasized that the objective of their cooperation is to enhance the bargaining power of all parties involved, achieved through increased purchasing volume and product diversity. This, they argued, would lead to reduced transaction costs and ultimately benefit consumers. CADE’s analysis could shed light on the circumstances under which such a collaborative strategy can be pursued without participants engaging in illegal practices resembling cartel behavior.
2.2 The Cassol and Todimo proposal
The companies aim to establish a “Purchasing Committee” with both firms as members, tasked with evaluating supply conditions and conducting negotiations under a commercial mandate. The Committee’s responsibilities encompass:
- Defining commercial agreements for purchase execution.
- Establishing policies for returns, rebates, and discounts.
- Negotiating promotional content and securing “promotional deals.”
- Negotiating supplier incentives such as “gloves.”
- Discussing conditions for in-store advertisements, funding for store openings, and terms of engagement for suppliers’ sales promoters.
- Developing a unified strategy for product portfolio management, including plans to expand proprietary brands distributed through competing sales networks.
To achieve these objectives, the companies clarified their intention to share their list of suppliers while maintaining separate purchase orders. They emphasized that no competitively sensitive information would be shared, and joint purchases or price negotiations would not occur.
2.3 CADE’s understanding
CADE highlighted that collaborative purchasing among competitors could resemble cartel-like behavior, citing two notable cases: one involving the establishment of a cartel for purchasing animal waste from slaughterhouses by companies in the grease and cargo transportation sector (case 08700.004404/2016-62) and another regarding a cartel in the orange market (08700.000729/2016-76; 08700.000738/2016-67; and 08700.000739/2016-10).
However, CADE also clarified the distinction between a purchasing agreement, which is a lawful commercial strategy subject to CADE’s oversight, and a cartel, which involves collusion. The authority outlined criteria for assessing such agreements to ensure they do not raise significant competition concerns:
- The potential for abusive exercise of monopsony power.
- Exchange of competitively sensitive information, which could facilitate collusive strategies.
- Increased costs for rivals due to exclusionary practices
2.4 Cassol and Todimo meet the criteria for a lawful purchasing agreement
CADE analyzed the information provided by the companies and determined that both have a market share significantly below the 20% threshold in the construction materials procurement market. Consequently, the authority concluded that it would be unlikely for either company to wield monopsony power. Regarding potential harm, CADE reiterated that the companies explicitly stated there would be no exchange of competitively sensitive information, thereby minimizing the risk of collusive behavior. In their own words:
“The consultation does not state that the competitors will make joint purchases to supply the two companies, nor is there any indication that they will jointly negotiate purchase prices. Nor is there any indication that the companies will share the values of the sales made by the competitor. On the contrary, the consultants say that the two companies will continue to place their purchase orders independently, without sharing competitively sensitive information with each other.
It should be noted that the consultation must be analyzed and answered based on the information provided by the consulting party in accordance with Article 7 of CADE Resolution No. 12/2015. Thus, it is not up to CADE, at this procedural moment, to investigate whether the allegations made by the consultants are factually correct. The commercial strategy should be assessed as described by the consultants, and CADE’s response issued adopting this strategy as a premise. If the strategy is implemented by the companies in a way that differs from that described in the consultation, the party will be liable to respond in the context of conduct control if it commits an infringement of the economic order.”[2]
Finally, regarding the potential increase in rivals’ costs, CADE observed that there were no indications of exclusivity contracts or vertical integrations with suppliers. Given the limited combined market power of the companies, it would not be feasible to exclude competitors. CADE not only endorsed the strategy but also suggested that it would not be necessary for the companies to file the case as a Merger, hinting at a streamlining of the process in the interest of efficiency.
Several interpretations can be gleaned from this decision. Firstly, it suggests that the parties provided comprehensive and high-quality information, instilling confidence in the authority that a re-evaluation under the Merger Act was unnecessary. Secondly, it raises the question of whether the parties would be strictly bound by the details presented in the consultation or if subsequent changes, while still aligning with CADE’s validation, would exempt them from notifying a separate transaction. It appears that this isn’t the case, as CADE stated that any potential subsequent operation not included in the consultation would need to be notified if implemented.
3. Trevo and Knauf
CADE recently unanimously rejected the purchase of Trevo’s drywall manufacturing plant by Knauf. This decision garnered attention not only due to its analysis, which reiterated concerns regarding transactions in markets with few players but also because of the arguments concerning the inadequacy of the remedies proposed by the companies. It now joins a very short list of operations fully rejected by the competition authority over the past decade.
3.1 Facts
The transaction involved Knauf’s complete acquisition of Trevo’s share capital and voting rights, driven by Knauf’s strategic aim to expand its footprint in Brazil’s growing construction market. Additionally, the acquisition promised synergies in sales and customer service within the drywall segment. For Trevo, the deal offered opportunities for divestment, cost reduction, and alignment with long-term goals.
Both parties argued that the acquisition wouldn’t result in vertical integration upstream, as Trevo doesn’t produce raw materials for Knauf’s products, nor would there be vertical integration downstream. However, CADE’s analysis raised concerns about horizontal overlap in key markets such as plasterboard (drywall), adhesive tapes, metal profiles, plaster-based putties, metal fasteners, and thermoacoustic insulation.
So, contrary to the companies’ expectations, CADE’s scrutiny of these markets highlighted competition concerns, particularly in the drywall sector, due to significantly high market shares and post-transaction HHIs.
3.2 Competition concerns
CADE highlighted that competitors reported significant barriers to entry and restrictions on imports due to antidumping policies, which, despite nearing expiration, deter the entry of imported drywall, especially from Mexico. They also noted the absence of new market entrants over the past five years, despite market growth.
In addition to barriers to entry, CADE expressed concerns about competition and the likelihood of post-merger market power, both unilaterally and through coordination. The rapporteur emphasized that Knauf’s substantial market shares could enhance the merged entity’s unilateral market power. Moreover, the presence of pre-merger price disparities favoring Trevo could potentially be exploited to extract consumer surplus strategically. Regarding coordination, CADE stated that the transaction might increase the risk of collusion by significantly reducing capacity asymmetry among market players.
Specifically, the decision highlighted:
- The transaction would decrease the number of market competitors from 4 to 3, leading to heightened concentration and establishing the involved companies as market leaders.
- The cessation of rivalry between the parties, coupled with Trevo’s tendency to absorb the majority of Knauf’s diverted sales during price hikes, suggests the potential for the merged entity to impose supra-competitive prices.
- Competitors exhibit significant similarities, indicating not only reduced rivalry post-transaction but also an elevated risk of coordination: CADE noted a symmetry of capacity, technological homogeneity, and a lack of aggressive pricing and customer sensitivity to prices among competitors. Importantly, it was observed that mergers increasing symmetry in productive capacity distribution tend to facilitate the sustainability of collusive agreements, as demonstrated by economic analyses conducted.
In summary, the Tribunal affirmed that there is insufficient evidence to dismiss the possibility of coordinated price increases or diminished investment in market development and quality post-transaction due to decreased competition. This conclusion is based on: (i) the limited number of companies involved; (ii) the symmetry of capacity among these companies; (iii) the decreased purchasing power of consumers; (iv) a certain level of transparency regarding installed capacity and other pertinent information about market competitors; (v) technological stability in terms of products and processes; and (vi) the absence of more aggressive pricing strategies not aligned with cooperation.[3]
3.3 Insufficient remedies
In an attempt to address concerns, Knauf and Trevo put forth a package of behavioral remedies since structural remedies weren’t feasible, as the asset being traded (Trevo’s sole drywall factory) is indivisible.
Knauf’s primary commitment was to maintain production volume, arguing that this would mitigate unilateral effects by preventing post-merger price increases and restricting quantity produced, thus preventing prices from reaching monopoly levels. They also suggested additional obligations such as investing in quality and divesting certain brands.
While Knauf highlighted that similar remedies had been accepted by CADE in the past, the authority expressed reservations, citing previous challenges with quantity controls. These difficulties included high monitoring costs and uncertainty about future events. Considering these complexities and international best practices favoring simpler remedies, CADE declined to accept Knauf’s proposal.
As other proposed remedies were contingent on quantity control, CADE concluded that Knauf’s remedy package was insufficient in mitigating competition risks, leading to the rejection of the transaction. This decision deviated from previous case law and sparked debate among Brazilian specialists and the market. It raised questions about whether there are unique factors justifying this change in approach or if CADE is altering its evaluation criteria.
4. Public Consultation from the Ministry of Finance on Digital Markets
The Secretariat of Economic Reforms, under the Ministry of Finance, initiated a consultation to gather opinions and evidence regarding the potential regulation of digital markets in Brazil. This initiative was accompanied by a seminar organized in collaboration with the Brazilian Institute of Competition, International Commerce, and Consumer Law (IBRAC). The consultation period concluded on May 2nd, yielding over 45 contributions from various institutions, including international associations and academics. The objective is to compile a report summarizing the key findings. The Ministry intends to forward its conclusions to Congress, specifically to Representative Any Ortiz, who is the rapporteur of Bill of Law 2768. This bill represents the first proposal aimed at establishing an ex-ante regulatory framework for digital platforms in the country.
This consultation marked the first instance where the Brazilian antitrust authority formally expressed its opinion on the necessity of specific efforts targeted at digital markets. CADE explicitly stated that some form of ex-ante regime is warranted while also emphasizing the importance of conducting a thorough impact assessment tailored to the specifics of the Brazilian market before endorsing any concrete proposal. Additionally, CADE defended its jurisdictional authority, asserting that if such a regime were to be implemented, it would be best suited to oversee it.
This stance from CADE has illuminated a clear divide between the antitrust authority and the Brazilian telecommunications regulator (ANATEL). Since the end of 2022, ANATEL has been actively positioning itself as the regulator of digital platforms, notably by advocating for PL 2768 in Congress. The original version of this bill stipulated ANATEL’s role as a platform regulator. However, these efforts have faced strong opposition from civil society and have not garnered significant support within the government.
It remains uncertain what the outcome of these developments will be and whether Brazil is on the path towards a new regulatory regime for digital markets. However, it is evident that there is a consensus within the government on the importance of conducting a comprehensive assessment of the market and regulatory alternatives before implementing any proposed solutions. Furthermore, there is recognition that adopting regulatory frameworks from other jurisdictions without careful consideration may not yield satisfactory results.
Bruna Cataldo & Marcela Mattiuzzo
| Citation: Bruna Cataldo and Marcela Mattiuzzo, Latin Antitrust Chronicles: January-June 2024, Network Law Review, Summer 2024. |
[1] See https://laweconcenter.org/wp-content/uploads/2024/04/ICLE-Comments-COFECE-Report-on-Marketplaces-English.pdf, page 6.
[2] See https://sei.cade.gov.br/sei/modulos/pesquisa/md_pesq_documento_consulta_externa.php?HJ7F4wnIPj2Y8B7Bj80h1lskjh7ohC8yMfhLoDBLddbFVNqCjirsEv8sOqjqAmpxciOr2FT0Xz7_wn2eJeHffRMj1nfR9F58wspqfAv79wslD0ucGVEp6vGywuve3KYk, §§ 9–11, free translation
[3] See https://sei.cade.gov.br/sei/modulos/pesquisa/md_pesq_documento_consulta_externa.php?HJ7F4wnIPj2Y8B7Bj80h1lskjh7ohC8yMfhLoDBLdda1MbZVBdvxREi6fq4b4uXdTwR7R2mRiLjFLScA_VxKMF4h_ddmDIGrbUMpUgGT-ZvLpN8R0y8S7KjsFnRajcK8#bookmark-jl2KS9fEt7S3Jfzs, §374, free translation
