PRICING CONDUCT ON THE CIGARETTE MARKET
PRESS RELEASE
PRESS RELEASE
The Competition Authority has imposed penalties on a price-fixing cigarette cartel: euro 50 million fine on Philip Morris, and euro 20 million on Ente Tabacchi Italiani for concluding an anti-competitive agreement on the tobacco market
At its meeting on 13 March 2003 the Competition Authority ruled that an agreement restricting competition had been concluded and implemented between 1993 and 2001 by the two leading tobacco companies operating on the Italian cigarette market: Philip Morris and Amministrazione Autonoma dei Monopoli di Stato which, in 1999, became Ente Tabacchi Italiani.
Considering the serious nature of the offences committed by these two companies, the Authority resolved to impose fines on five Philip Morris group companies which were parties to the agreement (Philip Morris International Management S.A., Philip Morris Products Inc., Philip Morris Products S.A., Philip Morris Holland B.V. and Philip Morris GmbH, totalling euro 50 million) and on Ente Tabacchi Italiani S.p.a. (a fine of euro 20 million).
The investigation, that began on 14 June 2001, had examined the pricing conduct of most of the companies on the cigarette market between 1993 and 2001, and the contractual relations under which Amministrazione Autonoma dei Monopoli di Stato initially, and Ente Tabacchi Italiani subsequently, manufactured and marketed Philip Morris brand cigarettes (Marlboro, Diana, Muratti e Mercedes) over the same period.
The investigation showed that the two main companies on the market, Philip Morris and Amministrazione Autonoma dei Monopoli di Stato/Ente Tabacchi Italiani, had concluded licensing contracts and then colluded widely with the intention and effect of causing a convergence between the commercial strategies of both companies, interfering with cigarette price competition, and artificially maintaining market stability. During the period concerned, Philip Morris and Amministrazione Autonoma dei Monopoli di Stato/Ente Tabacchi Italiani charged the same price increases simultaneously, managing to peg their point market share above 90%, which was also done through actions taken to restrict competitive schemes being conducted by their competitors.
The licence contracts related to some of the main Philip Morris brands marketed in Italy, and accounted for a substantial share of Amministrazione Autonoma dei Monopoli di Stato's and Ente Tabacchi Italiani's production. One of the typical elements of the contractual licensing agreements was the economic imbalance they created: for the licence agreements were an instrument used by Philip Morris to ensure that Amministrazione Autonoma dei Monopoli di Stato/Ente Tabacchi Italiani operated in a way that would not only protect its own interests, but also foster the interests of the licensor, increasing its revenues and enhancing its market position (in 1993, Philip Morris had a 46.9% cigarette market share, compared with AAMS's 45% share, and in 2001 these market shares had become, respectively, 62.2% and 27%).
The concerted arrangements between Amministrazione Autonoma dei Monopoli di Stato/Ente Tabacchi Italiani and Philip Morris, which were expressly provided in the licence contracts implemented until 1997, also took the form of setting price increases for the products licensed. By producing increased tax revenues from cigarette sales these enabled the companies to avoid moving upwards into higher consumption-tax rates applying to cigarettes during that period, under fiscal legislation.
The agreement between Amministrazione Autonoma dei Monopoli di Stato/Ente Tabacchi Italiani and Philip Morris was also targeted against other companies, requiring them to increase the prices of competing cigarette brands, and hampering their ability to increase their market shares.
Until 1998, to implement this joint strategy Amministrazione Autonoma dei Monopoli di Stato/Ente Tabacchi Italiani and Philip Morris exploited the position of AAMS as both a manufacturer and Italy's monopoly cigarette distributor. Until 1998 it was AAMS that notified the other companies of the price increases to be charged, and ensured their compliance with these indications. Subsequently, it was ETI that continued to play this role, at least until 1999 and 2000.
The prices charged by the cigarette companies other than Philip Morris and AAMS/ETI do not suggest they were parties to the agreement, because for a long time they were strongly constrained by certain conditions in their distribution contracts which, in 1998, the EC Commission ruled to be illegal, and by pressure exercised and exercisable over them by AAMS to neutralise any possibility for them to act competitively. After mid-1998 these companies subsequently acted differently from the two leading companies.
The agreement implemented by AAMS/ETI and Philip Morris substantially interfered with the competitive price dynamics on the cigarette market. Under the licence contracts for cigarette manufacture and sale, the imposition of price increases and the resultant joint action to push up the retail prices of all cigarette brands and to limit the registration of any new brands to fill the brand gap (the new brands to be introduced to the market) by other operators, AAMS/ETI and Philip Morris radically interfered with competition on the domestic cigarette market, successfully raising their revenues and maintaining a joint market share of around 90%, while seriously damaging consumers.
In view of the very serious nature, and the duration, of this offence, the Authority decided to hand down penalties in the following amounts, ordering the aforementioned companies to immediately refrain from commit the offences forthwith:
| - ETI SPA | 20,000,000 EURO |
| - PHILIP MORRIS PRODUCTS S.A. | 23,830,000 EURO |
| - PHILIP MORRIS HOLLAND B.V. | 9,729,000 EURO |
| - PHILIP MORRIS GmbH | 8,322,000 EURO |
| - PHILIP MORRIS PRODUCTS INC. | 6,252,000 EURO |
| - PHILIP MORRIS INTERNATIONAL MANAGEMENT | 1,867,000 EURO |
Rome, 28 March 2003