August 2023
Aaron Chen and Oli Wong
I. Common discount practices of online channels, which are unbearable to physical channels
The competition between physical and online channels in the book industry has persisted for many years. Since the emergence of online bookstore Books.com in 2000, new books have often been released with promotion discounts of 21% to 10%. For some books, even a 34% discount can be offered on a particular day. In 2020, e-commerce platform MOMO offered a 34% discount for over 80,000 types of books during its Double 11th sales event, triggering dissatisfaction among independent bookstores and publishers.
On March 8, 2023, Books.com launched the “March 8th Goddess Festival” event, offering popular books at discounts of 34% and 35%, covering books published by various publishers in the past 5 years. This event sparked a backlash from the publishing industry. On March 30 of the same year, the three major publishers associations and 14 senior executives from publishing houses jointly initiated a petition, urging the Ministry of Culture to set up a “system for orderly book discounts” to address the discount wars triggered by e-commerce competition in recent years. Within a week after the launch of the petition, over 300 signatures were gathered, including employees from publishers of all sizes and small and medium-sized physical retailers.[1]
To address this issue, the Legislative Yuan held a public hearing titled “With the Vicious Competition in Market Channels, What Is the Future of the Cultural Industry?” on April 11 of the same year. Representatives from the publishing and bookstore industries, as well as related practitioners, were extensively invited to attend the hearing, which was also attended by representatives from the Ministry of Culture, the Consumer Protection Commission of the Executive Yuan, the Fair Trade Commission (hereinafter, the “FTC”), and the Ministry of Digital Affairs. Therefore, this article aims to discuss potential issues related to the Fair Trade Act (hereinafter, the “FTA”) that may arise from book pricing for the consideration of both the government and industry players.
II. Fixed book price system
While there is no unified definition, the “fixed book price system” (FBP) can be understood as a regulatory framework for book pricing established through national legislation or agreements among various parties. It primarily involves restricting the retail price of books within a certain range (single-price system) or limiting the extent of discounts within a specified period (discount limitation system) to protect the rights and interests of publishers and physical bookstores.
The implementation of the FBP system varies across different countries. For instance, as early as 1900, the UK had the Net Book Agreement, which required booksellers and bookstores not to sell books below the price set by the publisher. However, after nearly a century of debate, this practice was abolished in 1997. France has implemented the FBP system since 1981, requiring new books to be discounted by less than 5% with e-books subsequently covered by the requirement. In Germany, formal legislation was introduced in 2002, stipulating that in principle, new books cannot be discounted within 18 months after publication.[2]
III. Agreement among upstream and downstream operators on the selling prices of books may raise the concern of resale price maintenance and concerted action under the FTA.
(1) Does a publisher limiting the selling price of books to a certain range violate the prohibition against resale price maintenance under FTA?
Article 19 of the FTA prohibits upstream and downstream enterprises from engaging in resale price restriction by stipulating: “An enterprise shall not impose restrictions on resale prices of the goods supplied to its trading counterpart for resale to a third party or to such third party for making further resale. However, those with justifiable reasons are not subject to this limitation. The provision of the preceding paragraph shall apply mutatis mutandis to services provided by an enterprise.” According to this provision, if an enterprise can present justifiable reasons,[3] legal violation can be avoided even with agreements on resale prices.
In practice, if publishers in Taiwan restrict the retail price of books within a certain range and use sanctions to punish downstream vendors that do not comply in order to create the effect of maintaining resale prices, they could potentially be sanctioned by the FTC. The cases involving “Nan I Book Enterprise Co., Ltd.” and “Global Views Commonwealth Publishing Co., Ltd.” are worth considering.
1. The Nan I Book Case[4]
Nan I Book Enterprise Co., Ltd. (“Nan I Book”) had suggested retail prices for the textbooks it published and did not grant distributors and bookstore retailers the right to set prices freely. When violations of the suggested retail prices occurred, Nan I Book imposed penalties by stopping the supply of books. The FTC found after its investigation that both parties had indeed had the above-mentioned price agreement and had been involved in two sanction cases. Therefore, the FTC concluded that an act of resale price restrictions had indeed occurred in violation of Article 18 (currently Article 19) of the FTA.
2. The GVC case[5]
Global Views Commonwealth Publishing Co., Ltd. (hereinafter, “GVC”) entered into an agreement with online bookstore operators, stipulating that the terminal sale price of the book “Steve Jobs” would be NT$599 and that the operators should not elect to adjust prices or provide any form of sales discounts without GVC’s consent. It was further agreed that if an operator elect to adjust the terminal sale price, which was verified, GVC would not only reserve the right to pursue its legal liabilities but also revoke the operator’s right to sell “Steve Jobs” and claim damages. The FTC found as a result of its investigation that the above-mentioned two online bookstore operators had indeed had the above-mentioned sales agreement, and that since operators all complied with the upstream suggested sale price of NT$599, the above-mentioned agreement indeed had deprived operators of the ability to set prices independently.
Although GVC argued that the above agreement had existed because GVC would be unable to provide any discounts due to its cost consideration if the operators’ retail price fell below NT$599, and that GVC even never imposed any sanctions or restrictions on any operators. However, the FTC held that since the agreement had already stipulated conditions for discounts, GVC’s arguments were apparently unacceptable.
The FTC further pointed out that the covenant on marketing prices and default in the agreement between the parties did interfere with and oppress the freedom of online operators to set prices. Consequently, the FTC concluded that GVC’s practice of restricting downstream enterprises from reselling “Steve Jobs” at certain prices violated Article 18 (currently Article 19) of the FTA and imposed a fine of NT$200,000 on GVC.
The above cases clearly show that the spirit of fair trade is rooted in safeguarding “fair competition.” If upstream publishers restrict downstream distributors or bookstores to sell books at fixed resale prices, maximum or minimum resale prices, or within a certain price range, they may fall within the scope of resale price restriction and subsequently be found in violation of Article 19 of the FTA and sanctioned by the FTC.
If publishers wish to impose restrictions on the resale prices of books, one viable approach is to consider five justifiable consideration factors enumerated under Article 25 of the Enforcement Rules of the Fair Trade Act and present “justifiable reasons” for restricting resale prices. Justification factors such as the effect of enhancing new business or brand access or promoting inter-brand competition may be considered. Alternatively, arguments could be made based on economically reasonable grounds related to competition considerations by asserting economically reasonable grounds such as safeguarding freedom of speech and culture, promoting the diversity of published works, and other competition considerations. In fact, the German courts and the European Court of Justice have recognized that limiting free competition can be justified for protecting the public interest in culture and books.[6]
However, the proviso in Article 19 of the FTA introduces the possibility of asserting “justifiable reasons” for being exempt from restrictions on resale price maintenance. In recent years, in cases involving vertical resale price maintenance by entities that “lack market power,” the FTC has provided a review mechanism similar to the “safe harbor” commonly used in foreign countries, and there are cases in which the FTC was more lenient and did not find such practices were unlawful. However, there are still no cases where the Fair Trade Commission has identified any justifiable reasons from the business to consider the act of engaging in restricted resale pricing as legal. In other words, the practical operation of Article 19 of FTA has veered close to a presumption of illegality. For operators, the behavior of vertical resale price restriction carries a high risk of being deemed unlawful unless their market power is exceedingly small. If the FTC could provide concrete review criteria for “justifiable reasons” in its practical operations, it could offer a way for operators to safeguard their rights and interests in the operation of the fixed book price system.
(2) Does a joint agreement among upstream and downstream enterprises on the sale price of books constitute a concerted action in violation of the FTA?
The regulation over entities engaging in concerted action under Article 14, Paragraph 1 of the FTA is limited to enterprises at the same production and distribution stage with competitive relationships. Therefore, if enterprises with competitive relationships in the same channel jointly agree, by contracts, agreements, or other means, to set the price of goods (such as price fixing or uniform discounts) or agree to align prices as much as possible, avoid price competition among themselves, etc., this would no doubt constitute a concerted action.[7]
In the case where upstream enterprises and several downstream enterprises jointly agree on resale prices, it is indeed possible that a concerted action may be constituted due to the competitive relationships among downstream enterprises themselves. However, the upstream businesses participating in such agreements do not directly fall under the provisions of Article 14, Paragraph 1 of the FTA due to their vertical relationships with their distribution partners. In other words, there will be doubts about the applicability of vertical concerted action under the current law.
For insights into the above issues, it’s worth considering the reasoning employed by the FTC in the 3M Taiwan Limited case.[8]
3M Taiwan Limited convened a performance review meeting with three downstream distributors. During the meeting, the three distributors separately expressed that since their past excessive low-price competition for customers was too serious, and they suggested setting reasonable terminal resale prices for products to stabilize market trade. As a result, the 3M Taiwan Limited and the three distributors (hereinafter, the “Sanctioned Entities”) gradually reached a consensus on the resale prices to be offered by the distributors to end-users. They also prepared a price list and presented it to their trading counterparts through the three distributors.
The FTC believed that following the effective date of the price list, instances of price-cutting competition among the three distributors had significantly decreased, leading to more stable selling prices. However, this undermined the rights and interests of the consumer base for the product, impaired the brand’s price competition within the product category, and severely affected market order. Therefore, the FTC concluded that the Sanctioned Entities jointly violated Article 24 of the FTA (currently Article 25), which provides that “enterprises shall not engage in any obviously unfair act sufficient to undermine trading order,” for agreeing on resale prices for products.
Although the FTC previously mentioned in the above-mentioned cases the possibility that a meeting conducted by upstream suppliers and downstream distributors to negotiate a price consensus may potentially violate the provisions of the FTA on concerted action. However, since the FTC considered that the entities involved in the case had low market shares in the relevant market, which is insufficient to affect market supply and demand functions, the FTC did not conclude that they had engaged in a concerted action. Based on the high degree of culpability of the Sanctioned Entities for price collusion and the legal interest of safeguarding trading order and consumer interest, FTC ultimately concluded that the upstream suppliers and downstream distributors jointly violated Article 24 (currently Article 25) of the FTA, which provides that “enterprises shall not engage in any obviously unfair act sufficient to undermine trading order,” for agreeing on the resale price of products.
However, the determination in this case warrants further discussion. Under the current law, Article 25 of the FTA serves as a supplemental provision and is applicable only when the violation cannot be fully regulated and addressed by other provisions of the FTA. In the above case, however, if the FTC concluded that the entities involved did not engage in a concerted action since the behavior of downstream distributors that have low market shares in the relevant market does not constitute a concerted action, this means that since such behavior does not constitute a concerted action under the FTA, there is no need to conduct a supplemental assessment under Article 25 of the FTA. However, the FTC still believes that a penalty is required in this case since it involved price restriction, or this case also pertained to the resale price maintenance under Article 19 of the FTA. Nevertheless, this situation is distinct from the conventional understanding of restrictions on resale price maintenance being imposed by upstream enterprises on downstream enterprises or being mutually agreed upon between upstream and downstream enterprises. Therefore, the provisions on resale price maintenance under the FTA are not applicable, and the FTC ultimately chose to handle this case in accordance with Article 25 of the FTA.
From this case, it’s evident that Article 14, Paragraph 1 of the FTA in Taiwan indeed lacks a mechanism to assess vertical concerted action between upstream and downstream entities. As a result, when non-competitive entities participate in a concerted action, Article 25 of the FTA needs to be employed as a supplementary measure. However, there’s a significant discrepancy in penalties between violating Article 14, Paragraph 1 and Article 25 of the FTA, which may lead to an unfair outcome where the same behavior results in different penalties and liabilities. In this light, the FTC intends to amend Article 14, Paragraph 1 of the FTA to include regulation on vertical concerted action.
According to the press reports, several publishing houses remarked that, due to the limitations imposed by the FTA, they are unable to collectively negotiate with distributors to impose discount restrictions.[9] Given that the FTA adopts a policy of “prohibition in principle with exceptions” for concerted action. Perhaps, publishing houses could potentially apply to the FTC and obtain permission for concerted action under Article 15, Paragraph 1 of the FTA. However, in practice, the types of concerted action that the FTC has approved over the years are very limited, and permission for emerging types is often difficult to obtain. While the rigorous stance taken by the regulatory authority on prior permission for concerted action can be understood, it may ultimately result in the difficulty facing all operators in obtaining permission for concerted action to seek an exemption. A solution might involve a comprehensive consideration of the need to maintain a prior approval system for concerted action, or the feasibility of providing accommodating measures such as providing an exemption mechanism for a concerted action that is not ipso facto illegal or raises a minimum concern about impairment to market competition, or promulgating guiding principles to help operators fulfill their compliance requirements and reduce the burden on enforcement agencies.
V. Conclusions
Books are not only cultural commodities but also significant media influencing national cultural identity. However, their economic characteristics as commodities will not disappear, and they are even more vulnerable to the impact of environmental changes. The challenges facing Taiwan’s book industry are no news, and the existence of the fixed book price system will be revisited when various channels engage in price wars. Regulatory authorities for industries formulate policies and regulations relevant to those industries based on their characteristics and policy objectives to promote their development, which does not fall within the remit of the FTC. What the FTC should safeguard are the competitive environment and mechanisms of the market after the relevant industry laws and regulations are formulated. Therefore, unless the order of free and fair market competition is disrupted, the FTC should not intervene in free market competition, especially prices determined through free market supplies and demands.
Back to the debate on whether the fixed book price system may potentially violate the provisions on resale price maintenance and concerted action under the FTA, the FTC might consider the following approaches. The FTC may adjust the finding of restrictions on resale price maintenance. The finding of cases involving vertical resale price restrictions without market power may be eased so that such cases are not unlawful. In addition, specific review criteria for “justified reasons” should be separately provided for consideration and application by operators. For operators that apply for concerted action permissions due to benefits to the overall economy or public interest, opportunities to obtain prior permissions should be actively expanded. Alternatively, a further step might involve exploring the possibility of abolishing the prior review system for concerted action.
[1] Shang-hsuan Wu, [In-depth Report] Book Prices Cut to the Bone by E-commerce Operators; Unprecedented Call on the Government for Help by the Publishing Industry;at https://tw.news.yahoo.com/news/深度報導-電商書價打到骨折-出版界史無前例團結向政府討救兵-230233006.html (last visited on August 7 ,2023).
[2] Ibid.
[3] Article 25 of the Enforcement Rules of the Fair Trade Act enumerates five consideration factors for just cause, namely, “encouragement of downstream enterprises to enhance efficiency or quality of pre-sale service,” “prevention of free-riding effects,” “promotion of entries of new businesses or brands,” “stimulation of competition between brands,” and “other reasonable economic grounds concerning competition.”
[4] The (87)-Gong-Chu-Zi-087 Disposition of April 13, 1998 from the Fair Trade Commission, Executive Yuan, R.O.C.
[5] The Gong-Chu-Zi-101137 Disposition of October 1, 2012 from the Fair Trade Commission.
[6] Hsiao-huei Chen (2015), Research on Book Price Constraints – Taking Germany as an Example, Page 171, the 22nd Symposium on Competition Policies and the Fair Trade Act.
[7] For example, in the Gong-Chu-Zi-104100 Disposition of October 14, 2015 from Fair Trade Commission (a case involving concerted price hikes of pet supplies), the FTC determined that the sanctioned parties, including seven businesses, had decided to refrain from engaging in price competition and requested upstream suppliers to control and cut off the goods for those who refused to cooperate through the a pet owner’s friendship seminar. This act is sufficient to undermine the supply and demand functions in the pet food and supply market in Tainan City in violation of the prohibition against concerted action under Article 14, Paragraph 1 of the FTA.
[8] The Gong-Chu-Zi- 207 Disposition of November 24, 1997 from the Fair Trade Commission, Executive Yuan, R.O.C.
[9] Hsin-yi Lin, Book Price War (Part II): Facing Vicious Competition, Publishers Are Not Humble! How to Implement the Fixed Book Price System? With Industry Consultation Back on the Horizon, Can a Consensus Be Reached?, at https://www.openbook.org.tw/article/p-67414 (last visited on August 7, 2023）.
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