FEDERAL COMPETITION COMMISSION ANNUAL REPORT 1994-95

FEDERAL COMPETITION COMMISSION

MEXICO MCMXCV

FEDERAL COMPETITION COMMISSION ANNUAL REPORT 1994-95

Directory

Plenum of the Federal Competition Commission

Commissioners

Fernando Sánchez Ugarte, President

Javier Aguilar Alvarez, Commissioner

Pedro Bosch García, Commissioner

Pascual García Alba Iduñate, Commissioner

Leonel Pereznieto Castro, Commissioner

Presentation

I am honored to submit this report detailing the work of the Federal Competition Commission and covering the period from June 23rd, 1994 to June 22nd, 1995. This document bears witness to the Commission’s performance in protecting the process of competition and free trade, and enables it to disseminate, with basis on illustrative cases, the principles and criteria used by the Commission in reaching resolutions. In this manner, it provides guidance to economic agents regarding the application of the Federal Law of Economic Competition.

In its second year of activities, the Commission fulfilled its mission despite restrictions imposed by the present economic conditions. Its work during the year was characterized by the importance and complexity of a greater number of cases, which received timely attention largely thanks to the professionalism of the public servants who work in this institution.

Fernando Sánchez Ugarte

President, Mexico City, October 1995

Contents

Introduction

I. General Competition Policy

II. Concentrations and Mergers

III. Monopolistic Practices

IV. Consultations

V. Opinions

VI. International Relations, Dissemination, and Administration

VII. Final Comments

Appendix

Concentrations and Mergers

Monopolistic Practices

Consultations

Introduction

This report covers the second year of activities of the Federal Competition Commission. It was prepared and published in compliance with Section III of Article 28 of the Federal Law of Economic Competition. In this manner, the Commission communicates its actions carried out during the period June 23rd, 1994 to June 22nd, 1995.

The obligation of informing economic agents is closely related to the technical and operational independence of this institution. In complying with this provision, the Commission submits the technical soundness and lawfulness of its resolutions for public consideration. In this manner, the Annual Report encourages quality and strengthens the independence of the Commission’s work. Similarly, it helps create a climate of certainty within the self-regulatory functioning of the markets.

It must be pointed out that independently of the contents of this report, that the publication of this material is made within the legal guidelines of confidentiality. In compliance with its terms, information that could harm a company’s competitive position has been excluded, as have details expressly described as confidential by the interested parties.

The aim of publishing the cases investigated, together with the principles and criteria used to resolve them, is to show the actions taken to prevent and eliminate monopolistic practices. Consequently, and by virtue of the neutrality with which the Commission must necessarily act in connection with the interests of economic agents, publication is a task of the highest order.

The attention given to consultations is principally intended to give orientation on the application of the Law in specific cases. In this way, the Commission contributes to reducing the number of infractions committed due to lack of familiarity with the legislation, and to identifying the monopolistic practices or other restrictions to competition that could affect the parties involved. By publishing its responses, the Commission extends its guidance to every other economic agent. In this regard, it must be pointed out that pursuant to Section IX, Article 25, of this Institution’s Internal Regulations, answers given to consultations have no binding legal effect.

The Commission’s power to advocate an environment favorable to the process of competition and freedom of access to markets is essential to the consolidation of the reforms intended to bring about a competitive economy at the international level, based on the efficient functioning of markets. To this end, the Law grants its broad authority to express opinions regarding government programs, policies, and measures, and on laws and regulations that refer to the aforesaid process. Through the information given on these opinions by the Commission, private individuals receive guidance on the pro-competition aspects of the regulatory and administrative framework. Similarly, it helps to raise awareness regarding obstacles that must be overcome regarding free competition.

The cases and opinions presented show the orientation adopted by the Plenum, the Commission’s supreme decision-making body. With regard to the composition of this body, it is worth pointing out that in December of 1994, the President of the Republic appointed Dr. Fernando Sánchez Ugarte, who meets the requirements established by the Law, to serve as a Commissioner and as the new President of the Commission. His inclusion and the continued presence of most of the Plenum’s members, have provided the Commission with the necessary continuity.

The promotion and protection of the process of competition and freedom of access with which the Commission is charged must be viewed within the context of the policies of liberalization, economic deregulation, and divestiture of state-run companies. With this in mind, the first chapter offers an overview of the competition policy implemented during the period covered by this report and describes the relevant guidelines contained in the National Development Plan for 1995-2000.

Chapters II and III describe the Commission’s investigation of concentrations, mergers, and monopolistic practices, featuring explanations containing summaries of the most representative cases. Likewise, Tables 2, 3 and 4 in the Appendix offer a complete itemization of matters brought to a conclusion, and indicating the economic agents involved and the decisions adopted by the Commission.

The attention given to individuals’s consultations and the Commission’s replies to the most representative recommendations to several cases are summarized in Chapter IV. The itemization of the cases dealt with under this mechanism can be found in Table 5 in the Appendix.

The Commission’s opinions on matters of competition and freedom of access contained in the policies, regulations, and administrative actions of federal authorities are presented in Chapter 5, whose introduction offers a general explanation of the activities undertaken and the means used to transmit its recommendations. The chapter then describes the main issues dealt with, in conjunction with the regulatory authorities.

Work carried out in the international arena is described in Chapter VI. The second part of this chapter details the efforts made by the Commission’s officers in disseminating and promoting the Federal Economic Competition Law. It then reviews the guidelines used to administer the institution’s resources.

Finally, Chapter VII highlights the main aspects of competition policy, offering some general comments on the actions undertaken and criteria used by the Commission in performing its duties.

I. General Competition Policy

Second Year of Work

The climate of uncertainty created in 1994 by a series of political events and the growing deficit in the current account helped undermine the expectations of domestic and foreign economic agents. These factors, along with increases in international interest rates and the demand for credit funds in industrialized countries, negatively affected the financing of the current account, our international reserves, and the exchange rate. Thus, the Mexican peso underwent a 71% devaluation in 1994.¹ In this way, the economic expansion that had started at the begining of last year had come to a halt by year’s end.

Macroeconomic imbalances could be seen as a result, interest rates increased instability in the exchange rate and in prices. As part of an upward trend, the exchange rate reported wide fluctuations between December, 1994 and March, 1995. Inflation accelerated during the same period and reached a high of 8% in April of this year. As a result of this situation, domestic interest rates increased rapidly to reach an average annual level of 86% in May, 1995.

To face these problems, the Federal Government launched a rigorous economic program consisting of an adjustment of public finances and the application of a restrictive monetary policy.³ It simultaneously resorted to the financial support of the international community, in order to replace short-term debt with medium- and long-term liabilities. In bringing about this adjustment, the government recognized the need to align the country’s expenditures with its revenues, applying a strategy aimed at restricting economic constraints in the short term. In this context, the GDP reported year-on-year variations of -0.6% and -10.5% in the first two quarters of 1995, respectively. Likewise, open unemployment rose substantially, reaching a level of 6.3% in urban areas during the month of April.

The program yielded its first results in the first half of this year. The balance of trade reported a surplus from the very first quarter, and the exchange rate remained relatively stable from April, and inflation returned on a downward trend, from 8% in April to 3.1% in June. Although with some delays, interest rates behaved similarly.

Strengthening the Role of Market Forces and Incentives

The progress made in strengthening the role of market forces and incentives has helped create a more competitive and flexible productive sector. Thus, regardless of the rise in the real exchange rate during 1994, the increases in industrial productivity allowed exports to rise to one of the highest levels in the world. This situation helped avoid a greater deficit in the current account fo the year. Likewise, the greater competition within markets facilitated the responsiveness of supply to changes in demand, thereby helping contain inflation for 1994.

The efficient functioning of the markets was a major source of support for the stabilization policy. In the AUSEE and subsequently in the action program to strengthen it,⁴ the progress made regarding competition was maintained and pro-competition measures were introduced to facilitate and reduce the cost of market restructuring. Notable among these measures were the following: the establishment of information channels to avoid speculative price adjustments arising from variations in the cost of imported components, the implementation of orientation and information programs regarding quality and pricing, and the launching of campaigns to encourage demand for domestic products and components with competitive prices and quality standards. The adequate functioning of the markets and the aforesaid measures helped avoid inflation levels in excess of those reported in the first half of 1995 and revert the upward trend in price levels. Similarly, conditions of competition and free access facilitated the modifications in relative prices that were necessary to substitute imported goods with domestic products and to increase exports. This helps to explain the trade surplus reported in the first quarter of 1995.

Economic liberalization and revised regulatory frameworks occupy a central position in the reforms aimed at strengthening the role of market forces and incentives. Their main effects have consisted of freeing and expanding the participation in domestic markets. In this way, the necessary conditions were created to increase economic competition. Nevertheless, the experience of 1994-95 highlighted the sensitivity of market involvement to variations in the exchange rate, together with the importance of completing the deregulation and administrative simplification processes. This emphasizes the need to persevere in promoting competition and eliminating the restrictions which still prevail.

The impact of opening up the economy has been felt in the consumer goods market. On the one hand, trade liberalization has reduced the market power of the largest national companies. On the other, the liberalization of foreign investment and greater opportunities for access to international markets have changed perspectives regarding the size of domestic companies. Furthermore, the pressures of globalization have stimulated the emergence of concentrations and mergers aimed at increasing the size and competitiveness of businesses. To summarize, opening the economy has allowed a reconciliation between efficiency, which at times goes hand-in-hand with large companies, and competition in domestic markets. This possibility is generously provided for in the Law, which grants relative importance to the size of economic agents in determining harm to competition. Indeed, the absence of a large number of national suppliers is not itself enough to grant substantial market power, nor to demonstrate the existence of monopolistic practices or make objections to concentrations and mergers.⁵ The real or potential presence of external competitors generally makes a major contribution to the efficient functioning of the corresponding markets.

Protecting competition and freedom of access requires coordination between the Commission and foreign trade authorities and the removal of obstacles to external competition.

To this end:

* This Institution participates on the Foreign Trade Commission, working for consistency between commercial policies and competition measures. With that aim it signed an administrative collaboration agreement with the Secretariat of Commerce and Industrial Development (Secofi), which allows the International Commercial Practices Unit to request the Commission’s opinion regarding the repercussions for competition of investigations concerning unfair foreign trading practices and countervailing measures. These mechanisms permit compliance with the commitment established in the AUSEE, under which internal legislation is to be strictly applied in order to protect the national productive apparatus and fight unfair practices in international trade, while not harming competition in domestic markets.

* The Commission monitors market dynamics to prevent and combat monopolistic practices that could counteract the effects of commercial liberalization, such as the closure of distribution channels.

Regardless of the advantages of commercial liberalization, it is not in itself enough to guarantee the establishment of conditions of competition and freedom of access. The globalization of the economy has not been free from the regional segmentation of markets and other anti-competitive practices that affect the functioning of national markets. To meet this challenge, the Commission has intensified its dialogue with businessmen and private organizations. This way, greater attention has been paid to the problems posed by export cartels, service dumping, and collusion among firms. The treatment of such actions is complex and requires cooperation with foreign competition authorities, because of their aspects of extraterritoriality. The Commission’s participation in the Working Group on Competition, as provided for in the North American Free Trade Agreement, allows progress to be made in this area in conjunction with our main trading partners.

The review of the regulatory framework favored economic competition by expanding and freeing access to different markets. This was the chief effect of the reforms that eliminated exclusive contracts, discriminatory treatment, and unclear mechanisms in the granting of permits and concessions. In addition, some measures such as largely eliminating price controls, replacing guaranteed prices⁶ with direct supports for farmers, and rationalizing consumption subsidies favored the functioning of market incentives. Notable during the first half of 1995 were the efforts to complete deregulation at the federal level, together with the efforts made by the state governments and the Federal District authorities to review the regulations in their jurisditions.

The regulatory reforms and commercial liberalization have helped improve the conditions of competition within the markets and to modify their structures. Nevertheless, the pressures imposed by the new environment have also generated defensive attitudes in the face of abusive attitudes towards competition, through the creation of monopolistic practices, and attempts to establish concentrations and mergers whose aim is to obtain greater market power. The following are some of the most outstanding actions recorded during 1994-95:

* Some agents have reacted adversely to the intensified competition in prices, quantity, and quality of product or services. The affected parties generally oppose market liberalization, arguing unfair competition. During 1994-95, the Commission received several complaints aimed at intervention in limiting competition. In most of the cases, the interested parties alleged ruinous competition and downward infringements of official prices. These complaints, although unfounded, were dealt with by both local and federal authorities. When faced with such situations, the Commission has issued recommendations to defend competition and freedom of access.

* The negotiation of controlled prices generally involved a prior agreement between the businessmen supervised and regulated by Secofi. Despite the absence of those controls, in several cases, price agreements between competitors have survived, particularly in sectors involving a large number of participants who must meet, or are susceptible to, intense competition. Such agreements constitute absolute monopolistic practices under the Federal Law of Economic Competition. During the period in question, the Commission sanctioned several companies and organizations for incurring in price agreements.

* The pressures imposed by new participants have had a favorable effect on the prices and services of companies within sectors previously protected. They have also provoked anti-competitive reactions from those who, while still enjoying a considerable degree of market power, have seen their shares diminish. Such was the case with the relative monopolistic practice adopted by Aerovías de México, S.A. de C.V., in which the company refused to deal with travel agencies that offered other domestic airlines’ services. Upon receipt of the case, the Commission ordered the suspension of such a practice.

* The market power of several state companies and the handling of their prices and contracts in accordance with criteria that are sometimes contrary to competition is a legacy left by the administrative procedures of the past. In 1995 the Commission detected anti-competitive practices in the supply of ethyl oxide and in the provision of certain airport services. The Commission recommended suspension of these practices.

* The concentrations and mergers of which the Commission was notified during 1994-95 reflect, above all, new trends in market structures and in the size and make-up of companies as a result of the greater degree of competition, both internal and external. The participation of private individuals in the public auctions of state companies (port installations and terminals) also constituted an important source of notifications. Most of the notifications received by the Commission during the period covered by this report did not pose threats to the process of competition and freedom of access. Of a total of 81 cases resolved, conditions were imposed on four and only one received a negative ruling.

* The concentrations and mergers upon which conditions were imposed, although justifiable on the grounds of efficiency, contained certain elements that could have threatened competition in the corresponding markets. In such cases the Commission, as part of its preventive function, subjected its approval to the establishment of specific conditions to eliminate the anti-competitive aspects of those operations. In this way it was possible to conciliate corporate growth and diversification with the development of efficient, competition-led markets. Among the concentrations and mergers that received such treatment were those involving Radiodifusión Red, S.A. de C.V. with Grupo Radio Centro, S.A. de C.V., and Empresas Cablevisión, S.A. de C.V. with Sercotel, S.A. de C.V. Both took place within a setting characterized by the easing of market access following technological change and greater liberalization of telecommunications. In these cases the Commission took into account the increased competition arising from the new Federal Telecommunications Law.

Sectors Currently Being Opened Up to Competition

The emergence of competition-regulated markets in sectors and industries traditionally characterized by few participants and, at times, by the absolute domination of a single company is one of the most recent developments in competition policy. In January of this year, the new administration recognized, in the context of the AUSEE, the need to modernize and expand the country’s basic service infrastructure by encouraging private investment and efficiency in such areas as railroads, telecommunications, ports, and airports.

It should be pointed out that the state-owned airline companies were sold during the last decade, while basic telephone services were divested in 1990. Additionally, port services are currently being privatized, and railway services involve a new and growing element of private participation. Nevertheless, the legal reforms necessary to intensify the participation of the private sector in infrastructure modernization and expansion and to extend freedom of access have developed slowly. Thus, over recent years there has been progress in certain legal provisions applicable to basic telephone services, air transport, and railways.

Key reforms took place in 1993 with the enactment of the Ports Law. Other another important steps took place in the first half of 1995, with constitutional amendments and the promulgation of the Federal Telecommunications, Civil Aviation, and Railroad Regulatory Laws. During the same period, amendments were made to the Regulatory Law on Article 27 of the Constitution as relating to oil, which allows private participation in the distribution of natural gas. In this manner, legislation enacted by Congress established solid bases to:

* Improve the conditions of competition and free access in the air navigation, radio, television, and mobile phone services.

* Facilitate the entry of new companies into the basic local and long-distance telephone services, which to date has been dominated by Teléfonos de México, S.A. de C.V. In this way, it is hoped that the near future will see an increase in competition in this activity.

* Divest railroad services and the distribution of natural gas, with the certainty that those services will be provided in a context of competition and freedom of access.

There can be no doubt that during the first months of this administration, determined support has been given to allow for competition and freedom of access in sectors that are central to the nation´s development. The progress achieved sets new challenges and demands closer coordination between the Commission and the regulatory authorities. The former is responsible for approving or sanctioning concentrations and mergers, ensuring the non-discriminatory allocation of concessions and permits, and close monitoring of commercial practices in the new activities that have been opened up in the market; the responsability of the latter is to apply the rules that will make competition possible.

Economic Competition in the 1995-2000 National Development Plan

The permanent aim of competition policy is to safeguard and promote competition and freedom of access in domestic markets, in order to help raise the efficiency of the Mexican economy and to expand the options available to economic agents for using their resources and choosing satisfiers. In accordance with this, and by strictly observing the Federal Law of Economic Competition, the Commission will persevere with its efforts to protect the competition and freedom of access and to promote the establishment of free markets in every sector. By applying the Law, the Commission will help bring about democracy as a way of life based on the constant economic improvement of the people.⁷

Competition policy and, in particular, the application of the Law occupy a major place in the economic policy guidelines contained in the National Development Plan for 1995-2000. Indeed, competition is an integral part of the strategies set forth in the Plan to attain the fundamental goal of "...promoting vigorous and sustainable economic growth to strengthen national sovereignty and to lead both to the social well-being of every Mexican and to coexistence founded on democracy and justice."

The efficient use of society’s productive resources and, consequently, of savings and their correct investment is one of the conditions necessary for attaining the maximum possible rate of economic growth on solid and lasting bases. To achieve this, the improved functioning of the markets is required.

By opening up opportunities for everyone, competition policy assists in distributing the benefits of economic growth among the country’s population. Resistance to monopolistic practices, in addition to favoring efficiency, leads to a better distribution of income and helps promote an economic structure based on democracy and justice.

Economic growth, the fundamental aim of the economic policy set forth in the National Development Plan for 1995-2000, together with the proposed actions in the fields of economic liberalization, reviews of regulatory frameworks, and the divestiture of state companies, poses new challenges regarding competition. To meet these challenges, the following guidelines will be followed:

* Application of the Federal Law of Economic Competition. "Monopolistic practices, by both private and state companies, will be resisted. In official dealings, the privileges that give rise to discrimination and inefficiency will be avoided. Actions to enforce the Federal Law of Economic Competition will be strengthened."

* Small and Medium-Sized Companies. Their vulnerability to anti-competitive practices will be countered by paying greater attention to their problems. To this end, the task of disseminating information regarding the Federal Law of Economic Competition will be strengthened and, when appropriate, ex -officio proceedings will be initiated against anti-competitive practices or the necessary steps will be taken to strengthen competition in this sector will be processed with the competent authorities.

* Economic Liberalization. Commercial protection and defensive actions in international markets will be more closely coordinated with competition policy. To this end, collaboration with the Secretariat of Commerce and Industrial Development will be strengthened. Similarly, monopolistic practices occuring abroad will be resisted by establishing better communication with the authorities of our trading partners and encouraging cooperation in international forums.

* Divestiture of state-run companies; granting concessions and permits; government procurement and public auctions. These areas will receive the greatest attention in order to prevent and, when necessary, to fight those combat threats to competition and freedom of access that may arise. Similarly, efforts will be made to ensure that these actions make a real contribution to competition and do not become the privileges of a few to the detriment of the public coffers and to the community at large.

* Sectors Currently Being Opened Up to Competition.¹⁰ The establishment of conditions to facilitate competition and to promote free access in activities traditionally reserved for the public sector or dominated by certain private economic agents will be encouraged through pro-competitive regulations and with the development of new forms of coordination between the Federal Competition Commission and the corresponding regulatory authorities and through the supervision that the Commission will carry out to protect the process of competition and freedom of access in those activities.

* Review of the Regulatory Framework. The Commission will closely collaborate with Secofi, other federal government agencies, and the state governments to eliminate excessive regulations applicable to the economy and, in particular, to suppress those that impose artificial barriers to entry or establish exclusive agreements.

* Transportation of Merchandise Within the Nation. In compliance with Article 14 of the Federal Law of Economic Competition, the Commission will place greater emphasis on identifying and eliminating barriers to unrestricted transportation of merchandise between the nation’s states. To this end, the Federal Competition Commission will intensify its investigations into such anti-competitive actions and, if appropriate, will reveal their existence.

* Regional Attention to Competition Problems. The structure of regional markets and the specific features of their economic agents and institutions call for a closer monitoring of the conditions of competition and free access in the different regions. Once budgetary restrictions have been overcome, the Commission will establish regional offices to decentralize its operations.

* Coordination with Other Policies. To make a more effective contribution to the efficient functioning of markets, competition policy will continue to develop in coordination with other governmental actions involving market behavior and regulation.

Competition policy, and in particular the strict application of the Federal Law of Economic Competition, occupies a key place in the strategy of the National Development Plan for 1995-2000. Therefore, the autonomy of the Federal Competition Commission and the efficient performance of its functions will make a major contribution to the implementation of the Plan and the achievement of its goals. In this context, special emphasis should be placed on the Commission’s role in preventing and eliminating restrictions on the process of competition and freedom of access that comes from private and public actions and could hinder the correct functioning of the markets and, consequently, of the policies set down in the National Development Plan.

___________________________

1 Calculated on the basis of the interbank exchange rate.

2 Interbank rate.

3 The policy to counter the country’s adverse economic situation was agreed upon on January 3, 1995 within the Unity Agreement to Overcome the Economic Emergency (AUSEE, from its Spanish initials). To consolidate this Agreement, on March 9, 1995 the Program to Strengthen the Unity Agreement to Overcome the Economic Emergency (PARAUSEE) was announced.

4 See footnote 3, p. @.

5 The explanation refers to relative monopolistic practices. For further details in this regard, see the introduction to Chapter III.

6 Except for corn and beans.

7 "Considering democracy not merely as a legal structure and political regime, but as a way of life based on the constant economic, social, and cultural betterment of the people." Political Constitution of the United Mexican States, Article 3, Section I, Paragraph (a).

8 1995-2000 National Development Plan, Official Journal of the Federation, May 31, 1995, p. 70.

9 1995-2000 National Development Plan, Official Journal of the Federation, May 31, 1995, p. 87.

10 Telecommunications, railroads, natural gas distribution, and others.

II. Concentrations and Mergers

The obligations of the Federal Competition Commission include challenging and or sanctioning concentrations¹¹ whose aim or effect is to reduce, harm, or hinder competition and freedom of access.¹² In carrying out the investigations necessary to perform this function, the Commission must consider, among others, the following elements:¹³ the market corresponding¹⁴ to the transaction, its structure, the suppliers active within it, and their power over that market. The actions adopted by the Commission can be either preventive or corrective.

To prevent the possible anti-competitive effects of concentrations, individuals are obliged to provide prior notification of such operations whenever the amount of the transaction exceeds the limits set forth in the Law.¹⁵ To the same end, the Commission can require that economic agents give notice of future concentrations, even when the amounts involved do not exceed the established thresholds.¹⁶

In addition to the preventive measures contemplated in the Federal Law of Economic Competition, in different processes dealing with the divestiture of state companies, participants are required to notify the Commission. This provision was included, at the Commission’s request, in the new legislation on telecommunications, ports, and railroads, and is applicable to requests and transfers of concessions and permits submitted by individuals. In such cases, a favorable ruling from the Commission is necessary for the interested parties to continue with or conclude their transaction.

Corrective measures will be applied to concentrations for which the obligatory notification has been omitted or falsified, and to those for which prior notification is not required but which do reduce or hinder competition and free access. In such cases, the Commission is empowered to apply rulings to such operations, to impose fines, or to order the partial or total dismantling of the concentration, the termination of control, or the cancellation of actions. Nevertheless, it must be pointed out that when dealing with concentrations for which notification is not required, the Commission can only act within a period of twelve months following the action.

Economic liberalization, the revised regulatory framework, and the divestiture of state companies largely explain the modifications in market structures and the consequent increase observed in the number of concentrations. For this reason, and as a result of the obligation to give notice, the investigation of concentrations constitutes the busiest area of Commission activities. Thus, during 1994-95, 109 notifications were analyzed, involving 88 concentrations and mergers and 21 public auctions. The total was 27% higher than the one recorded during the period 1993-94.

At the close of the period covered by this report, the following progress and results had been attained:

* 92% of notified concentrations had been resolved. Conditions were placed on four of them, and one objection was recorded; the remainder were approved unconditionally.

* The 21 cases involving participation in auctions submitted between June 9 and June 20 of this year were at an advanced stage of study.¹⁷

At the corrective level, the Commission conducted thirteen ex- officio investigations into alleged failures to submit notifications; of these, eight were concluded. Violations were confirmed in four cases, and the corresponding sanctions were imposed.

The impact of the established provisions applicable to concentrations and mergers on the functioning of companies and the behavior of the domestic economy makes it necessary for the Commission to perform its duties on solid analytical and informational bases, with administrative efficiency and timeliness. For this reason, the Commission asks economic agents for only the information strictly necessary for its investigations. Thus, economic agents are saved needless wastes of time and money. Thanks to this policy, all notifications have been resolved within the time frames established in the Law. The efficiency with which the Commission has acted in resolving concentrations can be substantiated in the following data:

* 47% of notifications were processed without requiring additional information from the parties involved. In those cases resolutions were issued within an average of 27 days, a period shorter than the 45 days allowed under the Law.¹⁸

* In 46% of notifications, additional information was requested. In these instances, the Commission gave its resolutions after an average of 42 days, which is less than the 80-day period permitted by the Law.¹⁹

* In those cases of excessively complex concentrations (7% of the total), the average period rose to 97 days; this is still 103 days shorter than the maximum requirement set forth in the Law.²⁰

Some Illustrative Cases

In order to illustrate the criteria used by the Commission to resolve the permissibility of different concentrations and mergers, some of the most representative cases are briefly described below.

Promotora Musical, S.A. de C.V. and Sanborn Hermanos, S.A.

On May 20, 1994 Sanborn Hermanos, S.A. (Sanborn) gave notice of having created a strategic alliance with Promotora Musical, S.A. de C.V. (Promotora). To this end, Sanborn initially subscribed one share of stock in Promotora. Subsequently, an increase in the variable portion of Promotora’s capital stock was agreed upon. The shares resulting from that increase were subscribed to and paid for by Sanborn. These resources were used to capitalize Promotora and to cover several of its obligations. Similarly, the alliance included Sanborn’s support for management of all the financial, fiscal, and accounting management of its partner.

Both companies sell recorded music. Promotora specializes in this line, while Sanborn also sells gifts, domestic appliances, medicines, and other products in its national chain of stores. The aim of the alliance was to assure a more active participation by Promotora in the record market, to which end they attempted to combine that company’s experience, trade names, and points of sale with Sanborn’s capacity to strengthen and develop the company. The arrangement stipulated that the parties would only be able to open new recorded-music stores through Promotora.

The relevant market corresponding to the concentration was that of recorded music sales intended for the final consumer across the nation. In this context, the Commission ruled that the concentration did not signify substantial market power, for the following reasons:

* The parties face competition from other chains of department stores and supermarkets, and from other businesses specializing in the sale of recorded music.

* There are no barriers to access in the relevant market. In this regard it should be noted that imported compact discs account for the largest share of the market supply and entry rates are subject to zero and 15% tariffs, depending on whether they come from the North American Free Trade Agreement area or from other parts of the world.

For the above reasons, the Commission deemed that the concentration did not threaten competition and freedom of access. Therefore, it decided to make no objection. However, upon submission of the documents that evidenced the completion of the transaction, the Commission detected that:

* Notice of the concentration was not given prior to its being carried out, thereby violating Article 20 of the Law.

* The parties submitted false information regarding the transaction, thereby incurring in a violation of Article 35, Section III, of the Law.

As a result, the corresponding fines were imposed on the economic agents involved.

Seguros Comercial América, S.A. de C.V. and Several Investment Companies

On July 25, 1994, the Commission was notified of the intention of Seguros Comercial América, S.A. de C.V. (América) to absorb, through mergers, several firms²¹ with investments in Almacenadora Vector, S.A. de C.V., Arrendadora Vector S.A. de C.V., Factoring Vector, S.A. de C.V., Financiera Vector, S.A. de C.V., a limited-purpose financial corporation, and Fianzas Lacomsa, S.A. de C.V. (The Companies). Upon completion of this operation, the absorbed firms would cease to exist and their stockholdings in The Companies would become part of the assets of the merging company. By means of this operation, América would obtain 99.99% of each of the Companies’ capital stock.

The Commission ruled that the markets corresponding to the operation were those of storage, leasing, factoring, and bond services at the national level. Each of these markets is perfectly differentiated from the others. Thus, the merger would concentrate 2.8%, 1.1%, 0.1% and 0.5% of the corresponding markets, respectively. Since such levels do not endanger competition or freedom of access, the Commission did not object to any condition of the transaction described.

Femsa Cerveza, S.A. de C.V. and John Labatt, Ltd.

On August 3rd, 1994, Femsa Cerveza, S.A. de C.V. (Femsa) gave notice of its intention to establish a partnership with the Canadian company John Labatt, Ltd. (Labatt). Both firms produce and distribute beer. With regard to the Mexican partner, it should be pointed out that Fomento Económico, S.A. (Fomento) has the following subsidiaries: Femsa, Femsa Empaques, S.A. de C.V., Operadora Maresa, S.A. de C.V., and Cadena Comercial Oxxo, S.A. de C.V. In turn, Femsa has holdings in the stock of Cervecería Cuauhtémoc, S.A. de C.V. and Cervecería Moctezuma, S.A. de C.V.

Femsa would reform its corporate by-laws to permit the creation of the partnership. Thus, a new stock structure would be established under which Labatt would subscribe to as much as 22% of the restricted circulation Series-D shares, with the option to acquire an additional 8% over a period of three years. Likewise, an eight-member Board of Directors would be set up, with Labatt entitled to appoint five of those directors and either appoint or remove the vice-president.

Within the framework of this operation, Femsa and Labatt signed a letter of intent including the following:

* Contract between Femsa and Cadena Comercial Oxxo, S.A. de C.V., under which the latter would promise to sell only those products manufactured, distributed, or represented by Femsa for an initial period of five years.

* Agreements on technical cooperation and corporate services between Femsa and Labatt.

* Labatt’s obligations:

--To take no direct or indirect part in representing or being connected to the production, marketing, sale, or distribution of any other Mexican brand of beer other than those produced by Femsa, either in Canada or in other countries, without Femsa’s prior authorization.

--To take no direct or indirect part in representing or being connected to the production, marketing, sale, or distribution of any brand of beer in Mexico except through Femsa.

After considering Femsa’s size and the viability of distributing the product throughout the nation, the Commission ruled that the relevant market corresponding to the concentration was that of Mexican and imported beer sold at the national level. In accordance with 1993 estimates, Femsa and Grupo Modelo have shares of the Mexican beer market of 48% and 52%, respectively. Both groups have fiercely fought for the domestic market by launching advertising campaigns, developing distribution channels, and vertically integrating their companies. The aim of this integration is to insure timely, sufficient access to inputs, product sales on the final market, and greater operating efficiency. With this in mind, it can be said that exclusive distribution agreements are part of the competition strategy developed by the two brewery groups.

The Commission ruled that the partnership between Femsa and Labatt reflected an international marketing strategy. The Mexican brewer’s reaction can be understood in the light of economic liberalization, the new conditions of competition prevailing in domestic markets, and domestic producers’ interest in penetrating foreign markets. On the one hand, this operation is a response to the partnership set up in March, 1993 between Grupo Modelo and Anheuser-Busch, under which the latter company acquired an 18% stake in Modelo; on the other, The Femsa-Labatt operation facilitates Femsa’s expansion into the Canadian market. Finally, it should be pointed out that Femsa’s distribution of Labatt Blue, Labatt Ice, and Labatt Genuine Draft imported beers, in addition to the imported beers it already sells (Heineken and Amstel Light), does not increase its market power, since it is competing against Grupo Modelo, which distributes Budweiser and Bud Light.

The Commission decided that considering the structure of the corresponding relevant market, economic liberalization, and the internationalization of Mexican companies, the partnership between Femsa and Labatt did not diminish competition or freedom of access. Consequently, no objections or conditions were placed on the transaction.

Carlos Abedrop D. and Conductores Latincasa, S.A. de C.V.

On August 4, August 1994, Mr. Carlos Abedrop informed the Commission of his intent to purchase 52% of the shares representing the capital stock of Conductores Latincasa, S.A. de C.V. (Latincasa), belonging to Ericsson Holding International, B.V. (Ericsson). The corporate purpose of Latincasa is to manufacture, process, and install metallurgical products, to produce cables and wires for electricity, telephony, and telegraphy, and to manufacture other electrical articles.

Previously,²² Grupo Condumex, S.A. de C.V. (Condumex) had notified the Commission of its interest in purchasing the aforementioned shares. On that occasion the Commission took the following elements into consideration:

* Condumex is a part of Grupo Carso, S.A. de C.V., which in turn has an important holding (in)(fuera) and maintains operational control over Teléfonos de Mexico, S.A. de C.V. (Telmex).

* Telmex is the leading purchaser of telephone cable.

* The operation would lead to the concentration of almost 70% of all telephone cable sales.

* With the purchase of Latincasa, Condumex would acquire control over the country’s leading producers of refined copper and wire rod: Cobre de México, S.A. de C.V. and Conticón, S.A. de C.V.

After considering the possible negative effects of the Condumex-Latincasa concentration, the Commission decided to impose a condition by which Grupo Carso must refrain from using its stake in Telmex to make the company discriminate against other producers in its purchases of telephone cables.²³ Despite the Commission’s positive ruling, the operation with Grupo Carso was not finalized; Ericsson therefore once again offered the shares for sale and Mr. Abedrop’s proposal was made.

The aim of Mr. Abedrop’s operation as notified was to strengthen Latincasa against the effects of commercial liberalization. To this end, the company required investments in cable manufacture that Ericsson was not planning to make, together with technical assistance for this product line. Responsibility for the former element fell to the new majority stockholder, while the latter was resolved through a contract with Ericsson Cables, A.B. This commitment required the payment of a commission on all exports involving either directly or indirectly one of the companies in Grupo Ericsson.

Mr. Abedrop’s main activities are related to the financial sector. When he gave notice of the operation in question he was the president of Latincasa and a minority shareholder in both that company and in Telmex. Given his minority holding in the latter firm, the Commission ruled that the concentration of which Mr. Abedrop was giving notice would not influence Telmex’s commercial relations with Latincasa.

The Commission did not object to nor impose conditions on the transaction, since the concentration did not threaten the processes of competition or freedom of access.

The Thomas Cook Group, Ltd. and Interpayment Services, Ltd.

On October 10, 1994 the Commission received notification of the interest of The Thomas Cook Group, Ltd. (Thomas Cook) to acquire 100% of the shares representing the capital stock of Interpayment Services, Ltd. (Interpayment). The former company is a subsidiary of Westdeutsche Landesbank Girozantrale and the latter is a subsidiary of Barclays Bank, PLC. The operation would take place in the United Kingdom of Great Britain and Northern Ireland between two companies incorporated under the laws of that nation. Nevertheless, the transaction would have effects within Mexico because of its involvement with Thomas Cook de México, S.A. de C.V. and, indirectly, with Interpayment’s sales representatives in this country. It should be pointed out that Thomas Cook holds a 70% share of the capital of its Mexican subsidiary. For these reasons and the possible effects on the domestic market, notice of the concentration had to be given to the Commission.

Interpayment is a company whose corporate purpose is to issue Visa brand travelers checks throughout the world. Thomas Cook is a leading international company for financial services related to travel agencies, and its main lines of business are travel agencies, foreign currency exchanges, and travelers checks. By purchasing the stock in Interpayment, Thomas Cook would acquire the travelers check issuing business of Barclays Bank, PLC.

The concentration between these foreign companies did not imply a change in the structure of the capital stock of Thomas Cook’s subsidiary. As a result of the foreign operation, however, there was reason to expect modifications in the structure of the relevant market, that of international payment instruments sold inside Mexico. In this context, Thomas Cook’s market share would rise from 13% to 17%, a percentage substantially lower than the 43% held by Citibank and 36% by American Express.

As a result of the above, the Commission ruled that the market power arising from the merger taking place abroad would not affect the process of competition and freedom of access within the nation. Consequently, the institution’s full board resolved to approve it without imposing any conditions.

Grupo Financiero Banorte, S.A. de C.V., with Arrendadora Banorte, S.A. de C.V., Factor Banorte, S.A. de C.V., and Almacenadora Banorte, S.A. de C.V.

On October 27, 1994, Grupo Financiero Banorte, S.A. de C.V. (Grupo Banorte) notified the Commission of its intent to purchase a majority stake in Arrendadora Banorte, S.A. de C.V., Factor Banorte, S.A. de C.V., and Almacenadora Banorte, S.A. de C.V. Upon notification, Grupo Banorte had a majority holding in Banco Mercantil del Norte, S.A. de C.V. (Banco Mercantil), which was, in turn, the main stockholder in the aforementioned leasing, factoring, and storage companies. In this context, it was determined that this concentration would involve an administrative restructuring, with the following aims:

* Eliminating Banco Mercantil’s stock holdings in the aforementioned auxiliary credit organizations. This aspect of the operation was in compliance with the regulation prohibiting commercial banks that are a part of a financial group from investing in or holding shares in the capital stock of auxiliary credit organizations.²⁴

* Maintaining the aforementioned auxiliary credit organizations within Grupo Banorte.

The Commission decided not to oppose the operation nor to impose conditions on it, since it involved a restructuring effort that neither diminished competition nor harmed freedom of access.

Ingenio Nueva Esperanza de Pujiltic, S.A. de C.V. and Ingenio Pujiltic, S.A. de C.V.

By means of documents dated December 2 and 6, 1994, Ingenio Nueva Esperanza de Pujiltic, S.A. de C.V., a subsidiary of Consorcio Industrial Escorpión, S.A. de C.V. (CIE), gave notice of its intent to acquire the assets of a bankrupt state-owned company known as Ingenio Pujiltic, S.A. de C.V. (Pujiltic).

Prior to this operation, 93.6% of the shares in Grupo Xafra were purchased by Consorcio Integral de Empresas, S.A. de C.V. (Consorcio Integral), which is related to CIE. Through that transaction, the purchaser gained control over nine mills, the product of which equals about 20% of the domestic sugar market and over 40% of the refined sugar market. After analyzing the operation, the Commission determined that the corresponding market was that of refined sugar produced and sold in the country. It also decided that Consorcio Integral’s power over that market could be offset by various factors, such as the conversion of standard sugar into a refined product and the possible substitution of corn syrup for the latter product at the industrial level. Nevertheless, because of the time and costs involved in such adjustments, the Commission deemed it would be prudent not to ignore the possibility that the aforementioned factors might not effectively offset the market power of the concentration. The Commission therefore placed a condition on the operation involving Grupo Xafra and Consorcio Integral. In the resolution the latter company was required to give notice of all future plans to purchase companies or assets related to sugar production and/or distribution, both directly and indirectly, involving subsidiary companies, dependent companies, or its shareholders, even when the amount of such operations was below the thresholds indicated in the Federal Law of Economic Competition.²⁵

In compliance with this condition, on November 3, 1994 Ingenio el Potrero, S.A. de C.V. gave notice of its intent to sell 45,000 tons of muscovado sugar to Ingenio Central Progreso, S.A. de C.V. The former company is one of the sugar-refining mills controlled by the Saenz family, while the latter firm belongs to Consorcio Industrial Escorpión.

After analysis of the corresponding market and reviewing the background details, the Commission ruled that since this was an operation with limited effects in the short term, it would not increase CIE’s market power. Therefore, it resolved to make no objection.

As with the previous operation, the purchase of Pujiltic by Ingenio Nueva Esperanza de Pujiltic, S.A. de C.V. did not exceed the minimums set forth in Article 20 of the Law. However, notification was obligatory by virtue of the condition established in the prior resolution on the concentration between Consorcio Integral and Grupo Xafra. Unlike the purchase of the muscovado sugar, this operation would have long-term effects in the relevant refined sugar market, that of refined sugar. Given these circumstances, the Commission considered the increased concentration that would result from the purchase of Pujiltic and reviewed, within the context of the new scenario, both the barriers to imports and the timescale and costs involved in adjusting to replacement products and in converting standard sugar into the refined product. Similarly, pursuant to Section V of Article 13 of the Law, it took CIE’s recent behavior into account. Upon review, the Commission ruled that the market power that would arise from the purchase of Pujiltic by CIE would endanger the process of competition and freedom of access. Therefore, the Commission) resolved to object to the operation and order CIE to give notification of all future purchases of companies or assets in the sugar sector, including those falling beneath the minimum levels indicated in the Law.

Grupo Radio Centro, S.A. de C.V. and Radiodifusión Red, S.A. de C.V.

On December 12, 1994, Corporación Medcom, S.A. de C.V. (Medcom) and Grupo Radio Centro, S.A. de C.V. (Radio Centro), as seller and purchaser respectively, informed the Commission of their intent to carry out an operation with the following characteristics:

* Purchase and sale of shares representing the capital stock of Radiodifusión Red, S.A. de C.V. (Red) for a fixed price plus a maximum contingent price to be estimated depending on the audience for Red’s news services.

* Transfer of title to commercially exploit three radio stations in Mexico City, one in Guadalajara (Jalisco), and another in Santa Catarina (Nuevo León).

* Transfer of intellectual and industrial rights covering various radio programs.

* License for Red to use various brands and authorship rights, including Monitor.

* Contract to provide Red with services including newscast production, informational programs, and special events from Infored, S.A. de C.V.,²⁶ allowing the use of those services by Radio Centro. Infored remained under an obligation to provide its radio, audio, derivative, and applications services to Red on an exclusive basis.

After analyzing the advertising market, and particularly that covered by Red and Radio Centro, the following conclusions were drawn:

* The geographical area covered by these companies is that of the Federal District Metropolitan Area (ZMDF).

* In this sector, radio advertising is forced to compete with an open television station with services aimed at the ZMDF and with several national-coverage television stations. However, the services of the latter are of less interest to advertisers whose business is limited to the ZMDF.

* Advertising services provided by restricted television in the ZMDF represent a growing source of competition for radio stations operating in the same area.

* Advertising carried out by print media competes partially with the services that radio provides, due to the more limited coverage of the print media.

* In deciding how to spend their advertising budget, advertisers usually consider all of the above media outlets.

While not losing sight of how the different media complement each other, the Commission determined that the relevant market corresponding to the operation was that of broadcast advertising services aimed at the ZMDF. In such a context, the concentration would have the following effects:

* Radio Centro would increase its number of radio stations under its control from 10 to 13, giving it a 24% share of the total.

* Radio Centro would concentrate 39.2% of all advertising sales, followed by Grupo Radiópolis, whose market share would remain at 27.7%.

* Radio Centro’s audience would increase from 30.3% to 45.6%. On the basis of audience distribution, the Herfindahl Hirschman concentration index would rise from 1,556 to 2,479 and the PGA²⁷ index from 0.39 to 0.70. It should be noted that although audience figures are not sufficient for estimating market concentrations, in the absence of reliable sales information these represent the best data available for such estimates. The detailed information, the saturation of the frequency bands available to radio stations, and the high audience and competitiveness of the Monitor newscasts would seem to indicate that the proposed operation would grant Radio Centro significant market power. At the same time, the evolution of the advertising market, the growing share held by television, and the deregulation of the telecommunications sector could partially offset the power implicit in this operation.

Consequently, the Commission decided that the approval of the operation without any conditions could reduce or harm competition in the relevant market. As a result, it ruled that it was reasonable not to object to the operation provided that the parties observed the following conditions:

* They were to submit documents to the Commission in order to give record of the terms and conditions of the notified transaction, including renegotiations) and of all other related operations.

* They were to eliminate the exclusivity restrictions on news services, informational programming, and special events included in the contractual relationship with Infored, S.A. de C.V., and any other similar or equivalent restrictions. The parties were also to give record, to the Commission’s satisfaction, of the way in which said services would be offered to third-party competitors, in the understanding that such offers must include non-discriminatory terms and conditions.

* They were to refrain from making conditioned sales, by abstaining from linking the purchase of advertising time from the companies acquired to the purchase of advertising time from the companies that currently comprise Radio Centro.

On April 21, 1995, Medcom and Radio Centro submitted to this Commission a new proposal that took the above conditions into consideration. The new structure of the transaction, the Commission’s comments on it, and the additional conditions imposed by the Commission are described below:

* The renegotiation of the operation was structured in two parts: the first would be limited to the purchase by Radio Centro of 33% of the total capital stock of Red; the second would involve an option to purchase the remaining 67% of the stock. The Commission ruled that this modification of the payment method did not substantially alter the concentration as it had previously been approved. Nevertheless, it warned the parties that until the transaction was completed in full, they would be considered competing economic agents and consequently bound by the terms of Articles 9 and 10 of the Federal Law of Economic Competition. Consequently, they were warned that they could not exchange information, perform the actions described in the aforementioned Articles, nor exercise the right to appoint members of the Board of Directors. The parties were informed that if the second part of the operation was not concluded within a period of 36 months, they would be under an obligation to restore the situation that prevailed prior to the Commission’s resolution.

* The Commission accepted the proposals eliminating exclusivity in news services, informational programs, and special events, together with the proposal made by the companies involved to offer Infored’s service to third parties. To this end it ordered the companies involved to present a copy of the corresponding agreement.

* With regard to conditioned sales, the Commission warned that regardless of prevailing uses and practices of the radio industry, purchasers should not be subjected to conditions that limit their choice of one or several programs or schedules nor to sundry purchasing modes that go against the purchasers’ interests.

* The Commission informed the parties that they should provide prior notification of any joint operating or marketing agreement entered into by and between them, be it formal or informal, and of any later concentration made with other economic agents, regardless of whether or not the amount involved exceeded the limits set forth in the Law for the notification of such undertakings.

Ucar Carbón Mexicana, S.A. de C.V. and Ucar Mexicana, S.A. de C.V.

On January 17, 1995, Ucar Carbón Mexicana, S.A. de C.V. notified the Commission of the intention of Ucar Mexicana, S.A. de C.V. to purchase 99.8% of the shares comprising its capital stock.

The transaction reflected an international-level restructuring in the control, management, and finances of the U.S. company Ucar, Inc. At that time, Union Carbide and Mitsubishi held equal amounts of stock in Ucar, Inc. Similarly, Ucar, Inc. had a holding in the capital of Ucar Carbon Company, Inc. which, in turn, held a 99.8% stake in Ucar Carbón Mexicana, S.A. de C.V.

Under the restructuring operation, the shares in Ucar, Inc. belonging to Mitsubishi would be purchased by a new group of stockholders, including some Union Carbide executives. At the same time, a U.S. company called Ucar Holding, Inc. would be created. This company and Ucar, Inc. would incorporate in Mexico the company Ucar Mexicana, S.A. de C.V., which would purchase 99.8% of the stock in Ucar Carbón Mexicana, S.A. de C.V. that had belonged until then to Ucar Carbon Company.

Since the operation of which due notice was given meant changes in the international control and administration of Ucar, Inc. and its subsidiaries, the aim or effect of which was neither to diminish nor threaten the process of competition and freedom of access within Mexico, the Commission decided neither to object to it nor to place conditions on it.

Empresas Cablevisión, S.A. de C.V. and Sercotel, S.A. de C.V.

On February 10, 1995, the Commission was notified of the intent by Sercotel, S.A. de C.V. (Sercotel) to purchase 49% of the stock of Empresas Cablevisión, S.A. de C.V. (Empresas). Empresas is a subsidiary of Grupo Televisa, S.A. de C.V. (Televisa) and Sercotel is a subsidiary of Teléfonos de México, S.A. de C.V. (Telmex).

Sercotel has a majority holding in several companies involved in such areas as real estate, construction, equipment rentals, operation of networks and plants, and technological research. They all are Telmex services suppliers. At the same time, Empresas holds a majority of the capital stock of Milar, S.A. de C.V., which in turn holds the stock of Cablevisión, S.A. de C.V. (Cablevisión) and other companies whose purpose is the transmission of restricted television at the regional level and the construction and installation of networks and studios related to those services. It should be pointed out that Cablevisión operates solely in the Federal District Metropolitan Area (ZMDF) and that the other regional companies do not as yet have the concessions necessary for broadcasting cable television.

The operation notified to this Commission also) required the express consent of the Secretariat of Communications and Transport (SCT). The SCT is empowered to interpret the provisions of the Cable Television Service Regulations and to rule on the correct compliance of the conditions contained in the interested parties’ concessions. The SCT informed the Commission that there was no impediment to Telmex’s participation in the capital stock of any company providing cable television services.

The television market comprises open services and restricted or pay services. The former are transmitted on the UHF and VHF bands and can be freely received with conventional antennas and TV sets. The companies active in this market segment obtain their income from advertising sales and therefore compete for audiences and advertisers. The services offered by restricted television companies, on the other hand, are intended exclusively for subscribers. The fees charged account for these companies’ main source of income. In contrast, revenues from advertising are substantially lower, since services of this kind are subject to greater audience and time restrictions. Thus, while advertising on open television is freely received by broad sectors of the population, on restricted television advertisers’ messages are aimed at specific audiences. On this basis, and bearing in mind the share of the television market enjoyed by Empresas, the Commission ruled restricted television to be one of the products covered by the concentration. It also considered the fact that Empresas is only involved in the ZMDF’s restricted television market through Cablevisión. In the remaining regions of the country, its subsidiaries do not provide such services because they lack the appropriate permits. As a result, it was ruled that with regard to television, the market corresponding to the concentration was that of restricted or pay television services offered in the ZMDF. In such a context, the concentration does not grant a level of market power that could reduce, harm, or impede competition and freedom of access; the reasons for this are the following:

* Cablevisión’s share of the relevant market has fallen from 98% in 1989 to 36% in 1994. The remaining 64% is now covered by MVS Multivisión, which has proven to be a very real competitor.

* Technological progress in this field has allowed the development of systems that facilitate the entrance of new competitors. Thus, cable systems are currently facing competition from microwave TV and satellite TV. Microwave has already proved its effectiveness in the ZMDF market. With regard to the option of satellite television, it must be pointed out that the most advanced system is competitive in terms of price, quality, and programming choices. In Mexico there are companies making preparations for providing services that use this system, including Medcom and MVS Multivisión.

* The new Telecommunications Law substantially frees the granting of concessions and eliminates the discretionality that characterized this process in the past. This limits the market power of the two companies that operate in the ZMDF by truly opening the sector up to new competitors.

* The new Telecommunications Law obliges Telmex to establish contracts for using its network on non-discriminatory bases that reflect costs. Under these terms, the opening up of Telmex’s network to a specific television company forces it to allow equal conditions of access to other television companies.

In turn, the telephone market at present comprises basic telephone services and mobile radiotelephony (using cellular and conventional technology). Mobile radiotelephony is not strictly a replacement for basic telephone services, given their differences in mobility, price, and market penetration. It was therefore ruled that basic telephony was the only product to be included in the market affected by the concentration. Under these conditions, the Commission considered the following factors in determining the market power that the operation represents:

* Telmex’s share of the basic telephony market is 100%.

* Long-distance services shall open up to competition in August, 1996, as stipulated in the Telmex concession.

* The Telecommunications Law facilitates entry of new companies by establishing measures such as the obligation to interconnect competitors’ networks under non-discriminatory conditions and by freeing the granting of concessions and eliminating the element of discretionality in their allocation. In this fashion, new companies will be able to connect to the Telmex infrastructure to offer services on a competitive basis.

* The technological development of the sector makes access to competitors economically viable. With regard to basic telephony, there are several companies interested in entering this segment with wireless technology, given the progress made with such systems and their shorter installation times. As for the possibility of using the cable television network for basic telephone services, it must be made clear that major investments and longer installation periods would be necessary.

After considering the above factors and the possibility of Cablevisión providing basic telephone services, the Commission decided that, given the new legal and technological conditions, the concentration proposed by Telmex and Televisa did not threaten competition or freedom of access as long as the following conditions were met:

* The economic agents involved must notify the Commission of all later concentrations and/or mergers they plan to carry out, regardless of whether or not the amounts involved are above those stipulated in Article 20 of the Federal Law of Economic Competition.

* Should Cablevisión provide telephone services over its network, after the appropriate modification to its concession, it must allow access by other companies wanting to use its cable infrastructure to provide local telephone services. This condition is essential so that the concentration does not lead to the exclusion of competitors.

Finally, it should be pointed out that the Commission gave notice of the need for the Secretariat of Communications and Transport to authorize the sale of stock in Empresas Cablevisión, S.A. de C.V. belonging to Grupo Televisa.

Fábrica de Chocolates la Azteca, S.A. de C.V. and Acra, S.A. de C.V., with Compañía Nestlé, S.A. de C.V.

On March 2, 1995, Nescalín, S.A. de C.V. (Nescalín) notified the Commission of its interest in acquiring all the shares comprising the capital stock of Fábrica de Chocolates La Azteca, S.A. de C.V. (La Azteca) and Acra, S.A. de C.V. (Acra). Nescalín is the holding company for stock in the companies that make up Grupo Nestlé, which include Compañía Nestlé de México, S.A. de C.V. (Nestlé). In turn, the Quaker Oats Company (Quaker) has majority control over La Azteca and Acra. The transaction meant the subsequent takeover of these two companies by Nestlé, which would remain as the merging company.

La Azteca produces chocolate for candy, for cooking, and in powder. Acra produces cocoa, cocoa butter, and cocoa liqueur, which are necessary for manufacturing chocolate. Of its total production, 65% is sold to La Azteca and the remainder is bought by an exporter. Similarly, Nestlé produces a wide range of industrial foods, including powdered chocolate including the above-mentioned products. In this way, both Quaker and Nestlé are vertically integrated in the production of the final product.

After considering the vertical integration of the companies involved, their products, their possible substitutes, and their areas of distribution, the Commission determined as relevant markets those comprising the different kinds of chocolate sold within the country and the aforementioned inputs sold in the same area. The industry involved in the first market numbers around 150 companies, the main ones being Nestlé, La Azteca, Ricolino, Turín, Chocolatera Jalisco, and Sabritas. Following the concentration, the Herfindahl Hirschman index would rise from 1,875 to 2,221, indicating that the market is far from being monopolistic. Consequently, it is unlikely that the concentration would have negative effects on competition.

At the same time, in the relevant market corresponding to the inputs, the concentration indicators were of no major concern. Given these conditions, the Commission deemed that the increase in Nestlé’s market power would not lead to anti-competitive practices.

The Commission therefore ruled that the concentration would not have adverse effects on competition in the two relevant markets described and, as a result, decided neither to object nor to place conditions on it.

___________________________

¹¹ "Concentration" shall be taken as meaning the absorption of, acquisition of control over, or any other action by means of which companies, associations, stock, stockholders’ interests, trusts, or assets in general are merged in operations that take place between competitors, suppliers, clients, or any other economic agents. See Federal Law of Economic Competition, Article 16.

¹² Such a situation may be indicated when the action or attempt to: (1) grant or possibly grant the power to unilaterally fix prices or substantially restrict supply in the relevant corresponding market, without competitors being able to counter its effects, (2) Have as a purpose to unduly displace other economic agents or prevent them from accessing the corresponding market, and (3) substantially facilitate the exercise of monopolistic practices by the participants in the concentration. See Federal Law of Economic Competition, Article 17.

¹³ The elements to be considered in investigating concentrations are set forth in Article 18 of the Federal Law of Economic Competition.

¹⁴ The relevant market is that in which the concentration or relative monopolistic practice that affects the goods or services being offered occurs. Similarly, substantial market power consists of the violating economic agent’s ability to, inter alia, fix prices or restrict supply without competitors being able to counteract such power. The elements to be considered in determining the corresponding market and substantial power within it are set forth in Articles 12 and 13 of the Federal Law of Economic Competition.

¹⁵ See Federal Law of Economic Competition, Article 20.

¹⁶ The Commission has imposed this preventive condition in resolutions addressing concentrations in which the participants have or acquire significant power in the relevant market.

¹⁷ The auctions were resolved on July 6, 1995.

¹⁸ Article 21, Section III, of the Federal Law of Economic Competition establishes that the Commission shall have a period of 45 calendar days following the notification or the submission of the additional information during which to issue its resolution.

¹⁹ Article 21, Section II, of the Federal Law of Economic Competition establishes that the Commission may request additional details or documents for a period of 20 calendar days following the notification; said details and documents must be submitted by the interested parties within fifteen days. Once the additional information has been presented, the Commission shall have a period of 45 days in which to issue its resolution. Thus, the accrued period is 80 days.

²⁰ Article 21, Section IV, of the Federal Economic Competition Law establishes that in particularly complex cases, the President of the Commission may extend the periods established in Sections II and III of the same Article for up to an additional 60 days. Thus, the maximum period is 200 days.

²¹ Compañía de Inversiones Monterrey, S.A. de C.V., Empresas de Servicios La Sultana, S.A. de C.V., Impulsora de Inversiones Regiomontanas, S.A. de C.V., Corporación Regiomontana de Inversiones, S.A. de C.V., Grupo de Empresas Regionales, S.A. de C.V., Impulsora de Inversiones de Monterrey, S.A. de C.V., Inversiones de Crecimiento, S.A. de C.V., Inversiones del Valle, S.A. de C.V., Inversora Comercial de Monterrey, S.A. de C.V., Negocios de Inversión de San Pedro, S.A. de C.V., and Organizaciones de Negocios Monterrey, S.A. de C.V.

²² On February 25, 1995.

²³ In addition, the concentration was also placed under the condition that Condumex must not increase its control over Cobre de México, S.A. de C.V. and Conticón, S.A. de C.V. See Federal Competition Commission, Annual Report 1993-94, pp. 24-26.

²⁴ Law Regulating Financial Groups.

²⁵ See Federal Competition Commission, Annual Report 1993-94, pp. 17-19.

²⁶ A subsidiary company of Corporación Medcom, S.A. de C.V.

²⁷ A concentration index developed by Dr. Pascual García Alba. Its main feature is that it does not punish any mergers or concentrations, since the result depends on the relative size of the merging companies and the structure of the corresponding market.

III. Monopolistic Practices

The fight against monopolistic practices represents the function given to the Commission that has generated the highest level of expectation. There is, however, a great deal of misunderstanding about its meaning. This situation goes along way to explain the limited of insufficient use of the Federal Law of Economic Competition by private individuals. Among the most common sources of confusion is the notion of "unfair competition". This argument has been used to denounce the intervention of new competitors in zones that were previously exclusive and the intensification of competition regarding prices, quantities, and quality levels. Such actions, considered anti-competitive by those making the complaints, are legitimate in the eyes of the Law and beneficial to society. At the same time, there are actions that go against competition but that ate not always denounced. In such cases the Commission makes its best efforts to identify them and to investigate them on an ex officio basis. Nevertheless, the broad and efficient combating of monopolistic practices depends on actions by every economic agent. For this reason and with the aim of facilitating the development of this chapter, it would be useful to explain the concepts dealing with monopolistic practices contained in the Law. Such practices can be classified in two types): absolute and relative.

Absolute monopolistic practices involve agreements by and between competing economic agents, with the aim or effect of fixing prices or amounts, dividing markets, or manipulating public auctions. (28) Because of their proven adverse effects on the process of competition and freedom of access, practices of this kind are subject to sanctions regardless of the conditions under which they are carried out and the reasons that might be offered in trying to justify them.

All other anti-competitive actions are classified as relative monopolistic practices. Unlike absolute practices, their determination requires a careful analysis of the circumstances in which they arise and their effects on competition and freedom of access. Thus, relative monopolistic practices (29) embrace actions or agreements by e conomic agents with substantial power in the relevant market, (30) the aim or effect of which is, or might be, to unduly displace other agents, to substantially impede access, or to establish exclusive advantages. With this in mind, the Law defines as anti-competitive such cases as the vertical division of markets, the fixing of prices or other resale conditions, tied sales, exclusivity contracts, refusal to trade, boycotts, and all those actions that could harm or impede the process of competition and freedom of access. (31)

Proceedings to pursue monopolistic practices can begin on an ex officio basis or by request. Any person can file a claim against absolute practices, whereas only the affected party can denounce relative practices. In the latter case, the person making the complaint must quote the elements involved and provide indications to show that he has suffered or could suffer significant harm.

Insufficient information from the complainant regarding this matter and its procedures largely explains the following results:

* The low number of complaints regarding monopolistic practices received during the Commission's first two years of work: 22 in 1993-94 and 17 in 1994-95.

*The high percentage of rejected complaints compared to cases brought to a conclusion: 95% in 1993-94 and 80% during the period covered by this report. Without exception, the rejected cases did not meet the minimum requirements necessary to substantiate the corresponding proceedings.

* Resolutions unfavorable to complainants during the Commission's first two years of work.

With regard to the rejected complaints, it should be pointed out that the Commission is obliged to respect procedural provisions and that, in rejecting them, does not prejudge the cases. Consequently, the interested parties can submit them once again if they fulfill the requirements set forth in the Law. Emphasis should also be placed on the convenience of complainants submitting the minimum elements necessary for the prompt processing of their cases. These shortcomings can be avoided through prior consultations with the Commission.

The Commission's ex officio investigations allow it to act more broadly in combatting monopolistic practices. In addition, by means of this procedure the Commission can take up anew those insufficiently grounded complaints that merit a thorough investigation.

During 1994-95, 26 studies prior to ex officio investigation were carried out, and investigations were formally begun in 21 cases. Of these, 11 were brought to a conclusion. In seven, sanctions were imposed or recommendations made to supress the practices, and in the remaining four no violations of the Law were detected.

Some Illustrative Cases

The presentation of the following cases is intended to indicate the criteria applied by the Commission in resolving them, with the aim of informing economic agents regarding how these matters are dealt with. The first case arose from a complaint, while in the remaining five the Commission acted on an ex officio basis.

Naviera Turística de Quintana Roo, S.A de C.V. vs. Transportes Marítimos de Yucatán y del Caribe, S.A de C.V. and Cruceros Marítimos del Caribe, S.A de C.V.

Naviera Turística de Quintana Roo,S.A. de C.V. (NTQR) submitted a complaint against Transportes Marítimos de Yucatán y del Caribe, S.A de C.V. and Cruceros Marítimos del Caribe, S.A de C.V. for "unfair competitive practices". Despite the fact that this concept is unrecognized by the Federal Law of Economic Competition, the Commission proceeded to investigate the actions upon which the complaint was based, which, according to the information providad by NTQR, consisted of the following:

* The improvement of equipment and expansion of service timetables by two other companies after NTQR began operations.

* Violations of the agreement establishing prices, timetables, and ticket-sale conditions signed by the Secretariat of Communications and Transport (SCT) and the companies involved on September 14, 1990. The irregularities referred to the failure to observe the fees, timetables, and ticket sale conditions that had been agreed upon.

It should be pointed out that the infractions referred to in the previous paragraph do not fall into the Commission's competence, but rather that of the regulatory authority. Also important is the fact that the SCT had freed service fees on August 14, 1991.

With regard to the matters that are covered by the Federal Economic Competition Law, it was ruled that making inprovements to and expanding services are normal commercial practices, consistent with competition. It was also established that the pricing strategies of the companies against which the complaint was brought did not reflect the typical characteristic of either absolute or relative monopolistic practices, since there was no evidence of collusion between the competitors nor of undue exclusion of the complainant. Having discarded the actions or agreements that could indicate the existence of relative monopolistic practice, the Commission deemed it unnecessary to identify the relevant market.

Consequently, the Commission resolved that no monopolistic practices were attributable to Transportes Marítimos de Yucatán y del Caribe, S.A de C.V. or to Cruceros Marítimos del Caribe, S.A de C.V.

Aeropuertos y Servicios Auxiliares

The Commission conducted ex officio investigations concerning the provisions of airport services and the functioning of duty-free shops at the nation's airports. Both cases involved Aeropuertos y Servicios Auxiliares (ASA) in its capacity as provider of airport services and as the administrator and operator of the airport belonging to it. In this context, the state company ASA enters into such transactions as the following:

*Contracts with third parties for the provision of airport services, including ramp, dispatching, and maintenance facilities.

* Allocating space for the provision of different services, including maneuvering, traffic, maintenance and repair, and retail sales.

On April 22, 1992, ASA entered into a partnership with Aerovías de México S.A de C.V. and Compañía Mexicana de Aviación, S.A. de C.V., for the provision of ground assistance services through the company Servicios de Apoyo en Tierra (Seat). The Commission ruled that this partnership could lead to discrimination against Seat's competitors in areas such as charges, the allocation of space, the terms of service-provision contracts, and the leasing of operational areas.

Similarly, ASA has established exclusive contracts for setting up and operating duty-free shops in the country's international air terminals, thereby placing barriers on the access of other economic agents to this activity and limiting consumers' options. It is important to point out that the Commission found no reasons of efficiency or security to explain such treatment. As a result, the Commission made the following recommendations to the state company:

* It should offer options for investors interested in operating ramp, loading, unloading, maintenance, and passenger reception and dispatching services, subject to technical, safety, and physical restrictions, without losing sight of the economies inherent in operating integrated services.

* It should withdraw its direct holding from Seat and play no part in future schemes designed to open up the aforementioned services to competition.

* It should refrain from granting airport service privileges to Aerovías de México,S.a de C.V. and Compañía Mexicana de Aviación, S.A. de C.V.

* It should cancel its exclusivity agreements and contracts with the operators of duty-free shops and allow all persons interested in this business to use the available space, provided the passenger safety and traffic standards and customs regulations are met.

The Commission determined that observation of these recommendations would resolve the competition problems affecting airport services while schemes to allow the privatization of airports under conditions of competition and free access are explored and implemented.

Purified Water Producers from the states of Campeche and Puebla

The Federal Competition Commission carried out two ex officio investigations into possible absolute monopolistic practices by purified water producers in the states of Campeche and Puebla. In both instances the Federal Law of Economic Competition was violated by the establishment of agreements among competitors to fix prices in their relevant markets, (32) under which:

* Purified water producers and distributors in the state of Puebla fixed a price for 19-liter bottles.

* Purified water bottlers in the state of Campeche fixed a price for 20-liter bottles.

Once this was demonstrated, the Commission's Plenary body ordered the termination of the practice and applied the corresponding fines to the economic agents involved.

Aerovías de México, S.A de C.V.

The Federal Competition Commission carried out an ex officio investigation into alleged relative monopolistic practices by Aerovías de México, S.A de C.V. (Aerovías). The alleged practices involved the vertical division of markets and the company's refusal to deal with travel agencies that sold other airlines' tickets. These actions were in contravention of Article 10, Sections I and V, of the Federal Law of Economic Competition.

During the investigations, contracts were made with the travel agency Baúl, S.A de C.V. (Baúl), located in the city of Chihuahua, state of Chihuahua. The Commission proved that Aerovías was refusing to use Baúl's services although the agency met the requirements established by the airline for transactions of that kind. As a result, Baúl was forced to resell tickets allocated by Aerovías to other travel agencies. This restrictiions placed Baúl at a disadvantage with regard to other agencies.

The infractor company was clearly aiming to prevent or discourage its current and potential clients from looking for alternative sources of supply. The relevant market where this practice took pkace was that of tickets for air travel services in the city of Chihuahua. In that geographic area, Aerovías enjoys substantial power, since it controls most of the flights to and from that city.

The Commission ruled that the airline's practice was causing the undue exclusion of several economic agents and substantially hindering their access to the market. By reason of this policy's negative effects on competition and freedom of access, the Commission ordered Aerovías:

* To suspend its unilateral action through which it was refusing to provide Baúl, S.A de C.V., and any other agent who met the applicable requirements, with the tickets they requested.

* To prepare, to the Commission's satisfaction, a memorandum indicating that the practices of refusing to deal with and/or discriminating against travel agents were prohibited, and also stipulating the requirements to be met for tickets to be supplied.

* To distribute the memorandum to its district departments and offices involved in selling tickets to travel agents, and to submit proof of their receipt thereof to the Commission.

Cámara Nacional de Autotransporte de Carga

The Federal Competition Commission carried out an ex officio investigation into the cultivation of an alleged absolute monopolistic practice by the Cámara Nacional de Autotransporte de Carga (the National Road Transport Chamber, or Canacar). This involved an agreement among the Chamber's members to fix the prices applicable to their cargo transport services.

The practice arose from a reference price guide for negotiations between users and road haulage transporters operating under concessions or with federal permits; Canacar had written the guide and distributed it among its members. The document specifically established the aim of setting minimum prices for road transport services. This arrangement between competitors constitutes a violation of Article 9, Section I, of the Federal Law of Economic Competition. As a result of this the Commission decided to fine Canacar for participating in the aforementioned absolute monopolistic practice on its members' behalf. Likewise, it ordered the Chamber:

* To cease from publishing and distribuiting the aforementioned price guide and to withdraw those copies in circulation among its members.

* To refrain from issuing or distributing any kind of guide, pamphlet or bulletin with the aim of fixing prices or minimum costs for the services provided by its members.

* To desist from establishing pricing policies aimed at creating minimum conditions for the hiring of road transport services.

Pemex-Petroquímica

The Commission conducted an ex officio investigation into an alleged relative monopolistic practice by Pemex-Petroquímica (Pemex), which involved the state company offering discriminatory prices for ethylene oxide.

Prices charged by Pemex are set by means of formulas approved by a Committee involving, among others, representatives of the Secretariat of Finance and Public Credit and the Secretariat of Commerce and Industrial Development. The formulas vary with each kind of user, thereby giving rise to significant differences. Thus, the price paid by ethoxilators was 56% higher than that paid by producers of ethylene glycol. These disparities were not based on differences in quality, since the products supplied to each user are markedly similar.

The investigation revealed that the selling conditions of ethylene oxide led to a segmentation of the market (33) and price discrimination, since:

* Pemex is practically the only supplier on the domestic market.

* The dangerous nature of the product and its high transport costs represent a barrier to imports. Moreover, the international trade in ethylene oxide is practically non-existent.

* As a result of this, Pemex enjoys substantial power in the market.

* The supply contracts included a statement by the purchaser of the ethylene oxide by which the purchaser promised not to resell the product in the state in which it was acquired without Pemex's prior authorization.

To summarize, the state company has been enjoying conditions favorable to a policy of price discrimination, without the threat of other competitors offsetting its market power and without the possibility of resale by users who had paid a lower price. To correct this situation, the Commission made the following recommendations to Pemex:

* It should make very effort necessary to modify its price policy in order to eliminate the discriminatory treatment given to ethylene oxide users.

* It should give evidence of the elimination of price discrimination by submitting to the Commission certified copies of the modified contracts.

28 See Federal Law of Economic Competition, Article 9.

29 See Federal Law of Economic Competition, Article 10.

30 See footnote No. 12 pp.

31 See Federal Law of Economic Competition, Article 10, Sections I to Vii.

32 See Federal Law of Economic Competition, Article 9, Section I.

33 The market corresponding to the practice under investigation is that of ethylene oxide sold in the country. This aspect was taken into account in the Commission's studies.

IV. CONSULTATIONS

Consultations with economic agents are essential for promoting of competition and freedom of access. Their importance arises from the current context, which is characterized by the strong effect of economic and legal reforms on market structures and behaviors and by the gradual adjustment of economic agents to a regulatory framework that strengthens the role played by market forces and incentives. Under these conditions, individuals have shown a growing interest in the Federal Law of Economic Competition and in the role given to the Federal Competition Commission.

Anticipating this demand and with the aim of promoting the Law, a wide-ranging dissemination effort took place during 1994-95. To this end, pamphlets explaining the Law and the Commission’s internal regulations were distributed among associations, business chambers, and companies. In addition, meetings and seminars were held in different business, professional, and academic forums both in Mexico and abroad. In response to this effort, to the gradual assimilation of the Law, and, above all, to the needs of economic agents, the Commission has attended to different requests for consultation.

Bearing in mind the experience of its first year’s work, the Commission restated its policy of dissemination and orientation for economic agents. Firstly, the incipient and diverse awareness of the Law among the interested parties was recognized. Secondly, the high level of effectiveness of consultations in formulating complaints and preventing anti-competitive practices was taken into account. Thus, during 1994-95, activities to disseminate the Law were maintained and consultations by companies were facilitated by establishing greater contacts with them. Working on these bases, the following steps have been adopted in order to provide better attention to consultations by individuals:

* Identifying those aspects of the Law that pose the greatest problems of assimilation or interpretation, in order to strengthen the Commission’s ability to reply.

* Supporting interested parties in learning to identify anti-competitive practices and in detecting institutional restrictions on competition.

* Providing support and orientation regarding formalities and procedures to resolve problems affecting competition, particularly to the most disadvantaged economic agents.

* More and better regional attention to the basic aspects of the Law and to the processing of consultations, with the help of the regional offices of the Secretariat of Commerce and Industrial Development.

It should be pointed out that the greater emphasis on supporting individuals in their consultations has been made in accordance with the provisions of Article 25, Section IX, of the Commission’s Internal Regulations: that is, without the answer given or attention paid to a consultation having any binding legal effects. Similarly, it should be made clear that the exchange of opinions, orientation, and the Commission’s replies, through the office of the Executive Secretariat, does not prejudge subsequent rulings by the Plenum.

During the period covered by this report, consultations were very dynamic. Thus, in 1994-95 they rose 117% in comparison with the previous twelve months. Of this total, only eight which were recently presented are awaiting a reply. As for the individuals seeking consultations, 87% represented private organizations or companies and the remaining 13% were public agencies.

Some Illustrative Cases

In order to illustrate the way in which the Commission handled requests for consultations, summaries of four cases are presented below. The first deals with a commercial chain’s aggressive discounting policy. The next two (presented together) refer to matters of exclusivity in regional markets for gasoline, and the last case offers some guidelines on the implications of publicizing a cost accounting methodology.

Regional Business Association

The president of a regional business association consulted the Federal Competition Commission regarding practices adopted by a retail chain that, in his opinion, were harmful to the association’s members in that they were being displaced from the market.

According to the document submitted to the Commission, the practice involved an aggressive policy of discounts. In this regard, the Commission generally believes that such campaigns are a legitimate practice -- price competition is inherent to the efficient functioning of the market, since it leads to the optimal allocation of resources and benefits consumers with lower prices. Nevertheless, the Commission does not discard the possibility that certain commercial campaigns can or may be intended to unduly displace competitors. In such a case, it is necessary to prove that the responsible agent or agents:

* Operate in a market characterized by high barriers to entry.

* Enjoy substantial power in the relevant market.

* Carry out actions among those indicated in the different sections of Article 10 of the Law.

In accordance with these criteria and the information provided by the association’s president, the identification of a monopolistic practice was not possible. Nevertheless, the interested party was informed of his right to denounce the commercial practices he believed to be illicit under the terms of the Federal Law of Economic Competition.

Gasoline Companies

The Commission received documents from two gas station owners who did not agree with the authorization of new stations located less than two kilometers from their businesses. One of the documents suggested it was necessary to suspend those authorizations or, alternatively, for the authorities to intervene in order to divide the market. In the other, the person seeking consultation suggested not authorizing gas stations within an area of five kilometers of his establishment.

Regarding this matter, it should be noted that during its first year of activities, the Commission investigated the gasoline distribution market in Mexico. This investigation revealed that the number of gas stations was lower than that which would prevail under conditions of greater competition and that there seemed to be an imbalance in their geographical distribution. In other words, there were areas with insufficient gasoline supply services. To resolve this situation and prevent possible anti-competitive practices, the Commission and Pemex-Refinación signed a coordination pact in June 1994.³⁴ This was an attempt to remove artificial barriers to entry, allow the diversification of those businesses, and generate a climate of competition. Thus, a substantial improvement in services, a more efficient use of infrastructure, and greater opportunities for investment in the distribution network were expected. Measures were established to attain the agreement’s goals, including the following:

* Increased flexibility in the requirements for installing and operating new gas stations.

* Freeing Pemex-Refinación to enter into contracts with all parties interested in establishing gas stations who meet the technical and image specifications.

* Elimination of criteria governing the number of service stations in a given area or the distances that should exist between them.

On the basis of the Federal Law of Economic Competition and bearing in mind the agreements established in the coordination pact, the Commission informed the persons who had requested consultations that their suggestions were in contravention of the aforesaid instruments.

National Road Transport Chamber

The National Road Transport Chamber (Cámara Nacional de Autotransporte de Carga, or Canacar) consulted the Commission regarding the development of a cost accounting program for its members; the aim of the consultation was to avoid any possible anti-competitive aspects involved in its methodology and application. This program involved dissemination of a costing method, examples of its use, and training courses or meetings at the national level. To enable members to use it more easily, the Canacar prepared a questionnaire to identify the elements that make up fixed and variable costs and to estimate the latter. It should be made clear that the procedure could be adapted to the particular operating conditions of each transport company, thus allowing for costs to be estimated individually.

In analyzing the consultation, the Commission decided that the publication and application of road transport costing methods that took different elements into account -- such as the importance of variable costs to the activity, the heterogeneity of the vehicle fleet, and the conditions of the nation’s roads -- could lead to greater efficiency in road transport operations. In this context, information on costs could direct transport companies’ investments in more efficient units, rationalize the maintenance of existing units, and assist towards a better organization of routes, all of which would benefit the sector and provide users with improved services. In its response, the Commission stated that the publication of costing methods was not in itself an infringement of the Law. It did, however, take into consideration the precedent of Canacar’s prior involvement in an absolute monopolistic practice involving price fixing among its members.³⁵ The Commission, therefore, warned the Chamber that the example on how to use the methodology would have to be strictly illustrative in nature, avoiding at all times the possibility that the estimates it contained might serve to fix service prices.

After considering these points, the Commission ruled that the material used to disseminate the costing method must indicate that the use of methodologies and estimates as ways to fix prices between competing road transport companies constitutes an absolute monopolistic practice and, as such, is sanctioned by the Law.

___________________________

³⁴ See Federal Competition Commission, Annual Report 1993-94, pp. 33-34.

³⁵ See the case study on the absolute monopolistic practice by the National Road Haulage Chamber on page @@.

V. OPINIONS

The Federal Competition Commission’s power to offer public authorities its opinions in favor of regulatory frameworks and on policies, programs, and administrative actions favoring the competition and freedom of access is as important as its powers to fight and prevent monopolistic practices. This power is essential in consolidating and furthering the economic and legal reforms aimed at bringing about an efficient and internationally competitive economy based on market dynamics. In this way, the Commission helps create an environment in which economic agents respond to the forces and incentives of markets characterized by competition and freedom of access.

The Commission’s authority to argue for a regulatory and administrative framework that favors competition is based on its broad authority to express opinions³⁶ and on its autonomy and that of its Commissioners. In accordance with the terms of the Law, the Commission can offer opinions on adjustments in the programs and policies of the federal administration when such adjustments have effects that could work against the process of competition and freedom of access, and also -- at the request of the Federal Executive Branch-- on adjustments to laws and regulations that deal with that process. Furthermore, the Commission can, when it deems appropriate, express opinions on matters of competition and freedom of access contained in laws, regulations, agreements, circulars, and administrative actions, without such opinions having legal force; neither is the Commission obliged to issue them.

Against this backdrop, the Commission maintained a constant dialogue with different public sector agencies and departments. The following are worthy of special note:

* Its participation within the inter-ministerial commissions on Expenditures, Finance, and Divestitures, and on the National Standards and Foreign Trade commissions.

* The Administrative Collaboration Agreement with the Secretariat of Commerce and Industrial Development, to enable the International Commercial Practices Unit to ask for the Commission’s opinion on the possible effects of investigations into unfair international trading practices and of countervailing measures on competition and freedom of access.

* Its involvement in the preparation of the bills recently approved by the Legislature: the Federal Telecommunications Law, the Railroad Service Regulatory Law, and the Civil Aviation Law. Similarly, in the discussion of matters related to competition and freedom of access in the amendments to Regulatory Law on Article 27 of the Constitution as Relating to Oil.³⁷

* Its comments on the rules for public auctions to divest seaport terminals and installations and the privatization process for petrochemical plants.

* Its opinions offered on the regulations for credit information agencies.

* Its involvement in reviewing the regulations for comparative advertising.

As can be surmised, the Commission has forums for the timely identification and presentation of its opinions concerning principal) government actions and measures dealing with competition. Thus, its participation in the aforementioned inter-ministerial commissions and in the Foreign Trade Commission was active and useful. The opinions offered by the Commission in those forums were duly discussed and, when appropriate, included in the decisions adopted. With regard to the National Standards Commission, it should be pointed out that the aim of this institution’s involvement with that body is to strengthen aspects of standardization that favor competition.

The communications and transport legislative package constitutes one of the most important efforts towards establishing a regulatory framework favoring competition and coordination between the regulatory authorities and this Commission. Indeed, the new legislation helps increase competition in the telecommunications and air-travel markets. Similarly, it allows the privatization of railway services in a context that is favorable to the efficient functioning of markets. In this way it is hoped that control mechanisms will be minimized in these traditionally regulated sectors.

The preceding description provides a general overview of the Commission’s contribution towards the creation of an environment that favors competition and freedom of access. In order to provide specific information on the most relevant cases, each of them are briefly described below.

Federal Telecommunications Law

The Mexican telecommunications sector is characterized by the presence of a single company for basic telephone services, a high level of concentration in the mobile telephony, open television, and restricted television sectors, and lower levels of concentration in radio markets. The structure of the most heavily concentrated markets is basically due to the following factors:

* The existence of natural monopolies³⁸ based on economies of scale arising from outdated technology.

* A regulatory framework congruent with the State’s former domination of telephone services and characterized by excessive controls and discretionality in the granting of concessions and permits.

* The slow assimilation of new technologies.

The development of new technologies has helped overcome the phenomenon of natural monopolies in this sector and, consequently, to facilitate the incorporation of new companies. It has also allowed a more intensive use of the radio spectrum. This situation gave rise to the possibility of greater freedom of access to these markets and, as a result, led to the obsolescence of the regulatory framework that had traditionally been considered viable. In this way, the increased disputability of the markets raised levels of competition and led, in the world, to the establishment of regulatory schemes that were more open to competition. Other countries’ experiences have shown that the new circumstances reduce costs and prices, encourage investment and adoption of new technologies, increase productivity both within the sector and outside it, and raise the competitiveness of economies engaged in this process.

In Mexico, the first steps towards the modernization of telecommunications were taken with the introduction of mobile (cellular) telephony, the privatization of Telmex, and the divestiture of the State television stations. Furthermore, formal progress towards the elimination of barriers to entry was made in 1993 when Telmex submitted its technical proposal for opening up its network to long-distance services. In this way, preparations were made for the termination, in 1996, of the Telmex exclusivity in this market.

The new Federal Telecommunications Law provided the regulatory framework necessary for opening up the sector’s markets -- in other words, for allowing freedom of access and making competition viable. In view of the nature of the sector, this does not mean that regulation of the sector will cease; rather, the legal framework will be less burdensome and more favorable to competition. Thus, market behavior was placed under the supervision of a regulatory authority and the Federal Competition Commission. The powers of the former include the authority to enforce the technical and legal conditions necessary to establish unrestricted competition and to apply the appropriate regulations when competition does not exist or when, in the Commission’s opinion, this process is subject to undue interference. The latter agency retains its powers of protecting competition and freedom of access.

The new norms regulating access to the sector, relations between participants, service supply, and pricing will be determining factors in the functioning and structure of telecommunications markets since they will allow a more efficient allocation of concessions and permits, reduced economic concentration within the sector, and less market power for the companies involved. In this regard, the following measures are worthy of particular note:

* The allocation of concessions for the commercial use of radio and satellite communications through competitive biddings with transparent and exact bases.

* The granting of concessions for public networks and permits for telecommunications service providers and ground transmission stations on non-discretionary and non-discriminatory bases.

* Broad access to the provision of value-added services, with the sole requirement of registering them in at the Secretariat of Communications and Transport.

* Certainty in the terms and durations of concessions and permits.

* Transfer of concessions and permits subject to minimal regulations.

* The prevention of anti-competitive practices by subjecting participants to competitive biddings and the granting of concessions and permits to the prior opinion of the Federal Competition Commission. With the same aim, participation by public network concession-holders in companies providing telecommunications services is now subject to the Secretariat’s authorization.

* The elimination of barriers to access by:

-- Establishing technical plans that will allow the broad development of new concession-holders, non-discriminatory treatment, and increased telecommunications services.

-- Adopting open-architecture network designs that will allow interconnections and interoperability between concession- holders networks in accordance with the aforementioned plans.

-- The establishment of interconnection agreements among concession-holders, allowing, among others, (1) Free access to the services, capacity, and functions of networks by means of non-discriminatory tariffs, (2) interconnections at any technically feasible communications point, (3) referrals of communications to the operator selected by the user at the closest point, and (4) the delivery of communications to their final destination or to a concession-holder or combination of concession-holders capable of carrying them to that point.

-- Prohibiting exclusive contracts for the use or exploitation of public telecommunications networks.

-- Applying sanctions to concession-holders who interrupt signal traffic between interconnected carriers without the prior authorization of the Secretariat.

-- Governmental arbitration of interconnection pricing, when concession-holders find difficulties in reaching agreement.

* Limitations on concession-holders’ ability to manipulate supply, by imposing sanctions on interruptions in the operation of general communications channels or in the provision of services, when there is no justifiable reason or Secretariat authorization to do so .

* The freedom to establish pricing schedules.

* The placement of specific obligations regarding pricing and service quality on those concession-holders who enjoy substantial power within the corresponding market, in accordance with the Federal Law of Economic Competition.

Railroad Service Regulatory Law

In different nations, railroads have been managed as State companies or have been subject to special regulations. Although economies of scale continue to influence the large size of these companies, the notable progress made with other means of transport and the expansion of road networks have had a marked effect on the market power of railroad companies and, as a result, on their ability to undertake anti-competitive practices. This situation, together with the inefficiency that has characterized railway operations, have favored their privatization, along with a reassessment of the railways regulatory framework in several countries.

In Mexico, the railways came into the State’s hands for reasons of economics and sovereignty. Nevertheless, progress in transport, increased competition between different means of transportation, and the nation’s integration into the global economy, particularly that of the North American region, forced a reassessment of the State’s role in the railroad sector and a search for adequate mechanisms for private participation. In this context, the Commission, working closely with the Secretariat of Communications and Transport, studied the situation of the national railway system and analyzed the implications of its privatization on competition and freedom of access. The privatization processes in several American and European Union countries were also examined.

Global experience indicates that the development of competition in this transportation sector requires the railway service to be fragmented into several companies, with facilities for interconnections and the shared use of the railroad network by competitors. In general two kinds of schemes are used. One is based on the fragmentation of the service by function, in which infrastructure, traffic control, and transportation are assigned to different companies, while the second implies regional divisions that preserve the vertical integration of the concessioned areas. The feasibility of these two methods varies with the geography of each nation and with the evolution of its transportation systems.

The Railroad Service Regulatory Law allows for two forms of divestiture, and takes into account conditions to guarantee competition between different modes of transport. In this context, the Law includes the following provisions related to access to the sector and to the efficient functioning of its markets:

* The allocation of concessions for constructing and operating railroads and providing public rail transport services through competitive biddings with transparent and exact bases.

* The granting of permits, on non-discretionary and non- discriminatory bases, for both the provision of auxiliary services³⁹ and for construction work and associated installations for railroads or the rights of way belonging thereto.

* Certainty in the terms and durations of concessions and permits.

* Transfer of concessions and permits subject to minimal regulations.

* The prevention of anti-competitive practices by subjecting participation in competitive biddings and the granting of concessions and permits to the opinion of the Federal Competition Commission.

* The removal of barriers to access by obliging concession- holders to mutually provide interconnection and terminal services and to share rail tracks along the sections determined by the Secretariat of Communications and Transport, by means of payments agreed upon by the parties.

* Arbitration by the Secretariat in the event of disagreements regarding the payments referred to in the previous paragraph.

* Interruptions in railroad operations or in the provision of public railroad transport services allowable only with the express permission of the Secretariat. This measure helps avoid manipulations of supply.

* The freedom to determine pricing schedules.

* The establishment of a consultation mechanism between the regulatory authority and the Federal Competition Commission to establish temporary pricing schedules when conditions of competition do not exist.

Civil Aviation Law

The Civil Aviation Law, in force since May 1995, is a step forward in the deregulation of air transportat services. Among the provisions favoring freedom of access and market self-regulation under conditions of competition, the following are worthy of special note:

* The granting of concessions and permits on the basis of transparent and non-discriminatory criteria.

* The transfer of concessions and permits through the observance of minimal regulations.

* Certainty for concession- and permit-holders.

* The allocation of timetables for aircraft landings and takeoffs, on equal and non-discriminatory bases, by scheduling committees composed of the interested parties.

* Coordination between the regulatory authority and the Commission when there is no competition in the markets so that, subject to the Commission’s opinion, temporary pricing regulations can be established.

The Commission will continue to work closely with the Secretariat of Communications and Transport on the creation of an environment of competition and freedom of access that will assist the more efficient functioning of the air transport sector. With this aim and at the Secretariat’s invitation, studies have begun in order to strengthen competition within the modernization plans for airport services.

Public Auctions for Port Terminals and Installations

During its first year of work, the Commission participated in the creation of the Integral Port Administrations (API), in conjunction with the Secretariats of Communications and Transport, Finance and Public Credit, and Commerce and Industrial Development. In this way, port operations were decentralized and the foundations were placed for allocating infrastructure and port services on a concessionnary basis. As a result of this process, at the beginning of this year the integral port administrations of several of the nation’s ports published two public notices calling for public auctions⁴⁰ in order to assign the use and exploitation of the following port terminals and installations along the Pacific and Gulf coasts:

* Auctions for three container terminals at the ports of Lázaro Cárdenas (Michoacán), Manzanillo (Colima), and Veracruz (Veracruz).

* Auctions for two multiple-purpose terminals at the port of Altamira (Tamaulipas)

* Auctions for two multiple-purpose terminals at the port of Lázaro Cárdenas.

* Auctions for two multi-purpose port facilities at Manzanillo(Colima).

Consistent with its authority, the Commission participated in submitting and analyzing issues relating to competition and freedom of access in these auctions. In this regard, the Commission favored allowing successful bidders to obtain no more than one terminal of each kind on each coast. In this way, concentrations that could give considerable market power to the winning companies would be avoided.

The Commission gave a favorable opinion on the other rules and procedures used in the auctions, which it deemed to be neutral and transparent. It also recommended warning bidders of the consequences of providing false information in notifications given to the institution and the sanctions applicable to those who construct or coordinate joint positions in public auctions.

Credit Information Agencies

The efficient development of the credit information market facilitates the incorporation of economic agents into the formal financial sector and tends to reduce the cost of credit. It also encourages more efficient channeling of finance and allows banks to exercise better control over their non-performing loan portfolios. Because of the vital importance of this function, the prevention of practices that could affect the process of competition and freedom of access is essential. Given these circumstances, the Federal Competition Commission studied the regulatory experiences of other countries and consulted several different experts.

Based on this, and bearing in mind the practices and concentrations prohibited under the Federal Law of Economic Competition, the Commission informed the Secretariat of Finance and Public Credit of its opinion regarding the "General Rules to be observed by Credit Information Agencies as described in Article 33 of the Law Regulating Financial Groups". The Commission ruled in favor of the following points:

* The convenience of allowing the establishment of credit information agencies in addition to that, or those, established by the banks.

* The need to prevent exclusive dealings between suppliers of credit information and any of the aforementioned agencies.

* The usefulness of establishing regulations in accordance with the predicted structure of the market for such services and the degree of vertical integration between information suppliers and credit information agencies.

* The pertinence of establishing an efficient and reliable system that will allow the flow of positive and negative information.

In order to encourage the healthy development of these markets and to prevent any possible anticompetitive practices, the Commission and the Secretariat of Finance will continue to work together on this matter.

Comparative Advertising

Commercial advertising is one of the most important instruments for competition in modern market economies. It is also the most common vehicle used by s