Prices and discounts by lq9323

VIEWS: 32 PAGES: 6

									                                       CHAPTER 5


                                Prices and discounts

History
   142. Before the Restrictive Trade Practices Act 1956 came into force there
were agreements relating to diazo material prices and discounts. DOMMDA
operated a price agreement but that agreement was superseded by one operated
by another organisation, the Federation of Engineers' Sensitised Material
Manufacturers (FESMM), which set price and discount levels in the industry.
The FESMM agreement set out minimum selling prices and discount categories
based on a customer's annual volume of purchases, the so-called *graded
accounts' scheme. One diazo material supplier told us that the FESMM
scheme was probably limited to large users (purchasing about £25,000 per
annum); that the discounts given to smaller companies were not necessarily
in accordance with the scheme; and that small users were allowed discounts
according to order value and that these discounts were published. Another
supplier said that the scheme was 'full of anomalies' and that although the
scheme was supposedly based on annual usage customers', discounts were in
practice 'related to names and not volumes'. Following the Restrictive Trade
Practices Act 1956 the Federation operated a voluntary information agreement
under which members could exchange information about prices and discounts.
This agreement was registered1. It seems that the members of the Federation,
who included most of the diazo suppliers, in general continued to grant dis-
counts in line with the FESMM scheme.
   143. In about 1964 one diazo supplier, E N Mason, who was losing market
share, tried to regain it by offering terms better than those in the FESMM
scheme. It was also at about this time that competition from other copying
methods was beginning to affect diazo copying. Competition on discounts
started to develop among the manufacturers who then came under increasing
pressure from their larger customers to grant higher discounts. FESMM was
dissolved in 1966-67 and we were told that by about 1966 competition on
discounts had become so fierce as to amount to price war. Discounts of 50 or
60 per cent were common and by 1968 one or two large customers were
receiving discounts in excess of 70 per cent. Other inducements were also
offered to customers. These included the grant of fixed term contracts and/or
retrospective rebates to large customers; the grant of trade terms to customers
who were not bona fide traders; the provision to large customers of diazo
machines and service either free or at low cost; and the inclusion of other
drawing office supplies, such as drawing paper, with diazo materials for discount
purposes.
   144. We were told that by 1968 the diazo material industry was in a serious
financial position, particularly the smaller companies. E N Mason, which was
subsequently taken over by Ozalid (see paragraph 51), was incurring losses
  1
      As number 554 on the Register of Restrictive Trade Agreements.
                                            37
and some of the other companies were also incurring losses or making little
or no profit on their diazo business. We have already referred in paragraphs 52
and 86 to the part the price war played in bringing about changes in the industry
in the late 1960s.


The end of the price war and subsequent industry discussions
List prices and discounts
   145. At Ozalid's initiative the principal diazo manufacturers held a number
of meetings in 1968 in an attempt to end the price war. The companies involved
were Ozalid, GAP, Nig1, Admel2 and Harper and Tunstall although all these
companies may not have been represented at every meeting. One solution was
thought to be the establishment of a new discount system in the industry.
A quantity discount scheme, which was to be published, with a discount scale
based on order value and with discounts tied to a single delivery was finally
agreed. It was also agreed that list prices were too low. The new discount
structure and list prices were introduced by Ozalid in August 1968 and the
other suppliers followed suit, but it was some time before the discounts were
put into effect for the larger customers (see paragraph 146).

   146. After the publication of the new price lists in 1968 the manufacturers
continued to meet until 1972 (although again all the manufacturers may not
have been represented at every meeting) to discuss changes in list prices and
published discounts. Other matters discussed at these meetings were the grant
of special and trade terms. When the new quantity discount structure was
introduced in 1968 it was realised that it could not be put into effect for the
larger customers (mostly Ozalid's and GAF's) who were still receiving discounts
in excess of the published quantity discounts, many of them under fixed term
contracts. The manufacturers were concerned to put as many of these cus-
tomers as possible on to the published quantity discount scale. The manu-
facturers said that the number of customers receiving trade terms had increased
significantly during the price war and that in their view trade terms had been
extended to some customers who were not really bona fide traders. It was felt
that the number of dealers in receipt of trade terms should be reduced. (H & T
said that it had few customers who were not bona fide traders and was little
concerned in these discussions; at the time the discussions took place GAP
and AM had already started to reduce the number of their trade customers.)
At a later stage Ozalid, GAP and AM agreed to restrict the number of new
customers (not already receiving trade terms) to whom they would grant such
terms.

   147. After 1972 there were telephone discussions between Ozalid and GAP
and Ozalid and AM about a number of changes3 in list prices and published
discounts; but there is no longer any contact between the manufacturers about
price and discount changes.
  1
  a
    Subsequently acquired    by Ozalid (see paragraph 51).
    Then a wholly-owned subsidiary of Addressograph-Multigraph Corporation since 1972
part of AM (see paragraph 106).
  3
    Under the price control legislation (introduced in April 1973) Ozalid and AM have always
had to pre-notify price increases to the Price Commission. GAP has to advise the Commission
of price increases but had to pre-notify such increases between January 1975 and July 1976.
                                            38
Registrable agreements
  148. The manufacturers considered that some of the discussions and actions
described in paragraphs 145 to 147 resulted in agreements or arrangements
(none of which are any longer effective) which may be registrable under the
Restrictive Trade Practices Act 1956, and towards the end of 1975 each company
submitted details to us. They also furnished details to the Office of Fair Trading.
At the Office's request the companies prepared a joint memorandum which
they submitted to the Office in October 1976 and of which they sent us a copy.
Nothing has yet1 been put on the Register.

   149. But the manufacturers disagree about the extent of the agreements.
All four consider that in 1968 they were party to a registrable arrangement about
the list prices and published quantity discounts, which resulted from the dis-
cussions described in paragraph 145, although they differ about its precise terms.
With regard to the later discussions and contacts between the manufacturers
about list price and published discount changes described in paragraphs 146 and
147 Ozalid and GAP consider that there were a number of separate arrangements
concerning such changes between all four parties between about May 1969
and about February 1971. AM agrees that it was party to these arrangements
but is uncertain, as is H & T, whether or not H & T was a party. Again the
manufacturers differ in some respects as to the terms of the arrangements made.
GAF considers that there was a registrable arrangement between it and Ozalid
about changes in published discounts in January 1972 but Ozalid is unable to
say whether such an arrangement was made. GAF and AM consider that the
telephone contacts between each of them and Ozalid, which are referred to in
paragraph 147, resulted in registrable arrangements concerning changes in list
prices and published discounts. But Ozalid does not concede that any of the
telephone contacts, which it considers were soundings out, gave rise to any
registrable arrangements although it 'accepts that there are grounds for inferring
that an arrangement . . . came into existence as a result of such telephone
contact'. AM considers that there was a further registrable arrangement about
list prices between it and Ozalid in about January 1975, but Ozalid does not
accept that such an arrangement was made.

  150. There is agreement that the discussions between the four manufacturers
about the restriction of the number of customers receiving special terms (see
paragraph 146) resulted in registrable arrangements in 1968 or 1969. However,
H & T considers that it was not a party to the later of these and there is dis-
agreement about the precise terms of some of these arrangements and about
the dates on which the manufacturers ceased to abide by them.

   151. AM and Ozalid are unable to say whether or not they were party to an
arrangement about the grant of trade terms, which GAF says was made between
the three manufacturers in 1970. However, Ozalid, GAF and AM consider that
the discussions about the restriction of the number of customers in receipt of
trade terms (see paragraph 146) resulted in a registrable arrangement between
them in 1971 but there is disagreement about the precise terms of the arrange-
ment and about the date on which it ceased to be effective.
  1
      On 22 November 1976.
                                        .39
Price competition since 1968
   152. Between August 1968 and late 1974 there was little price competition
in the industry although some sales were made at special terms particularly by
GAP who, acting independently, from 1972 increasingly supplied on terms
different from those of its competitors, and there were some differences between
H & T's list prices and those of the other suppliers, particularly towards the
end of the period when H & T's published discounts also became somewhat
different (see paragraph 135). In late 1974 considerable price competition began
to develop principally on the grant of special terms. We were told that this was
due to the continued decline in the demand for diazo materials, to the resulting
excess capacity in the industry and to some extent to the entry of Regma into
the market (see paragraph 140).
List prices and published discounts since 1968
   153. Each of the four companies has continued to publish a quantity discount
scale of the kind first introduced in 1968 with discounts based on order values
and applicable only to orders for delivery at one time to one address. There was
uniformity or near-uniformity between the four companies' list prices and
published quantity discounts from August 1968 until October 1973, except
that H & T's list prices for some specialities were lower (see paragraph 135).
As also described in that paragraph from October 1973 H & T's list prices
generally began to be slightly lower than those of the other companies and in
August 1974 its discount structure also became somewhat more favourable
than those of its competitors. Ozalid's, GAF's and AM's list prices and published
discounts continued to be the same or very similar until 1975 when their list
prices began to diverge somewhat.
   154. Until September/October 1976 Ozalid's and GAF's list prices were
nearly identical; but GAF's are now1 in general between 1 and 3 per cent lower
than Ozalid's, the largest differences being in the prices of polyester film.
During the first six months of 1976 AM's list prices were on average about
6 per cent lower than Ozalid's (and GAF's) but in July 1976 AM increased its
list prices which then became on average about 1 per cent less than Ozalid's.
Following price increases by Ozalid and AM in October 1976 AM's prices are
now in general between 1 and 4 per cent lower than Ozalid's with the largest
differences being in the prices of rolls and polyester films. H & T's list prices
were on average about 2 to 3 per cent lower than Ozalid's with the largest
differences being in the prices of polyester films2 but following price increases
by Ozalid and H & T in October 1976 the differential is now about 1 to 2 per cent
on average. GAF's and AM's published discount structures for both consumers
and traders are still identical for standard papers and very similar for specialities
but Ozalid's discount structure has since January 1976 generally been somewhat
more favourable than GAF's and AM's (except at one or two points of the
discount scale). H & T's discount structure is generally more favourable than
Ozalid's in most respects. Although the qualifying values for the maximum
published discounts for the standard papers and specialities (see paragraph 21)
differ all four companies still publish the same maximum discount rates which
are 35 per cent for standard papers and 25 per cent for specialities.
  1
    The position on prices and discounts described as current in this paragraph is that on
22aNovember 1976.
   In October 1976 H & T introduced a new range of diazo polyester films 'Line Five Dri-film'
and the list prices of these films are a few per cent lower than some of Ozalid's polyester films.
                                               40
   155. Information about price and discount changes is at Appendices 4 to 6.
It will be seen from Appendix 4 that until about the summer of 1974 the com-
panies usually made price and discount changes at about the same time or
within a month of one another. Appendix 5 sets out discount changes and
shows that the maximum published discounts have since 1970 been reduced
from 50 and 30 per cent to 35 and 25 per cent. Appendix 6 gives the changes in
the list prices of some standard sizes of the standard papers and of two thick-
nesses of polyester film and although not all the information is available for
AM and H & T there is no reason to believe that at the dates concerned these
two companies' list prices differed significantly from those being charged by
Ozalid and GAP.
   156. Appendix 7 sets out the current1 list prices of some standard sizes of
the materials referred to in Appendix 8. Current1 published discounts2 and the
companies' conditions of sale are shown in Appendix 8. The list prices of
products with the same type and weight of base materials are the same irres-
pective of the type of coating even though the coating costs may vary because
of differences in the costs of coating chemicals or in lengths of production run.

Sales at special terms
   157. Once the suppliers had reduced the number of customers in receipt of
special terms after the end of the price war in 1968 (see paragraph 146) it seems
that for some years they did relatively little business on terms other than those
in accordance with the published quantity discount scale. As indicated in
paragraph 152 there was some increase in the grant of special terms in 1973
and 1974 but towards the end of 1974 competition by way of special terms
began to increase sharply and continued to do so throughout 1975 and early
1976. An appreciable proportion of diazo materials business is now done on
such terms particularly with the larger consumers. The special terms granted
include the giving of various discounts within the range of published quantity
discounts for a size of order which would not justify such discount under the
published quantity discount scale; the grant of fixed discounts irrespective of
size of order usually at the maximum published rate, but sometimes at lower
and in a few cases at rates higher than the maximum rate; and the giving of
retrospective rebates to large customers on the basis of their annual purchases.
None of these special terms is granted on the basis of exclusive dealing. We
understand that users do not wish to be tied to a single supplier.

Trade terms
   158. Under Ozalid's, GAF's and AM's discount structures the discount
rates for consumers and traders are the same but the value of order which a
consumer must place to qualify for a discount is generally about double the
value of order which a trader must place to qualify for the same discount.
H & T operate a similar scheme, in that the top discount rates are the same
for traders and consumers but the qualifying value of order for traders is
about hah0; however, below the top rate of discount there are fewer discount
levels for traders than for consumers. The effect of these discount structures
is that, since mid-1970, consumers have been able to buy large quantities of
  1
  2
    On 22 November   1976.
   See footnote to paragraph 75.
                                       41
materials at the same net prices as traders. However, one supplier said that
the short shelf life of diazo materials meant that it was only the largest consumer
customers who could benefit. The relationship between trade and consumer
discounts is illustrated in the table below, which sets out the selling prices to
consumers and traders of a roll of medium paper. (Trade discounts are shown
in Appendix 8 together with the consumer discounts.)


Selling prices for roll of white medium paper (841 mm x 25 m)*
             OZALJD
                            order
                 list       below     order         order    order    order     order
                price       £190     £190+         £215+    £270+    £350+     £375+
                   £          £         £             £        £        £         £
consumer         3-10        3-10      3-10          2-95     2-95     2-95      2-79
trader           3-10        2-95      2-79          2-79     2-64     2-33      2-33
                order       order     order         order
               £430+       £540+     £700+         £865+
                  £           £         £             £
consumer         2-79        2-64      2-33          2-02
trader           2-02        2-02      2-02          2-02
             GAP
                           order
                 list      below     order          order    order    order     order
                price       £200    £200+          £400+    £500+    £700+    £1,000+
                   £          £        £              £        £        £         £
consumer          3-06       3-06     2-98           2-75     2-75     2-30      1-99
trader            3-06      2-98      2-75           2-30     1-99     1-99      1-99
             AM
                           order
                 list      below      order         order    order    order    order
                price       £200     £200+         £400+    £500+    £700+    £1,000+
                   £         £          £             £        £        £        £
consumer          3-00      3-00       2-93          2-70     2-70     2-25     1-95
trader            3-00      2-93       2-70          2-25     1-95     1-95     1-95

             H&T
                 list       order     order         order    order    order    order
                price      £100+     £200+         £400+    £450+    £600+     £900+
                  £           £         £             £        £        £        £
consumer         3-08        3-08      2-93          2-62     2-62     2-31     2-00
trader           3-08        2-31      2-31          2-31     2-00     2-00     2-00
  • On 22 November 1976.



Prices charged by trade houses
   159. While none of the four principal suppliers' price lists states that the
prices and discounts on the lists are recommended, Ozalid, GAP and AM regard
them as such and told us that trade houses generally offer the prices and dis-
counts on the lists but that some give better discounts. H & T considers that
in general a trade house would quote the prices and discounts on the company's
price list when retailing H & T materials although some might work to other
suppliers' lists. Of the 45 or so trade houses which gave evidence to the Com-
mission over half said that they charged the prices and gave the discounts shown
on their suppliers' price lists, but these 45 represent only a small proportion of
the total number of trade houses.
                                              42

								
To top