Silviase/jgov_v1.4_full_ann huggingface dataset:
A counter-argument is that a bigger and more monopolistic firm can be more R&D-intensive because it has a larger fund with which it can expend on R&D, can exploit economies of scale in R&D, and can utilize its brands and distribution channels to sell new products. Such a hypothesis is often called ‘the Schumpeterian hypothesis’, following Schumpeter (1942) $ ^{6} $ . A number of empirical studies that have been made to test this hypothesis, however, came up with mixed results, often disagreeing the hypothesis $ ^{7} $ .

In conclusion, monopoly (or, more generally, the lack of competition) hurts the society by raising the price and resulting in a welfare loss. Also it likely generates a weaker incentive for innovation, causing a slower rate of technological progress and a less frequent introduction of new, improved, or cheaper products. It is for this reason that a policy is needed to maintain and promote a competitive market environment. This is exactly the aim of competition policy (or antitrust policy as Americans usually call it).

### 3. Competition Policy in Japan

Japan’s Anti-Monopoly Act (AMA) states the aim of the Act in its Article 1 as follows:

“The purpose of this Act is, …, to promote fair and free competition, to stimulate the creative initiative of entrepreneurs, to encourage business activities, to heighten the level of employment and actual national income, and thereby to promote the democratic and wholesome development of the national economy as well as to assure the interests of general consumers.”

AMA was enacted in 1947 soon after Japan’s defeat in World War II. The Allied Power that occupied Japan intended to ‘democratize’ Japan’s economy by, first, forcing a number of zaibatsu (big business groups) to dissolve; second, by splitting 11 dominant firms and forcing a number of other firms to divest businesses and subsidiaries; and, third, by enacting AMA. It is the first country in Asia to have a competition law. Korea
followed 33 years later in 1980 and Taiwan in 1991. AMA was amended a number of times since then.

The office that implements AMA is Fair Trade Commission (FTC, usually abbreviated as JFTC to separate it from US Federal Trade Commission). The Commission is composed of a Chairman and four commissioners, with the administrative office that has about 800 staff. Competition Policy Research Center (CPRC) is a center within JFTC that makes independent research on issues related to competition policy, but not individual current JFTC cases, jointly with academics, namely, university professors in economics and law who collaborate on a part-time basis.

The four pillars of AMA are

1. Prohibition of unreasonable restraint of trade

2. Prohibition of private monopolization

3. Prohibition of unfair trade practices

4. Restriction of business combination

which will be discussed in turn in the following subsections.

When JFTC finds violation of these prohibitions and restrictions, it issues 'cease and desist order'. In the case of unreasonable restraint of trade (cartels and bid-riggings) and (since 2009) private monopolization and certain types of unfair trade practices, it also orders the payment of 'surcharges.' The rate of surcharge varies according to the type of conduct, the industry, and the size of the firm. In a cartel case of a large-scale manufacturing firm, it is ten percent of the sales amount of products or services in question during the period of violation but can be increased to fifteen percent in case of repeated offenders. Furthermore, when the JFTC regards the violation serious and deserving criminal sanction, it files an accusation with the Prosecutor General, in which case the court can impose criminal penalty to the violating individuals (imprisonment of up to 5 years or fine of up to 5 million yen, in the cases of 1 and 2 above) and the firms (fine of up to 500 million yen).

There is also a leniency program so that when firms involved in cartels and bid riggings voluntary report them to JFTC and help its investigation, their surcharges are immunized or reduced. Since the introduction of this program in 2006, it proved very effective and investigation of many of the cartel or bid-rigging cases since then has been
greatly facilitated by it. $ ^{8} $

#### 3.1. Prohibition of Unreasonable Restraint of Trade

“Unreasonable restraint of trade” means the following:

“such business activities, by which any entrepreneur, by contract, agreement or any other means irrespective of its name, in concert with other entrepreneurs, mutually restrict or conduct their business activities in such a manner as to fix, maintain or increase prices, or to limit production, technology, products, facilities or counterparties, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade” (AMA, Article 2(6)).

Essentially, it prohibits cartel and bid rigging. The following example gives a typical bid-rigging case:

Case 1: Bid Rigging in Steel Bridge Construction (Tokyo High Court, 2006)

In a series of public biddings during April 2002 to March 2005 for construction of steel bridges in motorways, 50 firms formed “Group K” and 32 formed “Group A”. These two groups decided which firm to win at each bid, and urged other firms to cooperate. This violates the prohibition of unreasonable restraint of trade and JFTC ordered 23 firms to pay 12.9 billion yen in total as surcharges $ ^{9} $ . JFTC also indicted the firms to the court, which ordered these firms to pay 6.4 billion yen as criminal fines, with imprisonment (with probation) of several company directors. The Ministry in charge of the public works also prohibited these firms to participate in biddings for several months, which caused the loss of substantial amount of works for the firms.

And the following cartel case became a landmark case for the reason to be stated presently.

Case 2: Toshiba Chemical Case (Tokyo High Court, 1995)

Eight manufacturers of paper phenol copper-clad laminates met regularly during
the first six months of 1987 and exchanged information and opinion on how to prevent the decline of their selling prices and to raise them. At their meeting on 10 June 1987, the top three announced their intention to raise their prices by 300 yen per square meter or by 15 percent, and asked the others to do the same. In consequence, they all raised their prices.

In Case 2, a big question is whether their information exchange and announcement has, "in concert with other entrepreneurs, mutually restrict[ed] or conduct[ed] their business activities" as the above-cited AMA, Article 2(6) stipulates (my brackets). JFTC decided it did. One of the defendants opposed and went to the court, seeking to negate JFTC's decision. The Tokyo High Court supported JFTC's decision, stating that "if an entrepreneur exchanges information of price-raising among other entrepreneurs and accordingly, takes the same or similar act with others, it is unavoidable for us to presume that the parties had a relationship to expect the concerted act each other and therefore, the said 'liaison of intention' exists unless there is a special occasion to show that the price-raising was implemented individually by a company's own decision that the price-raising is capable of meeting price competition in the relevant market and there is no relationship between that company's price-raising with other companies."

This case has been influential because, while the presence of 'liaison of intention' is necessary to satisfy the condition in AMA Article 2(6), the court stated clearly that "explicit agreement to bind upon the related parties is not necessary to prove 'liaison of intention.' In other words, 'liaison of intention' can be proved by showing mutual recognition of other entrepreneurs' price-raising and tacit acceptance of such a price-raising of another. (It is called 'liaison of intention' by a tacit agreement.) $ ^{10} $ (the parenthesis in the original).

#### 3.2. Prohibition of Private Monopolization

“Private monopolization” is defined as follows:

“such business activities, by which any entrepreneur, individually or by
combination or conspiracy with other entrepreneurs, or by any other manner, excludes or controls the business activities of other entrepreneurs, thereby causing, contrary to the public interest, a substantial restraint of competition in any particular field of trade" (AMA, Article 2(5)).

That is, restraint of competition with exclusion or control constitutes private monopolization. A typical example is the deterrence of entry, as the following case illustrates:

Case 3: Hokkaido Shimbun Press Case (2000)

Hokkaido Shimbun is a newspaper publishing company with a dominant position in the Hokkaido island of Japan (shimbun is a Japanese word for newspaper). Around 1994, Hokkaido Shimbun learned of a planned entry of a new newspaper company that would be named Hakodate Shimbun, in the area around Hakodate, a major city in the southwest end of Hokkaido. To prevent Hakodate’s entry, Hokkaido took several measures; for example, (i) it applied to Japan Patent Office “Hakodate Shimbun” and other likely names as trademarks $ ^{11} $ , (ii) to reduce Hakodate’s advertising revenues, Hokkaido offered lower advertising space charges to Hakodate’s probable advertisers, namely, middle and small firms in the Hakodate area, (iii) Hokkaido asked TV Hokkaido, a TV station and Hokkaido’s affiliate, not to accept Hakodate’s TV commercials.

JFTC regarded these had the intention of “excluding” the activity of Hakodate, thereby causing a substantial restraint of competition, and concluded it violated AMA.

In this case the tactics taken by Hokkaido very clearly appears to have been taken just for the sake of entry prevention and no theory will be able to explain them as rational and economic behavior. By contrast, the next case appears ambiguous:

Case 4: Japan Intel Case (2005)

Japan Intel imports central processing units (CPU) from Intel in USA, and sell to
personal computer makers in Japan. Japan Intel offered discounts (rebates) to PC makers on condition that (i) the proportion of Intel CPU among all the CPUs that the PC maker uses, called MSS, is 100%, or (ii) MSS is more than 90% with the rivals' being less than 10%; or (iii) for the major PC models, they only use Intel CPUs.

JFTC regarded this had the intention of “excluding” the activity of rival CPU manufacturers, thereby causing a substantial restraint of competition, and hence violated AMA.

A bulk discount, that is, a discount offered to buyers of large quantities, is usually considered a common and rational commercial practice. However, in the Intel case, the firm offered discount not on the basis of quantity but share, clearly implying the intention of excluding the rivals (mainly AMD in this case). Besides, Intel is undoubtedly a dominant world leader. These considerations probably led JFTC to judge Intel's behavior as violation of AMA.

#### 3.3. Prohibition of Unfair Trade Practices

Such practices as shown below are regarded as unfair trade practices under AMA.

• Refusal to deal (boycott)

• Discriminatory pricing and other discriminatory treatment

• Unjust low price sales

• Tie-in (bundling)

• Resale price maintenance (RPM)

• Dealing on exclusive terms

• Dealing on restrictive terms

• Abuse of dominant bargaining position

• Deceptive customer inducement

Let me here discuss only RPM. In a vertical relationship, say, from a manufacturer to a retailer and then from a retailer to a consumer, the manufacturer can determine the wholesale price, i.e., the price it charges to the retailer. If it also determines the retail price (i.e., the price retailer charges to the consumer, which is the 'resale price' from the manufacturer's standpoint) and forces the retailers to maintain it, it is called resale price maintenance (RPM). AMA prohibits RPM because it restrains the competition among retailers.
The following gives an RPM case condemned by JFTC:

## Case 5: Nike Japan Case (1998)

Nike Japan, a Japanese subsidiary of the US shoemaker, separated two types of retailers, key-account stores and general stores. Only key-account stores could sell 'top models' that are most popular among consumers. Since 1995, Nike Japan requested the retailers to sell at Nike's recommended prices, not to sell Nike products imported through other channels, and to refrain from advertising lower prices. It announced that only those retailers keeping these requests can be the key-store stores.

Moreover, Nike Japan had the sales people monitor retailers. When it found the key-account retailers not obeying the requests, it deprived them of the preferential treatment as key-account retailers. And when it found general retailers (discount retailers) selling at prices lower than the recommended prices or importing through other channels, it refused to supply to them.

These practices, JFTC judged, are unlawful RPM and violated AMA.

Manufacturers often claim that RPM is necessary for them to maintain product reputation and product quality. In fact, there is an economic theory suggesting that RPM may benefit consumers by encouraging the retailers to compete by offering better services instead of lowering prices $ ^{12} $ . Whether this theory can be applied to the Nike Japan case is a difficult question. Notwithstanding such a theory, JFTC regards RPM as per-se illegal $ ^{13} $ .

#### 3.4. Restriction of Business Combination

AMA, Article 15, stipulates the following: No corporation shall effect a merger if any of the following items applies:

(i) Where the effect of the merger may be substantially to restrain competition in a particular field of trade;

(ii) Where unfair trade practices have been employed in the course of the merger.
The same applies to other acts of business combination, including the acquisition of businesses, acquisition of shares, cross-holding of shares, integration by means of a holding company, and cross directorship. For simplicity, we focus on mergers and on the condition (i) above.

A difficult question of course is how to judge whether a certain merger will have the effect "substantially to restrain competition" and what should be "a particular field of trade." JFTC, similarly to its US and EC counterparts, have published the Merger Guidelines $ ^{14} $ to show how it intends to interpret these conditions. For instance, it clarifies the so-called safety harbor conditions in terms of the level and change of Herfindal-Hirshman index (HHI).

The Cournot oligopoly theory suggests that, unless entry threat is sufficiently strong, a merger reduces the number of competitors and results in a higher price, a smaller production level, and, therefore, an increase in welfare loss $ ^{15} $ . Hence, JFTC (and competition policy authority in any country) is watchful whether a certain merger is likely to result in such effects, that is, the condition (i) above. When such likelihood is large, JFTC may prohibit the merger or allow the merger subject to ‘remedies’, that is, certain actions by merging partners to reduce the expected anti-competitive effect, such as divestiture of a part of business or a promise to license their patented technologies on rational and non-discriminatory (RAND) terms.

In many cases, merging firms try to justify their merger arguing that it brings in a production, distribution, and R&D efficiency, thereby reducing costs and raise the social welfare $ ^{16} $ . The following gives such an example.

## Case 6: Merger between Japan Airlines (JAL) and Japan Air System (JAS) (2002)

JAL and JAS announced its plan to merge in 2002. With this merger, in many Japanese domestic flight routes, the number of competitors was expected to decrease from three (JAL, JAS, and ANA, i.e., All Nippon Airways) to two (JAL/JAS and
ANA), or two (JAL and JAS) to one (JAL/JAS). Thus, in preliminary consultation, JFTC warned that the merger might be judged to be anti-competitive and violating AMA. In response, JAL and JAS proposed the following remedies to minimize the competition-restraining effects: (i) To give up landing slots at the congested Tokyo Haneda Airport (expected to be offered to new entrants). (ii) To have the new entrants use their airport facilities, such as check-in counters, at reasonable fees. (iii) To decrease ticket prices for most routes by 10% and maintain these prices for at least three years. JFTC assumed that these remedies were sufficient and accepted the merger.

JAL and JAS emphasized that the merger would enhance efficiency. In the press release, they claimed 73 billion yen cost saving, 100 billion yen investment saving, 3000 staff reduction, and 10 aircraft reduction. With such saving, they claimed they would be able to attain ROE (return on equity) of 15 percent in three years, that is, in 2005, even though they were actually making losses at the time of the merger proposal.

What did happen in reality? First, despite the pledge of three-year price-freeze, JAL (the merged company) raised the price next year. Citing unanticipated rising fuel prices as the excuse, JAL raised the prices to the pre-merger level and JFTC did not object. Second, the actual ROE in 2005 was -32%, far below the promised 15%. In 2010, JAL virtually went bankrupt.

This case teaches us two valuable lessons. First, ‘conduct remedies’, such as promises on pricing, are non-credible and inadequate in view of the uncertain cost and demand conditions. ‘Structural remedies,’ such as divestiture, are preferable because it is non-reversible and therefore credible $ ^{17} $ .

Second, the merging firms’ claim of efficiency-enhancement effects should not be taken at face value, because managers tend to over-predict and overstate the efficiency gains. In fact, few of the empirical studies find the presence of efficiency gains from mergers $ ^{18} $ . Accordingly, it is unwise to assume without close scrutiny that the benefit of
efficiency enhancement (as claimed by the firms) will more than compensate the damage to the consumers that the merger may bring through reduced competition.

### 4. Competition Policy and Intellectual Property

Having now depicted the overall picture of competition policy in Japan, I will now discuss a very interesting and yet very difficult question of the relationship between competition policy and the intellectual property right (IPR) regime. IPR includes not just patents but also copyrights, designs, trademarks, and trade secrets. In Case 3, I have already given an example in which an incumbent firm intended to use trademarks for the sole purpose of excluding entrants. As this case illustrates, any form of IPR can be related to competition policy. In the following, however, let me focus on patents.

Patent is a legal device with which the government grants the inventor a monopoly right to use the invented technology. As such, it is bound to produce welfare loss due to monopoly as discussed in Section 2 and depicted by the area B in Figure 1. Necessarily, therefore, it is in direct conflict with competition policy that aims to eliminate monopoly.

However, the patent system is expected to provide incentives for research and development (R&D). Firms, both incumbents and entrants, will invest more in R&D when they expect to be granted patents and hence earn monopoly profits from them. With the R&D expected to promote new products, new processes, and new entrants, it may increase competition in the long run and benefit consumers with lower prices and better product quality.

That is, patent may hurt short-run competition and increase welfare loss but promote long-run competition and benefit consumers. The patent system or any other IPR system stands on this trade-off, which makes its treatment in competition policy extremely difficult.

#### 4.1. Patent Pool and Competition Policy

AMA (Article 21) states that the law “shall not apply to such acts recognizable as the exercise of rights” under the IPR laws. To clarify what would be recognized as “the exercise of rights”, JFTC published IP Guidelines $ ^{19} $ in 2007, which says that “any act
that may seem to be an exercise of a right cannot be ‘recognizable as the exercise of the rights’ provided for in the aforesaid Article 21, provided that it is found to deviate from or run counter to the intent and objectives of the intellectual property systems, which are, namely, to motivate entrepreneurs to actualize their creative efforts and make use of technology”. Of course, to decide whether a certain act should be regarded “to deviate from or run counter to the intent and objectives of the intellectual property system” is not an easy task. It is even more difficult when such an act was done not by an individual patent-holder but as a collective action of multiple patent-holders forming a patent pool. The following is virtually the only patent pool case that JFTC regarded as violating AMA.

## Case 7: Pachinko Machine Patent Pool Case (1997)

Pachinko is a type of game machines that are very popular in Japan. People play it in 'pachinko parlors' that usually have hundreds to (in big parlors) thousands of pachinko machines. The pachinko machine manufacturing industry is an oligopolistic industry, with 10 firms having more than 90 percent market share. They sell to pachinko parlors, which has a more divided market structure. It is also a high-tech industry with frequent model changes, and there were approximately 200 patents related to pachinko machines at the time.

In 1961, the manufacturers jointly established ‘Japan Association for Patent Management on Game Machines’ (my unofficial translation). The member firms commissioned the Association to license their patents, have the licensees show licensing seals on pachinko machines, and collect royalties. In short, the Association acted as a patent pool. However, the Association licensed only to 19 incumbent firms (including the 10 member firms) and refused to license the patents to newcomers, in order to prevent their entry. This behavior, JFTC ruled in 1997, had substantially restrained competition by excluding the activity of new firms that intended to manufacture pachinko machines. It cannot be regarded as the rightful ‘exercise of rights under the Patent Law’ and, hence, it violated AMA’s prohibition of private monopolization. JFTC ordered the Association to dissolve.

A very interesting question is whether JFTC would have taken the same view if the ten firms were instead integrated as a single firm, holding all the patents controlled by the