New investigation on price discrimination in the Liquid Petroleum Gas market

On February 2009, the Argentine Antitrust Commission (the “Commission”) issued a resolution in a market investigation on price discrimination regarding Argentina’s largest oil companies, YPF S.A. (“YPF”).[1]

In a previous case, YPF was sanctioned for a similar conduct to the one previously detailed. In an ex professo investigation initiated in 1997, the Commission analyzed increases in the price of Liquid Petroleum Gas (“LPG”), an essential source of energy for many residences in Argentina. The relevant market was determined to be the bulk supplier of LPG. The Antitrust Commission determined that YPF had a dominant position in all phases of LPG production and supply. The Commission also concluded that the market entry barriers were high and that imports were not a constraint on domestic producers.

The conduct assessed by the Antitrust Commission was YPF’s practice of exporting a high amount of LPG at prices that were lower than in Argentina. Further, YPF’s export contracts prohibited the re-importing of LPG to Argentina. The Antitrust Commission concluded that this conduct was harmful to the general economic interest and ordered YPF to cease its price discrimination as between the domestic and export markets and to eliminate the prohibition of re-importing LPG. Additionally, it imposed on YPF a fine of AR$ 109,644,000 (US$ 29,600,000).[2] The decision was upheld by the Argentine Supreme Court.

This new investigation was initiated by a former congressman who stated that YPF had abused its dominant position in the LPG market by selling its product on the domestic market at higher prices than the ones it could obtain by selling its products on the international market. According to the accusation, YPF imposed discretional prices and selling conditions that affected the market balance by damaging the weaker sectors’ interests and particularly consumers.

The Commission divided its analysis into four stages: (i) definition of the relevant market, (ii) determination of YPF’s position on the previously defined market; (iii) description of the characteristics of abuse of a dominant position and (iv) analysis of evidence.

Once again, the Commission decided that the relevant market for the investigation was the bulk supply of LPG for energy use. Regarding the geographic market, the Commission indicated that the reported conduct involved the whole national territory since it consisted in the setting of discriminatory prices between the domestic market and the international market.

Regarding YPF’s market share, the Commission reached to the conclusion that between the years 2001-2003, the total offer of LPG grew by 17%, although YPF’s contribution to that growth was only 0,6%. Thus, while YPF kept its LPG production capacity almost constant, the other competitors considerably increased their offer. Notwithstanding the above, YPF remained at the top of the charts on LPG production and domestic sales, increasing its participation within the latter. The evidence showed that internal market demand grew by 37% while YPF’s sales increased by only 5%.

According to the Commission’s analysis, in 2003 the companies offering LPG (except YPF and its related companies) were able to supply the whole market’s demand, whereas in 2001 the difference in order to meet that demand without YPF’s production was of 19%.

The Commission concluded that YPF clearly has an important infrastructure for the commercialization of LPG and is the main producer and seller in Argentina. On the other hand, YPF’s production and sales within the internal market had clearly decreased and the companies offering LPG (except YPF and its related companies) were now able to supply the whole market’s demand. These facts suggested that YPF would not have been able to significantly influence the market’s total LPG offer.

After this analysis, the Commission laid out the rules regarding abuse of a dominant position. It stated that a company has a dominant market position when it is able to move with relative independence from its competitors; for example, by determining market prices in order to maximize its profits. The accusation fell within the description of a company abusing its dominant position, consisting of imposing higher prices than those of a competitive market by systematically reducing the offer.

In order to determine whether YPF’s conduct for the year 2003 fit the description of said conduct, the Commission performed the following analysis.

In the period ranging from January 2000 to November 2004, the domestic market prices for LPG only exceeded the export prices in a period of eleven months in 2001 and of five months in 2003, and within 2003, the price difference was more than 5% in only two of those five months.

The Commission showed that for 2001, 2002 and 2003, YPF increased the offer of LPG for the domestic market whenever those prices were higher than the export prices, and likewise with the international market, always in reasonable amounts. It was also taken into account that the rest of the companies would have been able to supply the whole market demand without YPF’s or its related companies’ production.

Finally, by comparing domestic market prices with international market prices, the Commission verified that the internal market price variations fluctuated in accordance with international prices.

The Commission concluded that YPF’s behaviour regarding the offer of LPG did not match the conduct of a company abusing its dominant position in the period under analysis. On the contrary, the sales volume in the domestic market and the external market showed a performance similar to the one of a company maximizing its profit, by placing a higher proportion of its production in that market that offered the most attractive price.

The following facts were also deemed relevant: YPF’s competitors increased their market participation to the point of being able to supply the whole market by themselves, and thus, reducing YPF’s market participation and power over it; that during that period, the prices for the domestic market were not systematically higher than the export prices since there were normal fluctuations which were highly correlated with the international prices variations. 

On this basis, the Argentine Antitrust Commission dismissed the charges against YPF.

This precedent provides a guideline regarding price discrimination practices and supersedes a previous case that was sanctioned.

The setting of different prices as a means of maximizing the resources of a company was not considered to be an abuse of a dominant position, especially since it was acknowledged that price fluctuations can be tied to international price variations as opposed to tactics by a company in order for it to raise prices.

This decision has also established that the possibility of the remaining competitors to supply the relevant market is a mitigating factor since it decreases the dominant position of a company in the market and hence, the possibility of unilateral price fixing.