FINAL PAPER INTERMEDIATE MICROECONOMICS

FINAL PAPER INTERMEDIATE MICROECONOMICS Name / NPM: Shabrina Izazi Anwar 1306387411 Faculty of Economics Universitas Indonesia 2014 STATEMENT OF AUTHORSHIP “I certify that the attached material is my original work. I declare that no other person’s work has been used without due acknowledgement. Except where I have clearly stated that I have used some of material elsewhere, it has not been presnted by me for examination in any other course or unit at this or any other institution. I understand that the work submitted may be reproduced or communicated by the University of third party authorized by the University for the purpose of detecting plagiarism.” Name : Shabrina Izazi Anwar Student Register Number : 1306387411 Lecture Subject : Intermediate Microeconomics Title : Final Paper Intermediate Microeconomics Lecturer : Zahra Kemala Ninditha Murad Depok, May 2014 Shabrina Izazi Anwar I. INTRODUCTION 1.1 BACKGROUND In daily life, the general needs of people seem to have no limit. To fulfill that need, there are some retail stores that can assist. If looked further, retail industry can also have some problems. Here in Indonesia, the retail industry is starting to be dominated by modern market. In this matter, Carrefour is the name of the retail store that often discussed about. It is starting to lead to monopoly practice. Some practices of modern market that were never been done in Indonesia before, now are starting to be common. For example, the determination of minus margin in trading term between Carrefour and supplier of goods. The goal of Carrefour is to sell goods cheaper among its competitors. To do so, if other competitors like Giant, Hypermart, etc. sell goods below Carrefour’s price, Carrefour will ask for compensation to the supplier amounted the difference between purchase price of Carrefour and the competitors’ price. That is why Carrefour guarantees that all of its goods are the cheapest. However, the practice of minus margin is perceived as not fair from KPPU (Komisi Pengawas Persaingan Usaha). It is because suppliers cannot set the selling price in every retail store. So, if the selling price in Carrefour’s competitors is lower, suppliers will stop supplying to that certain retail stores. If that happens, Carrefour will seem to have more variable products and consumers will choose Carrefour than anything else. For this minus margin case, Carrefour breaks Pasal 19 UU no. 5/1999 and KPPU forbids Carrefour to practice minus margin to suppliers and pay fine for Rp 1,5 billion. Another case of Carrefour Indonesia is listing fee. Carrefour set primary price for suppliers to stock their products in Carrefour stores. The fee is too high for suppliers. This case also breaks Pasal 19 UU no. 5/1999. In 2008, Carrefour did acquisition over PT. Alfa Retailindo for 674 M. This action triggered monopoly practice. Carrefour increased it power in modern market since PT. Alfa Retailindo also has its power in modern market. The suppliers that work with Alfa will follow to work with Carrefour after that acquisition. KPPU has found the evidence of violation in trading term done by PT Carrefour Indonesia. From the report to KPPU, the trading term violation includes he determination of fixed rebate cuts, conditional rebate cuts, and listing fee. This practice is definitely cause disadvantage to suppliers. Carrefour regulated fized rebate of 7,5% that is supossed to be only 1%. After the acquisition of Alfa, Carrefour also charge fee for opening of a new store, remodelling fee, promotion fee, and joining fee. Carrefour Indonesia will likely have no strong competitors since it is so hard to compete with Carrefour’s capital. Carrefour can also control the suppliers and make them depend on Carrefour. That is why there is a big barrier for other companies to enter the industry. The domination of capital and strong distribution that big retailer like Carrefour has, can affect its competitors (horizontally) and suppliers (vertically). There are some fees that regulated by big retailer such as discount condition, opening fee, listing fee, rebate, and so on. Suppliers that sometimes are UKM businessman with middle education level will have a hard time understanding the unusual terms in the contract with the company. They are so proud to do business with big foreign companies, so they do not really pay attention to details. Then, in year ending, they just realize that their profit of selling it to big retailer has no big difference with their initial capital. Based on this case, the writer is interested in highlighting the problem of PT. Carrefour Indonesia and KPPU pasca the acquisiton of PT. Alfa Retailindo which are, the domination of the market share by retail industry and the practice of trading term that cause disadvantage to local suppliers. II. THEORETICAL BASIS 2.1 Profile of PT. Carrefour Indonesia Carrefour is the second largest retailer company in the world, after Wal-Mart. It is originally come from France and has been operated since 1957 and was founded by Marcel Fournier and Louis Deforey. It successfully spread all over the world, including in America, Asia, and Europe. Carrefour Indonesia started in 1996 and opened its first store in Cempaka Putih, in October 1998. Carrefour Indonesia initially introduced hypermarket concept in retail industry in Indonesia and provided consumers with new alternative of daily shopping. In present days, Carrefour has been operating in 84 stores in 28 cities in Indonesia. 72 million consumers have visited Carrefour in 2010, and 62 million in the year before. To satisfy consumers’ needs, Carrefour provides more than 40,000 products. Composition of Carrefour Indonesia’s shares changed since January 2013 with now the biggest share is hold by PT. Trans Retail. Carrefour basically provides everything household needs. From fresh food (meat, fish, vegetables, and fruits), drinks, household needs, baby stuffs, cosmetics, electronics, and textile. Carrefour is partner up with more than 4000 suppliers which 70% of them are SMEs (Small Medium Enterprises). There are three types of Carrefour in Indonesia, which are Carrefour Hypermarket (74 stores), Carrefour Market (7 stores), and Carrefour Express (3 stores). In January 22nd 2008, PT. Carrefour Indonesia did acquisition of PT. Alfa Retailindo amounted 351 million shares or 75% out of 468 million shares total of PT. Alfa Retailindo. The total transaction is Rp 674 billion with price per share is Rp 1,920. With this acquisition, Carrefour is strengthening its position in the leading company of retail store in Indonesia. 29 Alfa stores will change their name into Carrefour Express. The changing takes step-by-step process since June 2008. Now, there are 14 stores of Carrefour Express in Indonesia spread throughout DKI Jakarta, Jawa and Bali, Sumatera, and Sulawesi. 2.2 Imperfectly Competitive Market Imperfectly competitive market is a market or industry consists of producers that have market power or is able to control the output at market prices. The location of the market is imperfect competition between two markets that have different polar extremes. Imperfectly competitive market is in the middle of perfect competition and monopoly markets, as in the following figure: Forms of imperfect competition include: Oligopoly, in which there are few sellers of a product. Monopolistic competition, in which there are many sellers producing highly differentiated products. Monopsony, where there are many sellers but only one buyer, and oligopsony, where there are many sellers but few buyers. Below is the table that explains the differences among every market structure: 2.2.1 Oligopoly In oligopolistic markets, the products may or may not be differentiated. What matters is that only a few firms account for most or all of total production. In some oligopolistic markets, firms can earn long run profit because there is barriers to entry that make it difficult even impossible for new firms to enter. Oligopoly is a common form of market structure. Examples of oligopolistic industries are automobiles, steel, aluminum, petrochemicals, and so on. Managing an oligopolistic firm is complicated because pricing, output, advertising, and investment decisions involve important strategic considerations. Since only a few firms compete, each firm must carefully consider how its action will affect its competitors, and how will they possibly react. In Indonesia, oligopoly is easily happen. For example the retail industry, cement industry, cellular industry, and so on. There are three models of Oligopoly, which are The Cournot Model, The Stackelberg Model, and The Bertrand Model. 2.2.2 The Cournot Model The Cournot Model theory was introduced by Augustion Cournot in 1938. The Cournot Model explains about firms produce a homogenous product, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce. E In Cournot Equilivrium, each firms reaction curve tells it how much to produce given the output of its competitor. This equilibrium is an example of Nash equilibrium; “Each firm id doing best it gan given what its competitors are doing”. 2.2.3 The Stackelberg Model This model was named after a German economist named Heinrich Freiherr von Stackelberg in 1934. This theory explains about oligopoly model in which one firm sets its output before other firms do. In game theory terms, the players of this game are leader and follower and they compete on quantity. The Stackelberg leader is sometimes referred to as the Market Leader. 2.2.4 The Bertrand Model The theory of Bertrand Model was introduced by Joseph bertrand in 1883. This theory explains about oligopoly model in which firms produce a homogenous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to charge. 2.3 Komisi Pengawasan Persaingan Usaha (KPPU) To maintain the business competition in Indonesia, government has built an independent board which is Komisi Pengawasan Persaingan Usaha (KPPU). With the establishment of KPPU, government wished to minimize the negative effects of oligopoly. KPPU was established based on UU no. 5/1999 about the forbid of monopoly practice and unhealthy business competition. KPPU is expected to guarantee these following things in the people: 1. Consumers no longer be victim of to the producer as price takers 2. The diversity of products and prices can facilitate consumers to make choices 3. The efficiency of resource allocation 4. Consumers are no longer fooled by the high price but average quality, which is commonly found in the monopoly market 5. Consumer needs can be fulfilled as manufacturers have improved the quality and service 6. Making the ideal prices for goods and services, in quality and production costs 7. Open up the market so that the opportunity for businesses become wider 8. Creating innovation in enterprises 2.4 Undang-undang no. 5/1999 Some of the things that are regulated in UU no. 5/1999 or also known as the Antimonopoly law are: 1. Prohibited agreement, which is doing an agreement with other parties to jointly control the production and/or marketing of goods and/or services that may lead to monopolistic practices and/or unfair business competition such as price-fixing agreements, price discrimination, boycotts, closed agreements, oligopoly, predatory pricing, zoning, cartels, trusts (fellowship), and agreements with foreign parties that may lead to unfair competition. 2. Prohibited activities, which is to control the production and/or marketing through supply arrangements, which could cause the market setting monopolistic practices and/or unfair business competition. 3. Dominant position, business operators are abusing its dominant position to restrict the market, consumer rights obstruct, or impede other business actors business. III. DISCUSSION 3.1 The impact of acquisition of Alfa by Carrefour economically After the acquisition of Alfa, Carrefour’s market share increase to 57,99% (2008), before it was 46,30% (2007) in upstream market (market of supply of goods in hypermarkets and supermarkets as well as the retail services market hypermarkets and supermarkets). Legally, it is qualified as dominating the market. The overall income from upstream market is explained by this graph: The change in Alfa’s brand name really strengthens the domination of Carrefour and opens its chance to monopolize the retail industry in Indonesia. The profit of Carrefour itself is 7,2 trillion, and Alfa is 2 trillion, if summed the total will be 9,2 trillion. In Indonesia, Carrefour is already number 1, whereas Alfa is still in big 10. Modern market in Indonesia is likely to be dominated by foreign parties. Because there is support from Indonesian government. There is no way foreign companies can be this big if there is no support from the government. It is arranged in Peraturan Presiden no. 111/2007 about Daftar Bidang Investasi yang Tertutup dan Terbuka dengan Syarat (Perpres DNI). Perpres DNI implisitly states that foreign parties can enter the market in big scale. The acqusition of Alfa is leading towards monopoly practice. There is even a prediction that Carrefour will continue to acquisite other retail store. This matter is need to be watched because it will lead to monopoly and in the end will cause damage to other companies since Carrefour has really big chance to be a monopoly company. However fortunately, the Indonesian Government realized this matter. In 2009, KPPU decided PT. Carrefour Indonesia is proven to practice monopoly and unhealthy business competition over the acquisition of PT. Alfa Retailindo. Majelis Komisi decided Carrefour is guilty by breaking clause 17 verse 1 and clause 25 verse 1 a. Furthermore, Carrefour is asked to release all its shares ownership in PT. Alfa Retailindo to parties that are not affiliated with Carrefour later than one year. Carrefour also needed to pay fine amounted Rp 25 million to the government. 3.2 The practice of trading term that cause disadvantage to local suppliers. KPPU found indication of monopoly within the increase of costs to suppliers 120% higher after the acquisition of Carrefour to Alfa. Before the acquisition, the terms of trade with no listing fee is charged to the supplier reached 13%. Post-acquisition, the cost rose to 33%. Carrefour gave promotion discount 6% whereas before it was only 3,5%. One of the products that affected by changing in trading term is cosmetic. Rebate that Carrefour gave is 8,75% after it was only 2,5% before acquisition. What is Carrefour’s advantage from this trading term? Based on KPPU’s data, Carrefour gets Rp 40,2 billion or equal to 17,46% from operating income. Or in other words, even though no one buys the supplies, Carrefour will already has Rp 40,2 billion. These problems trigger local suppliers to complain to KPPU. Because they really become burden to them. Things that they complain about are listing fee (charging initial cost for every sales), fixed rebate (cut of the price), assortment fee (displaying fee), and minus margin mechanism. From these reports, Carrefour is proven to break UU no. 5/1999 about monopoly and unhealthy business competition and clause 19 a and b. Also, Carrefour is proven to use its dominanc power to set trading terms that is aimed to prevent consumers to get goods or services that are competitive in terms of price and quality. PT. Carrefour Indonesia is considered harmful to suppliers because of the high cost it set to local suppliers, particularly after the acquisition of PT. Alfa Retailindo by Carrefour. IV. CONCLUSION AND SUGGESTION 4.1 Conclusion 1. The practice of monopoly in Indonesia is starting to be common, so governement needs to be more strict in regulating laws about retail industry, in this matter. 2. Carrefour clearly use its dominant power directly or undirectly to set trading terms in aim for prevent suppliers to set the price lower to its competitors and this breaks UU no. 5/1999 4.2 Suggestions 1. Government should regulate laws that compliment UU no. 5/1999 that explains about business practice 2. There should be a balance retail trade system between suppliers and managers of modern market by monitoring the existence and application of the trading terms that do not exploit any other parties, in particular suppliers, so that it can create healthy competition in the business. V. 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