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Big Tobacco Cartel in Italy

If cigarette manufacturers agree on price increases, they condition according to their desires the periodic increase of the “Minimum price” of cigarettes and the minimum excise tax applied to them in Italy.

The “Minimum price” is calculated on the value of the price range of the most sold cigarettes. An increase of 10 cents agreed on by all the producers triggers automatically the adjustment of the “Minimum price,” which generally follows three months after the increase applied by the producers.

Chronology

  • 4 August 2008: Yesmoke informed the AGCM of the offence of «cartello» (cartel) committed by all the cigarette producers on the Italian market, who had acted illegitimately in such a way as to falsify the normal mechanism that determines the minimum sales price of cigarettes, and in so doing had damaged Yesmoke;
  • 28 August 2008: answer of the AGCM.

Notification of Yesmoke to the AGCM

4 August 2008.

To the Authority Guarantor of Competition and of the Market (AGCM)

Notification of illegitimate conduct aimed at falsifying the normal mechanism that determines the minimum sales price of cigarettes.

As is known, on August 4th 2008, the Yesmoke S.p.A. is asking the Authority Guarantor of Competition and of the Market to assess the legitimacy of the conduct of the Tobacco multinationals as described below.

The legislation is known… In Italian legislation there is, for smoking products, a “Tariffa minima di vendita” a minimum sales tariff (so-called “Minimum price”), established by Article 1, paragraph 486 of the 2005 Financial Law (L. 30/12/04 no. 311), that assigns to the Ministry of the Economy and of Finances (Ministero dell’Economia e delle Finanze) – the Autonomous Administration of the State Monopolies (Amministrazione Autonoma dei Monopoli di Stato) – (hereinafter the AAMS) – the delegation for individuating the criteria and the modalities for fixing this price.

To implement this delegation, the AAMS issued the decree “D. Dirett. 25 July 2005,” that became effective on 1 August 2005; this measure established that the criterion for the determination of the minimum sales price is based on “A percentage of the average assessed retail sales price of all the cigarettes listed in the tariff and effectively marketed” (article 2, paragraph 1). It was further specified, in paragraph 2 of the same regulation, that “The absolute value of the minimum price cannot be higher than the recorded price of the most sold cigarette (…).”

The criterion of determination prescribed by the law adopts, as reference data, the price of the cigarettes belonging to the most requested price class, individuating in this price a limit for setting the minimum price of all the cigarettes on the market. Currently the minimum price of cigarettes is updated every three months, taking as a base of reference the assessed average price of cigarettes in the preceding six months.

Connected to the estimate of the minimum price, there is the national legislation governing the subject of excise tax (that is, the tax on consumption) on processed tobaccos, dictated by Law 7.3 1985 no. 76 and subsequent amendments.

It stipulates the application of a minimum global excise calculated on the retail sales price of the cigarettes belonging to the most requested price class, with a plan for a minimum level of consumption tax (c.d. minimum excise) to be applied to cigarettes with a lower price than those belonging to the MPPC (the Most Popular Price Class); so, this means that the cigarettes sold at a lower price than the most popular price class cigarette, in any case, should have an excise equal to that applied to the MPPC itself.

In the past years, in the market of the determination of the minimum price of cigarettes, we can observe a practice with which the major cigarette producing companies, like Philip Morris, British American Tobacco, Japan Tobacco and Imperial Tobacco, have increased, only one time during the year and in an apparently agreed manner, the price of cigarettes in a period of time preceding the one when the minimum price is updated, contributing, in this way, to the creation of conditions to influence the determination of the minimum price.

On the official site of the AAMS (www.aams.it), we can find the following data relative to the increases of the minimum excise and consequently of the minimum price, that have been made in the two-year period:

  • on the date 29.1.07 Philip Morris increased its prices by 0.10 euro;
  • on the date 1.2.07 the other tobacco companies increased their prices by 0.10 euro;
  • on the date 2.4.07 the AAMS raised the minimum excise and the minimum price by 0.10 euro (3.40);
  • on the date 6.1.08 BAT increased its prices by 0.10 euro;
  • on the date 10.1.08 the other tobacco companies increased their prices by 0.10 euro;
  • on the date 1.4.08, the AAMS raised the minimum excise to the level of 3.50 euro;
  • on the date 18.4.08, the AAMS increased the minimum price to 3.50 euro;
  • on the date 26.6.08, Philip Morris increased its prices by 0.10 euro;
  • on the date 3.7.08, the other tobacco companies increased their prices by 0.10 euro;
  • we can presume that on the date 1.10.08, the AAMS will increase the minimum excise to the level of 3.60 euro.

The previous increases took place in the same way as the one of 2.4.07; for all the increases of the minimum price preceding the last increase, made on last April 18th, the increase of the minimum price occurred at the same time as the increase of the minimum excise. Following the increase of April 18th, the minimum price increase was made 18 days after the increases made one after the other by the major tobacco producing companies.

These are only some examples that do not pretend to be exhaustive, but they are useful to illustrate the mechanism implemented by the tobacco multinationals and they can be useful as a basis for you to direct your investigation and assessments, as, in the opinion of the writer, this is conduct and behavior that falsifies the mechanism of competition, damaging the manufacturers who, like Yesmoke S.p.A., are extraneous to this mechanism and who occupy niche positions.

The single annual increase in the prices of cigarettes is made by the major tobacco manufacturing companies, with a sort of agreement, by which the increase made by PM is followed immediately by consequent price increases by all the other major cigarettes sellers. This operation takes place in a period of time preceding when the minimum sales price will be determined.

These facts lead the writer to think that all this process could be the fruit of a previously agreed pact aimed at preventing the minimum retail price from dropping below a certain threshold; in this way, they are influencing in a contrived manner the final determination of the minimum sales price and removing it from the normal rules of the market that are meant to ensure fair competition free of illicit interference.

All the above premised, the writer asks the Authority Guarantor of Competition and the Market to activate all opportune verifications, and if the conduct described above turns out to be illegitimate, immediately forbid the continuation of these practices, imposing legal sanctions on those subjects who are responsible.

Cordial regards,

Yesmoke S.p.A.

Answer of the AGCM

On the 28th of August 2008, the AGCM answered that it will assess the relevance of the facts brought to its attention, to verify if the provisions of law no. 287/90 are to be applied.

28 August 2008

Subject: Notification arrived on 28 August 2008 relative to the determination of the sale price of cigarettes.

With reference to the above notification, we inform you that the case has been assigned for competence to the Direzione Agroalimentare e Trasporti (Dept of Agriculture, Food and Transport) of this Authority.

The office will verify the relevance of the facts communicated, to ascertain if the measures specified in Law 287/90 should be applied and it will inform you of the follow-up that the Authority intends to give to the notification.

The case has been assigned the identification DC6284.

The person in charge.

The comments of Yesmoke

This is an elementary case, a “Textbookl” case, with the victory practically guaranteed. Also because there is an identical case that is a perfect precedent.

An important precedent plays in Yesmoke’s favor, On the 14th of June 2001 the AGCM initiated a preliminary inquiry against the companies Philip Morris Companies Inc.: Philip Morris Srl, Intertaba Spa, Philip Morris Corporate Services Inc., ETI-Ente Tabacchi Italiani Spa, British American Tobacco P.l.c., British American Tobacco Italy, Japan Tobacco Inc., JT International Italia Srl, Reemtsma Cigarettenfabriken GmbH, Reemtsma Distribution Company Italy Srl, Altadis SA, Altadis Italia Srl, Austria Tabak AG, Gallaher Group P.l.c., Gallaher Italia Srl, Imperial Tobacco Group P.l.c. and Scandinavisk Tobakskompagni A/S, in order to ascertains possible violations of Article 2, paragraph 2, of Law no. 287/90.

The Autorità Garante della Concorrenza e del Mercato—AGCM—had deliberated on 13 March 2003

  • That the accord realized by Philip Morris International Management S.A., Philip Morris Holland Bv, Philip Morris GmbH, Philip Morris Products Inc., Philip Morris Products SA and ETI SpA (ex- AAMS) had as object and effect a significant and consistent alteration of the competition on the sale price of cigarettes on the national market from 1993 to 2001, in violation of Article 2, paragraph 2, letters a) and b), of law no. 287/90;
  • That the companies listed above shall cease the continuation of the offence, notifying the Authority of the measures adopted for the cessation of the violation within 90 days from the notification of this provision;
  • That, due to the gravity and the duration of the violation as per point a), administrative pecuniary sanctions are to be applied to the following companies: Philip Morris International Management S.A., Philip Morris Holland Bv and Philip Morris GmbH , Philip Morris Products Inc., Philip Morris Products S.A. and ETI S.p.A., in the measure indicated in the following table:
Company Sanctions (€)
ETI S.p.A. 20.000.000
Philip Morris Products S.A. 23.830.000
Philip Morris Holland Bv 9.729.000
Philip Morris GmbH 8.322.000
Philip Morris Products Inc. 6.252.000
Philip Morris International Management S.A. 1.867.000

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