Competition Assessment: The OECD Toolkit

COMPETITION ASSESSMENT:

THE OECD TOOLKIT

Il Foro Competencia y Regulación

Mexico City

Sean Ennis

9 January 2018

Outline

• Competition benefits on consumption side

• Benefits on supply side

• Competition assessment toolkit and key questions

• International experiences

• Conclusion

2

Benefits of competition – consumer side

Competition leads to substantial reductions in consumer prices

Competition provides greater choice

Competition fosters investment that leads to better quality products

3

Passenger Flights in Europe

Market liberalisation in 1993 led to more intense competition and entry

of low-cost carriers (e.g. EasyJet, Ryanair )

4

Passenger Flights in Europe

Price of the lowest priced carrier had fallen by 36% by 1997 and 66%

by 2002

5

Benefits of competition – the firm side

Drives firms to improve their internal efficiency and reduce costs

Provides incentives to firms to adopt new technology

Provides incentives to firms to invest in innovation

Reduces managerial inefficiency

6

Competition spurs productivity and

growth

• More competitive industries have higher

productivity rates and higher productivity growth

– Competitive industries enjoy higher annual productivity

growth (Nickell finds 2% gap)

• Virtuous Circle: as products became cheaper and

better, consumers buy more and firms’ turnover

increases

• Leading to higher growth

– EU single market increased productivity

– Countries with stronger competition frameworks have

higher growth (World Bank) 7

Competition and Productivity --

Japan’s Dual Economy

0 30 40 50 60 70 80 90 100 10

20

40

60

80

100

120

140

160 Steel

Automotive parts Metalworking

Cars

Consumer electronics

Computers

Soap and detergent

Beer

Retail Housing

construction

Food

processing

Employment

100% = 12.5 million employees Source: McKinsey Global Institute

U.S. = 100

Relative productivity levels

Index U.S. = 100

20

8

Regulation and its impact on markets

• Rules and regulations typically have desirable socio-economic objectives

• In specific circumstances, they also have the potential to cause harm to the efficient functioning of markets

• We do not question the socio-economic values • Our objective: assess the effects of the

regulations on – Extent of competition in the markets – Incentives for firms to engage in innovative activity – Potential for growth and expansion of the markets – The usefulness or purpose of the regulation itself – Consumer welfare

9

Regulation can stifle growth by

hampering productivity

Source - Arnold, J., Nicoletti, G. and Scarpetta, S. (2011). “Does anti-competitive regulation

matter for productivity? Evidence from European firms”. IZA Discussion Paper No. 5511.

Increase in multi-factor productivity compared to regulatory stance

Faste

r gro

win

g

More regulated

Regulations and their Impact on

Markets

• Some of the harmful effects that may arise from the rules and regulations relate to – Unduly high cost burden on firms

– Asymmetric costs across different types of firms

– Erecting barriers to entry (stringent or unreasonable licensing rules, for instance)

– Difficulty in marketing new products, hampering innovation

– Removing incentives to compete

11

Pro-competitive reform can help

Difference, Australia GDP growth to OECD average

12

IDENTIFY POLICIES TO ASSESS

APPLY CHECKLIST

ANY COMPETITION DISTORTION?

YES NO

IDENTIFY ALTERNATIVE OPTIONS

SELECT BEST OPTION

STOP IMPLEMENT BEST

OPTION

EX-POST ASSESSMENT

STOP

ALTERNATIVE STATUS QUO

Step 1

Step 3

Step 4

Step 6

Step 5

Step 2

13

Competition Assessment Checklist Initial Screening Based on the Checklist

• The checklist consists of four core questions

• A YES answer to any of the questions would signal a competition concern and warrant a detailed review of the rule or regulation under consideration

14

Competition Assessment Checklist Initial Screening: Checklist Question #1

• Does the rule or regulation limit the number or range of suppliers?

• This could arise, for example, if a regulation 1. Grants exclusive rights for a company to supply

goods or services 2. Establishes a license, permit or authorization process

as a requirement for operation 3. Limits the ability of some suppliers to provide a good

or service 4. Significantly raises cost of entry or exit by a supplier 5. Creates a geographic barrier to the ability of

companies to supply goods or services, invest capital or supply labor

15

Competition Assessment Checklist Initial Screening: Checklist Question #2

• Does the rule or regulation limit the ability of suppliers to compete?

• This could arise, for example, if a regulation

1. Controls or substantially influences the prices for goods or services

2. Limits freedom of suppliers to advertise or market their goods or services

3. Sets standards for product quality that provide an advantage to some suppliers over others or that are above the level that many well-informed customers would choose

4. Significantly raises costs of production for some suppliers relative to others (especially by treating incumbents differently from new entrants)

16

Competition Assessment Checklist Initial Screening: Checklist Question #3

• Does the rule or regulation reduce the incentive of suppliers to compete?

• This could arise, for example, if a regulation

1. Creates a self-regulatory or co-regulatory regime

2. Requires or encourages information on supplier outputs, prices, sales or costs to be published

3. Reduces mobility of customers between suppliers of goods or services by increasing the explicit or implicit costs of changing suppliers

4. Exempts the activity of a particular industry or group of suppliers from the operation of general competition law

17

Competition Assessment Checklist Initial Screening: Checklist Question #4

• Does the rule or regulation limit consumer information or restrict consumer choice?

• This could arise, for example, if a regulation

1. Limits the ability of consumers to decide from whom they purchase

2. Reduces mobility of customers between suppliers of goods or services by increasing the explicit or implicit costs of changing suppliers

3. Fundamentally changes information required by buyers to shop effectively

18

Greece 2016: Overview of

recommendations

19

Potential

restrictions

Draft

recommendations

E-commerce 15 10

Construction 61 42

Media 68 68

Pharmaceuticals 88 54

Other manufacturing 80 48

Other wholesale trade 265 132

TOTAL 577 354

Romania 2015: Overview

Recommendations

20

Construction Transport Food

Processing

Pieces of legislation

scanned

162

566 (plus 12 acts

not in force

anymore)

167

(Prima facie)

Restrictions found

81 85

45

Recommendations 64 50

32

Romanian Maritime Transport: Piloting

Definition: A service provided by a pilot with local knowledge and skills which enable him to conduct the navigation and manoeuvring of the vessel in and approaching the harbour.

Restriction:

• Authorisation: Port operators may operate piloting services besides private providers but without needing authorisation. (TM2)

• Criteria for authorisation, esp. number of pilots required by law. Port authorities require more in practice. (TM3)

Recommendation:

• Piloting services should be outsourced by tendering procedure.

• Requirement for number of pilots should be replaced by requirement for service level.

21

Piloting tariffs in different ports in EU

22

Source: relevant port websites

Conclusion

• The technical tool, OECD’s Competition Assessment Toolkit, has been

– Developed based on country experiences and input

– Used constructively to improve regulations in other countries

• Economic benefits from more pro-competitive regulation can be substantial

• The application of the Competition Assessment Toolkit in Mexico holds potential for substantial beneficial impacts.

23

Thank you

www.oecd.org/daf/competition

24