Competition Policy

Competition Policy

Competition Policy

Micro-economic Policies(Regulation, Trade, Investment)

Competition (Anti-Trust)Law

Promote Deregulation and Trade Liberalization

Prevent Anti-CompetitiveConduct

Fosters Mobility of Resources, CompetitiveEnvironment, Economic Efficiency, and Consumer Welfare,

by Maintaining and Encouraging the Process of Competition.

General DefinitionsCOMPETITION: Independent decision-making and rivalry between existing (and potential ) business entities in terms of such factors as prices, output, market share, quality, service and/or other conditions affecting the value of goods and services in order to profitably acquire, retain and increase the patronage of clients.

ECONOMIC REGULATION: Direct or indirect oversight and control by government of business entities, requiring mandatory adherence to rules, procedures and other measures over such matters as prices, output, entry, ownership, investment, or factors affecting the supply, demand and consumption of goods and services.

COMPETITION “versus” REGULATION

Competition preferred where-ever feasible:>Efficiency, investment, and consumer-welfare >Competitiveness, growth and employment

Economic regulation only when necessary.If not properly conceived and implemented:>Administrative and other costs including misallocation of resources, induces economic distortions, corruption…..

Preference for Competition Should Not Be A Matter of Ideology—Matter of Simply Lower Costs and Higher BenefitsCompetition Not A “Panacea” For All Situations

Market Failure (1) • When Markets Fail to Allocate Resources to

Their Highest Value Uses,

• That is, by Re-allocating Resources from One Use to Another, Overall Welfare of Society can be Improved (“Pareto” Efficiency Improvements Possible).

Market Failure (2)

FOCUS:Public Restraints (Policy Based)and/or

Private Restraints (Monopolistic Behavior)

on Competition

Competition Policy Seeks to Address / Correct these Sources of Market Failure.

MARKET FAILURERegulation May Be Necessary Because of:

Imperfect Markets >Natural Monopoly >Anticompetitive Markets & Business Conduct

Externalities >Pollution, Noise, Congestion…Information Asymmetry > Shortage, Non-availability or Non-disclosure, High Costs of Information Gathering…..Social and Other Objectives > Heath, Safety, Equity,

Fairness………However…

ECONOMIC SOPHISM

Frederic Bastiat (1801-1850):“Petition” to Honorable Members of the Chamber of Deputies by Manufacturers of Candles, Tapers, Lanterns, Sticks, Street Lamps, Snuffers, Extinguishers,And from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting…for Protection from the Relentless and Unfair Competition from the SUN……Floods the Market with Light the Minute it Appears…..and Sales of our Products Cease Immediately……

Demand (and Supply) for Regulation & Government Intervention……!!!

Possible Sources Of Public Restrains On Competition (1)

• Trade Policies– Tariffs and Non-Tariff Barriers– Anti-Dumping and Countervailing (CV) Duties– Discriminatory Export Practices

• Investment Policies– Exclusionary Lists– Ownership Restrictions– Licensing Requirements

Possible Sources Of Public Restraints On Competition (2)

• Regulations– Sector Specific ( Power, Transportation, Telecom….)

– Natural Monopolies

Government Actions in these Areas can Impede or Encourage Competition. Objective should be to Re-orient Policies and Regulations towards Competition, Market-Based Solutions.

Is Trade Liberalization/Deregulation Sufficient To Foster Competitive Business Practices? (1)

NO.

• Market Segmented by More Than Tariffs / Non Tariff Barriers / Regulations– Transportation Costs– Transaction Costs– Domestic And International Cartels– Non-Traded Products (Mainly Services)

Is Trade Liberalization/Deregulation Sufficient?

– Seller-Buyer Explicit / Implicit Contractual Arrangement

– International Cartels– Product And Technical Standards– Other Barriers To Entry

• Liberalization of Other Micro-economic Policies and Enforcement of Competition Law Complementary, Self Re-enforcing

Competition Law:Objectives and Instruments

Economic Efficiency

Policy Objectives

Public Benefit/Interest

Structural

Policy Instruments

Behavioral

Alternative Approaches to Competition Law

Economic EfficiencyPublic Interest

Behavioral

Structural

Benefits of policy consistency and consumer welfare

FlexibleDangers of policyDangers of policyinconsistencies andinconsistencies andvested interest vested interest interferenceinterference

RigidRigid

Instruments

Objectives

STRIVEFORTHIS

Focus Of Competition Law• Various Types of Transactions Conducted in

the Market Place as part of the Day-to-Day Business Activity of Firms.

• Various Types of Inter-firm Agreements, Ownership, Linkages, Associations and other Institutional Arrangement Exist.

• Vast Majority of these Transactions / Business Arrangements Do Not Pose Legal and/or Economic Problems.

• However, a Few do.

Per Se Vs. Rule Of Reason (1)

• Some Types Of Business Arrangements Restrictive Of Competition Clearly Undesirable– Example: Horizontal Agreements Between

Firms (Cartels, Collusion) To Fix Prices and/or Allocate Markets

– No Tenable Economic Justification From Societal Viewpoint

– Per Se Illegal Approach

Per Se Vs. Rule of Reason (2)

• Some Types Of Business Arrangements While Restrictive Of Competition May Not Necessarily Be Undesirable– Example: Mergers And Acquisitions, Vertical

Agreements Between Firms (Manufacturer - Distributor) Such As Exclusive Dealing, Resale Price Maintenance (RPM) Efficiency Enhancing

– Rule of Reason -- Balance Of Probabilities Approach

Market Power

• Competition Law Targets at “Exercise of Market Power” by Firms.

• Ability of Firm, Unilaterally or in Collusion with Others, to Profitably Raise Price and Maintain it over a Significant Period of Time Without Competitive Response by other Existing and/or Potential Firms (Hypothetical Monopolist Concept).

• Exercise of Market Power Gives Rise to Reduced Output -- Higher Prices.

Consequences of Market Power: The Monopoly Problem

• Problem of High Prices -- Profits and Low Output (Misallocation of Resources)

• Also Problem of Costs -- Costs Not Minimized for All Levels of Output

• X-Inefficiency

• Dynamic Inefficiencies

Other Consequences of Market Power

• Concentration in Market for Goods and Services.• Incentives for Ownership Concentration.• Rent Seeking and Undue Political Influence.• Lack of Accountability and Transparency.• Corruption, Bribery and Preferential Treatment.• Limits Economic Opportunities, and Broad Base

Participation in National Economy.• Undermines Competitiveness Sustainable

Economic Development.

Evaluating Market Power

Three Inter-related Areas of Analysis:

• Delineation of Relevant Market

• Analysis of Entry Barriers / Contestability

• Substantial Lessening of Competition

Delineation Of Relevant Market (1)

• Starting Point in Competition Analysis

• Two Fundamental Dimensions of Market– Product Market– Geographic Market

• Demand + Supply Considerations– Demand Side: Products Must Be Substitutable

From Buyer’s Point of View

Delineation Of Relevant Market (2)

– Supply Side: Sellers Must Be Included Who Produce or Could Easily Switch to Production of the Product / Substitutes

• Actual And Potential Sellers

• Canadian + U.S. +U.K…Antitrust Paradigm (Hypothetical Monopolist)

• Risks of too Narrow / Broad Market Definition

Analysis Of Entry Barriers (1)

• Barriers To Entry (BTE): Factors Which Prevent / Deter Entry Of New Firms Into An Industry Even When Incumbent Firms Earning Excess

Structural (Innocent, Economic)

BTE Strategic (Behavioral)

Policy (Govt.) Based Barrier


• Structural Barriers Arise From Basic Industry Characteristics– Economies Of Scale– Absolute Cost Advantages– Product Differentiation– Sunk Costs


• Strategic Barriers Arise From Behavior Of Firms– Market Foreclosure / Pre-emption Of Facilities– Excess Capacity– Price / Non-Price Predation, Etc.


• Policy Based Barriers Generally Arise from Govt..– Licensing

– Ownership / Sector Specific Restrictions or Regulations

• “Height” of Barriers to Entry Measured Mainly by:

Time Duration Required by New Competition/Competitors to Emerge

Substantial Lessening Or Prevention Of Competition (1)

• Ability of a Firm (or Group of Firms) to Influence the Dimensions Of Competition for a Sustainable Period of Time and Earn High Profits

• Generally Viewed in Terms Of Price Dimension

• “Substantial”: Magnitude of Price Increase / Above Competitive Level and Size of Market Affected

Substantial Lessening Or Prevention Of Competition (2)

• Time Duration

• “Lessening”: Remove or Limit Existing Competition

• “Prevention”: Limit or Constrain Potential or Emerging Competition

• Barriers to Entry and “Contestability” Of Markets

General Design Of Competition Law (1)

Essentially Structure -- Conduct -- Performance Paradigm

Structural ProvisionsMonopoly (Dominant Market Position)MergersOther Inter-Corporate Relationships (Ex: Joint

Ventures)

General Design Of Competition Law (2)

Behavioral Provisions Horizontal Restraints: Collusion (Price-Fixing

Agreements, Market Sharing Territorial Arrangements, Bid Rigging, Conscious Parallelism), Price Discrimination

Vertical Restraints: Resale Price Maintenance, Exclusive Dealing

Refusal To Deal, Price And Non-Price Predation, Other Anti-Competitive Practices

Performance-Implicit

Other Special Provisions

Specialization Agreements R & D Co-operatives Policy Linkages With:

Intellectual Property Tariffs Economic Regulation of Infrastructure (Power,

Transportation, Telephone, Water….) Other Economic Areas (e.g., Financial Markets…)

General Role In Government Policy

SCOPE OF COMPETITION LAW

Competition Law Should Be:

“General Law of General Applicability”

• All Firms (Economic Agents) Engaged in Commercial Activity

• Both Public (State Enterprises) and Private Sectors

Few Exceptions/Exemptions. These Vary by

Country But Rationale for Exemptions Should

Be Clear.

EXAMPLES OF EXCEPTIONS/EXEMPTIONS

• Labor Union Activity re: Collective Bargaining• Charitable Organizations• Underwriting: Issuance of Insurance and

Investment Securities• Financial Services (Debatable)• Amateur Sports Leagues• Professions-Setting Education-Qualification

Standardset. al.

Collusive Agreements

• Consensus Among Economists that these Agreements are Undesirable and should be Prevented.

• Prevention of these Agreements is Central to Competition Law.

• Enforcement based on Current and Historical Information.

• Per se Prohibition, Backed with Heavy Fines and Severe Penalties.

Vertical Restraints

• Resale Price Maintenance: Manufacturer / Wholesaler Sets the Minimum Price at Which a Product Will be Re-sold

• Exclusive Dealing: Manufacturer / Wholesaler Grants Exclusive Rights Of Sale of a Product in Given Market

• Controversial Area of Economics• Differences in Policies Across Countries

Abuse Of DominantMarket Position (1)

• Dominant Firm: Accounts for Significantly Greater Market Share than the next Largest Firm. Size Threshold may Vary Across Countries but Generally 35% plus of the Relevant Market.

Abuse Of DominantMarket Position (2)

• Abuse of Dominance: When the Dominant Firm Engages in Anticompetitive Practices to Maintain or Increase its Market Position by Disciplining, Driving Out and / or Preventing Entry of Other Competitors.

• Examples:– Acquisition of Supplier / Pre-emption of

Resource Inputs or Distribution Facilities

Abuse Of Dominant Market Position (3)

– Predatory Pricing or Loss Leader Selling– Vertical Squeezing, etc.

• Distinction Between Superior Competitive Performance and Anticompetitive Practices. Case by Case Approach Applying “Rule Of Reason” Advisable.

Mergers and Acquisitions (1)

• Particular Complex -- Controversial Area• Multiple Motives -- Two Of Special Interest In

Context Of Horizontal Mergers:– Collusion (Because Increases Market Concentration by

Reducing the Number of Competing Firms)

– Efficiency (Rationalization of Production, Economies of Scale & Scope)

• Vertical Mergers an Issue When Upstream or Downstream Concentration Exists

Mergers and Acquisitions (2)

• Prospective Analysis: Pre-Notification of Major Transactions (Size Thresholds in Asset or Sales Value and Market Shares)

• Cost-Benefit Approach (Weighing Gains in Efficiency Against Loss of Consumer Welfare)

• Case By Case Approach Applying “Rule Of Reason” Advisable

Investigation and

Prosecution by

Government Department or Agency

Competition Law:Administration and Enforcement

Appeal Rights

(Higher Courts)

Adjudication, Imposition of Fines or Civil

Damages (Court/Special

Tribunal)

Private Actions

Complaints or

Government Initiative

Administration And EnforcementOf Competition Law (1)

Division Of Principal Responsibilities• InvestigationInvestigation: Competition Agency

– Complaint-Driven, From Firms and Consumers– Weight Should Be Given to Complaints by

Customers vs. Competitors– Authority To Gather Evidence While Safeguarding

Business Confidentiality– Separate Office Accountable To Legislative

Assembly– High-Quality, Well-Paid Staff


• EnforcementEnforcement: Competition Agency and / or Judicial Authority, plus (?)

• Individual / Class Private Actions– Redress Mechanism For Complainants, With

Safeguards To Avoid Frivolous Actions


• AdjudicationAdjudication: Courts And / Or Specialized Tribunal– Requires Expertise In Business, Economics and

Law– Decision Subject To Appeal

• AdvocacyAdvocacy: Competition Agency– To Ensure Competition Issues Are Considered

In Government Policy Formulation


Overall System Of Checks and Balances, Ideally With Separation of Investigation, Enforcement and Adjudication. Independence from Political Interference (Policy and Budget)

Implications For Countries (1)

• Overly Aggressive or “Regulatory” Approach Can Impede Competition, Investment, Business Confidence

• Overly Lax Can Entrench Monopolies

• Complex Area, Substantial Staff Expertise and Institution Capacity Building Required

• Opportunities For “Jump-Starting”


• Focus On Selective, Critical Areas:– Strong Competition Advocacy Role, Especially

Aimed at Lowering Policy-Based BarriersImportant Interface with Privatization, Regulatory Reform and Other Government Policies

– Clear Rules Against Collusion– For Abuse Of Dominance and Mergers, Apply

Law Sparingly (that is Only in Most Clear/Blatant Cases-Violations of the Law) Until Staff and Institutional Expertise Develops


– Enhance Business Certainty Through Policy Statements and Guidelines. Critical for Attracting and Increasing Domestic and Foreign Investment

– Foster Public Education And Support

• Careful Attention to Effective Checks and Balances in Application of Law, to Minimize Stakeholder Influence and “Capture”

How Can Market PowerBe Curbed (1)

Specific Application Of Competition Law Against Private Restraints To Business In Markets Prohibition Of Price-Fixing And Other

Collusive Agreements. Severe Fines And Penalties

Prevent Abuse Of Dominant Market Position (Monopolistic Behavior)

How Can Market PowerBe Curbed (2)

Prevent Concentration Via Controls Of Merger And Acquisition Activity

But, Also Develop Broad Base Pro-Competition Micro-Industrial Policies, e.g., Reduce Barriers To Entry Against New (Domestic and Foreign) Firms

Foster “Contestable” Markets Strike Balance Between Compliance vs. Enforcement

of the Law Undertakings/Consent Decrees/Bench-Mark

Competition Competition Advocacy Role

Importance Of Competition Advocacy (1)

Generally No Single Institution / Focal Point In Government For Competition

Inter-Governmental-Departmental Conflicts -- Different MandatesTrade PolicyPrivatizationRegulation & Provision of Infrastructure

(Power,Transportation, Telephone,Water….) Services Industrial / Regional Development

Importance Of Competition Advocacy (2)

Stakeholders -- Interest Groups Interest Groups Need For Transparency – Accountability Different Institutional Designs

Publicity / Moral Suasion / Public Debate Voluntary / Informal / Formal-Statutory Role

PREFERRED APPROACH: Formal-Statutory Role

Concluding Messages Competition is a Vehicle--Not an

End in Itself; Focus on Economic Efficiency

Protect Competitive Process, Not Competitors

Emphasis on Business Conduct (Market Power), Not Market Structure (Concentration or Firm Size)

Concluding Messages

Reduce Barriers To Mobility Of Resources

Distinct From Regulation-Avoid “Regulating Competition”

Conditions Economic Environment in Which Business Activity Is Conducted

Effective Competition Reduces Need For Intervention

Concluding Messages

A “Framework Policy” -- 4th Cornerstone of Government Economic Policies, Along With Monetary, Fiscal And Trade Policies

Competition Should Be Integral To:

* Government-Business Relations

* Business Culture and Ethics

Documents

Competition Policy