24 February 2015
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Government-mandated sharing of trade secrets: anticompetitive interference

This post from AfricanAntitrust.com analyses a case that highlights the need for advocacy programs that educate public officials. In this particular instance, the S.A. Minister of Small Business requested companies to engage in conduct that violates the country’s competition law. Although the purpose of this request is to promote other public policy goals, it leaves both the South African Competition Commission (SACC) and the multinational companies in an awkward situation. How should the SACC act in the event of a government-lead antitrust violation? The post, that we highly recommend, provides arguments to find an answer to this question.

Editor's avatarAfrican Antitrust & Competition Law

south_africa

Ms. Zulu proposes foreign competitors share trade secrets with SA counterparts

Perhaps it is time for increased advocacy initiatives within the South African government, or at a minimum a basic educational program in competition law for all its sitting ministers.
In what can only be described as startling (and likely positively anticompetitive), Lindiwe Zulu, the S.A. Minister of Small Business, has demanded foreign business owners to reveal their trade secrets to their smaller rivals.
The South African Competition Commission, and perhaps one of the Minister’s own fellow Cabinet members, minister Ebrahim Patel, who is de facto in charge of the competition authorities, can see fit to remind Ms. Zulu that fundamental antitrust law principles (and in particular section 4 of the South African Competition Act), preclude firms in a horizontal relationship from sharing trade secrets that are competitively sensitive – i.e., precisely those types of information…

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16 February 2015
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Understanding competition law enforcement in China: NDRC v Qualcomm

By Amine Mansour*

China’s competition authorities have the reputation of being aggressive. Qualcomm’s case confirms such reputation. On 10 February 2015, China’s National Development and Reform Commission (NDRC) imposed a fine of 6.088 billion Yuan (975 million dollars) on Qualcomm calculated on the basis of 8% of the company’s 2013 sales in China. This adds to several royalty concessions offered by Qualcomm to local manufacturers. Notwithstanding the significance of the amount of the fine, the highest antimonopoly fine ever exacted in China, Qualcomm decided not to appeal the decision.

According to the NDRC, the company held a dominant position in the CDMA, WCDMA and LTE chipset markets. The official statement (here in Chinese) comes out with very succinct information and characterizes the abuse in extremely broad terms. Below you will find a brief presentation of the case followed by some comments.

The decision

First, the decision points out that Qualcomm was charging excessive royalty fees. In this respect, the company refused to provide its licensees with a list of its available patents from where they could choose and forced them to accept a package that includes out of date patents. Taking this into account, the NDRC held that the price charged was unreasonable. Second, the press statement highlights a tying mechanism in Qualcomm’s patent licensing activity. In particular, the NDRC points out the fact that Qualcomm tied, with no justification, licenses for wireless and non-wireless technology forcing Chinese customers to pay for unwanted licenses. Third, it is stated that Qualcomm abused its dominant position by adding unreasonable conditions on the sale of baseband chips. As a result the NDRC states that “Qualcomm’s acts to eliminate or restrict market competition, hinder and inhibit technological innovation and development and harm the interests of consumers violating China’s anti-monopoly law”. To address those issues, Qualcomm offered a corrective measures package. This package consists of the following actions (details in the Qualcomm press release).

Patent and products covered by Qualcomm’s concessions. One has to bear in mind that what is affected in the present case is a small fraction of Qualcomm’s patented technology. In particular, the decision focuses on the pricing of Qualcomm’s patented technology adopted as a standard for 3G and 4G devices (phones, tablets, laptops…).

Concessions offered. Qualcomm will be offering a separate and less broad license that includes only its 3G and 4G essential Chinese patents. Other essential and non-essential patents will be offered through a separate license. In addition, Qualcomm commits itself to make a list of its patents available to licensees during the negotiation process. Additional concessions focused, first, on grating a fair compensation to Chinese licensees in case of a cross-license agreement and, second, on removing unreasonable terms from license agreements including restrictions on licensees’ ability to challenge terms of their agreements. Interestingly, patents covered by the new commitments will be offered at new terms. These new conditions induce a reduction of the royalty base from 100% of the selling price to 65%. The applied rate will be « 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA ». The above-mentioned terms apply only to products to be sold for use in China. This means that a licensee’s sales of devices used in the US, EU, Japan or other major market will not, in principle, be impacted by the new terms. Of course, no one doubts that they will be offered to both existing and new licensees that may elect or refuse to take them. However, in the industry, licensees may also act as a contract manufacturer or an original design manufacturer (ODM). It then becomes less clear whether the new terms extend, for instance, to products designed and manufactured for another company. The rectification plans leaves open several implementation issues some of which are discussed in the following comments.

Comments

The decision opens more questions than it solves. From both the NRDC and Qualcomm’s statements it is not clear whether the agreed upon figures constitute the exact new terms to be offered to all existing licensees or whether they constitute a simple starting point for negotiation (royalty cap). Both interpretations give the idea that the NRDC is engaging in a sort of price regulation of intellectual property assets as it condemns the high level of royalties as such. Recently, Qualcomm itself reported that it is being targeted by EU and US regulators, and has been involved in private litigation concerning his licensing practices of its standard-essential patents in the US. In my personal view, it seems unlikely that the FTC will adopt an approach similar to the one put forward by the NRDC.

Regarding the EU, it is not completely clear how things will evolve. The EU Commission was extremely careful when targeting excessive prices especially in the case of immaterial assets. In this respect, the Commission investigations in the Qualcomm case provide a concrete example on how difficult it is to demonstrate that royalties are excessive and thus exploitative within the meaning of Article 102TFEU. On the other hand, there are many similarities between the settlement Rambus negotiated in 2009 in a case also about SEP’s and the corrective measures in the present case, which is an indicator that the Commission favors terms close to the ones in the Qualcomm case in China.

However, there may be an argument that by lowering royalties to be collected for devices sold for use in China, Qualcomm discriminates against branded devices to be exported to the EU and others countries and thus harming consumers in those parts of the world. The signal it may then send to the Commission is that it is charging excessive/unfair royalties for its essential European patents. This may prompt the Commission to intervene in order to bring royalties collected in the case of products sent to the European market to a level similar to the one applied for branded devices sold in China. Again, this seems very unlikely given that Qualcomm’s new terms in the Chinese case were extracted under the threat of a judicial proceeding.

In any case, price regulation (as done by the NRDC) differs from an eventual intervention from competition authorities in the EU or the US. This is to say that any move from the Commission or the FTC may not be as focused on the royalties amount in itself but rather on assessing whether the behavior of the dominant firm is designed as to limit existing or potential competition and as such to maintain the extraction of a supra competitive profits. However the only problem in this case is that there exists no competition and there will be no entry (unless the industry moves from the existing standards). Given the involvement of patents, excessive prices are not going to be challenged by competitors. This is what makes the issue of fairness and reasonableness a pressing one in the present case (the debate over the meaning of the terms “fair” and “reasonable” contained in the FRAND commitments is of critical importance here).

Should the Commission or the FTC intervene as “rate-setting” institutions and thus solve the issue relating to the meaning of the words “fair” and “reasonable”? The real answer should ensure that the likely impact on dynamic gains is fully taken into account. More clearly, profit is the main driver of R&D expenditures. However it appears that NRDC’s ruling added to the ex-ante uncertainty about profit with an ex-post cap. This effect can be better understood if we take the case of the industry’s eventual evolution toward the 5G technology. Firms will be less keen to invest in R&D for the 5G technology knowing that their returns are not only uncertain but will most likely be caped in one of the biggest markets in the world. In the name of fairness and reasonableness, price regulation of intellectual property assets can prove highly counterproductive having a detrimental impact on the evolution of technology.

Another striking aspect of the case is that Qualcomm’s licensing activity may be considered as abusive or not depending on the end user of the affected product. Devices sold for use in China will be subject to a specific regime in which royalties are still collected on the basis of the selling price but at a specific rate. In this way, the decision introduces what can be called the « Chinese consumption » criteria. Royalties applied for devices sold outside China are not considered as excessive (and so, not abusive) simply because they harm foreign consumers. Given that most of the devices are manufactured in China, the resulting mechanism has something that resembles to the idea of indifference toward an export cartel in that the involved practice affects mainly consumers outside the jurisdiction in which the conduct was initiated.

Vis-a-vis to Qualcomm’s licensees, the decision terms regarding royalties will most likely extend to other jurisdictions. It is hardly conceivable that Qualcomm will convince its licensees, at least the new ones, of any rate and base higher than what is adopted for devices sold for use in China. This domino effect is even more likely given that license agreements usually contain the « Most favored royalty rate provision » clause which means that the new terms need to be offered not only to licensees for sales of branded devices for use in China but also for the sales in other locations. In this respect, the NDRC’s decision may initiate a snowball effect that is hard to stop.

*Co-editor, Developing World Antitrust

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9 February 2015
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An analysis of one of El Salvador’s Landmark Merger Cases in Lalibrecompetencia

Editorial Team, DWA

To our Spanish speaking readers, we recommend a post published in Lalibrecompetencia (which you can find here) by Guillermo Castro. He writes about one of the most interesting aspects in the analysis of merger cases in oligopolistic markets: the identification of maverick firms. Guillermo analyses a sequence of two decisions of the Salvadoran antitrust authority in which the merger between two of the largest telecommunication companies in the country was blocked, in large part because the acquired company was deemed to be a disruptive agent in the market. In the first attempt to merge, the two companies were required to divest a significant portion of the resulting firm’s spectrum holdings (which they refused to do) and in the second decision the transaction was enjoined. It is hard to miss the parallel between the Salvadoran case and the failed AT&T – T-Mobile attempt to merge just a year before. Surely the US case had some influence in the Salvadoran authority’s decision. In both cases, the resulting firm was going to become the biggest player in the market and both involved the acquisition of a firm that was deemed to be the maverick. Without further introduction, we invite our Spanish speaking audience to read Guillermo’s post in Lalibrecompetencia.

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3 February 2015
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New Alliance with Lalibrecompetencia.com

Editorial Team, DWA

We are happy to announce to you that we have formed an alliance with Lalibrecompetencia.com, a blog that focuses on competition policy in Latin America. The cooperation will consist in mutually re-blogging the posts from each blog that are of common interest. The reason behind the alliance is to expand the coverage of both blogs. In our case, keeping you up to date regarding issues of interest in the developing world is quiet a big task for only us to undertake and, therefore, we greatly appreciate the help from our friends at Lalibrecompetencia.com

Lalibrecompetencia is an initiative founded by Juan David Gutiérrez, who is currently a PhD candidate at the Blavatnik School of Government in the University of Oxford and has taught Competition Law in the Universidad Javeriana of Colombia. The editing team is composed by Juan David and two other practitioners with vast experience in the field: Natalia Barrera and Victor Pavón-Villamayor. The blog has affiliated authors from 11 different countries. For more details about the editorial team and authors you can click here

We encourage our readers to follow Lalibrecompetencia.com blog (which also includes posts in English for our non-Spanish speakers). You can follow them on Twitter and Linkedin. For our Spanish speaking audience, their last post is on one of El Salvador’s landmark cases in which the competition authority enjoined the merger between two of the biggest telecommunications companies in the country (Claro and Digicel).

We are working on other potential alliances and we hope to have some news for you soon.

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2 February 2015
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Latin America

The Sugar Industry in El Salvador: A Case Study for Competition Authorities around the World

By Francisco Beneke*

One of the biggest challenges for the Competition Superintendence, the antitrust authority in El Salvador, is posed by the sugar industry. What makes this case worth studying is that it basically has it all: a cartel in the manufacturing stage, a dominant wholesale distributor, and a law that shields the industry against the competition authority (and as we will see, from any source of competitive pressure).

Starting with the law, enacted in 2001, the Sugar Act paints a good portrait of the manufacturing industry’s lobbying power. This law mandates and enforces a cartel as follows. Article 2 states that dividing market quotas between the processing plants is a matter of public interest. Articles 19 and 20 specify how this system works. Each plant is yearly given a percentage of the internal market based on past production history. This quota is subdivided in 12 equal parts, which represent the maximum of sugar that a firm can produce per month. If this maximum is not complied with, the processing plant is not only fined but also in the next year will be deprived of a portion of its market share equal to twice the size of the excess with which it is charged.

To enforce this mechanism, the manufacturers have to constantly disclose production information to the regulator (CONSAA), who also has auditing powers granted by the law. Another and more effective way of monitoring the market quotas is performed through the industry’s common sales agent, Dizucar.

Entry is also regulated in the Sugar Act. Any plant that wants to join the club has to be cleared by the CONSAA. The problem with this is that 3 out of 8 members of the board of directors of this state entity are representatives of incumbent plants. It is no majority but one has to bear in mind the political influence this industry has in order to assess the likelihood that the board would take a decision that affects the interests of incumbents. The chances of entry are, therefore, slight at best.

As the reader can see, the Sugar Act solves most of the problems that a cartel faces: coordination, cheating, and entry of new firms. In addition, the monitoring of the quotas is done with greater efficiency through the common sales agent mentioned above, which all but monopolizes the distribution of the production of the sugar mills.

Because the law states that this market division is in the public interest and regulates its functioning, the hands of the Competition Superintendence are tied in what concerns the cartel. Therefore, the authority took the only legally available course of action that it had. In April of 2010 it opened and investigation regarding alleged exclusionary conduct in which Dizucar, the wholesale distributor and common sales agent, was engaging.

In 2012, the Competition Superintendence found that Dizucar was guilty of abuse of dominance and fined the firm with approximately 1.1 million dollars. The amount is rather small since the decision states that the damage caused to consumers only in 2010 was as high as 12 million dollars. Nonetheless, the Competition Superintendence argued that the fine is the highest possible amount allowed by the law, which is the equivalent of 5 thousand times the legal minimum monthly wage. Technically, according to the law, this is not the highest possible amount. Article 38 of the Competition Act states that if the infringement is of particular gravity, then the fine can be established between twice and ten times the estimated amount of the profits acquired through the anticompetitive behavior. There is no discussion in the decision as to why this criterion was not applied when quantifying the fine but in light of the loss in consumer welfare that was claimed it is hard to see a good reason for keeping the fine so low.

Moving on from the case, the Competition Superintendence also undertook great efforts to do something about the Sugar Act. According to an opinion issued by the authority in August last year, since May 2010 the competition authority worked with other government institutions such as the Ministry of the Economy, the Ministry of Agriculture and representatives from Casa Presidencial (the equivalent of the White House) to form a consensus about the reforms that were needed to bring competition into the sugar industry. The work of this team culminated in a joint report in 2012 and a proposal to amend the law that basically aims to abolish the market division system.

Congress has undertaken no reforms yet, but to be fair with the Competition Superintendence and the other state institutions involved, lobbying for a change of the status quo can be a titanic task. Indeed, a very comprehensive study of the lobbying industry in the US found out that one of the strongest predictors of failure for lobbying activities is when the efforts are aimed at changing an established policy (see “Lobbying and Policy Change: Who Wins, Who Loses and Why” by Baumgartner, Berry, Hojnacki, Kimball and Leech (2009)).

To conclude, it can be seen that the strategy of the Competition Superintendence has been to coordinate both enforcing and advocacy tools at its disposal to tackle the problem. Beyond the law and beyond the economics of the decision and the proposed reforms, it is worth highlighting this coordination of activities at a strategic level. Some examples in Latin America suggest that a good enforcement policy aids antitrust authorities in gaining support for reforms they advocate. One such example is the price fixing case of medicines at the retail level by pharmacies in Chile in 2009. After the decision was made public, there was widespread condemnation among the population against the cartel, which helped streamline substantial reforms to strengthen the Chilean competition law. It still remains to be seen whether the Competition Superintendence’s efforts will succeed but I believe sugar consumers expect that this institution will not give up so easily.

* Co-editor, Developing World Antitrust

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18 January 2015
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Development and Antitrust Law

The Concentration of Economic and Political Power: A Priority for Competition Law and Policy in Developing Countries?

By Amine Mansour*

In the literature dealing with competition law and policy in developing countries, there appears to be a consensus according to which competition law cannot contribute to development unless it wins its battle against what is called the concentration of economic and political power.

Before getting into more details, the idea of concentration of economic and political power deserves some words. The concept in itself is not clear. The idea can be understood either as the collusion between the economic and the political powers leading to a concentration of the two or as the holding of both powers by the same person(s) at the same time. Of course, the concentration can be in reality more complex and subtle than what was described and consist of a mix of the two forms. Regardless of the view one may have on the understanding of the concept, it’s less important to focus on the form of the concentration of economic and political powers than on the effect of such concentrations. The very concrete impact can be disastrous for an economy.

In order to realize the magnitude that this impact can have, it is interesting to analyze first why powerful economic groups and individuals may attempt to capture political institutions. In reality, according to the developmental conception of competition, it is very important to empower low income people, to protect them against economic power and to ensure that they fully participate and contribute to the economic life. This presupposes a specific view to the goals of competition, a view where specific categories of people, the low income ones, are benefiting from the redistribution of wealth. (The consumer welfare standard does not deal with the question of which category of people benefit from the redistribution). The inevitable reaction of rational powerful economic groups is to reject such position as it not only endangers the expansion of their power and wealth but also threatens to shrink it. One way to reject such rules is to capture government power if it is not already the case. Such a conflict illustrates where the antagonism lies between developmental competition law and the concentration of economic and political powers.

In practice, it’s very important to differentiate between three scenarios.

First, if no competition law is adopted in a given country where economic and political powers overlap, the effect can be as simple as the blocking of every attempt to introduce any kind of competition law be it a pro-development or a pro-efficiency one (One interesting example is Guatemala where the adoption of a competition law has been dragged on for years and only after the EU pressed for it in its association treaty did Guatemalan authorities started to act. Even so, they are waiting to the very last moment when the deadline expires to enact the law (December 2016)). As a consequence, powerful producers will keep benefiting from missing competition to the sacrifice of consumers. In particular, low income consumers that would eventually have been able to afford new products as a consequence of the drop in prices will not see this scenario occurring. Put differently, powerful dominant firms may keep extracting undeserved profits thereby reinforcing their economic power. The distributive dimension at the heart of competition law will simply be nonexistent.

Second, even in cases where obstructing the adoption of a competition act is no longer possible ( international commitment/pressure from an international body), the economic and political powers may try to lower the impact such regulation may have on their welfare by interfering in the enactment process. Having a vested interest in maintaining the status quo, the hands concentrating economic and political power will do what it takes to preserve their wealth. This can be reflected in the adopted text through specific and sectorial exemptions, setting up a simple consultative authority, narrowing the scope of the Act (…). Competition law may simply look as an empty shell.

From the two above mentioned situations it emerges that economic and political powers can undertake “preventive” action that simply obliterate the effect competition law may have on addressing inequality.

But lets assume, in a third scenario, that a given developing country succeeded in introducing a competition act and setting up a competition authority (CA) but at the same time this authority faces a high concentration of economic and political power. Naturally, the question that emerges relates to whether the issue should be or can be a top priority from the perspective of development competition and, if yes, how to achieve it?

It should be noted first that CAs are not immune to external influences. However, their resistance to these interferences depends to a great extent on the powers they were granted. At the same time, not only the nature of powers and the institutional architecture (Both influenced by the intervention of interest groups in the enactment process) but also the public support a CA enjoys determines significantly the answer to the question raised above.

Even if the creation of a strong CA materializes, its task will not be an easy one. From a general point of view, it is clear that fighting against the concentration of economic and political power should be considered as a top priority in any CA’s mission. The main reason of course is that a balanced development cannot be achieved in the presence of a concentration of economic and political power. Instead, inequality may persist or even be exacerbated. In practice, however, the existence of such concentration of power can greatly obstruct competition authority efforts as long as (as soon as) a proactive approach to the enforcement of competition provisions against powerful economic entities is undertaken (budget cutting, huge press campaigns…).

At the end, it clearly appears that, as some of our readers have commented, one of the most important roles for competition law and policy from the perspective of development is tackling the concentration of economic and political powers but this concentration also can make competition law and policy ineffective in most developing countries.

*Co-editor, Developing World Antitrust

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22 December 2014
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Development and Antitrust Law

Does Competition Policy Promote Development?

By Francisco Beneke*

There are almost 80 developing countries that have enacted an antitrust statute.[1] In such economies, budget constraints force governments to prioritize the implementation of policies that have the greatest impact. Assigning resources to, for example, prevent and eradicate terrible widespread diseases may be more justified than improving the conditions of roads. The situation is no different for competition policy. The antitrust agency has to be staffed and equipped, which requires taxpayers’ money. Therefore, it is important to know if antitrust law contributes to the development of a country and if there are any adjustments to be made in order to enhance its positive effects.

The academic debate on whether competition policy promotes development is complicated. First, because development itself is a controverted concept and, thus, there are many approaches on how to measure it. In this post I will focus on GDP growth. Even if a high income per capita is a poor measure of development, it is still a valid (though it should by no means be the only) goal to increase the income levels of the population in general.

The second reason for the complexity of the debate is the distinction between competition and competition policy. Many theoretical and empirical studies make the case for a positive relationship between more competition and technological innovation, productivity, and economic growth. However, a different issue is the effect of the policy itself. In other words, is competition policy effective in procuring greater rivalry among firms and, therefore, spurring increases in productivity and innovation that cause sustained long-term growth?

The answer to this question is not a matter settled between academics. Exploring one aspect of competition policy in the US, the enforcement of the law over the period of 1947-2003, Young and Shugart II (2010) find that the activities of the DOJ (measured by the ratio of its expenditures on the Antitrust Division to GDP) are associated with negative impacts on the productivity of firms in the short run with no evidence of long run benefits that compensate the temporary loss of productivity. In other words, it appears that behavior adjustment to antitrust rules imposes additional production costs on firms.

One weakness of the study is, strangely, the timeframe that is analyzed. Usually a greater temporal scope of the data allows for estimations less sensible to short-term shocks. However, in this particular case, the study is measuring different things across time regarding competition policy. As it is known, antitrust enforcement in the US went through a deep overhaul in the late 70’s and all through the 1980’s. Therefore, it is hard to know from the study the effects that the current design has.

In another study, Dutz and Hayri do find a positive association between the perception of firms that competition policy works and economic growth (Dutz and Hayri (1999)). The measure is taken from the Executive Opinion Survey (EOS) administered by the World Economic Forum. It captures the perception of firms, excluding that of other key stakeholders, such as consumers. Therefore, it could be problematic to interpret it as a measure of the overall quality of competition policy.

Another problem of using this and other perception measures of the effectiveness of competition policy is that this latter concept is in itself ambiguous. The EOS does have methods to ensure consistency of the answers within a country, but a more difficult task is to ensure that the mindset with which executives evaluate competition policy across countries is comparable.

A few examples can illustrate the problem mentioned in the paragraph above. In the 2015 release of the EOS’s results we have that in Latin America the county where firms perceive that competition policy works the best is El Salvador, with a slightly better score than Chile. Although El Salvador has made a lot of progress in the implementation of competition policy, Chile has a significantly better track record in actively pursuing cartels and abuses of dominance. It is also surprising to see that Mexico falls well behind and even ranks worse than Guatemala, a country with no competition law. While no measure is perfect, the one used in Dutz and Hayri (1999) is far from adequate to measure real differences in the effectiveness of competition policy across countries.

Other studies use a composite index based on both perception and objective data on competition policy such as the formal and factual independence of antitrust agencies and the years of existence of a competition statute (Voigt (2006) and Bolaky (2013)). For a review of the literature that analyzes the effects of competition policy and growth see Petrecola, et al. (2015). These studies deserve some comments. In order to keep this post short, their analysis will be the object of a future entry.

The studies that find an association between more competition and strong economic performance present their own challenges. Petrecola, et. al. (2015) is an interesting case in which the authors find a positive association between the perception of the intensity of competition within a country and growth at the global level, but find a statistically significant negative association when considering only Latin American countries.

It is a hard task to reconcile these findings. The authors offer some potential explanations such as the accurateness of the indicators used, the preference of macroeconomic policy over competition policy (which both reduces the relative effects of competition policy on growth and the priority that governments give to the former). What is curious is that the indicator used in this study captures the perception of the intensity of local competition and not the effectiveness of competition policy so the explanations address why competition itself has a negative impact on growth. In addition, the reasons put forward argue for a reduced effect of competition policy but do not explain the “wrong” sign of this variable in the regression results.

Another aspect of competition policy is its advocacy pillar. The relationship between certain reforms usually advocated by antitrust authorities and growth has been vastly explored. Openness to trade was found to have a positive significant association with investment rates in Levine and Renelt (1992) and Brunetti and Weder (1995). Bailey, Graham and Kaplan (1985) find that the deregulation of the airlines industry in the 70’s explains most of its growth in productivity. However, it is worth pointing out that an important issue would be to measure the effectiveness of the advocacy efforts of the authority in ensuring reforms that promote growth.

Competition authorities rely on the studies that show its net positive effects on economic performance to claim a central role in the formulation of public policy and to receive more resources to expand the scope of their enforcement and advocacy activities. And to be fair, there is no shortage of such studies. However, this is only part of the story. Competition policy conceived as an instrument to enhance consumer welfare is not conclusively proven to promote growth and, least of all, development.

Possibly as a result of this, there is an emerging literature that addresses the issue of whether a different competition policy can be designed that fits the needs and priorities of developing countries. Some prominent scholars on the issue include Eleanor M. Fox and Michal S. Gal. Both scholars are co-authors of an influential paper on the subject, where they explore some of the specific economic and social characteristics of developing countries that warrant an adjustment of antitrust law and policy (Gal and Fox (2014)). Some actual examples of adapting competition policies to meet development goals are China and South Africa.

To conclude, I would like to stress that the positive net effects of competition policy on economic growth are not conventional wisdom. It is still an open question and invites academics and practitioners to contribute to the clarification of such an important matter.

* Co-editor, Developing World Antitrust

@Paco_Beneke

[1] The International Competition Network has member authorities from 115 different economies. This number is not exhaustive of all countries that have a competition law because, for example, the Chinese antitrust agencies are not members of the network. However it is still a good approximation. The number of the advanced economies from the International Monetary Fund is 40. This latter number includes two economies without an antitrust statute: San Marino (a country of approximately 31,000 inhabitants) and Macao (a special administrative region in China). This leaves us with some 77-plus developing countries that have an antitrust statute.

References

Bailey, Elizabeth E.; Graham, David R.; and Kaplan, Daniel P. Deregulating the Airlines. Cambridge, Massachusetts. MIT Press (1985).

Bolaky, Baineswaree. “The Effectiveness of Competition Law in Promoting Economic Development.” International Journal of Economics and Finance Studies, Vol. 5, No. 1, (2013).

Brunetti, Aymo, and Weder Beatrice. “Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures.” Weltwirtschaftliches Archiv 134.3 (1998): 513-33.

Dutz, Mark and Hayri, Aydin. “Does More Intense Competition Lead to Higher Growth?” CEPR Discussion Paper 2249, C.E.P.R. Discussion Papers (1999).

Gal, Michal S. and Fox, Eleanor M., “Drafting competition law for developing jurisdictions: learning from experience”. New York University Law and Economics Working Papers. Paper 374 (2014).

Levine, Ross and David Renelt. “A Sensitivity Analysis of Cross-Country Growth Regressions.” American Economic Review Vol. 82, No. 4, pp. 942-63 (1992).

Petrecolla, Diego; Greco, Esteban; Romero, Carlos; and Vila-Martinez, Juan P. “Economic Structure and Competition Policy Application in Latin American Countries.” In The Economic Characteristics of Developing Jusrisdictions: Their Implications for Competition Law. Gal, Michal S. et al, Eds. Edward Elgar Publishing, Northampton, Massachusetts (2015).

Voigt, Stefan “The Economic Effects of Competition Policy: Cross-Country Evidence Using Four New Indicators.” Available at SSRN: http://ssrn.com/abstract=925794 (2006).

Young, Andrew and Shughart, William. “The consequences of the US DOJ’s antitrust activities: A macroeconomic perspective,” Public Choice, Springer, vol. 142(3), pp. 409-422, March (2010).

 

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15 December 2014
1 Comment
Africa, Asia

Antitrust News from the Philippines, South Africa and Morocco: A New Comer, a Non-Conventional Merger Decision and Germany Offers Guidance

By Amine Mansour*

During last days, Francisco and I were very busy due to a huge workload. However, many important developments in the DW antitrust arena occurred.

1/– Philippines nears introduction of its first comprehensive competition Law.  Recently, the Senate President indicated that the Congress will pass the Act (will be known as Fair Competition Act of 2014) before yearend. This is close to became true as the text was approved on Second reading by the senators. Philippines is the last country from the ASEAN six majors to adopt a competition law (Indonesia and Thailand in 1999, Singapore in 2004, Vietnam in 2005 and Malaysia 2010). Introducing a Competition bill has become a pressing issue in Philippines giving its regional commitments. In 2015, ASEAN countries will implement the ASEAN Economic Community (regional economic integration) which calls in its Master Plan (ASEAN Economic Community Blueprint) for countries to undertake several actions in the field of competition and in particular “Endeavour to introduce competition policy in all ASEAN Member Countries by 2015“.

In substance however, the text comprises not only prohibitions on anti-competitive agreements and abuse of dominant position but introduces also a merger control regime. The wording of some provisions suggests that the drafters were inspired by the EU competition law model. In support of this position, we can, for instance, note the existence of the object/effect alternative in the article laying down the prohibition of anti-competitive agreements. Also, the exemption mechanism is somehow similar to article 101 (3) TFEU even if it does not include all the four conditions. Similarly to article 101 TFEU, the assessment of anti-competitive agreements under the Fair Competition Act of 2014 will thus consist of two different parts. Other developments confirm the preference given to the European model, but without going into too much detail (we will soon come up with a very detailed article on the Act) a quick overview of the text clearly points toward another victory for the European model of competition.

2/ In south Africa, The Competition Commission (CompetC) has identified in the merger Shoprite/Ellerines a public interest concerns relating to the situation of the 308 post-merger workers of the target company (Ellerines). Following this, it has recommended to the Tribunal making the approval of the merger conditional upon the retention of the remaining employees.  Naturally, the Tribunal agreed, yesterday, with this proposal and approved the merger on the condition that all post-merger workers will be employed by the acquiring firm Shoprite. Such decision does not come as a surprise. Article 12A (3) of the Competition Act clearly stipulates that: ” When determining whether a merger can or cannot be justified on public interest grounds, the Competition Commission or the Competition Tribunal must consider the effect that the merger will have on (…) (b) employment (…)“. But probably the most striking fact is that, the CompetC and Tribunal both have to assess a merger on the ground of public interest even if it appears that the notified operation does not give rise to any competition concerns. So this is probably why employment and other public interest issues are so often raised in merger cases in South Africa (for some very recent cases see here and here and also this one). Taking into account those precisions, what we have been highlighting as a very special case is not that special given the very nature  of article 12A of the Competition Act and somehow the Act itself which, inter alia, calls in section 2 relating to the purpose of the Act for the promotion and maintenance of competition in the Republic” in order (…) to promote employment and advance the social and economic welfare of South Africans (…)“.

3/ In Morocco, the Decree n° 2.14.652 which is an implementing regulation of the new law n° 104-12 on Freedom of Prices and Competition was adopted on the first of December (Her for Arabic readers). In this context, the Moroccan Competition Council (MCC) and German Federal Enterprise for International Cooperation (GIZ) launched a support program aiming at assisting the Moroccan institution in its effort to implement the newly adopted text. It is the second such project, after a twinning project , funded by the EU and implemented in 2009 between the MCC and the Bundeskartellamt for the purpose of strengthening the capacity of the Moroccan regulator.

*Co-editor, Developing World Antitrust

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24 November 2014
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Latin America

Mexico’s New Competition Law

By Francisco Beneke*

There is hardly a stronger way to show a state’s commitment to the goals of competition law than the “Pacto for Mexico”. This pact is a multi-partisan agreement in which competition is put at the center of the government’s policy to promote the development of the country. As a result of the pact, the constitution was amended and the Mexican competition authority was elevated to the category of an autonomous constitutional entity. Also, a new competition law was enacted on July this year. Whatever opinion anyone has on the substance of the constitutional amendments and the new competition law, Mexico’s intent is pretty clear: improve the country’s economic performance through the protection of the competitive process.

The new law gives greater investigative powers to the Comisión Federal de Competencia Económica (the Comisión), adds more types of conducts to its list of forbidden behavior and separates, to some extent, the investigative and adjudicative functions of the authority. However, what prompts me to write a post on this law are not these interesting issues but something that I believe troubles Mexican firms the most.

The wording of the law is a signal of Mexico’s distaste for concentrated market structures. Article 2 states among the objectives of the law to severely punish and suppress monopolies, monopoly behavior, unlawful mergers and so on. The part that I have underlined contrasts sharply with the general idea that antitrust authorities are not there to fight monopolies but monopoly behavior. The article talks separately about the latter so there is little room to construe that there was a confusion of concepts. Mexican legislators did mean to attach a negative connotation to the term monopoly.

But what makes the new Mexican law more unique is not its general call for arms against monopolies but its specific mechanism to suppress them: a special procedure in which, if the authority determines that the market lacks effective competition (“condiciones de competencia efectiva” in Spanish), injunctions and divestitures can be ordered and regulations regarding access to essential facilities can be issued (article 94 of the law). This special type of investigation is not to be confused with the procedures that deal with anticompetitive behavior. A firm may not be engaging on conduct that violates articles 53 to 56 of the law but may still be ordered to abstain from certain behavior, sell some of its assets or let competitors use them if the authority determines that there is little competition.

So far, the Comisión has not started any special investigation under article 94. Neither has the Instituto Federal de Telecomunicaciones, which possesses exclusive jurisdiction on competition law matters in telecommunication markets. As Mexican firms must be, I am eager to learn what lack of effective competition means. Also, according to the law, if the firm under investigation proves that a given conduct or essential facility has pro-competitive effects that compensate any negative impact on consumer welfare then no injunction, divestiture order or regulation will be issued. The pro-competitive effects can include dynamic considerations such as innovation arguments, so it will be interesting to see how the authorities handle this criterion.

From the paragraph above, it seems that the law on lack of effective competition will be very facts-specific and, therefore, one thing is pretty clear: the enforcement of article 94 will be surrounded by a high degree of uncertainty. Luckily for me, I can sit back and relax while I wait for developments on this area but I don’t think firms operating in Mexico share this attitude. Most likely they are wishing for the Comisión and the Instituto Federal de Telecomunicaciones to forget about this special procedure or at least to establish a high hurdle to prove a lack of effective competition.

Co-editor, Developing World Antitrust

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15 November 2014
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Africa

Competition Advocacy: Developments from Botswana

By Amine Mansour*

It’s widely accepted that competition authorities’ (CAs) mission extends beyond enforcement of competition rules to focus also on advocacy.

Several young and well-established CAs have engaged in numerous public awareness programs. It is critical for CAs in developing countries to engage in such activities as the real problem in those countries lies in the low-level of competition culture. People who are educated in how competitive markets work are less prone to believe arguments such as «it is good to protect national industries against foreign competition because they create jobs» or others of the sort. In this respect, I would like to highlight in this post a particular aspect of the activites that contribute to establish a real competition culture. Specifically, the main idea relates to the community or the audience that these programs should target when implemented in a developing country.

Several authors and papers call for a selective approach that directly targets the business sphere and decision makers. However, one key aspect that is often neglected in these works are young audiences. The recent activity of the Competition Authority of Botswana (CAB) is a great example of how a real competition culture could be disseminated within young people. First on the 7th of November, the CAB briefed students from the University of Botswana on how competition benefits consumers. Shortly after this initiative, students from Limkokwing University benefited from a lecture on competition law delivered by CAB’s staff. Efforts from this very young agency (set up on 2011) that, by the way, has won “the Most Media Visible Parastatal Award at the annual Ministry of Trade and Industry Awards”, led it to host Junior Achievement Botswana Students.

These initiatives show that the package competition/advocacy imposes a mandate on CAs to undertake a multifaceted effort. This drives us to consider whether young audiences, in particular students, should come as a priority in every effort. In addition to the argument based on alerting future generations to the benefit of competition policy, two additional reasons support this claim.

On the one hand, the common ground of the activities highlighted above is their educational dimension (briefing on market dynamics and the CA’s role in this respect). These efforts are more than welcome in the context of a developing country in which the public has a limited knowledge of the benefits of competitive markets. In this respect, students are a key element. By alerting them to the benefit a competition policy, they will be the relay for the dissemination of a competition culture to the general public.

On the other hand, pro-competition discourse when addressed to young audiences, in particular students, may face less opposition than would be the case with trade unions, local governments or entrepreneurial associations. In this perspective, it would be wise to secure this fraction’s support before addressing groups that may heavily oppose competition. Raising awareness of the benefits of competition is important to a large number of antitrust authorities in developing countries as it helps them to get the support of strategic sectors of the population.

Young audiences should be a central element of any awarness compaign. Their contribution to building a competition culture is not to be underestimated either when playing a seeding role or when being a target of those compaigns.

*Co-editor, Developing World Antitrust

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