Tag Archives: Competition Law in Developing Countries

How Can Competition Law Enforcement in the Digital Economy Help in the Fight Against Poverty?

By Amine Mansour*

When talking about competition law and poverty alleviation, we may intuitively think about markets involving essential needs. The rise of new sectors may however prompt competition authorities to turn their attention away from these markets. One of those emerging sectors is the digital economy sector. This triggers the question of whether the latter should be a top priority in competition authorities’ agenda. The answer remains unclear and depends mainly on the potential value added to consumers in general and the poor in particular[1].

Should competition authorities in developing countries focus on digital markets?

Obviously, access to computer and technology is not a source of poverty stricto sensu. In the absence of basic needs, strategies focusing on digital sectors may prove meaningless. In practice, the last thing people living in extreme poverty will think about is gaining digital skills. Their immediate needs are embodied in markets offering goods and services which are basic necessities. The approach put forward by several Competition authorities in developing countries corroborates this view. For instance, in South Africa, digital markets are not seen as a top priority. Instead, the South African competition authority focuses on food and agro-processing, infrastructure and construction, banking and intermediate industrial products.

There are however compelling arguments to be made against such position. Most importantly, although access to technology and computers is not a source of poverty, such an access can be a solution to the poverty problem. In fact, closing the digital gap by providing digital skills and making access to technology and Internet easier can help the low income population when acting either as entrepreneurs or consumers. In both cases competition law can play a decisive role.

The low income population acting as consumers

First, when acting as consumers, people with low income can enjoy the benefits of new technology-based entrant. Thanks to lower costs of operation, lower barriers to entry and (almost) infinite buyers, these new operators have changed the competitive landscape by aggressively competing against traditional companies. These features have helped them not only extending existing products and services to low-income consumers but also making new ones available for them. Better yet, in some cases increased competition coming from technology-based companies motivates traditional business forms to adapt their offer to low-income consumers so as to face this new competition and remedy shrinking revenues. Perhaps, the most noteworthy aspect of all these evolutions, is that these new entrants have, in some instances, been able to challenge incumbents’ position by driving prices downward to levels unattainable by traditional companies without scarifying their profitability.

A shining example of all this dynamic is the possibility for low-income consumers to engage, thanks to some mobile companies, in financial transaction without the need to pass through the traditional stationary banking infrastructure. For instance, in Kenya, M-PESA a mobile money transfer service that has over 22 million subscribers[2] and around 40,000 agents (around 2600 Commercial bank branches)[3] changed the life of million of citizens. The service enables clients to deposit cash into their M-PESA accounts, send or transfer money to any other mobile phone user, withdraw cash and complete other financial transactions. A farmer in a remote area in Kenya can send or receive money by simply using his mobile phone. In this way, M-PESA can act as a substitute to personal bank accounts. This experience shows how the digital economy helps overcoming the prohibitive costs of reaching low-income customers and thus raising living standards.

On that basis, we can easily imagine the counter-argument incumbent companies might put forward. In this regard, unfair competition and the need for regulation to preserve policy objectives are often in the forefront. However, there is a great risk that these arguments are simply used to restrict market entry and impede competition from those new players.

In fact, this kind of arguments do not always reflect market reality. For example, in some remote geographic areas, traditional companies and the new ones based on the digital/internet space do not even compete directly against each other. Accordingly, regulation intended to protect policy goals has no role to play given that the affected consumers are out of the reach of the traditional business. In the M-PESA example, it may be possible to argue that any operator engaging in financial transactions should observe the regulatory restrictions that apply to the banking sector in order to ensure that policy objectives such as the stability of the banking system or the protection of consumer savings are preserved. However, applying such a reasoning will leave a large part of consumers with no alternative given the absence of a banking infrastructure in remote areas. The unfair competition and regulation arguments may only hold in cases where consumers are offered alternatives capable of providing an equivalent service.

This shows the need to proceed cautiously by favoring an evidence-based approach to the ex-post use of the regulation argument by incumbent operators. This is however only one of different facets of the interaction between the competitive impact of companies based on the internet-space, the regulatory framework and the repercussions for people with low income[4].

The low income population acting as entrepreneurs

Second, the focus on digital markets as way to alleviate poverty is further justified when low-income people act as entrepreneurs. In fact, digital markets are distinguished from basic good markets in that they may act as an empowering instrument that encourages entrepreneurship.

More precisely, the digitalization of the economy results in an improved access to market information which in turn may benefit entrepreneurs especially the poor whether they intervene in the same market or in a different one. Practice is replete with cases where, for instance, a downstream firm heavily relies for its production/operation on services or products offered by an upstream company operating in a digital market. Similarly, in a traditional and somewhat caricatural way, a small-scale farmer may use VOIP calls to obtain market information or directly contact buyers suppressing the need for a middleman.

However, we can well imagine the disastrous consequences for these small-scale farmers or the downstream firm if mobile operators decide to block access to internet telephony services such as Skype or WhatsApp based on cheap phone calls using VOIP (this is what actually happened in Morocco). In such a case, the digitalization of the economy has clearly contributed to greatly lowering the costs of communication and distribution. However, low income entrepreneurs are prevented from benefiting of these low costs, which are a key input to be able to compete in the market.

The major difficulty here lies in the fact that, when low income people act as entrepreneurs, it is likely that they organize their activities in small structures. This result in relationships and structures favorable to the emergence of exploitative abuses. Keeping digital markets clear from obstructing anticompetitive practices is thus indispensable to ensure that small existing or potential competitors are not prevented from competing. This might not be easily achieved given that competition authorities’ focus is sometimes more on high profile cases.

*Co-editor, Developing World Antitrust

[1] Intervention may also be justified by the institutional significance argument. This significance lies in the fact that those markets are growing ones and challenging the common ways of both doing business and applying competition rules which in turn make it crucial for authorities to intervene by drawing the lines that ensure the right conditions for those market to grow and develop.

[2] http://www.safaricom.co.ke/about-us/about-safaricom

[3] http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-agents

[4] For instance, it possible to think of the same problem from an ex-ante point of view highlighting incumbent firms’ efforts to block any re-examination of the regulatory standards that apply to the concerned sector (no relaxation of the quantitative and qualitative restrictions). This aspect has more to do with the advocacy function of competition authorities.

Tagged , ,

Ten Years of the Competition Superintendence – Past, Present, and Future

By Marlene Tobar*

Competition law enforcement in El Salvador started ten years ago, an ideal moment to assess the work of the Competition Superintendence, the authority in charge of its implementation since January 2006.

In these first years, the institution has carried out a healthy oversight of markets promoting undistorted competition, strictly following the legal framework and proving its independence from political forces[1]. In addition, the authority has taken a leading position in the region. It has been awarded twice at the World Bank’s Competition Advocacy Contest, it is the only authority in Central America that has enjoined a merger (the acquisition of Digicel by Claro in the telecommunications market), and it has given a strong push to the design of a regional competition law through its work in the RECAC[2] (the Central American network of competition authorities).

In the law enforcement area, it conducted investigations in markets that have spillover effects in the economy such as the energy industry, the wheat flour market (carrying out dawn-raids), the distribution of sugar (imposing a fine on Dizucar, the dominant wholesale distributor that is owned by the local sugar mills), and the telecommunications industry, among others.

The institution acknowledged the role that public sector intervention plays and allocated substantial resources to identify restrictions to competition arising from regulations. For that purpose, the authority pointed toward the need of improving regulations to promote more openness to trade regarding products of social importance such as rice and sugar. The Competition Superintendence has also pushed for reforms to the law that creates a legal cartel in the production of sugar. Another important policy change promoted has been the amendment of the system under which radio-electric spectrum concessions are granted in the telecommunications industry. The recommendations are aimed at promoting competition in the allocation of this input (competition for the market) in a context of upcoming expiration dates to current grants in the broadcasting market and the still uncertain process of digital technology adoption in the country.[3] Recently, the authority issued a statement regarding a decision by the Supreme Court’s Constitutional Bench[4] on the alleged unconstitutionality of certain provisions of the Telecommunications Law. The Court stated that the national congress should not close the door on any advisory intervention of the Competition Superintendence during the hearings on the issue.[5]

The Competition Superintendence has decided a total of 14 cases of anticompetitive behavior, analyzed 16 merger transactions, carried out 23 market studies, issued 128 opinions, signed 36 MoU’s, and implemented a wide-ranging program of diffusion and promotion of the country’s competition law. The authority has imposed $15.1 million USD in fines (93% of which correspond to anticompetitive behavior decisions). In other words, it is quantitatively and qualitatively clear that the authority has sought to cover all sources of restrictions to competition.

Nonetheless, the main topic to reflect upon is the ability of having a real impact on efficiency and consumer welfare (objectives that the authority has to pursue by law), which are to be understood as indirect means to achieve higher living standards for society.

At the moment, such ability is hindered by the lack of support from the legislative, executive, and judiciary branches evidenced by (at least) two facts: first, the Supreme Court’s Administrative Bench’s judicial backlog regarding the review of the Competition Superintendence’s decisions on anticompetitive behavior. From the total of fines imposed by the authority ($15.1 million USD), more than 90% have been challenged by the punished firms, with 27 ongoing proceedings before the Administrative Court and 1 before the Constitutional Court. Currently, there are $9.1 million USD of overdue payments in fines. On its part, the Administrative Court has temporarily enjoined some of the payments and other precautionary measures, a part of which have been certified to the National Prosecutor[6].

Second, the authority has found scant support from other government institutions in the implementation of policy recommendations and inter-institutional dialogues have been rare at best (or non-existent in many cases). The first element hinders the ability to correct the punished anticompetitive behavior and hampers the deterrent effect of the fines; and the lack of support from other government entities reduces the likelihood that competition policy can spur economic and social growth.

All that said, it is important to look at the future and set the direction of competition policy in El Salvador. In his speech in the event commemorating the tenth year anniversary of the institution, the superintendent stated that he would seek for the institution to have a greater impact in key variables of the economy (development, poverty, and inequality) with the purpose of contributing to its “democratization”.

In order to do that, in addition to tackling the problems mentioned above, the authority will have to aim its competition enforcement activities toward solving the real problems faced by the country. As a consequence, there are more than a few considerations to be made. Some of the main issues to be analyzed are if the current legal framework is adjusted to the nation’s objectives; if the use of neoclassic economic theory is an adequate basis for the analysis of competitive restrictions (as the international community advises as best practices); determining the objectives that competition policy has to pursue in order to effectively contribute to the country’s development; to define the term of economic efficiency that will be pursued, among others. This analysis will have to be made taking into consideration El Salvador’s particular traits and variables that determine the dynamics of competition in its national markets.[7]

*The author is the head of the department in El Salvador’s competition authority that is in charge of the merger review proceedings, market studies, and opinions regarding law proposals and rules of tendering in public procurement.

[1] The law entered into force under a right-wing government. Under the current left-wing government the authority imposed a fine in the amount of $759,924 USD to Alba Petróleos for failing to report mergers. This firm is partly owned by ENEPASA, an association of municipalities governed by majors from the political party that controls the executive branch. Even so, the president re-elected the superintendent, Francisco Díaz, for a second term, setting a precedent in the region.

[2] Composed of the competition authorities from Costa Rica, El Salvador, Honduras, Nicaragua, Panama, and the Dominican Republic. Representatives of the Guatemalan government attend the meetings in an observer capacity since Guatemala has no competition law to this date.

[3] Currently, the Congress is evaluating the best way to implement the amendments ordered by the Constitutional Court regarding the design of an alternate mechanism for the auctions of radio-electric spectrum.

[4] Decision of the Constitutional Court on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014. In El Salvador, the Supreme Court of Justice is divided into separate sub-courts according to a subject-matter criterion.

[5] Clarification issued by the Constitutional Court on December 16, 2015, regarding its decision on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014.

[6] One such example is the order enjoining the anticompetitive behavior for which DIZUCAR (the wholesale distributor owned by El Salvador’s sugar mills) was punished.

[7] Gal, M., et al. (ed.) (2015). The Economic Characteristics of Developing Jurisdictions, Their Implications for Competition Law”. Edward Elgar, Northampton, United States.

Tagged , , ,

The Fear of Market Concentration, the Legacy of the Chicago School of Antitrust, and Political Influence of Firms – Lessons for Developing Countries

By Francisco Beneke*

The Fall of the Structure-Conduct-Paradigm and the Rise of the Chicago School of Antitrust

In its first decades, the courts and enforcers in the US were skeptical of market concentration and took a wide view of which conducts from dominant firms could be considered unlawful under the antitrust laws. This was in part due to the influence of the structure-conduct-performance paradigm that was widely supported by industrial organization economists of the time.

That changed with the rise of the Chicago School of Antitrust. Some of their main ideas were that market concentration was not always a sign of diminished competition and that the unilateral exercise of market power is almost always self-correcting and does not warrant the costs of antitrust intervention. This thinking took a strong foothold in academia and the courts in the late 1970’s and during the first Reagan Administration. During this time, many key positions in the DOJ, FTC, and the federal bench were filled with Chicago School supporters. The result was a clear break with prevailing rules regarding merger control and unilateral conduct such as predatory pricing.

Since then, some of the considerations that courts made in the past when blocking mergers and punishing dominant firms are now dismissed as making no economic sense. In this post, I analyze one such specific consideration that relates to the desire of a decentralized market structure because of the danger market concentration poses to democracy.

Does Favoring an Economy of Many Producers instead of a few big Efficient Corporations Make No Economic Sense?

In the 1960’s, starting with Brown Shoe Co., the US Supreme Court issued a series of merger decisions blocking transactions that in their most part concerned companies with low market shares. One of the main arguments of the Court was that the intent of Congress in enacting certain amendments to the Clayton Act was to stop the worrisome rising tide of concentration in the American economy. In the words of the Supreme Court: “we cannot fail to recognize Congress’s desire to promote competition through the protection of viable, small, locally owned businesses”. Higher prices could result from curtailing consolidation but the Court interpreted that Congress had stroke a balance in favor of decentralization. Similar arguments were used in 1945 in the Alcoa decision by judge Learned Hand in interpreting section 2 of the Sherman Act.

The decisions mentioned that Congress was worried not only with the economic power of firms controlling large parts of commerce but also with the threat that such control could have on other values of their democratic society. Individuals could find themselves helpless before big corporations. These considerations are now largely dismissed as not grounded on sound economic analysis. Weren’t they though? Under the light of political economy theories it is a valid question to ask.

Some economists argue that market concentration is a predictor of the formation of interest groups, and that dominant firms are more likely to exert political influence independently from their industry peers. That is, a firm with monopoly power is more likely to lobby for its own interests rather than those of the market as a whole. In addition, there is literature that supports an association between campaign donations and policy outcomes favorable to the donating firms. In other words, interest groups are effective in shaping public policy. In an earlier post in this blog, Amine already analyzed how influential firms could shape the adoption and enforcement of antitrust laws.

These theories and empirical studies can provide a framework and foundation on which to analyze a worrisome trend toward concentration of firms in the economy and still fit the analysis under the consumer welfare paradigm. For example, a merger that will lead to a stronger oligopoly can make firms in the industry lobby more effectively in order to entrench their position, especially in regulated markets. The likely result could be lower consumer welfare even in the face of efficiencies associated with the transaction.

These political economy theories are old. Dismissing the concern of the courts in the past regarding concentrated markets and the threat to democracy as based on unsound economic analysis was more a product of not looking outside the boundaries of microeconomics rather than the considerations lacking any economic sense.

Should Developing Countries be Concerned about a Worrisome Trend toward (or a Reality of) Concentrated Markets?

Professor Eleanor Fox advocates for a different focus for competition policies in developing countries. Rather than pursuing consumer welfare, Professor Fox advocates for competition policy as a tool of empowering medium and small enterprises by protecting them from abuses of dominant firms. The theories that link concentrated markets with the formation of interest groups and sub-optimal policies can be another argument in favor of Professor Fox’s approach.

The possibility of entrenching a monopoly or oligopoly position with the help of government policy can also have a long lasting impact in the overall development of the country. Firms that have already made investments in a given technology can oppose the introduction of new ones until they recoup their investment. That in turn would slow the pace with which countries adopt the latest methods of production, affecting productivity and, therefore, the income of workers.

If there is a link between concentrated markets and all of these harms that are usually not considered in antitrust analysis, then developing countries should be concerned with a rising tide or a current predicament of concentrated markets.

Another issue would be to analyze whether competition policy could be an effective tool to achieve this end. Given the already extensive length of this post, that can remain as a topic for future discussion.

*Co-editor, Developing World Antitrust

@Paco_Beneke

Tagged , , ,

Telecommunications Industry, Market Failures, and Government Intervention in El Salvador

By Carmen Ortiz*

In October of 2015, an incumbent in the Salvadoran telecommunications industry, Telefonica, affirmed that the country is the most underdeveloped in terms of telecommunications in Latin America[i]. The government responded with an effusive denial[ii]. It supports the current framework of allocation of Radio Electric Spectrum (RES) by auctions that reward the highest price. The controversy brings up considerations from a public law and competition policy perspectives regarding the impact that the sector regulation, Ley de Telecomunicaciones (LT), has on the conditions of competition in the market for broadband services.

The regulation’s objectives are the promotion of access to telecommunications for all sectors of the population, the protection of the rights of the users, operators, and service providers, the development of a competitive telecommunications market and the rational and efficient use of RES. RES[iii] is a scarce public resource fundamental for essential sectors such as telecommunications and for services such as mobile and wireless broadband. The reason for the regulation of RES is its scarcity and the fact that competing uses of the same frequencies result in chaos[iv]. Barriers to entry through the hoarding of RES are a type of business strategy[v].

The controversy points out market failures in terms of missing markets for the provision of full national coverage of broadband services. Three operators, Telefonica, Claro, and Tigo, offer 3G and/or 4G only in restricted areas close to the main cities. Digicel does not offer 3G, nevertheless, is the only one with national coverage for 4G services. The fact that the frequencies assigned for mobile telecommunications have all been licensed to incumbents[vi] and that no entry has occurred in the last 10 years indicate that the lack of RES is a barrier to entry.

SIGET, the regulator responsible for the management of RES, orders public auctions upon requests of licenses for its use. Licenses have a 20-year term and are adjudicated to the highest bidder. From a public policy and competition policy point of view, the legal framework is fundamentally flawed: it bans an evaluation for the appropriateness of issuing licenses of RES according to its rational and efficient use.

“Effective policy must recognize competition issues in the downstream market for wireless services”[vii]. Superintendencia de Competencia, the national competition authority, performed a substantial analysis on the topic and issued recommendations to SIGET on how to promote and protect competition through the management of RES[viii], for example, by performing auctions exclusively for entrants. Unfortunately, its recommendations are not binding for the regulator.

An analysis from a public law perspective can identify if the regulation favors certain players at the detriment of others and if competition and consumer welfare are neglected. The question to be answered is how the LT protects or neglects the interests of the players involved.

Starting with incumbents, who in majority have colluded in the past[ix], they would prefer to maintain the status quo and close the market than to confront pressures of an entrant. The price for closing the market can be paid through an auction, even if overbidding is necessary. The LT permits this strategy and facilitates foreclosure. On the contrary, potential entrants are negatively affected. They might not posses at once the economic resources necessary to win an auction against motivated incumbents and to invest on sunk costs to enter the market. Being implicitly excluded from a positive outcome in the auction and from the downstream market means they are losers. Moreover, the LT gives them incentives to abstain from participating in auctions.

The SC is obstructed from protecting and promoting competition to achieve economic efficiency and consumer welfare because its opinions and recommendations on the efficient management of RES are not binding for SIGET. SC could even be demotivated to continue spending resources in performing analysis and recommendations on a topic that has a dead end with the regulator. The SIGET is unable to achieve its own objectives because the LT inhibits it from evaluating the efficiency and rationality in allocating RES. New market failures cannot be prevented or corrected. The central government, receiving millions of dollars to be paid in the auctions, supports emphatically the higher bidder-winner design and fails to acknowledge the new market failures faced in the industry. Favored with additional income, it has no intentions to reform the legal framework. Finally, consumers, the most important of all, are deprived from wider choices and from the benefits of vigorous competition, innovation, lower prices, and ample access to broadband benefits in wider geographical areas. Hence, consumers are losers.

From a competition law and public law perspective, an efficient management of RES and a national broadband planning for the long term should be a priority in developing countries. The state is responsible for these and its responsibility cannot be circumvented by the economic gains resulting from a higher bidder-winner auction design. Auctions for licenses of RES are a way of efficient allocation and encouragement of investment. For this, the regulator should make efforts to remove the legal obstacles that obstruct its responsibilities. Then, evaluate the existence of market failures, the conditions of competition in the market (with the support of the competition authority), the legitimate needs of RES of the incumbents and the asymmetries between incumbents and entrants. The ideal outcome of an auction and its design should be based on a case-specific analysis. The design of auctions of RES must have as objectives attracting entrants, preventing collusion and promoting competition both in the auctions and in the downstream markets[x]. Regulations that inflexibly favor the higher bidder-winner may hinder competition, obstruct economic efficiency, economic growth and neglect consumer welfare. Such design does not guarantee that the winner could give the most efficient use of RES. Aiming for the highest price does not imply success in public policy nor economic efficiency in benefit of consumer’s welfare.

*LLM in International Competition Law and Policy, University of Glasgow, School of Law, Scotland, United Kingdom. Candidate for the LLM in Law and Economics, University of Utrecht, Netherlands. Head of the Mergers Control Unit in Superintendencia de Competencia, El Salvador, from January 2012 to August 2015.

References

[i] See recent declarations on local newspapers, available at: http://www.laprensagrafica.com/2015/10/15/el-salvador-el-pais-mas-atrasado-en-telecomunicaciones-de-latinoamerica

[ii] See, Government of El Salvador’s official webpage, available at:

http://www.presidencia.gob.sv/el-salvador-en-primeros-lugares-de-latinoamerica-en-crecimiento-de-acceso-a-telefonia-roberto-lorenzana/

[iii] Radio waves or hertzian waves: Electromagnetic waves of frequencies arbitrarily lower than 3 000 GHz, propagated in space without artificial guide. See the Radio Regulations Articles, International Telecommunication Union (ITU) Library & Archives, Edition of 2012, pg. 7, available at: http://www.itu.int/dms_pub/itu-s/oth/02/02/S02020000244501PDFE.PDF

[iv] Ozanich G.W., Hsu, C., Park, (2004). H. 3-G wireless auctions as an economic barrier to entry: the western European Experience, Telematics and Informatics 21, pg. 227. Available at: https://www.researchgate.net/profile/Han_Park/publication/223696166_3-G_wireless_auctions_as_an_economic_barrier_to_entry_the_western_european_experience/links/00463536b910a89e98000000.pdf

[v] Porter, M., (1984). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, NY., pg. 13-14.

[vi] According to the Cuadro Nacional de Atribucion de Frequencias (Table of national assignation of frequencies), see at: http://www.siget.gob.sv/attachments/2213_CNAF%202004%20y%20modificaciones%20al%202014.pdf

[vii] See, Cramton, P., Kwerel, E., Rosston, G., Skrzypacz, A. (2011). “Using Spectrum Auctions to Enhance Competition in Wireless Services”, The Journal of Law and Economics, Vol. 54, pg. 168, available at: https://web.stanford.edu/~skrz/spectrum-auctions-and-competition.pdf

[viii] See the opinion issued by the Competition Authority of El Salvador, 11/10, 2013, pg. 11, available at: http://www.sc.gob.sv/uploads/SC-043-S-LP-R-2013_111013_1340.pdf and the decisions SC-016-S/C/R/2011 and SC-013-S/C/R-2012

[ix] See Superintendencia de Competencia decision on collusion: SC-017-O/PS/R-2010/RES:19-12-2011

[x] Klemperer, P. (2001).”How (Not) to Run Auctions: the European 3G Telecom Auctions”, November 2001, available at: http://dx.doi.org/10.2139/ssrn.297907, pg. 3

Tagged , ,

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

Tagged , ,

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).

 

Tagged , ,

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

Tagged , ,

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

Tagged , , ,

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

Tagged

The Focus of Competition Policy in Developing Countries

By Francisco Beneke*

This subject has attracted a significant amount of attention and many policy recommendations have been issued. One strong current influenced by the Chicago School of Antitrust advocates for a focus on cartel prosecution and the abolition of legal barriers to entry.

One common argument we hear in pro of this position is that in abuse of dominance cases there is a great risk of punishing what could otherwise be an efficient conduct by a monopolist. The reason is that it is less clear, even in the presence of hard evidence of the conduct, if the effects of the behavior will be to reduce consumer welfare. In the case of predatory pricing there is the issue of what should be the appropriate measure of costs, and since there is no clear consensus many authorities hesitate because no one wants to send signals that aggressive competition could be punishable. In tying cases, sometimes it is not clear whether the practice does indeed constitute an exclusionary tie or if a new functionality has been added to a product. In sum, there are greater uncertainties that surround the efficiency considerations as opposed to price-fixing or other equivalent hard-core cartel conducts.

In addition, in the academic world it is disputed what should be the attitude of the state towards monopoly. Some academics that advocate for ideas close to those of Schumpeter argue that economic growth is achieved by a succession of monopolies and therefore state interference with this process can lead to societal harm. In other words, being a monopoly is the carrot and an aggressive policy against abuse of dominance or monopolization means that the state makes the carrot look less delicious to the horse that pulls the carriage that carries the national economy.

In addition, proponents of this focus argue for the great benefits of tearing down barriers to entry created by laws and other public policy instruments. Experts point fingers at the state as the biggest distorter of markets and, therefore, the main perpetrator of market failure.

I believe these are the main arguments but please feel free to comment below if I forget an important one.

There are also advocates that urge antitrust authorities to not turn away from prosecution of abuse of dominance conduct. To keep this already long post short, I will only present an argument that I haven’t heard so much.

While it is true that there are potentially great benefits that can be achieved from successful advocacy efforts, no one will want to hear what the antitrust authority has to say unless it gains some political standing. And how could it come to have such a privileged position? By searching for, finding and punishing the most harmful and entrenched cartels and abusive dominant firms. This, accompanied by a good PR strategy, will help the authority to gain the support of the general public. Only this way it will have more leverage to pursue its own advocacy agenda and not one subject to conditions on alignment with the central government and other institutions.

So, what do you think? We look forward to reading your comments regarding what should be the focus of antitrust authorities in the developing world.

*Co-editor, Developing World Antitrust

Tagged
%d bloggers like this: