Is Competition Law Essential to Achieve Competition Policy Objectives

Is competition law essential to achieve competition policy objectives?

In recent years there has been a ‘quiet revolution’ in the adoption of competition law by countries around the world. Over half of countries now have a competition law, or are in an advanced stage of preparing to introduce one, and the number continues to increase. This might be taken as indicating that the answer to the question posed in the title to this presentation is likely to be “Yes!” However, before reaching any conclusions, it is necessary to look first at what ‘competition policy objectives’ are, and how competition law might relate to them.

Competition is exercised in markets, which are powerful structures that, within the right framework, work to the advantage of society. Markets guide resources to the uses that are most valued, they encourage innovation and the use of most efficient methods of production, and they allow consumers to benefit from lower prices, better quality and a greater variety of goods and services. However, markets sometimes fail to work well, thereby depriving society of the benefits that are possible. Markets may fail for a number of reasons, with anti-competitive practices, including collusion and the abuse of market dominance, being common and important causes.

The broad objective of competition policy is to make markets work better. ‘Working better’ involves two important subsidiary objectives: efficiency and fairness. These objectives will at times conflict, and each country will need to decide the appropriate balance between them. While ‘efficiency’ is a concept that can be measured objectively, the idea of what is ‘fair’ reflects to a considerable extent the cultural values of the society concerned. Although all countries reflect both objectives at least to some extent, the goal of efficiency appears to be given increasing importance in a number of countries. Countries that take this approach argue that other specific objectives can be met better by targeted legislation than by a broad competition law.

‘Competition policy’ can be defined broadly to include all measures by a government that directly affect the behaviour of firms and the structure of industry, and thereby impact on the intensity of competition in that economy. This broad definition includes sector regulation, trade policy (which includes policies on tariffs, quotas and antidumping measures), investment policy, foreign exchange policy and labour market policy.

Competition law is an important strand of competition policy. When used appropriately, it provides the means for anti-competitive practices to be identified, for their effects to be analysed, and for any necessary remedial action to be taken. The publicity that can be generated from action taken against anti-competitive practices helps to reinforce the provisions contained in the competition law.

A few countries have argued that, at least for a small open economy, it is possible to have effective domestic competition without having a competition law. Singapore and Hong Kong were associated with this view. However, it is instructive to review what has happened in those two jurisdictions more recently.

Singapore began to introduce competition principles by including provisions designed to encourage competition in its laws that were adopted to regulate the liberalised market sectors of telecommunications, electricity and the mass media. In February 2003 the Economic Review Committee recommended that a national competition law be enacted, and public consultations were commenced on a draft bill. It is intended that a competition bill will be presented in Parliament later this year, and that a generic competition law will be enacted by 2005. The proposed bill will prohibit anti-competitive business practices and the abuse of a dominant position, and will provide for a review of mergers and acquisitions. There will be a provision for the imposition of substantial fines for those found to have breached the competition law, and for the use of structural remedies. Protection will be provided for ‘whistleblowers’. Singapore is no longer an exception to the general view on the value of competition law.

In March 2004, the Hong Kong Permanent Secretary for Economic Development and Labour confirmed that Hong Kong Government does not plan to introduce a generic competition law. However, Hong Kong’s competition policy includes a number of measures that reflect competition law principles.

Sector-specific competition provisions were included in the laws for the Telecommunications Authority and the Broadcasting Authority. A number of industries that operate under Government franchises (including power generation, legal services, medical services, bus operation and driving schools) are subject to criteria designed to maintain competition. Several cartels that had been set up by previous administrations, including an interest rate fixing arrangement by banks, were dismantled with government prompting.

In relation to competition in general, the Hong Kong Government established a high level forum chaired by the Financial Secretary, the Competition Policy Advisory Group (COMPAG). In May 1998, COMPAG issued ‘The Statement on Competition Policy’, which contains a comprehensive competition policy framework.

To supplement this statement and to encourage its implementation, CARG issued a set of guidelines in September 2003. These were issued after wide consultation with business groups and the Consumer Council. The purpose of the Guidelines is to define and remedy anti-competitive practices. They contain provisions for assessing the overall competitive environment, for measuring the effects of restrictive practices on the market, and for identifying types of anti-competitive practices. All government entities have been directed to adhere to the policy statement and guidelines, and all businesses have been called on to abide by them. Complaints about alleged restrictive practices may be made to the relevant policy bureau or government department, and complaints are monitored by COMPAG to identify any policy or systemic implications. It has been stated that, where necessary, the Government will take administrative or legal steps to remove anti-competitive practices.

While Hong Kong does not have a generic competition law, the pro-competition measures it has introduced contain many echoes of competition law.

Trade liberalisation and de-regulation can greatly increase the level of competition in an economy. However, even countries that are open to foreign trade can benefit from having a competition law. One reason is the existence of product sectors that are not tradable internationally, or are only tradable to a limited extent. These include goods for which transport costs comprise a large part of the value, perishable goods, and many services. The types of sectors that are non-tradable will vary with the economy concerned, but categories frequently encountered include the acquisition and processing of farm products, road and other transport, professional services, the distribution of consumer goods, and finance.

Where there is little or no effective competition from imports, domestic competitors may collude, and dominant players may misuse their position.

Collusion can result in prices being fixed at levels that are higher than are needed to continue the provision of adequate supplies, and in the division of markets geographically or by customer type. Bid rigging is a fairly common problem, and one that can significantly increase the cost of public procurement.

Dominance of a domestic market is not by itself a cause for concern, especially if it has been gained by innovative and efficient production and distribution, or if it reflects the existence of a natural monopoly. However, the abuse of dominance is a constant danger.

Another reason why openness of an economy to international trade does not guarantee domestic competition is that the supply of imports does not always respond sufficiently, for a variety of reasons.

An important implication of having a generic competition law is that it applies broadly to the economy. While every national competition law has some exceptions, these should be kept as few as possible and should be adequately justified. It is generally accepted that a competition law should be applied to the trading activities of government agencies as well as to the private sector, and to both domestic and foreign-owned firms. The existence of a generic competition law minimises the distortions created by exemptions or differential treatment. Because the presumption is that exceptions should be rare, the need to undertake ad hoc measures to deal with competition problems arising in particular sectors is largely removed.

The existence of competitive markets reduces the scope for corruption, because impersonal market forces replace other types of decision-making. Having a competition law extends this benefit, because of the increased transparency that is provided by having a process for receiving and investigating complaints and assessing them against the balanced criteria provided in the competition law.

A problem that has become more widely known in recent years is the existence of international hard-core cartels, and the severe effects they can have on developing countries. A study of one major international cartel, that for vitamins, found that countries without a competition law were overcharged more than countries that did have such a law. Cartels are difficult to deal with as long as they remain secret, and sometimes this can be for lengthy periods, but if a country has no competition law it has little hope of even attempting to deal with them.

Another way in which a competition law can help achieve competition policy objectives is that the institution created to enforce the law, a competition authority, can be an effective advocate for competition. Many policy decisions by governments have significant implications for competition. Examples are measures to regulate sectors of the economy, or to revise existing regulations, and decisions on whether to partially or fully privatise particular state-owned enterprises. In the absence of a competition authority most countries lack a focal point for giving continuing attention to the competition implications of government measures and business conduct. If a competition authority is empowered to do so, it can ensure that the likely effects of proposed policy measures on competition are not overlooked. The advocacy role naturally includes conveying the competition message to the business community and to consumers.

Sector regulators are used in situations where there is a natural monopoly or where other special factors exist. With the extensive privatisation that has been undertaken in many countries, sector regulators are much more common than in the past. Sector regulators have a range of responsibilities that include service reliability, safety issues, environmental protection, social service commitments, and price and or profit controls.

In regulated sectors, issues involving anti-competitive conduct and mergers will arise periodically. Questions on the terms on which interconnection is provided by the dominant firm to other firms often arise with networks such as telecommunications. The responsibility for dealing with competition problems in regulated sectors varies. In some countries there are sector regulators, but no competition authority. Where there is both a competition authority and a sector regulator or regulators, the allocation of power to deal with competition issues is normally one of the following:

a)the sector regulator has exclusive power to deal with competition issues; or

b)the sector regulator and the competition authority both have responsibility for competition in the sector. The respective powers of the two organisations on competition issues might not be identical, and cases exist where the boundaries to the powers of the two are not clearly defined; or

c)the competition authority has sole responsibility for dealing with competition issues in the sector.

Where a sector regulator has exclusive powers to deal with competition issues in the sector, but there is a competition authority, the authority can play an important role in encouraging the regulator to use these powers in a pro-competitive way. If there is no such guidance, sector-regulators are at risk of ‘regulatory capture’, that is, of giving priority to the interests of the regulated sector rather than the economy as a whole, a stance that may introduce distortions into the economy.

Conclusions

The existence of competition policy reflects recognition of the important contribution that competition in markets can make to economic growth and to consumer welfare. It is possible to promote an environment that is generally favourable to competition through a range of policy measures that do not include competition law. However, even for countries that have open economies, and which are therefore subject to subject to strong potential competition from abroad, anti-competitive practices can develop that will harm the economy and the consumer. More typically, countries have limitations on their degree of openness, and for them, the absence of a competition law leaves their economies at risk of a greater degree of harm. My conclusion is that with very few exceptions, an effective competition policy requires a competition law.

John Preston

Investment Competition and Business Team

Department for International Development, London

April 2004

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