COMISIÓN FEDERAL DE COMPETENCIA
Competition’s effect on poor
consumers: Mexican experience
Heidi Sada and Manuel Sánchez
CUTS
March 2013
1
Messages
1. Monopolies harm economic efficiency and
could also worsen income distribution.
2. Mexico has many monopolized markets with
negative effects on the poorest.
3. Competition policy could help reduce social
inequality.
2
There is ample academic literature on the effects
of monopolies on economic efficiency.…
Evidence on effects of monopolies on efficiency
Static effects
Exorbitant profits and
inefficient allocation of
resources
Dynamic effects
Less incentives for
productivity and
innovation
• Multiple studies that estimate that the lack of
competition significantly increases prices.
• Experiences in OECD countries show that when
companies collude and form a cartel, the cost of goods
and services can increase by 20% or more.
• Empirical evidence suggest that the welfare loss
associated with monopoly as a percentage of gross
domestic product (GDP) varies between 0.1 to 13 per
cent.
• Vast evidence that more competition increases
productivity and innovation.
3
… however, the distributive effects of monopolies
have been less explored.
The few studies identified suggest that monopolies can worsen social inequality:
“… it appears that the presence of past and current monopoly has had a major impact on
the degree of inequality in the current distribution of household wealth.”
(Commandor & Smiley, 1975)
“ Whatever the size of the absolute welfare loss arising from monopoly, there may be a
substantial effect on the distribution of welfare”
(Creedy & Dixon, 1998)
4
Messages
1. Monopolies harm economic efficiency and
could also worsen income distribution.
2. Mexico has many monopolized markets with
negative effects on the poorest.
3. Competition policy could help reduce social
inequality.
5
In 2008, the CFC conducted a market study, supported
by the OECD, to assess the distributive and spatial
effects of monopoly power in the Mexican economy*
Market identification:
Basic consumer goods:
Private
monopolistic
markets with
direct effects
on household
spending
1. Corn tortillas
2. Processed meats
3. Chicken and eggs
4. Cow milk
5. Carbonated soft
drinks, juices and
bottled water
6. Beer
7. Pharmaceuticals
* Carlos M. Urzúa (2008). “Evaluación de los efectos distributivos y espaciales de las empresas con poder
de mercado en México”.
The effects related to distribution of monopoly
gains and consumer costs
Static effects
Possible distributive
effects
B + T = consumers’ welfare loss
T = transference from the consumers to the firms (with
monopolistic gains)
B = net welfare loss
• Monopolistic gains (T)
could be distributed
unevenly between income
levels.
pm
T
B
pc
Cmg
qm
Source: Carlos M. Urzúa (2008).
• Consumers’ welfare loss
(B+T) could vary among
income levels.
qc
7
Deadweight loss modeling
Assumptions:
 Constant marginal cost (MC)
c
MC = Competitive price ( p )
ƞ
is the price elasticity of the good
(q m  q c ) q m
…………(i)
 m
( p  pc ) pm
Monopoly maximizes benefits when :
pm  pc
1

m
p

…………(ii)
( p m  p c )( q c  q m )
DWL 
2
After combining (i) and (ii)
in DWL:
pmqm
DWL  
2
Assuming :
•K Identical firms
•Cournot conjectural response
pmqm
DWL  
2K
8
Deadweight loss estimates (elasticities).
pmqm
1 n wi
DWL  
 
2 K
2 i 1 Ki
To estimate price elasticities Ursúa used a variation of the Deaton’s general model:
0
whc   0   0 ln xhc   ln  c  f c  u hc
ln vhc   1   1 ln xhc   ln  c  u1hc
Variable
whc
Spending in the good as a share total expenditure of a household in cluster c
vhc
x hc
Unitary value of the good regarding consumption oh a household in cluster c
c
Price of the good in cluster c
Total income of a household in cluster c
Fixed effect in cluster c
fc
u
Description
0
hc
,u
1
hc
Error terms
Data source: National Survey on Household Income and Expenditure (ENIGH).
Model source: Deaton, Angus. 1997. The analysis of household surveys: A microeconomic approach to
development policy. Washington, World Bank.
9
The study results indicate that the loss of consumer
welfare arising from monopolies is significant….
Consumer Welfare Loss Estimates
% expenditure on the
monopolized markets analyzed
41.9%
36.4%
Urban
Source: Carlos M. Urzúa (2008).
Rural
….the negative impact of monopoly power grows as
households are poorer.
Welfare loss in poorest
households
46.0%
39.4%
37.5%
32.9%
I
II
III
IV
Source: Carlos M. Urzúa (2008).
V
VI
Decile
VII
VIII
Urban
IX
X
Rural
Monopolies
deteriorate
Mexican
competitiveness,
but also tend to
worsen
income
distribution
These variances can also be observed between
Mexican states – with different levels of income
Monopolies’ effects on welfare
Bajo
Medio
Alto
Source: Carlos M. Urzúa (2008).
Messages
1. Monopolies harm economic efficiency and
could also worsen income distribution.
2. Mexico has many monopolized markets with
negative effects on the poorest.
3. Competition policy could help reduce social
inequality.
13
Monopolies in Mexico have been linked to particular
anticompetitive behavior, however, in many cases they
depend on restrictions created by the government …
By …
• Imposing barriers to foreign trade
• Implementing programs that facilitate
collusion
• Imposing subsidies that reduce o
eliminate incentives to compete
• Implementing strategies in public
procurement that facilitate collusion
and restrict entry (OECD- CFC joint
work to tackle this)
e.g.
medicines,
chicken &
egg, corn
tortilla
14