The Role of Competition

The Role of Competition
in a Market Economy
Competition Law Associates
Windhoek, March 2014
Industrial Organization and
Competition Policy
 Industrial Organization is a field of economics
that studies the strategic behavior of firms, their
interaction and the structure of markets
 Competition Policy is the study of policy options
for promoting healthy competition in the market
 Competition Law is the legislated expression of
those competition policy choices that a
government has adopted.
The Gale of Creative Destruction
 Joseph Schumpeter used this term in his 1942 book
“Capitalism, Socialism and Democracy” to describe the
process of competition
 Competitive markets in continual process of
 Entry, innovation and entrepreneurship are essential to
sustainable economic growth
 Winners and Losers
The Role of Competition
To protect the process of competition in order to:
 Promote the efficiency and adaptability of the
 Facilitate the opportunity for business to participate
in world markets
 Ensure that SME’s have an equitable opportunity
to participate in the market
 Provide consumers with competitive prices
and product choices
Functions, Powers and Duties
of Competition Authorities
 S.16
Competition Not an End in
 Economic Benefits – efficient resource
allocation, growth, innovation
 Consumer Welfare Effects – lower prices, better
quality, greater choice
 Governance – less need for government
intervention, reduced regulation
Economic Benefits
 In 1889, a year before the Sherman Act, Canada passed
into law an “Act for the Suppression of Combinations,
Formed in Restraint of Trade”
 The framers understood what is still true today: healthy
competition encourages “large aggregations of capital”
 It is this capital, these investments that result in economic
growth and job creation
 The forces of competition lead to the innovation, economic
transformation and renewal that Schumpeter pointed out
were necessary to sustain growth
 The pressure of competition creates the need which is the
“mother of invention” and innovation.
 Economists speak of dynamic efficiency and static efficiency
the latter includes allocative and productive efficiency
 Allocative efficiency is macro. Competition forces
competitors to make efficient choices resulting in the
efficient allocation of resources across the economy.
 Productive efficiency is micro. Competition forces firms to
save resources in the production process
 Dynamic efficiency – competition encourages innovation and
invention which results in increases in productivity and
overall welfare
Welfare Effects
 Adam Smith stated that the ultimate purpose of all
production was consumption and without the latter,
the former has no purpose
 As such efficiency in production should only be an
intermediate goal
 Allocative efficiency achieved through competition
results in lower prices, better quality and more
 Allocative efficiency tends to be more egalitarian at
the macro level (across the economy)
 Competition law enforcement is the lightest form of
government regulation or intervention in the market
 Allows competitors to freely make choices unless they
violate the law – reduces regulatory oversight
 The cost of administering competition law is far below that of
regulatory oversight
 The cost of collecting, administering and distributing excess
rents is likely to be far above the cost savings foregone by
prohibiting a monopoly
 Firms try to limit competition by pressuring government to
impose costly trade restrictions or regulation
Market Definition
 When analyzing anti-trust cases, competition
authorities are called upon to define the relevant
 This consists of Product and Geographic markets
 Although tools used in the analysis and relevant
evidence may apply to both it is critical that these
exercises are treated separately
 Product market analysis must always be done first
Relevant Product Market
 Hypothetical monopolist
 Critical loss analysis
 Own price elasticity of demand
 Price cross elasticity of demand
 End use of the product
 Technical or physical characteristics of the product
 Switching costs
Relevant Geographic Market
 Hypothetical Monopolist test
 Actual shipping patterns, imports, exports
 Transportation modes and costs
 Frequency of shipments, inventories
 Natural and artificial barriers (rivers, borders)
 Currency exchange rates
Market Power
 Ability to impose a small but significant non-transitory
increase in price that cannot be defeated by
competitors or customers
 We call this the SSNIP test
 1- 2 year measurement period
 Price is used as a proxy for service terms and quality
Three Main Areas of Concern
 Conspiracy and Bid rigging – considered to be the most
egregious competition offense because it is intended to
eliminate competitiion
 Mergers – the formation of market power through the
acquisition of assets or shares
 Abuse of Dominance – a firm with market power
engages in anti-competitive acts to lessen competition
or eliminate competitors
Conspiracy and Bid-rigging
 Cartel, formal or informal group of independent
businesses whose concerted goal is to lessen or prevent
competition among its participants.
 Typically, cartel members enter into a covert agreement
to engage in one or more anti-competitive activities, such
as to fix prices, allocate markets or customers, limit
production or supply, or rig bids.
 Conspiracy can be international, national or regional in
scope, with various degrees of formality and secrecy.
 Can be a loose oral arrangement or a highly structured
set of membership rules established by a trade
association and elaborately enforced.
Conspiracy and Bid-Rigging
 Cartels are harmful because typically they result in
higher prices for consumers and reduce the incentive
for companies to cut costs and be innovative.
 Cartel behaviour is unlawful under the competition laws
of most countries.
 Bid-rigging occurs when two or more bidders, in
response to a call for tenders, agree that one person
will refrain from bidding, withdraw a submitted bid, or to
agree among themselves on bids submitted.
 Acquisition or establishment, direct or indirect, by one
or more enterprises
(i) whether by purchase of shares or assets, lease of
assets, amalgamation or combination or otherwise,
(ii) of control (S.42) over the whole or a part of the
business of an immediate competitor, supplier,
consumer or other enterprise;
Market Share &
 Safe harbour: combined market share (unilateral
measure) or turnover or assets of target below
certain amounts
 CR4 below certain level (interdependent measure)
 High market share necessary but not sufficient
condition to establish that the merger would result
in the creation of market power
 Market share calculated on basis of dollar revenue,
unit volume or capacity
 Herfindahl-Hirschman Index (HHI)
Economic Factors Affecting
 Foreign competition
 Failing Firm
 Availability of Substitutes
 Entry
 Competition remaining in the market
 Removal of an effective competitor
 Change and innovation
 Life cycle of market – expanding, declining
Efficiency / Welfare Trade Off
 Canada - Efficiency Defence in the law
 U.S. - Price Standard
 E.U. – Consumer Surplus Standard
 U.K. – Public Interest override by Minister of Trade and
 Namibia – trade off between detrimental effects of a
lessening of competition and other potential economic
benefits or benefits to the public S.47
Abuse of Dominance
 A person or persons with market power have
engaged in abusive or anti-competitive conduct
 The conduct may be a single act, a single act
repeated and/or a series of different acts
 Such conduct has an anti-competitive purpose
or effect which is exclusionary, disciplinary or
Evidence of Abuse of Dominance
Usually readily available corporate documents:
 Exclusive contracts, payments for exclusivity
 Long term contracts or restrictions in contracts
 Correspondence revealing discriminatory,
exclusionary or predatory practices
 Strategic documents, documents prepared for
senior management or the Board of Directors
usually reveal if strategies are anti-competitive