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.
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‘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.
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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
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Government will take administrative or legal steps to remove anti-competitive
practices.
While Hong Kong does not have a generic competition law, the procompetition 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.
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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
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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
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an important role in encouraging the regulator to use these powers in a procompetitive 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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