Market Contestability and the Role of
a Competition Commission
Taimoon Stewart
Senior Research Fellow
SALISES, UWI
Presented at the High Level Symposium on the CSME,
Barbados
28-30 June, 2006.
Outline of Presentation
1. The concept of market contestability;
2. Will free entry within CSM guarantee that
market power will decrease?
3. Some potentially problematic sectors in CSM;
4. Role of a Competition Commission in the CSM;
5. Some considerations on the functioning of the
Community Competition Commission.
1.1 Definition of Contestability of
Markets
• A market where there is freedom of entry,
and exit is cost-less: allows potential
entrants whenever profits exceed the
normal rate;
• Costless exit: sunk costs are zero; (Sunk
costs: costs that can’t be recovered when
a firm leaves an industry);
• Such markets can be subject to hit and run
entry and exit.
1.2 Argument that Contestability
will ensure competition
• Free entry would prevent monopolist from
setting high prices, as this would trigger
entry;
• Such markets would attain socially
efficient output, duplication of fixed costs is
avoided and technological efficiency is
attained (static and dynamic efficiencies).
1.3 Counter Argument in Lit.: Market forces
alone unlikely to reduce monopoly power
• Sunk costs are rarely zero (could be in
Knowledge economy?)
• Consumers may have switching costs: e.g.,
cost of closing a bank acct. and moving to
another bank; or switching airlines and losing
frequent flyer miles; or, compatibility of
standards with established product will influence
consumer choice.
• Network effects, where sufficient buyers are
necessary to supply complementary products
such as car models and availability of car parts;
2. Free entry and exit within CSM will not
guarantee decrease in market power
• High concentrations exist in CSM due to
structural constraints:
– Need to achieve minimum efficient scale (MES), i.e.,
Small markets with too many firms would lead to low
profits and inability to cover fixed costs; tends toward
monopoly or oligopoly;
– Continued concentration of wealth in hands of
descendants of plantocracy in many MS- could erect
barriers to entry (e.g., St. Lucia – a few white families
dominate large sectors of the economy);
2. Cont’d. Will market power
decrease?
• Small firms in small markets (LDCs) vulnerable
to take-over by outside firms (e.g., T&T firms), therefore potential for new concentrations; eg in
SADC, S.African firms eliminated local
competitors in neighbouring countries through
mergers and take-overs;
• Prevalence of interlocking directorates and
accompanying anti-competitive effects;
• Large informal sector in CSM could have
dampening effect on monopolies.
3.1 Potentially problematic sectors
in CSM: Financial Sector
• Banks dominate the financial sector
• High concentration in all MS- at most, five or six
banks/ dominated by one or two large banks
(RBTT/Scotia/FCIB);
• Widespread perception of collusion amongst
banks; some bankers alluded to collusion;
others claimed market transparent, and follow
the leader strategy common;
• Wide spread between deposit and loan rates not
easily justifiable.
3.2 Potentially problematic sectors:
Tourism
• Concentration of Destination Management
Operators linked to plantocracy wealth
(e.g., St. Lucia)
• Vertical links with International Tour
Operators (ITOs)
• A few ITOs already dominant in the CSM
• Small operators squeezed out of business
(tour guides for cruise ship passengers,
restaurants, locals at heritage sites etc).
3.3 Potentially problematic sector:
Distribution
• Need access to distribution networks to
penetrate market or have to self distribute- too
costly
• Barriers to entry could be erected by dominant
local suppliers through tying up dealers in
exclusive contracts
• Suppliers in other MS could also tie up dealers,
e.g., KC Sweets of T&T reprimanded M&C of St.
Lucia for carrying sweets from Colombia
(interview with M&C).
3.4 Potentially problematic sector:
Beverages
• Beer Market: ongoing war between Heineken
(St. Lucia) and Carib (T&T):
– Carib tried to block entry of Heineken by complaining
about labeling to customs;
– Both Carib and Heineken giving loyalty discounts to
distributors which effectively blocks access to the
other;
– Carib provided refrigerators to retailers to store and
display cool beers, but restricted use to Carib beers
only;
– Carib sold in cans charged environmental tax in St.
Lucia, but canned Fruta is not charged.
4. Role of a Competition
Commission in CSM
• Advocacy: Cultivate a culture of competition: first priority:
– Educate consumer & promote dev. of consumer organizations;
– Encourage business sector to monitor and report anticompetitive conduct of other businesses; encourage internal CL;
compliance programmes;
– Educate Press, Labour Unions, NGOs;
• Advocate for competition in government of MS:
– Provide opinions on gov’t. laws and regulations that stifle
competition;
– Conduct of State Owned Enterprises;
– Competition interface with Regulated sectors to extent that
affects cross border trade (e.g., telecom sector?);
4. Role of CA cont’d.
• Undertake studies to monitor structure of
production and distribution of g & s so as to be
able to assess impact of concentrations on
competition;
• Issue guidelines and interpretation of rules so as
to foster confidence and certainty in the private
sector: need to tailor rules to local conditionsas
gain experience;
• Surveillance function in identifying anticompetitive conduct with cross border effects:
e.g., dividing up markets, barriers to entry,
predation, etc.
4. Role of CA cont’d.
• Assess complaints and select those that merit
investigation; issue judgments; enforce rules;
• Facilitate new entry into CSM markets;
• Cooperation with competition authorities within
and outside of CSM:
– Work closely with CA in MS
– Cooperate with other CAs for technical assistance,
information sharing, assistance in investigations, legal
assistance etc. (particularly regarding International
cartels).
5. Some challenges which the
Community CA will face
• Obvious ones: human and financial
resource constraint in CARICOM
• Uncertainty in initial phase (prior to
establishment of CL and CA in MS) of how
investigative and enforcement machinery
would function since dependent on
cooperation with MS CA and courts for
investigation and adjudication.
5. Challenges cont’d.
• Market concentration is the most imp.
competition issue in CSM, but no MCR in CSM
competition policy. Danger of take-overs and
pubic interest issues re employment. How will
CA deal with this?
• Independence key: Insufficient power vested in
CA.
– Power to initiate investigation dependent on MS and
COTED: insufficient political will
– Power to develop rules of competition and exemption
vested in COTED
5. Bottom Line
• Most important for Commission is establishing
CREDIBILITY with businesses, consumers and
Member States. Must have teeth, must instill
fear in would-be transgressors, must gain
confidence of consumers and MS.
• Therefore, must be free of political
interference, and must have resources to hire
qualified staff, pursue aggressive advocacy
programme and effectively enforce the law.