Competition Policy

1. Competition Policy Competition Policy Micro-economic Policies (Regulation, Trade, Investment) Competition (Anti-Trust) Law Promote Deregulation and Trade Liberalization Prevent Anti-Competitive Conduct Fosters Mobility of Resources, Competitive Environment, Economic Efficiency, and Consumer Welfare, by Maintaining and Encouraging the Process of Competition.

2. General Definitions COMPETITION: Independent decision-making and rivalry between existing (and potential ) business entities in terms of such factors as prices, output, market share, quality, service and/or other conditions affecting the value of goods and services in order to profitably acquire, retain and increase the patronage of clients. ECONOMIC REGULATION: Direct or indirect oversight and control by government of business entities, requiring mandatory adherence to rules, procedures and other measures over such matters as prices, output, entry, ownership, investment, or factors affecting the supply, demand and consumption of goods and services.

3. COMPETITION “versus” REGULATION Competition preferred where-ever feasible: >Efficiency, investment, and consumer-welfare >Competitiveness, growth and employment Economic regulation only when necessary. If not properly conceived and implemented: >Administrative and other costs including misallocation of resources, induces economic distortions, corruption….. Preference for Competition Should Not Be A Matter of Ideology—Matter of Simply Lower Costs and Higher Benefits Competition Not A “Panacea” For All Situations

4. Market Failure (1) • When Markets Fail to Allocate Resources to Their Highest Value Uses, • That is, by Re-allocating Resources from One Use to Another, Overall Welfare of Society can be Improved (“Pareto” Efficiency Improvements Possible).

5. Market Failure (2) FOCUS: Public Restraints (Policy Based) and/or Private Restraints (Monopolistic Behavior) on Competition Competition Policy Seeks to Address / Correct these Sources of Market Failure.

6. MARKET FAILURE Regulation May Be Necessary Because of: Imperfect Markets >Natural Monopoly >Anticompetitive Markets & Business Conduct Externalities >Pollution, Noise, Congestion… Information Asymmetry > Shortage, Non-availability or Non-disclosure, High Costs of Information Gathering….. Social and Other Objectives > Heath, Safety, Equity, Fairness……… However…

7. ECONOMIC SOPHISM Frederic Bastiat (1801-1850): “Petition” to Honorable Members of the Chamber of Deputies by Manufacturers of Candles, Tapers, Lanterns, Sticks, Street Lamps, Snuffers, Extinguishers, And from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting…for Protection from the Relentless and Unfair Competition from the SUN……Floods the Market with Light the Minute it Appears…..and Sales of our Products Cease Immediately…… Demand (and Supply) for Regulation & Government Intervention……!!!

8. Possible Sources Of Public Restrains On Competition (1) • Trade Policies • Tariffs and Non-Tariff Barriers • Anti-Dumping and Countervailing (CV) Duties • Discriminatory Export Practices • Investment Policies • Exclusionary Lists • Ownership Restrictions • Licensing Requirements

9. Possible Sources Of Public Restraints On Competition (2) • Regulations • Sector Specific ( Power, Transportation, Telecom….) • Natural Monopolies Government Actions in these Areas can Impede or Encourage Competition. Objective should be to Re-orient Policies and Regulations towards Competition, Market-Based Solutions.

10. Is Trade Liberalization/Deregulation Sufficient To Foster Competitive Business Practices? (1) NO. • Market Segmented by More Than Tariffs / Non Tariff Barriers / Regulations • Transportation Costs • Transaction Costs • Domestic And International Cartels • Non-Traded Products (Mainly Services)

11. Is Trade Liberalization/Deregulation Sufficient? • Seller-Buyer Explicit / Implicit Contractual Arrangement • International Cartels • Product And Technical Standards • Other Barriers To Entry • Liberalization of Other Micro-economic Policies and Enforcement of Competition Law Complementary, Self Re-enforcing

12. Competition Law:Objectives and Instruments Economic Efficiency Policy Objectives Public Benefit/Interest Structural Policy Instruments Behavioral

13. Alternative Approaches to Competition Law Behavioral Benefits of policy consistency and consumer welfare Flexible STRIVE FOR THIS Instruments Dangers of policy inconsistencies and vested interest interference Structural Rigid Public Interest Economic Efficiency Objectives

14. Focus Of Competition Law • Various Types of Transactions Conducted in the Market Place as part of the Day-to-Day Business Activity of Firms. • Various Types of Inter-firm Agreements, Ownership, Linkages, Associations and other Institutional Arrangement Exist. • Vast Majority of these Transactions / Business Arrangements Do Not Pose Legal and/or Economic Problems. • However, a Few do.

15. Per Se Vs. Rule Of Reason (1) • Some Types Of Business Arrangements Restrictive Of Competition Clearly Undesirable • Example: Horizontal Agreements Between Firms (Cartels, Collusion) To Fix Prices and/or Allocate Markets • No Tenable Economic Justification From Societal Viewpoint • Per Se Illegal Approach

16. Per Se Vs. Rule of Reason (2) • Some Types Of Business Arrangements While Restrictive Of Competition May Not Necessarily Be Undesirable • Example: Mergers And Acquisitions, Vertical Agreements Between Firms (Manufacturer - Distributor) Such As Exclusive Dealing, Resale Price Maintenance (RPM) Efficiency Enhancing • Rule of Reason -- Balance Of Probabilities Approach

17. Market Power • Competition Law Targets at “Exercise of Market Power” by Firms. • Ability of Firm, Unilaterally or in Collusion with Others, to Profitably Raise Price and Maintain it over a Significant Period of Time Without Competitive Response by other Existing and/or Potential Firms (Hypothetical Monopolist Concept). • Exercise of Market Power Gives Rise to Reduced Output -- Higher Prices.

18. Consequences of Market Power: The Monopoly Problem • Problem of High Prices -- Profits and Low Output (Misallocation of Resources) • Also Problem of Costs -- Costs Not Minimized for All Levels of Output • X-Inefficiency • Dynamic Inefficiencies

19. Other Consequences of Market Power • Concentration in Market for Goods and Services. • Incentives for Ownership Concentration. • Rent Seeking and Undue Political Influence. • Lack of Accountability and Transparency. • Corruption, Bribery and Preferential Treatment. • Limits Economic Opportunities, and Broad Base Participation in National Economy. • Undermines Competitiveness Sustainable Economic Development.

20. Evaluating Market Power Three Inter-related Areas of Analysis: • Delineation of Relevant Market • Analysis of Entry Barriers / Contestability • Substantial Lessening of Competition

21. Delineation Of Relevant Market (1) • Starting Point in Competition Analysis • Two Fundamental Dimensions of Market • Product Market • Geographic Market • Demand + Supply Considerations • Demand Side: Products Must Be Substitutable From Buyer’s Point of View

22. Delineation Of Relevant Market (2) • Supply Side: Sellers Must Be Included Who Produce or Could Easily Switch to Production of the Product / Substitutes • Actual And Potential Sellers • Canadian + U.S. +U.K…Antitrust Paradigm (Hypothetical Monopolist) • Risks of too Narrow / Broad Market Definition

23. Analysis Of Entry Barriers (1) • Barriers To Entry (BTE): Factors Which Prevent / Deter Entry Of New Firms Into An Industry Even When Incumbent Firms Earning Excess Structural (Innocent, Economic) BTE Strategic (Behavioral) Policy (Govt.) Based Barrier

24. Analysis Of Entry Barriers (2) • Structural Barriers Arise From Basic Industry Characteristics • Economies Of Scale • Absolute Cost Advantages • Product Differentiation • Sunk Costs

25. Analysis Of Entry Barriers (3) • Strategic Barriers Arise From Behavior Of Firms • Market Foreclosure / Pre-emption Of Facilities • Excess Capacity • Price / Non-Price Predation, Etc.

26. Analysis Of Entry Barriers (4) • Policy Based Barriers Generally Arise from Govt.. • Licensing • Ownership / Sector Specific Restrictions or Regulations • “Height” of Barriers to Entry Measured Mainly by: Time Duration Required by New Competition/Competitors to Emerge

27. Substantial Lessening Or Prevention Of Competition (1) • Ability of a Firm (or Group of Firms) to Influence the Dimensions Of Competition for a Sustainable Period of Time and Earn High Profits • Generally Viewed in Terms Of Price Dimension • “Substantial”: Magnitude of Price Increase / Above Competitive Level and Size of Market Affected

28. Substantial Lessening Or Prevention Of Competition (2) • Time Duration • “Lessening”: Remove or Limit Existing Competition • “Prevention”: Limit or Constrain Potential or Emerging Competition • Barriers to Entry and “Contestability” Of Markets

29. General Design Of Competition Law (1) • Essentially Structure -- Conduct -- Performance Paradigm • Structural Provisions • Monopoly (Dominant Market Position) • Mergers • Other Inter-Corporate Relationships (Ex: Joint Ventures)

30. General Design Of Competition Law (2) • Behavioral Provisions • Horizontal Restraints: Collusion (Price-Fixing Agreements, Market Sharing Territorial Arrangements, Bid Rigging, Conscious Parallelism), Price Discrimination • Vertical Restraints: Resale Price Maintenance, Exclusive Dealing • Refusal To Deal, Price And Non-Price Predation, Other Anti-Competitive Practices • Performance-Implicit

31. Other Special Provisions • Specialization Agreements • R & D Co-operatives • Policy Linkages With: • Intellectual Property • Tariffs • Economic Regulation of Infrastructure (Power, Transportation, Telephone, Water….) • Other Economic Areas (e.g., Financial Markets…) • General Role In Government Policy

32. SCOPE OF COMPETITION LAW Competition Law Should Be: “General Law of General Applicability” • All Firms (Economic Agents) Engaged in Commercial Activity • Both Public (State Enterprises) and Private Sectors Few Exceptions/Exemptions. These Vary by Country But Rationale for Exemptions Should Be Clear.

33. EXAMPLES OF EXCEPTIONS/EXEMPTIONS • Labor Union Activity re: Collective Bargaining • Charitable Organizations • Underwriting: Issuance of Insurance and Investment Securities • Financial Services (Debatable) • Amateur Sports Leagues • Professions-Setting Education-Qualification Standards et. al.

34. Collusive Agreements • Consensus Among Economists that these Agreements are Undesirable and should be Prevented. • Prevention of these Agreements is Central to Competition Law. • Enforcement based on Current and Historical Information. • Per se Prohibition, Backed with Heavy Fines and Severe Penalties.

35. Vertical Restraints • Resale Price Maintenance: Manufacturer / Wholesaler Sets the Minimum Price at Which a Product Will be Re-sold • Exclusive Dealing: Manufacturer / Wholesaler Grants Exclusive Rights Of Sale of a Product in Given Market • Controversial Area of Economics • Differences in Policies Across Countries

36. Abuse Of DominantMarket Position (1) • Dominant Firm: Accounts for Significantly Greater Market Share than the next Largest Firm. Size Threshold may Vary Across Countries but Generally 35% plus of the Relevant Market.

37. Abuse Of DominantMarket Position (2) • Abuse of Dominance: When the Dominant Firm Engages in Anticompetitive Practices to Maintain or Increase its Market Position by Disciplining, Driving Out and / or Preventing Entry of Other Competitors. • Examples: • Acquisition of Supplier / Pre-emption of Resource Inputs or Distribution Facilities

38. Abuse Of Dominant Market Position (3) • Predatory Pricing or Loss Leader Selling • Vertical Squeezing, etc. • Distinction Between Superior Competitive Performance and Anticompetitive Practices. Case by Case Approach Applying “Rule Of Reason” Advisable.

39. Mergers and Acquisitions (1) • Particular Complex -- Controversial Area • Multiple Motives -- Two Of Special Interest In Context Of Horizontal Mergers: • Collusion (Because Increases Market Concentration by Reducing the Number of Competing Firms) • Efficiency (Rationalization of Production, Economies of Scale & Scope) • Vertical Mergers an Issue When Upstream or Downstream Concentration Exists

40. Mergers and Acquisitions (2) • Prospective Analysis: Pre-Notification of Major Transactions (Size Thresholds in Asset or Sales Value and Market Shares) • Cost-Benefit Approach (Weighing Gains in Efficiency Against Loss of Consumer Welfare) • Case By Case Approach Applying “Rule Of Reason” Advisable

41. Competition Law:Administration and Enforcement Investigation and Prosecution by Government Department or Agency Adjudication, Imposition of Fines or Civil Damages (Court/ Special Tribunal) Appeal Rights (Higher Courts) Complaints or Government Initiative Private Actions

42. Administration And EnforcementOf Competition Law (1) Division Of Principal Responsibilities • Investigation: Competition Agency • Complaint-Driven, From Firms and Consumers • Weight Should Be Given to Complaints by Customers vs. Competitors • Authority To Gather Evidence While Safeguarding Business Confidentiality • Separate Office Accountable To Legislative Assembly • High-Quality, Well-Paid Staff

43. Administration And EnforcementOf Competition Law (2) • Enforcement: Competition Agency and / or Judicial Authority, plus (?) • Individual / Class Private Actions • Redress Mechanism For Complainants, With Safeguards To Avoid Frivolous Actions

44. Administration And EnforcementOf Competition Law (3) • Adjudication: Courts And / Or Specialized Tribunal • Requires Expertise In Business, Economics and Law • Decision Subject To Appeal • Advocacy: Competition Agency • To Ensure Competition Issues Are Considered In Government Policy Formulation

45. Administration And EnforcementOf Competition Law (4) Overall System Of Checks and Balances, Ideally With Separation of Investigation, Enforcement and Adjudication. Independence from Political Interference (Policy and Budget)

46. Implications For Countries (1) • Overly Aggressive or “Regulatory” Approach Can Impede Competition, Investment, Business Confidence • Overly Lax Can Entrench Monopolies • Complex Area, Substantial Staff Expertise and Institution Capacity Building Required • Opportunities For “Jump-Starting”

47. Implications For Countries (2) • Focus On Selective, Critical Areas: • Strong Competition Advocacy Role, Especially Aimed at Lowering Policy-Based Barriers Important Interface with Privatization, Regulatory Reform and Other Government Policies • Clear Rules Against Collusion • For Abuse Of Dominance and Mergers, Apply Law Sparingly (that is Only in Most Clear/Blatant Cases-Violations of the Law) Until Staff and Institutional Expertise Develops

48. Implications For Countries (3) • Enhance Business Certainty Through Policy Statements and Guidelines. Critical for Attracting and Increasing Domestic and Foreign Investment • Foster Public Education And Support • Careful Attention to Effective Checks and Balances in Application of Law, to Minimize Stakeholder Influence and “Capture”

49. How Can Market PowerBe Curbed (1) • Specific Application Of Competition Law Against Private Restraints To Business In Markets • Prohibition Of Price-Fixing And Other Collusive Agreements. Severe Fines And Penalties • Prevent Abuse Of Dominant Market Position (Monopolistic Behavior)

50. How Can Market PowerBe Curbed (2) • Prevent Concentration Via Controls Of Merger And Acquisition Activity • But, Also Develop Broad Base Pro-Competition Micro-Industrial Policies, e.g., Reduce Barriers To Entry Against New (Domestic and Foreign) Firms • Foster “Contestable” Markets • Strike Balance Between Compliance vs. Enforcement of the Law • Undertakings/Consent Decrees/Bench-Mark Competition • Competition Advocacy Role