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BRIDLING MARKET DOMINANCE – A View From Jamaica

BRIDLING MARKET DOMINANCE – A View From Jamaica. International Conference on Small States and Economic Resilience Malta – April 23-25, 2007. Barbara Lee Executive Director Fair Trading Commission - Jamaica. STRUCTURE OF PAPER. Introduction Defining “small” Section 1

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BRIDLING MARKET DOMINANCE – A View From Jamaica

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  1. BRIDLING MARKET DOMINANCE –A View From Jamaica International Conference on Small States and Economic Resilience Malta – April 23-25, 2007 Barbara Lee Executive Director Fair Trading Commission - Jamaica

  2. STRUCTURE OF PAPER Introduction • Defining “small” Section 1 • Major features of the market in a Small State Section 2 • An examination of how the Jamaican Competition Law, The Fair Competition Act (FCA) treats with market adjustment

  3. Structure of Paper Cont’d … Section 3 • Presents viewpoints on the adequacy of Competition Law for economic development Section 4 • Case studies within contrasting legislative frameworks Section 5 • Conclusion

  4. INTRODUCTION • DEFINING “SMALL” (i) World Bank definition – population (ii) GDP – Chares Webb’s “Competition Law in Small Economies Compared” (2006) (iii) Free Trade Area of the Americas – Economic vulnerability; levels of development

  5. Introduction Cont’d… DEFINING “SMALL” Cont’d … (iv) The focus of the paper: Dominance in Small States • factors facilitating such dominance • Measures to curb it

  6. SECTION 1 FEATURES OF THE MARKET IN A SMALL STATE • Natural monopolies, largely in utilities • Characteristics of Natural Monopolies • Large capital outlays • Relatively large overhead costs – preventing duplication, therefore competition

  7. Characteristics of natural monopoliesCont’d… • appreciable economies of scale and/or scope • Succeed in markets not large enough to sustain competition at an efficient scale • Rampantly rent-seeking

  8. Characteristics of natural monopoliesCont’d… • Caribbean experience in late 1980s into the 1990s • Privatization • Liberalization • Water, last bastion of the traditional natural monopolies • Electricity – competition in generation in Jamaica • Natural Gas – monopoly in Trinidad & Tobago and Barbados • Telecommunications • Fully liberalized in Jamaica March 2003

  9. Characteristics of natural monopoliesCont’d… • Phenomenal growth in the market for mobile telephony in Jamaica • 300,000 subscribers in January 2001 • 2,745,400 by September 2005 • Monopoly up until 2000 • Entry of competition in 2000, reaching 60.2% in September 2005 • Fixed line telephone lagging behind • One Licence issued in 2002 but no start-up • Cost • Chosen technology • Need for regulation • Curbing the behaviour of the dominant firm

  10. The Office of Utilities Regulation (OUR) • Established 1995 under the Office of Utilities Regulation Act, 1995 • Jurisdiction over all utilities • Regulates the telecommunications market under the Telecommunications Act of 2000 • Objects sections include “promoting fair and open competition”

  11. OUR Cont’d… • Required to consult with the FTC on matters of “substantial competitive significance” • To refer such matters to the FTC • Dominance under the Telecommunications Act to be determined as per the meaning under the FCA

  12. Monitoring Competition in the Mobile Market • Misleading advertising - Section 37 of the FCA • Advertising wars leading to information asymmetries • Vertical restraints • Abuse of dominance provision • Agreements that lessen competition substantially, e.g. sponsorship agreements

  13. Beneficiaries • Individually - sports clubs and sporting activities • Various geographic and social groupings • Nationally – growth in entrepreneurship • Growth in the economy • Improved consumer welfare • Disciplining of dominant firms Result of liberalization and unimpeded competition

  14. Electricity • Ministerial Order February 2001 • Exemption of the encumbent from the FCA • Power of Minister – Section 3(h) of the FCA • Relationship between independent producers and the encumbent • Affecting determination of price Despite the introduction of competition in generation no evidence of enhanced consumer welfare

  15. Factors Supporting Dominance & Creating Barriers To Entry • Strong social and family ties • Difficulties in obtaining credit • Cultural allegiances • E.g. Red Stripe Beer in Jamaica • Transportation costs, especially for an island

  16. Factors Supporting Dominance …Cont’d… • Bulk buying through dominant firms • Government policies • State aid • Concessions • Tax breaks • Preferential awards of contracts • Legislation • Intellectual property rights vis-à-vis dominant firms • Antidumping and Subsidies Laws

  17. SECTION 2DOMINANCE UNDER THE FCA • Definition • A firm is dominant if “… by itself or together with an interconnected company, it occupies such a position of economic strength as will enable it to operate in the market without effective constraints from its competitors or potential competitors” • The offence is the abuse

  18. Why would a dominant firm need to be constrained? United States vs Aluminium Co of America (Alcoa) 1945 • Such a firm can restrict output • Raise prices • Transfer income from customers to producers • Thereby excluding rivals from the market “by means other than superior performance in the form of better products, prices and service”

  19. Structure vs Conduct Remedies STRUCTURE • Role of merger control in preventing anti-competitive levels of concentration in the market • Omission of merger control provisions from the FCA • Rationale • Jamaica’s level of economic development • Relatively small size of many of its firms

  20. Structure Cont’d… Is there any merit to the argument? Kovacic et al think that mergers can • Bring superior managerial and/or technical skill to bear on underused assets • Yield economies of scale and scope, reducing cost, improving quality and boosting output

  21. Structure Cont’d… • Discourage incumbent managers from behaving perversely, fearing the possibility of a hostile takeover • Facilitate sale of a business to the “best” buyer at the best price • Few risks to competition

  22. Structure vs Conduct RemediesCont’d … CONDUCT REMEDIES • Sections 19-21 address the conduct of dominant firms, prohibiting, inter alia • Restricting the entry of persons into any market • Eliminating any person form any market • Improving unfair or selling prices • Limiting production … to the prejudice of consumers

  23. Justification • Conduct exclusively directed to improving production or distribution • To promoting technical or economic progress; and • Consumers are allowed a fair share of the resulting benefit

  24. Justification Cont’d… • Enforcement of intellectual property rights • Superior competitive performance • Substantial lessening of competition • The FCA therefore • Constrains the behaviour of dominant firms yet • Promotes innovation and encourages superior competitive performance

  25. SECTION 3VIEWPOINTS ON THE ADEQUACY OF COMPETITION LAW • Protection of “axial industries” - Dr Trevor Farrell • “… erecting walls and barriers to trade is not the answer” - Ambassador John K Veroneau

  26. SECTION 4CASE STUDIES (i) Beer Market • 2001 Investigation into the beer market – under Sections 17 and 19 the FCA • Market share – over 90% • Agreements that lessen competition substantially, included: • Promotional • Sponsorship • Demanding sales data on competing brands

  27. Beer Market Cont’d … • Settlement • Limiting length of agreements • Prohibiting option to renew and/or right of first refusal • Relating notice of termination without cause to value of sponsorship • Reducing number of outlets • Permitting promotion of competing brands

  28. Beer Market Cont’d … • Current Market • Increase in entrant’s annual revenue by some 200% • Entry of another competitor in 2006

  29. (ii) Cement Industry • Application of Anti-dumping Laws 2001 - complaint by monopoly producer Carib Cement Company Ltd (CCCL) to the Antidumping and Subsidies Commission (ADSC)

  30. Cement IndustryCont’d … FTC Caution: • Overall impact on competition and consumer welfare • Weigh protecting one company against cost of consumer and wider economic objectives • Value of CCCL’s promise not to raise prices without Government’s approval

  31. Cement IndustryCont’d … • Dumping duties of 89.79% imposed • 2002 and 2004 – further complaints • ADSC recommendation – • increase of tariff from 15% to 40% • Safeguard measure of 25.83% • Market demand – 900,000 tonnes • CCCL at 700,000 tonnes – climbing to 844,840 tonnes in 2005 but still inadequate Specific construction demands

  32. Cement IndustryCont’d … • By the middle of 2006 – crisis in the industry • tariff rolled back to 15% for three months • Tariff removed altogether – indefinitely • Importation resumed – 10 companies as at December 2006 • J$305M paid out in compensation

  33. Lessons • Dangers of picking winners and promoting national champions • Competition as a superior mechanism for organizing the economy • Trade remedies • Last resort • Use sparingly

  34. CONCLUSION Benefits of competition law and policy for states, however small – effective bridling of dominance to:- • Increase entrepreneurship • Promote market adjustment • Enhance consumer welfare

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