3D printing and the future of sunk costs in antitrust analysis

By Francisco Beneke*

I have heard about 3D printing before but never thought about its antitrust implications until now. After having a revelation-like moment, I decided to write a short post. I did some research (googled and did not go beyond the first results page, I confess) on this relationship but could not find much. Let me share what I think my revelation is.

Some futurists predict that this technology will soon take manufacturing industries by storm. What is so fundamentally disruptive about this technology is that it allows the same machine to manufacture/print all kinds of different products. As the technology evolves and we are able to print more and more products instead of producing them in traditional factories, manufacturing across industries will be performed by machinery that is not market- or firm-specific. That means, sunk costs as applied to capital goods will stop being a consideration.

If the same machine can print toothbrushes, glasses, shoes, and furniture, the risk of entering this activities will disappear and in theory we should see more competitive markets. 3D printing is already used in the production of auto and spacecraft parts and there have even been instances of house printing. In addition, this multi-purpose technology will free up resources to invest in other activities within the firm. We may see a lot more (or better) advertising, more R&D investment, or both.

According to Arun Sundararajan of NYU, in the future, we may see the average household owning a 3D printer that can print any type of physical product of a small enough size and printer shops for bigger, more complex goods. We will buy designs from a freelancer but we will have no more need of big factories and retail chains. This will be a world with easy hit-and-run entry and exit in almost all economic activities. A brave new world.

*Co-editor, Developing World Antitrust

@Paco_Beneke

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Riding the M&As wave in India’s telecommunications industry: The ambiguity of market concentration

By Francisco Beneke*

One can write either loud praise or a strong critique about the work of the Competition Commission of India (CCI) and the Competition Appellate Tribunal (Compat). However, it must be agreed that their influence on global affairs is growing at a fast pace. Now, the authorities must choose how to deal with a wave of consolidations in the world’s second largest mobile telecommunications market.

The industry was shaken up by the disrupting entry of Reliance Jio Infocomm, a company backed by India’s wealthiest man, Mukesh Ambani. It quickly captured an astonishing 100 million subscriber base in less than three months by basically giving all services for free for a limited period of time (ending in June this year). This was a hard blow to the industry, which had to enter into a profit-damaging price war, but fantastic news for consumers. In the aftermath, most of the main players have followed a consolidation strategy. In short, the deals may leave the mobile telecommunications market with three companies controlling at least 80 percent of subscribers and revenue.

Should these concentration figures raise concerns? A sensible answer is that the matter is complicated. Common thinking within antitrust authorities is that market concentration does not tell the entire story but that other factors, such as entry barriers, have to be examined. This, however, is not an interesting point because of two reasons: first, antitrust authorities tend to easily conclude the existence of barriers to entry in highly concentrated markets; and second, it is hard to find concentrated markets without some sort of entry impediment.

The more interesting question is how to interpret different market structures given certain industry characteristics. Under certain conditions, fewer firms can mean tougher competition. The reason is a commonly overlooked factor by antitrust authorities, which is the game being played in the industry. In other words, how firms adjust their behavior to that of their competitors. Here is where the work of John Sutton has made an invaluable contribution to our understanding of market structure.[1]

The game the author contemplates with the lowest concentration given a market size of a homogenous good is that of a cartel.[2] When firms collude to achieve the monopoly price, more firms can enter and share the market because of higher profits. When the game is more competitive—for example, with any form of uncoordinated behavior such as a Cournot or Bertrand setting—lower industry profits cause fewer competitors in equilibrium. In the most competitive game (Bertrand) the steady-state number of firms is one.

The bad news is that research on the determinants of the game in each market is still inconclusive.[3] As a practical matter, an antitrust authority like the CCI can conduct an investigation to obtain evidence on collusion and ensure that the strategies followed by market participants are at a minimum not the least competitive ones. But another important question still remains and is that of whether an increase in concentration will favor a game that leads to lower consumer welfare. An additional factor to consider in this matter is that of endogenous sunk costs, which can help understand how the existence of a few big players can actually be good news for consumers.

In markets like mobile telecommunications, firms usually choose how much they invest in the quality of their products (which in a broad sense includes advertising as well). That is, sunk costs are not exogenous. This is why, according to Sutton, we can see similar levels of concentration in the Indian market and that of my home country, El Salvador, even if the difference in size is abysmal. In such scenarios, Sutton’s model predicts that the biggest firms are expected to be the ones that offer the best quality and capture demand away from inferior products, which could mean greater concentration but is not necessarily detrimental to consumer welfare. The result will depend on how much value consumers place on superior quality.

We can easily imagine that preference for quality will be dictated in part by income. Here is where an important feature of the Indian market—and that of some developing countries—comes into play. India is an economy with rapidly rising incomes. If we can expect this trend to hold in the future, the mobile telecommunications market will be able to introduce better quality products for more demanding consumers. This could mean that the ideal market structure is one with a few firms with the resources to invest in the infrastructure needed (say, a 20 billion USD LTE network like the one deployed by Reliance Jio).

A final word of caution is in order. This article attempts only to shed light on factors that can be useful in understanding the consequences of the wave of consolidations in the telecommunications industry in India. However, a claim is not put forward that increased concentration is necessarily a good thing for consumers (it can lead to other overlooked problems already analyzed in this blog). Sutton’s theories rely on a set of assumptions that may or may not hold in this specific case. Their analysis can, nevertheless, help the CCI and the Compat to make a more educated guess (because merger control is nothing more than that) on the likely effects of the mergers that are currently taking place.

*Co-editor, Developing World Antitrust

[1] Sutton, J. (1991). Sunk Costs and Market Structure. Cambrige, MA: MIT Press; and Sutton, J. (1991). Technology and Market Structure. Cambrige, MA: MIT Press. For a discussion of Sutton’s work see Carlton, D.W., and Perloff, J.M. (2005). Modern Industrial Organization. USA: Pearson/Addison Wesley.

[2] With differentiated products, the theories predict only a lower bound of market concentration, but anything over it is possible.

[3] Carlton and Perloff (2005), supra, n. 1.

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Lock them up: A quick look at Chile’s new antitrust regulation

By Benjamin Gomez*

So it took a bit longer than originally predicted on my previous contribution to DWA [1], but it came as tough as expected. I am referring to the new amendments to Decree Law 211 – the antitrust statute in Chile – which entered into force by Law 20.945 on August 30th, 2016, bringing unprecedented punishments for cartels and an overall strict regulation of other relevant antitrust issues. In an effort to be critical yet pragmatic, I will keep the informal tone that has been encouraged by the founders of this blog.

We need to begin with the big shocker of this new law: the reinstatement of criminalization for an anticompetitive conduct. Prison time for cartels is no novelty; until 2003, Chilean Antitrust legislation contemplated up to 5 years of prison for these anticompetitive conducts (although no one was ever sentenced) [2]. But the new statute raises the criminal bar and now contemplates up to 10 years of prison time for individuals. Just to give a better idea, this is the same prison time that could potentially apply to a rape or murder case. Although it is difficult to imagine any high-society Chilean billionaire (as has been the tone for most recent cartel cases in the country) doing any effective jail time it is still a big deal, the fact that this new sanction is out there will definitely make the big players think twice.

Still on the cartel trail, we can see once again (as the previous amendments back in 2008) a significant increase in economic fines, this time doubling up the cap from USD $25 million to USD $50 million approximately. In addition, a new predominant criteria was inserted to determine the amount of the fine. The Antitrust Tribunal (Tribunal de Defensa de la Libre Competencia – TDLC) shall calculate and apply first 30% of the gains for each of the colluding parties during the breaching period, or alternatively up to twice the economic benefit gained by such party. Only if those benefits cannot be determined, the TDLC can apply other factors to freely decide on the amount of the fine, with the aforementioned USD $50 million cap.

All of these measures seem to be directly inspired by the Sherman Act, one of the main federal antitrust statutes in the United States, and maybe the harshest from a comparative perspective. The Sherman Act imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts or twice the money lost by the victims of the crime, if either of those amounts is over $100 million [3]. The new law already equalized the US on the jail time aspect, and if a new double-up is made by the Chilean Congress on economic penalties, Decree Law 211 will then be among the toughest antitrust regulations in the planet.

The Sherman Act imposes an exponential increase of fines, aimed at some of the world’s largest corporations, and that is a factor to be considered. To continue doubling-up the fines in Chile would lead to a potential punishment-victim disproportion. Furthermore, it is difficult to imagine a scenario where the Chilean criminal system would end up imposing effective imprisonment as the general rule, both from a logistics and cultural standpoint. On the other hand I understand that this has become a necessary effort to fight the growing recklessness by the major economic groups engaging in high-impact collusive agreements. Just as the year 2016 came to a close, the Chilean media exposed a cartel on the baby diaper market carried out by the same companies involved in the “Toilet Paper Cartel”, CMPC and Kimberly-Clark. Yes, you read correctly: a “Diaper Cartel” that systematically coordinated to increase prices between 2002 and 2009 (as if an agreement to fix prices of toilet paper was not outrageous enough!).

Moving past cartels, another interesting amendment to Decree Law 211 is the now mandatory control of all mergers and concentration operations. Just recently, the new thresholds were set by the National Antitrust Prosecutor of Chile (Fiscalia Nacional Economica – FNE) by means of Resolution 667 dated November 24, 2016, requiring all potential mergers where combined national sales by the intended merging parties are equal to or higher than USD $70 million approx. for the previous commercial year or at least USD $11 million approx. separately considered, to have prior antitrust clearance by the FNE. The effects of this new amendment will need to be assessed in time, but it is definitely positive to have the FNE thresholds already in place early in the game.

Finally worth mentioning, the new statute brings some positive novelties by imposing restrictions to different actors involved in the antitrust universe. For company board members, there will be interlocking restrictions in place, while members of the TDLC shall now have exclusive dedication to their role. This last one always puzzled me; how some members of such tribunal were acting as active law firm partners and gave advice to private parties on antitrust matters. Incompatibility and ethics must go both ways, and this is definitely a smart move to improve the current statute and prevent conflicts of interest.

All things considered, the new amendments to DL 211 come just in time to tackle the cartel explosion going on in Chile, which has reached new levels of shameless anticompetitive conducts –involving public health basic goods such as toilet paper and diapers – and is giving no signs of stopping. Higher fines and harsher punishments are seen with welcoming eyes by both government and the public, but at the same time there must be some serious consideration of how legislation is going to move forward and how convenient will it be to continue imitating some of the Sherman Act’s criteria for determining punishments by the TDLC. For now, locking up the bad guys seems to be a move in the right direction.

* Attorney at Law, Pontificia Universidad Católica de Chile

LL.M, University of California, Berkeley, School of Law

[1] https://developingworldantitrust.com/2016/01/18/the-chain-reaction-of-the-poultry-cartel-in-chile.

[2] Idem.

[3] https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws.

 

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The task of regulating Copyright Collecting Societies

By Monika Hasbún*

Understanding the basics

Intellectual Property (IP) refers to creative work which can be treated as an asset or physical property. This creative work can be represented in a variety of forms, such as inventions and literary and artistic work. Symbols, names and images used in commerce are also part of it. In order to protect these creations, IP law has established exclusive rights that permit its owners to obtain recognition and exploit these inventions and creations, seeking to establish a balance between the interest of innovators and public interest, so that creativity and innovation are fostered.

The primary, well known function of an IP right is to give its holder a competitive advantage in its commercial activities, by preventing unauthorized exploitation by thirds. The activities related to the management of intellectual property rights correspond, in essence, to the respective owners. But in certain cases and for certain types of use, individual management is practically impossible.

This is what happens in the case of copyright [1] and related rights. The impracticability of managing these activities individually created the need for collective management organizations. Imagine an artist created a song. This artist has the right to let other people use it or to prevent them from using it. There are a lot of activities involved in administrating the use of the work, for example, contacting and negotiating with every radio station that wants to play the song. On the other hand, it is also very difficult for every broadcasting organization to seek specific permission from every author for the use of every copyrighted work. With the purpose of facilitating this management, a very unique form of economic institutions was created: copyright collecting societies (CCS). These special societies license the use of copyright works, collect and distribute royalties, and monitor the use of copyrighted works.

Collective management can be seen generally as more beneficial than individual negotiations. Considering there are economies of scale in the administration of some copyrights, CCSs guarantee economic efficiency due to a centralized copyright management. From an economic point of view, their main rationale is the minimization of transaction costs both for creators (suppliers of copyright works) and for users (intermediate and final consumers). By exploiting the economies of scale in the administration of copyrights, a CCS can reduce transaction costs [2] substantially and make markets more efficient. [3]

CCSs as natural monopolies and their need for regulation

Collective licensing by CCS is viewed as a natural monopoly (or, in some cases, a natural oligopolistic market) in the sense that they are more efficient than if there was competition. As they offer their services bundled together it costs very little to offer these services to additional members once the initial investment in the structure of licensing, fee setting and monitoring is in place. It would be inefficient if several collecting societies were to exist side by side, as the economies of scale of a single actor, or just a few, billing and enforcing for all authors would be lost. Hence the natural monopoly. [4]

Natural monopolies are still monopolies and whether the existence of a single supplier is beneficial depends on how the CCS exploits this monopoly position. For example, CCSs acquire monopoly control of rights since they require the exclusive assignment of a specific bundle of rights. If a CCS manages all the rights in which a particular user is interested, they become the single license provider and hence gain monopoly power. For example, if the society’s tariffs are substantially higher than those of similar collecting societies in other countries, the exploitation of (but not necessarily an abuse) a dominant position may be suspected.

Regarding the problem of CCSs’ monopoly power, the economic literature offers three main mitigating factors: regulation, bilateral monopoly, and price discrimination [5] . On this occasion, the point of discussion will be regulation.

Regulation measures can range from political control or continuous scrutiny by specialized supervisory bodies to a simple application of competition and contract law. [6] How much regulation there should be is largely discussed. There are diverse examples of countries where the Administration has the faculty to supervise and control CCSs, for example in the case of tariffs. In Germany, CCSs are jointly authorized and supervised by the German Patent Office and the Antitrust Agency (Kartellamt). They can demand information on their activities, participate in their board meetings and fix their tariff rates. [7] In Spain CCSs are supervised by the First Section of the Intellectual Property Commission. According to article 158 bis. 4 of the IP Law (Texto refundido de la Ley de Propiedad Intelectual) this authority ensures that tariffs are equitable and non discriminatory. In other countries such as Peru[8], Ecuador [9] and Honduras [10], CCS are also obliged to register and publish their tariffs.

In El Salvador, for example, there are two operating CCSs, which up to this point have operated under no regulation. The Salvadorian Intellectual Property Law contains few provisions dedicated to these particular societies but they refer to their procedure of establishment and not their form of operation.

As a result of alleged abuses committed by CCSs in the tariffs offered for their services, the Parliament is now discussing a reform to the Intellectual Property Law, destined to regulate their operations. The main measure proposed in this project is to regulate the tariffs set up by these societies, so as to set ‘fair and reasonable’ tariffs, taking into account factors such as context and purpose of use of copyright material and its identifiable value. To what extent or if it is at all adequate to regulate their tariffs is the question. First of all, is there a suitable way to establish whether a collecting society’s tariffs are abusive? How can it be determined whether prices are too high?

So that a pertinent analysis can be made it is necessary to understand the rights they are managing and the principles governing the relationships between licensors and licensees. Their tariff and distribution structures are another important aspect. In the case of a “prototypical” case of monopoly rate regulation involving utilities, a tariff should ensure a reasonable return on its investment given its operating costs. Can this be applied in the case of music licenses, for example?

In the United States, rather than approaching this problem from a rate regulation perspective and trying to define an ideal rate, courts have defined the “reasonable” blanket fee as the price that would be charged in a competitive market for blanket licenses. Since such a competitive market does not exist, they opted for judicial rate setting. Given the absence of any other factual basis for setting a “reasonable” rate, courts have been forced to rely on historical prices, discounting them more or less, depending on the court’s own sense for the potential influence of undue market power and adjusting them for differences in circumstance. [11]

CCSs are complex institutions whose operation differs from country to country. In some countries such as the UK they are constituted as a corporate non-profit organization. In others, such as Italy, they operate under a government monopoly grant. In El Salvador, they operate under the form of commercial societies. The tariff regulation is just one example of how difficult it is to regulate the activities of these diverse types of societies. It is therefore important to analyze case by case if regulation is an appropriate measure to ensure an efficient operation of CCSs.

*The author is a lawyer and notary public in El Salvador, holds a bachelor of laws degree from the Universidad Dr. José Matías Delgado and has postgraduate degrees in public policy management and in law, economics, and business. She is currently a senior legal counsel in the Salvadoran competition authority.

[1] Copyright (or author’s right) is a legal term used to describe the rights that creator have over their literary and artistic works. Works covered by copyright range from books, music, paintings, sculpture, and films, to computer programs, databases, advertisements, maps, and technical drawings. World Intellectual Property Organization. “What is copyright” URL: http://www.wipo.int/copyright/en/

[2] The costs that arise out of the activities of a CCS can be divided in two groups: First the “search and information” costs concerning potential contracting partners and collecting and processing information about them. On the other hand, there are “bargaining and decision” costs related to the negotiations and conclusion of contracts. Zablocka, Adrianna. Antitrust and Copyright Collectives – an Economic Analysis. Yearbook of Antitrust and Regulatory Studies. Vol. 2008. Centre of Antitrust and Regulatory Studies, University of Warsaw. https://issuu.com/csair/docs/a._zablocka__antitrust_and_copyright_collectives

[3] Handke, C. Towse, R. (2007) Economic of Copyright Collecting Societies. 38 International Review of Intellectual Property and Competition Law. 937

[4] However, in the digital world, this affirmation is subject to discussion. There is the suggestion in various academic papers and official reports that digital technologies encourage competition in collective rights management and would break the natural monopoly justification for the single national society administering a specific bundle of rights. This is the case with online licensing and multi-territorial licensing. Towse, “The economic effects of digitization on the administration of musical copyrights.”

[5] Some studies suggest that a price discrimination approach is likely to be appropriate when analyzing the pricing behavior of collecting societies or other organizations who have a significant market power because of their breadth of copyright holdings. From a positive point of view, the standard argument is that compared to uniform monopoly pricing, price discrimination increases output and allocative efficiency as well as profit to the copyright owner. This way it has a desirable impact on the trade-off between incentives and access. Meurer, Michael J, “Copyright Law and Price Discrimination” . URL: http://www.bu.edu/law/workingpapers-archive/abstracts/2001/documents/meurerm061801_000.pdf

[6] Handke, C. Towse, R. (2007) Economic of Copyright Collecting Societies. 38 International Review of Intellectual Property and Competition Law. 937

[7] On 24 May 2016 the Collecting Societies Act (Verwertungsgesellschaftengesetz – VGG) was adopted. This act transposes Directive 2014/26/EU on collective management of copyright and related rights and replaces the previous Copyright Administration Act (Urheberrechtswahrnehmungsgesetz). This new act simplifies aspects such as the fixing of tariff rates and the participation in general meetings of members. Iacino, Gianna. “Germany New law for collecting societies”. URL: http://merlin.obs.coe.int/cgi-bin/article.php?iris_r=2016%206%2010&language=en

[8] Article 153, letter a), of the Legislative Decree 822

[9] Article 35 of the Regulations on the Intellectual Property Law

[10] Article 148 of the Intellectual Property Law

[11] See U.S. v. BROADCAST MUSIC, INC. 426 F.3d 91 (2005). This appeal arises from a decision of the United States District Court for the Southern District of New York (Stanton, J.), acting under the Broadcast Music, Inc. (“BMI”) Consent Decree,1 to set a rate for Music Choice’s licensing of BMI’s music. The license would apply to BMI music used by Music Choice on its cable, satellite, and Internet services between October 1, 1994 and September 30, 2004. Since BMI and Music Choice were unable to agree on a rate, the Consent Decree required the court to set one.

 

 

 

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Competition law in Guatemala: An instrument for solving current national problems -corruption in processes of public procurement-

By Luis Pablo Cóbar Benard*

Guatemala, October 17 2016

At some point it can become difficult to write a decent article, without taking the risk to sound boring, especially if it is a subject that has been widely addressed in its most important aspects. Such is the case of the status of the approval of the Competition Law in Guatemala and the corresponding Initiative 5074, which has been widely studied and criticized, both positively and negatively, so it’s not worth adding anything more in that matter. However, it does not mean that there is nothing important to share, especially because as the Competition Law Institute[1], we have remained active around this topic, and because certainly there are other important aspects related to the Competition Act, which have been unnoticed, so it’s time to talk about them with an open mind and vision.

As I mentioned on a previous article, just over a month after the submission of the initiative 5074 to the Legislature, by the Ministry of Economy, nothing relevant had happened, other than some academic events and a few opinion and academic articles that have been published. Thus, once the disaster was consummated without anything left to do, at least at the level of Ministry of Economy, the IDC co-organized and participated actively in two major forums on competition law, organized by the Spanish Chamber of Commerce, the Guatemalan-German Chamber of Commerce and Konrad Adenauer Foundation. Thanks to their efforts and the excellent network of contacts and friends around the Competition Law community that we have built for over nine years, we accomplished the participation of Dr. José María Marín Quemada (Chairman of the National Commission of Competition and Markets in Spain) and of our dear friend -of the real coffee Republic- Juan David Gutierrez, who shared his knowledge, experience, cases and invaluable recommendations. It is worth mentioning that we met Juan David when he invited us to participate as bloggers on LaLibreCompetencia.com, and we never imagined having the pleasure of meeting in person, or even, to have him in Guatemala as our guest for an important event and become new friends.

Representatives of the IDC participated as well in the process of public hearings that took place on August 3rd 2016 invited by the Commission of Economy and Foreign Trade of Congress. On that date, we presented our technical approach regarding the Competition Act No. 5074. At this point, it is difficult to predict how the final draft of the Act will look like once the Congress approves it, so we must wait and continue generating more information, analysis, reviews and debate as much as we can to increase awareness.

Achieving this space for the IDC was a success by itself, beyond what happens next and what the Congress will decide with the feedback provided. Why? Long before the creation of the IDC in early 2015, we began to work -within our practice as an independent Law Firm-, researching on economics, competition law, creating contacts outside Guatemala, conducting small workshops, and joining efforts with the authorities of the Ministry of Economy at that time[2] and business chambers. We saw the opportunity to be pioneers in a different branch of law[3], as disruptive innovators.

We knew it was hard work: opening a breach in an unexplored market, in a political complicated context and with the vision of having an important role on what happened last August 3rd. Looking back, we know we have taken the right path. We have been witnesses and protagonists in almost everything that has happened on this subject.

Over the time, we got interest in creating an academic institution devoted entirely to the study, dissemination, discussion, etc., of Competition Law in all its manifestations, which could stand out from any other that has existed so far. It was so, that in early 2015 we decided to carry out the plan and founded the Competition Law Institute. Right now, we are working to celebrate the entry of new members with fresh ideas, who will join the effort and share our passion for competition law.

During his recent visit to our country, Juan David, made two specific recommendations: (i) overcome the discussion on the content of the Competition Act; and (ii) make the authorities and everyone in general, understand the competition law, as an instrument to solve some of the major problems that Guatemala faces as a country.

There is a current concern surrounding corruption in public institutions that is tangible, and the flaws in the procurement processes at all levels in the ministries of the Executive, Congress, Judicial Branch, municipalities, autonomous institutions, etc. are well known. More sensitive cases of collusion in bidding processes could refer to: purchase of medicines (The Guatemalan Institute of Social Security and the Ministry of Public Health and Social Assistance); roads and infrastructure (Ministry of Communications, Infrastructure and Housing); and products and services of various kinds in municipalities and other entities. Some of these cases have cost human lives. Nobody is focusing on how to solve the problem and the current legal framework does not seem to offer any solution in the short, medium and long term. I mean the Competition Law as a tool to combat corruption in public procurement processes!

For more clarity, we look at the road that Mexico has walked to combat collusion in public procurement processes. During the Latin American and Caribbean Forum on Competition, held in April 2016 in Mexico City, representatives from COFECE mentioned their progress in this struggle, as well as aspects of modernization that have been developed. Mexico implemented a number of changes following the recommendations of the OECD, which included in-depth evaluation of laws and procurement practices at all levels of government as well as reducing the risk of manipulation by the effective design of procurement processes and detection of collusive practices during the bidding process.

The recommendations go through the implementation of six major guidelines: know the markets; genuinely maximizing of the number of bidders; use of clear requirements and avoid predictability; reduce communication between suppliers; establish clear criteria for awarding contracts; training staff on the risks of bid rigging. If the staff does not understand the importance of their good work, all the effort would be almost like throwing away resources.

In Guatemala, the legal framework on public procurement contained in the Government Procurement Law and its Regulations (Decree No. 57-92) and the new Regulation contained in Government Agreement No. 122-2016 should be revised deeply. The last amendment to the Law on Government Procurement, by Decree No. 9-2015, adds nothing significant, rather than imposing a maximum fine of Q.25,000.00 (equivalent to USD.3,250.00), which is ridiculous if we take into account the economic benefits that cheating bidders could obtain. Therefore, it makes sense to criminalize at least the collusive practices in public procurement processes, because in addition to the restrictive effect on competition, they are also defrauding the economic interests of the State.

Prices affected by collusion can damage a public institution as well as the economy. According to data from six economic studies in Mexican markets[4], the presence of cartels and collusive arrangements can raise prices of certain products to over 30% of its real value. That is, if public institutions are victims of collusive arrangements for any product or service, they could be paying a third more of what they should. To have an approximation on the amount of wasted resources caused by these practices it should be calculated from the moment they began and forward. Can you imagine what it could be done with all those wasted resources? Do you realize that competition is more than ethereal economic concepts and sophisticated terminology?

Honestly, it’s time to open our eyes, and get interested in what is happening with the approval of the Competition Act, because it goes far beyond a group of opportunistic lawyers and economists as it has been said, or some economic sectors who seek to perpetuate their privileges at the expense of our pockets; it goes beyond mediocrity or lack of commitment from some public officials. This has to do with saving lives and prevent disasters. It is our duty to see what is going on and demand that things must be done well. The Competition Law is wide and is related to many aspects of our work and daily life, and could well be part of the solution that many are seeking to solve important problems of our Nation, as long as we are willing to give it a try and take away the ideological veil from our eyes, minds and lips. It is time to get ready to compete and stand by our capacity and creativity.

We have always used football (soccer) as an analogy to explain the process of economic competition and the role of the competition authority in the markets, which always works wonderfully to capture public attention. We often use photographs of the very famous retired referee Pierluigi Collina as an example of the thoroughness that the authority in competition should have, with eyes almost out of their sockets, showing yellow and red cards right and left!

Taking advantage of the footballing analogy to conclude the article, the most beautiful sport in the world, as described by Luis Omar Tapia in the kickoff of every game, the famous writer Eduardo Galeano[5] comes to my mind. In his excellent book “Soccer in Sun and Shadow” where he describes masterfully poetic and daring, the intricacies of the sport, and referring to the language of doctors of soccer reads: As we said on Sunday recent past and so we affirm today, with head erect without mincing words, because we have always called a spade a spade and continue to denounce the truth even if it hurts many, no matter who falls and what it costs… 

*Co-founder of the Competition Law Institute in Guatemala

[1] IDC, From now on.

[2] Former Director of Promotion and Competition Department at Ministry of Economy. In late 2006 and early 2007, we had generated the contact between Director Edgar Reyes -RIP-, and us -Marcos Palma and Luis Pablo Cóbar-, whom he had established a very positive dynamic work that continued until he passed away in 2012.

[3]Always maintained a dual purpose, on the one hand, the intention to do our work for the country, without representing particular interests of any kind. On the other hand, the plan has always been to develop an area of legal practice on competition law with leadership from the academic point of view.

[4] Combat against collusion in public procurement processes in Mexico. CFE OECD 2015

[5] Writer born in Montevideo Uruguay in 1940, author of several books, translated into more than twenty languages and profuse journalistic work. Among his major works: Open Veins of Latin America, Vagamundo, The song of us, The Book of Embraces, among others.

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Market Definition and the Sharing Economy

By Carmen Ortiz*

Introduction

Technology enabled the flourishing of the sharing economy both in developed and in developing countries.[i] It is characterized as an innovative system of collaboration between peers through an online platform accessed through smartphones.[ii] Services, goods, spaces, and others that are in surplus are offered for lease or sale at reduced transaction costs. Thus, the sharing economy boosts competition while generating different effects for the groups affected. For one part, consumers benefit with the access to new products and services, lower prices and non price benefits. For the other part, traditional firms face new threats by suppliers that compete aggressively to reduce the revenues and the market shares of incumbents. This novel model of commerce motivates for an analysis that determines the extent to which competition authorities in developed and developing countries should include the sharing economy activities in the relevant markets (RM) for traditional products and services.

The inclusion or exclusion of sharing economy activities could widen or narrow traditional RM and this can produce several consequences that influence the efforts of competition authorities in their aim to protect competition. First, the analysis of market power may be influenced by identifying more or less competitive constraints in the commercial behaviour of an undertaking. Second, regarding merger control, if sharing economy firms participate in the same RM of traditional firms, mergers between them would be analysed as horizontal (for example, where traditional firms could acquire sharing economy start ups to eliminate competitors). Third, referring to abuses of dominance, traditional firms could independently or collectively exclude sharing economy suppliers by raising barriers to entry. Moreover, a cartel between traditional firms might be obstructed if sharing economy competitors are successful disruptors of collusion. For all these reasons it is important to set a framework for definition of RM that can adapt to cases where this model of commerce is present.

New and expanding competitive constraints by sharing economy suppliers can change the current structure of traditional markets. Real world cases of this model of commerce are Uber and Airbnb, which exert competitive pressures on traditional rivals. For example, Uber fares in Stockholm can be up to 60% lower than traditional taxi fares.[iii] Non price benefits for consumers include less congestion, less delays and less time lost in traffic, all of which increase the demand for the service. Regarding Airbnb, in Texas, its growth of by 10% results in decreases of 0.37% in monthly hotel revenues.[iv] In the period of 2010 to 2015 the occupancy rates of traditional hotels have decreased from 8-10% in the areas where Airbnb has more demand.[v] These firms will serve as examples for the development of this proposal.

Framework for defining RM when the sharing economy is present

For the purpose of suggesting a framework for the definition of RM, the EU antitrust jurisdiction will be taken as a base as it is a leading regime that can be taken as a guide or as a point of comparison for other jurisdictions. The first step in this framework is to embrace the objective and the concept of RM. In the EU, the objective of defining the markets is to establish which undertakings constrain others from behaving freely in absence of competition.[vi] The basic concept of RM encompasses a product and a geographic dimension, and these will remain as the building blocks of this proposal.[vii]

Second, the undertakings that could supply the products or services that form part of the RM must be defined.[viii] In this stage, the focus is directed to the economic activity of the entities.[ix] In the special case of the sharing economy, two economic activities must be distinguished: a) online platform’s intermediation of supply and demand and, b) the supply of products and services. The specific characteristics of the relationship between the owner of the platform for intermediation and the suppliers of the services are decisive to determine whether they together form a single undertaking or independent undertakings. Lougher and Kalmanowicz sustain that if the firm providing intermediation also influences the conditions of the offer it could be determined that there is a single undertaking performing both activities. This posture is also accepted outside the EU, for example, in Australia.[x] For example, Uber sets requirements for the driver, the car and for the mode of operation. According to Lougher and Kalmanowicz, the exam must consider the contractual conditions, whether or not the suppliers are independent from the platform, if they bear risks, if they are employees or agents, among others.

Third, once the firms have been identified, the competitive constraints that they encounter should be established. Firms can face constraints as demand substitutability, supply substitutability and potential competition.[xi] Special considerations for each of these constraints are required in the markets where the sharing economy is present. On one hand, demand substitutability significantly determines market definition. The whole purpose of market definition is to determine which are the substitute products or suppliers to which customers can switch. Demand substitutability may refer to the prices, characteristics and the intended use of the products. For the EU Commission, the decisive criteria is the consumer’s reaction to prices as it considers that product characteristics and intended use are insufficient to reveal demand substitutability.[xii] Nonetheless, consumers of the sharing economy have revealed that they prefer it for its convenience.[xiii] Therefore, this framework suggests that the analysis should be flexible enough to take into account the consumer’s reaction to prices and also the product’s characteristics and intended use as they are motifs of convenience. The evidence of marginal consumers switching for reasons as price or convenience to the sharing economy products and services and making the price increase in traditional products unprofitable allows the inclusion of those products and services into the traditional RM.

For example, to test consumers’ reactions to prices the EU Commission’s Notice refers to a hypothetical monopolist and whether its “customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas being considered”.[xiv] In the case of Uber, the test will reveal if the referred increase in prices of traditional taxi services would be unprofitable because Uber exerts sufficient competitive constraints that enable customers to switch to it. If yes, Uber should be included in the product market. For defining the geographic market, the question is to which other areas of Uber service would costumers switch “in the short term and at negligible cost” in reaction to the referred fare increase.[xv] Those areas that are alternatives for consumers should be included in the relevant geographic market. In synthesis, this is the extent to which Uber services could be included in the RM of traditional taxi services. It is interesting to note that it has been argued that because the sharing platforms are not direct substitutes of traditional products and services and because they cannot fulfill the demand, they should not be considered competitors (see Oxera Compelling Economics article). This proposal disagrees with such point of view. The reason is that the inclusion of a product in a relevant market relies on whether that product exerts sufficient competitive constraints in the other products to the point that their price increases are not profitable, not whether that product is able to fulfill the total demand or whether it is exactly the same in terms of characteristics.

Evidence in support of the inclusion of the sharing economy in the traditional market definitions could include the substitution on the recent past,[xvi] empirical data of quantities demanded and its impact on the traditional offer, good brand reputation that attracts the preference and loyalty of consumers,[xvii] convenience (accessibility, trust), the legal treatment by authorities of the product forming part of the traditional supply,[xviii] among others.

Regarding Airbnb, a similar methodology applies. Unprofitability after the mentioned price increase in hotel rooms in a given area will reveal if Airbnb exerts sufficient competitive pressures that allow its inclusion in the traditional RM of accommodation services. Past substitution, comparisons of the room capacity of hotels versus the growing supply of Airbnb,[xix] the impact of Airbnb on hotel’s revenues, uniqueness of Airbnb service, consumer’s preferences, could all constitute evidence that supports demand substitutability.[xx]

Once it has been established that the sharing economy activities exert sufficient competitive pressures to make unprofitable the price increases of traditional services, it must be ascertained which specific activities will be included in the definition of RM. The activities could be the intermediation platform and the supply, which could be considered independently or jointly in the exam of substitutability. It will all depend on the closeness and interdependence between those activities. If they are independent from each other, only be the products or services that exert competitive pressures on traditional products or services will be tested. If they are close enough to constitute one single activity, the intermediation and its underlying supply should be tested as a whole.[xxi] Even when it has been acknowledge that the “sharing economy platforms are generally active on the relevant product market for the intermediation of the relevant underlying supply”,[xxii] this is a situation that must be determined case by case.

On the other hand, regarding supply substitution and potential competition, the sharing economy involves a significant and constant competitive threat. In the scenario of the sharing economy, consumers with surplus of space, products and time, can easily become suppliers of more than one product or service depending on the surplus they possess over them and this way they can compete with traditional firms.[xxiii] This could happen in response to small and permanent changes in relative prices of traditional products and services which represent potential sources of income for new suppliers.[xxiv] The presence of sharing economy suppliers that compete for the customers of the traditional firms is an element that supports the inclusion of that specific sharing economy in the traditional RM.

Finally, regarding barriers to entry, these could take the form of legal, cultural, social and economic barriers that could weaken or obstruct the pressure exerted by the sharing economy on traditional businesses.[xxv] Legal barriers were raised with the French Constitutional Court banning Uber services (See article by Reuters). Moreover, Uber has closed operations in Frankfurt, Hamburg and Düsseldorf in response to a Court ban (See article by Lomas, N). Cultural barriers might arise when local custom, traditions and values are not relaxed enough as to allow its members to interact with strangers that offer services through the sharing economy. Social barriers might be the political instability, insecurity and violence in the society that could demotivate consumers from being exposed to the risks associated with the offer of the sharing economy (for example, unpredictability of trusting a stranger). Economic barriers could referr to the lack of resources to fund publicity and marketing for a sharing economy product or service. All of the mentioned barriers must be considered for the definition of relevant markets as they prevent consumers from switching their demand towards sharing economy substitutes.

Conclusion

Technology, consumer preference, strong brand reputation and the possibility of an ever growing supply provide the sharing economy with a high potential of growth within many sectors of the economy. The assessment of its inclusion on traditional RMs is essential for the protection of competition and innovation in developed and in developing countries. The assessment must be case and context specific as every industry has different structure and conditions. Moreover, barriers to entry specific to each national context might prevent the sharing economy from being a competitive constraint. For these reasons, there cannot be a one size fits all answer to whether the sharing economy activities should be included or not into the traditional relevant markets. In some cases, some analysis will result positive for its inclusion while in others, negative.

*LLM in International Competition Law and Policy, University of Glasgow, School of Law, Scotland, United Kingdom. Candidate for the LLM in Law and Economics, University of Utrecht, Netherlands. Head of the Mergers Control Unit in Superintendencia de Competencia, El Salvador, from January 2012 to August 2015.

Bibliography

Reports and Market Studies

Australian Competition and Consumer Commission, “The sharing economy and the Competition and Consumer Act”, 2015, available at: “https://www.accc.gov.au/system/files/Sharing%20Economy%20-%20Deloitte%20Report%20-%202015.pdf

Stefansdotter, A., Utfall Danielsson, C., Kastberg Nielsen, C., Rytter Sunesen, E. (2015) “Economic benefits of peer- to-peer transport services”, Copenhagen Economics, Stockholm. Available at: https://www.google.nl/search?client=safari&rls=en&q=Copenhagen+Economics+(2015),+%E2%80%98Economic+benefits+of+peer-to-peer+transport+services%E2%80%99,+25+August.&ie=UTF-8&oe=UTF-8&gfe_rd=cr&ei=1oePVuPECYim8wfcoLbwDA

Notices

Commission Notice on the definition of relevant market for the purposes of Community competition law (97/C 372/03)

Notice 07/14 of the Transport for London – Taxi and Private Hire, available: http://content.tfl.gov.uk/07-14-taxi-and-private-hire-smartphone-apps-in-london-letter-to-drivers.pdf

Decisions

Hofner and Elser v Macrotron GmbH (Case C-41/90) [1991] ECR I-1979

Google/DoubleClick (Case COMP/M.4731) Commission Decision [2008] OJ C 184

Microsoft/Yahoo! Search Business (Case COMP/M.5727)

Articles and News

Lomas, N. (2015), “Uber Pulls Out Of Three German Cities After Court Ban Shrinks Driver Pool”, TechCrucnh, available at: http://techcrunch.com/2015/11/02/uber-retrenches-in-germany/#.prbkyj5:RjYZ

Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law, available at: http://jeclap.oxfordjournals.org.proxy.library.uu.nl/content/early/2015/12/10/jeclap.lpv086.full.pdf+html

Oxera Compelling Economics, (2015) “A fair share? The economics of the sharing economy”. Available at: http://www.oxera.com/Latest-Thinking/Agenda/2015/A-fair-share-The-economics-of-the-sharing-economy.aspx

Reuters, “French court upholds ban on Uber’s service using non-professional drivers”, available at: http://www.reuters.com/article/us-france-uber-tech-idUSKCN0RM26C20150922

San Francisco Chronicle, “S.F. taxi owners, cabbies join forces against Uber, Lyft, others”. Sept 2014, available at: http://www.sfgate.com/bayarea/article/S-F-taxi-owners-cabbies-join-forces-against-5773407.php#photo-6898035

Wallsten, Scott, (2015), “The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?”, Technology Policy Institute, Studying the Global Information Economy, June 2015. Available at: https://www.ftc.gov/system/files/documents/public_comments/2015/06/01912-96334.pdf

Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”. Available at: http://people.bu.edu/zg/publications/airbnb.pdf

[i] See, information about the scope and impact of the sharing economy, at Crowd Companies. Author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/2014/09/29/a-day-in-the-life-of/ . See, also, information about the expected growth of the sharing economy, at Crowd Companies. Author: Jeremiah Owyang, available at: http://www.slideshare.net/jeremiah_owyang/sharingnewbuying , slide No. 12.

[ii] Australian Competition and Consumer Commission, “The sharing economy and the Competition and Consumer Act”, 2015, pg. 1.

[iii] Uber was founded in San Francisco, California, in 2009. It functions through an online platform that permits consumers to hire drivers that use their own cars. “Uber is evolving the way the world moves. By seamlessly connecting riders to drivers through our apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers. From our founding in 2009 to our launches in hundreds of cities today, Uber’s rapidly expanding global presence continues to bring people and their cities closer”. See, Uber Website: https://www.uber.com/about . See, also, Stefansdotter, A., Utfall Danielsson, C., Kastberg Nielsen, C., Rytter Sunesen, E. (2015) “Economic benefits of peer- to-peer transport services”, Copenhagen Economics, Stockholm. pg. 3-4. , which are factors that could increase the demand for the servicetter Sunesen, E. (2015) irms might have a different result if

[iv] Airbnb was founded in San Francisco, California. It is “a provider of travel accommodation and a pioneer of the sharing economy, has served over 30 million guests since it was founded in 2008. Although Airbnb remains privately held, its valuation of over $10 billion now exceeds that of well-established global hotel chains like Hyatt”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”, pg. 2.

[v] “Our main result is that in areas where Airbnb is most popular the revenue of the most vulnerable hotels in our data has decreased by about 8-10% over the past five years”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”. pg. 3.

[vi] See, Commission Notice on the definition of relevant market for the purposes of Community Competition Law (97/C 372/03), in further, Commission Notice, para. 13.

[vii] “A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use”. “The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area”. Comision Notice on the definition of relevant markets. Commission Notice on the definition of relevant market for the purposes of Community Competition Law (97/C 372/03), para. 7-8.

[viii] Case C-41/90 Hofner and Elser v Macrotron GmbH [1991] ECR I-1979

[ix] Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law, pg. 3.

[x] See Note 2, pg. 35.

[xi] See Commission Notice, para. 2.

[xii] See, Commission Notice, para. 36.

[xiii] See, Crowd Companies. Author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/category/collaborative-economy/

[xiv] See, Commission Notice, para. 15-17.

[xv] See, Commission Notice, para. 29.

[xvi] Commission Notice, para. 38. For example, “Taxis, badly losing the battle on San Francisco’s streets, are finally fighting back. After seeing 65 percent of their business migrate to ride services like Uber, Lyft and Sidecar, taxi drivers and company owners, at odds for decades, have joined forces — not only with one another but with their overseer, the Municipal Transportation Agency”. See, article: “S.F. taxi owners, cabbies join forces against Uber, Lyft, others”. San Francisco Chronicle

[xvii] See, information on the public perception of brand reputation of traditional business and sharing economy businesses, at Crowd Companies, author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/category/collaborative-economy/

[xviii] For example, in the UK, the OFT includes Uber in the private hire operator sector. See Notice 07/14 of the Transport for London – Taxi and Private Hire. See, also, Lougher and Kalmanowicz, pg. 8.

[xix] See, information about the growing supply of Airbnb in 2015, at Airbnb summer travel report: 2015, available at: http://blog.airbnb.com/wp-content/uploads/2015/09/Airbnb-Summer-Travel-Report-1.pdf

[xx] See, information about consumer’s preferences regarding accommodation options, at Jeremiah Owyang, available at: http://www.web-strategist.com/blog/2013/07/29/collaborative-economy-airbnb-loved-over-traditional-hotel-brands/ . Besides, for example, in the state of Texas in US, Zervas, Prosperio and Byers state that “(…) this estimate indicates that Airbnb listings result in some Airbnb stays that are substitutes for hotel stays in cities with an established Airbnb presence”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”, pg. 16.

[xxi] See Lougher and Kalmanowicz, pg. 5. See, also, Google/DoubleClick (Case COMP/M.4731) Commission Decision [2008] OJ C 184, para. 68 and Microsoft/Yahoo! Search Business (Case COMP/M.5727), para. 83.

[xxii] See Lougher and Kalmanowicz, pg. 7.

[xxiii] See, information about consumer’s potential of becoming suppliers in the sharing economy, at “Sharing is the New Buying: How to Win in the Collaborative Economy”, by Jeremiah Owyang available at: http://www.slideshare.net/jeremiah_owyang/sharingnewbuying

[xxiv] See, Commission Notice, para. 20.

[xxv] See, Commission Notice, para. 42.

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Development and Competition: a Useful Tool for Salvadoran Growth

By Flor A. Calvo*

Economic growth and development are highly relevant and important topics in El Salvador: education, health, transportation and security policies all focus on producing better social and economic levels in the country. However, competition law, a policy already present in El Salvador, has been constantly neglected as part of this toolkit for promoting growth and development. The law’s main objective is to “increase economic efficiency and consumer welfare”[1] by eliminating agreements among competitors, abuse of market power or mergers that could damage market competition and harm consumers.

But, how exactly could competition law affect development and growth?

Both theory and empirical research, like Nickell (1996)[2], Aghion (2008)[3] and Buccirossi (2013)[4], indicates that market competition increases productivity among markets and firms, due to the fact that firms that operate in highly competitive markets need to constantly innovate their products and improve their quality. Good examples of this dynamic are food courts: each competitor (food chains) presents their best possible offer in order to attract as many consumers as possible.

Another channel, through which competition affects development, is through the price level offered in each market. The greater the competition in a particular market, the lower the price level it has. Ivaldi (2014)[5] shows that prices in markets where cartels were found were 23% higher compared to the periods prior the establishment of the agreements. This implies that a timely and effective cartel detection ensures that consumers would not have to pay overpriced goods and services.

Also, Gutman & Voigt (2014)[6] analyzed the impact that newly enacted competition laws had on economic growth. They found once competition laws are enacted, they increase economic growth in countries that established them. For developing countries, in particular, economic growth is boosted through an increase in investment levels, both national and foreign investment, among countries with a competition law.

However, the effectiveness of the law to generate competition, and therefore growth, depends not only on its presence, but on the efficacy of its application. This requires coordination among competition authorities and other government institutions in order to punish anticompetitive actions and agents appropriately. Greco et al[7] showed that for Latin American countries, competition law is not enough to increase sustainable growth, but that they need a strong and effective enforcement of the law in order to generate the desired impact.

Although competition law has many limitations, it is a viable option to foster growth and development in El Salvador. Its relevance and inclusion into public policy discussions should be a priority since it is an option that generates positive externalities by increasing productivity, growth and local investment. Cases like South Africa, where competition is at the core of its policies, show how the introduction and strengthening of national competition enhances economic growth and social welfare. Certainly, our country possesses an important tool, one that could boost our economy if applied correctly.

*This article is a translation kindly provided by the author from a post in El Blog de la Competencia. The author holds a bachelor’s degree in economics and a master’s degree in international economics and development, specializing in impact assessment; has worked for international organizations such as FSD and 3ie; and works currently as an economist in the department in charge of the investigations of anticompetitive behavior in the Competition Superintendence of El Salvador.

[1] Art. 1, Competition Law. El Salvador.

[2] Nickell, S. (1996). Competition and Corporate Performance. Journal of Political Economy 104(4), 724-746.

[3] Aghion, P., Braum, M., & Fedderke, J. (2008). Competition and Productivity Growth in South Africa. Economics of Transition, 16(4), 741-768.

[4] Buccirossi, P., Ciari, L., Duso, T., Spagnolo, G., & Vitale, C. (2013). Competition Policy and Productivity Growth: An Empirical Assessment. Review of Economics and Statistics, 95(4), 1324-1336.

[5] Ivaldi, M., Khimich, A., & Jenny, F. (2014). Measuring the Economic Effects of Cartels in Developing Countries

[6] Gutmann, J., Voigt, S. (2014). Lending a Hand to the Invisible Hand? Assessing the Effects of Newly Enacted Competition Laws.

[7] Greco, E., Petrecolla, D., Romero, C., & Martinez, J. Competition Policy and Growth: Evidence from Latin America.

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DWA WEEKLY NEWS FROM 04/07/2016 TO 08/07/2016

Marriott’s Acquisition Of Starwood Has Antitrust Authorization From Saudi Arabia And Mexico

“Marriott International, Inc. today announced it has received authorization from competition authorities in Saudi Arabia and Mexico to proceed with its acquisition of Starwood Hotels & Resorts in a merger transaction.”

Russian regulator postpones decision on Google fine

“Russian federal competition regulator FAS has postponed a decision about fining Google, reports Prime, following an appeal by the search engine. Google was accused of violating the Law on Competition in September 2015.”

Competition Commission of Namibia has acting CEO

“The chairperson of the Namibian Competition Commission Sackey Akweenda on Friday announced the appointment of the commission’s director for mergers and acquisitions, Vitalis Ndalikokule, as acting chief executive officer.”

China Resources Beer executive says country is set to approve AB InBev’s Megabrew deal

“An executive at China Resources Beer today said he believes the country’s competition authority is set to clear Anheuser-Busch InBev’s (AB InBev) takeover of SABMiller. “We don’t see any obstacle so far in getting a green light from China authorities,” chief financial officer Tomakin Lai said, reported Reuters. “We are confident that the deal can eventually get approval.””

DWA Weekly News from 26/06/2016 to 3/07/2016

Our compilation of relevant news from last week:

Brazils Ser to press CADE on Krotons deal with Estacio, source says

“Ser Educacional SA will use all legal means to ensure a merger between Brazil’s two largest education companies, Estácio Participações SA and Kroton Educacional SA, meets antitrust rules, a source with knowledge of the matter told Reuters”

Brazil’s federal police raided the offices of at least 12 builders in cartel probe of railway projects, CADE said

“CADE did not specify where the raids were conducted but said police suspected some of Brazil’s largest construction companies, including Odebrecht SA, OAS SA and Andrade Gutierrez SA, were active members of a cartel. All have been linked to corruption at oil projects.”

Colombia fines diaper cartel $70 million dollars

“The Superintendency of Industry and Trade of Colombia (SIC) fined 208,000 million pesos (70 million dollars) to three companies and 16 of their managers for artificially increasing the price of disposable baby diapers.”

Competition Tribunal of South Africa clears AB InBev SABMiller Merger deal

“The Competition Tribunal, which gives the final word on mergers in Africa’s most industrialized country, said in a statement that concessions made by AB InBev to get the deal approved were designed to address both public interest and competition concerns arising from the merger.”

China Signals More Antitrust Scrutiny for Drugmakers Over Prices

“Chinese regulators are closely examining the pricing methods of local and foreign drugmakers for any antitrust violations, according to a state-run financial newspaper, as the government conducts a wide-ranging campaign to regulate prices of medicines.”

Indonesia’s KPPU aims to abolish cattle import quotas to fight cartels

“Indonesia’s anti-monopoly agency has proposed abolishing a cattle import quota system and replacing it with tariffs, in a bid to break the stranglehold of local cartels blamed for surging beef prices, its chief told Reuters”

Safaricom’s Little Cab triggers price war with Uber in Kenya

Safaricom-backed online taxi-hailing app Little Cab has sparked off a price war with rivals Uber and Mondo Ride by setting lower tariffs compared to its two global competitors.”

What Does Being a Developing Country Mean and What Does that Have to Do with Antitrust?

By Francisco Beneke*

What Is a Developing Country?

“Developing” is quite a broad label because we group under it countries as different as Brazil and Botswana, Mexico and Afghanistan, Pakistan and El Salvador. What about Russia or China? It sounds odd to put the successor state of the Soviet Union or the second largest economy in the world in the same pool as the other countries mentioned before. The issue is obviously not simple and certainly not a settled one.

The World Bank has a classification according to income per capita, which gives a simple measure for differentiating countries. However, it does not fully capture development differences. Venezuela, for example, is classified as a high-income country, but no one would argue that the standard of living there is similar to that of, say, Chile, which has a comparable income level.

GDP per capita growth as a measure of rising living standards has been under attack for some time and with good reason. One of the main critiques is that the measure does not capture how unequal growth is (fundamental in knowing how the situation of the most vulnerable parts of the population improves). In the US for example, in spite of continuous economic growth, the inflation-adjusted wages at the bottom of the income distribution have decreased.

The International Monetary Fund has its own classification of countries. In the World Economic Outlook yearly publication, the countries are classified either as advanced, transition, and emerging and developing economies. The criteria are not expressly set out but some information has been revealed as some countries get reclassified into the advanced category. An advanced country has basically a combination of high income per capita, well-developed financial systems, and a strong diversified economy. These criteria were mentioned when Israel, South Korea, and Singapore were promoted to advanced countries. However, there are no published parameters that a country has to reach in these areas to be classified in either category. The IMF observers simply know an advanced country when they see one.

The World Economic Forum takes a whole different approach and ranks economies by their competitiveness. The term is defined in the Global Competitiveness Report as the set of institutions, policies and factors that determine the level of productivity of a country. From lowest to highest competitiveness, the country classifications are: factor-driven, efficiency-driven, and innovation-driven economies. Between the three stages, there are countries classified as being in a transition period. Argentina and Brazil, for example, are in a transition between being an efficiency-driven economy to an innovation-driven one.

Finally, a discussion of what is development (which entails the question of what a non-developed country is) has to take into account the approach pioneered by Amartya Sen. According to the author, the correct approach of development policies should be to promote individual freedoms necessary for people to expand their capabilities.[1] His approach has been labeled as more humanistic since it attempts to focus development efforts on the individual’s liberties and not on macroeconomic indicators that obscure the multifaceted aspects of what makes someone fulfill his or her aspirations.

What Does All of These Have to Do With Antitrust? 

The income level of the population, the factors that affect productivity, and the conditions under which individuals can fulfill their potential are directly connected with competition policy in many ways. Since all of the previously mentioned classifications entail insights that are useful to antitrust analysis, it does not come as a surprise that the literature on the latter is not committed to one specific classification but rather has taken a more pragmatic approach. That is, commentators usually identify characteristics that are associated with lower development instead of discussing whether countries like Russia, Malaysia or Turkey are developing economies.[2]

As a first point, in a country with a low income level and a significant portion of the population living in poverty, the issue of whether antitrust law enforcement contributes to development becomes central. In a previous post I already analyzed some of the issues that are present in the literature, but the main conclusion is that there is no undisputed evidence that law enforcement activities lead to economic growth. A satisfactory methodological approach and good measures of the quality of competition policy are yet to be found.

Another issue closely connected to the previous one and already analyzed by Amine has been the establishment of enforcement priorities based on development goals such as the reduction of poverty. An additional related point is the use of antitrust policy to further the growth of local small and medium enterprises, protecting them from exclusionary conduct from dominant multinational firms. This has been the approach taken by China, much to the displeasure of the US.

Another point is that developing countries have some characteristics in common that affect the analysis within the cases. One example is the size of the informal economy, which in developing countries tends to be larger. The informal economy can affect an authority’s assessment of market power of firms in the formal sector. Usually, a key issue is to determine if producers in the informal sector can be considered as part of the same relevant market of firms in the formal sector and, thus, dilute the market shares of the latter. Other characteristics associated with developing countries that have been mentioned in the literature as variables that affect market conditions are corruption, underdeveloped financial markets, and scarcity of skilled labor.[3]

Finally, developing countries usually share a weak institutional environment. This is a factor that can affect antitrust analysis, especially within regulated industries, but it can also affect the effectiveness of competition policy itself. The authorities can in this respect find problems in procuring adequate budgets and staffing. Another important obstacle could be a slow and inefficient judiciary, postponing the final word on a decision in a case for years. Another practical problem is the lack of market information from public institutions (a given in countries like the US), which seriously hinders the investigation efforts of the competition authority.

Some Final Remarks

The main take away from examining various classifications of countries based on measures of development is that none of them fully captures the multifaceted aspects of the problem. To inform policy, one has to take the valuable insights that each of the relevant criteria gives and not focus only on, for example, increasing GDP growth.

Antitrust law is one of the tools of economic policy and, therefore, has to be shaped according to the specific needs of each country. Adapting competition policy to developing economies does not mean in general coming up with two categories of laws depending on whether a country is developed or not. It means establishing legal standards and enforcement priorities that suit, for example, El Salvador but that may not be adequate for China.

 *Co-editor, Developing World Antitrust

@Paco_Beneke

[1] Amartya Sen, “Development as Freedom”. Oxford University Press, First Edition (2000).

[2] A good example of this can be found in “The Economic Characteristics of Developing Jurisdictions: Their Implications for Competition Law”, Michal S. Gal, et al, eds.

[3] Michal S. Gal and Eleanor M. Fox, “Drafting Competition Law for Developing Jurisdictions: Learning from Experience”. In The Economic Characteristics of Developing Jurisdictions: Their Implications for Competition Law. Michal S. Gal, et al Eds. Edward Elgar Publishing (2015)

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