Competition Law and Economic Development – A Universal Solution?

This is the topic of a conference that will take place in El Salvador next November the 21st and 22nd, which is organized by the antitrust authority (Competition Superintendence). The event features two of the most influential academics on the topic: Prof. Eleanor Fox of NYU and Prof. Michal Gal of the University of Haifa. Other speakers include competition authority officials from South Africa, Kenya, Brazil, and the US; and researchers from the Max Planck Institute for Innovation and Competition in Munich.

As we have tried to report in this blog, many developing countries do not follow a conventional approach to the application of antitrust law. A part of the reason behind this is that the authorities share a feeling that their countries have pressing needs that are different from those in the economies in which competition law originated or where it has a longer track record. My home country shares now the same concerns—for which I sadly can’t take any credit—and is organizing the mentioned event in order to 1) obtain inputs on what adjustments it could make to its policy in order to have a greater impact on economic and social development; and 2) disseminate the ideas of researchers that have worked on topics regarding this general theme.

Given 1), the conference will also include roundtables in which practitioners, academics, and staff of various authorities will participate to refine the policy proposals that can come from the research discussed in the conference.

If you are interested in attending, here is the registration form. The audience so far includes attendants from many corners of the world. I will leave you with the event’s lineup.

Speaker Topic
Eleanor Fox Drafting Competition Law in Developing Countries: What Have We Learned (via Skype)
Michal S. Gal General Characteristics of Developing Economies and their Implications for Competition Law (via Skype)
Mor Bakhoum The Impact of Informal Economy on Competition Dynamics in Developing Countries”
Francisco Beneke Entry Analysis and Competition Law in Latin America: Why does Economic Development Matter?
Russel Pittman Competition Policy for Regulated Industries in Developing Countries
João Paulo de Resende Adapting Competition Law to Brazilian Context and its Contribution to BRICS Discussions
Liberty Mncube Beyond Economic Goals in the Application of Competition Law: South Africa’s Experience”
Raphael Mburu Enforcement of Competition Law in Kenya: A Contrasting Approach

 

Advertisements
Tagged

Hipster antitrust

Policy debate has an important rhetoric component. An appealing metaphor can be powerful in swaying the opinion of policy makers and the public (remember trickle-down economics?). That said, there is a recent trend in the US and other parts of the world to depart from certain aspects of conventional antitrust wisdom and some scholars are expressing concerns about how digital markets will look like in the future. Some commentators are calling these new/refurbished ideas and gloomy views of the digital landscape hipster antitrust because they depart from what is deemed to be the mainstream.

To the best of my knowledge, the term started to be used as a twitter hashtag, mostly with a pejorative connotation.  The problem with that, seems to me, is that being a hipster is not necessarily a bad thing and, therefore, the rhetoric trick may not be the best tactic for the defenders of the antitrust status quo.

Let me give you a brief historical timeline, which I think has led us to the use of this term. Back in the 1950s, there was discontent among a small group of academics with how antitrust laws were applied, mainly to single-firm conduct and mergers. These scholars and their ideas gave birth to the most influential school of thought in modern competition law: the Chicago School (CS) of antitrust. In those days, George Stigler and his colleagues were the outcasts who proposed non-mainstream, hipster ideas. Fast forward to the 1980s, and the Chicago School became conventional wisdom. Current antitrust law in the US still reflects a great deal of influence from it. I will not discuss the relative merits and flaws of the CS. I will just point to one common theme in the rhetoric of its proponents. Practitioners and academics who defend CS points of view have always said that they use the economic approach to antitrust.

Since now most of the CS views are mainstream, that formulation is very powerful. It implies that someone who tries to approach antitrust analysis with frameworks other than price theory does not deserve to be called an economist. Now, the rhetoric was freshened up and the advocates of ideas that depart from the mainstream are dismissed as antitrust hipsters. Some are even trying to make #adultantitrust (the opposite of #hipsterantitrust) a thing. This is problematic for one fundamental reason. The way a society is organized in order to produce goods and services depends on a myriad of important factors studied across many fields of the economics profession and other disciplines. Saying that price theory alone holds all the answers is, to put it mildly, myopic.

As I explained in a previous post, an intervention aimed to curtail market power can have detrimental/positive effects on other sources of market failure such as information asymmetries and externalities.[1] Therefore, the improvement of consumer welfare is too narrow a focus of antitrust enforcement policies. The first issue would therefore be to analyze the merits of including a holistic approach to efficiency.

In addition, there is the issue of whether to consider other policy objectives. In the US, Banks were allowed to merge and grow because it was thought that the financial system was going to become more efficient, which might have been true. However, as a result, too-big-to-fail institutions arose from this merger wave, which may have led to the reckless behavior that caused the global financial meltdown that started in 2007. The question in retrospect is whether such factors should have been taken into account by the antitrust authorities. One could say that other public entities are better suited to make such an evaluation of these peculiar issues. Even if that is true, policy makers still have to decide how the balancing of the interests will be carried out. Should financial stability, for instance, take precedence over consumer welfare?

The Chicago School of antitrust succeeded against the backdrop of the deep economic recession in the 1970s, which led to a change in economic thinking and the rise of Margaret Thatcher and Ronald Reagan. It comes, therefore, as little surprise that views of strong (though not blind) faith in market forces have come under attack after the Great Recession, with antitrust being no exception. The potential shift in competition policy could have deep repercussions at the global stage. Many countries in the world look to influential jurisdictions such as the US and the EU for guidance. If the consumer welfare paradigm falters in the former, the push for convergence toward the “economic approach” to antitrust could take a wild turn.

As a final consideration, it is important to keep in mind that each one of the new ideas and views in hipster antitrust analysis deserve their own individual trial. I, for one, do not question the merits of the law on vertical restrictions in the US compared to that in the EU. Another story is that of the relationship between political economy considerations and market dominance, topic on which I have already written before. Therefore, the doom of one hipster idea should not be taken to mean that all hipster points of views are baseless.

[1] See Markowitz, Richard (2014). Economics and the Interpretation and Application of U.S. and E.U. Antitrust Law (Vol. I). United States of America: Springer.

Tagged ,

Interesting links of the week

According to this video on Project Syndicate’s Facebook page, if you want to be a better economist you should read more novels. Stories are better at explaining life than math. https://www.facebook.com/plugins/video.php?href=https%3A%2F%2Fwww.facebook.com%2Fprojectsyndicate%2Fvideos%2F10155634206384481%2F&show_text=0&width=476

More on the inadequacy of GDP in measuring important aspects of development. https://www.project-syndicate.org/onpoint/is-it-time-to-abandon-gdp?barrier=accessreg. Some alternative measures, other than the Human Development Index, include Gross National Happiness (used in the Himalayan Kingdom of Bhutan) and the OECD’s Better Life Index. They have their own problems too.

Fabeook’s Internet.org project has some detractors. https://www.eff.org/deeplinks/2015/05/internetorg-not-neutral-not-secure-and-not-internet. The project enlists websites that people with lower incomes can access through their mobile devices without data charges. The article in the link applauds the purpose of the initiative but takes issue with some features that affect privacy.

How do you measure competition policy’s performance?

Some time ago, I wrote a post about the impact of competition policy on economic growth. I argued that it was an important question since competition authorities in developing countries have to struggle with where to assign financial resources and that they should do so based on the the potential of policies in solving the population’s more urgent problems (extreme poverty, for example). The conclusion was that, so far, there is no consensus on the effects of the policy on GDP growth, in part because differences in quality and performance of antitrust agencies is hard to measure.

In addition to the arguments in the mentioned post, there is an important issue that I did not address but that I came upon in a lecture given at the Munich’s Antitrust Law Forum (Münchner Kartellrechtsforum) by Prof. Richard S. Markovitz of the University of Texas. One of his points was that it is a mistake to focus competition policy on consumer welfare and his arguments were, surprisingly, very much grounded on neoclassical economics. His point, I find, is quite compelling. Market failures come not only in the form of market power but also externalities, information assymetries, and underprovision of public goods. Prof. Markovitz explained that there is no theoretical nor empirical support for assuming that a state intervention that reduces market power will be neutral in terms of the other sources of inefficiencies and that the effects on these can very well be negative.

The point can be illustrated with an example. If an antitrust agency uncovers a cartel in the munfacturing of cigarettes and manages to make the firms compete more aggressively in price, the negative externality that smokers impose on other people will increase and the net effect on efficiency will be ambiguous.

Another example with information assymetries can be the following. Higher margins may allow firms to invest more in advertising that, among other things, increases consumer awareness of different product traits. An antitrust intervention that reduces the market power of firms (say, by blocking a merger) will not necessarilly enhance consumer welfare since search costs will increase if firms start spendig less money on advertising.

The result is that even if competition policy in a given country succeeds in curtailing market power, its effects on efficiency and economic growth will not necessarily be positive. Since the net effects are in theory ambiguous, the matter is an empirical one. However, we go back to our first problem, which is how does one measure differences in the policy’s performance.

Last week, I read an interesting post based on research regarding the measurment of the deterrence effects of antitrust law. My first impression when reading the title was of wonder. One has to get creative in order to measure something that you can not see. However, the research mentioned in the post found a way by exploiting data on 500 legal and illegal cartels and their overcharges. This information allowed them to run simulations and provide conservative and upper-bound estimates. For more information on the research you can check out the post in question. The point I wanted to make is that if you can capture differences in deterrence effects across countries or through time, the data could serve to have a more appropriate measure to plot against other variables such as investment rate and GDP growth.

The authors themselves advise for further research on the topic. However, it might be that we are finally approaching a satisfactory measure of competition policy’s performance.

 

Tagged ,

Some interesting research in South Africa on competition law

The Economic Society of South Africa will hold its biennial conference starting on next Wednesday (30th of August). It will be a three-day event and competition policy presentations will be featured on Thursday. Even for our non-South African audience, we thought it a good idea to share with you the relevant parts of the program, as they include interesting research of which it is useful to be aware.

The talks on antitrust-related subjects include:

  • Oluwatobi Ogundele and Melissa Naidoo, Institutional mechanisms (IMs) for successful competition policy design and implementation in developing countries
  • Keabetswe Mojapelo, Testing For Structural Changes In Prices Due To Competition Policy Intervention: A Bai-Perron Approach
  • Joseph Akande, Does Competition reduce Stability? SFA and GMM Application to SSA Commercial Banks.
  • Willem Boshoff and Rossouw van Jaarsveld, Analysing Cartel Episodes: A Markov-Switching Application
  • Anmar Pretorius, Ewert Kleynhans and Reghard van Niekerk, The determinants of concentration in the South African manufacturing industry
  • Tapera G. Muzata, Overcharges and cartel deterrence in multi-product collusion
  • Albertus van Niekerk and Nicola Theron, Impact of competition enforcement in the cement industry in South Africa

We hope this information is of use.

 

Tagged

Democratic Party “Better Deal” Antitrust Proposals Would be a “Worse Deal” for the American Economy and Consumers

Last week we shared with you news about the Democratic Party’s plan in the US to revamp antitrust law and include considerations other than consumer welfare in the analysis of cases (e.g. wage stagnation due to increased comcentration). This post by Alden Abbott says it’s all nonsense. On the other hand, this Vox article takes a more favorable view: https://www.vox.com/policy-and-politics/2017/7/31/16021844/antitrust-better-deal. The US debate will definitely have global repercussions and we’re sure there’s still more to be said. We will keep you updated.

Truth on the Market

On July 24, as part of their newly-announced “Better Deal” campaign, congressional Democrats released an antitrust proposal (“Better Deal Antitrust Proposal” or BDAP) entitled “Cracking Down on Corporate Monopolies and the Abuse of Economic and Political Power.”  Unfortunately, this antitrust tract is really an “Old Deal” screed that rehashes long-discredited ideas about “bigness is badness” and “corporate abuses,” untethered from serious economic analysis.  (In spirit it echoes the proposal for a renewed emphasis on “fairness” in antitrust made by then Acting Assistant Attorney General Renata Hesse in 2016 – a recommendation that ran counter to sound economics, as I explained in a September 2016 Truth on the Market commentary.)  Implementation of the BDAP’s recommendations would be a “worse deal” for American consumers and for American economic vitality and growth.

The BDAP’s Portrayal of the State of Antitrust Enforcement is Factually Inaccurate, and it Ignores the Real Problems of…

View original post 1,926 more words

U.S.: It looks like Democrats want a public interest clause in merger control

Public interest clauses are somewhat controversial. They introduce non-competition considerations into the evaluation of the desirability of a merger and, therefore, give a queasy feeling to the neoclassical orthodoxy. In short, such clauses allow the competition authority or another regulator to evaluate the effects that the merger will have in aspects of the economy other than market power––for example, employment. In practice, these clauses can introduce uncertainty to the merging parties as to what they can expect in a final decision and can make the proceedings susceptible to political calculations.

Public interest clauses can be found in legislations of many a developed and developing country. Recent prominent examples where such a consideration played a key role are the SAB Miller-AB InBev merger in South Africa and the takeover of Tengelmann by Edeka in Germany (in this latter case, the approval of the merger by the Finance Minister led the chief of the Monopolies Commission to resign).

Now, Democrats in the United States are giving competition law a prominent position in their economic policy plans. According to an article in Bloomberg Law, the antitrust part of the plan says that “large mergers that would harm consumers, workers, and competition via higher prices and lower wages should be blocked.” (emphasis added) For this, Democrats want to establish “new merger standards that require regulators to review how the deal may impact wages and jobs, among other criteria”. This would arguably need an amendment to introduce a public interest clause, at least to be on the safe side (courts would in all likelihood strike down any agencies’ attempt to introduce such considerations based only on the Clayton Act).

The US has always been a champion of convergence of competition law around the world. An important part of this convergence effort is the urge to use an economic approach to enforce the law. What scholars and practitioners mean by economic approach is to focus on consumer welfare or efficiency as the sole concern. Hence the economic part of the term is somewhat confusing because this discipline is so much broader. But putting this discussion aside, it is somewhat ironic to see that convergence may ultimately go the other way around, with the US converging to other countries.

What are the driving forces behind this political movement? As I shared with you last week, some academics are increasingly worried with the effects of concentration on equitable growth, which has led them to start exploring their association. This will be perhaps one of the most crucial areas of research in antitrust analysis. It is of course a highly ideological subject but let’s hope that the availability of data in more and more countries around the world and the empirical research that they allow will ground the debate on more objective terms.

Tagged ,

Your guide to the Google Shopping decision

The Google Shopping case has shaken the competition law community to its core. Here is your guide to what the Commission has disclosed and what influential commentators have had to say about it.

First, let’s deal with the information that has come out of the Commission. The case concerns a leveraging of dominance from the search engine market to price-comparison services. Regarding dominance, the Commission relies on high market shares in all EEA markets (mostly of 90 percent) and on indirect network effects as the main barrier to entry (the more users who use Google’s browser the more attractive it is for advertisers and the more data Google has to improve search results and targeted advertising).

The comparison-shopping market, where the harm is alleged to have occurred, has been separated from merchant websites such as eBay and Amazon. The main difference is that comparison sites do not offer the option to buy the product of interest as the two mentioned companies do. In any case, the Commission argues that if one includes merchant platforms, Google’s conduct has caused harm in a substantial part of this joint market.

Now to the more complex point. The ruling on the conduct has been described by the Commission, in my opinion, in very confusing terms. The Commission insists that it is not meddling with how Google designs its results page or writes its algorithm. The conduct, however, concerns precisely how the company presents its own comparison-shopping results (at the top of the page with pictures of the products and their price) as well as the demotion of competitor services. The issue here is indeed the product design.

Regarding the harm in the market, the Commission states it has evidence that traffic to rival comparison sites has decreased significantly and that this can be traced directly to the demotion to subsequent pages of the results.

The commentary on the decision has concentrated on the harm part and the conduct. Some do argue that Google’s dominance is overstated but the harshest criticism has been directed at the conduct-harm analysis of the Commission. I will give you a review on five articles written by the following five influential commentators: Alfonso Lamadrid, Nicolas Petit, Alden Abbott, Geoffrey Manne, and Pinar Akman. As you will see, my conclusion will be in most cases that we have to wait to see the decision to make a final judgment on the merits of the case. It might not be the most exciting assertion but I think is the more sensible one. Let me explain to you why.

Product improvement or exclusionary conduct?

One of the arguments made in all the articles is that we are in the presence of a product improvement that the Commission has wrongly labeled as anticompetitive. Nicolas Petit used a more cautious language, though. I do agree that the universal search results, as the informative boxes in the results page are called, cannot be considered harmful to consumers. They provide valuable information in an improved format. The mentioned articles, however, overlook at least two important points. First, the boxes could include non-proprietary information, that is, content from other comparison-shopping sites. If such content is more relevant, then there could be harm to consumers if Google systematically favors its content. Second, the conduct that has been punished, as stated by the Commission, is not only the display of the box but also the simultaneous demotion of competing websites to the fourth page in the search results. This second part has been completely bypassed by the mentioned articles. It will be an important issue to make an assessment of the decision. There could be one hundred thousand business justifications for the demotions so I guess we’ll have to wait and see what the decision and Google said in more detail about it.

In this respect Pinar Akman makes a slight distinction. She argues that Google’s favoring of its own content in the universal search results (the box) can be seen as advertisement of its own products, which then makes the Commission decision incomprehensible. This is perhaps one of the best business justifications that Google could offer. However, one weakness of this argument is that across categories of queries Google does use third party content in the box—content from Wikipedia, for example.

Lots and lots of choices

Another popular criticism of the decision is that consumers have lots of choices when it comes to this type of content (comparing product prices). That is certainly true. Consumers can compare prices not only on the websites that Google allegedly excluded but also on Amazon and eBay, who in addition offer the option of buying the product through their own website (which may arguably make them a better choice than googling the product). All the scholars mentioned before make this point. What they do not address is the Commission’s statement that even taking these choices into account Google has significantly distorted competition because comparison-shopping websites are still closer competitors in the relevant market that was defined. My guess is that no one commented on this because everyone considers it a wild assertion.

What I would have to see to make an assessment is data on how consumers look for product information. The main issue would be to see if they favor comparison-shopping sites, and whether these are mainly reached through search engines (where Google is alleged to be dominant). Geoffrey Manne points that in the US more than half of product searches start at Amazon. If that were the case in the EU as well, then the Commission’s position would be weaker. We will have to wait and see the information on which the Commission based its conclusions.

No duty to cooperate with rivals

A related point to the previous two is that if Google is not the only or most important choice for consumers, then there is no duty to cooperate with rivals. The Commission’s argument is that the company has to apply the same algorithm to its own content, even when it chooses what to display in the box. Lamadrid argues that since Google has not been labeled as an essential facility, such an obligation is unwarranted for. He uses a supermarket analogy to portrait how, in his view, the Commission’s decision makes little sense. One should not expect a grocery store to not treat its proprietary brands favorably over those of competitors and such a conduct does not harm competition because consumers can go somewhere else. Abbott uses the same analogy. What both miss is the inadequacy of comparing a supermarket with a search engine. The latter is a multi-sided platform to which different economic principles apply in order to establish dominance. Google has different incentives in promoting its own content than a supermarket does in placing its own brands on a strategic shelf position. The latter makes some profit when it sells other brands. Google does not make a cent when providing a user with product-price information. Google’s interest is in increasing its traffic to monetize the other sides of the market (vendors who may be charged a fee per click on the product or advertisers who wish to target a given audience).

Although the supermarket analogy is wrong, what is still true is that the Commission has omitted the use of the term essential facility. That makes the case, as Lamadrid points out, unprecedented. As a matter of EU law this makes the Commission’s position peculiar but is not, in my view, fatal to it. From an exclusively EU law perspective the case is, as Petit points out, on strong grounds because the standard for exclusion is too low. As a matter of economic policy, the law as well as the case may be wrong. This point is closely related to the conclusion I reached in the previous point regarding the choices consumers have. If the Commission failed to prove harm beyond the exclusion of a small group of firms then it might have caused a great deal of harm from a consumer-welfare perspective. Receiving a pat on the back from the General Court and the Court of Justice would not change that.

Hard to trace rival’s traffic loss to Google’s conduct

One point that Pinar Akman and Alfonso Lamadrid make in their respective articles is that it is hard to trace the loss of traffic from the affected comparison-shopping sites to Google’s conduct. In addition, they argue that there are more plausible explanations for that (for example, changes in consumer preferences). Although it is true that there may be many reasons why these websites experienced fewer visits, there are statistical tools that can be used to elucidate the causal flow. The Commission may have had all the information it needed at its disposal to make such an inference. We’ll know this in due time.

The fine

It is the factor that has come as the biggest surprise. As Lamadrid and Petit point out in their articles, the Commission attempted to settle in the past, which implies a consideration that the case was not eligible for a fine (recital 13 of Regulation 1/2003). Both of them put too much weight on this consideration. First, the recital does not prohibit the Commission from pursuing the case if a settlement cannot be reached. It is a longshot, at best, to argue that once the Commission attempts to solve the case via commitments it falls into a trap. What kind of leverage would it have in negotiating if the prospect of a future fine is removed from the picture? As Jones and Sufrin point out, on the other side of the coin, the Commission has accepted commitments when the allegations concerned serious violations to article 102 of the TFEU.[1]

As an additional point of surprise, Akman points out that the decision goes against previous practice. The Commission does not usually impose a fine when it is unfamiliar with the conduct. As a matter of law this is of no relevance. As a matter of policy it might be the sensible approach and it is indeed surprising that the Commission decided to set a world record under such circumstances and in a market where the existence of such a magnitude of harm does sound a bit odd. 2.4 billion euros is a lot of money. I am looking forward to see where this magic number came from.

Google is one of the most innovative companies on earth

Akman and Petit point out that Google has the 4th largest R&D expenditure in the world. From a legal perspective, it doesn’t matter how good a monopoly is if it indeed committed a competition law violation. From an economic policy perspective it is of some importance only if the fines and order have the ability to reduce Google’s incentives to innovate. In the case at hand, this could be true if indeed the decision sends the wrong signal, even if it is in accordance with EU case law. If there is not enough evidence in the decision to support the competitive harm, for example, then companies in the EU will be left under an uncertainty cloud. Google may have technical reasons to prefer its own content where comparison-shopping is concerned, and if the Commission did not give them due weight, innovation in Internet platforms may indeed be affected.

Conclusions 

The commentary that I have analyzed has some good criticism of the Commission decision, at least based on what has been disclosed so far. However, it cannot be stressed enough that we can only make our final judgment once the decision itself is published. The main point will be that of harm. It is difficult, though not impossible, to prove that Google’s conduct is indeed welfare reducing, as Geoffrey Maine has pointed out in his criticism to a study regarding other types of search queries (local coffee shops). Other than that, I have nothing more to say than I am looking very much forward to see the decision in full.

[1] Jones, A. & Sufrin B. (2014). EU Competition Law: Text, Cases, and Materials, p. 982. Oxford University Press.

Tagged , ,

The relationship between antitrust and equitable growth

By Francisco Beneke*

The title of this post describes, according to the Washington Center for Equitable Growth, an under-researched area of economic policy. Therefore, the Center is opening a conversation on the subject “through a series of essays, reports, and future events that lay the groundwork for debate and informed solutions”.

The latest publication is “A communications oligopoly on steroids: Why antitrust enforcement and regulatory oversight in digital communications matter“. I highly recommend that you check it out as well as the other publications that can be found under the series entitled “Making antitrust work in the 21st century“. Commentary on each publication to follow.

*Co-editor, Developing World Antitrust

Interesting links for this week

Global cartel enforcement report – Key findings: Mid-year 2017: http://www.lexology.com/library/detail.aspx?g=4b99f432-eab4-4b46-9244-dc54af20801c

China will amend its merger control regime: http://www.jdsupra.com/legalnews/china-to-amend-the-merger-control-regime-16815/

The Commission is only a part of Google’s problems. The company has faced and faces antitrust investigations around the globe: https://www.bloombergquint.com/business/2017/07/11/googles-anti-trust-woes-whats-next-in-europe-and-india

According to the Washington Post, Google finances scholarship favorable to it as part of a sophisticated lobbying operation: https://www.wsj.com/articles/paying-professors-inside-googles-academic-influence-campaign-1499785286 To which Google responds: http://www.zdnet.com/article/google-no-we-dont-fund-biased-research-and-just-look-whos-paying-our-accusers/

Yandex, the “Google of Russia,” and Uber have agreed to merge their ride-sharing businesses in Russia and five neighboring markets with Yandex as leading partner: http://fortune.com/2017/07/13/uber-yandex-russia/ and the competition authority may not like it: http://tass.com/economy/956203 

The shipping industry’s competitive landscape is going to change substantially with this mega merger: https://www.worldfinance.com/markets/chinas-cosco-to-buy-rival-shipper-orient-overseas-for-6-3bn

Tagged
%d bloggers like this: