Why We Need Antitrust Law to Work: Some Thoughts on South Africa and El Salvador

By Francisco Beneke*

South Africans appear to be enraged by the prospect of having had to pay a higher price for cancer drugs. The Competition Commission of South Africa is currently undertaking three separate investigations on excessive pricing by three drug manufacturers: Aspen, Pfizer, and Roche. In El Salvador, the final word from the Supreme Court is finally out on the proceedings regarding a cartel of two wheat flour producers who conspired to raise the price of this product. In these two countries, which have a relatively high poverty rate (as defined by local authorities), antitrust cases that involve access to health and nutrition have an extra component that makes them special. Indeed, cases like this have the potential of generating social unrest. Why? The image of a cancer patient who cannot afford a needed drug or a malnourished child evokes a feeling that other cases do not.

Before going any further, one distinction between the situations in the two countries has to be made. In South Africa, we are talking about three ongoing investigations where guilt has not been yet established, while in El Salvador, the case that concerns us has already been decided. The two flour producers were found guilty and rightfully so. The case is the only instance where the Salvadoran authority has conducted a dawn raid, in which it found conclusive evidence of the agreement to allocate market shares. The point of this article is not to advance a judgment in the case of the South African investigations but to point out why a correct competition law enforcement policy is crucial in developing countries. Cartels and abusive dominant firms can be extra harmful in the sense that poor consumers do not simply forgo a part of their welfare but the harm extends to their daily struggle to survive.

I have picked these two examples as the basis of this post because they are recent developments. However, we can find similar situations in other countries in the past. When the farmacies cartel was uncovered in Chile, the population was so enraged by having had to pay more for their medicines that protests erupted and all of this served as a catalyst for reforms that strengthened the Chilean competition authorities.

Developing countries have a particular need for a working competition policy. They do not only have to ensure markets that promote productivity growth but also protect consumers in vulnerable situations. As a consequence, it is important to ensure that the deterrence effects are maximized in markets strategic to this purpose. I say this because it is a common problem in developing countries that competition authorities are underfunded and understaffed. As a result, their investigation and case-resolution capabilities are limited, which decreases the expectation of companies of being caught and punished for competition law infringements. In such a situation, the authority can nevertheless create such an expectation in important industries––for example, health and food products––by focusing its scarce resources on this industries. The deterrence effect of antitrust will not work in the whole economy but at least in an essential part.

The case of El Salvador also shows an important area where the advocacy efforts of the authority should be directed: judicial efficiency. The wheat flour cartel case spent almost nine years under judicial review after the date of the Competition Superintendence’s decision. Such prolonged court battles significantly hamper the deterrence effects of the competition law since the final payment of the fine and, perhaps more importantly, the enforceability of the injunction is postponed. Therefore, the companies can significantly discount the potential losses of an adverse judgment (though they have to pay substantial litigation costs, which nevertheless shows the value they place on delaying the final judgment). In addition, the lengthy proceedings tie up important personnel of the antitrust authority, which affects its enforcement activities.

Competition policy in developing countries faces more difficulties than in developed economies. But more is at stake. It is important that the policies achieve maturity and gain sufficient importance in the eyes of the public so that their funding can become a priority and the authorities can have a better chance of achieving their purpose.

*Co-editor, Developing World Antitrust

 

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Predatory pricing in India’s telecommunications market? The Competition Commission says no

By Francisco Beneke*

Some facts:[1]

  1. India is the second largest mobile telecommunications market in the world;
  2. Last September, it witnessed the entry of Reliance Jio Infocomm, which invested 20 billion USD to deploy a 4G network in India;
  3. This company is a part of a corporate group owned by India’s wealthiest individual—Mukesh Ambani;
  4. As part of its entry strategy, the company offered voice and data services for free until March this year, which allowed it to quickly capture just over 6 percent of the market in terms of users; and
  5. This led incumbent Bharti Airtel, number 1 operator in terms of both revenue and users, to sue Reliance Jio for abuse of dominance through predatory prices.

The Competition Commission of India (CCI) ruled last Friday that there was no prima facie case of predatory pricing,[2] which Bharti Airtel still has the opportunity to contest under article 26 (6) of the Competition Act. My guess is, however, that such efforts would be futile. Seeing the facts listed above it might be your guess too. After reading the short 17-page decision, one can clearly see that the CCI has a favorable view concerning the competition dynamics in India’s mobile telecommunications market, which may also foreshadow how it will decide the mergers under its review (it already okayed Bharti Airtel’s merger with Telenor India, but other transactions are still pending).

The decision may be summarized as follows: if winning a predatory pricing case against an incumbent is difficult, winning one against an entrant is next to impossible, considering that the complainant is arguably the dominant player. Bharti’s strategy was what one would expect. It tried to put forward a very narrow definition of the relevant market––4G services––where it argued Reliance Jio had, within less than a year, acquired a dominant position. The CCI did not buy it. It defined the market as the provision of wireless telecommunications services to end consumers, including 2nd, 3rd and 4th generation technologies. Jio’s 6 percent share in this broader market made it unnecessary to enter into the analysis on whether prices were predatory.

It strikes me as odd that Bharti would have considered pursuing this suit in the first place. It might have thought that the CCI could have been impressed with the fact that Jio is a part of a massive conglomerate with vast resources. Then again, it is hard to believe that the authority could have been persuaded that incumbents were in a disadvantageous position in this respect, as it rightfully was not.

From an economic standpoint, Bharti’s case was shaky, at best. It does not fit, at least with the information at hand, with the common assumptions that have to be made for a realistic price predation case.[3] It is hard to argue that Reliance Jio had such a cost advantage that it could have endured a lengthy price war to drive enough operators away from India’s market. The country is also experiencing fast growing incomes which will increase the size of the broadband markets, a trend that plays against a price predation strategy being effective. A growing market that can accommodate more entrants is not easy to monopolize. Being an entrant, it is also impossible to argue that Jio is in a position of having a low cost predator reputation that could keep companies away from the market once it becomes the dominant operator and raises its prices.

This is just a quick, though I hope illustrative, review of the case and its circumstances. The takeaways are: few incumbents like Jio’s strategy of giving away everything for free, the case was rightly decided, and it appears that Bharti’s legal advisers were either bored, not heard or have little clue on what a successful predatory pricing claim looks like. India’s telecommunications market is undergoing many changes, which I hope, will give us more interesting material to analyze in the future.

*Co-editor, Developing World Antitrust

@DWAntitrust

[1] See Competition Commission of India, Order under Section 26 (2) of the Competition Act, case No. 3 of 2017, available at http://www.cci.gov.in/sites/default/files/3%20of%202017.pdf; D’Monte, L (2017, April 30). It’s the survival of the biggest in India’s telecom industry. Live Mint. Available at http://www.livemint.com/Industry/n02lQV04A2ui4x37XKVzmL/Its-the-survival-of-the-biggest-in-Indias-telecom-industry.html; and Williams, C. (2017, January 14). How the Ambani family feud hit Vodafone’s Indian mobile empire. The Telegraph. Available at http://www.telegraph.co.uk/business/2017/01/14/ambani-family-fued-hit-vodafones-indian-mobile-empire/.

[2] Competition Commission of India, Order under Section 26 (2) of the Competition Act, case No. 3 of 2017, available at http://www.cci.gov.in/sites/default/files/3%20of%202017.pdf.

[3] See Carlton, D.W. & Perloff, J.M. (2005). Modern Industrial Organization, pp 352–357. United States of America: Pearson/Addison Wesley.

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Concrete Antitrust Economics

By Francisco Beneke*

Last week I read a book called Concrete Economics by two Berkeley professors, Stephen Cohen and Bradford DeLong. The general theme of the book is simple and straightforward: economic policy redesign throughout US history has been successful to the extent that it has been pragmatic, not based on abstract theories of how markets behave but on concrete thinking of what the economy needed. The authors argue that it had been that way until the last redesign of the 1980s when ideology prevailed and nobody had a good idea about the supposed benefits of moving the US away from manufacturing and toward what were believed to be higher value-added activities (finance, insurance, and real estate).

The point applies to the debate on some issues in antitrust analysis. Competition policy can take many shapes within the same country during different periods of times, as in the US, and also differ to a significant degree across important jurisdictions––say, the EU, US and China. The discussion of what is the right approach turns sometimes ideological. Take the debate surrounding digital markets for example. Some people advocate for a loose stance on big tech companies because of the fragility of their position. Google’s competition is one click away and Facebook took the field that was already dominated by other social networks. We can describe a position to be ideological if it’s based on a myopic view of the facts. What about the companies’ jaw-dropping share in online-advertising or the fact that true challengers only appear to succeed in certain niche markets? (think of the success of Snapchat with teenagers in the US). Some commentators like to oversimplify the discussion and throw general arguments such as that intervention dampens innovation. If only things were so simple. The question we should ask is which specific type of intervention we are talking about in order to make an educated guess on the effects we may expect to see.

Another topic on which the debate is highly ideological concerns my main area of research: do we need to adjust competition policy and analysis to the different characteristics and needs of developing countries? A big point of the discussion is about keeping consumer welfare as the north of the compass and ditch other considerations that would make antitrust an instrument of industrial policy. There are good points on both sides, and I must confess that my own research does not depart from the consumer welfare paradigm. What is certainly true is that purists, as professor Ariel Ezrachi calls them, claim a higher intellectual ground. Theirs is the economic approach. In that way, the debate turns ideological too.

There are good questions to ask around the purpose of competition policy in countries ridden with poverty and weak institutions. They are not populist and they are grounded in economic concepts. The desirability of focusing on consumer welfare rests on assumptions that look shaky, to say the least, in the case of developing countries. One such assumption is the flexibility of the workforce. If imports take a market by storm, the displaced workers will have a harder time being relocated to new activities because of their lower average education and skills development. Does that mean that developing countries should close their borders to imports? The point of this post and the book I read is that this is the wrong question to ask. It sounds ideological, not concrete because it is formulated too generally.

Concrete Economics has some important lessons for moving away from this ideology trap. First, in applying the book’s approach to tech markets or adjusting competition policy to unique economic and social contexts requires us to borrow some techniques from the medical profession. We can’t prescribe a treatment without a diagnosis (a point advocated by Jeffrey Sachs in his book “The End of Poverty: Economic Possibilities of Our Time”). That means not only compiling information but the right kind of it. Second, we have to paint a clear picture of the results that we are aiming for––in the authors’ words, what you see is what you get. And third, Cohen and DeLong favor a pragmatic approach of trying the policies that seem to have the best chance of succeeding, observing their results, ditching what does not work and keeping what does. This is what they argue happened during Franklin Roosevelt’s administration amid the Great Depression.

Granted, all of this is easier said than done, but worth the effort. A good start is asking the right questions. In the case of developing countries, for example, an important one is the following: what are the most pressing matters for the well being of the population and on which competition policy can make a significant contribution? Poor countries have an urgent need of education reform, but it is hard for me to picture a way in which antitrust can have a significant impact on the subject. On the other hand, vital infrastructure such as energy and telecommunications have important competition components that determine their coverage rate. Finally, we should come up with good evaluation methods––a practice that is scarce in competition policy––to be able to see what works and what doesn’t. As Cohen and DeLong admit, no one has the right formula, but that does not mean that we should not do anything.

Co-editor, Developing World Antitrust

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Regional integration and antitrust policy: Bigger markets are harder to threat

By Francisco Beneke*

I was talking to a friend at the Max Planck Institute for Innovation and Competition with whom I share an office, and he pointed out to me a risk to which antitrust authorities in developing countries are exposed and a good way of protecting them from it. His point was simple but brilliant. Let me tell you briefly what our conversation was about.

Haris pointed out to me that in the course of the proceedings, a multinational could subtly (or not so subtly) make the threat that, should it be enjoined from a certain conduct and imposed a fine, it would find it necessary to cease operations in the country in question adducing any business justification, such as unprofitability. Let’s say a pharmaceutical company is being tried for impeding parallel imports in a country where this is perfectly legal. If it were enjoined from entering into contractual provisions that make these imports harder in order to sustain a higher price for its medicines, the company may say that it would be forced to leave the market. If operation with the lower price due to competing imports would still be profitable, this hardball tactic could still make sense if the size of the market is so small as to render any effects on global profits negligible. The purpose would be to send a message and actually carrying out the threat would signal that the company means business.

The practical implications could put the antitrust authority in an awkward situation. The central government may not be so happy with losing a source of tax revenue. Workers will certainly not like their sudden unemployment. To make things worse, consumers will lose some of their welfare because of the supply contraction. It is easy to see how the antitrust authority may have more at stake than the multinational corporation.

On the other hand, what if this country suddenly becomes a part of an economic union with a common competition policy? The firm will be enjoined from sustaining price differences that are based solely on its market power and not in different costs in each country (in practice that would translate to the ones it can prove to the authority). Now the threat of leaving would have to involve a bigger market, and if such new market is large enough to offset the benefits of sending a message then the company cannot make a credible commitment to cease operations. It is simply not in its best interest. In short, Haris’ argument was that integration of markets and competition policy protects smaller member countries of such threats.

I am aware that the example raises some other issues, such as the desirability of addressing price discrimination within antitrust proceedings, but the point applies to any kind of anticompetitive behavior too. Less controversially, we could imagine the same kind of threat involving a cartel. Integration is not easy, but there are good reasons to pursue it.

*Co-editor, Developing World Antitrust

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Network Effects and the Assessment of Market Power in the Sharing Economy

By Francisco Beneke*

You may have heard of unicorns and venture capital in the Silicon Valley. Unicorns are startup companies that have not generated a single cent in revenue but are able to marshal multimillion-dollar amounts of capital from investors and cross the one-billion-dollar threshold in market value. Why? Their potential, of course. Venture capital firms don’t want to miss on the next Facebook. But in what exactly does this potential consist? In the particular case of platforms like the one just mentioned, the hope of the investors is that the company will have an exponential growth in consumers and providers, which in itself will make the product more attractive to other buyers and sellers, which in turn generates a virtuous circle in the company’s growth. That is, investors covet companies that can generate network effects or demand-side economies of scale, which enable them not only to monetize customers but also to get their hands on the data they generate.

In some markets, sharing economy platforms like Uber and Airbnb have grown so much that they are attracting lawsuits of abuse of dominance. That is, plaintiffs consider that these firms have become the main players in their markets. If these companies have already generated a critical mass of providers and customers, their position may be entrenched just for the fact that they are big. Providers will choose a given platform because the potential demand is bigger and customers will rather buy services through it because there are more options (in the case of Uber, for example, more drivers means shorter wait times and wider geographical coverage for passengers within a city).

There is much to be said about network effects and market contestability. However, I will focus just on one aspect. An important point in the case of sharing economy platforms is the geographical scope of these effects.[1] More Lyft drivers in San Francisco mean nothing to a customer in Munich. More Airbnb listings, on the other hand, are a different story.

You may have already guessed the direction of the argument in this post. The global (or at least transnational) character of Airbnb’s network effects makes it a more powerful company against its competitors than Uber. The battle for passengers is fought city by city, which means that companies have to attain a lower critical mass of consumers and providers to contest Uber or Lyft’s foothold. There can still be, to a certain extent, an international component in ride-hailing apps’ network effects. A part of their demand is composed of tourists. However, if we expect the bulk of passengers to be city residents then network effects will tend to be more local.  If any of these companies is being scrutinized for monopolization/abuse of dominance, this factor has to be taken into account.

That is not the same as saying that the geographical location of the market has to be correctly assessed. I’ll give you an example. If you are analyzing a short-term accommodation market you may define the relevant geographical dimension as that of a city. The company in question, however, may have a global reach, which makes it likelier that a tourist or a business traveler will use its platform to search for a place to stay.

I admit that network effects are a complicated issue from an antitrust perspective. The source of concern is something that benefits consumers in the first place. If the platform is attractive, among other things, because of its size, then all the better for it. That should lead to view mergers in any such markets with less suspicion, right? My bet is that it will not be that way except in the cases when national champions, like Didi in China, buy foreign threats, like Uber.

*Co-editor, Developing World Antitrust

[1] Sundararajan, A. (2016). The Sharing Economy–The End of Employment and the Rise of Crowd-Based Capitalism, p. 20. Cambridge, MA: MIT Press.

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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 3D printing 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 goods 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 in physical assets 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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