Tag Archives: Competition Law in Developing Countries

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

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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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Development and Competition: a Useful Tool for Salvadoran Growth

By Flor A. Calvo*

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Francisco Beneke*

What Is a Developing Country?

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

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

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

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

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

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

What Does All of These Have to Do With Antitrust? 

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

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

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

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

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

Some Final Remarks

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

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

 *Co-editor, Developing World Antitrust

@Paco_Beneke

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

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

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

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How Can Competition Law Enforcement in the Digital Economy Help in the Fight Against Poverty?

By Amine Mansour*

When talking about competition law and poverty alleviation, we may intuitively think about markets involving essential needs. The rise of new sectors may however prompt competition authorities to turn their attention away from these markets. One of those emerging sectors is the digital economy sector. This triggers the question of whether the latter should be a top priority in competition authorities’ agenda. The answer remains unclear and depends mainly on the potential value added to consumers in general and the poor in particular[1].

Should competition authorities in developing countries focus on digital markets?

Obviously, access to computer and technology is not a source of poverty stricto sensu. In the absence of basic needs, strategies focusing on digital sectors may prove meaningless. In practice, the last thing people living in extreme poverty will think about is gaining digital skills. Their immediate needs are embodied in markets offering goods and services which are basic necessities. The approach put forward by several Competition authorities in developing countries corroborates this view. For instance, in South Africa, digital markets are not seen as a top priority. Instead, the South African competition authority focuses on food and agro-processing, infrastructure and construction, banking and intermediate industrial products.

There are however compelling arguments to be made against such position. Most importantly, although access to technology and computers is not a source of poverty, such an access can be a solution to the poverty problem. In fact, closing the digital gap by providing digital skills and making access to technology and Internet easier can help the low income population when acting either as entrepreneurs or consumers. In both cases competition law can play a decisive role.

The low income population acting as consumers

First, when acting as consumers, people with low income can enjoy the benefits of new technology-based entrant. Thanks to lower costs of operation, lower barriers to entry and (almost) infinite buyers, these new operators have changed the competitive landscape by aggressively competing against traditional companies. These features have helped them not only extending existing products and services to low-income consumers but also making new ones available for them. Better yet, in some cases increased competition coming from technology-based companies motivates traditional business forms to adapt their offer to low-income consumers so as to face this new competition and remedy shrinking revenues. Perhaps, the most noteworthy aspect of all these evolutions, is that these new entrants have, in some instances, been able to challenge incumbents’ position by driving prices downward to levels unattainable by traditional companies without scarifying their profitability.

A shining example of all this dynamic is the possibility for low-income consumers to engage, thanks to some mobile companies, in financial transaction without the need to pass through the traditional stationary banking infrastructure. For instance, in Kenya, M-PESA a mobile money transfer service that has over 22 million subscribers[2] and around 40,000 agents (around 2600 Commercial bank branches)[3] changed the life of million of citizens. The service enables clients to deposit cash into their M-PESA accounts, send or transfer money to any other mobile phone user, withdraw cash and complete other financial transactions. A farmer in a remote area in Kenya can send or receive money by simply using his mobile phone. In this way, M-PESA can act as a substitute to personal bank accounts. This experience shows how the digital economy helps overcoming the prohibitive costs of reaching low-income customers and thus raising living standards.

On that basis, we can easily imagine the counter-argument incumbent companies might put forward. In this regard, unfair competition and the need for regulation to preserve policy objectives are often in the forefront. However, there is a great risk that these arguments are simply used to restrict market entry and impede competition from those new players.

In fact, this kind of arguments do not always reflect market reality. For example, in some remote geographic areas, traditional companies and the new ones based on the digital/internet space do not even compete directly against each other. Accordingly, regulation intended to protect policy goals has no role to play given that the affected consumers are out of the reach of the traditional business. In the M-PESA example, it may be possible to argue that any operator engaging in financial transactions should observe the regulatory restrictions that apply to the banking sector in order to ensure that policy objectives such as the stability of the banking system or the protection of consumer savings are preserved. However, applying such a reasoning will leave a large part of consumers with no alternative given the absence of a banking infrastructure in remote areas. The unfair competition and regulation arguments may only hold in cases where consumers are offered alternatives capable of providing an equivalent service.

This shows the need to proceed cautiously by favoring an evidence-based approach to the ex-post use of the regulation argument by incumbent operators. This is however only one of different facets of the interaction between the competitive impact of companies based on the internet-space, the regulatory framework and the repercussions for people with low income[4].

The low income population acting as entrepreneurs

Second, the focus on digital markets as way to alleviate poverty is further justified when low-income people act as entrepreneurs. In fact, digital markets are distinguished from basic good markets in that they may act as an empowering instrument that encourages entrepreneurship.

More precisely, the digitalization of the economy results in an improved access to market information which in turn may benefit entrepreneurs especially the poor whether they intervene in the same market or in a different one. Practice is replete with cases where, for instance, a downstream firm heavily relies for its production/operation on services or products offered by an upstream company operating in a digital market. Similarly, in a traditional and somewhat caricatural way, a small-scale farmer may use VOIP calls to obtain market information or directly contact buyers suppressing the need for a middleman.

However, we can well imagine the disastrous consequences for these small-scale farmers or the downstream firm if mobile operators decide to block access to internet telephony services such as Skype or WhatsApp based on cheap phone calls using VOIP (this is what actually happened in Morocco). In such a case, the digitalization of the economy has clearly contributed to greatly lowering the costs of communication and distribution. However, low income entrepreneurs are prevented from benefiting of these low costs, which are a key input to be able to compete in the market.

The major difficulty here lies in the fact that, when low income people act as entrepreneurs, it is likely that they organize their activities in small structures. This result in relationships and structures favorable to the emergence of exploitative abuses. Keeping digital markets clear from obstructing anticompetitive practices is thus indispensable to ensure that small existing or potential competitors are not prevented from competing. This might not be easily achieved given that competition authorities’ focus is sometimes more on high profile cases.

*Co-editor, Developing World Antitrust

[1] Intervention may also be justified by the institutional significance argument. This significance lies in the fact that those markets are growing ones and challenging the common ways of both doing business and applying competition rules which in turn make it crucial for authorities to intervene by drawing the lines that ensure the right conditions for those market to grow and develop.

[2] http://www.safaricom.co.ke/about-us/about-safaricom

[3] http://www.safaricom.co.ke/personal/m-pesa/get-started-with-m-pesa/m-pesa-agents

[4] For instance, it possible to think of the same problem from an ex-ante point of view highlighting incumbent firms’ efforts to block any re-examination of the regulatory standards that apply to the concerned sector (no relaxation of the quantitative and qualitative restrictions). This aspect has more to do with the advocacy function of competition authorities.

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Ten Years of the Competition Superintendence – Past, Present, and Future

By Marlene Tobar*

Competition law enforcement in El Salvador started ten years ago, an ideal moment to assess the work of the Competition Superintendence, the authority in charge of its implementation since January 2006.

In these first years, the institution has carried out a healthy oversight of markets promoting undistorted competition, strictly following the legal framework and proving its independence from political forces[1]. In addition, the authority has taken a leading position in the region. It has been awarded twice at the World Bank’s Competition Advocacy Contest, it is the only authority in Central America that has enjoined a merger (the acquisition of Digicel by Claro in the telecommunications market), and it has given a strong push to the design of a regional competition law through its work in the RECAC[2] (the Central American network of competition authorities).

In the law enforcement area, it conducted investigations in markets that have spillover effects in the economy such as the energy industry, the wheat flour market (carrying out dawn-raids), the distribution of sugar (imposing a fine on Dizucar, the dominant wholesale distributor that is owned by the local sugar mills), and the telecommunications industry, among others.

The institution acknowledged the role that public sector intervention plays and allocated substantial resources to identify restrictions to competition arising from regulations. For that purpose, the authority pointed toward the need of improving regulations to promote more openness to trade regarding products of social importance such as rice and sugar. The Competition Superintendence has also pushed for reforms to the law that creates a legal cartel in the production of sugar. Another important policy change promoted has been the amendment of the system under which radio-electric spectrum concessions are granted in the telecommunications industry. The recommendations are aimed at promoting competition in the allocation of this input (competition for the market) in a context of upcoming expiration dates to current grants in the broadcasting market and the still uncertain process of digital technology adoption in the country.[3] Recently, the authority issued a statement regarding a decision by the Supreme Court’s Constitutional Bench[4] on the alleged unconstitutionality of certain provisions of the Telecommunications Law. The Court stated that the national congress should not close the door on any advisory intervention of the Competition Superintendence during the hearings on the issue.[5]

The Competition Superintendence has decided a total of 14 cases of anticompetitive behavior, analyzed 16 merger transactions, carried out 23 market studies, issued 128 opinions, signed 36 MoU’s, and implemented a wide-ranging program of diffusion and promotion of the country’s competition law. The authority has imposed $15.1 million USD in fines (93% of which correspond to anticompetitive behavior decisions). In other words, it is quantitatively and qualitatively clear that the authority has sought to cover all sources of restrictions to competition.

Nonetheless, the main topic to reflect upon is the ability of having a real impact on efficiency and consumer welfare (objectives that the authority has to pursue by law), which are to be understood as indirect means to achieve higher living standards for society.

At the moment, such ability is hindered by the lack of support from the legislative, executive, and judiciary branches evidenced by (at least) two facts: first, the Supreme Court’s Administrative Bench’s judicial backlog regarding the review of the Competition Superintendence’s decisions on anticompetitive behavior. From the total of fines imposed by the authority ($15.1 million USD), more than 90% have been challenged by the punished firms, with 27 ongoing proceedings before the Administrative Court and 1 before the Constitutional Court. Currently, there are $9.1 million USD of overdue payments in fines. On its part, the Administrative Court has temporarily enjoined some of the payments and other precautionary measures, a part of which have been certified to the National Prosecutor[6].

Second, the authority has found scant support from other government institutions in the implementation of policy recommendations and inter-institutional dialogues have been rare at best (or non-existent in many cases). The first element hinders the ability to correct the punished anticompetitive behavior and hampers the deterrent effect of the fines; and the lack of support from other government entities reduces the likelihood that competition policy can spur economic and social growth.

All that said, it is important to look at the future and set the direction of competition policy in El Salvador. In his speech in the event commemorating the tenth year anniversary of the institution, the superintendent stated that he would seek for the institution to have a greater impact in key variables of the economy (development, poverty, and inequality) with the purpose of contributing to its “democratization”.

In order to do that, in addition to tackling the problems mentioned above, the authority will have to aim its competition enforcement activities toward solving the real problems faced by the country. As a consequence, there are more than a few considerations to be made. Some of the main issues to be analyzed are if the current legal framework is adjusted to the nation’s objectives; if the use of neoclassic economic theory is an adequate basis for the analysis of competitive restrictions (as the international community advises as best practices); determining the objectives that competition policy has to pursue in order to effectively contribute to the country’s development; to define the term of economic efficiency that will be pursued, among others. This analysis will have to be made taking into consideration El Salvador’s particular traits and variables that determine the dynamics of competition in its national markets.[7]

*The author is the head of the department in El Salvador’s competition authority that is in charge of the merger review proceedings, market studies, and opinions regarding law proposals and rules of tendering in public procurement.

[1] The law entered into force under a right-wing government. Under the current left-wing government the authority imposed a fine in the amount of $759,924 USD to Alba Petróleos for failing to report mergers. This firm is partly owned by ENEPASA, an association of municipalities governed by majors from the political party that controls the executive branch. Even so, the president re-elected the superintendent, Francisco Díaz, for a second term, setting a precedent in the region.

[2] Composed of the competition authorities from Costa Rica, El Salvador, Honduras, Nicaragua, Panama, and the Dominican Republic. Representatives of the Guatemalan government attend the meetings in an observer capacity since Guatemala has no competition law to this date.

[3] Currently, the Congress is evaluating the best way to implement the amendments ordered by the Constitutional Court regarding the design of an alternate mechanism for the auctions of radio-electric spectrum.

[4] Decision of the Constitutional Court on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014. In El Salvador, the Supreme Court of Justice is divided into separate sub-courts according to a subject-matter criterion.

[5] Clarification issued by the Constitutional Court on December 16, 2015, regarding its decision on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014.

[6] One such example is the order enjoining the anticompetitive behavior for which DIZUCAR (the wholesale distributor owned by El Salvador’s sugar mills) was punished.

[7] Gal, M., et al. (ed.) (2015). The Economic Characteristics of Developing Jurisdictions, Their Implications for Competition Law”. Edward Elgar, Northampton, United States.

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The Fear of Market Concentration, the Legacy of the Chicago School of Antitrust, and Political Influence of Firms – Lessons for Developing Countries

By Francisco Beneke*

The Fall of the Structure-Conduct-Paradigm and the Rise of the Chicago School of Antitrust

In its first decades, the courts and enforcers in the US were skeptical of market concentration and took a wide view of which conducts from dominant firms could be considered unlawful under the antitrust laws. This was in part due to the influence of the structure-conduct-performance paradigm that was widely supported by industrial organization economists of the time.

That changed with the rise of the Chicago School of Antitrust. Some of their main ideas were that market concentration was not always a sign of diminished competition and that the unilateral exercise of market power is almost always self-correcting and does not warrant the costs of antitrust intervention. This thinking took a strong foothold in academia and the courts in the late 1970’s and during the first Reagan Administration. During this time, many key positions in the DOJ, FTC, and the federal bench were filled with Chicago School supporters. The result was a clear break with prevailing rules regarding merger control and unilateral conduct such as predatory pricing.

Since then, some of the considerations that courts made in the past when blocking mergers and punishing dominant firms are now dismissed as making no economic sense. In this post, I analyze one such specific consideration that relates to the desire of a decentralized market structure because of the danger market concentration poses to democracy.

Does Favoring an Economy of Many Producers instead of a few big Efficient Corporations Make No Economic Sense?

In the 1960’s, starting with Brown Shoe Co., the US Supreme Court issued a series of merger decisions blocking transactions that in their most part concerned companies with low market shares. One of the main arguments of the Court was that the intent of Congress in enacting certain amendments to the Clayton Act was to stop the worrisome rising tide of concentration in the American economy. In the words of the Supreme Court: “we cannot fail to recognize Congress’s desire to promote competition through the protection of viable, small, locally owned businesses”. Higher prices could result from curtailing consolidation but the Court interpreted that Congress had stroke a balance in favor of decentralization. Similar arguments were used in 1945 in the Alcoa decision by judge Learned Hand in interpreting section 2 of the Sherman Act.

The decisions mentioned that Congress was worried not only with the economic power of firms controlling large parts of commerce but also with the threat that such control could have on other values of their democratic society. Individuals could find themselves helpless before big corporations. These considerations are now largely dismissed as not grounded on sound economic analysis. Weren’t they though? Under the light of political economy theories it is a valid question to ask.

Some economists argue that market concentration is a predictor of the formation of interest groups, and that dominant firms are more likely to exert political influence independently from their industry peers. That is, a firm with monopoly power is more likely to lobby for its own interests rather than those of the market as a whole. In addition, there is literature that supports an association between campaign donations and policy outcomes favorable to the donating firms. In other words, interest groups are effective in shaping public policy. In an earlier post in this blog, Amine already analyzed how influential firms could shape the adoption and enforcement of antitrust laws.

These theories and empirical studies can provide a framework and foundation on which to analyze a worrisome trend toward concentration of firms in the economy and still fit the analysis under the consumer welfare paradigm. For example, a merger that will lead to a stronger oligopoly can make firms in the industry lobby more effectively in order to entrench their position, especially in regulated markets. The likely result could be lower consumer welfare even in the face of efficiencies associated with the transaction.

These political economy theories are old. Dismissing the concern of the courts in the past regarding concentrated markets and the threat to democracy as based on unsound economic analysis was more a product of not looking outside the boundaries of microeconomics rather than the considerations lacking any economic sense.

Should Developing Countries be Concerned about a Worrisome Trend toward (or a Reality of) Concentrated Markets?

Professor Eleanor Fox advocates for a different focus for competition policies in developing countries. Rather than pursuing consumer welfare, Professor Fox advocates for competition policy as a tool of empowering medium and small enterprises by protecting them from abuses of dominant firms. The theories that link concentrated markets with the formation of interest groups and sub-optimal policies can be another argument in favor of Professor Fox’s approach.

The possibility of entrenching a monopoly or oligopoly position with the help of government policy can also have a long lasting impact in the overall development of the country. Firms that have already made investments in a given technology can oppose the introduction of new ones until they recoup their investment. That in turn would slow the pace with which countries adopt the latest methods of production, affecting productivity and, therefore, the income of workers.

If there is a link between concentrated markets and all of these harms that are usually not considered in antitrust analysis, then developing countries should be concerned with a rising tide or a current predicament of concentrated markets.

Another issue would be to analyze whether competition policy could be an effective tool to achieve this end. Given the already extensive length of this post, that can remain as a topic for future discussion.

*Co-editor, Developing World Antitrust

@Paco_Beneke

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Telecommunications Industry, Market Failures, and Government Intervention in El Salvador

By Carmen Ortiz*

In October of 2015, an incumbent in the Salvadoran telecommunications industry, Telefonica, affirmed that the country is the most underdeveloped in terms of telecommunications in Latin America[i]. The government responded with an effusive denial[ii]. It supports the current framework of allocation of Radio Electric Spectrum (RES) by auctions that reward the highest price. The controversy brings up considerations from a public law and competition policy perspectives regarding the impact that the sector regulation, Ley de Telecomunicaciones (LT), has on the conditions of competition in the market for broadband services.

The regulation’s objectives are the promotion of access to telecommunications for all sectors of the population, the protection of the rights of the users, operators, and service providers, the development of a competitive telecommunications market and the rational and efficient use of RES. RES[iii] is a scarce public resource fundamental for essential sectors such as telecommunications and for services such as mobile and wireless broadband. The reason for the regulation of RES is its scarcity and the fact that competing uses of the same frequencies result in chaos[iv]. Barriers to entry through the hoarding of RES are a type of business strategy[v].

The controversy points out market failures in terms of missing markets for the provision of full national coverage of broadband services. Three operators, Telefonica, Claro, and Tigo, offer 3G and/or 4G only in restricted areas close to the main cities. Digicel does not offer 3G, nevertheless, is the only one with national coverage for 4G services. The fact that the frequencies assigned for mobile telecommunications have all been licensed to incumbents[vi] and that no entry has occurred in the last 10 years indicate that the lack of RES is a barrier to entry.

SIGET, the regulator responsible for the management of RES, orders public auctions upon requests of licenses for its use. Licenses have a 20-year term and are adjudicated to the highest bidder. From a public policy and competition policy point of view, the legal framework is fundamentally flawed: it bans an evaluation for the appropriateness of issuing licenses of RES according to its rational and efficient use.

“Effective policy must recognize competition issues in the downstream market for wireless services”[vii]. Superintendencia de Competencia, the national competition authority, performed a substantial analysis on the topic and issued recommendations to SIGET on how to promote and protect competition through the management of RES[viii], for example, by performing auctions exclusively for entrants. Unfortunately, its recommendations are not binding for the regulator.

An analysis from a public law perspective can identify if the regulation favors certain players at the detriment of others and if competition and consumer welfare are neglected. The question to be answered is how the LT protects or neglects the interests of the players involved.

Starting with incumbents, who in majority have colluded in the past[ix], they would prefer to maintain the status quo and close the market than to confront pressures of an entrant. The price for closing the market can be paid through an auction, even if overbidding is necessary. The LT permits this strategy and facilitates foreclosure. On the contrary, potential entrants are negatively affected. They might not posses at once the economic resources necessary to win an auction against motivated incumbents and to invest on sunk costs to enter the market. Being implicitly excluded from a positive outcome in the auction and from the downstream market means they are losers. Moreover, the LT gives them incentives to abstain from participating in auctions.

The SC is obstructed from protecting and promoting competition to achieve economic efficiency and consumer welfare because its opinions and recommendations on the efficient management of RES are not binding for SIGET. SC could even be demotivated to continue spending resources in performing analysis and recommendations on a topic that has a dead end with the regulator. The SIGET is unable to achieve its own objectives because the LT inhibits it from evaluating the efficiency and rationality in allocating RES. New market failures cannot be prevented or corrected. The central government, receiving millions of dollars to be paid in the auctions, supports emphatically the higher bidder-winner design and fails to acknowledge the new market failures faced in the industry. Favored with additional income, it has no intentions to reform the legal framework. Finally, consumers, the most important of all, are deprived from wider choices and from the benefits of vigorous competition, innovation, lower prices, and ample access to broadband benefits in wider geographical areas. Hence, consumers are losers.

From a competition law and public law perspective, an efficient management of RES and a national broadband planning for the long term should be a priority in developing countries. The state is responsible for these and its responsibility cannot be circumvented by the economic gains resulting from a higher bidder-winner auction design. Auctions for licenses of RES are a way of efficient allocation and encouragement of investment. For this, the regulator should make efforts to remove the legal obstacles that obstruct its responsibilities. Then, evaluate the existence of market failures, the conditions of competition in the market (with the support of the competition authority), the legitimate needs of RES of the incumbents and the asymmetries between incumbents and entrants. The ideal outcome of an auction and its design should be based on a case-specific analysis. The design of auctions of RES must have as objectives attracting entrants, preventing collusion and promoting competition both in the auctions and in the downstream markets[x]. Regulations that inflexibly favor the higher bidder-winner may hinder competition, obstruct economic efficiency, economic growth and neglect consumer welfare. Such design does not guarantee that the winner could give the most efficient use of RES. Aiming for the highest price does not imply success in public policy nor economic efficiency in benefit of consumer’s welfare.

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

References

[i] See recent declarations on local newspapers, available at: http://www.laprensagrafica.com/2015/10/15/el-salvador-el-pais-mas-atrasado-en-telecomunicaciones-de-latinoamerica

[ii] See, Government of El Salvador’s official webpage, available at:

http://www.presidencia.gob.sv/el-salvador-en-primeros-lugares-de-latinoamerica-en-crecimiento-de-acceso-a-telefonia-roberto-lorenzana/

[iii] Radio waves or hertzian waves: Electromagnetic waves of frequencies arbitrarily lower than 3 000 GHz, propagated in space without artificial guide. See the Radio Regulations Articles, International Telecommunication Union (ITU) Library & Archives, Edition of 2012, pg. 7, available at: http://www.itu.int/dms_pub/itu-s/oth/02/02/S02020000244501PDFE.PDF

[iv] Ozanich G.W., Hsu, C., Park, (2004). H. 3-G wireless auctions as an economic barrier to entry: the western European Experience, Telematics and Informatics 21, pg. 227. Available at: https://www.researchgate.net/profile/Han_Park/publication/223696166_3-G_wireless_auctions_as_an_economic_barrier_to_entry_the_western_european_experience/links/00463536b910a89e98000000.pdf

[v] Porter, M., (1984). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press, NY., pg. 13-14.

[vi] According to the Cuadro Nacional de Atribucion de Frequencias (Table of national assignation of frequencies), see at: http://www.siget.gob.sv/attachments/2213_CNAF%202004%20y%20modificaciones%20al%202014.pdf

[vii] See, Cramton, P., Kwerel, E., Rosston, G., Skrzypacz, A. (2011). “Using Spectrum Auctions to Enhance Competition in Wireless Services”, The Journal of Law and Economics, Vol. 54, pg. 168, available at: https://web.stanford.edu/~skrz/spectrum-auctions-and-competition.pdf

[viii] See the opinion issued by the Competition Authority of El Salvador, 11/10, 2013, pg. 11, available at: http://www.sc.gob.sv/uploads/SC-043-S-LP-R-2013_111013_1340.pdf and the decisions SC-016-S/C/R/2011 and SC-013-S/C/R-2012

[ix] See Superintendencia de Competencia decision on collusion: SC-017-O/PS/R-2010/RES:19-12-2011

[x] Klemperer, P. (2001).”How (Not) to Run Auctions: the European 3G Telecom Auctions”, November 2001, available at: http://dx.doi.org/10.2139/ssrn.297907, pg. 3

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The Concentration of Economic and Political Power: A Priority for Competition Law and Policy in Developing Countries?

By Amine Mansour*

In the literature dealing with competition law and policy in developing countries, there appears to be a consensus according to which competition law cannot contribute to development unless it wins its battle against what is called the concentration of economic and political power.

Before getting into more details, the idea of concentration of economic and political power deserves some words. The concept in itself is not clear. The idea can be understood either as the collusion between the economic and the political powers leading to a concentration of the two or as the holding of both powers by the same person(s) at the same time. Of course, the concentration can be in reality more complex and subtle than what was described and consist of a mix of the two forms. Regardless of the view one may have on the understanding of the concept, it’s less important to focus on the form of the concentration of economic and political powers than on the effect of such concentrations. The very concrete impact can be disastrous for an economy.

In order to realize the magnitude that this impact can have, it is interesting to analyze first why powerful economic groups and individuals may attempt to capture political institutions. In reality, according to the developmental conception of competition, it is very important to empower low income people, to protect them against economic power and to ensure that they fully participate and contribute to the economic life. This presupposes a specific view to the goals of competition, a view where specific categories of people, the low income ones, are benefiting from the redistribution of wealth. (The consumer welfare standard does not deal with the question of which category of people benefit from the redistribution). The inevitable reaction of rational powerful economic groups is to reject such position as it not only endangers the expansion of their power and wealth but also threatens to shrink it. One way to reject such rules is to capture government power if it is not already the case. Such a conflict illustrates where the antagonism lies between developmental competition law and the concentration of economic and political powers.

In practice, it’s very important to differentiate between three scenarios.

First, if no competition law is adopted in a given country where economic and political powers overlap, the effect can be as simple as the blocking of every attempt to introduce any kind of competition law be it a pro-development or a pro-efficiency one (One interesting example is Guatemala where the adoption of a competition law has been dragged on for years and only after the EU pressed for it in its association treaty did Guatemalan authorities started to act. Even so, they are waiting to the very last moment when the deadline expires to enact the law (December 2016)). As a consequence, powerful producers will keep benefiting from missing competition to the sacrifice of consumers. In particular, low income consumers that would eventually have been able to afford new products as a consequence of the drop in prices will not see this scenario occurring. Put differently, powerful dominant firms may keep extracting undeserved profits thereby reinforcing their economic power. The distributive dimension at the heart of competition law will simply be nonexistent.

Second, even in cases where obstructing the adoption of a competition act is no longer possible ( international commitment/pressure from an international body), the economic and political powers may try to lower the impact such regulation may have on their welfare by interfering in the enactment process. Having a vested interest in maintaining the status quo, the hands concentrating economic and political power will do what it takes to preserve their wealth. This can be reflected in the adopted text through specific and sectorial exemptions, setting up a simple consultative authority, narrowing the scope of the Act (…). Competition law may simply look as an empty shell.

From the two above mentioned situations it emerges that economic and political powers can undertake “preventive” action that simply obliterate the effect competition law may have on addressing inequality.

But lets assume, in a third scenario, that a given developing country succeeded in introducing a competition act and setting up a competition authority (CA) but at the same time this authority faces a high concentration of economic and political power. Naturally, the question that emerges relates to whether the issue should be or can be a top priority from the perspective of development competition and, if yes, how to achieve it?

It should be noted first that CAs are not immune to external influences. However, their resistance to these interferences depends to a great extent on the powers they were granted. At the same time, not only the nature of powers and the institutional architecture (Both influenced by the intervention of interest groups in the enactment process) but also the public support a CA enjoys determines significantly the answer to the question raised above.

Even if the creation of a strong CA materializes, its task will not be an easy one. From a general point of view, it is clear that fighting against the concentration of economic and political power should be considered as a top priority in any CA’s mission. The main reason of course is that a balanced development cannot be achieved in the presence of a concentration of economic and political power. Instead, inequality may persist or even be exacerbated. In practice, however, the existence of such concentration of power can greatly obstruct competition authority efforts as long as (as soon as) a proactive approach to the enforcement of competition provisions against powerful economic entities is undertaken (budget cutting, huge press campaigns…).

At the end, it clearly appears that, as some of our readers have commented, one of the most important roles for competition law and policy from the perspective of development is tackling the concentration of economic and political powers but this concentration also can make competition law and policy ineffective in most developing countries.

*Co-editor, Developing World Antitrust

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