Tag Archives: Competition Law in Developing Countries

Competition Law and Economic Development – A Universal Solution?

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

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

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

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

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

 

Advertisements
Tagged

Hipster antitrust

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

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

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

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

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

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

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

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

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

Tagged ,

How do you measure competition policy’s performance?

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

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

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

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

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

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

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

 

Tagged ,

Some interesting research in South Africa on competition law

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

The talks on antitrust-related subjects include:

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

We hope this information is of use.

 

Tagged

Interesting links for this week

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

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

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

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

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

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

Tagged

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

 

Tagged , ,

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.

Tagged ,

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.

Tagged ,

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)

Tagged

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.

Tagged , ,
%d bloggers like this: