The Role of Competition in a Market Economy Competition Law Associates Windhoek, March 2014 1.
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Transcript of The Role of Competition in a Market Economy Competition Law Associates Windhoek, March 2014 1.
The Role of Competition in a Market Economy
Competition Law AssociatesWindhoek, March 2014
1
Industrial Organization and Competition Policy
Industrial Organization is a field of economics that studies the strategic behavior of firms, their interaction and the structure of markets
Competition Policy is the study of policy options for promoting healthy competition in the market place
Competition Law is the legislated expression of those competition policy choices that a government has adopted.
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The Gale of Creative DestructionJoseph Schumpeter used this term in his 1942 book
“Capitalism, Socialism and Democracy” to describe the process of competition
Competitive markets in continual process of transformation
Entry, innovation and entrepreneurship are essential to sustainable economic growth
Winners and Losers
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The Role of Competition Authorities
To protect the process of competition in order to:
Promote the efficiency and adaptability of the economy
Facilitate the opportunity for business to participate in world markets
Ensure that SME’s have an equitable opportunity to participate in the market
Provide consumers with competitive prices and product choices
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Functions, Powers and Duties of Competition Authorities
S.16
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Competition Not an End in Itself
Economic Benefits – efficient resource allocation, growth, innovation
Consumer Welfare Effects – lower prices, better quality, greater choice
Governance – less need for government intervention, reduced regulation
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Economic Benefits In 1889, a year before the Sherman Act, Canada passed
into law an “Act for the Suppression of Combinations, Formed in Restraint of Trade”
The framers understood what is still true today: healthy competition encourages “large aggregations of capital”
It is this capital, these investments that result in economic growth and job creation
The forces of competition lead to the innovation, economic transformation and renewal that Schumpeter pointed out were necessary to sustain growth
The pressure of competition creates the need which is the “mother of invention” and innovation.
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EfficiencyEconomists speak of dynamic efficiency and static efficiency
the latter includes allocative and productive efficiency
Allocative efficiency is macro. Competition forces competitors to make efficient choices resulting in the efficient allocation of resources across the economy.
Productive efficiency is micro. Competition forces firms to save resources in the production process
Dynamic efficiency – competition encourages innovation and invention which results in increases in productivity and overall welfare
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Welfare EffectsAdam Smith stated that the ultimate purpose of all
production was consumption and without the latter, the former has no purpose
As such efficiency in production should only be an intermediate goal
Allocative efficiency achieved through competition results in lower prices, better quality and more choice
Allocative efficiency tends to be more egalitarian at the macro level (across the economy)
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GovernanceCompetition law enforcement is the lightest form of
government regulation or intervention in the market
Allows competitors to freely make choices unless they violate the law – reduces regulatory oversight
The cost of administering competition law is far below that of regulatory oversight
The cost of collecting, administering and distributing excess rents is likely to be far above the cost savings foregone by prohibiting a monopoly
Firms try to limit competition by pressuring government to impose costly trade restrictions or regulation
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Market DefinitionWhen analyzing anti-trust cases, competition
authorities are called upon to define the relevant markets
This consists of Product and Geographic markets
Although tools used in the analysis and relevant evidence may apply to both it is critical that these exercises are treated separately
Product market analysis must always be done first
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Relevant Product MarketHypothetical monopolist
Critical loss analysis
Own price elasticity of demand
Price cross elasticity of demand
End use of the product
Technical or physical characteristics of the product
Switching costs
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Relevant Geographic MarketHypothetical Monopolist test
Actual shipping patterns, imports, exports
Transportation modes and costs
Frequency of shipments, inventories
Natural and artificial barriers (rivers, borders)
Currency exchange rates
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Market PowerAbility to impose a small but significant non-transitory
increase in price that cannot be defeated by competitors or customers
We call this the SSNIP test
1- 2 year measurement period
Price is used as a proxy for service terms and quality
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Three Main Areas of ConcernConspiracy and Bid rigging – considered to be the most
egregious competition offense because it is intended to eliminate competitiion
Mergers – the formation of market power through the acquisition of assets or shares
Abuse of Dominance – a firm with market power engages in anti-competitive acts to lessen competition or eliminate competitors
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Conspiracy and Bid-riggingCartel, formal or informal group of independent
businesses whose concerted goal is to lessen or prevent competition among its participants.
Typically, cartel members enter into a covert agreement to engage in one or more anti-competitive activities, such as to fix prices, allocate markets or customers, limit production or supply, or rig bids.
Conspiracy can be international, national or regional in scope, with various degrees of formality and secrecy.
Can be a loose oral arrangement or a highly structured set of membership rules established by a trade association and elaborately enforced.
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Conspiracy and Bid-RiggingCartels are harmful because typically they result in
higher prices for consumers and reduce the incentive for companies to cut costs and be innovative.
Cartel behaviour is unlawful under the competition laws of most countries.
Bid-rigging occurs when two or more bidders, in response to a call for tenders, agree that one person will refrain from bidding, withdraw a submitted bid, or to agree among themselves on bids submitted.
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MergerAcquisition or establishment, direct or indirect, by one
or more enterprises (i) whether by purchase of shares or assets, lease of assets, amalgamation or combination or otherwise,
(ii) of control (S.42) over the whole or a part of the business of an immediate competitor, supplier, consumer or other enterprise;
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Market Share & ConcentrationSafe harbour: combined market share (unilateral
measure) or turnover or assets of target below certain amounts
CR4 below certain level (interdependent measure)
High market share necessary but not sufficient condition to establish that the merger would result in the creation of market power
Market share calculated on basis of dollar revenue, unit volume or capacity
Herfindahl-Hirschman Index (HHI)
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Economic Factors Affecting Competition
Foreign competition
Failing Firm
Availability of Substitutes
Entry
Competition remaining in the market
Removal of an effective competitor
Change and innovation
Life cycle of market – expanding, declining
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Efficiency / Welfare Trade OffCanada - Efficiency Defence in the law
U.S. - Price Standard
E.U. – Consumer Surplus Standard
U.K. – Public Interest override by Minister of Trade and Industry
Namibia – trade off between detrimental effects of a lessening of competition and other potential economic benefits or benefits to the public S.47
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Abuse of DominanceA person or persons with market power have
engaged in abusive or anti-competitive conduct
The conduct may be a single act, a single act repeated and/or a series of different acts
Such conduct has an anti-competitive purpose or effect which is exclusionary, disciplinary or predatory
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Evidence of Abuse of DominanceUsually readily available corporate documents:
Exclusive contracts, payments for exclusivity
Long term contracts or restrictions in contracts
Correspondence revealing discriminatory, exclusionary or predatory practices
Strategic documents, documents prepared for senior management or the Board of Directors usually reveal if strategies are anti-competitive
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