Competition policy: Why does it matter

The author is research associate at the Philippine Institute forĀ Development Studies and PhD student, University of the Philippines.

As most developing countries and economies in transition legislate
their competition laws, it becomes fashionable to talk about
competition policy. What exactly is competition policy and why does a
country need it? Isn’t trade liberalization enough to ensure
competition? Wouldn’t competition lead to cutthroat rivalry that would
eventually result in the death of domestic firms and domination by
large firms as feared by some sectors in society?

Competition is seen as a process that allows a sufficient number of
producers in the same market or industry to independently offer
different ways to satisfy consumer demands. As competition is often
equated with rivalry, it pressures firms to become efficient and offer
a wider choice of products and services to consumers at lower prices.
This way, consumer welfare increases resulting in dynamic efficiency
through innovation and technological change.

To understand how competition works, we need to introduce the concept
of market power. The latter refers to the ability of firms,
unilaterally (as in monopolies) or in collusion with others (as in
cartels), to profitably raise prices and maintain these over a
significant period of time without competitive response by other
existing or potential firms. Market power may be gained by erecting
barriers to entry like cartel arrangements and mergers that damage
competition. As cartels raise prices and restrict supply, artificial
shortages are deliberately created. Output restrictions cause
inefficiency, reduce productivity, result in economic and social harm,
and hinder development.

After more than 20 years of trade liberalization, there still remain
various impediments to entry in Philippine industries that continue to
undermine the pro-competitive effects of import competition. While
trade liberalization may be a precondition for the growth of a free
market, it does not, by itself, guarantee effective competition as
evidenced by the case of the telecommunications industry. While
liberalization prompted PLDT to install more telephone lines, introduce
a range of telecommunications services as well as price reductions; the
competition that emerged was muted because of the slow and difficult
interconnection of new players with dominant carrier PLDT. In
telecommunications, opportunities for competition can be realized only
if smooth interconnection among various telecommunications services is
possible. In the presence of vague competition laws, PLDT was able to
exert monopoly power over access to networks and dictated the pace of
interconnection in the country. Interconnection costs were high and
resulted in various consumer complaints like unsuccessful call attempts
and irrational calling charges.

The cement industry provides another interesting example when price
deregulation and import liberalization are unaccompanied by competition
rules. Having a history of a government-sponsored cartel in the
industry, cement firms were able to engage in tacit price fixing as
they raised their prices continuously since 1999 in a simultaneous
manner amid excess supply, overcapacity, and weak demand.

The goal of competition policy is to preserve and promote competition
through the prevention of restrictive business practices by firms and
their abuses of economic power including inefficient government
regulation. Antitrust laws prohibit firms from attaining or exercising
substantial market power obtained through improper means. Competition
laws do not prosecute firms that have gained market power through
legitimate behavior, i.e., skill, foresight, and hard work. Competition
policy is consistent with liberalized trade policy, relaxed foreign
direct investment and ownership requirements and economic deregulation.

Competition law is about the elimination of abusive monopoly conduct,
price fixing and other cartels. It is also about the prohibition of
mergers and acquisitions that limit competition. Competition law is
primarily meant to protect consumers, both individual consumers and
firms that buy intermediate goods and capital assets including
governments that build infrastructures. Competition law is meant to
protect the competition process, which allows efficient firms that
respond to consumer demand to succeed over the inefficient firms.

Promoting competition is a big challenge, the benefits are long term
and they do not come without problems. Concerns about opening up the
economy too quickly to competition are understandable. Domestic firms
that have high costs fear that they would be wiped out if efficient
foreign competitors were to enter right away. Small domestic firms are
also worried that they would not be able to compete with large business
rivals. Competition places relentless pressure on firms, foreign or
domestic, to cut costs to be more competitive, and that often
translates into lost jobs. All countries experience social and economic
disruptions when local firms are unable to compete with foreign or new
entrants that have lower costs. The disruption is often highest in
developing countries that lack framework laws and institutions
necessary for a well functioning market economy. Competition policy is
not and cannot be the answer to every social and economic problem.
Other separate measures need to accompany competition policy to
alleviate dislocations and mitigate the pain of adjustment. To address
labor displacement, market retraining and other welfare support are
necessary.

There are currently many proposals for an antitrust law and the
creation of a Fair Trade Commission including House Bill 1373 or Fair
Trade Act of 1994 by Rep. Gerardo Espina and House Bill 183 or Fair
Trade Act of 1998 by Rep. Rolando Briones. The enactment of these laws
is the first step towards the creation of new competition laws in the
country and its enforcement from the ground up. As we embark on this
difficult and very important task, the government must clearly indicate
that competition policy is indeed a priority so that after the
legislation of competition laws, training and institution building
could commence.

Competition should be viewed as a means and not an end in itself. We
should always maintain our focus on economic efficiency rather than on
size or market structure alone. It is worth noting that not all
increases in concentration from mergers are inimical to competition.
Not all monopolies are inefficient and abusive. The emphasis should be
on business conduct, market power and keeping markets competitive and
disciplining, whenever necessary, exercises of market power that reduce
output or increase prices.

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