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Competition Laws and Monopolistic Behaviour – Part I

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A. THE PHILOSOPHY OF COMPETITION

The aims of competition (anti-trust) laws are to ensure that consumers pay the lowest possible price (=the most efficient price) coupled with the highest quality of the goods and services which they consume. This, according to current economic theories, can be achieved only through effective competition. Competition not only reduces particular prices of specific goods and services – it also tends to have a deflationary effect by reducing the general price level. It pits consumers against producers, producers against other producers (in the battle to win the heart of consumers) and even consumers against consumers (for example in the healthcare sector in the USA). This everlasting conflict does the miracle of increasing quality with lower prices. Think about the vast improvement on both scores in electrical appliances. The VCR and PC of yesteryear cost thrice as much and provided one third the functions at one tenth the speed.

Competition has innumerable advantages:

It encourages manufacturers and service providers to be more efficient, to better respond to the needs of their customers, to innovate, to initiate, to venture. In professional words: it optimizes the allocation of resources at the firm level and, as a result, throughout the national economy.

More simply: producers do not waste resources (capital), consumers and businesses pay less for the same goods and services and, as a result, consumption grows to the benefit of all involved.

The other beneficial effect seems, at first sight, to be an adverse one: competition weeds out the failures, the incompetents, the inefficient, the fat and slow to respond. Competitors pressure one another to be more efficient, leaner and meaner. This is the very essence of capitalism. It is wrong to say that only the consumer benefits. If a firm improves itself, re-engineers its production processes, introduces new management techniques, modernizes – in order to fight the competition, it stands to reason that it will reap the rewards. Competition benefits the economy, as a whole, the consumers and other producers by a process of natural economic selection where only the fittest survive. Those who are not fit to survive die out and cease to waste the rare resources of humanity.

Thus, paradoxically, the poorer the country, the less resources it has – the more it is in need of competition. Only competition can secure the proper and most efficient use of its scarce resources, a maximization of its output and the maximal welfare of its citizens (consumers). Moreover, we tend to forget that the biggest consumers are businesses (firms). If the local phone company is inefficient (because no one competes with it, being a monopoly) – firms will suffer the most: higher charges, bad connections, lost time, effort, money and business. If the banks are dysfunctional (because there is no foreign competition), they will not properly service their clients and firms will collapse because of lack of liquidity. It is the business sector in poor countries which should head the crusade to open the country to competition.

Unfortunately, the first discernible results of the introduction of free marketry are unemployment and business closures. People and firms lack the vision, the knowledge and the wherewithal needed to support competition. They fiercely oppose it and governments throughout the world bow to protectionist measures. To no avail. Closing a country to competition will only exacerbate the very conditions which necessitate its opening up. At the end of such a wrong path awaits economic disaster and the forced entry of competitors. A country which closes itself to the world – will be forced to sell itself cheaply as its economy will become more and more inefficient, less and less non-competitive.

The Competition Laws aim to establish fairness of commercial conduct among entrepreneurs and competitors which are the sources of said competition and innovation.

Experience – later buttressed by research – helped to establish the following four principles:

There should be no barriers to the entry of new market players (barring criminal and moral barriers to certain types of activities and to certain goods and services offered).

A larger scale of operation does introduce economies of scale (and thus lowers prices).

This, however, is not infinitely true. There is a Minimum Efficient Scale – MES – beyond which prices will begin to rise due to monopolization of the markets. This MES was empirically fixed at 10% of the market in any one good or service. In other words: companies should be encouraged to capture up to 10% of their market (=to lower prices) and discouraged to cross this barrier, lest prices tend to rise again.

Efficient competition does not exist when a market is controlled by less than 10 firms with big size differences. An oligopoly should be declared whenever 4 firms control more than 40% of the market and the biggest of them controls more than 12% of it.

A competitive price will be comprised of a minimal cost plus an equilibrium profit which does not encourage either an exit of firms (because it is too low), nor their entry (because it is too high).

Left to their own devices, firms tend to liquidate competitors (predation), buy them out or collude with them to raise prices. The 1890 Sherman Antitrust Act in the USA forbade the latter (section 1) and prohibited monopolization or dumping as a method to eliminate competitors. Later acts (Clayton, 1914 and the Federal Trade Commission Act of the same year) added forbidden activities: tying arrangements, boycotts, territorial divisions, non-competitive mergers, price discrimination, exclusive dealing, unfair acts, practices and methods. Both consumers and producers who felt offended were given access to the Justice Department and to the FTC or the right to sue in a federal court and be eligible to receive treble damages.

It is only fair to mention the “intellectual competition”, which opposes the above premises. Many important economists thought (and still do) that competition laws represent an unwarranted and harmful intervention of the State in the markets. Some believed that the State should own important industries (J.K. Galbraith), others – that industries should be encouraged to grow because only size guarantees survival, lower prices and innovation (Ellis Hawley). Yet others supported the cause of laissez faire (Marc Eisner).

These three antithetical approaches are, by no means, new. One led to socialism and communism, the other to corporatism and monopolies and the third to jungle-ization of the market (what the Europeans derisively call: the Anglo-Saxon model).

B. HISTORICAL AND LEGAL CONSIDERATIONS

Why does the State involve itself in the machinations of the free market? Because often markets fail or are unable or unwilling to provide goods, services, or competition. The purpose of competition laws is to secure a competitive marketplace and thus protect the consumer from unfair, anti-competitive practices. The latter tend to increase prices and reduce the availability and quality of goods and services offered to the consumer.

Such state intervention is usually done by establishing a governmental Authority with full powers to regulate the markets and ensure their fairness and accessibility to new entrants. Lately, international collaboration between such authorities yielded a measure of harmonization and coordinated action (especially in cases of trusts which are the results of mergers and acquisitions).

Yet, competition law embodies an inherent conflict: while protecting local consumers from monopolies, cartels and oligopolies – it ignores the very same practices when directed at foreign consumers. Cartels related to the country’s foreign trade are allowed even under GATT/WTO rules (in cases of dumping or excessive export subsidies). Put simply: governments regard acts which are criminal as legal if they are directed at foreign consumers or are part of the process of foreign trade.

A poor and in need of establishing its export sector – should include in its competition law at least two protective measures against these discriminatory practices:

Blocking Statutes – which prohibit its legal entities from collaborating with legal procedures in other countries to the extent that this collaboration adversely affects the local export industry.

Clawback Provisions – which will enable the local courts to order the refund of any penalty payment decreed or imposed by a foreign court on a local legal entity and which exceeds actual damage inflicted by unfair trade practices of said local legal entity. US courts, for instance, are allowed to impose treble damages on infringing foreign entities. The clawback provisions are used to battle this judicial aggression.

Competition policy is the antithesis of industrial policy. The former wishes to ensure the conditions and the rules of the game – the latter to recruit the players, train them and win the game. The origin of the former is in the 19th century USA and from there it spread to (really was imposed on) Germany and Japan, the defeated countries in the 2nd World War. The European Community (EC) incorporated a competition policy in articles 85 and 86 of the Rome Convention and in Regulation 17 of the Council of Ministers, 1962.

Still, the two most important economic blocks of our time have different goals in mind when implementing competition policies. The USA is more interested in economic (and econometric) results while the EU emphasizes social, regional development and political consequences. The EU also protects the rights of small businesses more vigorously and, to some extent, sacrifices intellectual property rights on the altar of fairness and the free movement of goods and services.

Put differently: the USA protects the producers and the EU shields the consumer. The USA is interested in the maximization of output at whatever social cost – the EU is interested in the creation of a just society, a liveable community, even if the economic results will be less than optimal.

There is little doubt that developing countries should follow the EU example. They are often socially sensitive, export oriented, their economy is negligible and its consumers are poor, and they are besieged by monopolies and oligopolies.

In my view, its competition laws should already incorporate the important elements of the EU (Community) legislation and even explicitly state so in the preamble to the law. Other, mightier, countries have done so. Italy, for instance, modelled its Law number 287 dated 10/10/90 “Competition and Fair Trading Act” after the EC legislation. The law explicitly says so.

The first serious attempt at international harmonization of national antitrust laws was the Havana Charter of 1947. It called for the creation of an umbrella operating organization (the International Trade Organization or “ITO”) and incorporated an extensive body of universal antitrust rules in nine of its articles. Members were required to “prevent business practices affecting international trade which restrained competition, limited access to markets, or fostered monopolistic control whenever such practices had harmful effects on the expansion of production or trade”. the latter included:

Fixing prices, terms, or conditions to be observed in dealing with others in the purchase, sale, or lease of any product; Excluding enterprises from, or allocating or dividing, any territorial market or field of business activity, or allocating customers, or fixing sales quotas or purchase quotas; Discriminating against particular enterprises; Limiting production or fixing production quotas; Preventing by agreement the development or application of technology or invention, whether patented or non-patented; and Extending the use of rights under intellectual property protections to matters which, according to a member’s laws and regulations, are not within the scope of such grants, or to products or conditions of production, use, or sale which are not likewise the subject of such grants. GATT 1947 was a mere bridging agreement but the Havana Charter languished and died due to the objections of a protectionist US Senate.

There are no antitrust/competition rules either in GATT 1947 or in GATT/WTO 1994, but their provisions on antidumping and countervailing duty actions and government subsidies constitute some elements of a more general antitrust/competition law.

GATT, though, has an International Antitrust Code Writing Group which produced a “Draft International Antitrust Code” (10/7/93). It is reprinted in II, 64 Antitrust & Trade Regulation Reporter (BNA), Special Supplement at S-3 (19/8/93).

Four principles guided the (mostly German) authors:

National laws should be applied to solve international competition problems; Parties, regardless of origin, should be treated as locals; A minimum standard for national antitrust rules should be set (stricter measures would be welcome); and The establishment of an international authority to settle disputes between parties over antitrust issues. The 29 (well-off) members of the Organization for Economic Cooperation and Development (OECD) formed rules governing the harmonization and coordination of international antitrust/competition regulation among its member nations (“The Revised Recommendation of the OECD Council Concerning Cooperation between Member Countries on Restrictive Business Practices Affecting International Trade,” OECD Doc. No. C(86)44 (Final) (June 5, 1986), also in 25 International Legal Materials 1629 (1986). A revised version was reissued. According to it, ” .Enterprises should refrain from abuses of a dominant market position; permit purchasers, distributors, and suppliers to freely conduct their businesses; refrain from cartels or restrictive agreements; and consult and cooperate with competent authorities of interested countries”.

An agency in one of the member countries tackling an antitrust case, usually notifies another member country whenever an antitrust enforcement action may affect important interests of that country or its nationals (see: OECD Recommendations on Predatory Pricing, 1989).

The United States has bilateral antitrust agreements with Australia, Canada, and Germany, which was followed by a bilateral agreement with the EU in 1991. These provide for coordinated antitrust investigations and prosecutions. The United States thus reduced the legal and political obstacles which faced its extraterritorial prosecutions and enforcement. The agreements require one party to notify the other of imminent antitrust actions, to share relevant information, and to consult on potential policy changes. The EU-U.S. Agreement contains a “comity” principle under which each side promises to take into consideration the other’s interests when considering antitrust prosecutions. A similar principle is at the basis of Chapter 15 of the North American Free Trade Agreement (NAFTA) – cooperation on antitrust matters.

The United Nations Conference on Restrictive Business Practices adopted a code of conduct in 1979/1980 that was later integrated as a U.N. General Assembly Resolution [U.N. Doc. TD/RBP/10 (1980)]: “The Set of Multilaterally Agreed Equitable Principles and Rules”.

According to its provisions, “independent enterprises should refrain from certain practices when they would limit access to markets or otherwise unduly restrain competition”.

The following business practices are prohibited:

Agreements to fix prices (including export and import prices); Collusive tendering Market or customer allocation (division) arrangements; Allocation of sales or production by quota; Collective action to enforce arrangements, e.g., by concerted refusals to deal; Concerted refusal to sell to potential importers; and Collective denial of access to an arrangement, or association, where such access is crucial to competition and such denial might hamper it. In addition, businesses are forbidden to engage in the abuse of a dominant position in the market by limiting access to it or by otherwise restraining competition by: Predatory behaviour towards competitors Discriminatory pricing or terms or conditions in the supply or purchase of goods or services Mergers, takeovers, joint ventures, or other acquisitions of control Fixing prices for exported goods or resold imported goods Import restrictions on legitimately-marked trademarked goods Unjustifiably – whether partially or completely – refusing to deal on an enterprise’s customary commercial terms, making the supply of goods or services dependent on restrictions on the distribution or manufacturer of other goods, imposing restrictions on the resale or exportation of the same or other goods, and purchase “tie-ins.”

(continued)

Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant
Self Love – Narcissism Revisited and After the Rain – How the West
Lost the East. He served as a columnist for Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International
(UPI) Senior Business Correspondent, and the editor of mental health
and Central East Europe categories in The Open Directory and
Suite101.

Until recently, he served as the Economic Advisor to the Government
of Macedonia.

Visit Sam’s Web site at http://samvak.tripod.com

Competition Laws and Monopolistic Behaviour – Part I
About Sam Vaknin
Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com WebProNews Writer
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