competition assessments and regulatory policy development vivek ghosal georgia institute of...
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Competition Assessments and Regulatory Policy Development
Vivek GhosalGeorgia Institute of Technology
Atlanta, GA, USA
CUTS-CIRC Conference on Economic RegulationNew Delhi, April 2011
Incorporating Competition Assessments into Regulatory Impact and Analysis
2Vivek Ghosal. Competition Assessments and Policy Development.
Impacts on Competition and Innovation
Regulation can have substantial impacts on competition and innovation, even when aimed at other policy objectives. E.g.,• Regulation may require one company to provide a service (and
prevent other companies from providing that service)• Regulations may differ across geographic areas, or between
companies that perform similar functions but have a different legal status (e.g. banks vs. savings and loans)
• Regulation may limit entry by new firms (e.g. by requiring a license that becomes an artificial barrier to entry)
• Regulation may result in asymmetric distribution of cost burden across firms – as may occur with setting of various types of standards
3Vivek Ghosal. Competition Assessments and Policy Development.
Regulation Impacts can be Harmful
In the absence of considerations of competition and innovation impacts, rules and regulations may• Weaken incentives for cost control and innovation• Introduce regulatory risk• Lead to captured regulators• Lead to direct regulatory costs for the government and the firms• Restrict consumer choice• Distort market prices• Unduly limit product variety• Limit advertising and marketing• Create entry and mobility barriers
4Vivek Ghosal. Competition Assessments and Policy Development.
Pro-competition Pro-Innovation Reforms are Economically Beneficial Decreases in prices – many examples worldwide
o After US deregulation, prices for long distance telephone calls, airlines, trucking and rail fell at least 25% and sometimes up to 50%
o Consumer benefits of $19.4b in airline industry, $19.6b in trucking, $9.1b in railways
Increase in productivityo Australia productivity growth increased by 1-1.75 percentage pointso Shipping port operations (Argentina, Brazil)
Greater quantity: e.g., new airline routes and more flights per route Greater variety: e.g., in grocery stores; pharmacies Modernization investments: e.g., in shipping fleet (Philippines) Changes in managerial and organizational structures: e.g., retail grocery
and superstore operations Better quality: e.g., better/more in-flight services in airlines (New
Zealand)
5Vivek Ghosal. Competition Assessments and Policy Development.
Developing an Assessment ScreenScreen Question 1
Does the rule or regulation limit the number or range of suppliers?
This could arise, for example, if a regulation1. Grants exclusive rights for a company to supply goods or
services
2. Establishes a license, permit or authorization process as a requirement for operation
3. Limits the ability of some suppliers to provide a good or service
4. Significantly raises cost of entry or exit by a supplier
5. Creates a geographic barrier to the ability of companies to supply goods or services, invest capital or supply labor
66Vivek Ghosal. Competition Assessments and Policy Development.
Developing an Assessment Screen Screen Question 2
Does the rule or regulation limit the ability of suppliers to compete?
This could arise, for example, if a regulation1. Controls or substantially influences the prices for goods or
services2. Limits freedom of suppliers to advertise or market their goods or
services3. Sets standards for product quality that provide an advantage to
some suppliers over others or that are above the level that many well-informed customers would choose
4. Significantly raises costs of production for some suppliers relative to others (especially by treating incumbents differently from new entrants)
77Vivek Ghosal. Competition Assessments and Policy Development.
Developing an Assessment ScreenScreen Question 3
Does the rule or regulation reduce the incentive of suppliers to compete?
This could arise, for example, if a regulation1. Creates a self-regulatory or co-regulatory regime
2. Requires or encourages information on supplier outputs, prices, sales or costs to be published
3. Exempts the activity of a particular industry or group of suppliers from the operation of general competition law
88Vivek Ghosal. Competition Assessments and Policy Development.
Developing an Assessment ScreenScreen Question 4
Does the rule or regulation limit the choices and information available to customers?
This could arise, for example, if a regulation1. Limits the choices that a consumer can make
2. Reduces mobility of customers between suppliers of goods or services by increasing the explicit or implicit costs of changing suppliers
3. Limits useful and relevant information available to customers
99Vivek Ghosal. Competition Assessments and Policy Development.
Spread of Competition Assessments as Integral Part of Regulatory Reform
Over 25 countries have used/use competition assessments in some way, including• Australia• Brazil• European Union• Korea• Mexico• Taiwan• United Kingdom• Among others …
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Process Options for Implementing Competition Assessments in Regulatory Reform Process
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What is ReviewedProportionality
Costly to review in detail all possible rules & regulations Need proportionality, which means that we
• Prioritize which regulations to review• Consider the importance of the sector when determining the
extent of resources to devote to reviewo Can consider alternative criteria for prioritizing sector: e.g., is
it going to be a key sector for future competitive advantage and growth
• Assess the likely size of effects when deciding on the level of resources to devote to review
12Vivek Ghosal. Competition Assessments and Policy Development.
What is ReviewedImplementing Proportionality
How to implement proportionality? Limit the universe of regulations to review Review only new regulations
• Only those with an expected, large competitive effect
Review existing regulations• Only in obviously important sectors
For the above two categories• Apply a screen for basic questions to triage• Perform in-depth reviews only where benefits from increasing
competition and innovation will be largest
1313Vivek Ghosal. Competition Assessments and Policy Development.
Who Performs the ReviewAgencies
Ministry or agency officials• Have knowledge of sectors and markets• Ministry/agency influence essential to successful implementation
of reforms
If other levels of review exist • Government ministry responsible for overseeing regulation• Competition authority (if it has resources devoted to the task)
14Vivek Ghosal. Competition Assessments and Policy Development.
Who Performs the ReviewOptimal Stage for Integration
Most feasible approach to incorporating competition assessments• Insert competition assessment into existing review process of
new regulations• A ministry/agency, or its policymaking officials, use it
1515Vivek Ghosal. Competition Assessments and Policy Development.
Who Performs ReviewTraining
Appropriate training is essential• Training could be performed by government agencies, the
competition authority and other organizations
In some instances, staff may not be adequately trained in applied Industrial Organization, Microeconomics, Statistical Methods and Regulation – areas which provide the conceptual background
1616Vivek Ghosal. Competition Assessments and Policy Development.
Who Performs ReviewTraining
This can be an important problem in many countries• Government/Civil services musical chairs
o Optimal period ??• Inadequate sector/issue-specific training
The frontier of sophistication and skills needed to examine and understand modern markets, complex industries, and the effects of myriad rules and regulations have moved out
May be producing significant gap with existing skills and institutions to deliver required outcomes• Television example
o markets, products, geography, strategies1717Vivek Ghosal. Competition Assessments and Policy Development.
Who Performs ReviewTraining
Training most crucial at beginning With staff turnover of implementers, ongoing training is
also required Written materials needed to support training and
implementation• E.g., national guidance on competition assessment• Spanish guidance
http://www.cncompetencia.es/Administracion/GestionDocumental/tabid/76/Default.aspx?EntryId=29518&Command=Core_Download&Method=attachment
1818Vivek Ghosal. Competition Assessments and Policy Development.
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Process, Coherence and Outcomes
Tenure of Regulators
Fundamental issues arise from the research by• **Faure-Grimaud, Antoine and David Martimort. “Regulatory
Inertia,” RAND Journal of Economics, 2003.• Peltzman, Sam. “Toward a More General Theory of Regulation.”
Journal of Law and Economics, 1976.
**Independent versus affiliated regulator• Independent means it does not change with political party• Affiliated means it changes with political party in power
2020Vivek Ghosal. Competition Assessments and Policy Development.
Tenure of RegulatorsUncertainty in Policy and Outcomes
Extent of capture and fluctuations in decision-making due to party ideology varies across the two alternatives• Independent versus affiliated regulator
Differences across countries and States within countries Regarding capture and ideology, many stakeholders
• Politicians• Government officials who implement• Firms• Consumers/Citizens• Highly skilled consultants !!
2121Vivek Ghosal. Competition Assessments and Policy Development.
Tenure of RegulatorsUncertainty in Policy and Outcomes
This can introduce significant uncertainty into firms’ decision-making:• Dixit, Avinash and Robert Pindyck. Investment under
Uncertainty. Princeton University Press, 1994.• Ghosal,Vivek, and Prakash Loungani. “Differential Impact of
Uncertainty on Investment in Small and Large Businesses,” Review of Economics and Statistics, 2000.
Adverse consequences for investment, growth and innovation• Effects seem stronger in small and medium enterprises
2222Vivek Ghosal. Competition Assessments and Policy Development.
Tenure of RegulatorsUncertainty in Policy and Outcomes
This is a difficult and complex problem to overcome One aspect that may provide some relief is having clear
process – such as assessment screens discussed earlier• Potentially provides a coherent theme and set of guidelines to
follow• May help in reducing uncertainty, once the mechanism has been
allowed to operate for a while and outcomes are observed
It is not a one-shot game but an evolution, as stakeholders (winners? losers?) will endogenize outcomes and may ask for ask for revisions• Stakeholders re-optimizing can be any of the ones mentioned
2323Vivek Ghosal. Competition Assessments and Policy Development.
Tenure of RegulatorsUncertainty in Policy and Outcomes
An additional aspect that may provide coherence and effectiveness is related to what I mentioned earlier related to training of those who implement• Government/Civil services musical chairs• Inadequate sector/issue-specific training
Greater process coherence, competence and predictability of outcomes may yield to higher achievement of targets
2424Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in Reviews of Existing Rules and Regulations
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Examples of Initiatives
United Kingdom (2002-2004) Australia Hilmer process (1995) Mexico Competitiveness Reforms (2008) Sweden (2009)
26Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsUnited Kingdom – Broad Initiative
RIA overseen by unit close to center of industry oversight
RIA includes “competition checklist” If any answers are yes, then a detailed competition
assessment is required• Guidelines for competition assessment have been prepared by
the UK competition authority Office of Fair Trading (OFT)• OFT has personnel available to discuss performing RIA with
other parts of government
2727Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsUnited Kingdom – Sector Example: Telecommunications
UK Telecom regulatory review started in January 2004, had two consultations with public, and explored• Extent competition and/or regulation has delivered the goals of
lower prices, higher quality of service and wider choice for service providers and consumers
• UK consumers’ perspectives on those markets, including the value they place on different products and services
• Innovation and significance of emerging technologies as a driver of new opportunities for service providers and consumers
• Scope for effective competition at all levels in the telecommunications markets and the extent to which that competition is likely to be sustainable in the foreseeable future
2828Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsUnited Kingdom – Sector Example: Telecommunications
Result of review• Undertakings agreed with British Telecom to create a new
wholesale arm with functional separation, not ownership separation
• Strategic Review of Telecommunicationso http://www.ofcom.org.uk/static/telecoms_review/index.htm
2929Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsAustralia: National Competition Policy
Hilmer Report (1995)• http://ncp.ncc.gov.au/docs/Hilmer-001.pdf
National Competition Policy (NCP) reform program• Thoroughly review existing legislation and where possible,
revise to promote competitiono Identify those laws that have an impact on competition
o Over 50% of 1700 laws identified have been (or are being) reviewed
o Instills culture of rigorous justification for new business regulation
o Federal government pays states for quality of effort in revising regulations (0.1-0.2% of GDP used for incentive payments)
• Impacto Growth rate increased by 1-1.75%
30Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsMexico: Competitiveness Reforms
Ministry of Economy introduced reform program in 2008 Competition authority given
• Task of developing proposals in technical way, independent of political pressures
o Reviews any part of state regulation
• Competition authority prioritizes based ono Size of sector
o Likelihood of competition problem with regulation
o Importance of improvements to the poor
• Resources that allow contracting with leading academics to prepare reports
• Resources that allow staff expansion for performing reform reviews
31Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsMexico: Competitiveness Reforms
Process of preparing good reports takes time and resources• Reform is a marathon, not a sprint
Benefits already beginning to be felt• Unilateral passage of reform reducing tariffs and border barriers
to trade• Banking reforms diverted plan for price regulation to one that
improves structure of market
3232Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsSweden: Review of Competitive Restraints
Ministry of Economy asked competition authority to perform broad review of competitive restraints in economy in August 2008• Undertake broad review of competitive situation in Sweden• Propose ways of strengthening competition• Rank the proposals• Evaluate potential effects, economic implications and feasibility
Competition authority• Took task seriously, seeking outside comment• Produced report & recommendations in April 2009
http://www.konkurrensverket.se/upload/Filer/ENG/Publications/rap_2009-4_english_version.pdf
• 60 proposals
33Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsSweden: Recommendations – 1
Recommendations included• Complete integration of Nordic and North European electricity
markets and dissolve the joint ownership in electricity production
• Price-regulate district heating and consider exposing the market to competition
• Improve the customer mobility in the electricity market• Introduce more efficient rules for the distribution of radio
frequencies• Abolish the exclusive right of the Swedish State Railway (SJ
AB) in the profitable passenger rail transport services
34Vivek Ghosal. Competition Assessments and Policy Development.
Initiatives in ReviewsSweden: Recommendations – 1
Recommendations included• Implement freedom of establishment within the home help
services• Introduce clearer rules for public selling activities• Introduce regulation on state aid• Facilitate private customers switching banks• Facilitate comparisons within social services and health care
3535Vivek Ghosal. Competition Assessments and Policy Development.