8/4/2019 Competition: What is it all about?

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P h i l i p p i n el n s t i t u t e ' f o rD e v e l o p m e n tS t u d e s

nfif Economic Issueof the D ay

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Competition:What s lt All About? whatiscompeCompetitions seen saDrocesshatallowssufficientnumber fproducersn he samemarket r industryoindependently fferdifferentways o satisfyconsumeremandsSince ompetitions oftenequated ith ivalry tpressuresirms obecome fflcientndoffera wider hoice foroductsndservicesoconsumerst lowerprices. competitiveeconomynablesindividualso exerciseeconomic reedomwherein onsumersreable o choose hat heyvaluemostandentrepreneurso choosewhereheywant oinvest, hecompetitionprocessllows onsumersandproducerso maketheirchoices,reeof anypriceixing onspiraciesandmonopolisticbullying.ssuch,consumerelfareincreases,esultingndynamic fficienrythroughnnovationndtechnologicalhange,:,1+K',1+

(First f twoparts)ompetit ionpolicy is a "fashionable" opic these days as we witness manydeveloping ountries nd economiesn transit ion egislateheir comPetit ionlaws.But what exactly s competit ion aw and policyand why doesa countryneed t? Is t rade iberal izat ion ot enough o ensure ompet i t ion?Would

competit ion ot lead o cutthroat ivalry hat eventually esults n the deathof domesticf i rmsand dominat ion y large i rms?

Before ne answers hesequestions, owever, ne irst needs o understandheconceptof competit ionwhich is explained n the sidebar.

It is important o recognize hat high levelsof marketconcentration s well asth e presence f monopolies a type of industrial tructurewhere here s only one argefirm) or oligopolies where hereare a few large irms) are not necessarily etrimentalto competit ion.Large irms may achievea dominantposit ion n the market throughlegitimate ay s ike nnovation, uperiorproduction r distributionmethods, r greaterentrepreneurial kil ls.For as long as markets emaincontestable herein entry nto amarket s easy,one can expect arge i rms in an ol igopol ist ic nvi ronment o actindependently r monopolies o behave n a competit ivemanner.

One may ask: how ca n there be competit ive rices f there s only one firm oronly a few firms in the market?The answer s that if entry is easy and co_stless,hepotential hreat from imports or domestic ompetitorswill make he incumbent irmsbehave ompetit ively. or nstance, s soon as onefirm or a group of firms attemPts oincrease ricesor Iowerquality rom the competit iveevels, new firm can come n toserve he market, herebydrivingpricesback o competit iveevels.Barrierso competitionCompetit ion, owever, an be essened ignif icantly y structural haracteristics,restrictive usiness ractices, nd government egulatory olicies, xamples f whichar e shown n Box l. Theseact as barriers o entry.Economies f scale s an exampleofa structuralbarrier . When there are increasing eturns o scale, here s a minimumsize hat f irms have o attain f they are o have heir average ostas low as possible.fthe minimum efficient cale s so large hat only one firm can serve he entiremarket,therewill be a monopolyas n the cases f publicuti l i t ies ike he distribution f water,electricity, nd piped gas.

Cartel rrangementsnd mergershat imitcompetit ion, eanwhile, reexamplesof behavioral haracteristics r restrictive usiness ractices whereasanti-dumpingan d investment icensing, mong others,are regulatorybarriers

8/4/2019 Competition: What is it all about?

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**ffimThe Economic ssue

of the Day is one of aseries f PIDSefforts ohelp n enlighteninghep u b l i c a n d o t h e rinterested artieson theconcepts ehind ertaineconom ic ssues . h i sdisseminationutlet imsto def ine ndexpla in,ns i m p l e a n d e a s y - t o -understanderms,basiceconomtc onceptsasthey relate o currentande v e r y d a y c o n o m i c s -relatedmatters.

Th i s / ssue waswritten by Ms. RafaelitaA.M, Aldaba,ResearchAssociate t he Institute.

Theviewsexpressedare hose f he author(s)and do not necessar i lyreflect hoseof PIDS..,i+i+ i(

Phil ipplnenstitutefor Development$tudlesNEDA a Makati uilding,106Amorsolo treetLegaspi illage, akatiCityTelephoneos: 924059and 935705Fa xNos: 939589

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Box Structural,iehavioral,nd egulatorYarrters0cntryStructural:baniers ue olelyo conditionsutsidehecontrol fmarket articipantsf, Sunk osts costshatafirmcannot void ywithdrawingrom hemarkeUheyarea sortof entryeeO Absoluteost dvantageaccesso naturalesourcerhumanesourcesI Economiesf scale unitcostof productionallswith ncreasingutputD Large apitalequirementsO Networkndustriesfirmshatarecompetitorshare ome riticalacilityike iansportationand elecommunicationsBehavioral:epresentbuse fdominantositionhererelativelyarge"irms ngagenanti-competitiveonduct rrestrictiveusinessracticesypreventingntryor orcing xitof competitorsthroughariousinds f monopolisticonductD ExcessapacityO Productifferentiationnd dvertisingD Horizontalestraintscartels r collusionprice-fixinggreements,arket haringerritorialarrangements,id igging),rice iscriminationfl Verticalestraints resale ricemaintenance,xclusiveealinSO Foreclosurend xclusionO Tacticso ncreaseivals'costsRegulatory: arriersmposedygovernmentoliciestr Specialermits,icenseo operate11 Regulatignlinfluencingheuse fsomenputsfl Tariffs, uotas,ndothernontariff arriersn Anti-dumpingnd ountervailingutiesO Discriminatoryxport racticesD ExclusionaryistsO OwnershiorestrictionsSource:Frameworkor heDesignndmplementationf Competitionaw ndPolicy,heWorld ankand heOrganisationorEconomico-operationndDevelopment,998.

Market power and abuseof dominanceTh epresence f barriers o entry mpedeg ompetit ion ndallows irms o acquire

andexercise arket ower.Market ower n turn enablesi rms, n i lateral lyin hecaseof a monopoly)or in collusionwith others as n cartels),o profitably aisepricesan dmaintain heseover a s ignif icant eriodof time without competit ive esPonse y otherexisting r potential irms.Marketpowergives ise o reduced utput,higherpricesan dpoorerqual i typroductswhich harm consumers nd otherproducers. hus,economicwelfare s adversely ffected.

For nstance, i th carte ls nd col lusion,he economic reedom f consumersan d potential ivals s taken away. Cartelsmakeconsumers elieve hat what they seeare ndependentffers.By raising rices nd restricting upply, owever,heydeliberatelyc rea t ea r t i f i c i a l ho r t ages ,esu l t i ng n goodsand se rv i ces ecom ing om p le t e l yunavai lableo some buyersand unnecessar i ly xpensiveor others.Theseoutputrestrictions ause nefficiency,educeproductivity, esult n economic nd socialharm,and hinderdevelopment .

Large irms may further ake advantage f their marketpower by abusing heirdominant osi t ion r monopol izat ion.heymay suppress ompet i t ion y rest r ict ing rforeclosinghe entryof smaller ivals hrough, or example,he ncrease f he competitors'costsof entering market r thecharging f predatory riceswhich harms he comPetit iveprocess. {*

COMPETITIO

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P h i l i p p i n eI n s t i t u t e f o rD e v e l o p m e n tS t u d i e s

nfiS Economic Issueof the D aY

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Competition Policy: Why Does lt whatiscompeMatter? (Secondf woparts)Competition olicyand aw: s t necessary?

Th e goal of competit ion olicy s to preserve nd promotecomPetit ionhroughth e prevention f restrictive usiness ractices y firms and through he correction finefficientovernmentegulations. ompetit ionolicyseekso achieve conomic fficiencyto maximize onsumerwelfare. t is consistent ith policies hat enhance ompetit ionnlocal and internationalmarkets ike the liberalized rade policy, elaxed oreigndirectinvestment nd ownership equirements, nd economicderegulation.

Compet i t ionol icy ncludes: l ) pol ic ieshat enhance ompet i t ionn domest icand nternational arkets, nd (2)a competit ionaW also eferredo as he anti-monopolyor anti-trust law. Anti-trust law is a clear set of enforceableegal ules applying ocommercia l act ics,behavior , nd t ransact ions y commercia l stabl ishments.t isdesigned o attain he objectives f competit ion olicy. t prohibits irms from attainingor exercising ubstantialmarketpowerobtained hrough mpropermeans. n this regard,said la w doesno t prosecute irms that havegainedmarket power through Iegitimatebehavior, .e.,skil l, oresight, nd hard work. It is more concerned it h the eliminationof abusivemonopolyconduct,price ixingand othercartels, ndwith the prohibit ionofmergers nd acquisit ionsha t Iimit competit ion. competit ion aw prevents he settingup of artif icialbarriers o entry and helps acil itatemarketaccess, nhance ompetit ionand ensure he flow of benefits o consumers.

After more han twenty yearsof trade iberalization,herestil l remains ariousimpedimentso ent ry in Phi l ippine ndust r ies hat cont inue o undermine he pro-competit ive ffects f mportcompetit ion.While rade iberalization ay bea preconditionfor the growth of a freemarket, t doesnot, by itself,guarantee ffective ompetit ion soutlined n Box l. Effective ompetit ion merges nly if trade eformsare accompaniedby the creationof competit ivemarketand industrystructures.n the presence f highbarr iers o ent ry, t is necessary o designsafeguardshat would ensuremarketcontestabil itynd egulate nti-competit iveusiness onductwhichca ndamage mergingcompetit ion.The ealities ndproblems

Promoting ompetit ion s a big challenge, specially ecause he benefitsar eIong erm and do not comewithout problems.Concerns boutopeningup the economyto o quickly o competit ion re understandable. omestic irms hat havehigh costsan dotherproblems ear hat theywould bewipedou t f eff icient oreign ompetitors er e oenter ightaway.Smalldomestic irms alsoworry that heywould not be able o compete

Competitions seen saprocesshat allowssufficientnumber fproducersn hesamemarket r industryoindependentlyofferdifferentways o satisfyconsumeremands.Since ompetitionsoftenequated ithrivalry tpressuresirms obecomefficient ndoffera wider hoice fproductsndservicesoconsumerst lowerprices. competitiveeconomy nablesindividualso exerciseeconomicfreedomwherein onsumersreable o choose hat heyvaluemostandentreDreneurso choosewhere heywant oinvest. hecompetitionprocessllows onsumersandproducerso make

theirchoices,reeof anypriceixing onspiraciesandmonopolisticbullying.ssuch,consumer elfareincreases,esultingndynamic fficiencythroughnnovationndtechnologicalhange.{+ }K rl+

8/4/2019 Competition: What is it all about?

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Affinmtfhe Economic ssue

of the Day is one of aseries f PIDS fforts ohelp n enlighteninghep u b l i c a n d o t h e rinterested artieson theconcepts ehind ertaineconom icssues . h i sdisseminationutlet im sto defineand explain,ns i m p l e a n d e a s y - t o -understanderms,basiceconomicconceptsasthey relate o currentande v e r y d a y c o n o m i c s -relatedmatters.

T h s /ssue waswrittenby Ms. RafaelitaA.M. Aldaba,ResearchAssociate t he Institute,

Theviewsexpressedare hose f theauthor(s)and do not necessar i lyreflect hoseof PIDS.

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Phil lppinenstitutefor Developnnent$tudiesNEDAa Makati uilding,10 6AmorsolotreetLegaspi illage, akatiCityTelephoneos : 924059an d8935705Fa xNos: 939589

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E c o n o m i c I s s u e o f t h e D a vJ u n e2 O O 1 V o l u m e l N u m b e r - COMPETITION OLICY

Box ' ] :When eregulat ionrrdiberal izat i rnr i l o l nouqh. . .[Whycompetition olieys necessary]O The ase f hederegulationf he elecommunicationsndustryrovidesconcretexamplefwhathappenshen ompetitionules re ague r acking. hileheentry fnew layersromptedthe PhilippineongDistanceelephoneompany,nc. PLDT)o launchts zerobacklogrogramninstallingoreelephoneines nd esultedn he ntroductionf arange f elecommunicationseruicesaswell spriceeductionsn nternationalalls,mobile hones,ndpagingervices,he nterconnectionofnewplayers ithdominantarrier LDT as low nddifficult.n elecommunications,pportunitiesforcompetitionanbe ealizednly f smoothnterconnectionmongariouselecommunicationservicesispossible.ince LDT as ble o exertmonopolyower ver ccessonetworks,t dictatedhepaceof interconnectionn he country.nterconnectionostswerehighand esultedn various onsumercomplaintsike nsuccessfulall ttemptsnd rrationalallingharges.O The ementndustryrovidesnothernterestingxamplehen rice eregulationnd mportliberalizationrenotenougho promoteompetition. aving history f a government-sponsoredcarteln he ndustry highweight-to-valueature, igh ransportationndhandlingosts hich ffernatural rotectiongainstmports lushe act hat here reno eal ubstitutesorcementlumbersmoreexpensive),he ndustry asable o engagen tacitpriceixingas t has ncreasedtspricescontinuouslyince 999na simultaneousanner midst situationf excessupply,vercapacity,ndweak emand.

wi th Iargebusiness ivals.Compet i t ion uts re lent less ressure n f i rms, oreignordomestic, o cut costs o be more competit ivewhich often ranslates nto lost obs.Allcount r ies xper ienceocia land economic isrupt ions hen local i rmsare unable ocompetewith foreignor new entrants hat have ower costs.Th e disruption s oftenhighestn developingountr ieshat ack rameworkawsand nst i tut ions ecessaryora wel l - funct ioning arket conomy. ompet i t ionol icy herefore hould ot andcannotbe seenas he answer o everysocia l nd economic roblem.Othermeasures uchasmarket etraining nd otherwelfaresupportsneed o accompany ompetit ion olicy oal leviate is locat ionsnd mi t igate he pain of adjustment .Whatshouldwe do?

In he ace f hechal lenges,hatshouldwe do andwhatpol icy i rect ion houldwe take?

In the ast wo decades,he Phi l ippinesasdonesubstant ia l conomiceformsin termsof deregulat ion,r ivat izat ion,nd he removal f unreasonableradebarr iers.Theadopt ion ndenforcementf a t ransparentompet i t ionaw andpol icy s necessaryto complement hese eforms.As indicatedby the exper ience f other count r ies,competit ion aw is the foundation or fostering ustainable ompetit ivemarkets.

In both Houses f Congress,hereare currentlymanyproposalsor an anti-trustla w and regulation nd he creation f a FairTradeCommission. he wo most mportanta r e H o u s e B i l l3 T 3 o r t h e F a i r T r a d e A c t o t l g g 4y C o n g r e s s m a n G e r a r d o E s p i n a a n dHouseBi l l 183or Fai rTradeAct of 1998by Congressmanolando r iones.With somemodifications,he enactment f these aws is the first step towards he creationan denforcement f new competit ion aws n the country.

Compet i t ionhould eviewed sa means ndnotan end n tsel f .Whi le ndust r ia lmarketstructure s an importantdeterminant f business onduct, he policyemphasisshould alwaysbe on economicefficiency ather han on size or market structurealone, t should e on businessonduct ,market owerandkeeping arkets ompet i t iveas well as on disciplining, henevernecessary, xercises f marketpower that reduce