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August 2, 2009

Competition and Commission

One of the alleged defects of capitalism is that it creates very large companies with market power, which if not checked by anti-trust laws or competition commissions, would soon become an exploitative monopoly. Therefore, in India we had the Monopolies and Restrictive Trade Practices Commission (MRTPC) created in 1969. The MRTPC set arbitrary quantitative limits on a company’s growth – for example, companies with assets more than Rs. 100 crores ($20 million presently) needed government permission to expand or start a new undertaking. In 1991, the most restrictive clauses of the MRTPC were rationalized but the need for “smarter” antitrust was still felt. Now the Competition Commission of India (CCI) is being staffed, as it supplants the “command and control” MRTPC. The CCI is admittedly better – the biggest improvement is that antitrust offences would be evaluated based on industry structure, and not just firm size. Therefore, whether a company’s turnover is huge or not now matters less than whether relatively it is a dominant player in its industry, and whether it is abusing its dominance in the eyes of the commission.

But antitrust has a fundamental defect – it is against the very essence of the rule of law. This is because whether an antitrust violation has been committed or not is not decided solely by pre-determined objective and quantitative criteria, despite pretensions to the contrary, but ultimately by bureaucrats according to their biases. This is so because anything can be, and is, labeled as anti-competitive – low prices are called predatory pricing, similar prices can be called price fixing, and high prices can be called price gouging! Since obviously all transactions would not be

punished, stating any objective criteria which would also not criminalize obviously innocent practices is very difficult to do. In fact, the quasi-jurisprudence of antitrust even has a “rule of reason” to decide such cases, which sounds eerily contradictory to the rule of law.

But a few antitrust cases do not violate the rule of law – for example, obvious price-fixing agreements which are declared “per se” illegal. Yet, even here it is not clear why all price-fixing arrangements are anti-competitive – for example, if a second and third biggest players fix prices to compete with the biggest player in an industry, competition could actually rise. In fact, that is often the basis of mergers and acquistions (M&As) – but while price fixing is scorned upon, a complete union is benignly looked at.

In fact, antitrust rarely works. What seems like “unfair practices” to technocrats often turn out to be economies of scale (the bigger the firm, the lower the average cost and in a market with even a few competitors, that means a lower selling price) or economies of scope (buying a car with a built-in audio system may be cheaper and more convenient for the customer).

Similarly, price gouging (or “unfairly” high prices) is necessary to ensure efficient allocation of scarce resources inter-temporally (if petrol pumps are forced to keep the same price when future supply is in question because of, say, a natural disaster, then the stocks would be quickly sold out and no petrol would be on the market – or more likely, it will now be in the underground market). Price-fixing, as mentioned above, can actually raise competition in many circumstances. Moreover, there is technically no such thing as a relevant “market” for a specific company. A butter producer might have a 70 percent market share in butter sales, but if the company does try to exploit its market power and raise prices, customers may shift towards margarine. Underestimating the true market choices of butter customers – and forcibly decreasing its price – will hurt the margarine industry, and force customers into a sub-optimal product-price choice.

In fact, Dr. Michael Sproul (CSUN) has “little doubt that in the great majority of cases antitrust prosecution does not lead to lower prices. In general, an indictment for price fixing results in slightly higher prices”. Indeed, with the spread of economic globalization, competition cannot be avoided by even the biggest firms – therefore, antitrust reorganizations and litigations do little excepting enriching lawyers and bankers. In many cases the artificially high market power that still exists is either because because of over-regulation (it is strange why unions are never  subjected to anti-trust) or trade barriers (which protect the industry against foreign competition) For example in India, protection can still be observed in products like pre-owned cars or services like law and finance. Hence Henry Havemeyer, president of the American Sugar Refining Company, observed more than a century ago that the “tariff is the mother of the trust”.

Even in supposedly blatant “market tying” cases like Microsoft trying to block out competitors of Internet Explorer what could have been demanded was simply that Microsoft should not block the installation of any other browser
on its operation system (OS). But the authorities wanted nothing less than the break up of the company! Yet in just a few years after that antitrust threat, the Schmupterian reality of “creative destruction” in the marketplace has caught up with Microsoft without any government policing.

Apple’s OS is eating away Microsoft’s share, and Google Chrome can be easily – and for free – downloaded from the Internet. Therefore, the costs of “market failure” are often exaggerated, but the costs of government failure are underplayed. For example, antitrust authorities are used by politicians to protect their political friends and to co-opt economic elites through antitrust threats. For example, Paul O’ Neill, CEO of Alcoa and later US Treasury Secretary engineered a global aluminum cartel yet he was shielded by US antitrust authorities, but in February 1996 a small-time seller of painted aluminum signs for gasoline stations was arrested for price-fixing.

In India too, the Jet-Sahara merger was unnecessarily rocked by MRTPC deliberations – any “abuse of dominance” is only possible if the companies were at least sustainably profitable (which Jet and Sahara were not).

Nevertheless, antritrust can be useful in a game-theoretic sense simply because other countries often hold the antitrust veto on many mergers and acquisitions between Indian firms and their firms. If an EU antitrust threatened any Indian takeover, a retaliatory threat against European MNCs could be conveyed. Hopefully threats would suffice to deter – because otherwise both economies would unnecessarily suffer. (This situation is very similar to trade policy where unilateral free trade is beneficial by itself but if protectionist threats can induce lowering of barriers in other
countries then the benefit is further increased). Somewhat similarly, antitrust can potentially be creatively used by developing countries like India to wage a rearguard battle against TRIPS (Trade Related Aspects of Intellectual Property Rights) at WTO to defend medical generics. Also, CCI can also be referred to by the judiciary in various disputes involving substantial natural resources regarding potentially anti-competitive effects – for example, in the current Reliance-KG Basin controversy. In fact, the CCI should be further broken up into units – one part serving as an“competition advocacy” internal think tank, one part serving as an independent tribunal so that the CCI can serve as a prosecutor and investigator, but not as a judge (so that company privacy can be maintained, and due process is
maintained).

That is, the CCI can be used to deter foreign antitrust action, and to create ideas about how to remove the adverse effects of state-granted monopolies. But to empower bureaucrats and politicians to pass judgments on all M&A activities beyond a certain size, all vertical integration efforts, and all marketing and sales promotions is to further increase crony capitalism and corruption in India. Ultimately what checks market power is competition – foreign or domestic – not competition commissions.


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