COMPETITION POLICY AND COMPETITION LAW

Presentation by

Nkonzo HlatshwayoPartner

Webber Wentzel Bowens

3 October 2007

Overview

• Consider the role of competition policy in fixing markets

• Competition law as an expression of policy choices made

• Policy choices are not cast in stone

• In some jurisdictions, issues not associated with competition policy may in fact have a close association with competition policy – public interests

Clear line of causality ...

• Competition in itself ensures all that is good -

efficiency, low prices, many products to choose

from, higher employment, increased welfare, greater

participation in world markets, equal playing field for

all ….

• Where does this causal link come from?

• Is it always true?

• Why do we need a law to ensure competition?

Origins of the “link”

• Adam Smith (“Wealth of Nations”) - the rational man

by minding only his own business will be led by “the

invisible hand” to promote the larger interest of

society.

• Introduced the concepts of “a market economy” and

free enterprise

• Neo-classical micro-economics: competition is the

engine of free enterprise

When competition works ...

• Numerous sellers, many buyers

• Must produce good quality products at acceptable

prices or be driven from the market

• Must be efficient and produce at lowest cost

• Only the best and the most efficient will survive in

the long run

But competition at times fails ...

• Government may suppress it

• Competition extinguishes itself (public utilities)

• Private participants subvert competition and prevent

market forces from operating freely

• Latter only possible if a firm has market power (it

can “make” prices)

Market structure and market power

• Market structure: number and relative size of

players in a market

• Perfect competition vs Monopoly (and everything in

between …)

• Market power = f(market structure)

• Monopolist is a price maker - market forces do not

determine the price

Perfect competitio

n

Perfect competitio

n

Monopolistic competition

Monopolistic competition OligopolyOligopoly MonopolyMonopoly

MANY FIRMS

ONE FIRM

• Number of sellers

• Product differentiation

• Barriers to entry

• Rival reactions

• Long-run profit greater than normal

Many Many Few One

None Yes Yes or NoUnique product

None None Yes Yes

None

No

None

No

Yes No

Possible Possible

Different market structures

Government’s options

• Do nothing - the market will correct itself (Chicago

School approach)

• Directly regulate the firm with monopoly

power (set prices, etc)

• Restore the vigour of competition through

competition/antitrust enforcement

Consensus on ...

• Competition is worth preserving

• Sometimes you need to be big to be efficient

• Big is not necessarily bad

• Nothing wrong with striving to be

“dominant” - it is what you do with your

dominance that matters

What is competition policy?

• As already indicated, the main reason for government’s involvement in the market place is that markets sometimes fail

• They do not produce the socially efficient quantities of goods at socially efficient prices

• As a result of such market failures, governments then intervene to improve market outcomes for consumers

• Governments sometimes use competition policy to support market based reforms

Competition policy as a catalyst

• In the past twenty years, many least developing countries, particularly those in Africa, have adopted market reforms that have been underpinned by competition policy.

• In many instances some of these reforms were prescribed by international aid agencies which insisted on the adoption of competition policy

• Competition policy has therefore been seen as a catalyst for market reforms

A competition friendly environment

• Often argued that when an environment is competition friendly, it attracts new entrants

• New entrants mean new investment, sometimes foreign investment

• Renders the country’s economy more efficient and therefore better able to remain competitive internationally

Competition is consumer friendly

• One of the key outcomes of competition enforcement is that consumers have product choices and competitive prices

• Markets work best in an environment where consumers set the standards and make demands.

• Greater consumer activism is an important element for competitive markets

What is competition policy?

• Competition policy is therefore a regulatory tool that is employed to address market failures by maintaining or creating the foundations for effective functioning markets

• Competition policy is aimed at emulating free market conditions

• In this connection, competition policy may require the establishment of regulatory institutions and procedures or legislation that will ensure equal opportunities for all businesses, stimulate economic efficiency and protect consumers

Key components of competition policy

• Economic policies aimed at enhancing competition in local and international markets

Trade policy Deregulation privatisation

• Competition law or anti-trust law

Competition law is therefore a sub-set of competition policy

South African experience

• Due to isolation, South Africa had a highly concentrated economy

• Many entities were not exposed to international competition

• A significant segment of the South African population had been excluded from economic participation by law

• South Africa’s own international competitiveness was doubtful given the fact that it had been isolated

Aims of SA’s competition policy

• The aims of South Africa’s competition policy are:• To promote and maintain competition in order to:

promote efficiency, adaptability and development

provide competitive prices and product choices

promote employment and advance welfare

expand opportunities for participation in world markets

ensure that small and medium-sized enterprises have an equitable

opportunity to participate

promote a greater spread of ownership (in particular in regard to

historically disadvantaged persons)

Common but unique

• Although some of these are common, they are at the same time uniquely South African –

International competitiveness

Promoting a greater spread of the economy to black South Africans

Employment

Barriers to the implementation of successful competition policy in Africa

• Conflict with other policy objectives

• Resistance from vested interests

• Lack of Good Governance

• Tension with sector specific regulators

What is competition law

• Competition law is a legislative approach to private as well as public concentration of economic power and the conduct that flows from this concentration

• Competition law governs both the nature and extent of competitive interaction among firms in all industries

• It is also the expression in legislative form of the countries’ competition policy

What is competition law?

• Competition law involves the enactment of laws and rules that are aimed at guaranteeing and maintaining a market where vigorous, yet fair, competition will result in the most efficient allocation of economic resources and the production of goods and services at the lowest price

• Its primary aim is therefore to create a level playing field where everyone can compete freely and fairly

Examples

• Public interest considerations in exemptions and mergers

The competitiveness of small firms and firms owned or controlled by historically disadvantaged South Africans

The impact of transactions on employment

Exemption if prohibited conduct would assist small firms or firms owned or controlled by historically disadvantaged South Africans to compete

The law reflects policy choices

• Dominance versus abuse of dominance

our law does not outlaw dominance: dominance in and of itself is not a problem

it outlaws abuse of dominance

conduct as opposed to structure (some constitutional issues)

Policy choices could be undermined

• Government often in a conflict situation

• The need to keep and maintain public entities that enjoy monopoly, on the one hand

• The need to introduce competition in those sectors, on the other

Sector specific interests

• Sector specific regulators often accused of industry capture

• Insistence on special rules for their regulation

• Immunity could compromise consistent application of competition principles

Examples: Telkom and banking

Reviewing policy choices

• After 8 years of enforcement, government is reviewing the policy choices

Review to deal with uncompetitive outcomes as opposed to anti-competitive conduct

Market surveillence powers for Commission

Power to investigate complex monopolies

Diverstitures

Structure versus conduct

• In the past conduct triggered investigation

• Proposed that structure should trigger investigation

• Pre-emptive versus reactive

• Pre-emptive to be twinned with merger control

Conclusion

• Competition is made up of the various policy choices that you make for purposes of promoting or maintaining competition in your country

• Competition law is the instrument you often use to implement your competition policy

• Competition policy could be undermined by new choices by government

• Government is often conflicted (Telkom, where government is a shareholder)