Convincing Policymakers and Garnering Greater Support for Competition Reforms Frederic Jenny...

Convincing Policymakers and Garnering Greater Support for Competition Reforms

Frederic Jenny

Professor of Economics, ESSEC Business School

Chair OECD Competition Committee

Issues to be discussed

1) Competition Advocacy

2) Evaluation as a Competition Advocacy Tool

3) A growing demand for Evaluation

4) Different Tools of Evaluation

5) Methodological Difficulties of Evaluation

6) Examples of Evaluation Studies Showing the Benefit of Competition

7) Methodological Difficulties of Evaluations

8) Practical Difficulties of Evaluations

9) Building a Competition Culture: Dialogue with Policy makers

Competition Advocacy

In 2002 the International Competition Network published a report on Advocacy and Competition Policy, which built on earlier work and defined Competition Advocacy as:

“Competition Advocacy refers to those activities conducted by the competition authority related to the promotion of a competitive environment for economic activities by means of non-enforcement mechanisms, mainly through its relationships with other governmental entities and by increasing public awareness of the benefits of competition.”

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In any country, the building of a competition culture is a complex and long process. Undertaking this process is necessary, however, if countries are to reap the benefits of open and competitive market systems.

Having an appropriately designed competition law is a first step but in many countries the enforcement of the law is unsatisfactory due to a faulty institutional design of the competition authority, lack of experience of competition law enforcers or insufficient resources.

Effective enforcement of the law is not a sufficient condition to create a competitive market system.

Ex ante compliance with the law by economic actors is even more important than ex post elimination of anticompetitive behaviors by the competition authority.

The degree of ex ante compliance with the law will depend on a number of factors: knowledge of the law, deterrence of the law enforcement system, understanding of the value of competitive markets, social responsibility of firms, rationality of business decisions etc.

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Building a competition culture

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The ability of a competition law system to deliver its expected benefits in a country will also depend on the broader economic environment in which it operates. Its performance will depend on the robustness of the legal environment of business as well as on the degree of political consensus on the value of competition and on whether the industrial policy, trade policy or deregulation policy, etc. make it possible for the competition mechanism to expand to all markets or limit its scope.

Thus competition authorities have two very different functions: a competition law enforcement function and a competition advocacy function with the general public, consumers, the business community, government , academia , the press etc., to ensure the existence of an environment favorable to market competition.

One of the most important questions faced by competition authorities is how to be more effective in advocating for competition and building a competition culture. This question raises complex technical issues and institutional issues

Building a competition culture

Competition Policy System

Competition LawInstitutional Design of the Authority

Relationship with courtsCompetition Advocacy

Rule of LawElimination of Corruption

Liberalisation of International TradeInternational Competition

Privatization(Inefficient SOEs)

Deregulation(Assessment of

transitory conditions)

Industrial Policy Sectoral Regulation

Link with sectoral regulatorsand industrial policy makers

Promotion of a competition culture

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Consumer PolicyProperty Laws

Evaluation as an Advocacy Tool

As we have seen in the cases mentioned so far, by letting the public know the consumer benefits from competition law enforcement, the KFTC was able to receive public support for the competition law and policy and raise awareness among companies about anti-competitive practices.

In each case, the effects of law enforcement were traced and analysed through surveys and comparisons of market prices before and after the law violations. Changes in prices were also analysed chronologically for a certain period after the corrective measures were taken against the law-violating practices.

The results of analyses were made public through press releases and media coverage, which contributed to increasing support from citizens for the competition policies. The case of graphite electrodes, in particular, served as a motive for concluding various bilateral cooperation agreements for international cooperation.

Korean contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005




3) A Growing Demand for Evaluation







A Growing Demand to Assess the Effectiveness of Competition Policy

There are growing demands from outside competition agencies to develop and apply measures to test the effectiveness of competition policy. In an increasing number of jurisdictions, legislatures and other public bodies are initiating projects to evaluate the effects of competition policy programs or to analyse the efficiency of competition agency organisation and procedures.

(…) It is also apparent, however, that we are witnessing an increase in external demands for the measurement of competition policy systems and the quality of operations of individual competition agencies.

(…) For competition agencies (and for other public bodies), it is becoming increasingly evident that legislatures will not be satisfied with general, undocumented assurances that the enactment and implementation of competition laws deliver good results for society. Korea’s intervention during the Roundtable provides one example of how an agency can use ex post evaluation of effects (in Korea’s case, the effects of enforcement against cartels) to show how the implementation of a competition law can improve the well-being of consumers.

OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Fancy Theoretical Model Is Not Enough

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Having a Good Story to Tell:Exploitatice Practices

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Different Tools of Evaluation

Analytically it seems that most evaluation methods fall into one of three broad categories.

First, competition enforcement at one authority can be bench-marked against other similar authorities, or compared over time.

Second, the effectiveness of competition enforcement can be measured by evaluating the quality of individual decisions or of decisions in general.

Third, competition enforcement can be evaluated by studying the impact of regulatory interventions on the functioning of the market.

In its efforts to evaluate the effectiveness and efficiency of its enforcement, the Swedish Competition Authority has used methods from all three categories.

US contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Assessing the Impact of Competition Policy

Ultimately, what is most interesting is the effect of competition policy (law as well as enforcement) on the efficiency of the economy at large and its ability to increase consumer welfare. There are two principal ways to address such an issue. One can be labelled a top-down strategy and he other a bottom-up strategy.

A top-down strategy would look at the whole of the economy and then try to infer the benefits that accrue from competition law and enforcement, for instance by comparing markets or countries which are subject to different forms of competition rules, or by comparing the same country over time, in order to identify the effect of policy reforms.

A bottom-up strategy would look at individual cases, and then estimating the effect of all decisions.

Swedish contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Sectoral Studies

Sectoral studies can provide informative perspectives on how competition policy affects economic performance.

Sectoral studies provide opportunities for a competition agency to evaluate how the application of its various policy instruments (notably, the prosecution of cases and the pursuit of advocacy measures) has affected the performance of the sectors.

Compared to the examination of specific interventions, a sectoral study permits the evaluation team to examine broader trends within the sector and attempt to relate the competition authority’s interventions over time to developments in the sector.

OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Methodology of Evaluation of antitrust legislative instruments: Use of Survey Methods in the EU

The survey methods used when gathering information from stakeholders have been mainly questionnaires and interviews. We have either sent the questionnaires directly to interested parties that we have identified ourselves or we have launched the questionnaires at the Commission web-site (or used the combination of both ways).

In each review process, relevant empirical information has also been provided by our experience with the enforcement of the rules and as a result of complaints we have received from customers or consumers concerning the types of business practices that we were reviewing.

Second, in addition to empirical data collection, a major part of the exercise has consisted of a review and analysis of relevant economic and legal theories. We have also carried out comparisons of policies and practices in different jurisdictions. The competition authorities of the EU Member States and of some third countries have also provided information on their practices.

EU contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Methodology of Evaluation of Antitrust Legislative Instruments and Policy Programmes in the EU

(…) Our experience is that interviews and questionnaires give a wide enough representation of views and information existing in the market for the purposes of revision proposals. Particularly in the interviews, we have tried to have a wide geographic and/or sector coverage for the samples we have made.

With the publication of the evaluation reports and invitations to the interested parties to comment in writing and in public hearings, we have sought to get further feed-back from the interested parties.

Sometimes we have explicitly asked to comment on the results of our fact finding, particularly if the interested parties felt that the geographic or sector sample was not representative.

We have also commissioned external economic and statistical studies to complement our own fact finding.


Hearings and Workshops as Evaluation ToolsHearings and workshops also can be powerful policy development tools. They allow the Agencies to bring together experts from business, government, law, and academia to engage in in-depth analyses of competition issues, including support for and criticism of the Agencies’ previous actions and views. The following are several examples of how the Agencies have deployed these tools to help evaluate the effectiveness of their enforcement programs:

In 2002, the DOJ and FTC held joint hearings entitled Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy.

In October 2003, the FTC issued a report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,

The FTC held a workshop on health care competition in 2002, and in 2003, the DOJ and FTC held 27 days of joint hearings to examine the state of the health care marketplace and the role of competition, antitrust, and consumer protection in providing high-quality, cost-effective health care

US contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Study Demonstrating the Benefits of Introducing Competition in a Number of Sectors

In 2004 the Department of Trade and Industry published a study it had commissioned from academics at the University of East Anglia1 which assessed the benefits resulting from the introduction of competition in a number of sectors where previously competition had been muted.

Using a case study approach, the research evaluated policies promoting sectoral liberalisations and deregulation, in addition to competition interventions by the OFT and the Competition Commission. These interventions and policy changes were assessed against the policy objectives of removing market imperfections and thereby reducing prices for consumers.

The report found that the introduction of competition can sometimes lead to substantial reductions in price. For both international telephone calls, which were deregulated in the UK, and European economy airfares, which were affected by the liberalisation of the sector across the European Union, average price was more than halved within a decade of the intervention.

British contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

2.1 DTI Study: The Benefits of Competition

Prices of new cars fell by around ten per cent following an investigation by the Competition Commission and in the market for replica football shirts, prices fell on average by 15 per cent following the OFT’s intervention on price fixing. In the latter case, the report found that the outcome vindicated the changes to the competition regime brought about by the introduction of the Competition Act 1998. However, in two of the sectors examined (book sellers and retail opticians) the results were not conclusive.

The report also illustrates that introducing competition into a market can promote innovation, for example the new business model introduced by budget airlines. Assessing innovation ex-ante is unpredictable, but the benefits derived highlight that introducing competition can have wider benefits than simply lowering prices. Overall, the study found little conclusive evidence of any harmful side effects as a consequence of the policy intervention and showed, in general, that the competition policies had been a success.


Study Demonstrating the Benefits of Introducing Competition in a Number of Sectors

The PwC Economics Report on Ex-Post Evaluation of Mergers in the UK

PwC were asked to carry out an ex-post evaluation of mergers occurring between 1990 and 2002, which following consideration by the OFT, had been referred by the Secretary of State for Trade and Industry to the CC and subsequently cleared by the CC.

The PwC study aimed to determine the actual impact on competition of cleared mergers, set against the CC’s expectation that the mergers would not lead to a substantial lessening of competition. More specifically the key areas under examination were:

• whether the CC was correct in its beliefs that mergers would not impede competition;• when mergers were not anti-competitive, whether this was for the reasons indicated by the CC in its rationales for clearance; and• when there was a lessening of competition, how markets responded.

And more generally the study aimed to elucidate how markets adjust to significant increases in concentration


The PwC Economics Report on Ex-Post Evaluation of Mergers in the UK

PwC’s approach was to conduct in-depth interviews with different market participants (buyers, competitors, new entrants, third parties and the merged parties themselves). Buyers eventually constituted the largest group of interviewees because they were felt to be in the best position to interpret whether markets were working well, and because buyer power was among the reasons most frequently cited by the CC for clearing mergers. The interviews sought to ascertain participants’ views on market developments both immediately following the mergers and in the longer run, in terms of key indicators of competition (prices; market structure and definition; technology; and changes in buyers’ behaviours), rather than asking them whether they felt the CC got it right. These views were compared to a detailed evaluation of the factors that the CC’s own reports cited as being critical in its decision to clear the merger. If, for example, the CC had noted low barriers to entry as an important source of competitive constraint, PwC would assess whether substantial entry had occurred.Thus the evaluation of each case actually contained many separate assessments of how accurately the CC’s analysis was borne out by subsequent market developments.


Methodological Difficulties with Top-Down and Bottom-up Evaluations

There are, of course, grave methodological problems with both approaches.

The problem with a top-down strategy is to isolate the effect of competition policy from other factors that influence welfare and economic growth.

The problem with a bottom-up strategy is that the most important effect of competition policy is that it serves to make market actors abstain from anti-competitive actions in the first place. If competition rules and enforcement is effective, firms will not enter into cartel agreements or attempt to abuse dominant positions, and they may not even try to get approval for anti-competitive mergers.

Swedish contribution, OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Methodological Difficulties of Competition Evaluations

Considerable work remains to be done to refine the methodologies used to evaluate the effectiveness of completed competition policy interventions.

(…)Perhaps the greatest difficulty posed to date is to devise analytical models that permit the evaluation team to draw confident conclusions about how the competition agency’s intervention, as opposed to other factors, affected economic performance.

Even when the evaluation team has devised a sound analytical model, the process of collecting and analysing data can be time consuming and involve nontrivial costs. Despite methodological difficulties, competition agencies have made informative efforts to link specific interventions to changes in the economic environment.

,OECD Competition Committee Roundtable on Evaluation of the Actions and Resources of the Competition Authorities, 2005

Methodological difficulties Encountered in the EU Merger Remedies Study

The principal methodological difficulties encountered can be summarised as follows

1.Comparison of actual market developments with counter-factual scenariosof what would have happened without the remedy or without the merger. Ourresponse to this challenge: construction of the most likely scenarios with the help ofthe interviewed experts.

2. Objectivity of replies in interviews. Our response to this challenge: comparisons of replies of different interviewees concerning the same remedy and verification/double-checking with data from other sources.

3. Availability of quantitative data. Our response to this challenge: in relation to a number of remedies, additional fact-finding efforts were made, in particular via questionnaires sent out to companies to collect quantitative data.









7) Building a Competition Culture: Dialogue with Policy Makers

Economic Rationality and Political Rationality Aligned

The UK Government recognises the importance of developing policy based on detailed evidence and the necessity of conducting full evaluation of a policy’s impact after it has come into effect.

This is reflected in the Modernising Government White Paper (1999) commitments to ensure that all policies are subject to ex-ante appraisal and ex-post evaluation in an explicit effort to ensure that genuinely evidencebasedpolicies are created.

Evaluation is particularly important as it allows the success of the policy to be assessed, any unintended consequences of the policy to be observed, and provides evidence and information to support any changes necessary to ensure the policy comes closer to meeting its objectives.


Reasons for the Economic Perspective and the Political perspective Not to Be Aligned

Reasons for which politicians may not support an effective competition regime

1)They may be mostly interested in macro-policies ( employment, productivity, growth, innovation etc….) and consider a competition regime as a secondary determinant of macro-economic performance ( as opposed to trade policy, industrial policy, the rule of law etc…..)

2)They may have different discount rates than economists and favor policies having short term, domestic and regional benefits such as industrial policiy or government interventions in market mechanisms ( due to concern for their reelection) rather than policies having long term benefits ( like competition policy) and short run costs.

3)They may care about the welfare of the constituency they represent rather than the overall welfare ( and therefore they may be captured by specific groups)

Reasons for the Economic Perspective and the Political perspective Not to Be Aligned

Reasons for which politicians may not support an effective competition regime

4) They may weigh differently consumer surplus and producer surplus

5) They may not understand economics

6) They may not trust economic analysis

Conclusion

1) After twenty years of rapid development of competition law throughout the world , there is a growing need for independent evaluations of the effectiveness of competition policy systems to make the case for competition both in developing countries and in developed countries ( ex OECD evaluation program)

2) A number of possible focuses for such evaluations (impact of specific actions by competition authorities, effectiveness of pro market reforms in some sectors, contribution of competition policy to growth, productivity etc…)

3) Different instruments to evaluate the impact of competition law or policy (econometric models, comparisons with a benchmark sector or period, surveys, peer review etc…..).

Conclusion

4) Methodological difficulties due to the difficulty of sorting out the influence numerous determinants of competition and of market performances and to the difficulty of gathering good and relevant data should not be under estimated and should be explicitly acknowledeged

5) Benefits of such evaluation are 1) to help competition authorities know how to do a better job, 2) to make the case for competition with policy makers if their incentives are aligned with the incentives of competition authorities, 3) to establish a convincing case with the public ( Australian experience)

Convincing Policymakers and Garnering Greater Support for Competition Reforms Frederic Jenny...

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