COMPETITION LAW PRESENTATION FOR ACADEMIA 2016
AHMED QADIRDirector General
Competition Commission of Pakistan
“Although about two-thirds of the world’s grossdomestic product (GDP) is driven by
consumers, yet they are often not given the recognition and the importance they deserve, which
often sees them being subjected to anti-competitive behaviour by a
powerful network of businesseswhich controls capital.”
Dr MUKHISA KITUYI, Secretary General, UNITED NATIONAL CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD); Biennial Competition, Regulation & Development Conference, Nairobi, Kenya, 12 December
2015
“The corrupt version of capitalism—when powerful
corporations deliberately try to eliminatehealthy competition to preserve their
privileged position—generates economicinefficiencies and social injustice,
thereby undermining political support
for the free-market based system….”
(RAJAN & ZINGALES, THE ROAD TO PROSPERITY: SAVING CAPITALISM FROM
CAPITALISTS, Transition Newsletter, 2003)
An important point
■Often Competition Policy and
Competition Law used interchangeably
■There is a difference between the two…
Competition policy: the bigger picture
COMPETITION REFORMS
Promoting Competition
Curbing Anti-competitive
Practices (ACP)
COMPETITION POLICY
COMPETITION LAW
Some Commonly Observed Characteristics of Developing Economies
■ that tend to reinforce each other:
– High levels of ownership and concentration
– ‘Missing middle-sized firms (large, SMEs)
– Conglomeration
– Corporate management and control challenges
– Underdeveloped financial markets (e.g., debt-equity)
– Close government-business relations/connections
Domestic Competition & International Competitiveness■ Michael Porter, THE COMPETITIVE ADVANTAGE
OF NATIONS (1990):“Few roles of government are more important to the upgrading of an economy than ensuring vigorous domestic rivalry. Rivalry at home is not only uniquely important to fostering innovation but benefits national industry…..In fact, creating a dominant domestic competitor rarely results in international competitive
advantage. Firms that do not have to compete at
home rarely succeed abroad. Economies of scale are best gained through selling globally, not through dominating the home market” (pg 662).
What Constitutes Effective Competition Policy ?
■ Anything that fosters inter-firm rivalry and entry by
– Preventing anti-competitive practices and … Promoting competition
– Enacting Competition (antitrust) Law to address both public policies and private sector restrictive business practices that impede competition
■ Specialised Agency(ies)
Protecting competition: Competition law
Joseph Stiglitz (2001)
Competition is the basis of a dynamic market economy. Yet, as Adam Smith recognized, firms inevitably seek to restrict it: more profits can be made by creating a monopoly rather than through better products… So government must “set the rules of the game” to maintain a fair playing field, and vibrant competition.
Adam Smith: conspiracy against the public
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public…” wrote Adam Smith in 1776.
COMPETITION NEEDS TO BE Safeguarded and Sustained■ Competition is not automatic
■ Competition can be distorted by public policies and restrictive business practices.
■ Public policy often manipulated by various interest
groups including private sector firms
■ This entrenches anti-competitive business practices and policies
■ Discourages both domestic and foreign investment
COMPETITION LAW■ Establishes a Competition
authority to ensure implementation of the law.
■ Controls:– Dominant firms’ behaviour– Mergers and acquisitions
which might result in monopoly or dominant firms
■ Disallows anti-competitiveagreements:– Cartel agreements– Collusive tendering– Price fixing
ANTI-COMPETITIVE
PRACTICESANTI-
COMPETITIVE AGREEMENTS
ABUSE OF DOMINANT
POSITION
COMPETITION COMMISSION of Pakistan (CCp)
An independent body established under §12 to enforce the COMPETITION ACT, 2010.
Main roles include:
•Advocacy•Market analysis•Policy Notes
•Investigation & Enforcement•Exemptions•Mergers and Acquisitions• Compliance & Leniency
Dominance…and its abuse
DOMINANT POSITION
■ A situation in which one or more enterprises possess such significant market power to adjust prices, outputs or trading termswithout effective constraint from competitors
■ Company with market share under 30% is not dominant
■ Company market share of more than 40% is generally considered dominant
■ Between 30% and 40%, question of dominance depends on other factors, e.g.,
– General competitive outlook of market structure imports, tariffs, etc.– Number of competitors in market
■ Market share over 50%: there is a rebuttable presumption that it has the ability to behave independently of its customers, competitors and consumers.
ABUSE OF Dominance
■ §3 of the COMPETITION ACT 2010
– An enterprise is prohibited from engaging, whether independently or collectively, in any conduct which amounts to an abuse of a dominant position in any market for goods or services.
■ Types of abuse
– Exploitative
– Exclusionary
ABUSE OFDOMINANTPOSITION
Unfair purchase or selling prices
or unfair trading conditions
Limiting or Controlling
supply
Refusing to supply
Applying different
conditions Predatory behaviour
Excessivepricing
Abuse of Dominant Position
Limiting or controlling
supply
Refusing to deal
Predatory behaviour
Excessive pricing
Applying different
conditions
Unfair purchase/selli
ng prices or unfair trading
conditions
Market Dominance Red Flags (1)
■ Red Flag: Tying
– tying and bundling are often intended to provide customers with better products more cost effectively.
– But when an undertaking ties a product from one market (tied product) to a product that is dominant in a different market (tying product), the potential for anti-competitive behaviour arises, so…
– A dominant company may not make sale of one product conditional on purchase of another unless objectively justified
– Tying is prohibited even when apparently beneficial to consumers
■ Red Flag: Loyalty Discounts
– Dominant company may not offer its customers special discounts to discourage alternatives (promotes inefficiency)
– Any discount arrangement must be based on fair grounds
Market Dominance Red Flags (2)
■ Red Flag: Exclusivity– Dominant company may not force customers to purchase
all/most of their requirements from it
■ Red Flag: Refusal To Supply– Dominant company must supply everyone, absent non-
discriminatory and objectively justified criteria for it not to do so
– This applies to supplying competitors also
■ Red Flag: Long-Term Agreements– Dominant company’s entrance into long-term, no-
termination contracts can be abuse of dominance
Market Dominance Red Flags (3)
■ Red Flag: Discriminatory Business Terms
– Dominant company may not discriminate amongst customers, absent fair and objectively justified grounds
■ Red Flag: Predatory Pricing
– Dominant company may not sell products at prices below cost to drive competitors out of business (create a monopoly position)
■ Red Flag: “Restrictive Clauses"
– Agreement between dominant company and customer: customer will not accept offer from another supplier until dominant company has declined to match it
27 December 2016
ABUSE OF Dominance
■ Conduct otherwise seen as ABUSE and therefore prohibited may be allowed if there are reasonable commercial justifications
or represents a reasonable commercial
response to the market entry or market conduct of a competitor.
■ The law allows a reasoned approach to making this determination
Prohibited agreements
Prohibited agreements
■§4 of the COMPETITION ACT 2010– A HORIZONTAL or VERTICAL AGREEMENT (there has to be an
agreement, decision or concerted practice) between ENTERPRISES
(must involve more than one undertaking) is prohibited insofar as the agreement has the OBJECT or EFFECT of SIGNIFICANTLY preventing, restricting or distorting competition in any MARKET for goods or services.
HORIZONTAL AGREEMENTS
Agreement(s) between enterprises all of which operate at the same level in the production or
distribution chain
PRODUCTION LEVEL
e.g., between chicken producers
between sugar manufacturers
DISTRIBUTION CHAIN
e.g., between retailers
between wholesalers
VERTICAL AGREEMENTS
Agreement(s) between enterprises each of which operate at a different level in the production or
distribution chain
MANUFACTURERMANUFACTURER
WHOLESALERWHOLESALER
RETAILERRETAILER
VERTICAL AGREEMENT
VERTICAL AGREEMENT
Prohibited Agreements = Cartels
■ Cartel: An agreement between competing firms designed to limit or eliminate competition between them
■ Cartels are harmful because they enable participants to charge higher prices than in competitive market
■ Cartels are most serious infringement of all competition laws
■ Cartel behaviour can lead to extremely high fines and criminal sanctions
■ Most common types of cartel-like behaviour are…
ANTI-COMPETITIVE AGREEMENTS
Price-fixingLimiting or Controlling
output
Bid Rigging
Market Sharing
Red Flag: Price-Fixing
■ Agreement between competitors on pricing is almost always illegal
■ Price-fixing is prohibited in both horizontal and vertical relationships
■ Agreement between competitors to set minimumprices is blatant price-fixing
■ Indirect agreements may also be illegal, e.g., to –– Comparing price lists before publication– Exchanging detailed information on each other’s
production costs– Agree on any other term of sale
Red Flag: Resale Price Maintenance
■ Agreement between suppliers and distributors and/or retailers on how much they may charge their customers
■ Setting recommended prices or maximum sales prices is generally not illegal if manufacturer allows distributor/retailer to determine price
ANTI-COMPETITIVE AGREEMENTS
Price-fixingLimiting or Controlling
output
Bid Rigging
Market Sharing
Red Flag: Limiting or controlling Output■ Cartel may enable price increases (or prevent
reductions) by restricting production (what happens under OPEC?)
■ Agreements typically involve quota system of output allocations e.g., certain amount or percentage
■ One company may agree to stop producing oneproduct in exchange for other company stopping production of another product
■ These agreements are serious violations and not likely to get an exemption
ANTI-COMPETITIVE AGREEMENTS
Price-fixingLimiting or Controlling
output
Bid Rigging
Market Sharing
Red Flag: Bid-Rigging
■ Bid-rigging: Agreement amongst competitors to collaborate over their response to invitations to tender
■ Typically, colluding companies agree which
company will win current tender
■ Next time there is a tender, another company will win, etc.
■ Bid-rigging is a very serious cartel offense
ANTI-COMPETITIVE AGREEMENTS
Price-fixingLimiting or Controlling
output
Bid Rigging
Market Sharing
Red Flag: Market-Sharing
■ Agreement between competitors to divide up customers or geographical areas where they will not compete against each other
■ An agreement to limit one competitor’s attempts to make sales in certain markets is almost certain to be illegal
■ Market-sharing is particularly serious because nationally it isolates geographical markets and internationally, hinders integration of countries into a single markets or trading blocs
– ASEAN made competition law a requirement for its 15 member countries by 2015
Red Flag: Market-Partitioning
■ Market-sharing agreements between competitors are illegal - horizontal
■ Market-sharing agreements may also be vertical
– i.e., between suppliers and their distributors
■ Producers may restrict distributors from selling outside an allocated territory
■ Producers may not prevent distributors from responding to unsolicited orders from customers outside designated territory
ANTI-COMPETITIVE AGREEMENTS
Price-fixingLimiting or Controlling
output
Bid Rigging
Market Sharing
Sharing Information
Red Flag: Information-Sharing■ Competitors sometimes agree to exchange or share information
■ Some information-sharing is legal and enhances competition
■ Sharing confidential business information is serious violation, e.g.,
– Information on prices, rebates, and other price-related information
– Production or distribution costs
– Forecast capacity
– Investment plans
■ Content of information is the decisivefactor – not medium of exchange
Exemptions
■ Can be given to
– Some possible anti-competitive agreements could have significant identifiable technological, efficiency, or social benefits but
– Benefits could not be provided without the anti-competitive agreement and
– The detrimental effect of the agreement is proportionate to the benefits and
– Competition is not eliminated completely
Mergers & Acquisitions
Mergers and Acquisitions
■ §11 of the COMPETITION ACT 2010
– Allows the Commission to review any merger or acquisition that could affect competition in the market by creating or strengthening a dominant position.
Merger Analysis: A Taxonomy
■ HORIZONTAL mergers– Mergers between producers of substitutes, i.e. products /
services within the same relevant market, e.g., two brands of toothpaste, two mobile network operators, two grocery stores or clinics (in the same geographic market)
■ VERTICAL mergers– Mergers between producers of complements, i.e., products /
services are “inputs” to one another, e.g., manufacturer and distributor, petrol producer and fuel retailer, coffee plantation and coffee manufacturer
■ CONGLOMERATE mergers– Mergers between producers of competitively unrelated
products e.g., cars and washing machines
Merger Analysis: Horizontal Mergers
■ Pro-competitive effects of horizontal mergers– displacement of ineffective management– realisation of savings through the elimination of fixed costs– realisation of savings through the reduction of variable costs
■ Anti-competitive effects of horizontal mergers– Unilateral effects (non-co-ordinated effects): the creation of market
circumstances that permit the merged firm to raise the price of some or all of its products / services (or otherwise compete less effectively, e.g. in terms of range, quality or service), without any change in the nature of competition
– Co-ordinated effects: the creation of market circumstances that change the nature of competition such that the merged firm and its rivals are able to tacitly coordinate their actions in order to compete less intensively
Merger Analysis: The Basics
■ If a merger does not create, protect, or enhance market power, it should be cleared
■ Market power: “the ability profitably to sustain prices above competitive levels” where “competitive constraints” are not effective
– Competitive constraints■ Existing competition: firms already in the market (effectiveness gauged by, among other
things, market shares, barriers to expansion) ■ Potential competition: firms that may enter the market and prevent exercise of market
power (effectiveness gauged by entry barriers)■ Buyerpower: credible threats to switch to new suppliers or sponsor entry and growth (but
do all customers have this threat?)
■ With mergers, the issue is whether prices (or, quality adjusted prices) would rise relative to the “counterfactual”, i.e., the level that would otherwise have occurred absent the merger
Approval of Mergers
■Big mergers have to be reported for
clearance
■ Mergers that would substantially lessen
competition are prohibited
■ Mergers to near monopolies rarelyallowed globally
Promoting competition
COMPETITION COMMISSION of Pakistan (CCp)
§12: An independent body established to enforce the COMPETITION ACT, 2010.
Main roles include:
Advocacy Market analysis Policy Notes
Investigation & Enforcement Exemptions Mergers and Acquisitions Compliance & Leniency
Conducting research [§28]
Market Studies
State of Competition Report
Advocating for competition [§29]
Outreach
Opinions
Policy Notes
Increase acceptability of
the law
Make legislation and policies pro-
competitive
Encouraging compliance
To conclude…
Changing economic landscape
Economies have changed from when competition laws were crafted in the late 19th and early 20th century
We are now in the Information age: primary currency is intellectual
property and data (land, labour, capital)
Being Data Rich…and data poor will matter
“A billion hours ago, modern homo sapiens emerged.
A billion minutes ago, Christianity began.
A billion seconds ago, the IBM PC was released.
A billion Google searches ago … was this morning.” HAL VARIAN, GOOGLE
Globalisation, Competition Policy, and competition law –Trade-offs
globalisationhas created
challenges for competition
enforcement. Consider this:
• Should government permit mergers, or joint ventures if they reduce competition, but enhance the ability of domestic businesses to compete internationally?
• Should government move to break up monopolies, if the global marketplace for the products offered is highly competitive?
• Should regulators enforce competition laws against foreign
companies if they operate subsidiaries within their borders?
• What steps can governments take to create a level playing field, so that corporations operate under a common set of competition rules and regulations wherever they do business?
Strengthening the regulatory regime
■ Effective regulation is critical to making markets work for people and promoting health, safety and fairness.
■ Since 2000, growing amount of regulation e.g., anti-money laundering, banks and consumer financial protection, securities market, telecommunications, electronic media…
■ The Commission must not only be a market regulator(enforcement) but a market developer (compliance) also
■ Our economic future depends on the [right] policychoices we make
Making Pakistancompetitive
better is
everybody's jobTHANK YOU