Competition Assessments and Regulatory Policy Development Vivek Ghosal Georgia Institute of Technology Atlanta, GA, USA CUTS-CIRC Conference on Economic.

Competition Assessments and Regulatory Policy Development

Vivek GhosalGeorgia Institute of Technology

Atlanta, GA, USA

CUTS-CIRC Conference on Economic RegulationNew Delhi, April 2011

Incorporating Competition Assessments into Regulatory Impact and Analysis

2Vivek Ghosal. Competition Assessments and Policy Development.

Impacts on Competition and Innovation

Regulation can have substantial impacts on competition and innovation, even when aimed at other policy objectives. E.g.,• Regulation may require one company to provide a service (and

prevent other companies from providing that service)• Regulations may differ across geographic areas, or between

companies that perform similar functions but have a different legal status (e.g. banks vs. savings and loans)

• Regulation may limit entry by new firms (e.g. by requiring a license that becomes an artificial barrier to entry)

• Regulation may result in asymmetric distribution of cost burden across firms – as may occur with setting of various types of standards


Regulation Impacts can be Harmful

In the absence of considerations of competition and innovation impacts, rules and regulations may• Weaken incentives for cost control and innovation• Introduce regulatory risk• Lead to captured regulators• Lead to direct regulatory costs for the government and the firms• Restrict consumer choice• Distort market prices• Unduly limit product variety• Limit advertising and marketing• Create entry and mobility barriers


Pro-competition Pro-Innovation Reforms are Economically Beneficial Decreases in prices – many examples worldwide

o After US deregulation, prices for long distance telephone calls, airlines, trucking and rail fell at least 25% and sometimes up to 50%

o Consumer benefits of $19.4b in airline industry, $19.6b in trucking, $9.1b in railways

Increase in productivityo Australia productivity growth increased by 1-1.75 percentage pointso Shipping port operations (Argentina, Brazil)

Greater quantity: e.g., new airline routes and more flights per route Greater variety: e.g., in grocery stores; pharmacies Modernization investments: e.g., in shipping fleet (Philippines) Changes in managerial and organizational structures: e.g., retail grocery

and superstore operations Better quality: e.g., better/more in-flight services in airlines (New

Zealand)


Developing an Assessment ScreenScreen Question 1

Does the rule or regulation limit the number or range of suppliers?

This could arise, for example, if a regulation1. Grants exclusive rights for a company to supply goods or

services

2. Establishes a license, permit or authorization process as a requirement for operation

3. Limits the ability of some suppliers to provide a good or service

4. Significantly raises cost of entry or exit by a supplier

5. Creates a geographic barrier to the ability of companies to supply goods or services, invest capital or supply labor


Developing an Assessment Screen Screen Question 2

Does the rule or regulation limit the ability of suppliers to compete?

This could arise, for example, if a regulation1. Controls or substantially influences the prices for goods or

services2. Limits freedom of suppliers to advertise or market their goods or

services3. Sets standards for product quality that provide an advantage to

some suppliers over others or that are above the level that many well-informed customers would choose

4. Significantly raises costs of production for some suppliers relative to others (especially by treating incumbents differently from new entrants)



Does the rule or regulation reduce the incentive of suppliers to compete?

This could arise, for example, if a regulation1. Creates a self-regulatory or co-regulatory regime

2. Requires or encourages information on supplier outputs, prices, sales or costs to be published

3. Exempts the activity of a particular industry or group of suppliers from the operation of general competition law



Does the rule or regulation limit the choices and information available to customers?

This could arise, for example, if a regulation1. Limits the choices that a consumer can make

2. Reduces mobility of customers between suppliers of goods or services by increasing the explicit or implicit costs of changing suppliers

3. Limits useful and relevant information available to customers


Spread of Competition Assessments as Integral Part of Regulatory Reform

Over 25 countries have used/use competition assessments in some way, including• Australia• Brazil• European Union• Korea• Mexico• Taiwan• United Kingdom• Among others …


Process Options for Implementing Competition Assessments in Regulatory Reform Process


What is ReviewedProportionality

Costly to review in detail all possible rules & regulations Need proportionality, which means that we

• Prioritize which regulations to review• Consider the importance of the sector when determining the

extent of resources to devote to reviewo Can consider alternative criteria for prioritizing sector: e.g., is

it going to be a key sector for future competitive advantage and growth

• Assess the likely size of effects when deciding on the level of resources to devote to review


What is ReviewedImplementing Proportionality

How to implement proportionality? Limit the universe of regulations to review Review only new regulations

• Only those with an expected, large competitive effect

Review existing regulations• Only in obviously important sectors

For the above two categories• Apply a screen for basic questions to triage• Perform in-depth reviews only where benefits from increasing

competition and innovation will be largest


Who Performs the ReviewAgencies

Ministry or agency officials• Have knowledge of sectors and markets• Ministry/agency influence essential to successful implementation

of reforms

If other levels of review exist • Government ministry responsible for overseeing regulation• Competition authority (if it has resources devoted to the task)


Who Performs the ReviewOptimal Stage for Integration

Most feasible approach to incorporating competition assessments• Insert competition assessment into existing review process of

new regulations• A ministry/agency, or its policymaking officials, use it


Who Performs ReviewTraining

Appropriate training is essential• Training could be performed by government agencies, the

competition authority and other organizations

In some instances, staff may not be adequately trained in applied Industrial Organization, Microeconomics, Statistical Methods and Regulation – areas which provide the conceptual background



This can be an important problem in many countries• Government/Civil services musical chairs

o Optimal period ??• Inadequate sector/issue-specific training

The frontier of sophistication and skills needed to examine and understand modern markets, complex industries, and the effects of myriad rules and regulations have moved out

May be producing significant gap with existing skills and institutions to deliver required outcomes• Television example

o markets, products, geography, strategies1717Vivek Ghosal. Competition Assessments and Policy Development.


Training most crucial at beginning With staff turnover of implementers, ongoing training is

also required Written materials needed to support training and

implementation• E.g., national guidance on competition assessment• Spanish guidance

http://www.cncompetencia.es/Administracion/GestionDocumental/tabid/76/Default.aspx?EntryId=29518&Command=Core_Download&Method=attachment



Process, Coherence and Outcomes

Tenure of Regulators

Fundamental issues arise from the research by• **Faure-Grimaud, Antoine and David Martimort. “Regulatory

Inertia,” RAND Journal of Economics, 2003.• Peltzman, Sam. “Toward a More General Theory of Regulation.”

Journal of Law and Economics, 1976.

**Independent versus affiliated regulator• Independent means it does not change with political party• Affiliated means it changes with political party in power


Tenure of RegulatorsUncertainty in Policy and Outcomes

Extent of capture and fluctuations in decision-making due to party ideology varies across the two alternatives• Independent versus affiliated regulator

Differences across countries and States within countries Regarding capture and ideology, many stakeholders

• Politicians• Government officials who implement• Firms• Consumers/Citizens• Highly skilled consultants !!



This can introduce significant uncertainty into firms’ decision-making:• Dixit, Avinash and Robert Pindyck. Investment under

Uncertainty. Princeton University Press, 1994.• Ghosal,Vivek, and Prakash Loungani. “Differential Impact of

Uncertainty on Investment in Small and Large Businesses,” Review of Economics and Statistics, 2000.

Adverse consequences for investment, growth and innovation• Effects seem stronger in small and medium enterprises



This is a difficult and complex problem to overcome One aspect that may provide some relief is having clear

process – such as assessment screens discussed earlier• Potentially provides a coherent theme and set of guidelines to

follow• May help in reducing uncertainty, once the mechanism has been

allowed to operate for a while and outcomes are observed

It is not a one-shot game but an evolution, as stakeholders (winners? losers?) will endogenize outcomes and may ask for ask for revisions• Stakeholders re-optimizing can be any of the ones mentioned



An additional aspect that may provide coherence and effectiveness is related to what I mentioned earlier related to training of those who implement• Government/Civil services musical chairs• Inadequate sector/issue-specific training

Greater process coherence, competence and predictability of outcomes may yield to higher achievement of targets


Initiatives in Reviews of Existing Rules and Regulations


Examples of Initiatives

United Kingdom (2002-2004) Australia Hilmer process (1995) Mexico Competitiveness Reforms (2008) Sweden (2009)


Initiatives in ReviewsUnited Kingdom – Broad Initiative

RIA overseen by unit close to center of industry oversight

RIA includes “competition checklist” If any answers are yes, then a detailed competition

assessment is required• Guidelines for competition assessment have been prepared by

the UK competition authority Office of Fair Trading (OFT)• OFT has personnel available to discuss performing RIA with

other parts of government


Initiatives in ReviewsUnited Kingdom – Sector Example: Telecommunications

UK Telecom regulatory review started in January 2004, had two consultations with public, and explored• Extent competition and/or regulation has delivered the goals of

lower prices, higher quality of service and wider choice for service providers and consumers

• UK consumers’ perspectives on those markets, including the value they place on different products and services

• Innovation and significance of emerging technologies as a driver of new opportunities for service providers and consumers

• Scope for effective competition at all levels in the telecommunications markets and the extent to which that competition is likely to be sustainable in the foreseeable future


Initiatives in ReviewsUnited Kingdom – Sector Example: Telecommunications

Result of review• Undertakings agreed with British Telecom to create a new

wholesale arm with functional separation, not ownership separation

• Strategic Review of Telecommunicationso http://www.ofcom.org.uk/static/telecoms_review/index.htm


Initiatives in ReviewsAustralia: National Competition Policy

Hilmer Report (1995)• http://ncp.ncc.gov.au/docs/Hilmer-001.pdf

National Competition Policy (NCP) reform program• Thoroughly review existing legislation and where possible,

revise to promote competitiono Identify those laws that have an impact on competition

o Over 50% of 1700 laws identified have been (or are being) reviewed

o Instills culture of rigorous justification for new business regulation

o Federal government pays states for quality of effort in revising regulations (0.1-0.2% of GDP used for incentive payments)

• Impacto Growth rate increased by 1-1.75%


Initiatives in ReviewsMexico: Competitiveness Reforms

Ministry of Economy introduced reform program in 2008 Competition authority given

• Task of developing proposals in technical way, independent of political pressures

o Reviews any part of state regulation

• Competition authority prioritizes based ono Size of sector

o Likelihood of competition problem with regulation

o Importance of improvements to the poor

• Resources that allow contracting with leading academics to prepare reports

• Resources that allow staff expansion for performing reform reviews


Initiatives in ReviewsMexico: Competitiveness Reforms

Process of preparing good reports takes time and resources• Reform is a marathon, not a sprint

Benefits already beginning to be felt• Unilateral passage of reform reducing tariffs and border barriers

to trade• Banking reforms diverted plan for price regulation to one that

improves structure of market


Initiatives in ReviewsSweden: Review of Competitive Restraints

Ministry of Economy asked competition authority to perform broad review of competitive restraints in economy in August 2008• Undertake broad review of competitive situation in Sweden• Propose ways of strengthening competition• Rank the proposals• Evaluate potential effects, economic implications and feasibility

Competition authority• Took task seriously, seeking outside comment• Produced report & recommendations in April 2009

http://www.konkurrensverket.se/upload/Filer/ENG/Publications/rap_2009-4_english_version.pdf

• 60 proposals


Initiatives in ReviewsSweden: Recommendations – 1

Recommendations included• Complete integration of Nordic and North European electricity

markets and dissolve the joint ownership in electricity production

• Price-regulate district heating and consider exposing the market to competition

• Improve the customer mobility in the electricity market• Introduce more efficient rules for the distribution of radio

frequencies• Abolish the exclusive right of the Swedish State Railway (SJ

AB) in the profitable passenger rail transport services


Initiatives in ReviewsSweden: Recommendations – 1

Recommendations included• Implement freedom of establishment within the home help

services• Introduce clearer rules for public selling activities• Introduce regulation on state aid• Facilitate private customers switching banks• Facilitate comparisons within social services and health care


Competition Assessments and Regulatory Policy Development Vivek Ghosal Georgia Institute of Technology Atlanta, GA, USA CUTS-CIRC Conference on Economic.

Documents

competition assessments

innovation regulation

entry regulation

regulation impacts

innovation impacts

loans regulation

policy objectives

new firms