Competition Policy: the Road Ahead for Egypt

Competition Policy: The Road Ahead for Egypt
Organised by ECES & the Australian Embassy
Conrad International Cairo, Nile Ballroom
24 May 2001
Session 1: Lessons from International Experience
Professor Allan Fels
Chairman
Australian Competition & Consumer Commission
1. Introduction
The purpose of my paper is to give an overview of the rationale and justification for having a competition regime, to explain why it is needed and how Australia has gone about implementing and administering an effective competition regime.
I will then endeavour to draw on some of the lessons learned in Australia that are relevant for any country developing its own competition regime. It is important to keep in mind that I am not necessarily advocating the Australian model as one which would be most suited to the Egyptian situation. It is vital that countries develop a model that most suits its own needs, which may involve the combination of aspects of a number of different models. Competition policy is an area where one size does not fit all due to the diversity of, and asymmetries in, countries’ situations, competition regimes, legal traditions and cultural contexts.
What I will try and highlight today are the key elements and essential considerations that must be taken into account in the development of an effective regime.
I wish to begin with a story based on Australian experience.
The freight express industry is responsible for overnight delivery of urgent packages and parcels from one major city to the next. In Australia, this industry is dominated by two main firms.
For many years these two firms secretly agreed to share the market: that is to agree who got which customers, to keep those customers as "pets" and then not to compete against each other for those customers. It is as if each got half of the people in this room and agreed not to compete for customers from the other half.
Sometimes customers sought competitive tenders. However, in this case the two firms would engage in secret bid rigging. That is, they would agree in advance which firm would win the bid, the winner would then decide the price and the other firm would agree to submit a higher bid in order to allow the agreed winner to secure the contract.
Sometimes customers attached to one firm would seek to be advised of the price which the other firm would charge. That is, they would seek a competitive quotation. In this case, the other firm would supply a quotation but only after checking to ensure its quotation was well above the price of its competitor. In other words, it made sure it did not compete for the business.
Suppose that for some reason a customer decided to change from one freight business to the other. The winning business then had a problem. It had to get rid of the new customer or alternatively undertake to lose an established customer to compensate the other company. By prior arrangement with its competitor, it might do this by suddenly doubling its price to the customer, blaming the Unions or the world price of fuel or other causes. The customer would then ask the other competitor what its price was, be advised a price that was perhaps only 50 per cent higher, and then would thankfully choose that other supplier.
Alternatively the customer who was to be overcharged would receive very bad service for a time. That is, the customer would be "burnt". For example, urgent packages sent overnight from one capital city to another would instead arrive at another capital city a week later. Eventually the customer would change suppliers. In some cases, if a customer changed supplier, the winning supplier would pay cash to compensate the losing supplier.
The victims of these arrangements were business rather than consumers although ultimately the higher costs to business would have been passed on to consumers because the cartel eliminated competition, kept prices high, service poor and meant there was no pressure on either supplier to be efficient.
The ACCC began investigating but it was very difficult. No-one would talk, the lawyers for the cartels were obstructionist and difficult and we could not get evidence. There was a real risk the parties could delay an outcome for years and the fines would be minor compared to the profits made from the cartel.
The ACCC, however, was persistent. It used its powers of compulsion to get information. It ignored repeated complaints to politicians about these investigations by lobbyists representing big business. Eventually the firms paid very high fines and received bad publicity. The cartel ended and there was a fall in price. Some other cartels fearing similar exposure apparently quietly ceased to operate.
There are many other cartels of this kind, including some organised globally.
However, the story does not end there. Once the cartel was dissolved, the firms faced competition between themselves for the first time, then sought to merge with one another on the grounds that this would avoid inefficient duplication and achieve various cost savings and the benefits of economies of scale. Their true purpose, of course, was to avoid price competition between themselves and to gain higher profits or to at least continue with their previous level of profit through the establishment of a monopoly. In other words, they were trying to achieve through merger what they had previously achieved through operating a cartel.
Incidentally this case illustrates an important point: a competition law must not only ban cartels but it also needs to prohibit those mergers which are designed to achieve the same results as cartels by lessening competition. (Of course this is not to say that mergers are the same as cartels because many mergers are not anticompetitive and even when they are anticompetitive they are more likely to achieve cost savings than are price fixing agreements between competitors.) If not, as cartels are outlawed, the cartel participants will seek to establish a monopoly. This was Australia’s experience when it prohibited price fixing agreements between competitors but not anticompetitive mergers in the 1960s.
There was, in fact, another development to the story. A couple of years later a small firm sought to enter the market by providing the same overnight delivery services. It used efficient, new methods and was a threat to the competitors. One of them responded by sharply lowering prices well below its own costs, operating at a high temporary loss, and drawing upon its own deep pocket of financial reserve to fund these losses. The aim was to eliminate the competitor and to restore the former more profitable and quieter life. As well, the firm wanted to send a signal to any other small competitor considering entering the market that it would be dealt with similarly.
In this instance the ACCC took successful court action against the firm for misuse of market power on the grounds of predatory pricing.
This whole case, which is based on a blend of two cases, identifies some of the key elements of competition law:

the need for strong laws to cover the three basic elements of horizontal agreement, mergers and abuse of dominance;
the need for an independent authority and independent courts;
the need for investigatory powers;
the need for a determined approach to enforcement by the regulator despite severe obstructionism and resistance by firms under investigation; and
the need for penalties and publicity.

Ultimately business customers and consumers gain, but the business which breaks the law usually fights the regulator with every means at its disposal. No-one likes the blow-torch of competition to be applied to themselves. They only want it applied to their suppliers.
Yet one further episode in this saga occurred. One of the firms advertised that it used jet planes to convey parcels. To test this representation, the ACCC sent a parcel containing an altimeter, (that is a gadget which measures height off the ground), through the freight company. The altimeter showed that at no stage had the parcel in fact left the ground. Transport was by truck or rail, contrary to the advertising. The ACCC used its powers regarding false advertising in this instance to secure legal remedies for consumers.
This reveals an important further point which concerns the complementarity between competition and consumer protection regulation. To put it plainly, competition does not work if consumers are misinformed about the product on offer and businesses which advertise honestly suffer a competitive disadvantage if competitors are not prevented from advertising dishonestly.
In some countries issues about false advertising are kept separate from competition law, but in others, including Australia, they are linked.

Why have a competition regime?
Background

Under normal circumstances, a competitive market structure will allocate resources in such a way as to produce the goods and services which consumers value most highly and are prepared to pay for, and it does so at the lowest possible cost in terms of resource use. Thus, competition policy is based on the belief that a competitive market will result in economic efficiency and increased social welfare. Having a sound competition regime will also create economic opportunities for individuals that would not otherwise arise.
In most countries, unrestricted competition is not a goal in itself. Competition generally drives economic efficiency, the effective allocation of resources and ultimately economic growth which in return will benefit all participants in the economic process. However, the aim of competition policy is not exclusively related to efficiency. Competition policy may encompass a broader set of policy objectives including consumer welfare, more equitable income distribution and encouragement of small business.
Ideally, competition policy would be non-interventionist and non-regulatory. It would leave market forces to operate. In practice, however, this is just not possible. Not all markets are competitive and even those that are competitive initially may change as a result of market conduct or other factors.
It follows then that there is concern amongst policy makers about conduct that results in an increase in market power, or conversely, that results in a substantial lessening of competition. Market power may be defined as the ability to ‘give less and charge more’. It refers to a situation where a firm (of group of firms acting jointly) has discretion in its decision making because it is free from constraints imposed by competition. The type of conduct that may be of concern for this reason can be categorised as:

horizontal arrangements between competitors, which may result in boycotts, market sharing or price fixing;

misuse of market power where firms already have significant market power, (most governments would not seek to make such power illegal, rather they would seek to curb its abuse);

vertical restraints, such as resale price maintenance and exclusive dealing – whilst recognising that these may, in some circumstances, appear to be efficiency enhancing (usually there are other ways of achieving the same results without a reduction in competition); and
mergers and acquisitions – these are different in that they are the only conduct that has the potential to directly alter market structure (although other conduct may change structure indirectly).

There is also one other large area of concern in that Governments often made decisions and enact laws that restrict competition. A comprehensive competition policy, as discussed in Section 3 of this paper, is needed to cover all Government actions that hinder competition.
2.2 Objectives
In Australia, the definitive statement on why countries need a vigorous competition policy was provided by the Trade Practices Tribunal (now known as the Australian Competition Tribunal) in its judgment on the QCMA case in 1976, which has subsequently been adopted by all Australian courts:
Competition may be valued for many reasons as serving economic, social and political goals. But identifying the existence of competition in particular industries or markets, we must focus upon its economic role as a device for controlling the disposition of society’s resources. … There is of course a creative role for firms in devising the new product, the new technology, the more effective service or improved cost efficiency. And there are opportunities and rewards as well as punishments. Competition is a dynamic process; but that process is generated by market pressure from alternative sources of supply and the desire to keep ahead.
In other words, a competitive market never stands still. If the competitive process is working properly, there will be a constant quest for static and dynamic efficiency. Efficient production and consumption decisions will be made. Competitive markets are constantly adjusting to the ebb and flow of information and innovation; to changes in government policy; to entry and exit conditions; to each firm making its own decisions independently, free from coercion or predation, but in the face of interactive rivalry in the light of available levels of information on consumer demand and the availability of resources.
The operation of the competitive process is rather like survival of the fittest – except that we need to ensure that those firms which do survive are fit to survive in the broadest social sense of being good social citizens. All firms should have an equal opportunity to succeed in a market – but no firm should be guaranteed success (or even an equality of outcomes), unless it is consistently efficient, innovative and responsive to consumer demands. This was recognised by the High Court of Australia in its famous Queensland Wire Industries judgment, where Mason CJ and Wilson J stated:
Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to "injure" each other in this way. This competition has never been a tort … and these injuries are the inevitable consequence of the competition sec. 46 is designed to foster.
Australian government policy recognises that competition can provide many benefits for all Australians. To maximise the productive potential of Australia, governments in recent years have launched numerous programs to reform the competitiveness of Australian markets. In particular, this has included reforming and reconsidering any remaining industry protection, from whatever source, and ensuring that businesses do not act in an anticompetitive manner, or are at least suitably punished for their wrongdoings.
In fact, there has never been greater universal recognition than at present of the need for an effective competition policy in Australia. Federal and State Governments, the business sector, unions, resource owners, community groups and the Australian public generally:

regard competition in markets for goods and services as a prerequisite for both static and dynamic economic efficiency;
acknowledge that markets left on their own can often achieve competitive outcomes;
but nevertheless accept that in many cases competition policies need to be actively enforced;
recognise the broad constituency served by competition policy; and
accept that, in many situations, competition can be best achieved by government withdrawal from markets, for example by deregulation, privatisation, abolishing licensing and so on.

It is worth noting that the business community is a major beneficiary of competition policy. All firms have a major interest in ensuring that their inputs are supplied competitively; that their output is sold to a competitive buying market; and that their less scrupulous competitors do not engage in predatory pricing or other misuses of market power, or in deceptive or misleading conduct at their expense.
A regime to promote free and fair competition within an economy should address and provide remedies for any of the market failure issues outlined above.
A critical part of any regime is its enforcement mechanism. Such mechanisms need to transparent, available to everyone and binding on everyone. The mechanism may involve a publicly-funded enforcement agency (recognising the economic benefit and increased social welfare outcomes to the economy as a whole), private rights of action in the courts or a combination of both.
2.3 Trade and competition linkages
Trade policy and competition policy both have the same fundamental objective of enhancing consumer welfare through more efficient allocation of resources, whether it be by lowering governmental barriers to trade or through promoting competition.
The benefits to be achieved via globalisation and enhanced international trade can be undermined by anti-competitive behaviour (such as cartels and anti-competitive mergers) occurring on an international scale. This can and does create situations where a national government has difficulties in dealing with anti-competitive behaviour taking place in other countries which affect its economy. It is important for a country to have both a strong and well enforced domestic competition regime and for there to be cooperation with other governments in order to achieve effective outcomes at this global level.