Competition Law vs Neoliberal Competition Policy

I wrote a paper for a volume on the OECD and competition policy last year, but the editors ultimately wanted less policy analysis and more on the inner workings of the OECD, so it got dropped. But a lot of the content is relevant to today’s release of the Competition Policy Panel report, so I’ve excerpted the relevant bits below. The key point is that traditional notions of competition policy that are based on government intervention to correct perverse market outcomes (anti-trust, breaking up cartels, unfair business practices) have been subsumed to a utopian vision of competition policy premised on greater foreign investment and trade liberalization, and deregulation.

The fundamental issues are related to how economies are structured and governed – and therefore what role the state can and should play to address undesirable outcomes, which itself will be a function of whose interests the state makes those decisions. The public policy responses to real world markets, with all of their challenges and contradictions, will reflect both economic interests and power, and ideological priors. Thus, the desired degree of democratic control and accountability are essential considerations to any policy choice.

Unfortunately, the deification of markets and competition – “market fundamentalism” in the words of Stiglitz (2000) – can be a large obstacle to clear thinking about regulation, competition policy and public ownership. An essential faith in markets characterizes the panel’s approach, with a tendency to downplay well-known shortcomings of capitalist economies. The arena of policy is not in textbook markets of perfect competition, full information and no externalities, but in the realm of the “second best” (Lipsey and Lancaster 1947) – where efficient market outcomes cannot be theoretically proven to be superior because one or more core assumptions underlining standard economic (neoclassical) theory has been violated.

Competition policy and competition laws are historically a subset of regulatory policy by which the state regulates private sector activity. Because large companies can take actions that can have negative, even if unintended, consequences for the economy as a whole (e.g. the failure of a bank) or that impact on other economic actors and consumers (such as the abuse of a monopoly position), there is a need for many different tools to regulate the behaviour of corporations.  The competitive process alone is not sufficient to make these protections, nor is the promotion of competition through competition laws and authorities.

While competition policy remains an important policy tool for governments, the rhetoric of competition can be excessive, and the promises made for competitive markets overstated. There can be benefits from the rivalry of a competitive marketplace, particularly in the production of mass consumer goods and services. But there is a gap between this simple point and the reality of capitalist economies as we know them, and thus a danger in viewing competitive markets as a substitute for public interest regulation, redistributive policies, and public services and enterprises. Even perfectly competitive markets may be characterized by many undesirable outcomes, such as underproduction of basic research, pollution, resource depletion, and high levels of inequality. Asymmetries of information also fundamentally impair the efficiencies of a competitive process.

Rarely do real-world markets conform to textbook notions of “perfect competition”. The contemplation of imperfect competition introduces substantial uncertainties into any theoretical approach. Yet, the overwhelming dominance of a small number of large corporations in certain sectors is quite common in industrialized countries. A number of features of capitalist economies lead to greater concentration in markets. First, size matters in order to achieve economies of scale at which production is efficient. This is true for traditional manufacturing industries and newer high-tech industries where upfront costs for research and development can be very high. Second, in many industries large advertising budgets are used to gain and preserve market share – a form of investment in corporate brand name and loyalty. Third, mergers and acquisitions reinforce these trends through consolidation.

When economic forces push in the direction of more concentrated markets, the best approach for policy makers to address market power (if they choose to act at all) may not be to impose greater competition in the marketplace, but to ensure strong regulation in the public interest or public provision on a monopoly basis. Even choices limited to competition policy are ultimately political in nature and involve trade-offs — there is no “optimal” competition policy on a one-size-fits-all basis that can be specified a priori in strict, legal terms.

The scope of competition policy ultimately reflects political decisions about how to organize and regulate economies, and this will differ depending on size of economy, level of development, the specific sector, and other particular circumstances. An over-emphasis on competition has a great potential for obstructing legitimate democratic choices about how to structure relations in particular economic sectors and the economy as a whole.

An interesting counter-example is intellectual property protection, which is essentially the opposite of competition. Most countries grant copyright protection for creative and artistic works and patent protection for advances in technology and innovation. These policy choices confer monopoly rights for a specific duration of time as a reward for the societal advancement of knowledge. Such additional policy considerations and the need to balance competing objectives and interests, however, do not merit much attention from the panel when it comes to other dimensions of the economy.

Finally, some important knowledge about how real-world market relationships work is worth emphasizing. Leamer (2006: 21-22) comments:

In fact, there are very few exchanges that are mediated by “markets.” There are very few “commodities” whose value is transparent enough to allow the formation of a market. There are very few exchanges that take place at a frequency high enough and transparent enough to other potential participants that market prices can emerge. Most exchanges take place within the context of long-term relationships that create the language needed for buyer and seller to communicate, that establish the trust needed to carry out the exchange, that allow ongoing servicing of implicit or explicit guarantees, that monitor the truthfulness of both parties, and that punish those who mislead.

Real-world capitalism is a different beast than textbook treatments that idealize market exchanges, and which form the basis for the view of primacy of markets at the heart of the review.

A delicate balance that reflects political choices rather than ideological priors is reflected in competition laws, whereby national governments, through their competition authorities, enforce laws and administrative rules to maintain fairness in the marketplace. These provisions apply to the private sector, relating to three broad areas. First, competition authorities investigate and discipline collusive agreements between companies (including cartels) that involve anti-competitive practices such as big-rigging, raising prices by limiting production, and splitting up markets. Second, competition authorities address abuses of dominant market position, where a leading company uses its advantage to drive out competitors through practices such as predatory pricing, limiting access to essential facilities, or tied selling. Third, competition authorities regulate mergers and acquisitions to prevent excessive market dominance that affects other companies or consumers.

Competition policy in the context of globalization also encompasses neoliberal policies such as trade liberalization, loosening or eliminating restrictions on foreign investment, deregulation, and privatization of state enterprises. This neoliberal competition policy exposes domestic producers to foreign competition, which, it is argued, increases competition and leads to lower prices for consumers, greater efficiency of resource allocation, and stronger economic growth.

One reason why competition policy is being emphasized at the international level is the perception that formal commitments to market access in trade agreements are hindered by practices by governments and businesses inside the border. This is also reflected in the overall approach of the panel to view regulations as barriers to trade and investment, and thus seek harmonization and performance-based instruments. After liberalization of government measures, the next bottlenecks to market access are domestic industrial arrangements, many of which are deemed to be the legacy of socialist governments or wrong-headed attempts to protect the domestic market.

The rhetoric of competition can serve as a smoke screen for economic interests that stand to benefit from specific types of changes. Competition provisions will be supported by more advanced countries to the extent that they facilitate market access for their corporations beyond existing levels. This is tied to investment liberalization, as constraints on foreign investors, by their very nature, limit market access and favour domestic corporations. Policies that place restrictions or conditions on foreign investment or that support state-owned enterprises and trading organizations are an important part of the policy toolbox. While in theory, enhancing competition would increase total welfare in the global economy, even if this is the case, the welfare gains may be unevenly distributed geographically, and within countries, distributionally, as winners may be large global corporations who send their gains out of the country. In a national economy, there is also a clear government role and (to varying degrees) capacity through redistributive policies to mitigate any damage done.

There is no obvious reason why a neoliberal competition policy that privileges market access should be adopted. The shape and scope of competition laws should be determined by appropriate democratic processes in response to particular political and economic circumstances. Competition policy should not be uniform – the marked differences in competition law and overall policy objectives among industrialized countries illustrates the desirability of allowing nations to adopt competition frameworks that suit their needs.

These issues play out in unique ways in Canada, where a broad range of public policy issues are also at stake beyond notions of economic efficiency. Countries need to have the capacity to make these trade-offs based on their own democratic institutions, including criteria such as universal access, cultural considerations, social objectives or regional development. Maintaining the flexibility to pursue such options should not be dismissed.

Competition policy approaches may act as a barrier to cross-subsidization by utilities, whether under public or private control. For example, government policy may ensure that all regions have access to electricity or telephony at reasonable prices, by charging slightly more in urban areas to cross-subsidize lower prices in rural areas. These activities play a redistributive role that is rooted in issues of equity and access, rather than just economic efficiency. In the absence of such interventions, market prices may be monopoly prices or markets may not exist at all.

In key areas of the economy, a country can reasonably argue that the public interest necessitates measures to keep out or restrict foreign competitors. Telecommunications, energy, banking and other vital services, though run through the private sector, should not necessarily be forced open to foreign competition, in the name of market access. In these areas competition is likely to be limited at best. And in extreme cases, such as that of California in 2003, deregulated competitive markets actually led to a gaming of the system that bilked US$10 billion from ratepayers into the hands of companies like Enron.

Domestic culture or local content rules are also important because they not necessarily have foreign substitutes and thus competition cannot be a remedy. In Canada, content rules support the development of a domestic cultural industry distinct from the dominant entertainment industry of the US. In markets dominated by US players, there may not seem to be a competition problem based on a traditional competition test, but too many foreign voices can drown out Canadian ones. But from the OECD perspective, the presence of Canadian content and “shelf-space” requirements is construed as anti-competitive vis-à-vis foreigners.

Thus, a pitfall of neoliberal competition policy approaches is that they may continue a preoccupation with market access by restricting the activities of the public sector (the very essence of neoliberalism). In contrast, the enhanced power of global corporations, and the mobility of international capital, suggest that that focus of competition policy at the global level should go back to its roots, targeting abuses of dominant position and market power in the private sector. Thus, opening borders may increase competition, but if borders are already open and competition is not sufficient, other remedies must be considered.

An alternative approach should reframe the debate in terms of the very nature and types of institutions required to meet the basic needs of everyone in society, and this means moving beyond dependence on market/capitalist institutions. If there is a taboo in neoliberal thinking it is public ownership. But while currently unfashionable, there are valid reasons why the state should retain more autonomy in designating monopolies and other state enterprises. Natural monopolies – in electricity, water distribution, sewage disposal and treatment, and telecommunications – are often better addressed through a public or regulated private monopoly. In some areas like telecommunications, the belief in competition has spurred a complex mesh of “pro-competitive re-regulation”, but this is not necessarily a superior model to a public integrated monopoly.