What are the Government’s Policies on Market Competition?
by Lyndon Magsino, CPA
Reference: https://www.linkedin.com/pulse/governments-competition-policies-intervene-markets-lyndon/
A. Introduction
Many countries are yet to formalize a government policy that can create a healthy, efficient and effective market competition. More often, government interventions do not provide the market players an inclusive business environment and cannot stop any abuse of dominance of large players and price discrimination.
In this article, I have analyzed the main reasons why governments use competition policies to intervene in markets. To support my analysis and arguments, I have used as an example, the competition regulatory frameworks of the Philippines, which aims to promote a level-playing field for all market players.
The Philippines have legislated the Philippine Competition Act (PCA) in 2015 and has set up the Philippine Competition Commission (PCC) as an enforcing authority.
B. Background of the Philippine market
While the PCA is applicable, without exemptions, to all companies and firms across all sectors that are engaged in economic activity, including the Government-Owned and Related Entities (GORE), the new law may have created a sense of “barrier to entry” and may have favored the existing market players, or even enable a dominance in the market. In addition, the “tolerance clause” that authorizes the PCC to grant exemptions specific practices or sectors can also make the law vulnerable to bribery or corruption and may proliferate any anti-competitive behavior and economic distortions. Hence, the Government should clarify this matter and develop an implementing procedure to avoid or minimize this risk.
Currently, the existing market players are somehow protected by high barriers, particularly in certain sectors, such as telecommunications, TV networks, energy, mining and public utility (e.g. water and electricity).
As per my research, the Philippine market is structured in six (6) types and the following table summarized the characters of each market structure:
1. Monopoly
2. Monopsony
3. Monopolistic Competition
4. Oligopoly
5. Oligopsony
6. Perfect Competition
C. Reasons why Governments use competition policies to intervene in markets
My research revealed that many countries and governments including the OECD and the World Bank have been promoting and implementing a pro-competition policy, preventing any anti-competitive business practices and reducing any harmful market interventions of the government.
According to the website of the Philippine Competition Commission (PCC), the Commission is a newly-constituted independent quasi-judicial body mandated to implement the national competition policy and enforce the Philippine Competition Act (“PCA” or also known as Republic Act 10667), which serves as the primary competition law in the Philippines for promoting and protecting market competition.
The PCA is consistent with the national government’s goal of creating a more inclusive economic growth and attain a more equitable distribution of opportunities, income and wealth. The law is considered a game-changer, which aims to improve consumer protection and help accelerate investments and job creation in the country.
The objectives of the Philippine Competition Act include:
· “Enhance the economic efficiency and promote free and fair competition in trade, industry and all commercial economic activities, as well as establish the National Competition Policy.
· Prevent economic concentration that will control the production, distribution, trade, or industry that will unduly stifle competition, lessen, manipulate or constrict the discipline of free markets.
· Penalize all forms of anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions, with the objective of protecting consumer welfare and advancing domestic and international trade and economic development.” (Republic Act No. 10667. Sec. 2)
· The World Bank Group, 2018. Fostering Competition in the Philippines: The Challenge of Restrictive Regulations
· OECD, 2007. Competition and Barriers to Entry. Policy Brief.
The PCC is attached to the Office of the President of the Philippines and it prohibits any anti-competitive agreements, abuses of dominant positions, including the mergers & acquisitions that limit, prevent, and restrict the competitions. PCC also regulates or prohibits the monopolies, taking into consideration the public interest and prohibits mergers and acquisitions that enable unfair competition.
In previous years, the Philippines has made significant economic growth (e.g. an average of 7% GDP Growth year-on-year). Despite of this positive growth, the government is still confronting the challenge on how to sustain the momentum with an “inclusive development” where no one is left behind. The implementation of the PCA, as well as the creation of the PCC, aims to promote economic efficiency and ensure fair and healthy market competition where all market players can benefit from and/or contribute to the economic developments.
The PCC sets out a regulatory framework for market competition with mainly two objectives:
1. Protect consumer welfare by giving consumers access to a wider choice over goods and services at lower prices, and;
2. Promote competitive businesses and encourage market players to be more efficient and innovative. The competition also benefits small and medium businesses.
As a regulatory body, the PCC is also protecting the markets from any anti-competitive behavior of companies and collaborates with other government agencies to promote the culture of market competition.
In developing the Philippine Competition Act, the government took into consideration the Organisation for Economic Co-operation and Development (OECD) Product Market Regulations (OECD-PMR) and the WBG’s Market Competition Policy Assessment Tool (WBG-MCPAT), with certain specific objectives, including but not limited to (World Bank 2018):
· Develop the main role of the Philippine Competition Commission (PCC), which is critical to address if any, discretionary regulations or any loopholes that can be misused for any anti-competitive behavior.
· Map the regulatory restrictions on competition.
· Contextualize competition restraints within each sector and develop a policy and recommendations.
· Quantify the potential impact of a more pro-competitive regulatory environment for the Philippines’ economy.
Note:
WBG-MCPAT is a methodology developed by the WBG’s Competition Policy Cluster to identify specific problems at the market level and prioritize competition tools accordingly.
According to the World Bank, the effective implementation of competition law and policy depends on several elements, which are beyond the law itself. It can also prevent overcharges from anti-competitive conduct, such as cartel behavior (i.e. up to 49%).
Further, for the law to be implemented effectively, a number of factors beyond the primary legal and policy framework must be in place. Refer to the four pillars of the WBG’s elements of effective implementation of competition law and policy (World Bank, 1999).
Currently, the World Bank Group works in over 60 countries to offer implementation support, technical advice and capacity building on:
· “Opening specific markets to competition, reducing government interventions that may shelter less efficient firms, protect incumbents or facilitate collusion, including sector-specific regulatory design.
· Implementing effective competition advocacy strategies, national competition policies, state aid, and infusing competition principles in regulatory reforms.
· Design of anti-cartel programs (including leniency), merger control, market and competition analysis techniques, institutional effectiveness of competition authorities, and advocacy strategies across government agencies.
· Designing mechanisms that minimize the distortive effects of incentives and state aid support and promote competitive neutrality among market players
· Provide empirical research and economic analysis as foundations for reform implementation around three modules such as (1) Antitrust rules and enforcement; (2) Pro-competition market and sector regulation; and (3) Competition principles in the broader public policies, including GORE and competitive neutrality.” (World Bank, 2018)
D. Real cases of Government’s competition policies
As the law and related prohibitions (i.e. abuse of dominance, cartels) are very new in the Philippines, the Commission set the enforcement to be effective from June 2017. Prior to its effectivity, the anti-competitive practices are still prevalent in the country.
Since the creation of the Philippine Competition Commission, the Board has implemented its mandate by designing and approving implementing rules and regulations. They have also reviewed the foreign investment restriction in the construction industry and challenged the major economic concentration in the telecom industry.
Today, the PCA is now fully implemented in the country, which prohibits cartels and other anti-competitive agreements (PCA. Section 14) and abuses of dominance (PCA. Section 15). It also established the 50% threshold for the presumption of market-dominant position (Section 37 of Competition Act and Rule 8, Section 3 of Rules and Regulations to Implement the Provisions of Republic Act No. 10667).
Further, because of the PCA, the existing ship operators can no longer prevent new players/entrants from serving certain routes. This is equivalent to a 5% savings in the transport logistics costs and reduced dramatically the time to register new vessels.
Having said this, there is still a market failure in the Philippines, particularly in public goods and price discrimination is still prevalent.
According to its website, the PCC have also issued key Policy Notes, Decisions and Memorandum Circulars, for example:
· Joint Venture between Filinvest Alabang and Mitsubishi Corporation (Ref. 35-M-027/2019)
· Acquisition by Grab Holdings, Inc. of Assets of Uber B.V., Inc. (Ref. 33-M-012-2019)
· Merger Review Guidelines (PCC, 2019)
E. Analysis and Conclusion
In my analysis, the effective regulatory frameworks with efficient enforcement have prevented anti-competitive business practices and improved economic opportunities in the Philippines. Such laws and regulations have promoted an “inclusive growth” in a level-playing field and minimized/eliminated any politically-driven government interventions in markets.
For example, the proposed joint venture between Mitsubishi Corporation (an automotive and industrial infrastructure company) and Filinvest Alabang, Inc. (a real estate developer), through the acquisition by Mitsubishi of 40% was reviewed and approved by the PCC. In the PCC report, they concluded that the proposed joint venture will not likely result in a substantial decline of competition in the markets because a sufficient competitive constraint would remain from all market players even in post-acquisition.
Another example, the acquisition by the Grab Holdings of Uber’s assets was regulated by the PCC, in coordination with the Philippine Land Transportation Franchising and Regulatory Board (LTFRB), since it may result in a monopoly. The acquisition was carried out in accordance with the PCA and Merger Review Guidelines. The PCC has approved the acquisition, taking into consideration the lack of competitive constraints on Grab and whatever potential competition concerns arising from the acquisition. Further, the LTFRB has also issued several franchises and opened the industry to other players.
As I observed in specific markets, particularly in certain industries such as telecom, transportation, public utility and energy, the government’s competition policies created a pro-competition business environment and resulted in more active market participation, both from the local and foreign firms. In the process, it benefits both sellers and buyers and increased consumption, industry productivity, exports, and investment.
Overall, these reforms have ultimately translated into the growth of aggregate output, higher employment opportunities, and positive consumer welfare.
Glossary
GORE Government-Owned and Related Entities
OECD Organisation for Economic Co-operation and Development
PCA Philippine Competition Act (Republic Act No. 10667)
PCC Philippine Competition Commission
PMR Product Market Regulation
PPP Public-Private Partnership
SEC Securities and Exchange Commission
WBG World Bank Group
References
· Philippine Competition Commission (https://phcc.gov.ph/)
· Baye, M and Prince, J. (2014) Managerial Economics and Business Strategy: 9th Edition. New York. McGraw-Hill
· Organisation for Economic Co-operation and Development (https://www.oecd.org/competition/)
· The World Bank. Markets and Competition Policy. Retrieved from https://www.worldbank.org/en/topic/competition-policy
· Organisation for Economic Co-operation and Development, 2012. Policy Framework for Investment.
· Akbar, Y. (2019). Market Structure [PowerPoint presentation]. Dubai, UAE.
· http://www.oecd.org/competition/reforms/
· https://phcc.gov.ph/implementing-rules-regulations-philippine-competition-act/
· Republic Act No. 10667, 2015. The Philippine Competition Act
· Philippine Competition Commission, 2018. Merger Review Guidelines. Philippines
· Akbar, Y. (2019). Structure-Conduct-Performance & Government Regulation of Competition [PowerPoint presentation]. Dubai, UAE.
· OECD, 2007. Competition and Barriers to Entry. Policy Brief.
· The World Bank Group, 1999. A framework for the Design and Implementation of Competition Law and Policy.
· Balgos, T. Market Structure. Retrieved from https://www.scribd.com/doc/296690776/Market-Structure-5
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