Competition Policy in East Asia

Erlinda Medalla

• Publisher: Routledge
• Year: 2004
• ISBN:
  9781134267576
• Edition: 1
• Topic: History
• Subtopic: Asian History
• Index: History

Competition Policy in East Asia clarifies the key issues and provides a framework for understanding competition policy, looking in-depth at a number of regulated sectors for additional perspectives.Until two or three decades ago, competition and consumer protection policies were the preserve of the major developed economies like the United States, the United Kingdom and some European countries. Now competition issues are at the top of the international agenda as globalization spreads and as the operations of the World Trade Organization, the World Bank, the Asia Pacific Economic Cooperation forum and other organizations have brought about a realization that regulatory reform - and in many economies the creation for the first time of regulatory instruments for competition and consumer protection - is an imperative.

1
Perspectives on competition policy: an overview of the issues

Erlinda M.Medalla

INTRODUCTION

Competition policy has been the subject of debate at the international level for some time now, but especially since 1996, when it was included among a number of issues to be discussed by the World Trade Organisation (WTO). The early multilateral discussions dwelt on how domestic competition policies restrict market access. At the WTO ministerial conference in December 1996, the interaction between trade policy and competition policy was identified as one of the four ‘Singapore issues’ (so called after the host city) that warranted further study. In recent years the discussion has shifted somewhat to embrace a broader view of how competition policy can contribute to economic development. As barriers to trade have continued to fall, factors have become more mobile and technological change has increased, countries have been re-examining the place of competition policy in an overall national framework, often moving ahead of the policy agendas being shaped in international forums.

This book draws together a collection of papers on competition policy that were presented at the Twenty-Eighth Conference of the Pacific Area Forum on Trade and Development (PAFTAD), held in Manila on 16–18 September 2002. It seeks to clarify the issues and provide a framework for understanding competition policy, looking in depth at a number of regulated sectors for additional perspectives.

The book contains eleven chapters. The first four chapters outline a framework for competition policy, describe the work that has been undertaken in the WTO on the linkages between trade policy and competition policy, and discuss implementation issues. This introductory chapter, among others, suggests a broad framework for competition policy that would cover, in varying degrees depending on the objectives of different countries, four main areas: the antitrust or competition law at its core, consumer protection measures, the regulation of monopolies, and a review of other domestic policies and regulations that may affect competition.

Succeeding chapters build on this framework and discuss some of the major competition policy debates, including whether there is a need for a WTO agreement on competition policy and how competition policy is best implemented.

In Chapter 2 Ping Lin examines the evolution of competition law in East Asia, comparing the frameworks in place in Japan, China and Hong Kong, and evaluating each country’s ability to deter violations of competition law. The chapter highlights some common difficulties that East Asian countries face in developing an effective competition policy.

The evolution of competition policy will differ across countries, depending on the overall policy environment and the influence of stakeholders, as Rod Shogren points out in Chapter 3. This chapter discusses a range of practical issues in implementing competition policy and describes the organisational skills and culture that are needed in a competition agency. Choices will need to be made in deciding whether competition policy and regulation should be carried out within a single agency or whether regulation is better undertaken by sector-specific agencies.

Chapter 4, by Robert Anderson and Frédéric Jenny, explains that current proposals for competition policy agreements do not explicitly link competition policy with market access concerns; rather they aim to ensure that all countries have national legislation in place to deal with anticompetitive practices. The authors predict that cooperation between member states on competition policy issues will most likely be voluntary and note that a commitment to competitive markets rather than regulatory approaches is more likely to increase economic welfare.

The next five chapters review regulatory approaches in the electricity, telecommunications, airline, shipping and insurance sectors. These chapters describe the intricacies in regulation, the difficulties in balancing objectives, and the need for clear principles and policies.

Chapter 5, by Maria Fe Villamejor-Mendoza, describes the evolution of the Philippine electricity sector, which has moved from being dominated by a public monopoly to gradual privatisation. The sector provides an example of the enormity of the task of transforming state-owned industries in developing countries. Reforms include the development of a wholesale spot market, the segregation of subsectors and the unbundling of tariffs. Although policy issues and legal challenges are still to be faced, these reforms are moving the sector in the right direction.

Telecommunications is another sector where regulatory reforms aimed at increasing competition have brought great benefits. Chapter 6, by Christopher Findlay, Roy Chun Lee, Alexandra Sidorenko and Mari Pangestu, reviews policy in a number of Asia Pacific economies. It provides information on their commitments under the General Agreement on Trade in Services (GATS) and on the extent of implementation. The policy environment in these countries is set against the performance of their telecommunications sector. Empirical work reported in the chapter shows that markets open to entry by both domestic and foreign suppliers are more competitive and should deliver better performance.

There has also been a strong trend toward deregulation and privatisation in the airline industry. In Chapter 7 Ralph Huenemann and Anming Zhang describe how substantial liberalisation in domestic and international routes over the past twenty years has improved efficiency in the industry. However, city pairs are not usually served by more than two or three carriers, so competition policy in air transport continues to confront oligopoly behaviour. The continuing resistance to cabotage and foreign ownership means that alliances between airlines will remain important. The implications for consumer welfare are ambiguous, and regulators will have difficulty in deciding which alliances to sanction.

Deunden Nikomborirak offers a further perspective from the shipping industry in Chapter 8. This chapter examines the problems governments and shippers face in countering the substantial market power of liner shipping operators that set up international cartels to set prices and allocate capacity. Blatant anticompetitive practices by liner conferences in developed countries have been sustained at the expense of shippers from developing countries with little bargaining strength. To counter this power governments should consider regulatory approaches and should push for having the issue addressed in the WTO.

In Chapter 9 Melanie Milo analyses how market structures and regulatory regimes affect competition in the insurance industry in five East Asian countries —Indonesia, Malaysia, the Philippines, Singapore and Thailand. The incipient insurance markets in the ASEAN5 continue to be highly regulated and protected. Reform of the insurance industry is still in the initial stages and more market-oriented reforms are needed.

In Chapter 10 Lewis Evans and Neil Quigley provide some perspectives on the interaction between contract law and competition law and suggest some lessons for the sequencing of reforms in developing countries. The chapter argues that priority should be given to promoting mechanisms that will reduce uncertainty about the enforceability of contracts. This means that the provisions of an existing contract could take precedence over competition law.

Finally, in Chapter 11, David Round looks at the progress being made in forging regional cooperation in East Asia on competition policy and its enforcement. The chapter suggests ways that national and regional cultures for competition can be developed. It considers how regional cooperation might be put into effect, and assesses how globalising companies might provide an added impetus to national and regional efforts to enhance domestic competitive mechanisms. The time is ripe for a leader—a particular government, or an individual, or a group—to take on the mantle of developing a truly regional approach to the promotion of competition and consumer protection.

In both developed and developing economics the role of competition is central to national goals of maximising economic benefits given scarce resources. This introductory chapter reviews the theory behind competition policy and suggests a framework that could be applicable to any market economy at any stage of development.¹ It discusses the primary objectives of competition policy, proposes an ideal framework for competition policy and looks at what will be needed to implement such a framework. It identifies the major areas of competition policy and briefly presents the current state of competition policy in the region. Then some of the issues that confront regional economies are examined.

COMPETITION POLICY OBJECTIVES

A market is perfectly competitive when there are many firms trying to outdo each other in the price and/or the quality of the product or service they offer, and when there is open entry and exit of firms. Most industries are not perfectly competitive. In reality, perfect competition is not necessary for the benefits to be realised, only effective competition—that is, the presence of an actual or potential rival that could viably contest the market. When there are no barriers to entry and the market is contestable, monopolists and oligopolists can behave like perfect competitors (Baumol and Willig 1981).

In a competitive setting, resources are allocated to where consumer welfare is optimised, led by the ‘invisible hand’ of market forces, in Adam Smith’s words. If firms do not produce the best quality of products at the least cost, and sell at the price dictated by the market, market share will be lost to other firms. In such a setting, individual firms have no power to dictate the price or the quantity supplied in order to extract excess profits.² Competition, or the threat of competition, acts as an efficient market regulator that limits the market power of firms and induces production and consumption at optimal levels and costs. The result is lower prices, better quality products and wider consumer choice.

Competition also optimises efficiency by constraining firms to produce more with less (technical efficiency) and by inducing better resource allocation (allocative efficiency). Allocative efficiency is encouraged because investment is directed to where the highest returns exist. The dynamic gains from innovation that competition fosters and the flexibility that it develops enables the economy to cope better with change.

The welfare and efficiency impacts of competition are generally recognised as the main objectives of competition policy in most countries in the region. As the later chapters on selected sectors illustrate, even when regulatory objectives are entwined with social and other objectives, efficiency remains an avowed goal.

Aside from these direct benefits, another important and positive implication of competition is its effect on equity. By reducing, if not eliminating, the economic power of individual sectors and providing the best products for the best price, competition advances equity objectives.

Competition may not always be enough to ensure that the market performs its role of efficiently allocating resources. There may be genuine market failures that justify some limitation of competition—when more competition could cause inefficiencies. In such cases, rules may be needed to take the place of the competitive process that the market fails to bring about. The most notable example of a market failure is a natural monopoly, which occurs where a product or service is non-tradable and the market is too small to be optimally served by more than one firm. Allowing another firm to be established only creates duplication and wastes scarce resources. There will be a need to stipulate access rules if the monopoly provides a facility that is essential to the survival of rival firms. It can also be the case that anticompetitive conduct, such as high market concentration and mergers and acquisitions that reduce the number of firms in the market, can increase competition and efficiency by creating economies of scope or synergies between firms. Again, this would require some deviation from the general principle of discouraging market concentration.³

In short, competition is not an end in itself, and competition policy should promote competition as long as it encourages efficiency and growth. In addition, if possible, competition policy should be consistent with social objectives. These principles are, of course, more easily stated than applied in practice. Social objectives can conflict with competition objectives and the trade-offs are often difficult to resolve.

These considerations suggest that competition policy should primarily be about protecting and promoting competition and ensuring that the market is able to function effectively and efficiently. In many instances, this would simply entail making the market contestable by removing artificial barriers to entry, but there will be cases where the market fails and more will be required from competition policy. Additional rules will be needed to assist the market in bringing about the highest level of welfare.

In sum, competition policy has two main tasks: (1) to ensure that no entity can gain market power that it can abuse; and (2), where necessary, to implement rules that would make up for any failure of the market to perform its price-allocation function. In most instances, these rules may simply be about making the market more contestable and prohibiting and disciplining clear restraints of trade. Where market power is inherent in the structure of an industry, competition policy should strip the owner of the ability to use or abuse such power. This may require enforcing rules to guide the market and punish anticompetitive acts.

There are several steps involved in implementing competition policy. The first is to determine whether firms or groups of firms have market power. If they do, the next step is to find out how such power has been attained.

There are many factors that could affect the state of competition. Figure 1.1 describes a number of steps to be followed in determining the existence of market power in an industry and selecting a policy tool to promote greater competition. The first factor to consider is the presence of trade barriers. There is no question that the trade regime adopted by a country affects the state of competition. Simply by allowing imports to enter, some barriers to entry are broken down and the market becomes more contestable. Hence, because of its widespread impact on the economy, trade policy can be a major tool to promote competition and is usually the first to be implemented. If the good is tradable, and there are no significant barriers to trade, then it is likely that the market will be more or less contestable.

For goods that are non-tradable, perhaps because of transport costs or trade barriers, the geographic market will be limited to within local borders. In such cases there may be major barriers to entry that cannot be broken down by trade liberalisation. For instance, markets will be less contestable if domestic distribution channels are restricted to local producers through vertical integration or agreements on exclusive dealing. Such barriers will be a subst...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURES
• TABLES
• CONTRIBUTORS
• PREFACE
• ABBREVIATIONS
• 1: PERSPECTIVES ON COMPETITION POLICY: AN OVERVIEW OF THE ISSUES
• 2: THE EVOLUTION OF COMPETITION LAW IN EAST ASIA
• 3: IMPLEMENTING AN EFFECTIVE COMPETITION POLICY: SKILLS AND SYNERGIES
• 4: COMPETITION POLICY, ECONOMIC DEVELOPMENT AND THE POSSIBLE ROLE OF A MULTILATERAL FRAMEWORK ON COMPETITION POLICY: INSIGHTS FROM THE WTO WORKING GROUP ON TRADE AND COMPETITION POLICY
• 5: COMPETITION IN ELECTRICITY MARKETS
• 6: TELECOMMUNICATIONS
• 7: THE AIRLINE INDUSTRY
• 8: THE SHIPPING INDUSTRY
• 9: THE INSURANCE INDUSTRY
• 10: THE INTERACTION BETWEEN CONTRACT AND COMPETITION LAW
• 11: REGIONAL COOPERATION IN COMPETITION POLICY