Protecting contestability by checking monopolies
Pradeep S Mehta | Friday, 6 June 2008
CONTESTABILITY of markets is the adrenaline of all economies. While countries liberalise their economies, an extremely vital concomitant reform is the enactment and implementation of competition laws, so that consumers get the benefits of liberalisation. In 1995, when only about 35 countries had a competition law, today the number has crossed 100. But their task is not easy. Because, gains of liberalisation are often neutralised by anti-competitive practices, and these continue to emerge regularly. Thus, the need is imperative for an effective competition policy and law around the world.
Businesses either collude through cartels or plainly abuse their dominance through monopolistic and exclusionary behaviour. Every other day, cartels are being hauled up by competition agencies around the world. But a more difficult fight is against dominant players abusing their dominance through monopolistic practices. The fight of the European Commission (EC) with Microsoft for abusive behaviour may be cited here. In its first-ever and biggest fine on a single company, the Commission recently levied a fine of US$1.4bn on Microsoft for non-compliance with its order.
The fine stemmed from a 2004 decision by the Commission in which Microsoft was required to disclose "complete and accurate" technical information on reasonable terms that can allow competitors to develop products compatible with the Windows system. In complying with the order, the royalties that Microsoft demanded from its competitors were pretty unreasonable, thus, negating the spirit of the order.
This is a typical case of an intellectual property rights (IPR) holder which misuses its position by ensuring that consumers have little choice, and are, thus, pushed into buying their products. Not only that but also Microsoft is too clever, as it has allegedly stacked national standards sub-committees of the International Standards Organisation (ISO) with their nominees so that when international standards are being finalised, they will be loaded in favour of Microsoft's products.
In India, Monsanto is facing a competition action for charging excessively for its patented Bt cotton seeds. The case has not been resolved finally, but shows how intellectual property rights holders abuse their monopolistic status.
Abusive behaviour can also be seen in many cases, where there are natural monopolies, such as airports, energy and utility companies. Energy companies around the world create onerous conditions for their consumers, most of which do not have a choice at all. Another type of abusive behaviour has been observed in segments like microchips. Intel, the entrenched manufacturer commands nearly 80 per cent of the market, and allegedly shuts out competition through various means, fair and foul. Animal spirits appear to be guiding its business practices.
At the end of February, Intel, with an impeccable sense of irony, or perhaps as a result of a corporate Freudian slip, put a front page ad in the Financial Times of London with the strapline -- "A Beast in Every Sense of the Word". While it was designed to sell us its new raft of microchips it may as well have been summing up the views of the increasing numbers of competition agencies, including the EC, around the world investigating its alleged abuse of monopoly power. The extent to which the company rather than the product can be viewed as a beast is the latest example of what is becoming a significant divide in global competition enforcement.
In Europe, and in parts of Asia, monopoly power is still seen as problematic and worthy of serious competition action. In North America, monopoly power has been relegated largely to a regulatory also-ran as agencies focus on cartels and merger reviews. The key questions for all those interested in competition policy is: firstly, does the divergence have any practical impact on consumers and economies?, and secondly, does it matter if agencies differ on abusive monopoly power?
So how are we facing a situation where the EC is seen to be blazing a trail against abuse of monopoly power while the US Department of Justice (DoJ) treats monopoly power as seriously as rowdiness at a game? The answers lie in more than one place. Firstly, the US and the EU simply enforce their competition rules differently. The US agencies have to argue their cases before judges who have become increasingly wedded to a rather simplistic and dated interpretation of a Chicago School anti-interventionist doctrine.
Even if, like the Federal Trade Commission (FTC) has notably tried, the DoJ prosecuted more monopoly cases, there is no evidence that the judiciary would sanction any action. As a reversal of the excessively interventionist cases in the 1960s and 1970s wedded to an economically rightwing judiciary has lead to monopoly power being placed below cartels and merger review as agency priorities.
In the case of the EC, the Competition Directorate General has considerably more administrative leeway in making decisions, with the court system largely checking for competence rather than second-guessing decisions. This greater administrative leeway has combined with a legacy of significant state involvement in the economy. The battles to liberalise European aviation and energy markets have made monopoly power a high profile issue and emboldened the Commission to look at all monopoly power as a significant drain on consumer welfare.
If the agencies look at issues differently why should we care? The simple answer is that consumers and intermediate firms do not care why they are being overcharged or being denied choice, or innovative products. They simply care that someone does something about it. Being attacked by a group or by a large individual beast is fundamentally irrelevant to the victim - the effect is the same and the need for action is equally compelling.
Two recent monopoly power cases in the technology sector strike at the very heart of a modern economy. With Microsoft and Intel, regulators need to ensure that innovation for the benefit of consumers, and indeed the entire economy, is protected. No two firms should be able to retard the ability of both rivals and customers to innovate and offer varied products to their consumers. To do so denies consumers of the ability to choose effectively.
Without effective short-term consumer choice in technology markets, supplier-firms cannot flourish and demand more and better products from a range of suppliers. Without a wide supplier base, the future trajectory of computing is left in the hands of a Wintel monopoly.
Monopoly power matters to consumers and customers just as much as cartel power or merger control. Hampering choice, retarding rivals and customer innovation, overcharging and controlling intermediaries are simply bad for consumers and the wider economy. In the regulatory jungle, the abuse of monopoly power really is 'a beast in every sense of the word'.
The author is the Secretary General of Jaipur (India)-based CUTS International and Co-chairman of the International Network of Civil Society Organisations on Competition (INCSOC). E-mail: www.pradeepsmehta.com
Businesses either collude through cartels or plainly abuse their dominance through monopolistic and exclusionary behaviour. Every other day, cartels are being hauled up by competition agencies around the world. But a more difficult fight is against dominant players abusing their dominance through monopolistic practices. The fight of the European Commission (EC) with Microsoft for abusive behaviour may be cited here. In its first-ever and biggest fine on a single company, the Commission recently levied a fine of US$1.4bn on Microsoft for non-compliance with its order.
The fine stemmed from a 2004 decision by the Commission in which Microsoft was required to disclose "complete and accurate" technical information on reasonable terms that can allow competitors to develop products compatible with the Windows system. In complying with the order, the royalties that Microsoft demanded from its competitors were pretty unreasonable, thus, negating the spirit of the order.
This is a typical case of an intellectual property rights (IPR) holder which misuses its position by ensuring that consumers have little choice, and are, thus, pushed into buying their products. Not only that but also Microsoft is too clever, as it has allegedly stacked national standards sub-committees of the International Standards Organisation (ISO) with their nominees so that when international standards are being finalised, they will be loaded in favour of Microsoft's products.
In India, Monsanto is facing a competition action for charging excessively for its patented Bt cotton seeds. The case has not been resolved finally, but shows how intellectual property rights holders abuse their monopolistic status.
Abusive behaviour can also be seen in many cases, where there are natural monopolies, such as airports, energy and utility companies. Energy companies around the world create onerous conditions for their consumers, most of which do not have a choice at all. Another type of abusive behaviour has been observed in segments like microchips. Intel, the entrenched manufacturer commands nearly 80 per cent of the market, and allegedly shuts out competition through various means, fair and foul. Animal spirits appear to be guiding its business practices.
At the end of February, Intel, with an impeccable sense of irony, or perhaps as a result of a corporate Freudian slip, put a front page ad in the Financial Times of London with the strapline -- "A Beast in Every Sense of the Word". While it was designed to sell us its new raft of microchips it may as well have been summing up the views of the increasing numbers of competition agencies, including the EC, around the world investigating its alleged abuse of monopoly power. The extent to which the company rather than the product can be viewed as a beast is the latest example of what is becoming a significant divide in global competition enforcement.
In Europe, and in parts of Asia, monopoly power is still seen as problematic and worthy of serious competition action. In North America, monopoly power has been relegated largely to a regulatory also-ran as agencies focus on cartels and merger reviews. The key questions for all those interested in competition policy is: firstly, does the divergence have any practical impact on consumers and economies?, and secondly, does it matter if agencies differ on abusive monopoly power?
So how are we facing a situation where the EC is seen to be blazing a trail against abuse of monopoly power while the US Department of Justice (DoJ) treats monopoly power as seriously as rowdiness at a game? The answers lie in more than one place. Firstly, the US and the EU simply enforce their competition rules differently. The US agencies have to argue their cases before judges who have become increasingly wedded to a rather simplistic and dated interpretation of a Chicago School anti-interventionist doctrine.
Even if, like the Federal Trade Commission (FTC) has notably tried, the DoJ prosecuted more monopoly cases, there is no evidence that the judiciary would sanction any action. As a reversal of the excessively interventionist cases in the 1960s and 1970s wedded to an economically rightwing judiciary has lead to monopoly power being placed below cartels and merger review as agency priorities.
In the case of the EC, the Competition Directorate General has considerably more administrative leeway in making decisions, with the court system largely checking for competence rather than second-guessing decisions. This greater administrative leeway has combined with a legacy of significant state involvement in the economy. The battles to liberalise European aviation and energy markets have made monopoly power a high profile issue and emboldened the Commission to look at all monopoly power as a significant drain on consumer welfare.
If the agencies look at issues differently why should we care? The simple answer is that consumers and intermediate firms do not care why they are being overcharged or being denied choice, or innovative products. They simply care that someone does something about it. Being attacked by a group or by a large individual beast is fundamentally irrelevant to the victim - the effect is the same and the need for action is equally compelling.
Two recent monopoly power cases in the technology sector strike at the very heart of a modern economy. With Microsoft and Intel, regulators need to ensure that innovation for the benefit of consumers, and indeed the entire economy, is protected. No two firms should be able to retard the ability of both rivals and customers to innovate and offer varied products to their consumers. To do so denies consumers of the ability to choose effectively.
Without effective short-term consumer choice in technology markets, supplier-firms cannot flourish and demand more and better products from a range of suppliers. Without a wide supplier base, the future trajectory of computing is left in the hands of a Wintel monopoly.
Monopoly power matters to consumers and customers just as much as cartel power or merger control. Hampering choice, retarding rivals and customer innovation, overcharging and controlling intermediaries are simply bad for consumers and the wider economy. In the regulatory jungle, the abuse of monopoly power really is 'a beast in every sense of the word'.
The author is the Secretary General of Jaipur (India)-based CUTS International and Co-chairman of the International Network of Civil Society Organisations on Competition (INCSOC). E-mail: www.pradeepsmehta.com