UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD)
dhall.vinod1@gmail.com UNCTAD’s goal is cp and consumer welfare
A perfectly competitive market requires a large number of sellers and buyers, each seller, therefore, having only a small share of the market. Further, the product should be homogeneous, there should be no entry or exit barriers or information asymmetries and both the seller and buyer should have access to the market. In such a market, sellers are price takers, not price makers, and the price of a product equals its marginal cost; each supplier makes only a normal profit. A perfectly competitive market achieves both allocative efficiency (AE) and productive efficiency (PE), which, when combined maximises both society’s welfare (EW) and consumer welfare
- AE is achieved when the goods are produced in the quantities desired by society, and it is not possible to make anyone better off without making someone else worse off.
- PE is achieved when goods are produced at the lowest possible cost, that is, as little of society’s wealth is expended in the production process as is necessary.
Competition also enhances DE (dynamic -long term- efficiency) in that it spurs R&D
If perfect competition is at one end of the spectrum, at the other end is monopoly. Here, there are many buyers but only one seller, who is a monopolist and who is in a position therefore, to increase prices and reduce the volume of supply. In this situation there is allocative inefficiency (AI), which is also referred to as deadweight loss.
the objection to monopoly is not only that the monopolist is able to charge excessively and reduce production, but also is inefficient due to higher remuneration , excessive staff, maintaining excess capacity or excessive product differentiation. This situation is also referred to as X-inefficiency
-competition may not yield efficiencies:
<> cocoo can argue a case where comps are indeed bad, thus merger should be blocked:
a. where economies of scale support the existence of only one enterprise.
b. where there is a “network effect”: the utility of a product/service increases with the increase in the number of consumers, e.g. in telecommunications or personal computer operating systems. in these cases, competition is not good. it is more beneficial to have only one or a few producers.
How does competition law protect the consumer? :
only the control of UTPs (misleading advertising, conditional selling, excessive pricing, discriminatory pricing, etc) has a direct impact on consumer welfare, whereas the impact of restrictions (eg via merger control) is indirect….thus, in cl, consumer law is concealed, but less concealed in adp….There are certain aspects of consumer interest where competition law cannot reach at all. eg: aspects relating to safety (for instance in electrical gadgets and toys), health (for instance, in the case of drugs and food items), environment (for instance, air pollution and pollution of drinking water sources), and privacy (which can be breached, for instance, through leakage of credit or other data). For the protection of consumer interest in these areas, specialized laws have been enacted in various countries, to try to protect consumers from the following harms…Consumer law (CRL) was born to protect consumers from these market failures:
- Freedom of contract resulted in a weak or inexistent bargaining position for consumers;
- freedom of competition made price fixing, restrictions of competition and misleading trade practices possible
- equality of rights and duties meant that there was no place for special consumer rights or any form of positive discrimination
- The asymmetrical and unilateral structure of communication, disadvantaged or even damaged consumers…nontransparency on the market makes consumers decide in an irrational way (bound rationality)
- the lack of safety (eg health and safety regulations)
- the lack of barriers to access to justice and representation
externalities [ <> EEAC by PADI]
when one party’s actions impose uncompensated benefits or costs on another party. Environmental problems are a classic case of externality.
eg: the smoke from a factory may adversely affect the health of local residents.
eg: competition depletes resources, such as fisheries or the broadcast spectrum. they are common property resources critical for the welfare of consumers. Thus, state intervention in the competitive system to protect consumer interests is required
Costs of anti-competitive practices to consumers:
eg: increase in prices
the harm caused by cartels, particularly international cartels amounts to billions of dollars annually,
Such concentration confronts coffee producers in Kenya and Latin America, cotton farmers, and tea and tobacco growers in Malawi, fish processors and exporters in the Lake Victoria region, and milk processors in Chile.
in Peru poultry firms and their associations engaged in what amounted to price fixing by agreeing to prevent new entry, exclude some existing competitors, and limit the availability of live poultry for sale in order to raise or maintain prices…. there was no competition until consumer organizations started a boycott and the Minister of Trade intervened to prohibit price collusion
The more direct method of calculating loss in consumer welfare due to cartelization comes from the measurement of consumer surplus = the maximum that consumers are willing to pay for the marketed quantity of a product, less the amount they actually pay.
Cartelization leads to an increase in the price and a reduction in quantity
In the United States, two important economic schools :
-the ‘Harvard school’ of thought: competition policy should be mainly concerned with structural remedies, rather than with behavioural remedies.
– the ‘Chicago school’ of thought: focuses on the pursuit of efficiency as the sole goal of antitrust, efficiency consisting of AE and PE….most markets are competitive, and entry barriers are more imagined than real; a monopolist’s position is quickly eroded and firms pursue profit maximization. antitrust policy should be less interventionist, and government intervention is usually clumsy and inefficient. Therefore the principle is non-intervention, unless the plaintiff can show proof.
The European tradition believes that competition is necessary and also the dispersing of private economic power so as not to influence political power. its greater concern in protecting the freedom of competitors to compete on merits.
how cl analyses possible violations:
an important starting point is to determine the relevant market, to identify the products and services that are such close substitutes for one another, that they operate as a competitive constraint on the conduct of the supplier of those products and services. The relevant market comprises the relevant product market and the relevant geographic market. An economic tool usually employed in determining the relevant product market is the SSNIP test (Small but Significant Non-transitory Increase in Price, also called the hypothetical monopolistic test) to assess primarily the demand side substitutability of the product.
Also, economic tools are used for determining the entry barriers, which may include determining the economies of scale, extent of product differentiation, extent of capital requirement, and predatory behaviour.
3 types of anticomps [market failures]
A/cartels and other anti-competitive agreements,
B/(monopolization=ADP)
C/anti-competitive mergers.
The harm is even greater in developing countries, because there the markets are generally more fragile, as concentration levels are higher, dominant position is more prevalent, entry barriers are higher (regulatory restrictions, capital scarcity, etc.) due to inadequate infrastructure etc; and competition authorities are less resourced or skilled.
Thus we need to prioritise protection of consumers in developing countries
Bid rigging in public procurement markets (i.e. collusive tendering) is also pervasive in many developing economies, and merits vigorous enforcement initiatives”.
Cartels are the most pernicious form of anti-competitive activity. A World Bank Background Paper shows that in 1997 developing countries imported US$81.1 billion worth of goods from industries that had seen a price-fixing conspiracy.
However, there are only a few examples of global cartels being penalized in developing countries;
Consumer interest as a goal of competition law:
trade associations or Chambers of Commerce decisions [= decisions of associations of undertakings = DAUs]: DAUS are being used as a platform for concerted action in prices, since companies can meet there to negotiate prices etc, and cannot be accused of communications between companies.
daus are being urged to adopt a compliance code, for example by excluding certain types of subjects from discussion in meetings such as prices, tenders and profit margins.
the main purpose of European competition policy is to promote the interests of consumers, that is, to ensure that consumers benefit from the wealth generated by the European economy. This objective is horizontal:
1-the Commission must consider the interest of consumers in all aspects of its competition policy.
2-there is a trade-off between AE allocative and PE productive efficiencies. This may happen when a more efficient and, therefore, a lower cost firm tries to enhance its market power by increasing its market share. This may lead, on the one hand, to higher productive efficiency as the average cost of production in the industry would decline; on the other hand, it could lead to lower allocative efficiency due to higher prices in the market.
the extent to which consumer interest is served depends upon the welfare standard pursued by a CA:
a. the consumer welfare model:
the ultimate goal of competition law is to prevent increases in consumer prices due to the exercise of market power by dominant firms. The consumer welfare standard is tilted in favour of consumers and considers wealth transfers from consumers to producers as being harmful. Consequently, it assigns less weight to efficiencies unless these directly benefit the consumers through, for example, lower prices or better products. This approach runs the risk of focusing on short-term consumer welfare and ignoring the long-term benefits to consumers from higher efficiencies.
b. the total welfare model:
looks at the gains to society as a whole, irrespective of whether the gains are to producers or to consumers, and whether there is a transfer of wealth from consumers to producers. Efficiencies therefore are desirable, even if the gains are not directly passed on to consumers. This approach values the long-term consumer welfare by accepting that higher levels of efficiency today, even if they directly increase producer welfare, would benefit consumers in the long run. a higher level of producer surplus may be necessary for innovation, which lead to dynamic efficiency and benefit consumers in the long run
Article 82 of the EC Treaty
adp may consist of a limitation in production, markets or technical development, to the prejudice of consumers”. thus, indirectly, Article 82 is a consumer policy that suppress inefficient practices not controlled by competition
ecj in United Brands v ec: adp is the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers
In determining the relevant market we use the SSNIP test. is based on inspection of consumer behaviour. If a non-transitory increase in price, say by 5 to 10 per cent, does not lead to the switching of a substantial number of consumers to a second product, then the second product is not part of the same market as the first product.
For example, in 1998 Football World Cup, ec applied this test and found that consumers of tickets for the Finals of the Football World Cup did not treat that product as interchangeable with tickets for other football or sports events or other forms of entertainment. The World Cup tickets therefore constitute a separate market, and the organizers enjoyed a dominant position, even a monopoly, in this market.
a relevant market is separate (from other markets) where the consumer product/service is not substitutable [= elasticity of demand].
A dominant firm carries a “special responsibility” not to adp
For example in RTE, BBC, ITP three television companies printed separate guides to future programmes, using copyrights which they held over their own listings to prevent the appearance of a single, integrated publication. A consumer was thus forced to buy three separate guides. The firms were obliged by the courts to make their listings available to third parties, subject to payment of a reasonable fee….the companies had abused the economic power under their copyright by preventing the appearance of a new product
ecj in the Magill case, and recently in the IMS Health case: a new product must not be denied to consumers because of the refusal to license by the dominant enterprise.
A connsumer group may also be permitted to intervene in proceedings before the court. In Fordwerke AG and Ford of Europe Inc v Commission, BEUC had complained to the Commission about Ford’s practices which involved suppression of imports into the UK, and the court upheld the right of BEUC to intervene in support of the Commission’s case.
In the United States, private action for enforcement of the antitrust law is the vast majority of the cases in the courts. Many of these cases of private action constitute consumer-driven complaints. Over 90 per cent of all competition cases in the United States remain private treble* damage actions that can be brought under either state or federal law or combined into a single case in federal court
*The US has the principle of treble damages whereby compensation can be claimed up to three times the cost of the injury caused.
Growth of consumer protection law:
cl has the indirect effect of protecting consumer interest, even where there is no explicit reference to consumer protection…But competition law is neither designed to, nor can, protect all aspects of consumer interest.
cl serves various objectives [apart from protecting competition]:
a. gains in economic efficiencies (productive efficiency, allocative efficiency and dynamic efficiency),
b.preventing a high level of concentration of economic power and its consequent abuse for economic or even for political purposes,
c. maintaining the freedom of trade or occupation and protection of small and medium enterprises.
d. In the EU, an important aim is to protect the common market.
e. consumer interest
The interface between competition law and consumer protection:
competition law and consumer law are complementary and even mutually reinforcing
cl is horizontal (between firms). consumer law (csl) is vertical, and addresses the unequal relationship between consumers and firms, to enable consumer choice to be effectively exercised.
they are both aimed at keeping the market competitive and try to bring market performance close to [perfect competition = a market where consumer sovereignty is safeguarded and welfare is maximized].
– “confusopoly” – apparently deliberate attempts by firms to offer consumers choices that are confusing, for example by offering prices that are difficult to compare. But other firms may compete by cutting through the maze and offering price packages that are simple and easy to understand. The telecommunications and airlines industries are examples where “confusopoly” abound. In the telecommunications industry, firms have been announcing pricing plans that are both difficult to understand and to compare with each other. In the airlines industry, firms offer low fares, but these may be bounded by restrictions on days of use or minimum stay restrictions.
Tensions = balancing
-If cma gives greater weight to total welfare, as against consumer welfare, or if it gives greater weight to productive efficiency, as against allocative efficiency, it would provide less satisfaction to long term consumer interest.
-if cma gives greater weight to dynamic efficiency, as against static efficiency, it would provide less satisfaction to short-term consumer interest.
this has exposed consumers to complex choices; in utility markets (such as electricity and telecommunications) it has created challenges in respect of service, quality, management of customer complaints, information asymmetries etc
When a market becomes more exposed to competition, raises consumer protection concerns. For instance, it may attract unscrupulous “fly-by-night” firms …. thus, cocoo must act, and also govs must regulate or delegate selfregulating powers… but this reduces competition too much. there is a need for better coordination between competition law and consumer protection:
in the United States, enforcement of competition law lies with two agencies, the United States Department of Justice (DOJ) and the United States FTC. While the DOJ enforces only competition law, the FTC enforces both competition law and the consumer protection laws
In the EU, the DG Competition sees consumer protection as the little sister and competition law the big brother, and while both legal areas have their own DGs within the Commission, there seems be little cooperation between the two….To handle better the integration of the two, it was created a new post called the Consumer Liaison Officer: liaises between the DG Competition and consumer organizations at the national and EC levels as well as between the DG Competition and other DGs in the Commission.
Unfair trade practices (UTPs)
UTPs are practices that directly disadvantage the consumer such as misleading claims and advertising, conditional selling, excessive pricing, discriminatory pricing and other misrepresentations. These are per se illegal under most competition laws, and only proof of occurrence is required to justify punitive action.
United Nations Guidelines for Consumer Protection:
call upon governments to develop a consumer policy around eight themes, namely:
(i) physical safety;
(ii) promotion and protection of consumers’ economic interests;
(iii) standards for the safety and quality of consumer goods and services;
(iv) distribution facilities for essential goods and services;
(v) measures enabling consumers to obtain redress;
(vi) education and information programmes;
(vii) promotion of sustainable consumption; and
(viii) specific areas concerning health.
Salient features under the themes:
(i) Appropriate policies should ensure that goods produced by manufacturers are safe for intended use, with distributors ensuring their proper handling and storage. Consumers should also be informed about the proper use of goods and the risks involved in their use, with the government adopting policies through which manufacturers recall defective and hazardous products for replacement or modification, as well as provide for adequate compensation to the consumer.
(ii) Government policies should seek to enable consumers to obtain optimum benefit from their economic resources by resulting in adherence to satisfactory production and performance standards and the use of adequate distribution methods, fair business practices, informative marketing and effective protection against practices that adversely affect consumer welfare and freedom of choice in the market place.
(iii) Governments should encourage and ensure the availability of facilities to test and certify the safety, quality and performance of essential consumer goods and services.
(iv) Governments should consider adopting specific policies to ensure the distribution of essential goods and services where this distribution is endangered, as could be the case in rural areas. Such policies could include assistance for the creation of adequate storage and retail facilities in rural centres, incentives for consumer self-help and better control of the conditions under which essential goods and services are provided in rural areas;
(v) Governments should undertake legal and/or administrative measures to enable consumers to obtain redress through formal or informal procedures that are expeditious, fair, inexpensive and accessible. Enterprises should be encouraged to resolve consumer disputes in a fair, expeditious and informal manner and to make information on redress and other dispute-resolving procedures available to consumers.
(vi) Governments should develop or encourage the development of general consumer education and information programmes, including information on the environmental impact of consumer choices and behaviour and the possible benefits and costs of changes in consumption. In this exercise the government should take into account the cultural traditions of the people concerned. The aim of such programmes should be to enable consumers to be capable of making an informed choice of goods and services, and become conscious of their rights and responsibilities.
(vii) Governments, in partnership with business and relevant organizations of civil society, should develop and implement strategies that promote sustainable consumption through a mix of policies that could include regulations, economic and social instruments, sectoral policies with regard to land use, transport, energy and housing, information programmes to raise awareness of the impact of consumption patterns, removal of subsidies that promote unsustainable patterns of consumption and production, and promotion of sector-specific environmental management best practices.
The Guidelines have recognized eight consumer rights :
(i) right to basic needs;
(ii) right to safety;
(iii) right to choice;
(iv) right to redress;
(v) right to information;
(vi) right to consumer education;
(vii) right to representation; and
(viii) right to a healthy environment.
In countries, poor ones particularly, where the consumer does not have purchasing power, opportunities to acquire goods/services, must be made available…..right to basic needs and right of access to basic needs. Therefore the Consumer Unity and Trust Society (CUTS) has added :
(xi)the Right to Opportunities
(x)the Right to Boycott, where legal redress is not forthcoming, or the opposing party does not accede easily