Author: Sandeep Suresh
“The competitive process and the development process are so intertwined as to be indistinguishable”
Competition, the process of rivalry between firms striving to gain sales and make profits, is the driving force behind economies. Efficient and fair markets are essential for economic growth. Effective competition is not automatic and can be harmed by inappropriate government policies, legislations and anti-competitive conduct of corporate firms. So there is an indispensable need for a definite system of law to ensure effective and fair competition and thereby enjoy its benefits.
Competition laws maintain and promote market competition by regulating anti-competitive conduct of firms. The history of competition law dates back to the Roman Empire when one of the earliest examples of competition law ‘Lex Julia de Annona’ was enacted in 50 BC. Under the Constitution of Zeno in 483 AD, the Florentine municipal law of 1322 and 1325 was considered to be a pro-competition law.
During the middle ages, the English land also saw the coming up of such competition laws under King Henry III who passed an Act in 1266 and King Edward III who passed the Statute of Laborers of 1349 and other statutes that outlawed anti-competitive practices. Modern competition law began in the United States of America (USA) when it formulated the Sherman Act, 1890 and the Clayton Act, 1914. The USA’s codification of the common law position on restraint of trade had a widespread effect on the subsequent development of competition law. After World War II and the fall of the Berlin wall, competition law went through phases of renewed attention and legislative updates all around the world.
The history of competition law in India dates back to the1960’s when the first competition law, namely the Monopolies& Restrictive Trade Practices Act (MRTP) was enacted in 1969. But after the economic reforms in 1991, this legislation was found to be obsolete in many aspects and as a result, a new competition law in the form of the Competition Act, 2002 was enacted in 2003.This legislation has been quite effective till date. The Competition Commission of India, a quasi judicial body established under the Competition Act, 2002 has performed satisfactorily to curb anti-competitive practices in the Indian markets. In the coming chapters, by an analysis of the various aspects of competition law, researcher will be establishing that fair competition is definitely a catalyst that speeds up economic development.
Fair Competition –the Catalyst
Effective and fair competition between the producers or firms in a market is indisputably beneficial for the firms and is a key driver of economic development and consumer welfare. The highlight of competition between firms is that it is beneficial for every market participant including customers and not just the sellers. Competitive markets give consumers wider choice of goods, better quality of goods and services at lower prices. With regards to producers/sellers, it gives them stronger incentives to minimise their cost of production through innovation and other productivity enhancing techniques. This enables them to pass on cost savings to the customers and offer better products and greater choices at lower prices. As a result of such low prices, more quantity of goods is consumed and produced leading to higher productivity and growth.
Another beneficial aspect of competition for the sellers is that it promotes two kinds of efficiencies namely, static efficiency (optimal utilization of existing resources at least cost) and dynamic efficiency (optimal introduction of new products and efficient production processes). More importantly, competition laws protect producers and consumers from anti-competitive practices which increase costs and prices and eventually reduce production. The source of consumer welfare, producer welfare and economic growth in international trade are competition policies and surveillance over anti-competitive trade practices. Apart from this, there are many other empirical evidences and studies that show the existence of a positive correlation between fair competition and economic development.
In his book ‘The competitive Advantage of the Nations’, Michael Porter has affirmed about the positive connection between competition among firms and economic growth. He has asserted that strict enforcement of competition laws helps in the continual improvement and innovation in the industries of a nation thus producing economic growth. In one of his studies, he found only a few examples of ‘national champions’ or firms with unparalleled domestic rivalry that were internationally competitive whereas he found that nations with leading world positions in certain industries have a number of strong domestic rivals. Another work by Porter showed that in Japan only those sectors characterised by strong domestic competition remained internationally competitive following the country’s recent economic downturn. A World Bank report in 2000 and the UNCTAD report in 2002 also asserted that the effectiveness of competition laws is positively associated with long run growth.
To further strengthen arguments in favour of fair competition , it is necessary to discuss its role in efficient allocation of resources. Competition helps in restructuring of sectors that have lost competitiveness. The competition for capital and other resources by firms throughout the economy leads to money and resources flowing away from weak uncompetitive sectors towards the other extreme. Hence competition directs resources to its most efficient use. Therefore, a well-designed and properly implemented competition law system promotes economic growth by ensuring better allocation of resources. For a developing economy handicapped by resource constraints, efficient allocation of resources is absolutely essential to enable optimum utilisation of limited resources.
From the viewpoint of production firms, it is true that firms faced with vigorous competition are constantly pushed to become more internally proficient and productive. The force of competition compels managers to improve the technical efficiency of production, abandon outdated production techniques and invest in new technology. Competition puts pressure on enterprises to reduce costs, improve quality and to strive towards excellence. Increased competition forces firms to adapt to just-in-time production and management systems. As a result, flexibility, speed and reliability regarding delivery of goods have attained priority and are key sources of dynamic competitiveness.
The advantages of fair competition can be tangibly seen in the context of Foreign Direct Investment (FDI) as well. Competition promotes transparency and enhances the attractiveness of an economy to foreign investment and maximises the benefits of such investments. Since competition law is applied to all the firms operating in the national economy, in addition to disciplining local firms, it ensures that FDI does not bring with it restraint of trade or abuses of market power.
Apart from this, competition law improves the investment climate in an economy because it creates a level playing field where property rights are respected by providing recourse against anti-competitive acts by less efficient firms. The need for competition law becomes more evident when FDI is liberalised. Very often FDI takes the form of a foreign corporation acquiring or establishing a joint venture with a domestic enterprise which may substantially lessen competition and the foreign firm may gain a dominant position in the relevant market thus charging higher prices.
In simple micro economic terms, a monopolist, given the nature of the demand for a product, would tend to maximise profits, by limiting the output to such a level which is lower than what would have been obtained under a competitive environment. If there are a lot of sectors with monopolies under conditions of elastic demand, the total production in all those sectors would be much lower than what would be in a situation where the markets are competitive. By adopting strict competition laws, these sectors can benefit from the entry of more players as it would reduce the incentives for these firms to produce less than the competitive output level. Thus, healthy competition would result in increased levels of production and thus lead to economic growth.
“The corrupt version of capitalism—when powerful corporations deliberately try to eliminate healthy competition to preserve their privileged position—generates economic and social injustice, thereby undermining political support for the free market based system”. As mentioned earlier, effective competition is not automatic and can be harmed by anti-competitive practices employed by producers. However, it is fortunately true that anti-competitive practices tend to be less prevalent in economies where there is an effective implementation of competition law and policies that would act as deterrents.
The Asian Development Bank in one of its reports in 2005 emphasized that the benefits of an open market economy cannot be fully realised unless restrictions on competition are removed. The intended benefits of trade reforms may not be realised without active enforcement of competition law because firms will find other incentives to engage in anti-competitive practices. This highlights the importance of having faith in the benefits of competition from an early stage of economic growth.
Fair Competition – a Comparative Analysis of its Advantages
Mr. Raghuram Rajan, a well known Indian economist once remarked that the competition structure in India creates opportunity, and equality of access – to the market, to education and to capital. The impact of competition, as it was gradually introduced in the Indian market over the last several years has been substantial in nature.
It has contributed in terms of higher GDP growth, employment expansion, wider choice of goods and lower prices for the consumers. Competition has benefited the Indian consumer and the industry in ways that could not have been envisaged earlier. The benefits have been more evident in sectors such as airlines, telecommunications, automobiles and consumer electronics.
Two recent books have underlined the power of competition in driving economic growth and consumer prosperity. William Lewis, in ‘The Power of Productivity’ and economist Paul London in ‘The Competition Solution’ have studied the rise in economic prosperity of the USA in the late 1990s. It was established in their research that competitive pressures had helped suppress inflation, raise living standards, and pushed manufacturing productivity up by 4% a year and it has brought down real air fares, telephone rates along with boosting up of employment in more efficient sectors. The opening up of industries such as airlines, railroads, banking to a competitive environment by deregulation has improved the service quality and reduced average prices from 30 to 75 percent. Also, the breakdown of price fixing conspiracies, which is an anti-competitive practice, in a few industries had resulted in the decline of manufacturing costs in the USA.
In the United Kingdom (UK), the Government has considered competition to be one of the five drivers of productivity. A recent study showed that competition had led to substantial reduction of prices in business markets like airways, international telecommunications, new cars and football kits. A firm-level research in the UK found 20% – 50% of the increase in productivity in manufacturing resulted from the process of competition, including the entry and exit of firms.
In the European Union member states, opening up of the telecommunications sector to international competition has helped the consumers to such an extent that they can now choose from a number of alternative service providers and products. Opening up these markets to competition has also allowed consumers to benefit from lower prices and new services. Competition and governmental policies favouring competition has contributed heavily in the increased income in these countries by 1.1% – 1.5 % over the period of 1987 – 1993, creation of 30,000 – 90,000 jobs and in the decrease of inflation by 1-1.5 %.
In Australia, the National Competition Policy (NCP) reforms introduced in 1995 have been a major contributor to the nation’s productivity surge in the late 1990’s. The Australian Productivity Commission in its report in 2005 has underpinned the benefits created by the NCP reforms. The rate of increase in the nation’s real per capita incomes in the second half of the 1990s was as high as at any time during the 20th century. The unemployment rate has witnessed gradual reduction in the last decade. Another contribution of the NCP reforms was that the productivity growth rates were the highest for at least the last forty years. This increase has effectively boosted the average Australian household’s annual income by $7000.
The productivity flow in the 1990’s has increased Australia’s GDP by 2.5 per cent. The increase in Australia’s GDP and national income substantially increased the taxation revenue which eventually helped the government to raise funds for consumer welfare programs. The NCP reforms have also produced significant price reductions in electronics and telecommunications sector. Additionally, competition law practices have furthered improvements in service quality, reliability and product choices available for the consumers in some sectors.
The positive role that fair competition can play in the development process of an economy has been increasingly recognised in Africa as well. The 2005 Report of the Commission for Africa (CfA) had concluded that investors need ‘effective competition laws’, and observed that: “Robust competition laws and policies with strong institutions to enforce them are vital to improving productivity and to promoting innovation and better prices”.
Therefore, considering the above propositions and empirical evidences, researcher is of the opinion that, the positive correlation between fair competition and economic development is undeniable. Today, most of the nations have moved towards a market based economy recognising competition as a central principle in their economic reforms. Also, more than 100 countries have enacted modern competition laws and set-up competition authorities.
An important part of competition law should be its advocacy function, which helps to impart a culture of competition in the manner in which firms interact in the economy. This can foster increased adherence of competition law principles that benefits the firms and the economy equally. Pro competition advocates are definite to encounter resistance from those who are hostile to the operation of free markets. But the situation has never been more favourable than it is now for promoting what many have begun to call a ‘culture of competition’.
Apart from this, researcher also suggest, the introduction of competition law and its advocacy as a course in the academic syllabus of all the Business Management colleges because it is the students from these colleges that are involved in business markets the most after graduation. To conclude, it is beneficial to remember that a fair competition policy system is a key component of a robust economy.
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- Dr. S. Chakravarthy, Competition and Corporate Governance, COMPETITION LAW REPORTS, VOL I, PART 2, April-June, 2010, at p.35 (hereinafter Competition and Corporate Governance)
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- OECD Report, supra note 1, at p.5