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Understanding competition regulation

, February 22, 2017, 0 Comments

competition-regulation-marketexpress-inCompetition regulation and its context and relevance in an emerging market like India: Why should markets be regulated? Understanding Monopoly, Oligopoly and the need for Regulation.

WHAT IS COMPETITION AND WHY IS IT RELEVANT?

Competition, in the context of economics, means the contest/rivalry among sellers of products and services to attain business goals including an increase of profits and market expansion. Competition benefits consumers by way of lower prices, better quality and variety of goods. Producers are benefitted by competition as there is incentive to innovate, increase productivity and improve service. Overall, competition leads to lower costs, best use of resources and innovation. It is vital for the growth of businesses and benefits consumers and thus, in turn, for the growth of the economy.

MONOPOLY, PERFECT COMPETITION AND IN-BETWEEN

Economic theory lays down different types of market structures with varying degrees of competition. Markets for any product or service may be categorised based on the number of buyers and sellers, which impacts the changes in price of the commodity in response to changes in demand and supply. On one extreme is a monopoly – the case of a single seller/producer of a commodity or service and many buyers, for example, the market for railway services and distribution of electricity. A monopoly is characterized by absence of close substitutes, barriers to entry faced by prospective sellers and therefore lack of competition. The seller can charge a higher price than the price that would have prevailed had there been other sellers as consumers do not have an alternative seller to buy from.

On the other extreme is perfect competition – the case of the many sellers of an identical or almost identical commodity and many buyers. Under perfect competition, the commodities sold are identical, or perfect substitutes of each other, prices are determined by the market forces of demand and supply and no individual seller can exercise any influence on the price. This is because consumers have plenty of alternative sellers that they could buy from instead. While perfect competition in its purest form does not exist, the closest example, could be the market for unbranded agricultural products.

The market structures that do exist in the real world are the ones in between these two extremes. Monopolistic competition – having features of both perfect competition and monopoly – is a market, having many sellers and many buyers but unlike in perfect competition, the products of the sellers are differentiated products. Products that are different or are perceived to be different in terms of physical differences such as shape, size, design and colour, quality or price. The products are close, but not perfect substitutes. Sellers in such a market can set the price of their slightly different product independent of and there are no entry barriers. An example of such a market may be the restaurant business -the offerings of each restaurant are similar but slightly different and hence each can set its prices independently.

Oligopoly is a market characterised by a few sellers and many buyers and barriers to entry for prospective sellers. The products sold being very close substitutes, the pricing decisions of the few existing sellers and strategically interdependent. For example, in the market for domestic air travel in India the few companies provide almost identical quality of air travel service and price cuts/ discounts provided by one company is often matched by the other companies. A special case of an oligopoly is a duopoly which is a market consisting of only two sellers. Examples include the market for black soft drinks (Pepsi and Coca Cola) and the market for the supply of commercial airplanes (Airbus and Boeing).

WHY SHOULD COMPETITION BE REGULATED?

To ensure that fair and free competition prevails in the economy, competition is regulated by competition authorities in almost every country. In a market, having several sellers, companies may collectively, by explicit or tacit means, decide to raise prices, lower quality, restrict existing competitors or prevent new companies from starting similar businesses. Similarly, a monopoly may misuse its position and cause harm to smaller companies and the consumers. Mergers and acquisitions (M&A) among existing companies increase the size of companies and reduce the number of companies in the relevant industry. The larger companies created because of M&A may in turn may indulge in anti-competitive practices.

COMPETITION REGULATION IN INDIA

In India, the regulation of competition began with the Monopolies and Restrictive Trade (MRTP) Act, 1969. The purpose of the MRTP Act was “to provide that operation of the economic system does not result in the concentration of economic power to the common detriment, for the control of monopolies, for the prohibition of monopolistic and restrictive trade practices and for matters connected therewith or incidental thereto.” Under MRTP, concentration of economic power or a monopoly was per se detrimental for the economy.

The Competition Act, 2002 (Act) altered this presumption and provided that monopolies are not per se bad unless there are unfair trade practices involved. The purpose of the Act is “to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto”.

The enforcement of the Act is entrusted with The Competition Commission of India (CCI) which was established by the Act. The CCI accomplishes this through mainly four lines of work: (i) Regulation of mergers and acquisitions (Merger Control); (ii) investigation of explicit or tacit agreements among persons or companies, which impede competition; (iii) prohibition of actions taken by dominant companies aimed at elimination or restriction of its competitors and thus decreasing competition (ii and iii are collectively called ‘Anti-trust Analysis’); and (iv) competition advocacy.