Transcript BRIDLING MARKET DOMINANCE – A View From Jamaica

BRIDLING MARKET
DOMINANCE –
A View From Jamaica
International Conference
on
Small States and Economic Resilience
Malta – April 23-25, 2007
Barbara Lee
Executive Director
Fair Trading Commission - Jamaica
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STRUCTURE OF PAPER
Introduction

Defining “small”
Section 1

Major features of the market in a Small State
Section 2

An examination of how the Jamaican
Competition Law, The Fair Competition Act
(FCA) treats with market adjustment
2
Structure of Paper
Cont’d …
Section 3

Presents viewpoints on the adequacy of
Competition Law for economic development
Section 4

Case studies within contrasting legislative
frameworks
Section 5

Conclusion
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INTRODUCTION

DEFINING “SMALL”
(i) World Bank definition –
population
(ii) GDP – Chares Webb’s
“Competition Law in Small Economies
Compared” (2006)
(iii) Free Trade Area of the Americas –
Economic vulnerability; levels of development
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Introduction Cont’d…
DEFINING “SMALL”
Cont’d …
(iv) The focus of the paper: Dominance in Small
States
• factors facilitating such dominance
•
Measures to curb it
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SECTION 1
FEATURES OF THE MARKET
IN A SMALL STATE
•
•
Natural monopolies, largely in utilities
Characteristics of Natural Monopolies
•
•
Large capital outlays
Relatively large overhead costs – preventing
duplication, therefore competition
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Characteristics of natural monopolies
Cont’d…
•
appreciable economies of scale and/or
scope
•
Succeed in markets not large enough
to sustain competition at an efficient
scale
•
Rampantly rent-seeking
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Characteristics of natural monopolies
Cont’d…
•
•
•
•
•
Caribbean experience in late 1980s into the
1990s
• Privatization
• Liberalization
Water, last bastion of the traditional natural
monopolies
Electricity – competition in generation in
Jamaica
Natural Gas – monopoly in Trinidad & Tobago
and Barbados
Telecommunications
• Fully liberalized in Jamaica March 2003
8
Characteristics of natural monopolies
Cont’d…
•
Phenomenal growth in the market for mobile telephony
in Jamaica
•
•
•
•
•
•
Monopoly up until 2000
Entry of competition in 2000, reaching 60.2% in
September 2005
Fixed line telephone lagging behind
One Licence issued in 2002 but no start-up
•
•
•
300,000 subscribers in January 2001
2,745,400 by September 2005
Cost
Chosen technology
Need for regulation
•
Curbing the behaviour of the dominant firm
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The Office of Utilities Regulation
(OUR)
•
•
•
•
Established 1995 under the Office of
Utilities Regulation Act, 1995
Jurisdiction over all utilities
Regulates the telecommunications
market under the Telecommunications
Act of 2000
Objects sections include “promoting fair
and open competition”
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OUR Cont’d…
•
•
•
Required to consult with the FTC on
matters of “substantial competitive
significance”
To refer such matters to the FTC
Dominance under the
Telecommunications Act to be
determined as per the meaning under
the FCA
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Monitoring Competition in the
Mobile Market
•
•
•
•
•
Misleading advertising - Section 37 of
the FCA
Advertising wars leading to information
asymmetries
Vertical restraints
Abuse of dominance provision
Agreements that lessen competition
substantially, e.g. sponsorship
agreements
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Beneficiaries
•
Individually - sports clubs and sporting activities
•
•
Various geographic and social groupings
Nationally – growth in entrepreneurship
•
Growth in the economy
•
Improved consumer welfare
•
Disciplining of dominant firms
Result of liberalization and unimpeded competition
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Electricity
•
•
•
•
Ministerial Order February 2001
• Exemption of the encumbent from the
FCA
Power of Minister – Section 3(h) of the FCA
Relationship between independent producers
and the encumbent
Affecting determination of price
Despite the introduction of competition in
generation no evidence of enhanced consumer
welfare
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Factors Supporting Dominance
& Creating Barriers To Entry



Strong social and family ties
Difficulties in obtaining credit
Cultural allegiances


E.g. Red Stripe Beer in Jamaica
Transportation costs, especially for an
island
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Factors Supporting Dominance …
Cont’d…


Bulk buying through dominant firms
Government policies
State aid
 Concessions
 Tax breaks
 Preferential awards of contracts


Legislation
 Intellectual property rights vis-à-vis
dominant firms
 Antidumping and Subsidies Laws
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SECTION 2
DOMINANCE UNDER THE FCA

Definition


A firm is dominant if
“… by itself or together with an
interconnected company, it occupies
such a position of economic strength
as will enable it to operate in the
market without effective constraints
from its competitors or potential
competitors”
The offence is the abuse
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Why would a dominant firm need to
be constrained?
United States vs Aluminium Co of America
(Alcoa) 1945


Such a firm can restrict output
 Raise prices
 Transfer income from customers to producers
Thereby excluding rivals from the market “by
means other than superior performance in the
form of better products, prices and service”
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Structure vs Conduct Remedies
STRUCTURE
 Role of merger control in preventing anticompetitive levels of concentration in the
market
 Omission of merger control provisions
from the FCA
 Rationale


Jamaica’s level of economic development
Relatively small size of many of its firms
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Structure Cont’d…
Is there any merit to the argument?
Kovacic et al think that mergers can
 Bring superior managerial and/or
technical skill to bear on underused
assets

Yield economies of scale and scope,
reducing cost, improving quality and
boosting output
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Structure Cont’d…



Discourage incumbent managers from
behaving perversely, fearing the
possibility of a hostile takeover
Facilitate sale of a business to the
“best” buyer at the best price
Few risks to competition
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Structure vs Conduct Remedies
Cont’d …
CONDUCT REMEDIES
 Sections 19-21 address the conduct of
dominant firms, prohibiting, inter alia




Restricting the entry of persons into any
market
Eliminating any person form any market
Improving unfair or selling prices
Limiting production … to the prejudice of
consumers
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Justification



Conduct exclusively directed to
improving production or distribution
To promoting technical or economic
progress; and
Consumers are allowed a fair share
of the resulting benefit
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Justification Cont’d…




Enforcement of intellectual property
rights
Superior competitive performance
Substantial lessening of competition
The FCA therefore


Constrains the behaviour of dominant
firms yet
Promotes innovation and encourages
superior competitive performance
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SECTION 3
VIEWPOINTS ON THE ADEQUACY
OF COMPETITION LAW

Protection of “axial industries”
- Dr Trevor Farrell

“… erecting walls and barriers to
trade is not the answer”
- Ambassador John K Veroneau
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SECTION 4
CASE STUDIES
(i) Beer Market



2001 Investigation into the beer market –
under Sections 17 and 19 the FCA
Market share – over 90%
Agreements that lessen competition
substantially, included:
 Promotional
 Sponsorship
 Demanding sales data on competing brands
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Beer Market Cont’d …

Settlement


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Limiting length of agreements
Prohibiting option to renew and/or right
of first refusal
Relating notice of termination without
cause to value of sponsorship
Reducing number of outlets
Permitting promotion of competing
brands
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Beer Market Cont’d …

Current Market


Increase in entrant’s annual revenue by
some 200%
Entry of another competitor in 2006
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(ii) Cement Industry

Application of Anti-dumping Laws 2001
- complaint by monopoly producer
Carib Cement Company Ltd (CCCL) to
the Antidumping and Subsidies
Commission (ADSC)
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Cement Industry Cont’d …
FTC Caution:



Overall impact on competition and
consumer welfare
Weigh protecting one company against
cost of consumer and wider economic
objectives
Value of CCCL’s promise not to raise
prices without Government’s approval
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Cement Industry Cont’d …



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
Dumping duties of 89.79% imposed
2002 and 2004 – further complaints
ADSC recommendation –
 increase of tariff from 15% to 40%
 Safeguard measure of 25.83%
Market demand – 900,000 tonnes
CCCL at 700,000 tonnes – climbing to 844,840
tonnes in 2005 but still inadequate
Specific construction demands
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Cement Industry Cont’d …

By the middle of 2006 – crisis in the
industry
tariff rolled back to 15% for three months
 Tariff removed altogether – indefinitely
 Importation resumed – 10 companies as
at December 2006


J$305M paid out in compensation
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Lessons



Dangers of picking winners and
promoting national champions
Competition as a superior mechanism
for organizing the economy
Trade remedies


Last resort
Use sparingly
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CONCLUSION
Benefits of competition law and policy
for states, however small – effective
bridling of dominance to:
Increase entrepreneurship

Promote market adjustment

Enhance consumer welfare
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