201610 1721 Queenstown Guyana Presented by Kevin Harriott Kharriotgmailcom Fair Trading Commission jftcgovjm The views expressed herein are those of this facilitator and do not necessarily reflect the views of the Fair Trading Commission in Jamaica ID: 740516
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Slide1
The Economics of Competition
2016.10. 17-21Queenstown, Guyana
Presented by
:
Kevin Harriott| Kharriot@gmail.com
Fair Trading Commission| jftc.gov.jmSlide2
The views expressed herein are those of this facilitator and do not necessarily reflect the views of the Fair Trading Commission in Jamaica.
Disclaimer2October 24, 2016
The Role of Economics in Competition Law EnforcementSlide3
Understand the
rationale for competition law.Understand the features of perfect competition.Understand the link between economics and antitrust enforcement.
Learning Objectives
3
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide4
What do you understand by the term “competitive markets”?Is it fair that students pay a lower fare than adults on public transportation?
Is it fair for consumers that goods are being “dumped” in Jamaica?Discussion Points4
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide5
The Objectives of Competition Law
The Economics of Competition LawMarket DefinitionMarket Power AssessmentTopics of Discussion
5
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide6
1.1 A Policy Perspective
6October 24, 2016The Role of Economics in Competition Law Enforcement
Competition Policy
Competition law
Narrow
v. Broad Definition
Anti-dumping
Telecoms
deregulation
Industrial policy
Intellectual propertySlide7
1.1 A Policy Perspective
7October 24, 2016The Role of Economics in Competition Law Enforcement
Consumer Policy
Competition law
Public Sanitation
Standards law
Consumer lawSlide8
Economics Objectives:Efficiency
Consumer ProtectionNon-Economic ObjectivesEquity PoliticalOther1. Stated Objectives of Competition Law
8
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide9
1. Objectives in Practice…
Antitrust enforcement is a war against the unjustified use of market power.October 24, 2016
The Role of Economics in Competition Law Enforcement
9Slide10
1. Objectives in Practice…
Antitrust enforcement is a war against the unjustified use of market power.October 24, 2016
The Role of Economics in Competition Law Enforcement
10Slide11
1. Objectives in Practice…
Antitrust enforcement is a war against the unjustified use of market power.October 24, 2016
The Role of Economics in Competition Law Enforcement
11Slide12
1. Objectives in Practice…
Antitrust War ChestOctober 24, 2016
The Role of Economics in Competition Law Enforcement
12Slide13
1. Objectives in Practice…
Antitrust War Chest (i). Legislation - Anti-competitive agreements - abuse of dominance - Mergers
October 24, 2016
The Role of Economics in Competition Law Enforcement
13Slide14
1. Objectives in Practice…
Antitrust War Chest (i). Legislation (ii). Advocacy
October 24, 2016
The Role of Economics in Competition Law Enforcement
14Slide15
1. Objectives in Practice…
Antitrust War Chest (i). Legislation (threat from commercial conduct) (ii). Advocacy
October 24, 2016
The Role of Economics in Competition Law Enforcement
15Slide16
1. Objectives in Practice…
Antitrust War Chest (i). Legislation (threat from commercial conduct) (ii). Advocacy (threat from govt. conduct)
October 24, 2016
The Role of Economics in Competition Law Enforcement
16Slide17
The Objectives of Competition Law
The Economics of Competition Law 2.1 What is meant by “Competitive Markets”? 2.2 How do competitive markets compare to other markets? 2.3 How economics have shaped legal standards Market Definition
Market Power Assessment
Topics of Discussion
17
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide18
2.1 What are “competitive markets?”
October 24, 2016
The Role of Economics in Competition Law Enforcement
18Slide19
2.1 What are “competitive markets?”
“looks like” or “performs like” the perfectly competitive market structure
October 24, 2016
The Role of Economics in Competition Law Enforcement
19Slide20
2.1 “competitive markets?” (cont’d)
Market structure:number of suppliers/buyersconditions for entry and exitinformationsubstitutability
October 24, 2016
The Role of Economics in Competition Law Enforcement
20Slide21
2.1 “competitive markets?” (cont’d)
Various market structures studied by economists(Perfectly) Competitive [worshipped, no real world example]
October 24, 2016
The Role of Economics in Competition Law Enforcement
21Slide22
2.1 “competitive markets?” (cont’d)
Various market structures studied by economists(Perfectly) Competitive [worshipped, no real world example]Oligopoly [tolerated, eg
. new cars dealer]
October 24, 2016
The Role of Economics in Competition Law Enforcement
22Slide23
2.1 “competitive markets?” (cont’d)
Various market structures studied by economists(Perfectly) Competitive [worshipped, no real world example]Oligopoly [tolerated, eg
new cars dealer]
Monopolistically Competitive
[
tolerated
, service station dealer]
October 24, 2016
The Role of Economics in Competition Law Enforcement
23Slide24
2.1 “competitive markets?” (cont’d)
Various market structures studied by economists(Perfectly) Competitive [worshipped, no real world example]Oligopoly [tolerated, e.g. new cars dealer]
Monopolistically Competitive [tolerated, e.g. service station dealer]
Monopoly
[
despised
, e.g. Guyana Power & Light Inc]
October 24, 2016
The Role of Economics in Competition Law Enforcement
24Slide25
2.1 “competitive markets”? (cont’d)
25
October 24, 2016
The Role of Economics in Competition Law Enforcement
Features
Competitive
Oligopoly
Monopoly
Suppliers
Many
Few
One
Difficulties entering/exiting
None
Medium
Very
High
information
Perfect
---
---
substitutability
Perfect
---
noneSlide26
Economists rank markets based on “efficiency” Static Efficiency
Allocative efficiency:- resources are allocated to reflect consumer preferences. [“p = mc”]Productive efficiency:- average production costs are minimizedTotal Surplus:- Maximize consumer + producer surplusDynamic Efficiency
Product innovation
:- introduction of “new” product
Cost innovation
:- cheaper way of producing existing product
October 24, 2016
The Role of Economics in Competition Law Enforcement
26
2.2 How “competitive markets” compareSlide27
How do you measure costOpportunity Cost
Marginal costAverage costTotal CostFixed costVariable costLong run incremental costAcquisition costReplacement cost
October 24, 2016
The Role of Economics in Competition Law Enforcement
27
2.2 How “competitive markets” compareSlide28
2.2 How “competitive markets” compare
28
October 24, 2016
The Role of Economics in Competition Law Enforcement
Economic
Performance
Competitive
Oligopoly
Monopoly
Allocative
efficiency
Yes
No
No
Productive efficiency
Yes
No
No
Maximum
Social Surplus
Yes
No
Usually
notSlide29
2.3 How economics have shaped legal standards
Competition law is an attempt to codify the behaviour of economic agents in a competitive market
October 24, 2016
The Role of Economics in Competition Law Enforcement
29Slide30
Competition
Law StandardsParallel Economic conceptsRelevant MarketMarket
Monopoly Power
Market power
Dominant enterprise
monopoly
Abuse of dominance
Unilateral effects
Collusion/conspiracy/cartel
Coordinated conduct
The effect of substantially lessening competition
Anticompetitive
effects
October 24, 2016
The Role of Economics in Competition Law Enforcement
30
2.3 How economics have shaped legal standards (cont’d)Slide31
Characteristics of Competitive Market
Scrutinized Conduct [Pillars of CL]Many suppliers/ consumersMergers and Acquisitions (M&As)No difficulty entering/ leaving
Abuse of
dominance
Perfect
information
Collusion
Perfect substitutability
Competition Advocacy
October 24, 2016
The Role of Economics in Competition Law Enforcement
31
2.3 How economics have shaped legal standardsSlide32
The Objectives of Competition Law
The Economics of Competition LawMarket definitionIndirect evidenceDirect evidenceMarket Power Assessment
4.1 legal standards of proof
4.2 theories of harm
4.3 dominance
4.4 mental traps to avoid
Reminder
: Topics of Discussion
32
The Role of Economics in Competition Law Enforcement
October 24, 2016Slide33
PurposeAssessmentIndirect Evidence
SSNIP Test (see US merger guidelines 2010)Direct Evidence“first principles approach” (see Salop, 2001)3. Market Definition
33
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide34
Definition of Relevant Market“Smallest group of substitutable products sold in a geographic region”Relevant Market has at least Two Dimensions
Product MarketGeographic MarketOTHER DIMENSIONTime (day, week, month etc)3. Market Definition (cont’d)
34
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide35
SSNIP (or Hypothetical Monopolist)TestSmall but Significant Non-Transitory Increase in PricesUsed by most Competition Authorities to define Market
3. Market Definition (cont’d)35
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide36
SSNIP (or Hypothetical Monopolist)TestStart with the product at the centre of the complaint.
ROUND ONEIf there was only a single seller of this product (i.e. a hypothetical monopolist), could such monopolist profitably increase prices by 5%?3. Market Definition (cont’d)
36
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide37
If price increase is profitable, then consumers do not have much substitutes for the product. Then concluded that product is in a market by itself. End SSNIP TEST
3. Market Definition (cont’d)37
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide38
If price increase is NOT profitable, then consumers must have switched to a substitute for the product. conclude that product at the subject of the complaint is competing in a market with at least one other product. Identify the other product and continue SSNIP Test
3. Market Definition (cont’d)38
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide39
ROUND TWOIf there was only a single seller of these two products, could such monopolist profitably increase prices by 5%?
3. Market Definition (cont’d)39
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide40
If price increase is profitable, then consumers do not have much substitutes for the two products. Then concluded that these two products are in a market by themselves. End SSNIP TEST
3. Market Definition (cont’d)40
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide41
If price increase is NOT profitable, then consumers must have switched to a substitute for the two products. conclude that two products are competing in a market with at least one other product. Identify the other product and continue SSNIP Test.
End SSNIP test when you have found a group of products for which it would not be profitable for a hypothetical monopolist to increase prices by 5%.3. Market Definition (cont’d)41
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide42
Direct Evidence of Market DefinitionObserved conduct such as “collusion” could define the relevant market.
3. Market Definition (cont’d)42
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide43
The Objectives of Competition Law
The Economics of Competition LawMarket definitionIndirect evidence
Direct evidence
Market Power Assessment
4.1 legal standards of proof
4.2 theories of harm
4.3 dominance
4.4 mental traps to avoid
Reminder
: Topics of Discussion
43
The Role of Economics in Competition Law Enforcement
October 24, 2016Slide44
Per se (strict liability) {
No economic foundation}Rule of Reason (fact-specific)Conduct unjustified if it leads to a “substantial lessening of competition” 4.1 Legal Standards of Proof
44
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide45
4.2 Theories of Harm
Definition of Market Power“The ability to raise prices above competitive levels profitably for a sustained period of time.”
October 24, 2016
The Role of Economics in Competition Law Enforcement
45Slide46
Is this consistent to exercising market power?
4.2 Theories of Harm (cont’d)46October 24, 2016
The Role of Economics in Competition Law Enforcement
price
time
JuneSlide47
Is this consistent to exercising market power?
4.2 Theories of Harm (cont’d)47October 24, 2016
The Role of Economics in Competition Law Enforcement
price
time
JuneSlide48
Is this consistent to exercising market power?
4.2 Theories of Harm (cont’d)48October 24, 2016
The Role of Economics in Competition Law Enforcement
price
time
JuneSlide49
Is this consistent to exercising market power?
4.2 Theories of Harm (cont’d)49October 24, 2016
The Role of Economics in Competition Law Enforcement
price
time
JuneSlide50
Harm to rivalsHarm to consumers
4.2 Theories of Harm (cont’d)50October 24, 2016
The Role of Economics in Competition Law EnforcementSlide51
Harm to rivalsPower to exclude rivalsRaising rivals cost
Harm to consumers4.2 Theories of Harm (cont’d)51
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide52
Comment on “CL does not protect competitors”Harm to rivalsPower to exclude rivals
Raising rivals costHarm to consumersPower over price4.2 Theories of Harm (cont’d)52
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide53
Is building a better mouse trap harmful?
Position on Price-gouging legislation.Position on “Buy local” strategy.Position on anti-dumping enforcement.Position on local vs
imported Goods (reference Cement Study, 2009)
Discussion Points
53
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide54
PurposeAssessmentImpediments (barriers) to entry/exit
Concentration measuresVertical restraints4.3 Dominance54
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide55
Impediments (barriers) to entry/exitEntry must be timely; Entry must be likely; and
Entry must be sufficient.4.3 Dominance (contd)55
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide56
measures of market concentrationHerfindahl-Hirschman Index (HHI).HHI < 1,500 ---> unconcentrated market
1,500 < HHI < 2,500 - moderately concentratedHHI > 2,500 - highly concentratedM-firm Concentration Ratio (CRm)CRm < 50% ---> unconcentrated market50% < CRm < 80% ---> moderately concentrated
CRm > 80% ---> highly concentrated
4.3 Dominance (
contd
)
56
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide57
Change in HHH<100
100<change in HHI<200Change in HHI>200Merger result in…
Unconcentrated market
No further analysis
No further analysis
No further
analysis
Moderately concentrated market
No further analysis
raises
significant
competitive concern
raises
significant
competitive concern
Highly
concentrated market
No further analysis
raises
significant
competitive concern
Presumed
likely to enhance market power
October 24, 2016
The Role of Economics in Competition Law Enforcement
57
4.3 Dominance (
contd
)Slide58
Vertical restraintsBuyer power
Supplier power4.3 Dominance (contd)58
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide59
Threshold test trap
Price-up TrapCellophane Trap (advance level course)Marginal Cost Trap (advance level course)Unilateral SSNIP Trap (
advance level course
)
4.4 Mental Traps to avoid
59
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide60
Threshold Test Trap: “Mistaking an enterprise’s inability to profitably raise price above current level because of current competitive constraints from certain rivals for an inability to exercise market power even after those rivals are excluded.”
4.4 Mental Traps to avoid60
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide61
Price-Up Trap: “Mistaking an enterprise’s inability to profitably raise price above the current level for an inability to exercise market power by preventing competitor’s conduct that otherwise would reduce price below the current level, thereby mislabeling maintenance of market power as a lack of market power.”
4.4 Mental Traps to avoid61
October 24, 2016
The Role of Economics in Competition Law EnforcementSlide62
Guyana Rice Development Board (anti-competitive agreements), March 2016Tankweld
Ltd (abuse of dominance), 2011CASE STUDIES62
October 24, 2016
The Role of Economics in Competition Law Enforcement