The effects of anti-competitive business practices on developing countries and their development ...

687 Pages·2008·4.37 MB·English

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

The effects of anti-competitive business practices on
developing countries and their development
prospects

HASSAN QAQAYA
GEORGE LIPIMILE
Editors

UNITED NATIONS
New York and Geneva, 2008
NOTE

The views expressed in this volume are those of the authors
and do not necessarily reflect the views of the UNCTAD secretariat.

The designations employed and the presentation of the material
do not imply the expression of any opinion whatsoever on the part of the
United Nations secretariat concerning the legal status of any country,
territory, city or area, or of its authorities, or concerning the delimitation
of its frontiers or boundaries.

Material in this publication may be freely quoted or reprinted,
but acknowledgement is requested, together with a reference to the
document number. A copy of the publication containing the quotation or
reprint should be sent to the UNCTAD Secretariat.

UNCTAD/DITC/CLP/2008/2

ii
FOREWORD

During the last decade, many developing countries have
adopted or are in the process of enacting competition laws. There is
growing awareness among developing countries of the adverse effects
of anti-competitive practices on their economies as well as their
populations. The effects of such practices are not easily quantifiable and
may therefore not be obvious. Nevertheless, developing countries have
come to recognize the potential benefits that can be derived from
competition law enforcement. The drive to establish legal and
institutional frameworks in order to fight anti-competitive practices has
intensified in recent decades.

In over three decades working with many developing countries
across the globe, UNCTAD has accumulated a wealth of knowledge and
expertise in making competition law and policy work for development.
The Accra Accord (paragraph 104) recognizes that "UNCTAD is the
focal point for the work on competition policy and related consumer
welfare within the United Nations system. It provides to its Member
States a forum for intergovernmental policy dialogue and consensus
building in the area of competition laws and policies. … a forum to
discuss competition issues on the multilateral level, … . UNCTAD's work
in this area should promote competition law regimes that take into
account the prevailing conditions in the developing countries." Within
this framework, the current publication brings together studies by
practitioners and academics focussed on identifying the effects of anti-
competitive practices on developing countries and their development
prospects.

The various sections of this publication cover a wide range of
cross-cutting competition issues. The publication highlights the
synergies between competition and consumer laws and policies. It
emphasizes the role of competition law and policy as a complementary
policy tool in poverty alleviation. It also draws attention to competition
concerns in commodity markets, which are of crucial importance to
developing and least developed countries. Moreover, it provides lessons
from a broad range of experiences from developed as well as
developing countries, including economies in transition. The contribution
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of competition enforcement can often be indistinguishable from that of
other economic policies in increasing efficiency and competition.
Nonetheless, this publication upholds the view that competition law and
policy are supportive of the overall process of economic development by
curbing anti-competitive practices that negatively impact consumers and
increase costs to business.

It is my hope that this publication, which is being launched at
the ninth session of the Intergovernmental Group of Experts on
Competition Law and Policy in Geneva, in July 2008, will contribute to
the enhanced understanding among government officials, private-sector
stakeholders, consumer organizations and civil society of the necessity
of competition law and policy and raise awareness on the damage
caused by anti-competitive practices on the economies of developing
countries.

I would like to reiterate that UNCTAD will continue to support
developing countries in their efforts in adopting competition and
consumer laws and establishing and strengthening the capacities of
their competition authorities through technical assistance and capacity-
building programmes.

Supachai Panitchpakdi
Secretary-General of UNCTAD

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EXECUTIVE SUMMARY

During the 1990s, many studies were undertaken to
demonstrate the effects of anti-competitive practices on consumers and
producers both in developing and developed countries. Damages
caused by such practices to developing countries have implications for
the purchasing power of consumers through increased prices.
Producers in the developing world are also affected by anti-competitive
practices through increased barriers to entry by restriction of information
on technology. A World Bank study1 shows that, in 1997, developing
countries imported US$81.1 billion worth of goods from industries where
companies were involved in price-fixing arrangements in the 1990s.
These goods represented 6.7 per cent of imports and 1.2 per cent of
GDP in developing countries. These figures reveal the significance of
the economic impact of the damages of anti-competitive practices on
developing economies. It is worth mentioning that the quantitative
effects of anti-competitive business practices are not easy to
demonstrate. The most obvious effect of such practices is seen in the
form of price increases in markets involving output-restricting or price-
fixing cartels and dominant firms abusing their market power. In such
cases, consumers are the ones who suffer directly from restricted
competition.

One of the policy options available to governments to prevent or
eliminate anti-competitive practices is the introduction and enforcement
of competition law. The interrelationships between competition law and
other government policies, such as consumer protection,
macroeconomic policies and poverty alleviation, are an important
catalyst to economic development and better livelihoods. Among these
policies the synergies accruing between competition and consumer
protection law enforcement to protect consumer interest and welfare are
worth noting.

This publication is a compilation of studies done by competition
practitioners and academics. It brings together studies quantifying the

1 Margaret Levenstein and Valerie Suslow (2001), Private International Cartels
and their Effect on Developing Countries, Background Paper for World Bank’s
World Development Report 2001, available at
http://www.worldbank.org/wdr/2001/bkgroundpapers/levenstein.pdf.
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effects of anti-competitive practices, on the one hand, and, on the other,
studies demonstrating/emphasizing the benefits of competition law and
policy, through establishing links between competition and other cross-
cutting issues. Part A deals with the interaction between competition
and consumer policies. Part B focuses on competition law and policy
and on poverty eradication. Part C discusses competition issues in
commodity markets. Part D is devoted to lessons learnt from
competition policy and law enforcement; experiences of developing as
well as developed countries from both national and regional
implementation perspectives. Lastly, Part E deals with specific anti-
competitive practices, such as cartels, abuse of dominance and patent
policy, which have a bearing on competition in the market.

The Interface between Competition and Consumer Policies

Competition and consumer protection law and policy areas form
part of the development perspective of UNCTAD's work. Considering
the needs of consumers, especially in developing countries, and the
imbalances they face in economic terms, educational levels and
bargaining power, UNCTAD published the Guidelines for Consumer
Protection.2 The objectives stated in the Guidelines include, among
others, assisting countries in controlling abusive business practices by
all enterprises, which practices adversely affect consumers, and
encouraging the development of market conditions, which provide
consumers with greater choice at lower prices. These objectives point to
the close relationship between consumer protection and competition
policies.

Competition law and consumer protection policies are
complementary and mutually reinforcing. Competition in the market
increases efficiencies and encourages innovation. Competition also
creates incentives for product differentiation and improves the quality of
goods and services provided. In that sense, competition enhances
consumer welfare by providing consumers with a wider choice at
competitive prices. Consumer protection strengthens competition in the
markets. Consumers make informed decisions in their preference for
goods and services in respective markets when they are well informed.

2 UN Guidelines for Consumer Protection, United Nations, New York and
Geneva, 2001, available at: http://www.unctad.org/en/docs/poditcclpm21.en.pdf.
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This increases competition between firms and results in efficiency
and/or quality improvement, which in turn benefits consumers. In this
publication there are studies that quantify benefits to consumers from
competition in different sectors of the economy as well as those that
quantify the adverse effects of anti-competitive practices on consumers
(Sections 1, 2 and 3). These studies illustrate the strong link between
competition and consumer protection. Other studies use econometric
models to demonstrate the contribution of competition law to alleviate
the costs of cartels incurred by consumers. Some competition
authorities have even estimated the rate of return in terms of consumer
welfare on each dollar spent on competition law enforcement (Section
2).

In some cases, total damages caused by the violation of
competition law are found to be significant while the damage per
consumer is relatively low, especially with respect to the price of the
product and the household budget. These are some of the factors
hindering or discouraging consumers from initiating private damage
actions. There are particular cases in which the market where violation
takes place is different from the market where the damage occurs.
Therefore damages are not visible to individual consumers. In such
cases, consumers may not be aware of the costs they incur. Market
assessment can be a useful tool to give visibility to damages caused by
anti-competitive practices. Such studies would strengthen the
competition advocacy work of competition authorities, by analysing the
level of competition in the market as well as the causes and possible
consequences of all factors restricting competition. The outcomes of
these studies may be used by policy makers in decision and policy
making (Section 13). It is interesting to note that one of the tasks of the
US Federal Trade Commission's Bureau of Competition is to provide
information for consumers, businesses and policy makers on
competition issues and market analysis (Section 1).

With respect to the interface between competition and
consumer interest, there are trade-offs between the two. Competition
law works to achieve efficiencies in the market. These can be
categorized as productive, allocative and dynamic efficiencies. It is
unlikely to achieve all these efficiencies at the same time. Therefore, the
competition authorities have to make an assessment as to which
efficiency shall be given more weight in each competition case. This
creates a trade-off between different types of efficiencies. One trade-off
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is between static and dynamic efficiency while another occurs between
productive and allocative efficiencies. For instance, although consumers
would not gain from dynamic efficiencies resulting from innovation in the
short term, they may benefit significantly in the long term (Section 1).

Tensions between competition and consumer interest arise in
situations where competition results in outcomes not favourable to
consumers, such as high switching costs, trade-offs between price and
quality. Additionally, consumers may have difficulties in price
calculations due to complex pricing schedules offered by companies.
This problem is prevalent in recently liberalized sectors, such as utilities
and professional services, where there could be need for regulations to
protect consumers and ensure that an adequate quality of services is
provided. However, such regulations may reduce competition in these
markets and in the extreme cases may even result in anti-competitive
practices (Section 1). Furthermore, competition in the market may lead
to negative effects on the environment and may not fully address the
social benefits of public good. In these areas, there is need to impose
regulatory rules to balance the long-term costs and benefits in terms of
social welfare. Health and safety issues also require attention by
consumer protection authorities since information asymmetries impede
the functioning of competitive markets, such as in the restaurant food
and used car markets (Section 2).

In jurisdictions such as India, the EU and the US, competition
law includes promotion and protection of consumer interest and welfare
among its goals. In these cases, there is a direct reference to consumer
welfare and interest. In the case law of many jurisdictions, relevant
courts or competition authorities consider consumer interest in their
decisions. Although consumer interest is one important element of
competition law, not all aspects of consumer interest, such as safety,
health, environment and privacy, can be addressed by competition law
enforcement. These additional aspects of consumer interest require
specialized laws, which also protect consumers against unfair business
practices (Section 1).

However, Section 3 provides examples of how effective
enforcement of competition law in developing countries can inherently
enhance consumer welfare. Case examples exemplify how merger
evaluation accords the competition authority with an opportunity to
approve mergers with conditions geared towards enhancing consumer
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welfare. Such conditions may include continued availability of goods and
services in the domestic market and a better quality and wider range of
products.

The synergies between competition laws and consumer
protection laws should be exploited to promote competition and
consumer welfare. These two policies use different tools but reinforce
one another to correct market failures. Competition law facilitates the
work needed by consumer policy by ensuring effective competition in
markets, while consumer policy contributes to strengthening of fair
competition, that is, competition on merits rather than through fraud and
deception, between firms by enhancing the ability of consumers to make
informed decisions and exercise choice (Section 1).

Government support is crucial in providing the necessary
infrastructure to develop and implement consumer protection policies
and in ensuring consumer participation in developing countries.
Competition laws that are not complemented by consumer protection
provisions or separate consumer laws risk failure to protect consumers
against anti-competitive practices (Section 2).

Competition and Poverty Eradication

We live in an era of market-driven globalization, in a world
increasingly interdependent and with unprecedented openness in the
global economy, a world in which the volume of trade and economic
growth has no precedent in history. This is an era, which, though largely
beneficial, has also brought about poverty and inequalities in wealth and
opportunities for the people and small and medium economic actors in
the markets. It is also an age that needs to translate these positive
aspects into gains for developing countries and particularly their people.

Poverty is one of the greatest challenges facing developing
countries today. The phrase "living on less than a dollar a day" has crept
into modern literature, news items, journals and other media to describe
the dire hopelessness of the poor within world populations. In this
context, the Millennium Development Goals, and in particular poverty
alleviation/reduction and/or eradication, comprise a subject that has
been elevated in profile. It features among the top priorities of all
international organizations and governments for policy implementation.
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Poverty has become a subject of study by research institutions and
individuals. It has also been identified as one of the most important
areas for ensuring coherence and aligning global and domestic policies.

Poverty is a reality in almost all countries at various dimensions
and magnitudes and the denial of it in any context negatively affects the
efforts made in dealing with it. The existence of poverty is associated
with many causes including government policies, poor planning and
non-motivation. Nonetheless, the cause of poverty not withstanding, its
alleviation is perceived to emanate from some policy interventions
(Section 5 and 6). Therefore, it is necessary for governments to identify
the poor, what they need and where they are located.

Certain factors have been identified as causes of poverty in
developing countries. They include lack of progressive economic growth
due to other factors, for instance prevalence of diseases such as
HIV/AIDS, high population growth rates, lack of infrastructure support,
etc. Debt burden perpetuates poverty in many developing countries
where a large percentage of GDP goes to debt servicing, leaving limited
resources to tackle poverty-related issues (Section 5). Other possible
factors could be associated with high inequality in income between the
rich and the poor, or between those who are able to exploit the available
opportunities and those who are not. Disparities could be based on
rural-urban, inter-racial and/or inter-social factors, climatic conditions,
access to markets and historical factors.

In connection with this, many authors have studied the pro-
growth and pro-poor benefits of competition in the markets, finding
indications that economies with competitive domestic markets generally
tend to have higher growth rates and per capita income.

International competition has seen a period of intensification,
now that interdependence of national economies has increased to a
point where all economies are exposed to the influence of events and
policies originating in other parts of the globe. The widely accepted
economic notion that barriers to competition impede innovation, growth
and prosperity is supported to some extent by the proliferation of policy
and law initiatives dealing with competition at both national and regional
levels. Bearing this in mind, in a spirit of continuous coherence, the
United Nations took the step of adopting in 1980 the UN Set of
Multilaterally Agreed Equitable Principles and Rules for the Control of
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