Healthy market competition is fundamental to a well-functioning economy.
Basic economic theory demonstrates that when firms must compete for customers, it leads to lower prices, higher quality goods and services, greater variety, and more innovation.
Defining the market in relation to competition is very tricky.
Competition laws are based on a certain understanding of how markets work and what market outcome should be achieved.
Bangladesh enacted the Competition Act in 2012.
In the preamble, the act stated that “Whereas in the context of gradual economic development of the country, it is expedient and necessary to make provisions to promote, ensure and sustain congenial atmosphere for the competition in trade, and to prevent, control and eradicate collusion, monopoly and oligopoly, combination or abuse of dominant position or activities adverse to the competition.”
Why competition is necessary
Competition is the basis of a market economy.
When businesses vie for customers, prices fall and economic output increases.
As unproductive firms are replaced by innovative firms, the economy becomes more efficient.
Competition allows the market economy to allocate resources efficiently.
Without it, there can be distortions that reduce overall welfare, as concentrated interests benefit at the expense of the broader public.
Competition is an economic process of interaction, interconnection and struggle between the enterprises acting on the market in order to provide better sales opportunities for their products, meet the needs of customers and obtain the greatest profit.
Modern competition is an integral attribute of the global market.
Industrialization of economic life expands the mass base of competition.
Along with giant monopolies, medium, small and even very small firms enter the market struggle.
When there is insufficient competition, dominant firms can use their market power to charge higher prices, offer decreased quality, and block potential competitors from entering the market -- meaning entrepreneurs and small businesses cannot participate on a level playing field and new ideas cannot become new goods and services.
Market power leads to dominant position, which leads to inequality.
In common parlance, market means a place where commodities are bought and sold at retail or wholesale prices.
Thus, a marketplace is thought to be a place consisting of a number of big and small shops, stalls and even hawkers selling various types of goods.
In economics however, the term “market” does not refer to a particular place as such, but it refers to a market for a commodity or commodities.
It refers to an arrangement whereby buyers and sellers come in close contact with each other directly or indirectly to sell and buy goods.
While defining ‘relevant market' in Competition Commission Act, 2012 under section 2-S (ii) a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are homogenous and are distinguished from the conditions prevailing in the neighboring areas.
In a just concluded case, the Competition Commission of India imposed a penalty of Rs1,337.76 crore on Google for abusing its dominant position in multiple markets in the Android mobile device ecosystem.
The CCI delineated following five relevant markets in the present matter:
- Market for licensable OS for smart mobile devices in India
- Market for app store for Android smart mobile OS in India
- Market for general web search services in India
- Market for non-OS specific mobile web browsers in India
- Market for online video hosting platform (OVHP) in India.
Market competition correlates with productivity
Empirical studies have largely suggested that product market competition is positively correlated with productivity.
Productivity levels and growth rates in many countries have lagged behind the competitive markets around the world.
Academics and policy makers have focused attention on the lack of product market competition as one of the main reasons for this poor performance.
The idea that competition improves efficiency has a long history in economics.
According to this theory, competition is a static end-state in which firms cannot persistently over charge and earn abnormal profits.
Competition between firms can benefit consumers, workers, entrepreneurs, small businesses.
A market is competitive when rivals are sufficiently threatening to incentivize an incumbent to improve (better quality, lower price, new services, more innovation, etc.) to maintain its competitive advantage.
Inefficient firms are penalized by consumers while more efficient and innovative companies are rewarded.
To obtain a competitive situation several criteria need to be met.
These include having a considerable number of rivals, participants possessing common knowledge about market opportunities, and there being free entry and exit.
According to this theory, the excess of the price over costs decreases as the number of producers increases.
Perfect competition is the opposite of a monopoly.
In a monopoly, there are no rivals and a monopolist can extract abnormal profits by pricing as high as the consumer will bear (i.e. as far as the elasticity of demand permits).
The measurement of competition is not straightforward.
Competition is a complex concept and not directly observable.
Over the years, this has resulted in the development of numerous methods to capture and measure the degree of competition.
Competition authorities measure market competition for broadly three reasons.
The first one is to apply competition law in markets affected by mergers and potential abuse of dominance (competition enforcement).
The second reason is to assess whether pro-competitive intervention is needed and whether such intervention is likely to be net beneficial (competition advocacy).
The third reason is to assess the effectiveness of the competition policy of an authority (impact assessment).
Competition authorities who may want to consider developing further their market screening intelligence using a combination of competition indicators could start with markets defined during casework.
Subsequently, this can be extended to include other important markets, particularly as firm-level data becomes more available.
This could allow an authority to obtain a more reliable view on how a market is evolving and hence identify where there could be problems, or alternatively myth-bust when indicators suggest problems are absent in well-defined markets.
Competition authorities cannot create and perfect market competition unless all the stakeholders and particularly the government support the commission with law, policy and action.
For example, after assuming the office of the President, US President Biden has signed an executive order on promoting competition in the American economy.
It launched a whole-of-government effort to combat growing market power in the US economy by seeking to ensure that markets are competitive, because of the scale and scope of the market power problem.
The US president's executive order makes the promotion of competition central to the government's mission by dedicating the entire government to reversing these trends.
Affirmative action
The order of the US President therefore directs or encourages roughly a dozen agencies to engage in more than 70 specific actions that will remove barriers to entry and encourage more competition.
For example, the order encourages the Department of Health and Human Services to work with states developing drug importation programs and to consider finalizing rules allowing hearing aids to be sold over the counter at a fraction of their current price.
It requires all agencies to use their procurement and spending powers to avoid entrenching monopolists and to create new business opportunities for small firms.
It encourages the Federal Trade Commission (FTC) to issue rules curtailing non-compete agreements which inhibit labour mobility, preventing workers from switching to jobs that offer better pay and benefits.
It directs the Department of Agriculture to consider strengthening its enforcement of laws designed to prevent large meat-processing companies from taking advantage of farmers.
The scrutiny of the market and ensuring perfect competition in the market is the primary job of the competition commission.
The focus should be given to create a perfect competition in the market.
The authorities including Bangladesh Competition Commission cannot avoid the responsibility for the so-called syndicates in the market.
Syndicate is the popular name of collusion of sellers in the market although syndicate of buyers is also possible in the market.
Despite an active anti-trust agency, the order of the US President is a unique example of how leaders can instruct different agencies to ensure competition in the market.
It may be noted that the President did not urge the law-enforcers to punish the businessperson for syndication.
The major job of any competition commission is to create a market with perfect competition.
The market and competition are the basis of a free market economy.
Bangladesh has adapted the market economy but the Bangladesh Competition Commission alone is struggling to establish different markets having perfect competition.
The author is a non-government adviser at the Bangladesh Competition Commission. He can be reached at mssiddiqui2035@gmail.com