Markets need not be Perfect: Competition Policy and Market Structure Analysis in the Global South/ Mercados nao tem que ser perfeitos: politica da concorrencia e analise de estrutura de Mercado no Sul global.
| Autor | Waked, Dina I. |
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Introduction
When we make antitrust arguments, we employ the rhetoric of competition. We simply take for granted the received learning that competition policy (and its celebrate logic of efficiency) has always provided the ground for antitrust arguments. (2)
Countries in the Global South have been taught to follow a competition policy that seeks to maximize the allocative efficiency of society under a proscribed ideal of perfect competition. They are encouraged, often even pressured, to attain this ideal of perfect competition so that their resources are allocated in the most efficient way. Any other goal they desire to achieve has been deemed unscientific, political and lacks objectivity. This has influenced their market structure and market failure regulations, particularly their newly adopted competition laws.
This article presents the encounter between countries in the Global South with this ideal. It challenges the allocative efficiency-perfect competition nexus as an unsuitable guide for countries in the South. An alternative is then proposed where dynamic efficiency, innovation and growth replace the static ideal of allocative efficiency. Under this proposed alternative, the markets necessary to realize these goals are now open to a mix of competition and concentration. Under this alternative, the concentrated enterprises are considered beneficial for society as they can innovate, spend on R&D, and in the long run can reduce their cost functions to allow for even lower prices than those prevailing in perfectly competitive markets.
This alternative proposal relies on a redistributive mechanism that is integral to the pursuit of these alternative goals, whereby not only are the ills of the monopolistic and dominant firms outdone, as the higher prices will now be taxed and redistributed back to the consumers paying these overcharges, but also, the tax imposed is bound to be born by these enterprises themselves and not passed on to consumers. Hence, assuring an increased state income that is funded from monopoly rents and can now be redistributed back not only to the direct purchasers, but also to fund infrastructure project and social welfare programs.
There are five parts to this article. Part II introduces the allocative efficiency--perfect competition nexus and how, as the ideal driving markets and welfare analysis, has impacted markets in the Global South. Part III proposes an alternative to this market configuration that pursues goals more suitable to countries in the South. Part IV sets forth arguments in support of this alternative. The first arguments in support of this alternative draw on evidence from other countries, particularly those that have developed using similar policies to those proposed in this alternative and not the allocative efficiency--perfect competition nexus. The second arguments supporting the alternative rely on empirical evidence. And the third arguments support the alternative by presenting ideas from the progressive era history of economic thought. Part V of the article concludes.
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The allocative efficiency--perfect competition nexus
Countries in the Global South, with an increasing number ever since the 1990s, have adopted competition laws often to please donor institutions and other times hoping to realize to development promises. (3) The main advocates for "competition law for development" have been the international organizations such as the Organization for Economic Cooperation and Development (OECD); the World Bank; the International Monetary Fund (IMF) and others.
These international organization have issued relentless advice pointing to these laws as the missing link for development and growth. Trade partners in more advanced countries, notably the European Union (EU) have conditioned trade deals with countries in the Global South on the adoption of such laws modeled on their own legislations. Other lending institutions have done the same: preconditioning the loans on the adoption competition laws modeled on international principles of advanced nations' competition laws. The surge in adopting competition laws has reached its zenith in the 1990s with the hight of neoliberal reforms part of the Washington Consensus, integration of many countries in the Global South in world trade arrangements and the sidelining of socialist alternatives to free market configurations and globalization requirements.
The model laws that were transplanted into the Global South are very similar to the laws adopted in Northern more advanced countries and have very little local flavor. Few exceptions stand out, such as e.g. South Africa where its competition law seeks a "broader range of considerations including the promotion of a more equitable spread of ownership as well as the 'interests' of workers." (4)
South Africa's exceptionalism aside, the modus operandi of competition laws, in the North and South alike, is to structure markets built on the economic model of perfect competition to attain allocative efficiency. The assumption is that only under perfect competition is equilibrium achieved, consumer welfare maximized, deadweight loss prevented, and resources allocated in the most efficient manner. Both the notions of efficiency and perfect competition, considered pillars of the global economy, are ingrained in our understanding of how the global and thereby the local economy and its markets should be organized.
The ideal was thereby set: a market structure encouraging perfect competition to guarantee allocative efficiency. The countries in the Global South were persuaded to follow the motto of "the more competition the merrier." Their historically protected monopolies, often dominated by local elite or the government, originally only considered responsible for the ills of their political economy, were now considered additionally as the reason these countries did not grow, develop or catch up. This led to active adoption of competition laws, setting up of competition authorities and using foreign experts to advice on the implementation and the policy necessary to achieve the set goals of perfect competition and allocative efficiency.
Although the goals of competition laws cover a wide range of choices, each leading to a different outcome and enforcement objective, (5) the most widespread modern or mainstream goal of competition enforcement is allocative efficiency, which is also termed consumer welfare. It is a static goal and in economic terms, it is called consumer surplus- which measures the difference between what consumers were willing to pay for a good and what they actually paid (also known as wealth-maximization). The ideal that is desired, namely a maximization of consumer welfare, is achieved when market prices are equal to the marginal cost of production; a situation that prevails under perfect competition. As soon as we move away from the perfect competition ideal, prices increase and consumer welfare decreases. A monopolist charging monopoly prices will result in reducing consumer welfare and creating a dead weight loss to society, namely wasted resources that could have been employed but are not.
Although the terms (allocative efficiency and consumer welfares), in strict economic sense are the same referring to consumer surplus maximization, (6) one can discern two different motivations in the application of these different terms. On the one hand, those concerned with consumer welfare or surplus seem to be interested in an application of competition law that is mainly occupied with protecting consumer property from being stolen by firms with market power. (7) According to scholars in this camp, antitrust enforcement should prohibit any conduct that would lead to a reduction of consumer surplus as this would amount to exploitation "that unfairly transfers [the wealth of consumers] to firms with market power." (8) What is important to this line of argument is the prevention of wealth transfer, which is considered theft (9) and takes place when "consumers [are forced] to pay supracompetitive prices." (10) According to this approach, a consumer surplus for welfare standard better reflects society's judgments about the appropriate distribution of economic welfare. (11)
On the other hand, those who direct their attention towards allocative efficiency focus their competition law application on the prevention of the deadweight loss (DWL) triangle from emerging, i.e. a desire for the economy to produce without any inefficient allocation of resources. (12) The advocates of allocative efficiency as the goal of antitrust argue that consumer welfare is maximized through the efficient allocation of resources. (13) This is achieved when "the existing stock of goods and productive output are allocated through the price system to those buyers who value them most, in terms of willingness to pay or willingness to forgo other consumption." (14)
The pursuits of both versions of consumer welfare are realized when markets are perfectly competitive. Perfect competition forces prices down to the marginal cost of production and assures that societies resources are allocated in the most efficiency way possible. Such a market structure entails that markets are pushed to accept an ever increasing number of competitors with the desire to force prices downwards to ultimately be equal to the marginal cost of production. The economic theory suggests that prices above marginal cost signal the profitability of market entry. Thereby enticing new players--local, foreign, small and large--to enter the market. No intervention, whatsoever, is needed; except to assure that prices are set freely. In other words protections of the free functioning of the market. This is guaranteed through the legal apparatus that assures the protection of the freedom of contractual arrangements and the sacredness of private property. All actors are then simply interpreting pricing signals to enter or exit, to...
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