2016 academia roadshow the act

COMPETITION LAW PRESENTATION FOR ACADEMIA 2016

AHMED QADIRDirector General

Competition Commission of Pakistan

“Although about two-thirds of the world’s grossdomestic product (GDP) is driven by

consumers, yet they are often not given the recognition and the importance they deserve, which

often sees them being subjected to anti-competitive behaviour by a

powerful network of businesseswhich controls capital.”

Dr MUKHISA KITUYI, Secretary General, UNITED NATIONAL CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD); Biennial Competition, Regulation & Development Conference, Nairobi, Kenya, 12 December

2015

“The corrupt version of capitalism—when powerful

corporations deliberately try to eliminatehealthy competition to preserve their

privileged position—generates economicinefficiencies and social injustice,

thereby undermining political support

for the free-market based system….”

(RAJAN & ZINGALES, THE ROAD TO PROSPERITY: SAVING CAPITALISM FROM

CAPITALISTS, Transition Newsletter, 2003)

An important point

■Often Competition Policy and

Competition Law used interchangeably

■There is a difference between the two…

Competition policy: the bigger picture

COMPETITION REFORMS

Promoting Competition

Curbing Anti-competitive

Practices (ACP)

COMPETITION POLICY

COMPETITION LAW

Some Commonly Observed Characteristics of Developing Economies

■ that tend to reinforce each other:

– High levels of ownership and concentration

– ‘Missing middle-sized firms (large, SMEs)

– Conglomeration

– Corporate management and control challenges

– Underdeveloped financial markets (e.g., debt-equity)

– Close government-business relations/connections

Domestic Competition & International Competitiveness■ Michael Porter, THE COMPETITIVE ADVANTAGE

OF NATIONS (1990):“Few roles of government are more important to the upgrading of an economy than ensuring vigorous domestic rivalry. Rivalry at home is not only uniquely important to fostering innovation but benefits national industry…..In fact, creating a dominant domestic competitor rarely results in international competitive

advantage. Firms that do not have to compete at

home rarely succeed abroad. Economies of scale are best gained through selling globally, not through dominating the home market” (pg 662).

What Constitutes Effective Competition Policy ?

■ Anything that fosters inter-firm rivalry and entry by

– Preventing anti-competitive practices and … Promoting competition

– Enacting Competition (antitrust) Law to address both public policies and private sector restrictive business practices that impede competition

■ Specialised Agency(ies)

Protecting competition: Competition law

Joseph Stiglitz (2001)

Competition is the basis of a dynamic market economy. Yet, as Adam Smith recognized, firms inevitably seek to restrict it: more profits can be made by creating a monopoly rather than through better products… So government must “set the rules of the game” to maintain a fair playing field, and vibrant competition.

Adam Smith: conspiracy against the public

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public…” wrote Adam Smith in 1776.

COMPETITION NEEDS TO BE Safeguarded and Sustained■ Competition is not automatic

■ Competition can be distorted by public policies and restrictive business practices.

■ Public policy often manipulated by various interest

groups including private sector firms

■ This entrenches anti-competitive business practices and policies

■ Discourages both domestic and foreign investment

COMPETITION LAW■ Establishes a Competition

authority to ensure implementation of the law.

■ Controls:– Dominant firms’ behaviour– Mergers and acquisitions

which might result in monopoly or dominant firms

■ Disallows anti-competitiveagreements:– Cartel agreements– Collusive tendering– Price fixing

ANTI-COMPETITIVE

PRACTICESANTI-

COMPETITIVE AGREEMENTS

ABUSE OF DOMINANT

POSITION

COMPETITION COMMISSION of Pakistan (CCp)

An independent body established under §12 to enforce the COMPETITION ACT, 2010.

Main roles include:

•Advocacy•Market analysis•Policy Notes

•Investigation & Enforcement•Exemptions•Mergers and Acquisitions• Compliance & Leniency

Dominance…and its abuse

DOMINANT POSITION

■ A situation in which one or more enterprises possess such significant market power to adjust prices, outputs or trading termswithout effective constraint from competitors

■ Company with market share under 30% is not dominant

■ Company market share of more than 40% is generally considered dominant

■ Between 30% and 40%, question of dominance depends on other factors, e.g.,

– General competitive outlook of market structure imports, tariffs, etc.– Number of competitors in market

■ Market share over 50%: there is a rebuttable presumption that it has the ability to behave independently of its customers, competitors and consumers.

ABUSE OF Dominance

■ §3 of the COMPETITION ACT 2010

– An enterprise is prohibited from engaging, whether independently or collectively, in any conduct which amounts to an abuse of a dominant position in any market for goods or services.

■ Types of abuse

– Exploitative

– Exclusionary

ABUSE OFDOMINANTPOSITION

Unfair purchase or selling prices

or unfair trading conditions

Limiting or Controlling

supply

Refusing to supply

Applying different

conditions Predatory behaviour

Excessivepricing

Abuse of Dominant Position

Limiting or controlling

supply

Refusing to deal

Predatory behaviour

Excessive pricing

Applying different

conditions

Unfair purchase/selli

ng prices or unfair trading

conditions

Market Dominance Red Flags (1)

■ Red Flag: Tying

– tying and bundling are often intended to provide customers with better products more cost effectively.

– But when an undertaking ties a product from one market (tied product) to a product that is dominant in a different market (tying product), the potential for anti-competitive behaviour arises, so…

– A dominant company may not make sale of one product conditional on purchase of another unless objectively justified

– Tying is prohibited even when apparently beneficial to consumers

■ Red Flag: Loyalty Discounts

– Dominant company may not offer its customers special discounts to discourage alternatives (promotes inefficiency)

– Any discount arrangement must be based on fair grounds


■ Red Flag: Exclusivity– Dominant company may not force customers to purchase

all/most of their requirements from it

■ Red Flag: Refusal To Supply– Dominant company must supply everyone, absent non-

discriminatory and objectively justified criteria for it not to do so

– This applies to supplying competitors also

■ Red Flag: Long-Term Agreements– Dominant company’s entrance into long-term, no-

termination contracts can be abuse of dominance


■ Red Flag: Discriminatory Business Terms

– Dominant company may not discriminate amongst customers, absent fair and objectively justified grounds

■ Red Flag: Predatory Pricing

– Dominant company may not sell products at prices below cost to drive competitors out of business (create a monopoly position)

■ Red Flag: “Restrictive Clauses"

– Agreement between dominant company and customer: customer will not accept offer from another supplier until dominant company has declined to match it

27 December 2016

ABUSE OF Dominance

■ Conduct otherwise seen as ABUSE and therefore prohibited may be allowed if there are reasonable commercial justifications

or represents a reasonable commercial

response to the market entry or market conduct of a competitor.

■ The law allows a reasoned approach to making this determination

Prohibited agreements

Prohibited agreements

■§4 of the COMPETITION ACT 2010– A HORIZONTAL or VERTICAL AGREEMENT (there has to be an

agreement, decision or concerted practice) between ENTERPRISES

(must involve more than one undertaking) is prohibited insofar as the agreement has the OBJECT or EFFECT of SIGNIFICANTLY preventing, restricting or distorting competition in any MARKET for goods or services.

HORIZONTAL AGREEMENTS

Agreement(s) between enterprises all of which operate at the same level in the production or

distribution chain

PRODUCTION LEVEL

e.g., between chicken producers

between sugar manufacturers

DISTRIBUTION CHAIN

e.g., between retailers

between wholesalers

VERTICAL AGREEMENTS

Agreement(s) between enterprises each of which operate at a different level in the production or

distribution chain

MANUFACTURERMANUFACTURER

WHOLESALERWHOLESALER

RETAILERRETAILER

VERTICAL AGREEMENT

VERTICAL AGREEMENT

Prohibited Agreements = Cartels

■ Cartel: An agreement between competing firms designed to limit or eliminate competition between them

■ Cartels are harmful because they enable participants to charge higher prices than in competitive market

■ Cartels are most serious infringement of all competition laws

■ Cartel behaviour can lead to extremely high fines and criminal sanctions

■ Most common types of cartel-like behaviour are…

ANTI-COMPETITIVE AGREEMENTS

Price-fixingLimiting or Controlling

output

Bid Rigging

Market Sharing

Red Flag: Price-Fixing

■ Agreement between competitors on pricing is almost always illegal

■ Price-fixing is prohibited in both horizontal and vertical relationships

■ Agreement between competitors to set minimumprices is blatant price-fixing

■ Indirect agreements may also be illegal, e.g., to –– Comparing price lists before publication– Exchanging detailed information on each other’s

production costs– Agree on any other term of sale

Red Flag: Resale Price Maintenance

■ Agreement between suppliers and distributors and/or retailers on how much they may charge their customers

■ Setting recommended prices or maximum sales prices is generally not illegal if manufacturer allows distributor/retailer to determine price



output

Bid Rigging

Market Sharing

Red Flag: Limiting or controlling Output■ Cartel may enable price increases (or prevent

reductions) by restricting production (what happens under OPEC?)

■ Agreements typically involve quota system of output allocations e.g., certain amount or percentage

■ One company may agree to stop producing oneproduct in exchange for other company stopping production of another product

■ These agreements are serious violations and not likely to get an exemption



output

Bid Rigging

Market Sharing

Red Flag: Bid-Rigging

■ Bid-rigging: Agreement amongst competitors to collaborate over their response to invitations to tender

■ Typically, colluding companies agree which

company will win current tender

■ Next time there is a tender, another company will win, etc.

■ Bid-rigging is a very serious cartel offense



output

Bid Rigging

Market Sharing

Red Flag: Market-Sharing

■ Agreement between competitors to divide up customers or geographical areas where they will not compete against each other

■ An agreement to limit one competitor’s attempts to make sales in certain markets is almost certain to be illegal

■ Market-sharing is particularly serious because nationally it isolates geographical markets and internationally, hinders integration of countries into a single markets or trading blocs

– ASEAN made competition law a requirement for its 15 member countries by 2015

Red Flag: Market-Partitioning

■ Market-sharing agreements between competitors are illegal - horizontal

■ Market-sharing agreements may also be vertical

– i.e., between suppliers and their distributors

■ Producers may restrict distributors from selling outside an allocated territory

■ Producers may not prevent distributors from responding to unsolicited orders from customers outside designated territory



output

Bid Rigging

Market Sharing

Sharing Information

Red Flag: Information-Sharing■ Competitors sometimes agree to exchange or share information

■ Some information-sharing is legal and enhances competition

■ Sharing confidential business information is serious violation, e.g.,

– Information on prices, rebates, and other price-related information

– Production or distribution costs

– Forecast capacity

– Investment plans

■ Content of information is the decisivefactor – not medium of exchange

Exemptions

■ Can be given to

– Some possible anti-competitive agreements could have significant identifiable technological, efficiency, or social benefits but

– Benefits could not be provided without the anti-competitive agreement and

– The detrimental effect of the agreement is proportionate to the benefits and

– Competition is not eliminated completely

Mergers & Acquisitions

Mergers and Acquisitions

■ §11 of the COMPETITION ACT 2010

– Allows the Commission to review any merger or acquisition that could affect competition in the market by creating or strengthening a dominant position.

Merger Analysis: A Taxonomy

■ HORIZONTAL mergers– Mergers between producers of substitutes, i.e. products /

services within the same relevant market, e.g., two brands of toothpaste, two mobile network operators, two grocery stores or clinics (in the same geographic market)

■ VERTICAL mergers– Mergers between producers of complements, i.e., products /

services are “inputs” to one another, e.g., manufacturer and distributor, petrol producer and fuel retailer, coffee plantation and coffee manufacturer

■ CONGLOMERATE mergers– Mergers between producers of competitively unrelated

products e.g., cars and washing machines

Merger Analysis: Horizontal Mergers

■ Pro-competitive effects of horizontal mergers– displacement of ineffective management– realisation of savings through the elimination of fixed costs– realisation of savings through the reduction of variable costs

■ Anti-competitive effects of horizontal mergers– Unilateral effects (non-co-ordinated effects): the creation of market

circumstances that permit the merged firm to raise the price of some or all of its products / services (or otherwise compete less effectively, e.g. in terms of range, quality or service), without any change in the nature of competition

– Co-ordinated effects: the creation of market circumstances that change the nature of competition such that the merged firm and its rivals are able to tacitly coordinate their actions in order to compete less intensively

Merger Analysis: The Basics

■ If a merger does not create, protect, or enhance market power, it should be cleared

■ Market power: “the ability profitably to sustain prices above competitive levels” where “competitive constraints” are not effective

– Competitive constraints■ Existing competition: firms already in the market (effectiveness gauged by, among other

things, market shares, barriers to expansion) ■ Potential competition: firms that may enter the market and prevent exercise of market

power (effectiveness gauged by entry barriers)■ Buyerpower: credible threats to switch to new suppliers or sponsor entry and growth (but

do all customers have this threat?)

■ With mergers, the issue is whether prices (or, quality adjusted prices) would rise relative to the “counterfactual”, i.e., the level that would otherwise have occurred absent the merger

Approval of Mergers

■Big mergers have to be reported for

clearance

■ Mergers that would substantially lessen

competition are prohibited

■ Mergers to near monopolies rarelyallowed globally

Promoting competition

COMPETITION COMMISSION of Pakistan (CCp)

§12: An independent body established to enforce the COMPETITION ACT, 2010.

Main roles include:

Advocacy Market analysis Policy Notes

Investigation & Enforcement Exemptions Mergers and Acquisitions Compliance & Leniency

Conducting research [§28]

Market Studies

State of Competition Report

Advocating for competition [§29]

Outreach

Opinions

Policy Notes

Increase acceptability of

the law

Make legislation and policies pro-

competitive

Encouraging compliance

To conclude…

Changing economic landscape

Economies have changed from when competition laws were crafted in the late 19th and early 20th century

We are now in the Information age: primary currency is intellectual

property and data (land, labour, capital)

Being Data Rich…and data poor will matter

“A billion hours ago, modern homo sapiens emerged.

A billion minutes ago, Christianity began.

A billion seconds ago, the IBM PC was released.

A billion Google searches ago … was this morning.” HAL VARIAN, GOOGLE

Globalisation, Competition Policy, and competition law –Trade-offs

globalisationhas created

challenges for competition

enforcement. Consider this:

• Should government permit mergers, or joint ventures if they reduce competition, but enhance the ability of domestic businesses to compete internationally?

• Should government move to break up monopolies, if the global marketplace for the products offered is highly competitive?

• Should regulators enforce competition laws against foreign

companies if they operate subsidiaries within their borders?

• What steps can governments take to create a level playing field, so that corporations operate under a common set of competition rules and regulations wherever they do business?

Strengthening the regulatory regime

■ Effective regulation is critical to making markets work for people and promoting health, safety and fairness.

■ Since 2000, growing amount of regulation e.g., anti-money laundering, banks and consumer financial protection, securities market, telecommunications, electronic media…

■ The Commission must not only be a market regulator(enforcement) but a market developer (compliance) also

■ Our economic future depends on the [right] policychoices we make

Making Pakistancompetitive

better is

everybody's jobTHANK YOU