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january 10, 2009 EPW Economic & Political Weekly60

competition in deregulated Markets

K V Bhanu Murthy, Ashis Taru Deb

K V Bhanu Murthy (bhanumurthykv@yahoo.com) is at the Commerce Department, Delhi School of Economics and Ashis Taru Deb (Ashishtaru@sify.com) is with the College of Vocational Studies, Delhi University.

Although the paper “Competition and Monopoly in Indian Cotton Seed Market” (15 September 2007) is a good attempt at identifying some of the dynamics of the industry, the authors do not provide any explicit theoretical framework for analysing competition.

Of late, we have come across a few studies on competition in deregu­lated markets. Such studies are

welcome as they attempt to grapple with the complex issue of competition. The p aper titled “Competition and Monopoly in Indian Cotton Seed Market” (EPW, 15 September 2007) by Murugkar, Rama­swami and Shelar (hereafter MRS) is one such study. Since we have been working in the area for some time and since the study by MRS is sponsored by the International Food Policy Research Institute, we have chosen to examine the paper and make some critical comments.

The paper is a good attempt at identify­ing some of the dynamics of the industry by referring to the changes in market l eaders before and after entry. The most signi ficant contribution of the study lies in the description of the peculiarities of the c otton seed market in India. However, it does not help other researchers to under­stand competition either in general or in some other market. In any analysis of competition, one would expect the follow­ing components to be present: (i) A con­ceptualisation of competition, given the plethora of literature on the notion of c ompetition; (ii) the theoretical frame­work underlying such a concept; (iii) a modification of the framework to suit the parti cular industry; (iv) measurement of the phenomenon of competition using the concept and framework; and (v) a model a nalysing competition in the said industry g oing through deregulation.

Unless any study that purports to ana­lyse competition incorporates all, or at least some of the above, it does not do jus­tice to the study of competition. The study by MRS is found wanting in all the above aspects, except for some rudimentary measures like Herfindahl’s concentration ratio and the analysis of market leaders through the ranks of leading firms.

There exists well­established literature on competition that calculates mobility and turnover to quantify rivalry. There are a ttempts made by Heggestad and Rhoades (1976), Denizer (1997) and Bod­enhorn (1990). But such measures of r ivalry were not used by MRS. We (Murthy and Deb 2007b) have extended these ap­proaches to formalise a measure of com­petition. Our formulation uses the Boden­horn’s measure of rivalry and argues that such a measure of the phenomenon is i ndicative of competition. In doing so it operationalises competition. Our paper develops a model to analyse competition in the private banking industry that has undergone deregulation. We also estimate the model of competition and successfully explain the determinants of competition. Finally, we are able to identify the market form with the help of our overall approach and methodology.

Apparently no concept in economics is as hazy as competition. The concept has gone through a very complicated process of evolution in the history of economic thought. During the process of evolution, the concept got mixed with other notions, and any attempt to understand the true essence of competition has been rendered difficult. A few reviews of the concept, which remained confined to only selected interpretations of competition cut across each other.

Since the above pursuit is too vast and complicated for the confines of a single p aper, we have written a paper that c ritically reviews the conceptual and t heoretical background of competition (Murthy and Deb 2007a). Our study is based on the theoretical framework of the structure­conduct­performance (SCP) par­adigm. In the current scenario of deregu­lation, it becomes imperative to under­stand critically the notion of competition. Any serious r esearcher on competition has to squarely address this issue, irrespective of the level of complexities involved. It is quite natural that we should know the concept of c ompetition properly, before we make an a ttempt to make policy r ecommendations.

Even the Competition Commission of India, with all its expertise did not provide

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Economic & Political Weekly EPW january 10, 2009 61

an experts’ definition and provided a l ayman’s one in its web site. According to such a layman’s definition, “competition in the market means sellers striving inde­pendently for buyers’ patronage to maxi­mise profit (or other business objectives)”. It is not very clear how competition policy will “promote and sustain competition” without rigorous concept of competition, which is capable of being opeartionalised. Policy pronouncement in the absence of adequate economic input is going to be far from perfect. This has led Bhattacharya (2003) to plead for a greater economic i nput into the formulation and enforce­ment of competition policy.

Even the Narasimham Committee which has ushered in banking reforms in 1991 does not envisage the notion of com­petition. It has specified a market struc­ture that specifies actual number of banks in different segments of industry: public sector, private sector and foreign banks, consequent on entry. Such a conception of market structure belies any notion of a theoretical framework of competition. Certainly not one that arises out of the SCP paradigm, which to our mind is the only framework to analyse competition.

competition and concentration

A common idea runs through a number of studies on competition which relate i ncrease in competition to a fall in concen­tration. In fact some of the studies suggest that “competitive conduct changes quickly as the number of incumbents increase” (Bresnahan and Reiss 1991). Such an idea, found in standard textbooks is simplistic. Apparently, it has a lot of intuitive appeal, so much so that it is taken for granted b efore subjecting it to a careful scrutiny. It appears that MRS also resort to such a con­ception of competition. This problem does not exclusively relate to MRS. Apart from this study, there are a few more studies (Pray, Ramaswami and Kelley 2001; Shirai and Rajsekaran 2001 and Sumalatha 2008) which follow the same line of argu­ment linking competition to concentration as above.

Deb (2004) has derived the conditions under which entry may either increase or decrease concentration ratio. This means that entry does not necessarily reduce con­centration, as per the popular perception.

There is another crucial link that com­pletes the argument. It is often purported that a more competitive market structure emerges as a result of a fall in the concen­tration ratio. There are two problems with this kind of an argument.

First, the fallacy about this argument is that concentration happens to be a part of the market structure, while as per the tra­ditional notion, competition is a conduct variable (Bodenhorn 1990). Unless the process by which a fall in concentration ratio leads to a rise in competition is made explicit it cannot even be taken to be a d efence of the traditional notion of com petition. Our work, on the other hand, clearly, identifies and concep­tualises the pro cess of competition, apart from m easuring, modelling and estimat­ing competition.

Second, the nexus between concentra­tion ratio and competition has been over­simplified. The above linking argument has been questioned by Bain (1956) and Mann (1966). They have expressed scepti­cisms about the use of concentration ratio as adequate indicator even of m onopoly power. It is only when a fall in concentra­tion ratio leads to reduction in monopoly power that competition would increase. Saving (1970) has demonstrated that the relationship between concentration ratio and monopoly power exists u nder very stringent conditions.

Although MRS do not provide any e xplicit theoretical framework to analyse competition, it will be interesting to de­velop such a theoretical framework from the ideas implicit in their paper, to exam­ine what is the nature of competition in the cotton seed industry. It would be even more significant if an attempt to measure

competition is operationalised and mod­elled with the help of such an underlying theoretical framework.

References

Bain, J (1956): Barriers to New Competition (Cam­bridge, Mass: Harvard University Press).

Bodenhorn, H (1990): “Entry, Rivalry and Free Bank­ing”, Review of Economics and Statistics, 72(4): 682­86.

Bhattacharya, Aditya (2003): “India’s Competition Policy – An Assessment”, Economic & Political Weekly, 38(34): 3561­74.

Bresnahan, T F and R C Reiss (1991): “Entry and Com­petition in Concentrated Markets”, Journal of P olitical Economy, 99(5): 977­1009.

Deb, A T (2004): “Market Structure and Entry: A Study of the Determinants of Market Concentra­tion in Private Domestic Banking Industry in I ndia”, paper presented in 6th annual conference on money and finance, Indira Gandhi Institute for Development Research, Mumbai.

Denizer, C (1997): “The Effect of Financial Liberalisa­tion and New Bank Entry on Market Structure and Competition in Turkey”, Research Policy Working Paper, WPS No 1839, World Bank, Wash­ington DC.

Heggestad, A A and S A Rhoades (1976): “Concentra­tion and Firm Stability in Commercial Banking”, Review of Economics and Statistics, 58(4): 443­52.

Mann, M (1966): “Seller Concentration, Barrier to E ntry and Rates of Return in Thirty Industries 1950­1960”, Review of Economics and Statistics, August.

Murugkar, Ramaswami and Shelar (2007): “Competi­tion and Monopoly in Indian Cotton Seed Mar­ket”, Economic & Political Weekly, 52(37): 3781­89.

Murthy, Bhanu K V and A T Deb (2007a): “Theoretical Framework of Competition as Applied to Banking Industry” (15 December). Available at SSRN: http://ssrn.com/abstract=1073662.

– (2007b): “Operationalising and Measuring Com­petition: Determinants of Competition in Private Banking Industry in India”. Available at SSRN: http://ssrn.com/abstract=1073682.

Pray, C E, Bharat Ramaswami and T Kelley (2001): “The Impact of Economic Reforms on R & D by the Indian Seed Industry”, No 6: 587­98.

Saving, T (1970): “Concentration Ratio and Degree of Monopoly”, International Economic Review, 11(1): 139­46.

Shirai and Rajsekaran (2001): “Is India’s Banking Sec­tor Reform successful? From the Perspective of the Governance of the Banking System”, mimeo, Keio University.

Sumalatha, B S (2008): “State of Competition among Mutual Funds in India: An Exploratory Analysis”, paper presented to 44th Indian Econometrics C onference, 3­5 January.

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