UNDERSTANDING & COMMUNICATING BENEFITS OF COMPETITION REFORMSTANIA BEGAZO, ECONOMIST

COMPETITION POLICY GROUP

TRADE AND COMPETITIVENESS GLOBAL PRACTICE

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CREW Project International Conference

Bangkok

November 19, 2014

What is a competition reform?Approach to implementing competition reforms

Understanding & Communicating Benefits of Competition Reforms2

Evidence as a Catalyst for Change

Key elements to explain and communicate the benefits of competition reforms

A. Empirical evidence

B. Media outreach

C. Awareness

raising + initiatives

1. Literature reviews – effects on key variables:- Macroeconomic/sectoral: productivity,

growth- Microeconomic: consumer welfare and

savings, income poverty

2. Reform/country-specific ex-ante estimates:- Macroeconomic: GDP growth, productivity- Microeconomic: consumer savings,

income poverty- Indicators along theory of change

3. Reform-specific ex-post estimates- Entry, market structure, consumer welfare,

prices

Sector Evidence Methodology Reference

Various foods and medicine - Mexico

Consumer welfare loss from monopoly is higher for the poorest vs the richest by 20% in urban areas and 23% in rural areas

Uses household income and expenditure survey. Calculate elasticities and welfare effects

Urzua (2013)

14 household commodities- Australia

Welfare loss associated with monopoly is 46% higher for the poorest 10% compared to richest

Uses household survey to estimate elasticities & welfare effects using consumer surplus

Creedy and Dixon (1998). Also (2009)

Flour, bread and maize meal- South Africa

Collusion between bread manufacturers lead to an overcharge between 7% - 42%

“During and after” approach using data from the cartel firms

Mncube (2013)

Pre-cast concrete products- South Africa

Cartel led to an overcharge of:- - 17% - 28% in Gauteng - 51% - 57% in KwaZulu-Natal.

“Difference in difference” using prices of a non-implicated firm as a competitive benchmark

Khumalo et al (2012)

A number of existing sectoral studies provide evidence of the effects of competition reform or enforcement of competition rules on consumers and producers...

A.1. Relevant empirical evidence I: Example: Evidence of benefits for consumers

Sector Evidence Methodology Reference

Rice- Vietnam

Land and market reforms (moving to market driven production and pricing) led to dramatic increases in paddy rice productivity in rice growing regions

Build data set on Total Factor Productivity

Kompas et al (2009)

Various export crops- Sub-Saharan

Africa

Competition among processors increases farmgate prices and improves farmer livelihood

Use a game theory model to simulate price effects of a change in market structure

Porto, Chauvin and Olarreaga (2011)

Trucking- Lao

Breaking a cartel and opening transit to all Thai truckers reduced logistics costs from Bangkok to Vientiane by 30%

Case study Arnold (2005)

Fertilizer 80% to 100% of the fertilizer subsidy paid by the Indian government from 2011-2020 would, in fact, finance monopolistic rents from the Potash fertilizer cartel

Use projected prices and production figures from the Conference Board Report on Potash

Jenny (2012)

Shipping- Latin America

Reducing market power in shipping would reduce shipping costs by 45% and boost trade by 17 %

Back-of-the-envelope calculation assuming all markups are reduced to the smallest markup in the data set on prices

Hummels et al (2009)

A.1. Relevant empirical evidence II: Example: Evidence of benefits for producers

Method:• Use household survey data to

estimate welfare effects of price changes across the income distribution.

• Elasticities are estimated from survey data and welfare effects proxied by equivalent income effects of price changes.

Findings:

• Eliminating market distortions (trade barriers, non-tariff barriers, government influence on prices, potential anticompetitive practices at business associations) would reduce poverty.

Source: KIHS 2005/2006. Argent and Begazo (2014)

Household expenditure share in maize

Household expenditure share in sugar

Eliminating overcharges of 20% would increase

real income and …

Poverty by 1.8 pp

Poverty by 1.5 pp

Poorest decile gains 6.4 times more than the richest

Poorest decile gains 3.4 times more than the richest

A.2. Benefits of proposed reforms I: Country specific estimates – Kenya

Demonstrating the effects of limited competition in sugar and maize on the poor

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A.2. Benefits of proposed reforms II: Country-specific estimates – Turkey

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Method 1: Demonstrating the effects of increased competition on productivity growth

Use pricing power (Price Cost Margins) as proxy for product market competition.

Labour productivity growth was regressed on PCM across countries, industries and time

Findings: A 10% decrease in average PCMs leads to a 4.5% increase in the annual rate of

productivity growth

Method 2: Demonstrating the effect of reduced service sector regulation on growth value add

growth in service intensive industries

Uses results from previous studies on the effect of a country moving toward OECD best practices levels

of regulation

Calculates the effect of a significant decrease in regulatory restrictiveness (at least one quartile) for

Turkey

Findings: A significant decrease in regulatory restrictiveness increases value added growth in

service-intensive industries by 0.5% -1 %

Findings: A 0.75% increase in value added growth would equate to an additional value

added US$484 million for Turkey

o # Draft law/regulation

o # practices recommended for modification

o # Reports produced

o # Training/ awareness workshops conducted

o # participants in events satisfied

Advisory to remove sector regulations that create entry barriers and limit expansion

Allow for affordable and

high quality products for businesses,

households and the public sector

Unlock private sector growth

and investment in markets that lack competition

Goals

Consumer savings due to higher competition

Investment generated

Outcome

• Market concentration (reduction of modified HHI)

Outputs

Minimize administrative

burden of antitrust rules on businesses

Compliance Cost Savings due to more effective competition rules

Impact

• # anticompetitive practices detected/prevented

Direct fees involved in merger notification# of days of merger review process

Public sector savings due to higher competition

• # state aid instruments modified to minimize distortions

• Amount of aid granted through approved state aid

• Market concentration (reduction)

# L

aw

/Reg

ula

tion

s a

dop

ted

# P

racti

ces m

od

ified

Efficient allocation of

public resources and a level

playing field for businesses

Public sector savings

Advisory to increase the effectiveness of antitrust rules

Advisory to minimize distortive aid and incentive schemes

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A.2. Benefits of proposed reforms III: M&E framework for competition reforms

A.3. Benefits of completed reforms I:Opening the domestic container shipping market to competition in the Philippines

- High shipping costs- Few shipping operators

on primary routes- Burdensome

registration procedure- Existing operators

delay/ prevent entry of competitors

- Usage of foreign vessels can be

restricted by domestic players via “Certificate of Public Convenience”

(CPC).

- Simplification

of CPC issuance

procedure for existing

operators

- Avoid delaying/

preventing entry

- Incumbents no longer have the

opportunity to contest

entry

- Expedite issuance of

CPC

from >50 to 4 days

POTENTIAL MEDIUM TERM INDICATORS:

1) SERVICE QUALITY/PRICES

2) INVESTMENTExpected additional

investment generated in the shipping industry:

Context/Background Output ImpactOutcome

Research question• How does increased contestability affect incumbents’ decisions on pricing, routes covered, quality,

investment, frequencies, capacity?

A.3. Benefits of completed reforms II: Promoting equal treatment during registration in agricultural input markets in Honduras

- Only 1,200 pesticides were registered in

Honduras vs 2,500+ in Guatemala, Costa Rica or

Nicaragua.

- Fertilizer consumption at least 50% below

neighboring countries.

- Discretional treatment of registration applications

distorting the level playing field.

- Some applications processed in 6 months,

others in 3 years

Streamlined registration procedure

+

Procedural manuals for consistency

+

Online database for transparency & facilitation of

consumer choice (ongoing)

Cost-effective registration on a level playing field

Streamlined and standardised

process reduced registration time- From up to 3

years to 90 days

INDICATOR 1: CHOICE

Increased choice for at least 35,000 farmers:

300 products registered/year (340%

increase).

INDICATOR 2:

PRICE

Prices of some pesticides dropped up

to 9%.

Context/Background Output Impact

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Outcome

FUTURE DIRECTIONS FOR IMPACT STUDIES: SUBNATIONAL REGULATIONS• Anticompetitive regulations can exist at the subnational level• Likewise, reform programmes often occur at the subnational level• Provides an opportunity to exploit inter-state or inter-regional variation to examine impacts• Examples from European retail sector: Bertrand and Kramarz, 2002; Viviano, 2008

1. Communication strategy:- Press conferences- Press releases- Factsheets- TV interviews

2. Training to journalists:

B. Engaging the media

Media engagement and training to journalists• E.g. In Kenya, a Business Journalists Training

workshop held by the Competition Authority in May 2014• The Authority is now covered by the media 2-3 times

per week • Potential pilot to test use of media and impact figures

to advocate for pro-competition reforms in specific sectorsMedia campaign for specific competition

decisions• E.g., COMESA launch of merger guidelines

13Understanding & Communicating Benefits of Competition Reforms

1. Global voice on the importance of competition:- Competition Advocacy Contest –

successful implementation of reforms- Generation of data for research/analytics

(Product market regulation indicators, competition diagnostics indicators)

- Pre-ICN conference- Peer-to-peer learning (RCC)

2. Country-level Outreach to different stakeholders:- Government bodies (regulators,

prosecutors, judges, public procurement authorities)

- Business associations- CSO

+

C.1. Global voice on the importance of competitionAn example of a global initiative

1. Successfully promoting pro-competition market reforms, opening of markets, and infusion of

competition principles in other sectoral policies

2. Assessing the potential negative effects of certain rules and regulations on the market and informing

policy makers and public authorities

3. Raising awareness of private sector stakeholders and empowering consumers to deter anticompetitive

behaviour

4. Improve the effectiveness of antitrust enforcement through advocacy with relevant public bodies.

• The WBG Competition Advocacy Contest showcases activities of competition agencies that result in measurable impacts on markets, consumers & other stakeholders to:-

• Expand interest in the competition agenda globally• Raise the profile of competition champions within governments

• 2013 Awards - 4 themes: 2014: Inclusive growth for shared prosperity

1. Promoting pro-competitive reforms that foster growth and reduce inequality

2. Promoting awareness of competition benefits in a time of crisis

3. Promoting cooperation with relevant public bodies in order to balance other public policy interests with competition

goals

Conclusions

• Quantification of the positive impact of reducing regulatory restrictions and tackling anti-competitive behavior can help…

1. Catalyze reform2. Strengthen enforcement of antitrust rules

• Combination of ex-ante and ex-post estimates• Methodologies for ex-ante estimates and indicators to test the

theory of change.• Ex-post estimates require understanding current data availability

(e.g. household surveys, firm-level data) and developing appropriate quantitative methods; and identifying appropriate indicators and building databases for future research

• Dissemination of results to government, judiciary, private sector and civil society is key to build support for the pro-competition agenda and overcome political economy barriers to reform.

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Contacts

https://www.wbginvestmentclimate.org/advisory-services/cross-cutting-issues/

competition-policy/

Tania Begazo

tbegazo@worldbank.org