Competition policy, the back-story, and a casual conversation with a very smart, non-competition audience (PART 1)
Helen: So yes I’ll speak about competition economics and Shivani and Nick asked me to particularly focus on my work in digital markets, particularly around digital platforms, and I’ll speak to this as well, I won’t speak too much to the detail but I’ll actually speak about the bigger and broader and more exciting topics that are in no way confidential at all.
So the agenda for the hour, I’ll tell you a little bit about what competition economics is. I think many of you have a fair idea but also for myself too, it’s good to try and explain to somebody what this is all about. And then as I mentioned we’ll focus on digital markets, I think also all of you are probably highly aware of that as well or you may not be aware that you’re aware but you’ll see that you are.
Please feel free to raise questions, comments throughout, that would be really great, and I might say it’s super nice to to discuss with a non-competition audience because competition economists are obviously trained in very similar ways and so we may think in the same way and there’s often not significantly new challenging ideas brought, so it would be really nice to hear all your thoughts, please don’t feel that anything is possibly not relevant, it likely is relevant, and I’d love to hear and to think about your questions and your thoughts.
Okay so what is competition, what are the benefits to competition? Like I was saying now, I saw this morning about the airlines, and this this kind of example makes me think, how would it be to live in an economy where you go to the supermarket and you don’t have much choice in terms of what groceries you buy, you know the prices are not great, you’re really just subjected to what’s on the market, and and your options are not good and the quality is not good, same if you want to choose a bank or you want to choose a social media provider, maybe the price is okay, but the terms are terrible, you have to hand over a lot of your data or you are locked in. I think this, living in this kind of economy would certainly bother me quite a lot and so this is really the thinking around what are the benefits to having competition in an economy.
And to give you the stock standard answer the first cartoon here, I’ll just read the bubble here, the man says “sorry I meant the directorate general for competition at the European Commission”, it’s a big, it’s the big competition authority, “my job is to make sure businesses respect competition on the market because it can contribute to keep prices low, quality high, and ensure a large choice of products”… So this is the standard answer as to what is competition about and what your competition practitioners do and he goes on to say “competition policy benefits businesses and consumers”, um I think businesses may disagree that it benefits them depending on who you speak to, and the women responds “sounds important, can you explain how it relates to well me?” And I think this is always a challenge to explain what you do and why it’s relevant, and I’ll get onto the formalities of it in the next slide.
So competition policy is really all geared towards making sure we have good prices, good choices, good quality. This one case… is the bread cartel, many of you may be aware of this, this was actually fairly recent, finalised a few years ago. Basically there was a case that found there’s collusion both on prices and also allocating the market, essentially the big bread producers saying you go after that market, I’ll go over this market we don’t compete, we don’t go over each other’s lines, we also agree to keep the prices at a certain level, and this was huge, it went on for for many years. So this is a really good example, and the illustration of course shows there are people here, a woman and a child and a baby basically standing underneath the shelf and all the bread loaves are above her thanks to price fixing.
Then for those interested in further back story, I always think about the fact, quite interestingly, that competition policy started in the oil industry. Back in the 19th century there was a big big oil company, Standard Oil and Rockefeller — that’s the main founder of that, essentially they, as soon as they saw competing firms in the oil industry, they bought them and kept the ones that were efficient, they dropped the rest as soon as they were acquired, they also procured exceptional discounts from their suppliers and really controlled the entire oil industry.
I find this interesting because as many of you know we we still have an interesting set up in the oil markets with OPEC and also in the last days we see the oil price all over the place. So competition legislation at the time that was introduced basically broke up this company into many different firms. Also interestingly for a side note is that Rockefeller apparently ended up making more money owning many different firms as opposed to one big firm and we see this phenomenon actually today where we see companies delisting and preferring to have many small entities.
But today competition economics is still about how do firms compete in an economy and there are formal processes that this follows. So we have three competition authorities — the Competition Commission, the Competition Tribunal and the Competition Appeals Court, and it goes in that order so if there is a case it will first go to the Commission, if it’s contested it’ll go to the Tribunal, still contested it will go to the CAC, if it’s still contested as the recent Mediclinic merger, it will go to the Constitutional Court, and so this is all a formalised process and we have a Competition Act, it’s 25 years old now, it was implemented in 1998. And there are big amendments over time, lots of amendments in 2019 particularly around participation in the economy for SMEs and firms owned by historically disadvantaged shareholders and I’ll say more about that.
Now what does competition economics and law focus on? So I should just mention on this point, competition economists work very closely with competition lawyers, in fact most of the time we are contracted by the attorneys who are in turn contracted by the firms who make the stuff we actually need, the products and services.
And what does it focus on? Basically some formalities just to give you an idea of you know different types of cases that the legislation provides for. Those restrictive horizontal practices such as collusion I mentioned the bread cartel just now, also restrictive vertical practices, for example when you as a someone in the value chain mandate that those that you sell on to need to maintain a minimum resale price.
And then abuse of dominance is a big category of competition work, so essentially when you have a big market share, usually at least 45 percent sometimes slightly less but at least 45 market share in a market that is defined — which in itself is quite a lot of work to define a market — then essentially you have a special responsibility not to abuse that dominance. So being big in itself is not a problem but abusing such dominance may be queried and may mean that you face a competition case.
And here there are many categories — excessive pricing in a way that doesn’t relate to your costs, also refusal to deal — basically saying you just don’t want to deal with someone — tying and bundling, in other words if you’re dominant in the market, simply throwing in an extra product in order to leverage that dominance into other areas, also predatory pricing, essentially if you have deep pockets and you price below cost for a period of time to try to increase your share in the market and then raise price when you have the ability.
And then most recently certain price discrimination and buyer power — essentially when you’re a big firm and in a value chain you maybe say to your suppliers that are upstream from you, you say to them you’re quite a small supplier so we pay you quite a low price, and that firm cannot really participate in the value chain as a result, and the same downstream, if you say to someone downstream in the value chain, you know you’re quite small we have to give you quite a high price relative to the rest and they cannot participate as a result… these are new amendments, these latter two, that we still need to get good precedent on in the country.
And then mergers and acquisitions, these are big mergers, you see them in the news all the time, where the base threshold is if the target has more than 100 million turnover assets and then it must be notified, it must go through competition approval.
And then market inquiries, I think all of you know and Shivani, Martin, they’ve worked with me in prior years on market inquiries as well and there’s the digital stuff that I’m going to mention now largely has to do with a market inquiry.
So you’re probably thinking well what do competition economists do in all of this? The lawyers I think it's clear that they are needed, but what do the economists do? We often do all the stuff that the lawyers don’t want to do in terms of bringing the evidence so anything data related, quantifying prices, profits, revenues, looking at trends and often bringing the data related evidence.
Also related is that economists would often in these processes play a role where they actually need to testify in front of the competition authorities as to the evidence that they found and the argument they are making so there’s a very, I’d say, quite an important responsibility, that one needs to take if if you fulfill this role.
Okay and then what are some of the recent debates before I move on to the digital stuff. I’ll mention this because it ties in quite crucially I think with access to the economy, participation in the economy, there are big recent debates and I’d say for the last few years, around some of these topics, the first being pure competition issues and public interest issues, public interest being jobs, transformation, that sort of thing. The preamble to the Competition Act does focus on participation in the economy, promoting jobs, that sort of thing, so this is not something that has slid into competition policy in an unwarranted fashion, it absolutely does have a place.
There has however been a lot of concern in recent years about the extent and the placing of the focus on public interest through competition policy, so for example when there is a large merger if there are not major competition concerns, whether it is the correct space to mandate items such as employment and new shareholder schemes and transformation, and that sort of thing.
And the reason it is questioned is because for the firms making these deals, they obviously often don’t know what they’re walking into, they may see, they may get an opinion ahead of time to say this merger is likely going to be cleared, go for it, you’re not going to raise prices, you’re not buying a competitor, and then when you get there you find actually this is going to be a huge cost that we didn’t factor in. But I would disagree with the idea that public interest is not a competition issue, I think it does feed in, it’s just about the extent and the placing of it, that I can understand causes a lot of concern and uncertainty.
And then secondly this focus between the idea of whether competition policy should focus on the consumer or the competitors. So traditionally competition policy, up until a few years ago, if anyone asked us, we would say the aim of competition policy is always to think about the consumer, what is going to get them the lowest price, best quality, the best choice. And that has shifted a bit towards also, given the state of our economy — where we are in terms of participation and growing the economy, having more SMEs, having more thriving marketplaces — and that has shifted in the last years towards also thinking about the competitor.
So the buyer power provision that I mentioned earlier is a great case in point where previously you would say buyer power is not a bad thing in a value chain, you have this big firm, they are pushing fairly low prices on the upstream suppliers, if this is passed through the value chain the consumer gets a lower price, so buyer power in itself is not a bad thing. And with the recent amendments this has been rethought to say well we actually need to also stimulate these smaller upstream suppliers, so if a low price is so low relative to other bigger suppliers and it’s really inhibiting their participation in the value chain, we need to rethink it, so that’s a nice illustration I think — of a mental shift from focusing only on the consumer to also protecting competitors as well, and this really pivotal shift came around 2019 with the amendments to the legislation.
I think we’ve covered the last point, I think everyone is concerned that we need to grow the economy really fast, we need GDP to grow, we need investment, we need deal making, at the same time we also need to include a lot more people in the economy, stimulate smaller firms and you know how does competition policy aim to to balance out these things? This is the perfect point to discuss a little bit so please go for it Shivani.
Shivani: Yes this challenges fundamentally what we believe about economic models and what is good and what is not good. So you know I think one of the fundamental flaws in modern capitalism is the lack of inclusion right — we behave as if capitalism has free markets, it reflects people’s preferences, that there’s all of these dynamics at play, but the reality of the ways in which this history and the ways in which our societies have been formed is that particular voices and perspectives are valued over others. So you know, Jodi shared yesterday a little bit about that book on the ways in which women are excluded from data, which is a ridiculous book, it’s so comprehensive, you know just the ways in which women are missing from like the way we think about public transport, the way instruments musical instruments are designed, all of these aspects of society. So it seems completely natural to me that competition policy should should include things like SMEs but I wonder actually if it’s a broad enough definition of inclusion, and whether the focus on race and redress in South Africa stops us from actually thinking about inclusive capitalism in a broader sense that would apply outside of South Africa, I think it’s actually a global issue.
And then the second thought related to that, when you’re talking about the consumer and I was thinking about also what we sort of presume is good for the consumer, so you know having lots of choice at cheap prices, is that good for the consumer if that leads to the way that food economies are organised where it’s all about like cheap processed food that harms people’s health, or we destroy the planet actually because we’re pushing towards disposable, what do you call it, fast fashion, all of these things that we know now actually aren’t sustainable practices, and don’t build towards the kind of long-term well-being of society. So do we think about the consumer as an individual and what’s in the short-term interests of that individual, or do we think about the consumer as a collective and what’s in the long-term interests of the collective? Anyway it is stimulating to think about competition policy and how that reflects some of the beliefs we maybe don’t question about for example, what we think makes for a good economy.
Helen: Yes, amazing and these are such good thoughts Shivani thank you.
Rose: Also related possibly to predatory pricing, I was thinking about this in the Namibian context — in Namibia there’s one big telecoms operator or mobile network operator and they were previously I think a government partnership, but what has often happened, which is the opposite of what happens in South Africa, which is more competitive, is that data and airtime is really cheap in Namibia which makes it very difficult for others to enter the market and they’ve tried. Also it’s not as if they increase their prices very suddenly, they’ve stayed low for a very long time, so I wonder how do you balance the consumer’s interest versus I suppose having a variety of products in the market, which might be better theoretically?
Helen: So I don’t know the context or the details, but predatory pricing by definition is pricing below one’s cost, so figuring out firstly what are the correct costs you should be looking at can be quite difficult, the economic cost, and that in itself is a whole exercise, and then there’s always this question of is it part of a longer term strategy, so in the short term possibly as you say, even in the medium term, maybe even five ten years, consumers are better off, prices are low, they’re not being raised. I think the thinking is always, is this leading towards a situation where then there is perhaps a monopoly and we don’t know what to do about that monopoly and they are then perhaps in a position where they abuse their dominance and we need to then regulate or bring an abuse of dominance case? So it’s it’s kind of proactive thinking about what is this, where’s the strategy going, and is it a problem?
Nick: So you said that it’s extended from looking at protecting the consumer to also including the competitor — is there a case where it looks at the employee as well? How far does competition go? I’m thinking for example about some accounting graduates who are skilled and get paid very low wages because there aren’t any other options because of the market structure and I was wondering if that’s covered by competition?
Helen: Wow and it’s been a question for a long long time as long as I can remember, but I haven’t seen a good case dealing with that, but I think it’s good to challenge oneself in questioning this. I’ve often also thought about Uber drivers, you know the competition is so good, we have all these innovative offerings but the Uber drivers maybe get paid so little and it’s almost then a question of when is the price too low — we always think about when is the price too high, but also when is the price too low from a labor perspective? I have not seen a good competition case that focuses on exactly that in South Africa but I will look internationally.
Helen: I realized that I skipped a slide so I’ll just briefly mention it, it’s quite important. I put on the left a picture of a big dam wall, basically no water is going over, and on the right a big gushing waterfall, and on the left I’ve written this is essentially what we don’t want to see thanks to competition policy — where the economy is not moving, where the hand is almost too tight that it’s constraining the economy.
And also crucially remembering that you’re preventing the increase of barriers to entry — which is what competition policy aims to do — not necessarily to in itself reduce barriers to entry. I think this is really important to always remind ourselves, that by making sure you’re not increasing barriers to entry you’re not necessarily reducing them — you’re not stimulating SMEs, you’re not stimulating startups…
This is part of a much bigger picture and on the right here I’ve indicated that building an economy requires things like a good competition policy which I think we have in South Africa, plus all the stuff that Percept is doing, a lot of industrial organisation around a lot of other things and I have mentioned — skills building, education, capital, investor confidence, tax incentives, other regulations, and policies, labor laws, IP law, consumer protection…
It’s important to think also about what are the limits of competition policy and how much we should be focusing on building the economy through this channel versus through other areas of law, through education, through skills, through making sure that it’s already fertile ground for investment, all of that sort of thing.
Shivani: It feel like an unreasonable amount of responsibility to place on the Competition Commission to hold all of these like very deep questions about like the structure of the economy, it just feels like a conversation we should be having like much more societally and should be feeding through policy all over the place, I would hate to feel like I had to be the one to weigh all of these things up.
Helen: Yes I agree, always good to bear in mind also in one’s engagement with the authorities that these individuals are taking on a big a big chunk of responsibility, we may not always agree with their decisions but it may be a huge load that they are bearing in South Africa.
Part 2 next.
All views are my own and do not reflect the views of any firm or other person.
