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Market Contestability and the Role of a Competition Commission Taimoon Stewart Senior Research Fellow SALISES, UWI Presented at the High Level Symposium.

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Presentation on theme: "Market Contestability and the Role of a Competition Commission Taimoon Stewart Senior Research Fellow SALISES, UWI Presented at the High Level Symposium."— Presentation transcript:

1 Market Contestability and the Role of a Competition Commission Taimoon Stewart Senior Research Fellow SALISES, UWI Presented at the High Level Symposium on the CSME, Barbados 28-30 June, 2006.

2 Outline of Presentation 1.The concept of market contestability; 2.Will free entry within CSM guarantee that market power will decrease? 3.Some potentially problematic sectors in CSM; 4.Role of a Competition Commission in the CSM; 5.Some considerations on the functioning of the Community Competition Commission.

3 1.1 Definition of Contestability of Markets A market where there is freedom of entry, and exit is cost-less: allows potential entrants whenever profits exceed the normal rate; Costless exit: sunk costs are zero; (Sunk costs: costs that can’t be recovered when a firm leaves an industry); Such markets can be subject to hit and run entry and exit.

4 1.2 Argument that Contestability will ensure competition Free entry would prevent monopolist from setting high prices, as this would trigger entry; Such markets would attain socially efficient output, duplication of fixed costs is avoided and technological efficiency is attained (static and dynamic efficiencies).

5 1.3 Counter Argument in Lit.: Market forces alone unlikely to reduce monopoly power Sunk costs are rarely zero (could be in Knowledge economy?) Consumers may have switching costs: e.g., cost of closing a bank acct. and moving to another bank; or switching airlines and losing frequent flyer miles; or, compatibility of standards with established product will influence consumer choice. Network effects, where sufficient buyers are necessary to supply complementary products such as car models and availability of car parts;

6 2. Free entry and exit within CSM will not guarantee decrease in market power High concentrations exist in CSM due to structural constraints: –Need to achieve minimum efficient scale (MES), i.e., Small markets with too many firms would lead to low profits and inability to cover fixed costs; tends toward monopoly or oligopoly; –Continued concentration of wealth in hands of descendants of plantocracy in many MS- could erect barriers to entry (e.g., St. Lucia – a few white families dominate large sectors of the economy);

7 2. Cont’d. Will market power decrease? Small firms in small markets (LDCs) vulnerable to take-over by outside firms (e.g., T&T firms), - therefore potential for new concentrations; eg in SADC, S.African firms eliminated local competitors in neighbouring countries through mergers and take-overs; Prevalence of interlocking directorates and accompanying anti-competitive effects; Large informal sector in CSM could have dampening effect on monopolies.

8 3.1 Potentially problematic sectors in CSM: Financial Sector Banks dominate the financial sector High concentration in all MS- at most, five or six banks/ dominated by one or two large banks (RBTT/Scotia/FCIB); Widespread perception of collusion amongst banks; some bankers alluded to collusion; others claimed market transparent, and follow the leader strategy common; Wide spread between deposit and loan rates not easily justifiable.

9 3.2 Potentially problematic sectors: Tourism Concentration of Destination Management Operators linked to plantocracy wealth (e.g., St. Lucia) Vertical links with International Tour Operators (ITOs) A few ITOs already dominant in the CSM Small operators squeezed out of business (tour guides for cruise ship passengers, restaurants, locals at heritage sites etc).

10 3.3 Potentially problematic sector: Distribution Need access to distribution networks to penetrate market or have to self distribute- too costly Barriers to entry could be erected by dominant local suppliers through tying up dealers in exclusive contracts Suppliers in other MS could also tie up dealers, e.g., KC Sweets of T&T reprimanded M&C of St. Lucia for carrying sweets from Colombia (interview with M&C).

11 3.4 Potentially problematic sector: Beverages Beer Market: ongoing war between Heineken (St. Lucia) and Carib (T&T): –Carib tried to block entry of Heineken by complaining about labeling to customs; –Both Carib and Heineken giving loyalty discounts to distributors which effectively blocks access to the other; –Carib provided refrigerators to retailers to store and display cool beers, but restricted use to Carib beers only; –Carib sold in cans charged environmental tax in St. Lucia, but canned Fruta is not charged.

12 4. Role of a Competition Commission in CSM Advocacy: Cultivate a culture of competition: first priority: –Educate consumer & promote dev. of consumer organizations; –Encourage business sector to monitor and report anti- competitive conduct of other businesses; encourage internal CL; compliance programmes; –Educate Press, Labour Unions, NGOs; Advocate for competition in government of MS: –Provide opinions on gov’t. laws and regulations that stifle competition; –Conduct of State Owned Enterprises; –Competition interface with Regulated sectors to extent that affects cross border trade (e.g., telecom sector?);

13 4. Role of CA cont’d. Undertake studies to monitor structure of production and distribution of g & s so as to be able to assess impact of concentrations on competition; Issue guidelines and interpretation of rules so as to foster confidence and certainty in the private sector: need to tailor rules to local conditionsas gain experience; Surveillance function in identifying anti- competitive conduct with cross border effects: e.g., dividing up markets, barriers to entry, predation, etc.

14 4. Role of CA cont’d. Assess complaints and select those that merit investigation; issue judgments; enforce rules; Facilitate new entry into CSM markets; Cooperation with competition authorities within and outside of CSM: –Work closely with CA in MS –Cooperate with other CAs for technical assistance, information sharing, assistance in investigations, legal assistance etc. (particularly regarding International cartels).

15 5. Some challenges which the Community CA will face Obvious ones: human and financial resource constraint in CARICOM Uncertainty in initial phase (prior to establishment of CL and CA in MS) of how investigative and enforcement machinery would function since dependent on cooperation with MS CA and courts for investigation and adjudication.

16 5. Challenges cont’d. Market concentration is the most imp. competition issue in CSM, but no MCR in CSM competition policy. Danger of take-overs and pubic interest issues re employment. How will CA deal with this? Independence key: Insufficient power vested in CA. –Power to initiate investigation dependent on MS and COTED: insufficient political will –Power to develop rules of competition and exemption vested in COTED

17 5. Bottom Line Most important for Commission is establishing CREDIBILITY with businesses, consumers and Member States. Must have teeth, must instill fear in would-be transgressors, must gain confidence of consumers and MS. Therefore, must be free of political interference, and must have resources to hire qualified staff, pursue aggressive advocacy programme and effectively enforce the law.

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