Competition Law in Hong Kong Howard Davies

Why Have Competition Law? In a market economy, it is accepted that the market mechanism will only give the ‘optimal’ result if all industries are subject to competition WHAT DO WE MEAN BY AN ‘OPTIMAL RESULT’? WHAT DO WE MEAN BY ‘COMPETITION’?

In formal textbook economic analysis ‘Optimal’ result is also referred to as an ‘optimal’ allocation of resources, or ‘social welfare maximisation’ It means producing exactly the ‘right’ amount of each good and service The ‘right’ amount is where the price is equal to the marginal cost This happens automatically under ‘perfect competition’

This Is the Formal Version of the Idea of the ‘Invisible hand’ Adam Smith – ‘The Wealth of Nations’ 1776 ‘It is not to the generosity of the baker that we owe our bread, but to his pursuit of his own self-interest’

Why and How Does That Happen? Some board work may help MC –extra cost of one more unit D – extra benefit of one more unit Optimal output

Perfect Competition Large number of small buyers and seller Identical products Free entry and exit Perfect knowledge of market opportunities Profit-maximizing behaviour

Perfect Competition Under perfect competition, price will equal marginal cost of production because every firm is in this situation MC D = AR = MR = P m PmPm

Perfect Competition For the industry as a whole Supply = horizontal sum of firms’ MC curves PmPm

If We Have a Monopoly Situation P profit max P optimal Q profit- max Q optimal MC D=AR MR

Monopoly Leads to: A STATIC ‘misallocation’ of resources. Price not equal to marginal cost. With the existing resources and technology output is less than it could be. Units of a product which consumers value more highly than their cost of production do not get produced A DYNAMIC misallocation of resources insufficient attention and resources are devoted to innovation because there is no competitive pressure CONSUMERS lose out to PRODUCERS

Perfect Competition is a Model of an Ideal Situation Helps to understand the major forces at work – market economies often behave ‘as if’ perfect competition were in place BUT, not a very useful benchmark for policy If we say ‘every industry which is not perfectly competitive’ must be regulated we have to regulate everything

Practicable Alternatives to Perfect Competition as a Benchmark? ‘Workable’ competition the most desirable form of competition selected from those that are practically possible’ – Clark (1940) but what is that? ‘Contestable’ markets Where entry is free and fast and exit involves little cost Even a single firm cannot exert much market power for fear of entry A perfect competition type outcome can arise even in situations far from p.c.

All These Approaches Are About Market Structures But market structure is not the only way to approach the extent of competition THREE elements Structure Conduct Performance

Conduct and Performance Are Also Key Aspects Focus on firms’ conduct rather than structure Cartel arrangements, price fixing. Aggressive behaviour towards entrants Focus on performance of firms Are they making large profits that cannot be attributed to superior efficiency or better products?

Alternative Policy Approaches ‘rules’ versus ‘discretion ‘rules’ - certain behaviours or market structures are ‘per se’ illegal Close to the US approach at one time – it is illegal to monopolize or seek to monopolize (e.g. cartels) and unnecessary to prove harm has been done ‘discretion’ – certain behaviours or structures may allow damage to the public interest but it is doing the damage that is illegal The UK approach

Alternative Policy Approaches Sector-specific versus Comprehensive Competition Laws Hong Kong has regulations in respect of telecommunications and electricity (the Scheme of Control) but no general competition law US, UK, Europe have more comprehensive systems

Does Hong Kong Need A Comprehensive Competition Law? In the traded goods sector Probably not because HK firms are subject to intense competition amongst themselves and from overseas firms – highly contestable markets – toys, electronics etc In the domestic market There are very significant anti-competitive structures and practices

Examples of Anti-competitive structures and practices? Minimum commissions on brokerages – protects small inefficient firms and reduces the efficiency of capital market Banking cartel on interest rates – now abandoned but no formal policy to require it. Park’, Shop v Wellcome (remember Admart?) Property development – a few large developers and a land sale system biassed in their favour The European Union expressed concern at the extent to which Hong Kong’s domestic economy is dominated by a small group of interests