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A bi-monthly, internationally circulated e-newsletter of the CUTS-Centre for International Trade, Economics & Environment (CUTS-CITEE), which has been designed to disseminate information about the "7 UP Project", in addition to reporting interesting newsitems, which have been reported across the globe on competition and other related issues. The 7-Up Project is a 2 year research and advocacy programme being conducted by the Centre with the support of DFID, UK for a comparative study of competition regimes of seven developing countries of the Commonwealth. |
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ISSUES |
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7 Update: Vol. 1, No. 5, June 2001 |
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National Reference Group Meeting View Point: Anti-trust & Innovation Anti-trust, but pro-innovation
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EDITOR’S
NOTE
The
Ist Phase of the 7-Up
project is now on the verge of completion. The last two months have
been the most important period for the project. This was the period when
the field survey was carried out by the country partners and the draft
reports were also prepared. The draft reports were discussed in the
National Reference Group (NRG) meetings of each of these countries.
Interestingly, the deliberations in these meetings were not limited to the
country reports. The participants discussed all the issues that they
thought important to instill a healthy competition culture in the economy. Out
of the seven project countries, in three, the competition laws are
relatively new. Two countries are in the process of adopting a new law
while two others are considering adopting a new law. In the countries with
a new law (Tanzania, Zambia and South Africa), the NRG meetings
deliberated mainly on the issues of enforcement and the interface between
the competition authority and the regulatory authorities. In the countries
that are in the process of adopting a new law (India and Sri Lanka), the
NRG attempted to evaluate the existing competition regime and on the basis
of that came out with some suggestions regarding the proposed competition
law to make it more effective. In the other two countries (Kenya and
Pakistan) the NRG members were almost unanimous in feeling the need for a
new competition law in the changed economic scenario both at home and
outside. In
all these countries, NRGs were of the opinion that the competition law
should be able to address their development concerns and protect their
national champions against unfair competition from the TNCs. They were
equally concerned about the effectiveness of domestic competition law to
take care of anti-competitive practices in the globalising environment.
However, they stopped short of recommending a multilateral competition
framework, as they were not very sure of the implications of such a
framework. The
NRGs also felt that it was essential to have a good advocacy and support
base to enforce the laws effectively. At the same time they recognised the
need for a strong consumer movement in ensuring that. They also recognised
that the consumer movement in these countries (with the exception of
India) was rather weak, and needs to be strengthened. In
this edition, we have carried a brief on the project progress and the
viewpoint on anti-trust and innovation. Views and comments of the readers
on the same are welcome. Happy reading! 7-Up Team, CUTS This
was the most crucial period of the first phase of the 7-Up
Project, as it is popularly known. The project entitled “Comparative
Study of Competition Regimes in Select Developing Countries of the
Commonwealth” is being implemented by CUTS, Jaipur with the support of
DFID, UK. The countries selected for the study are India, Pakistan, Sri
Lanka, Kenya, South Africa, Tanzania and Zambia. The
Project is running in the last quarter of its first phase and the
following is a brief report of its progress during the months of May and
June 2001.
During this period, the country
researchers prepared the draft phase-I country reports. These reports have
been prepared on the basis of the information and data collected from the
respective Competition Authorities in these countries. A comprehensive
questionnaire, dealing primarily with the institutional framework for
enforcing competition laws in project countries, was sent in advance to
the researchers for the purpose of collecting the requisite data. 2.
National Reference Group (NRG) Meetin
The formation of NRG comprising of
various stakeholders of the Project and organising their meeting was one
of the most important activities of the first phase of the project.
NRGs were formed in the project countries and the NRG
meetings were organised during this period. These meetings were
attended by CUTS staff as well. The
draft phase-I country report was presented at the meeting and in some
countries it was also sent in advance to the NRG members. The comments and
suggestions that emerged were then incorporated for preparing the Final
Phase-I Country Report. The
NRG deliberated on the inputs prepared in each country and a base that
would be used for launching advocacy for strengthening competition culture
in these countries was created.
The
Final Phase-I Country Reports have been sent to Prof. Rakesh Basant, the
core researcher of the Project, for a comparative analysis of the same.
Prof. Basant would prepare a synthesis of these reports which would be
presented and deliberated at the Phase-I
culmination meeting of the Project to be held on 7-8th
September in Goa, India. ReguLetter
No. 3 June 2001 During
this period, the third issue of the “ReguLetter” was also published.
It is a quarterly newsletter of the CUTS Centre for International Trade,
Economics & Environment, being published under the project. The
purpose of this newsletter is to provide a forum, in particular to the
civil society, to understand the issues clearly and promote a healthy
competition culture in the world. It covers developments relating to
competition policy and economic regulations ZCC
Publications on Competition Under the 7-Up Project, CUTS has published five booklets and 10 posters on Competition for the Zambia Competition Commission (ZCC) which observed a Competition Day in Zambia on 28th June. The publications have been produced with the hope that this will inspire other countries to also take up similar publications to create awareness, which will enable the development of a healthy competition culture. VIEW-POINT:
Anti-trust & Innovation The roll-out of Windows XP by
Microsoft on October 25 is expected to revive debate in diverse fora about the compatibility of US
anti-trust policy and laws with emergent information technologies. According
to reliable media reports, some State attorneys general in the US,
encouraged by the appeals court ruling that Microsoft did, in fact,
violate the Sherman Anti-trust Act by bundling its Internet Explorer
browser with its operating system (OS), are now preparing to level the
charge that its Windows XP will result in the company occupying larger
areas of prime real estate in cyberspace. The
basis for this charge? The
bundling of MSN Messenger, Microsoft's Passport authentication technology
and a new Windows Media Player that burns CDs and plays DVDs, streaming
video and Internet music with Windows XP which, in terms of ubiquity, is
expected to rival Windows 95. Over
30 companies, including Apple Computer, Adobe Systems, Corel, Intervideo,
Netopia, Real Networks and Symantec, fear that they will wind up as
roadkill on the information highway if Microsoft is allowed to incorporate
these features in Windows XP. While
their stand-alone products are indubitably superior to the features
bundled with Windows XP, these companies fear that the average buyer will
just buy or go along with the Microsoft product to save themselves the
bother of picking up third-party offerings. Microsoft
has been characteristically laconic in its dismissal of these concerns.
It has maintained that it is simply trying to improve its products
in a fiercely competitive market so that it continues to deliver value to
its customers. And, just in
case people thought that it wasn't serious about what it was saying,
Microsoft has announced the withdrawal of Sun Micro system's Java
technology from Windows XP. This
means that Web applications that run on Java won't work on XP without the
installation of additional software. Who
is wearing the white hat in this particular showdown on main street? It's very, very difficult to tell. The
official version is that Microsoft is wearing a black hat here because,
when customers opt for bundling because it gives them immediate
gratification and ease-of-use, they are basically stifling competition
and, thereby, ensuring higher prices down the line. But
life isn't that simple. In
order to understand why it isn't (at least, in this particular case),
we'll have to get a hang of the basics of the so-called New Economy and
the ways in which it works differently from the so-called Old Economy. But
before we get into that, it might be worth the while to check out the
history of anti-trust doctrine per se which, as we shall see, wasn't all
that simple either. The
roots of anti-trust doctrine lie in need to protect and help consumers.
However, historically, the evidence has been that the doctrine and the
laws embodying it have been used to hinder efficient corporations that
have increased output and lowered prices.
Cynics argue that this has happened because the doctrine was never
a pro-consumer one at any point of time and that it was formulated in
order to protect some firms from the efficiency of other firms. In order
to buttress their position, they cite the fact that virtually every
anti-trust action has involved two or more firms and hardly ever consumers
and firms. Others,
less cynical in their orientation, have been inclined to the view that the
anti-trust doctrine and the attempts to put it into practice have not
worked because those involved - economists, regulators and so on - have
not been able to define clearly certain basic concepts such as competition
and entry barriers. For
instance, does the lowering of prices by a firm constitute competition or
an attempt to monopolise the market?
And then again, does heavy expenditure incurred by a firm on
research and development, advertising and so on enhance entry barriers,
thereby stifling competition and hurting the interests of the consumers? Backing
up a little, we find that micro-economic theory, from roughly the 1940s to
the 1960s, was pretty much based on what economists refer to as the
perfectly competitive equilibrium model which embodied the assumption that
competitively structured markets tended towards equilibrium in which
price, marginal cost and minimum average cost were all equal and in which
consumer interests were, thereby, protected optimally.
It followed that if firms advertised or if they achieved economies
of scale that other firms could not or if they achieved a level of market
share which allowed them to control prices, they were working against the
interests of the consumers. Inevitably,
such firms were viewed then as candidates for prosecution under anti-trust
laws. In
the 1970s and 1980s, however, the Chicago School economists trashed this
theory and demonstrated that the co-relation presumed to have existed
between market concentration and profit didn't hold good in all cases.
At about the same time, Austrian economists put forward the
argument that real world divergences from perfect competition do not
necessarily mean market failure or, for that matter, justify anti-trust
action. They went to say that
products should be differentiated if the market itself was differentiated,
that firms should advertise if adequate information was not available to
consumers and that lower costs achieved by firms through innovation must
be allowed to wipe out less innovative firms.
And then, as a clincher, they pointed out that people were getting
dominant firms mixed up with monopolistic entities… And
now for anti-trust policy in the context of the New Economy. Let's assume for the moment that anti-trust policy and laws
are entirely unambiguous - and then figure out why people say that they
create a whole bunch of problems when hooked up to emergent information
technologies. The
anti-trust doctrine was developed in the context of smokestack economies
characterised by multi-firm, multi-plant production of physical goods such
as cars and steel and cement and cigarettes and so on.
In as much as this production was undertaken on a multi-firm
multi-plant basis, the economies of scale were limited at the plant and
firm-levels. Inevitably,
average costs rose with output. Further,
smokestack economy enterprises required high capital investment and were
characterised by stable market shares, relatively slow innovation and
extended entry/exit cycles. New
Economy firms are, in a manner of speaking, the mirror image of these
enterprises. They enjoy much higher economies of scale and, consequently,
the total average costs of their products fall across output.
They require less capital investment, run on extremely high levels
of innovation and have accelerated entry/exit cycles.
Most significantly, they benefit from economies of scale in
consumption owing to what is referred to as network externalities. New
Economy companies are different from Old Economy outfits in another
extremely important respect: their principal output is intellectual
property. Intellectual
property has a unique feature - it has extremely high fixed costs relative
to marginal costs. That is,
it'll cost you a bomb to create intellectual property but, once you've
created it, the cost of making additional copies is very low. In fact, in
the case of software, it is so low that it might as well be zero.
That is just great for customers, right? Wrong. The problem here is
that intellectual property has to be given very high levels of protection
under law. If this is not
forthcoming, everybody will jump on board for a free ride and innovators
may not be able to recover even the cost of their innovations. And
so, we have a situation in which protection will actually increase
production - even while deflecting demand to more expensive substitutes. There
goes the very basis of the anti-trust doctrine ….. Regulators
are aware of all this. Thus,
Robert Pitofsky, Chairman of the US Federal Trade Commission, addressing a
recent conference on anti-trust, technology and intellectual property held
at the Berkeley Centre for Law and Technology (University of California),
said that "it is unduly simplistic to assert that intellectual
property is like all other forms of property" but added that "it
is also unduly simplistic to conclude, as some have urged that because of
differences, anti-trust enforcement has little or no role to play when it
comes to market power based on intellectual property” (Pratap Ravindran, Business Line, India, 08.08.01) Anti-trust,
but Pro-innovation According
to Robert Pitofsky, while comprehensive empirical data is lacking, there
is a widely-held view that markets in the New Economy are characterised by
an increased rate of innovation, relative case of entry and instability of
market shares. Consequently,
cartels and monopoly power in intellectual property markets will
necessarily be short-lived and, in any event, will be "defeated more
quickly and efficiently by market forces such as new entry than by any
band of bureaucrats."
He told the conference: "On
average, market power probably is less durable in the hi-tech sector of
the economy. As a result, it
is unlikely that any dominant firm will eclipse completion for 50 years to
the extent and in the way Alcoa dominated the aluminium market in the
first-half of the 20th century.
Nevertheless, we have seen that systems designed to encourage and
protect innovation - patents and copy rights - can be and often are used
to barricade a market against entry by new rivals.
It also appears that network efforts occur more frequently in
sectors of the economy characterised by intellectual property.
Brand name recognition and reputation for reliability can create
substantial advantages for incumbents.
Finally, practices illegal under the anti-trust laws such as
exclusionary conduct or intimidation tactics available only to very large
firms can themselves impede entry by more efficient challengers.
Market dominance for 'only'
15 or 20 years can take enormous resources out of the economy and, by
excluding innovative new entrants, foreclose alternative paths of
technical development"
How, then, can intellectual property
rights be protected and innovation fostered without the erosion of
consumer welfare? According
to Pitofsky, as in most other areas of anti-trust, most cases involving
intellectual property that raise serious anti-trust problems are settled
with conditions rather than litigated. "Because areas of the economy
characterised by intellectual property usually are dynamic rather than
static, reliable predictions are difficult.
This is a problem across-the-board, but it particularly applies to
designing remedies that alleviate competitive problems without unduly
interfering with innovation incentives. He
said that among the issues that need to be addressed are:
(Business Line, India, 08.08.01) 7-Up
project: Phase-I
culmination meeting, 7-8th September, Goa, India The
Phase-I culmination meeting of the 7-Up
project will be held on 7-8th September in Goa, India. The
meeting would take stock of the first phase output, i.e. the Phase-I
country reports and would also deliberate on the synthesis of these
reports prepared by Prof. Rakesh Basant, the core researcher of the
Project. The meeting would
also chalk out a plan of action for the Pahse-II of the project which
would deal with cross-border issues. For
more information: http://cuts-international.org/forthcoming-events.htm#7-Up Regional
meeting for the Asia-Pacific:
New Dimensions of Consumer Protection in the Era of Globalisation, 10-11th
September, Goa, India Consumer
Unity & Trust Society is organising a meeting on “New Dimensions of
Consumer Protection in the Era of Globalisation,” on 10-11th
September 2001, in Goa, India, together with UNCTAD and Consumers
International. The
meeting is being held for the Asia-Pacific region and will bring together
leaders in consumer policy, mainly from civil society, and also from
government and business sector from the region. The
objective of the meeting is to better inform the Expert Group that has
been called upon by UNCTAD to discuss “Consumer Interests,
Competitiveness, Competition and Development.” in Geneva in October
2001. For
more information: http://cuts-international.org/forthcoming-events.htm#Asia-Pacific
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CUTS
Centre For International Trade, Economics
& Environment (CITEE)
D–217, Bhaskar Marg, Bani Park, Jaipur 302 016, India, Ph:
+91(0)141-228 2821 Fax: 91.141.2282485 Email: cuts@cuts.org |
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