CUTS-IWOGDA

PUBLIC INTEREST IN COMPETITION

Competition issues have been on the global trade agenda from the days of the Havana charter. However in recent years there has been a growing interest in competition issues. The underlying presumption of competition is that competitive markets bring benefits particularly for consumers and businesses. Restoring and enhancing incentives to compete lead to greater efficiency in resource use, lower prices and costs- higher incomes and fairer outcomes. The European Union (E.U) driven by market access conditions was behind the push to get competition policy included in the Doha Declaration. The main thrust behind this initiative was based on the belief that despite trade liberalization, policies such as competition policy (or the lack of it) could act as a non-tariff barrier to trade. High profile cases like the Kodak-Fuji film case and the Boeing McDonnell Douglas merger case reinforced this belief. An analysis of these two cases will illustrate that to put competition issues on the WTO agenda is driven by producer interests. [1]

Developing countries on the hand having little to gain from market access considerations, fear, interalia, that large MNCs headquartered at developed markets would expand into their markets and threaten young domestic companies. They also fear that any multilateral agreement on competition policy would be intrusive and impinging on their sovereignty to decide according to their unique market conditions. Developing countries like developed countries are affected by anti-competitive practices of globalized trade like domestic import cartels, international cartels that allocate national markets among participating firms, abuses of dominant positions etc are eager to design competition laws to safeguard their interests while maintaining their ability to regulate in public interest.

The question of public interest has always come up whenever reforms take place. Public interest is a term that remains contested and ill defined especially as traditional values are being replaced by market values and will require significant development if it is to have any significant utility in the reform process. Nonetheless, Public Interest can be viewed as an analytical framework, which enables a rebalancing of ideas, which influence policy makers. Although ostensibly in public interest, the WTO reforms have been dominated by efficiency, productivity and contestability considerations. Very little priority has been given to non-economic considerations such as coordination, equity representation, political accountability, and consultation and distributive outcomes. The ultimate objectives of most competition policies are the promotion of economic efficiency and or consumer welfare. Economic efficiency entails considerations such as optimal allocation of an economy’s scarce resources, the most effective combination of productive resources and the optimal rate of technological innovation, development and diffusion. Economic efficiency is sometimes equated to social welfare and therefore is therefore presumed to be in public interest. Some competition authorities like the US for instance effectively pursue consumer welfare. Under this approach, the fundamental question is not whether a business practice generates distortions in the market, which could lead to reductions in social welfare but whether it would have a detrimental impact on consumer prices or on the choice or quality of goods and services available to consumers. In such instances consumer interest is equated to public interest. The concept of Public interest has adapted itself to the values assigned to it. How then can public interest be defined and how should a competition policy whether multilateral or domestic be pursued that is in public interest

Many definitions of the public interest emphasize some kind of commonality of interest, a single interest that all citizens are presumed to share. Edward Banfield describes the difference between special interests and the public interest as follows: “A decision is said to serve special interests if it furthers the ends of some part of the public at the expense of the ends of the larger public. It is said to be in the public interest if it serves the ends of the whole public rather than those of some sector of the public.”

There are others who believe that there is no one interest which all members of a given society share. The public interest, for these people, is based on consensus among the “preponderance” of the people. As Anthony Downs puts it :

“The concept of public interest is closely related to the universal consensus necessary for the operation of a democratic society. This consists of an implicit agreement among the preponderance of the people concerning two main areas: the basic rules of conduct and decision-making that should be followed in the society; and general principles regarding the fundamental social policies that the government ought to carry out.”

F. Raymond Marks and others describe not a consensus but a balancing of interests when they say that the public interest is “policy resulting from the sum total of all interests in the community – possibly all of them actually private interests – which are balanced for the common good.”

The next question that would inevitably arise is how is the balancing to be done. Some
            observers believe that “the public” is not capable of determining the “public interest.”
            Supporters of the “idealist” school believe that only government officials have the knowledge
            and the wisdom to determine what the public interest is. Anthony Downs describes modern
            idealists :

“The idealist school believes that the public interest consists of the course of action that is best for society as a whole according to some absolute standard of values, regardless of whether any citizens actually desire this course of action. Therefore, the task of government officials is to be fully acquainted with that standard of values and to apply it to concrete situations by means of their own judgment. Public opinion need not understand the wisdom of the policies arrived at.”

A number of other theorists however emphasize procedure when discussing the public
interest. Often, the procedure involves interest groups and depends on a pluralist
conception of society. A quotation from Gerhard Colm illustrates this:

“The mixture of personal and general interests differs in various groups and individuals, but from these varying emphases a consensus emerges as to what constitutes the public interest within the frame of reference of the particular society and culture. One of the main functions of the political processes in a democracy is to hammer out this common understanding of what is accepted as constituting the public interest.”

The question that inevitably rises next is what would be the procedure for establishing
public interest? These two aspects of public interest, first the value judgments as to what constitutes public interest –in legal terms substantive due process- and second the method or procedure as to how the value judgments are arrived at- the procedural due process- have received equal emphasis on literature.

Economists Jesse Burkhead and Jerry Miner use a legal analogy to define their position:

“In administrative law it is usually impossible to define substantive due process, but it is not as difficult to define procedural due process. If this analogy is appropriate, it should be possible to define a procedural public interest, even though its content cannot be specified. A procedural public interest would consist of an assurance, in the decision process, that the widest possible range of interests will be consulted. This consultation will assure that the intensities of preferences are revealed, even if these cannot be measured with precision. The esthetic cost of destroying a scenic wilderness cannot be compared with the value of power and water to be produced from a reservoir, but the intensity of reaction of affected groups can at least be assessed. A procedural public interest would both establish the values that underlie the public interest and reveal the consequences of alternative policies. The rules of the game are important, not just the specific, isolated outcomes.’

There are many facets to the “public interest,” which is why it has been so difficult to arrive at a consensus definition. It seems, however, that many of these facets can be grouped under two principal headings: efficiency and equity. Efficiency, in this context, concerns the size of society’s output “pie,” while equity involves judgments about the relative amounts of the “pie” that go to various people, and the process by which (or the “procedural justice” with which) the amounts are decided.

Adopting the foregoing analysis on public interest how can a competition policy be designed to meet public interest?

For a multilateral agreement on competition policy to be in public interest it has to balance both the economic interests (market access and merger issues) and the social interests of developing nations such as low levels of income, skewed distribution of wealth, low levels of education and asymmetric information and preservation of culture. Public interest requires that concerns of all parties should be addressed, This is could well mean a paradigm shift in the focus of the developed countries from market access considerations to welfare and equity considerations as the basis for a multilateral competition policy. Besides, at this stage, developing countries with underdeveloped market structures lack the technical and practical expertise to assess the costs and benefits of a multilateral competition policy that would be in their interest and would require more understanding of international market structures and the impacts of international competition on their country

This can be done through increased level of cooperation, understanding and information sharing between countries. Such a broad based cooperation to raise awareness and encourages convergence on desirable regimes and enforcement practices. It would also serve the useful purpose of identifying precise areas of disagreement and a better understanding of those areas where convergence is not feasible or desirable.

Other strategies can also be explored such as commitments by developed countries to developing countries for greater technology transfer and technical assistance,pressures for modifications in antidumping laws countries as specific tradeoffs against agreeing to a competition agenda.

However realism suggests that the primary focus of developing countries should be to design and implement suitable domestic competition policies[2]. This would involve an extensive national exercise in identifying the interests of all stakeholders. Domestic competition policy should address the ability of market forces to determine the allocation of productive resources while ensuring that social equity objectives are realized efficiently. Care should be taken to see that the competition policy is not captured by producer interests. It is important that competition policy and the enabling legislation (competition law) are consistent so that the competition criteria can help ensure that government intervention does not become excessively costly to the economy.

To sum up the public interest criteria in competition requires the identification of the various competing interests, addressing them in a fair and transparent manner to meet the twin objectives of welfare and equity

[1] The Kodak Fuji dispute resolved around the exclusive or selective vertical arrangement between upstream and downstream sellers. In such an arrangement a producer gives exclusive rights to one wholesaler on the condition that one wholesaler must not act for any other firm. The US claimed that Kodak was excluded from access to film wholesale markets, obliging it to sell to retailers, a much less efficient method of market penetration Japan responded that the control of wholesalers by Fuji was irrelevant since most of the retailers they served also bought imported film and that Kodak’s own distribution system amounted to the creation of a wholesale system of its own to the exclusion of Fuji. The WTO panel did not see anything wrong with Fuji’s system. It is interesting to note that the dispute revolved around whether vertical agreements were anticompetitive or not and not whether companies had market shares they were unhappy with, thereby putting no weight on efficiency and welfare considerations.

The Boeing McDonnell Douglas merger case involved two US based firms whose combined sales in Europe were big enough for the EU Commission to claim right of scrutiny. The main concern of the EU was that certain of Boeings long arm sole sourcing contractual arrangements with airlines risked permanently excluding airbus if they were not challenged. The concern was not that the merger would result in higher prices for aircraft buyers, the concern was to protect airbus EU’s competitor of Boeing McDonnell Douglas.

[2] Arguably, the delays in the adoption and implementation of an effective competition policy has negative consequences in the development process and may require costly industrial adjustments at a later stage. In a formal communication to the WTO, the Korean government noted that: “In hindsight , if a competition policy had been introduced earlier, Korea’s economic development would have been achieved in a more balanced and sound manner. At the early stage of development, the negative structural effects of market concentration and the distortions of the market structure were largely overlooked. As a consequence, Korea is now confronting the very difficult task of industrial restructuring. If competition policy had been introduced before the market structure was distorted, such tasks could have avoided.”(WTO,1997c.p.3)

Comments on the Paper

Comments by Gary Horlick

The author correctly asks that this be defined. Will that halt negotiations? Is there a different one for each country?

Comments by Peter Muchlinski

It appears not to accept that competition policy can have certain valuable economic welfare effects, which clearly it can. There is a public interest in efficient firms that do not distort the market to harm consumer welfare. Full competition may not always be possible but at least workable competition can be safeguarded in highly concentrated markets and anti-competitive practices deterred.

The papers does not develop a very important argument, namely, the public interest that exists in the control of monopolisation of markets

The paper offers a misleading account of how competition policy can be used to deliver redistributive effects. At most such policy can preserve a degree of workable competition in a market from which even and efficient growth can occur, thereby providing more profit and income that can be subjected to taxation. This revenue can then be used for redistributive purposes. There is no guarantee that competition policy can ensure such a result only that it can make such a result more probable. After all competition policy is highly subject to political intervention and may be used for ends that aim at the preservation of market privileges rather than enhancing competition. See for example the development of anti-trust policy in the Reagan Administration with its effect of diminishing competition regulation.

I feel the authors should have a rethink of what they are trying to say, and whether their presentation of competition policy is correct.

Comments by Peter M. Holmes

I find this very interesting but very very philosophical. I am not sure how it is going to fit into policy debates. In particular I think it doesn't distinguish 3 things well enough:

What public interest criteria ought to be in national competition laws -
The UK has moved to the view that only competition criteria should be included - with equity etc. being dealt with by other tools -What should the trade off between equity and efficiency be in global rules on competition in an ideal world.
How much in practice should a WTO comp agreement constrain governments to pursue "other" aims in competition law

Comments by Eleanor Foxe

I think you are correct that the developing countries must discover the "public interest in competition" that is good for them, and you are also right that a good place to start is their own public interest in competition, with a view to national law. Second, they must be certain that whatever might be demanded at world level is not against their own public interest.   I do not think they should bargain for any antitrust that they deem not good for them in return for (eg) greater market access for textiles (which may have been a suggestion in the paper);   antitrust law is likely to be too permanent to accept harmful rules.
I have some slightly different but largely compatible ideas on what is the public interest of the developing countries. While economists often like to group everything into the categories efficiency and equity, I do not, and I think it might be in the interests of developing countries to resist this categorization. If industrialized countries agree to accept any world antitrust regime, they - particularly the United States, will do so in the name of a certain kind of efficiency - aggregate economic welfare.   Aggregate (short term) world efficiency underlies the Washington Consensus, and it is good for the industrialized countries but is often at the expense of the efficiency - and wealth and general welfare - of developing countries. It does not take account of the non-readiness of many developing countries to participate in an open world system, and to "grow" their own indigenous companies to do so. It does not take account of the fact that a number of developing countries need to nurture a competition culture first.       My problem with the use of word "equity" in the competition context is that industrialized countries such as the U.S. believe that there is no place for equity in antitrust; antitrust is about markets and equity is often anti-market; about chilling competition to protect (they will say) inefficient firms.
I think that it might be useful to think: how can a competition regime be most helpful to developing countries (all of their people, not, as you say, special interest groups).   I think that competition rules can be helpful in increasing the economic welfare of the nation by placing competition on a merits basis, so that firms have a fair shot to win business based on what they offer rather than on privilege; ie, cutting through cronyism. It can be helpful to buyers in the county, including business as intermediate buyers, in preventing cartels that exploit them.   It can be helpful at an international level in helping to prevent multinational cartels that exploit them.   Ideally, it would also be helpful in preventing unilateral exploitations and unfair exclusions by MNEs, but it is going to be very hard to get a world principle that will constrain MNEs that are taking action that the MNEs call efficient but that unfairly exclude LDC businesses.
I agree also that process (procedural justice) is important.   Some of the Doha principles are about proceduraly justice - access to courts and to non-discriminatory treatment in courts abroad.
I do not agree with some of the factual statements in the paper.   I am not sure that Kodak-Fuji and Boeing/McDonnell Douglas prove your points. It is true that Boeing could be read as only protecting Europe's national champion; but it can equally be read as simply applying Europe's established precedents; and it does not prove that the WTO agenda is driven by producer interests. As for Fuji-Kodak, for strategic reasons, the case went to the WTO only regarding Japan's government measures - the Large Retail Store Law and the Premiums law, which were allegedly government barriers to market access. It turned out that neither was a discriminatory law, nor an uncontemplated law, and therefore there was no GATT violation.   The anticompetitive nature of the vertical agreements was never adjudicated.     Whether or not some producer interests may have been behind a WTO antitrust market access agenda, the "market access" agenda has not been pushed, and the agenda (Doha) is now an anti-cartel and process agenda.   The developing countries must decide whether these principles are good for them, and with what qualifications.   I assume acceptions to the anticartel principles will be allowed (as per the OECD hard core cartel recommendation) if transparent and reexamined.    I think that these principles are largely good for the developing countries, especially if they can get (agreed) help in prosecuting world cartels targeted at them.   The help should come in two ways: the industrialized countries should agree to "catch" their own export cartelists, and they should at least agree to help do the discovery against their firms that cartelize to harm LDCs.     Of course the developing countries should get technical assistance from the developed countries, and they will. Also, it may be very important to the developing countries agencies to be part of world networks, that will support the agencies in their development of competition principles, and in their standing up against their own governments that want to "play" privilege rather than merits.
I think the public interest discussion can be shorter. You may not want to mention the possibility of balancing of interests - which could be balancing interests of inefficient firms against interest of consumers.   I think the interest is to get a robust, well-function economy going, and when it is well functioning it will benefit consumers and other buyers and will also benefit the energetic and creative producers and will also help make them players in the world system.

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