barriers to entry competition

After the cartel, relief for consumers and entrepreneurs

A recent study by two competition economists, Junior Khumalo and Jeffrey Mashiane, illustrates the devastating impact that collusive behaviour has on the economy.  A concrete products cartel, which ran from the early 1970s and was uncovered by the Competition Commission in 2007, is the focus of the study. Firms in this cartel had engaged in market allocation, price fixing and collusive tendering – all mechanisms designed to eliminate competition between firms through explicit and implicit arrangements.

As Khumalo and Mashiane explain, the emergence of competition in a once cartelised market takes some time, but the benefits of competition are significant. After the competition authorities’ interventions, the erstwhile cartelists began to compete more vigorously with one another. Five new companies entered the implicated markets. Prices, which had been kept artificially high by the cartel, fell by 37 percent in Durban and 27 percent in Johannesburg.This can only bode well for employment and dynamism in the economy.

For the full story, please see a Business Report article published by the authors on 06 June and the paper as published by the University of Johannesburg’s Centre for Competition Economics. This makes for very sober reading, and also points to the fact that the fines that are imposed by the competition authorites are rather conservative in the face of the harm caused by anti-competitive behaviour.

BRICS competition inequality violence

Rio de Janeiro/City of God

View from the Sheraton Hotel, Leblon, Rio de Janeiro

Image: Trudi Makhaya

Bela vista: crumbling mansions teetering off a dramatic hill, the restless sea, Favela do Vidigal in the distance. Having flown into Rio tired at night, this is quite a sight to wake up to.

I spent a week in the land that is joined with South Africa in discussions of that terrible condition – extreme inequality. Entrepreneurship takes a certain dynamic in such divided economies. There is that perpetual challenge of how to link the “first” and the “second” economy. These are economic networks that exist within one country yet may be divided by language, education and geography. This manifests itself in different levels of formality, productivity and ultimately wealth. And so, in a five star hotel that could be anywhere in the world, one is met with views of utter poverty.

Another expensive hotel close to a favela, the Royal Tulip, hosted the International Competition Network’s Annual conference. This gathering brings together competition authorities from around the world, including various authorities from the African continent such as the Competition Commission of South Africa and its counterparts in Botswana, Swaziland, Namibia, Tanzania, Kenya, Morocco: International Competition Network

A short while after returning from Rio, I watched the movie City of God again. This must be like watching Tsotsi after a visit to Johannesburg spent largely in Sandton – so close to drama, yet so far away. In my case, I did get some taste of the drama in Rio after having had a scary moment in a taxi. As my colleagues and I settled into this taxi, the driver got into a spat with a rival taxi and tried to ram into it. The rival taxi had picked up passengers that our driver was aiming for. A local lady sitting next to me let out a scream. I knew it was on. But it wasn’t. But that brief episode of travelling like the locals do brought to mind what I was told when I brought up the prospects of a favela tour: bullets don’t know tourists.

I feel dissatisfied that I did not stray much from the affluent or tourist-friendly areas. But of what use would it have been for me to do so? To witness life in the favela? To show solidarity with poor people of colour? But does that amount to anything?

City of God, which takes its title from a favela in Rio, depicts awful gang violence in a forgotten resettlement area in Rio in the 1960s and 1970s. The favela looks much like a township, endless rows of small houses in an area that the government settles people in but that soon becomes a slum with limited recreational facilities, poor provision of basic amenities such as water and electricity and limited enforcement of law and order. Lawlessness generates drug-lords who control violence and create a parallel system of ‘justice’. This system cannot end the cycle of violence. After endless shootouts, it’s impossible to discern victims of violence seeking vengeance from criminals.

City of God is aesthetically pleasing but comes off as a superficial portrayal of a traumatised community. There is no context to the chaos, just a bloodfest with one escapee, Rocket who is a budding photographer. His only asset is access to the violent favela and its images, which are then reproduced for middle and upper class Rio to consume. Paulo Lins, the author whose book the movie is based on, is quoted as saying: “Brazil is a racist country and a racist society,” he said. “But the funny thing is that nobody will admit to being a racist, and that’s the problem. Blacks in Brazil are always in an inferior, subaltern position, but you can’t find a white person who is a racist.” (see interview here: Paulo Lins interview ).

barriers to entry competition enterprise development public policy

The intersection between competition policy and entrepreneurship

In the latest edition of the Competition Commission’s newsletter, Principal Economist Trudi Makhaya has penned an article on the role that competition policy can play in supporting entrepreneurship. Some extracts:

The South African economy is characterised by high levels of concentration in many sectors and, compared to other developing countries, low rates of new business formation.  This apparent lack of competition and dynamism is often attributed to various factors, most notably the size of the local market and the legacy of state-centred, protectionist apartheid capitalism.

The Fair at Madrid, Francis Goya 1779.
Oil on canvas  258 X 218cm.
Prado Gallery, Madrid, Spain.
The National Planning Commission and the Development Bank of South Africa, to name just two institutions, have placed entrepreneurship and new business formation back on the agenda as forces for capability development, employment generation and economic growth. Current thinking in South Africa has emphasised access to finance, skills and economic infrastructure as the major obstacles to the formation and durability of new businesses. 

The structure of the economy and the nature of rivalry and power dynamics in the market have not been paid as much attention in addressing the entrepreneurship challenge.

One of the purposes of competition policy in South Africa, as articulated in section 2 (d) of the Competition Act 89 of 1998 (as amended), is to “ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy.” Read in conjunction with other parts of section 2 which call for the promotion of efficiency and adaptability of the economy, as well as a greater spread of ownership in the economy, it can be argued that this legislation takes a positive stand in favour of economic freedom and entrepreneurship.

This is not unusual. For instance, the Competition Commission of Singapore sees its role as encompassing the protection of the competitive process, as it is this process that “allows new businesses to enter and existing competitors to develop new ways to compete in a market.” The interaction between customer choice and business responsiveness to those choices is seen as the basis for innovation, efficiency and improvements in productivity and quality. The roots of US anti-trust can also be found in the desire to limit the ability of conglomerates to act anti-competitively towards their competitors and suppliers.

In linking competition policy to entrepreneurship, it is especially useful to examine the pervasiveness of barriers to entry and exit across the economy. The level and intensity of competition within a market is closely associated with the nature of barriers to entry and exit in that market. New entry has been defined by the OFT as a “situation in which both a new undertaking is established in the industry and that new productive capacity is set up in the industry”.  Entrants into an industry can be expected to drive down profits towards their long run competitive level and also bring innovation and dynamism into the market. Barriers to entry and exit limit both allocative and dynamic efficiency. 
Where an industry includes a profitable, super-dominant firm, it is expected that there may be some barriers to entry that protect this firm from the entry of potential rivals, and also that it will have an incentive to heighten those barriers through its conduct. 

Where entry occurs, various strategies are available for a super-dominant incumbent to push the entrant completely out of the market or to prevent it from expanding (or to consign it to a niche in the market). Such strategies include conduct that raises rivals’ costs or reduces rivals’ revenue.  Cartels also have the effect of preventing new entry into markets, as cartelists have an incentive to make sure that their collusive profits do not attract “disruptive” entry.

Within the South African context of concentrated industries, some with super-dominant firms, and given expectations about the incentives and behaviour of incumbents and in light of the practices that have been revealed through the Competition Commission’s enforcement practices, the intersection between competition policy and entrepreneurship becomes very important. Competition policy has a bearing on the climate for entrepreneurship as it is a tool for challenging abusive and restrictive practices that stifle entrepreneurship.

The competition authorities explicitly dealt with this nexus between competition policy and small business in Nationwide Poles (case number 72/CR/Dec03). In this case, Nation Wide Poles, a small pole manufacturing firm complained that Sasol did not supply it with a key input on the same terms as its larger competitors. The Competition Tribunal argued that the Act had the development of small business in mind, as demonstrated by its preamble and, looking back in time, the explanatory memorandum that accompanied it. The “special treatment” accorded to price discrimination, with its own section separate from other abuse of dominance provisions, is also seen as reflecting legislative concern with maintaining accessible and competitively structured markets in which entrants can compete effectively against incumbents.  

Though the Tribunal did not succeed in its particular use of the public interest arguments in favour of small business in Nationwide Poles (where it was arguing for a different standard of showing substantiality where a small business is harmed), its remarks about the potential of competition law to contribute to an enabling environment for small business development have merit. The Competition Appeal Court was careful to make it clear that its decision did not seek to diminish the ability of small and medium businesses to “use the Act to protect their ability to compete freely and fairly” (case number 49CACAPRIL05).

Though entrepreneurship and small business development have not been invoked explicitly in most of the competition authorities’ decisions, it is clear that the proximate victims of exclusionary and abusive conduct in many cases have been entrants and small enterprises.

In applying its prioritisation framework, the Commission already takes into account conduct that retards small business development and entrepreneurship, such as cartelisation. It is expected that this approach should go some way towards addressing obstacles to entry and expansion that arise from anti-competitive conduct. 

The Commission’s prioritisation framework also calls for the consideration of the nature of barriers to entry in an industry in making screening decisions. In this way, competition policy can be supportive of the broader entrepreneurship policy agenda, especially as it relates to the ability of   ability of small, independent or specialist firms to bring innovation, choice, and dynamism to the market, with long term benefits to consumers.

Link to the full article and newsletter
Image Source: WikiPaintings

barriers to entry competition enterprise development public policy Vision 2030

Competition policy, the South African economy and entrepreneurship

David Goldblatt
Braiding hair on Bree Street, Johannesburg, 2002
Digital Prints on 100% cotton rag paper

Edition of 6

 In this week’s Mail and Guardian, two senior economists from the Competition Commission of South Africa (Simon Roberts and Trudi Makhaya) write about the role of competition policy in promoting an environment conducive to new entry and business growth in the economy. Below are some extracts though it would be far more enlightening to read the full article:

Vision 2030, the plan released by the National Planning Commission, presents a vision of a South Africa in which mass entrepreneurship is possible…
For the plan to succeed it implies a positive understanding of competition as the ability to enter and compete effectively, where effort and creativity is rewarded rather than an inherited incumbency…
A strong emphasis on promoting competition is important in South Africa because of the stifling nature of old networks…
Although these networks may have lost the type of access they had to the state, recent competition cases have shown that they are able to continue to control private activity. Multilayer cartels have been uncovered in concrete pipes, cement, reinforcing steel, scrap metals, flour and bread.

What is often not recognised is that for cartels to be sustained they must not just agree among themselves, but must also keep out new entrants attracted by the high profits. So, not only are consumers harmed by the ­collusive prices, but so is opportunity. Dynamism is harmed in another way as managers who guaranteed their market share through collusive arrangements enjoy the “quiet life” rather than worrying about quality and service…

The orientation to protecting their position through erecting defences to potential rivals has been characterised as “handicap competition”, seeking strategies to disadvantage and undermine other firms outside the club through devious schemes, as compared with “performance competition” where managers commit themselves to winning in the marketplace through the legitimate pursuit of productivity and efficiency…

Given our status quo, not facing up to the tension between the interests of entrants and incumbents is in effect a decision to support the existing networks, albeit with some new members likely buying into them.

The Latin American experience may be instructive where the development of competition law was hostage to the region’s economic history. As these economies were largely dependent on extractive industries and agriculture, elites were indifferent to the value of competition in the economy.It has only been through globalisation and concerns over inequality that competition law has gained traction in recent times.

We believe that in South Africa it is necessary to take a positive stand on future competition through widening participation and increased diversity as guiding principles. This is consistent with supporting entrepreneurship and creativity whereby different ideas and approaches are introduced to the marketplace and tested.”

Trudi Makhaya and Simon Roberts are economists at the Competition Commission. They write in their personal capacity

barriers to entry competition small business

Competition Matters – Media 24 referred to the Competition Tribunal for alleged predatory pricing

On 31 October 2011, the Competition Commission referred a case of predatory pricing against Media 24 to the Competition Tribunal.
According to the Commission’s release, Media 24 engaged in predatory pricing with regards to the advertising rates it charged in the community newspaper market in the Goldfields region of the Free State. The Commission’s investigation found that Media 24 implemented its predatory pricing strategy by charging advertising rates below costs for Goudveld Forum, one of the two community newspapers it controlled in the region. Goudveld Forum budgeted for and operated at a loss until its competitor (and complainant), Gold-Net News, was driven out of the market. The Commission found that Media 24’s strategy was intended to exclude competitors and to discourage future entry into the community newspaper market.
The Commission has asked the Tribunal to levy an administrative penalty of 10 percent on Media 24’s turnover.