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

One reply on “The intersection between competition policy and entrepreneurship”

Bully for Nationwide Poles. I would still like to see the commission doing some damage to the real cartels that are destroying the potential for economic growth in South Africa – viz the banking and telecoms sectors.

If you consider that it is cheaper to call the UK from India on a cell phone than to make a local mobile-mobile call in South Africa you cannot possibly tell me that consumers are not being unfairly fleeced by local operators – where is the competition here?

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