5.1 Theoretical underpinnings of anti-competitive behaviour
5.1.2 Anti-competitive behaviour by state monopolies
This section firstly argues that the occurrence of state monopolies is deep-rooted because of the state participation in the market through the presence of state-owned enterprises (SOEs). The establishment and maintenance of SOEs are justified by the need of a state
35 Ibid 19.
36 Ibid.
37 Taylor, above n 9, 20.
38 This was noted by the prominent economist Adam Smith: „People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in conspiracy against the public or in some contrivance to raise prices‟. See Adam Smith, An Inquiry into the Nature and Cause of the Wealth of Nations (1976) IV.7.175 (5th ed, annotated reprint, Methuen, London ,1904)
<http://www.econlib.org/library/Smith/smWN.htm>
39 Taylor, above n 9, 16.
165 presence in the market. There are many reasons for that,40 including: political and ideological reasons, such as the desire for the achievement of better distribution of wealth and power within society;41 social reasons, such as guaranteeing employment, offering better working conditions to the labour force and improving industrial relations;42 and economic reasons, such as the treatment of market failure and finally, the need for promoting of economic growth in undeveloped areas or in industrial sectors.43 SOEs are commonly found in the supply of public goods such as telecommunications, energy and transportations and the provision of social services such as health and education.44 However, when participating in competition with other firms, they benefit from a number of significant privileges and immunities that can enable them to be state monopolies, making it easy to conduct anti-competitive behaviour.
The next section discusses anti-competitive behaviour committed by certain state monopolies under competition law, particularly their incentives to such behaviour. It argues that state monopolies participate in the market legally as firms; hence they can conduct market behaviour as other firms do. For the purpose of this thesis, this is significant, because the consideration of anti-competitive behaviour of state monopolies can be directly inferred from similar behaviour of other firms. Finally, this section explains why state monopolies can conduct these types of behaviour.
40 Pierangelo Toninelli, „The Rise and Fall of State-Owned Enterprises, the Framework‟ in Pierangelo Toninelli (ed) The Rise and Fall of State-Owned Enterprises in Western World (Cambridge University Press, 2000) 3-24, 3-24; OECD, „State-Owned Enterprises and the Principle of Competitive Neutrality‟
(Policy Roundtable, DAF/COMP(2009)37, 2009), 27
<http://www.oecd.org/dataoecd/43/52/46734249.pdf>; Winston, above n 32, 2-3.
41 This ideological and political motive can be found in countries whose policies are grounded by the belief that SOEs can be instructed by their governments to reduce prices, particularly for goods that are in demand by lower income earners, so that this can influence the distribution of real income within society. Besides, through SOEs, the state can control strategic resources. See Dieter Bửs, Public Enterprise Economics:
Theory and Application (Amsterdam, 1989); Joseph E Stiglitz et al, The Economic Role of the State (Oxford, 1989); Shleifer, „State Versus Private Ownership‟ (1998) 12 (4) Economic Perspective 130-150.
See also OECD, „Principle of Competitive Neutrality‟, above n 40, 27.
42 Maxim Boycko andrei Shleifer and Robert W Vishny, „A Theory of Privatization‟ (1996) 106 (435) Economic Journal cited in OECD, „Principle of Competitive Neutrality‟, above n 40, 28.
43 OECD, „Principle of Competitive Neutrality‟, above n 40, 28.
44 International Competition Network (ICN), Report on the Objectives of Unilateral Conduct Laws, Assessment of Dominance/Substantial Market Power and State-created Monopolies (2007), 65-66
<http://www.icn-moscow.org/page.php?id=7>.
166 Due to their „state‟ nature, state monopolies are SOEs or formed from SOEs,45 so that the term „state monopolies‟46 is used interchangeably with „state-owned enterprises‟ (SOEs) in this section. In many countries state monopolies participate in the market with the same legal status as other firms as they carry out economic activities.47 It is argued that state monopolies have stronger incentives and more advantages in committing anti- competitive behaviour than others. Following reasons are given:
Firstly, state monopolies participate in the market with a variety of government granted subsidies and special benefits that bring them more competitive advantages over private rivals.48 For example, they are entrusted by governments with exclusive or monopoly rights over some of the activities that they are mandated to pursue49. They can receive direct or indirect subsidies from the government or from other public forms of financial assistance that is significant to lower their operating costs.50 Besides, they benefit from preferential access to credit and other financial services and from information asymmetries, because they can have access to data and information that are not available or limited for their private counterparts.51 The benefit from the lack of bankruptcy
45 There are not many differences between the two notions: (i) state monopolies and similar terms such as government businesses (for example, the term „government business‟ is preferred in Australia); public monopolies and (ii) State-owned enterprises (SOEs). In some written works of scholars discussing questions surrounding state monopolies, for example in that of David Sappington, the term SOEs is used rather than state monopolies. Anti-competitive behaviour in the form of pricing undertaken by state monopolies is explained thoroughly in the written work of Sappington, despite the fact that throughout the work, the term „state-owned enterprises‟ is used rather than „state monopolies‟. See David E M Sappington and Gregory J Sidak, „Competition Law for State-Owned Enteprises‟ (2003) 71 (2) Antitrust Law Journal.
See also David E M Sappington and Gregory J Sidak, „Anti-competitive Behavior by SOEs: Incentives and Capabilities‟ in Richard R Geddes (ed), Competing with the Government: Anti-competitive Behaviour and Public Enterprises (Hoover Institution Press, 2004) 28.
46 What is a „state monopoly‟ is discussed earlier in Chapter 3. State monopolies can include state firms with dominant position in the market.
47 Examples of competition legislation with regard to state monopolies‟ behaviour can be found in country reports to the International Competition Network (ICN)
<http://www.internationalcompetitionnetwork.org/>.
48 Richard R Geddes, „Case Studies of Anti-competitive SOE Behaviour‟ in Richard R Geddes (ed) Competing with the Government: Anti-competitive Behaviour and Public Enterprises (Hoover Institution Press, 2004) 28.
49 For example, in the US, the US Postal Service is granted by the federal government exclusive monopoly over both the delivery of letters and the use of customers‟ mailbox. Or monopoly over the carriage of passengers on intercity railroad routes is granted to Amtrak. See Geddes, above n 47, 28.
50 OECD, „Principle of Competitive Neutrality‟, above n 40, 36-37.
51 Ibid. Trebilcock and Iacobucci, above n 1, 1428; Sappington and Sidak, „Competition Law for SOEs‟, above n 45.
167 constraint allows them to generate losses for a long period of time.52 They can benefit from privileges and immunities that allow them to recoup losses incurred in non-core markets or make them irrelevant53 or transform losses into their future debts.54 They are also relieved of the obligation to compensate their investors or can enjoy exemption from taxation that can help to reduce their operating costs.55 They may benefit from less binding price regulation, while a typical private firm is subject to such regulation. The lack or absence of necessary powers of the regulatory agency gives opportunities for them to engage in anti-competitive behaviour, including below-cost pricing.56
These privileges and immunities are a significant competitive advantage that creates incentives for them to get involved in competitive ventures on favourable terms;
therefore, it can lead to unfair and inefficient competition with private firms.57 When SOEs enjoy a statutory monopoly58 in a core market, they can easily become monopolist, making possible for them to raise prices rather than minimising costs to maximise their profits.59
Secondly, state monopolies are primarily entrusted to pursue goals other than seeking a
52 Geddes, above n 48; OECD, „Principle of Competitive Neutrality‟, above n 40, 36-37; Trebilcock and Iacobucci, above n 1, 1428-1429.
53 Sappington and Sidak, „Competition Law for SOEs‟, above n 45.
54 Gregory J Sidak and Daniel F Spulber, Protecting Competition from the Postal Monopoly (AEI Press, 1996) 116.
55 Trebilcock and Iacobucci, above n 1, 1428. An example can be taken from the case of Polish SOEs where the tax authority might not press troubled SOEs to pay taxes because this might force them to go
bankcruptcy. See answer by Polish authority to the OECD, „Roundtable on the Application of Antitrust law to SOEs – Contribution from Poland‟ (Working Party No.3 on Cooperation and Enforcement,
DAF/COMP/WP3/WD (2009)37, (2009) <http://www.uokik.gov.pl/download.php?id=47>.
56 Sappington and Sidak, „Competition Law for SOEs‟, above n 45, 517. This is demonstrated in the case of the US Postal Rate Commission where this Commission lacks subpoena power and has limited powers to set maximum prices for postal services.
57 Michael A Crew and Paul R Kleindorfer, Privatizing the U.S. Postal Service (2000), 6
<http://crri.rutgers.edu/pub/wp/Privatization-Cato1.pdf>.
58 „Statutory monopoly‟ is defined as „a monopoly protected by law from entry by rivals.
Such monopolies are sometimes set up as a quid pro quo for an obligation to provide a universal service; the UK Post Office is an example of this.‟ See „statutory monopoly‟ in John Black, Nigar Hashimzade and Gareth Myles, A Dictionary of Economics (Online) (Oxford University Press, 2009).
59 Giacomo Dalla Chiara, „A Monopolistic State in Competitive Markets: How State Ownership and State Intervention Affect Competition‟ (Bachelor Degree Thesis, Luiss Guido Carli University, 2010) 17
<http://tesi.eprints.luiss.it/379/1/dallachiara-tesi.pdf>.
168 maximisation of profits. Profit maximisation is limited to merely one of their objectives,60 or it may not exist at all or could be avoided.61 State monopolies can be assigned by governments to treat market failure62 or to implement a desired social objective, such as income redistribution.63 and thus they are often imposed by the law with the duty or prerogative to pursue specific objectives.64 This can provide them with greater ability to sustain prices below costs for more extended periods of time than a private profit- maximizing firm.65 State monopolies have more freedom to expand the scale or scope of their activities than private ones because they are not subject to takeover threats and, in general, are not restricted in terms of the discipline of capital markets.66 Hence it is argued that an important incentive is the lower concern of profit maximisation than private firms with profit generation have, because it enables state monopolies to commit anti-competitive behaviour, including the consolidation of the monopoly position that they have.
Sappington and some others believe that SOEs can lobby for regulations leading to an increase of operating costs of their competitors; can restrict their rivals in accessing essential productive inputs; or they can raise the market price of inputs by buying
60 OECD, „Promoting Competition in Postal Service‟ (Roundtable on Competition Policy, DAFFE/CLP (99)22, 1999) 55 <http://www.oecd.org/dataoecd/35/36/1920548.pdf>.
61 Trebilcock and Iacobucci, above n 1, 1422-1425. According to Rees, „the objective of profit
maximization has been explicitly rejected for public enterprises because in general they have monopoly power in at least some of the market they supply and so profit maximization would result in policies which nationalization was expressly intended to avoid‟. See Ray Rees, Public Enterprise Economics (Weidenfeld and Nicolson, 1976) 5 cited in Giacomo Dalla Chiara, above n 59, 17.
62 Swedish Competition Authority, The Pros and Cons of Competition in/by the Public Sector (2009), 46
<http://www.kkv.se/upload/Filer/Trycksaker/Rapporter/Pros&Cons/Pros_and_Cons_Comp_by_public_sect or.pdf >.
63 Ibid. See also Sappington and Sidak, „Competition Law for SOEs‟ above n 45, 515; Jenik Radon and Julius Thaler, „Resolving Conflicts of Interest in State-Owned Enterprises‟ (2005) 57 (1) International Social Science 11-20.
64 For example, the US Postal Services has its objectives as „to provide postal services to bind the Nation together through the personal, educational, literary and business correspondence of the people. It shall provide prompt, reliable and efficient services to patrons in all areas and shall render postal services to all communities. The Postal Service shall provide a maximum degree of effective and regular postal services to rural areas, communities and small towns where post offices are not self-sustaining‟. See US Code - Title 39: Postal Service <http://vlex.com/vid/sec-postal-policy-19236133>.
65 OECD, „Principle of Competitive Neutrality‟, above n 40, 37.
66 Sappington and Sidak, „Competition Law for SOEs‟, above n 45, 500.
169 excessive amounts of these inputs.67 Among the consequences of the relaxation of profit- making, the use of pricing becomes one of the most visible advantages.68 State monopolies are able to set particularly low prices for the products for which they face the most intense competition,69 or to maintain prices below costs for a long period.70 Besides, they may be able to escape from any restriction of pricing by taking actions to relax binding constraints against pricing below marginal cost.71 This is also supported by the reduced concern about loss making and recoupment of losses and by the ability to cross- subsidise.72 As a result, the strategy of pricing below cost can reduce competitors‟ shares or force them out of business or prevent the entry of new competitors.73
State monopolies can also take advantage of raising a rival‟s costs by increase their product and services prices74 so as to disadvantage them.75 The goal of raising the rival‟
costs is to increase their price of output and ensure any average cost increases of the dominant firm are less than the incremental costs of the rival.76 It is not necessarily intended to exclude firms with higher costs from the market. Rather, it allows the
67 As cited by Sappington and Sidak, „Competition Law for SOEs‟ above n 45, 510: Thomas Krattenmaker and Steven Salop, „Anti-competitive Exclusion: Raising Rivals‟ Costs to Achieve Power Over Price‟ (1986) 96 Yale Law Journal 209; Steven Salop, „Strategic Entry Deterrence‟ (1979) 69 (3) American Economic Review 415; Steven Salop and David Scheffman, „Cost-Raising Strategies‟ (1987) 36(1) Journal of Industrial Economics 19; Steven Salop and David Scheffman, „Raising Rivals‟ Costs, (1983) 73 (2) American Economic Review 267.
68 According to an OECD report, a firm is able to maintain prices below cost that are supported by either prices above cost in some other segment or by some other source of funds if it does not have to seek to strictly maximise profits. See OECD, „Promoting Competition in Postal Service‟, above n 60, 55.
69 According to Sappington, SOEs may set the prices for some of their products below their marginal costs of production, which is difficult for private firms, because their price for a product must be set in a way that is close to its marginal cost of production. So that a higher price would inversely lead to the move of many potential customers to purchase the product of the others. See Sappington and Sidak, „Competition Law for SOEs‟ above n 45, 502-504.
70 OECD, „Promoting Competition in Postal Service‟, above n 60, 55.
71 A variety of ways is pointed out by Sappington as the intentional understatement of marginal production cost by manipulating of accounting data in order to understate their actual marginal cost; recording costs that are truly incurred in producing the product whose price the firm would like to set below marginal cost;
or overinvesting in capital to reduce its marginal cost, etc. See Sidak and Spulber, above n 54, 22, 105-26.
72 OECD, „Principle of Competitive Neutrality‟, above n 40, 39.
73 Ibid 41.
74 Salop and Scheffman, above n 67, 267.
75 Sappington and Sidak, „Competition Law for SOEs‟ above n 45, 511.
76 Krattenmaker and Salop, above n 67, 209.
170 dominant firm to raise its price above the competitive level.77 The raising of the rival‟s costs increases the demand for the state monopolies‟ product or service78 and enables them to expand their scope because their competitors are less able to invest in increased research and development and to roll out new products and services and processes.79 This will have impacts on competitors because it will reduce the amount of output they choose to sell to customers and/or to increase the prices they charge for their products.80
In sum, there are a number of reasons for the presence of state enterprises in the market.
As they engage in economic activities, there is potential anti-competitive conduct in the same way as is that of private firms. This is why competition jurisdictions tend to treat state and private firms equally. However, the concern here is not only about whether universal application is necessary, but also about the ability of state firms to act in restraint of competition. This is because they have incentives to engage in such behaviour due to their privileges and immunities.