Is the lack of competition one of the causes of inequality?
Anything that enhances a firm's ability to exploit consumers can't be a good thing, writes Liberty Mncube
"The nature of the market affects distribution and hence has much to do with inequality, an obviously pressing issue in this country,” said Judge Dennis Davis at the recently concluded annual competition conference.
His remarks challenged and provoked us on the issue of inequality, in particular, does the increasing concern with inequality call for a competition policy response? How does competition law enforcement square with inequality concerns?
The effect of competition on growth in general can be described in two different ways. One way is to describe the link between competition and the drivers of economic growth. Competition policy promotes growth drivers such as productivity, innovation, investments and lower prices.
Competition policy contributes to productivity and economic growth through three main channels: (a) competition induces firms to become more efficient to stay ahead of rivals (internal productivity); (b) competition allows high productivity firms to replace laggards (sectoral productivity); and (c) competition pushes firms to invest and innovate (dynamic efficiency).
But I think it is important to recognise that competition law interventions rarely target productivity growth directly; instead they focus on promoting competition itself, often measured by lower prices, entry or other consumer benefits, and in doing so, contribute to productivity growth and thus economic growth overall.
For example, the uncovering of the fertiliser and cement cartels has led to entry in the fertiliser and cement markets. Competition leads to lower prices, including lower input prices, lower costs and more economic activity in follow-on markets.
The other way is to describe the link between competition policy and the challenge of poverty and inequality because the pace of growth is not everything, the pattern of growth also matters.
Desirable effects of competition may be compromised by the presence of high levels of poverty and inequality.
Resolving the challenges of unemployment, poverty and inequality is at the core of government initiatives to foster inclusive economic growth. Inclusive growth is about both the pace and pattern of economic growth.
In his recent thought-provoking book called Inequality: What can be done? Professor Tony Atkinson makes the following proposal: “Proposal 2: Public policy should aim at a proper balance of power among stakeholders, and to this end should a) introduce an explicitly distributional dimension into competition policy.”
Some commentators would have you believe that distribution does not matter in competition policy, as reflected in the use of the total welfare standard.
I disagree. I consider that such a perspective is neither descriptively accurate nor normatively appealing.
Not only is such a perspective troublesome from an economic and moral view, it is equally and more importantly out of touch with developments in modern economics (in particular, advances in information asymmetries and game theory).
Using these developments in economics, many have rightly argued, including Professor Joseph Stiglitz, that the more successful firms may not only be those who are more able to produce products that consumers love and do so at lower costs; but rather firms that are better able to create and exploit market power, including taking advantage of consumers.
I am persuaded that firms like Telkom, Sasol, SAA, Media24, AMSA, firms involved in the cement cartel, bread cartel, construction cartel and many others would have long lost their dominance were it not for their conduct which created new barriers, reduced competition and enhanced their abilities to exploit customers.
A few would disagree with the assertion that market power is one of the major sources of inequality. The monopolist’s monopoly rents come at the expense of consumers whose well-being decreases as returns from the abuse of market power accrue disproportionately to the wealthy. Others have already pointed out that inequality leads to poorer economic performance, including lower growth and more instability. I agree.
Market power creates barriers to entry, and inequality means fewer people have resources to enter markets.
Even more concerning is the thought that traditionally, strong unions may have appropriated some of the market power rents, but this possibility has weakened today by the decline of active private sector unionisation. Some commentators have argued only for a consumer welfare standard for reasons which include the fact that it is readily administrable and more likely to engender political support. I find this perspective incomplete. While the consumer welfare standard helps, it is not justified for reasons based on inequality, and perhaps rightly so, as there are some markets where consumers are wealthy and firms are small or owned by historically disadvantaged people. As you probably know, protecting buyers and their consumer surplus provides a poor approximation to preventing wealth transfers to those at the top of the wealth distribution.
I agree with the view that overcoming the inequality problem needs a strong embrace of issues of distribution. The key question, however, is: Distribution to who? Some jurisdictions use the consumer welfare standard but do not consider it distributive.
Fortunately for me, South Africa stands out on this issue in that the pursuit of distributive justice is permissible if not compelled by competition law and its unique responsiveness to issues of distributional equity and fairness.
Distribution is to consumers, workers, small firms, firms owned by historical disadvantaged persons and the poor.
While the effect of competition on inequality has not been studied extensively, and has often been assumed to be malign as competition creates winners and losers, Professors William Comanor and Robert Smiley used simple estimates of the prevalence of monopoly profits, together with data on the heritability of wealth, to suggest that in the US, more than half of the wealth of the richest 2.4 percent of households was ultimately derived from monopoly profits, through inheritance.
In February this year, the World Bank study showed that competition policy in South Africa has brought substantial benefits to households, especially the poor.
In my view, competition enforcement should account for inequality concerns by targeting resources towards products purchased by the poor and low income consumers. The commission has already implemented a prioritisation policy which led to uncovering cartels in bread (staple food), wheat flour (key input into bread), and maize meal (staple food).
Second, inequality might be addressed in individual cases by adopting creative and innovative remedies targeted primarily to benefit the poor. The commission is already active in not just restoring competition in markets but also crafting remedies with distributional effects to reduce inequality. For example, the Pioneer Foods Settlement Agreement included a discount remedy and a fund to support small businesses.
Let me conclude by making reference to Davis's final remarks: “In key areas of cartel regulation, abuse of dominance and merger control, a developing jurisprudence has taken place which, notwithstanding some of the errors that have been committed in the past (not least of all by the Competition Appeal Court), it is possible that both from the perspective of economic growth and greater equality, competition policy and law can play a significant effect.”
I believe therefore that we must also continue to be aggressive in advancing our mission to undertake competition regulation for a growing and inclusive economy.
* Professor Liberty Mncube is the chief economist at the Competition Commission South Africa, and honorary professor of economics at the University of Stellenbosch