Submitted by Mexico

Competition policy is increasingly acknowledged as an instrument that promotes economic development as witnessed by the increasing number of countries that enact and enforce competition laws and by the recommendations international, regional and global organisations issue to encourage countries to adopt a competition law and policy. In Mexico, competition policy has consolidated in a relatively short time and has created an effective institutional structure that confers transparency, credibility and effectiveness on law enforcement. In spite of this, competition policy has not been wholly incorporated into the stock of public policies, partly because there is not a broad understanding of the role competition policy plays in the our country's process of economic development.

The reasons for a competition policy

It is important to star explaining why trade liberalisation, deregulation and privatisation are necessary, but do not provide sufficient elements to ensure the efficient functioning of markets.

Although a country may implement trade liberalisation measures, market power can still arise due to the existence of entry barriers that hinder or deter market access. Likewise, the nature of some goods and services make them unsuitable for foreign trade. Consequently, international trade liberalisation does not ensure increased competition for these goods or services.

On the other hand, privatisation does not necessarily imply enhanced market competition. A government privatising a firm may end up transforming a state-owned monopoly into a privately held one. Often, the goal of obtaining the largest revenue from the privatisation process is achieved by endowing the privatised firm with market power, thereby contradicting the goal of maximising economic efficiency.
As regards deregulation, this policy is inappropriate to hinder anticompetitive practices and in many cases is unable to prevent a dominant firm from incurring in abuse of its market power.

A second reason for implementing a competition policy is that a significant number of monopolies remain in place and are unlikely to disappear as a result of market liberalisation. Such is the case of activities reserved to the State and operated by means of a monopoly. It is important to regulate these firms in order to preclude them from abusing their dominant position and incurring in monopolistic practices in related activities. This is particularly crucial in the present context where the possibility of permitting private investment in certain reserved activities is under consideration. Without an effective competition policy new investors will not be able to compete in the same conditions as state-owned monopolies.

On the other hand, the Mexican economy developed under protectionist policies and measures, and thus presents highly concentrated industry structures in some sectors where contestability is insignificant. In such cases, the implementation of a competition policy essential to promote growth and efficiency.

A third argument for competition policy is the existence of anticompetitive practices that deter market efficiency. These are particularly harmful for small and medium size firms that are precluded from entering markets or from growing. There is, for instance, a growing number of international cartels that distort international trade and investment flows that call for a nation-wide coordinated competition policy. In addition, domestic cartels would certainly proliferate in the absence of a competition authority.

How does competition policy help to promote economic development?
In a static context, it is easy to understand why a monopoly creates at least three negative effects. On one hand, a monopoly can obtain extraordinary rents by reducing output and increasing prices, thereby having the effect of redistributing income from consumers to producers. On the other hand, this distortion in the allocation of resources brings about a once and for all reduction of the domestic product available for distribution among the country's population (net social welfare loss).

The third negative effect of a monopoly derives from the existing incentives to capture the extra normal rents the monopoly generates. The firm's managers, workers and providers try to get hold of higher salaries and conditions than those that would prevail under competition conditions. This situation leads to an undesirable result that the firm produces at inefficient costs and society incurs in a net welfare loss because the costs of production are higher than those that would prevail under competition conditions.

The inefficiencies and distortions caused by a monopoly are the same as those occurring when a market is cartelised, that is, when competitors engage in horizontal agreements to fix prices, restrict output, allocate markets or rig bids. It is widely accepted that horizontal practices harm the economy and therefore affect its development. This is why the Mexican competition law and most of competition legislations sanction horizontal practices per se.

There are people who believe monopolies may be positive for economic development by providing protection to certain activities in order to enable their development. However, experience has shown that, although this protection does attract investments, the monopolised firm never attains efficiency or competitiveness. The cost of this protection is thus absorbed by the rest of the economy, that loses global competitiveness.

There are also some people who consider that competition is unfeasible in certain sectors because it precludes firms from attaining scale economies (natural monopoly argument). According to the modern approach, implemented in the telecommunications sector world wide, competition may be introduced by establishing specific regulation on the facility section of the activity. This approach also considers that it is inconvenient to multiply investments in those segments where the facility may be used under competition conditions. Consequently, by applying competition policy together with an efficient regulation, a balanced and competed development may be achieved in those sectors facing network economy problems.

Some others argue that the so called "predatory nature" of competition precludes the development of certain sectors. This is simply unbelievable. There are no cases where competition has been proved to be intrinsically destructive.

Monopolies have also been considered positive in the belief that they support the activities and competitiveness of a domestic firm in international markets by creating a "national champion". This argument has two failures. A domestic consumer needs to pay high monopoly prices in order to subsidise the firm's sales abroad. This is unfair and causes economic distortions and inefficiencies, thereby reducing the rest of the economy's competitiveness. On the other hand, domestic industry's competitiveness abroad is unreal because it only occurs as a result of the cross subsidy. Finally, monopolies are also seen as a means to obtain fiscal incomes.

The easiest way to understand how competition policy fosters economic development in a dynamic context is by analysing its impact on four elements considered when making investment decisions: income, costs, profitability and risk. Competition policy facilitates market access by new competitors thereby enabling the generation of productive infrastructure and incomes. It does so by tackling predatory and other anticompetitive practices that an agent endowed with market power may carry out or the barriers that a monopoly may impose on market access or an authority may impose in order to protect incumbent firms.

As to costs, competition policy also fosters investments by promoting lower prices for inputs and capital goods. For example, increased competition in telecommunications enhances efficiency throughout the economy. It is therefore vital to consolidate competition in the telecommunications sector in order to impulse economic development nation-wide.

The third element to consider is profitability. Competition policy plays a two-fold role in this matter. On one hand, competition in the financial sector is necessary for domestic investors to have access to sufficient financial resources at competitive interest rates. On the other hand, profitability grows when incomes increase and investment costs fall.

Competition policy helps reduce investment risks by facilitating decision-making. It makes the game's rules transparent for investors and it is part of "good governance", that provides legal certainty regarding the observance of investor's property rights and that economic institutions are designed to support free market access.

Competition may be seen as a process of rivalry among firms for the marketplace. This rivalry may manifest itself in various ways: lower prices; enhanced quality; the development of new products with enhanced features to satisfy consumer's needs; and the development of new production techniques that allow producers to supply better quality products at lower prices, among other. A monopolised market lacking contestability would unlikely result in continuous improvement and innovation since the monopolist, facing no rivals, has no incentives to keep the interest of its captive consumers.

Sometimes competition leads to the process of "creative destruction" described by Schumpeter, by means of which an inefficient firm disappears from the marketplace and another firm, more fit to adapt itself to current and future market needs, takes its place following a process analogous to Darwin's evolution. This explains why any attempt to protect a failing firm in order to sustain employment actually poses a risk on the economy's capacity to generate employment. Eventually, the firm will experience bankruptcy and in the meantime the prevailing unfair competition conditions impede the development of new firms.

In brief, competition works as a fuel for economic dynamism. The more fuel is injected through competition, the faster the economy grows. Limiting competition therefore reduces the economy's vitality.

Competition policy also spurs economic development by providing the institutional support needed for markets to operate efficiently and so to enable their contribution to economic progress. Without a competition legislation, the risk an investors faces that an economic agent forecloses market access or unduly displaces firms from the marketplace is larger. Likewise, an effective merger review policy confers firms certainty that an excessive market concentration, that may affect the value of their original investment, will not be allowed.

Competition policy instruments contribute to economic development in line with their particular features. The first of these, merger review, empowers the competition authority to sanction and block operations that would endow the merged firms with market power that may jeopardize competition. However, the goal of merger review is not to discourage investments, therefore only operations pertaining to existing investments or assets are subject to review and may be blocked, new investments or investment increases are excluded. This preventive power allows the competition authority to avoid the acquisition of competitors in order to create a monopoly and ensures market participants that mergers that facilitate anticompetitive practices will not be allowed. Economic development is thus fostered by reducing the risk faced by investments and by guaranteeing the economy's competitiveness. In order to ensure merger review does not hinder business or become an excessive burden on firms, the competition authority must enforce its powers in a timely fashion and with judgement, so as to block or condition only those operations that deserve to.

The second competition policy tool is the investigation of monopolistic practices. The competition authority sanctions those practices that harm economic efficiency and distort markets, and thus hinder the process of economic development.

Competition advocacy is the third instrument. By protecting the competition process, the competition authority reduces the risk that other authorities or economic agents introduce anticompetitive measures that may affect the dynamics of the domestic economy.

The Mexican experience in competition law enforcement demonstrates that competition is a powerful tool for the promotion of economic development. Mexico has undoubtedly taken steps forward in fostering an efficient and effective competition policy, but this policy needs to be strengthened in order to achieve the level of development Mexican people seek and deserve.