COMPETITION LAW AND POLICY

 A.                 DEFINITION OF TERMS

 1.     What is Competition Law?

Competition law refers to the framework of rules and regulations designed to foster the competitive environment in a national economy.  It consists of measures intended to promote a more competitive environment as well as enactments designed to prevent a reduction in competition.

2.       What is Competition Policy?

        Competition policy, on the other hand, broadly refers to all laws, government policies and regulations aimed at establishing competition and maintaining the same.  It includes measures intended to promote, advance and ensure competitive market conditions by the removal of control, as well as to redress anti-competitive results of public and private restrictive practices.

B.                GOALS/OBJECTIVES OF COMPETITION POLICY

3.        What are the Goals  of Competition Policy?

    §         To promote economic efficiency, which comprises three (3) components

  o    Productive efficiency – Firms use the least cost production techniques to produce maximum possible goods and services from given inputs

o    Allocative efficiency – Resources are channeled to those sectors where they are best utilized in order to produce goods and services that are valued most highly by consumers

o    Dynamic efficiency – Firms strive to maintain their competitiveness by investing in Research and Development, innovation, marketing and management to keep abreast of the changes in technology, preferences and products.

§         To correct market failure

§         To enhance consumer welfare

§         To achieve higher economic growth

§         To promote competitiveness in both and domestic and foreign market

4.      Basic Market Structure in which the degree of competition affects prices, output and profits.  These are:

 §            Perfect Competition - This is an ideal or extreme form of competition. It occurs when a market consists of many firms selling an identical product to many buyers. Any firm that wishes to do so can enter or leave the market.

       §            Monopoly - A market with a sole supplier of a good, service or resource for which there is no close substitute. In addition, there are barriers to entry of new firms.

§            Natural Monopoly - A natural monopoly arises from natural barriers to entry (such as a unique source of supply) or situation in which one firm can supply the entire market at a lower price than two or more firms could offer.

       §            Monopolistic Competition - Similar to perfect competition, but rather than firms producing identical products, these are many firms competing against each other by producing similar but slightly different products.

 §            Oligopoly - One characterized by a small number of firms where quantity sold by any one firm is influenced by its choice in respect of strategic variables         ( such as prices, product design, research and development, advertising, and sales locations) and these choices are strongly influenced by other firms in the industry.

 C.                MARKET FAILURE

 5.     What is market failure?

             Occurs when the market is unable to achieve an efficient and equitable allocation of resources.

6.    What are the sources of market failure?

I.   Public Goods – a public good is one, which if provided to one consumer, is freely available to all consumers.

 Ex. -  Street lighting, parks, roads, etc,.  This means no private firm is able to make a profit from providing such goods.  Therefore, government should ensure that such goods are provided at the socially desired level.

 II.    Income Distribution – The market will not necessarily ensure equitable distribution of incomes.  This may motivate government to introduce policies to redistribute wealth through measures, i.e., income taxes and social security benefits.

 III.   Monopoly – The operations of monopoly or natural monopoly often result in misuse of market power and inefficient allocation of resources, which reduce community welfare. For this reason, governments generally regulate monopoly and enforce laws preventing cartels. This type is a major rationale for a comprehensive competition policy.

 IV.   Externalities – An externality arises when an activity confers a benefit (like the benefit of education or immunization) or imposes a cost (pollution) on a third party, without the cost or benefit being included in the market price of that activity.

                 V.    Information Asymmetries – In theory, buyers and sellers in a competitive market have complete knowledge about a product or service characteristics and quality. Information asymmetries between producers and consumers can lead to market failure and reduce community welfare.  

D.                COMPETITIVE CONDUCT RULES

7.    What are the competitive conduct rules? 

Competitive Conduct - describes the decision-making processes of firms in a competitive market, where price, quantity and profit choices are dictated by overall market conditions and these are not unduly influenced by the actions of one or more large firms. In essence, competitive conduct describes firm behavior under conditions of perfect competition.

 Competitive Conduct Rules – are government’s response to the absence of perfect competition in a market. Their primary objective should be to protect or enhance the competitive process in markets where it is only partially operating.

 Competitive Process – competitive conduct that reduce costs and prices, which is driven by impersonal and diffuse market forces and the threat of entry of additional suppliers. It results in efficient resource allocation and pricing, which can be attained in open, dynamic markets resembling perfect competition.

Ä        Competitive conduct rules codify what is acceptable behavior in an economy. Typically, such rules prohibit arrangements that can be construed as anti-competitive, in that they either:

Increase the power of firms within a market to the extent that this inhibits competitive conduct; 

Prohibit existing competitors or potential market entrants from effectively competing.

8.     What are  anti-competitive agreements?

 Ä    Anti-Competitive Outcomes or Agreements – The Hilmer Report (Hilmer 1993) identifies several market outcomes or agreements which can be viewed as anti-competitive. These are:

Horizontal Agreements – agreement that exists between firms (suppliers or consumers) at the same level of production chain. This is often referred to as collusion. Collusion usually takes the form of an agreement on price, such a combination of firms provides them with a degree of pricing power, or in other words, the ability to at least influence the price of  a good.

Vertical Agreements – It may vary where firms at different stages of the production chain collude. In most cases, vertical collusion occurs between suppliers and users of business inputs. This may relate to price or other matters (i.e. quotas, exclusive dealings, etc.,)

Misuse of Market Power – This type of anti-competitive conduct occurs when a single firm in a dominant position in a market misuses its market power. EX: predatory pricing

Mergers and acquisitions - Mergers and acquisitions can constitute inappropriate market behavior where they lead to market outcomes of the typed described above. It is unlikely that a move towards increasing market concentration will normally be viewed as favorably affecting competition.

Ä     Potential solution to different types of anti-competitive conduct. These include:

 Per se Prohibition – Prohibition is the most direct form of anti-competitive measure that an authority can undertake. IT refers to those activities which are ambiguously detrimental to regular competitive behavior in a market (e.g., price fixing).

 Rule of Reason (Competition Test) – A wide variety of business practices that while inhibiting competition, may not require total prohibition, The most widely used determinant in such a case is whether or not such activity reduces competition in the market.

Authorization – A mechanism through which the public benefit from ostensibly ant-competitive conduct can be assessed as a counter balancing consideration.  The process involved here is a direct intervention or inquiry by a governing commission. Authorization implies that the commission can “authorize” certain conduct where there is a perceived net benefit to the community from anti-competitive conduct.

Notification – involves the approval of certain types of anti-competitive conduct upon the offender being granted immunity, conditional on the consent of the market regulator. These type of arrangements rely on absolute openness and transparency.

Examples of Anti-competitive Conduct

o        Price-fixing agreement – competitors agree to fix prices at a particular level, use of less obvious devices such as “recommended prices”, in reality, fix prices by agreement.

o        Market sharing agreements – agreement among competitors to share a market. Ex: a number of producers may choose to restrict their sales to certain geographic areas, thus developing local monopolies.

o        Exclusionary provisions – agreements between competitors to limit dealings with a particular supplier or customer or a particular class of customer. Ex: primary boycotts, secondary boycotts. These actions are taken to prevent new firms from entering the market, or to force existing firms out of the market.

    Primary boycotts or exclusionary provisions occur when a group of people or firms agree not to deal with a particular supplier or customer. This is subject to per se prohibition.

Secondary boycotts – occur when a group of people who may not otherwise deal with the target organization persuade another uninvolved (supplier) not to deal with the target organization.

 o    Tie-in arrangements and third line forcing – when the supply of goods or services to a person is made provisional upon them also purchasing additional goods and services, either from the same supplier (tie in arrangement) or from another specified supplier (third line forcing)

  o   Retail price maintenance – refers to action by suppliers, manufacturers or wholesalers specifying a minimum price below which goods or services may not be resold or advertised for resale.

E.                 REGULATORY RESTRICTIONS ON COMPETITION  

9.     What are regulatory restrictions?

o        Regulatory restrictions – are government’s own restrictions on competitive conduct, either through legislated regulation or direct ownership.

These restrictions can detract from overall competitiveness in the economy, in much the same way as market failure, in the sense that they detract from the regular workings of the market.

Regulatory restrictions may entrench a smaller number of players in a less competitive environment. Consequences of these are higher prices, poorer quality goods and a group of firms that have a diminished response to their market.

 Regulatory Restrictions Existing in the Philippines

 o        Regulatory barriers to market entry, including licensing and franchising agreements;

 o        Government monopolies, including monopolies on public utilities such as electricity generation and supply, telephone services and the shipping industry;

    o       Rural marketing, especially restrictive marketing boards; and

 o        Other restrictions on competitive conduct.

 10.      Forms of Regulations that Impact on Competition

            There are two (2) forms of regulations that impact on competition directly:

Ä       Barriers to entry are burdens or limitations forcing any firm not presently operating in a market. They derive from;

     o      Economies of scale due to market share achieved by the incumbents;

o     Capital requirements (including investment in brand development through advertising and the like);

o     Cost savings accruing to existing firms from their experience and familiarity with the particular industry

o     Monopoly access to key infrastructure;

o     Monopoly of key industry knowledge.

 Ä         Regulations that restrict competitive behavior:

     o      Price control; and

o     Advertising restrictions

 Impact of Regulation

   o      Higher prices;

o      Lower quality goods; and

o      Less consumer choice as a result of reduced competition

In the case of monopolies, they can prevent any competition in the market

 F.                 ESSENTIAL FACILITIES-

11.     What is essential facility?

 Within the framework of competition policy, an essential facility is a major infrastructure which exhibits two characteristics:

         Ä     The facility is essential to the effective operation of an economic organization; and

Ä     The facility exhibits natural monopoly characteristics. Ex: electricity  grids, rail infrastructure, roads, port facilities, pipelines and telecom network. 

12.      What is natural monopoly?

Distinguishing feature: one facility can supply the entire market demand more clearly than two or more smaller facilities.

Typically, natural monopolies have the following features:

 Ä         Large development and start-up costs

Ä         Economies of scale: as the organization increases its output, the average cost per unit output declines

Natural monopolies are an outcome of the size of the market and the type of technology available to meet its demand. It is not a market structure, it is a cost minimizing method of production. There are two major implications:

Ä        An industry may consist of more than one firm even though the existing technology would suggest that monopoly is more economically efficient.

Ä        The existence of natural monopoly conditions in an industry may vary as demand varies and as the prevailing technology changes

G.                MAIN AREAS OF CONCERN OF COMPETITION LAW/POLICY

 What are the main areas/concerns which competition law/policy should address?

 Competition laws and policies are meant to address concerns that include:

a)       preventing enterprises from entering into agreements which do not have any beneficial features and which will restrict competition, either amongst themselves or between them and third parties;

b)       controlling attempts by monopolists or dominant firms from abusing their market position and preventing new firms from entering the market;

   c)       ensuring that workable competition is maintained in oligopolistic industries; and

  d)       monitoring mergers between independent enterprises, where the effect of the merger may result in market concentration and reduction in competition.

 H.                AGENCIES IMPLEMENTING COMPETITION POLICY

 1.      What are the agencies in the Philippines undertaking the implementation and enforcement of competition laws?

 §    Tariff Commission (TC) – An attached agency of the National Economic and Development Authority (NEDA), it is mandated to assist the Cabinet Committee on Tariff and Related Matters (TRM) in the formulation of a national tariff policy and to monitor the implementation of the Tariff and Customs Code (TCC).

§    Bureau of Import Services (BIS) – A staff agency of the Department of Trade and Industry (DTI), it is mandated to monitor import quantities and prices of selected sensitive items (particularly liberalized goods) to anticipate surges of imports and assist domestic industries against unfair trade practices.

§    Bureau of Trade Regulation and Consumer Protection (BTRCP) - Also a staff agency of the DTI, it is mandated to formulate and monitor the registration of business names and the licensing and accreditation of establishments; it also evaluates consumer complaints and product utility failures.

§    Securities and Exchange Commission (SEC) – An attached agency of the Department of Finance (DOF), it is mandated to administer corporate government laws such as the approval and registration of corporate consolidations, mergers and combinations. It also implements the Securities Act of 1982 which penalizes fraudulent acts in connection with the sale of securities (e.g. price manipulation, inside trading, short selling, etc).

 Other agencies likewise enforce laws on anti-competitive behavior such as:

·    DTI and attached agencies including the Bureau of Foods and Drugs, Intellectual Property Office, and the Bureau of Product Standards for consumer welfare and protection.

·    Philippine Economic Zone Authority – for ecozone developers and ecozone-registered enterprises

 Certain enforcement agencies are also industry-specific like:

 ·   Bangko Sentral ng Pilipinas - for banks and financial institutions

·   Insurance Commission - for insurance companies

·   National Food Authority - for rice, corn, wheat and other grains and food stuff

·   Sugar Regulatory Administration - for the sugar industry

·   Philippine Coconut Authority - for the coconut industry

·   Garments and Textile Export Board - for garment manufacturers and exporters

·   Board of Investments - for pioneer/non-pioneer industries and those listed in the Investments Priorities Plan, availing of the incentives under the Omnibus Investments Code

·   National Telecommunications Commission - for telecommunications companies

·   Land Transportation Franchising and Regulatory Board - for common carriers for land

·   Civil Aeronautics Board - for companies engaged in air commerce

·   Maritime Industry Authority - for the shipping industry

·   Philippine Ports Authority - for port operators and arrastre services

·   Department of Energy, Energy Regulatory Board, and the National Power Corporation - for power generation companies and oil companies

2.     What are the problems encountered in the enforcement of competition laws?

 The following have been identified as some of the reasons behind the poor enforcement of competition laws:

    ·   Despite the number of laws and their diverse nature, competition has neither been fully established in all sectors of the economy nor has existing competition been enhanced in other sectors.  Since each law is meant to address specific situations, there runs the risk of one law negating the positive effects of another.

 ·   There is no central enforcement agency.   Enforcement is done by several individual agencies that do not operate in a coordinated manner and sometimes produce conflicting policies.  Moreover, responsibility is too diffused and accountability for implementation of the laws is difficult to place.  There is also a lack of expertise in the appreciation and implementation of competition laws.

 ·   Fines imposable for breaches of the laws are minimal.  Likewise, most punishments are penal in nature, hence, evidence requirements are substantial.

 ·   There is a lack of jurisprudence and judicial experience in hearing competition cases.

 ·   The SEC regards “efficiency gains” as more important than competition considerations in mergers and does not have a mandate to challenge mergers unless it can demonstrate they are against the public interest.

 3.      Does the Philippines have a formal competition policy framework?

Although the Philippines has no explicit competition policy framework, the promotion of competition has been implicit in the major reforms implemented since the 1980’s.  Before the reforms, the Philippine economy was characterized by a highly restrictive policy, pervasive industry regulations, and other government intervention in various forms, e.g., protective policies, industry regulation and regulatory controls.

 4.       What has the government done to open up the market to competition?

Since 1993, the government has demonstrated greater determination and better success in its program to open up the market to competition.  It has implemented an economic reform agenda designed to strengthen the market structure  through deregulation and economic liberalization.

The major reforms implemented include, among others:

1.    substantial trade reforms which reduced the number of regulated items to a minimum and brought down tariff rates

2.    abolition of a number of regulatory bodies

3.    privatization

4.    demonopolization of the telecommunications industry

5.    some deregulation in the shipping and airline industries

6.    oil deregulation

7.    easing of entry of foreign banks

8.    easing the foreign equity limits, and resorting to a much less restrictive negative list of activities where foreign equity is limited

            the retail trade law.

I.              BASIC PHILIPPINE LAWS DEALING WITH COMPETITION POLICY

1.      What are some of the basic laws dealing with competition?

         The Philippine Constitution provides that “the state shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.”

The most basic law addressing anti-competitive behavior is penal or criminal in nature.  Article 186 of the Revised Penal Code defines and penalizes monopolies and combinations in restraint of trade and provides penalties therefor.

The Civil Code of the Philippines (which came into effect in August 1950) and Republic Act No. 165 (otherwise known as the Act to Prohibit Monopolies and Combinations in Restraint of Trade) allow for the collection of damages arising from unfair competition.

     While the cited statutes mention or refer to competition, none of them actually defines the term.

Special laws or statutes have also been enacted to specifically address some unfair trade practices.  The Intellectual Property Code provides for the protection of patents, trademarks and copyrights.  The Corporation Code of the Philippines provides for the rules regarding mergers and consolidations, and the acquisition of all or substantially all the assets or shares of stock of corporations.  The Revised Securities Act which complements the Corporation Code proscribes the manipulation of security prices and insider trading.

Another piece of important legislation is the Price Act which defines and identifies illegal acts of price manipulation such as hoarding, profiteering and cartels.  Just as important is the Consumer Act of the Philippines which, among others, provides for consumer product quality and safety standards.

 2.     What should the government do to strengthen the economy’s competition regime?

The government recognizes the need to enact a comprehensive competition policy framework in order to address the inadequacies of past legislations dealing with unfair trade measures.  Identifying areas for change and improvement is a fundamental step in developing an effective competition regime.  The following factors should be taken into consideration:

Markets – in the formulation of competition policy, both the domestic and international markets should be taken into consideration.  Competing in the international market is largely dependent on how open, strong and integrated the domestic market is. Unfair trade practices and anti-competitive behavior in the domestic market may very well undermine, even nullify, gains from market opening initiatives.

Measures – Laws bearing on competition are numerous and varied.  However, there remains a need to enact an overall law on competition, particularly a comprehensive anti-trust legislation.  There are several bills pending in Congress where some authors have suggested that competition law should:

 (a)   focus on the actual and or potential business conduct of firms in a given market, and not on the absolute or relative size of firms.  It should look at the business conduct of firms and the business environment in which the firms operate.

(b)    be effectively harmonized and linked with other government policies.  Promoting competition in the business environment constrains anti-competitive behavior by firms and also inculcates sound business practices and ethics.

(c)    be a law of general application, addressing all sectors of the economy.  Exemptions from its application may be allowed if they will not limit competition, are based on sound economic principles and are aimed at facilitating legitimate economic activity.

(d)    contain provisions explicitly prohibiting business practices that are clearly against economic efficiency and consumer welfare, such as price fixing, bid rigging, restriction of output and market shares, allocation of geographic markets and  customers, which should be deemed illegal per se and subject to criminal law and severe penalties. 

(e)    provide for a “rule of reason” approach with respect to horizontal and vertical mergers, specialization agreements, joint ventures, vertical manufacturing, wholesale and retail distribution arrangements. Prior notification to and approval by the concerned agency of such business arrangements are recommended but only with respect to the largest transactions, taking into consideration size thresholds in terms of market share, assets, sales and/or employment of parties involved.

Maintenance - The effective implementation and enforcement of anti-competition laws should be vested in a centralized agency with sufficient powers to oversee and monitor the competitive climate in the different sectors of the economy, to formulate and recommend such measures as would ensure the maintenance of competition in the Philippine domestic market and as would anticipate developments in the international market.

Message - Finally, a competition policy can only be effective if the people believe in it.  This is best ensured by allowing the people to participate in making the decision.  Consultations and consensus building, therefore, are prerequisites to the adoption of such policy.  It is also important to consult the public because much of the anti-competitive behavior in the market may be attributed to them. 

    To ensure appropriateness and acceptability of proposed measures as well as easier implementation and observance by the public, dissemination, awareness, education and information campaigns should be undertaken through mass media.

3.      What are the difficulties encountered in enacting a National Competition Law and creating Central Competition Authority?

 A number of underlying issues exist which hinder the development of a workable competition policy.  These issues include:

 ·   Lack of Understanding and Education on the Rationale and Positive Implications of a Competition Policy

 –  Despite the introduction of pro-competitive reforms in the economy,  “competition culture” has yet to be ingrained in the psyche of the Filipino people  (business community, consumers, government officials, legislature) especially in these times of global economic slow down.

 ·   Lack of Political Will – Certain influential   members of Congress are themselves corporate owners/majority stockholders of dominant firms who are threatened by the enactment of a comprehensive competition policy/law.  They would resist the passage of a competition bill.

 ·   Lack of Technical Expertise and Experience –  The competition authority should have very competent and knowledgeable manpower to define markets, identify anti-competitive actions, and judiciously construct and administer “competition tests” on issues of concentration, agreements, mergers and acquisitions.    The question is, what would be the best way of developing such expertise and institutions?

 ·   Lack of Agreement on How to Establish a Single Central Competition Authority

One approach is to do this gradually, possibly on a piecemeal basis.  The creation of a coordinating body to administer an austere law would be a good start.

Another approach is to transform an existing body which is performing some of the functions of competition policy.

A third approach would be to create a new central body which could be designed to develop and evolve into what it should ideally become.

   ·  Current Lack of Experience and Knowledge in Competition Policy Matters in the Judiciary –  If this is not addressed, then the new law will remain un-enforced (as existing legislation is) or worse, enforcement will be inappropriate, creating potential economic inefficiencies.  The issue in respect to insufficient knowledge and experience is clear:  It is one thing to know that a firm in a position to control the relevant market for a particular good or service is not permitted to limit production for the purpose of raising prices, and another to prove that the firm in question has control of a market and that it is reducing production to raise prices. Still another thing is adjudicating a case where such accusations are made.

 · Continuing Resistance to Globalization by Certain Sectors Who Feel Threatened by Liberalization and International Trade Commitments –  Domestic industries allege that they are suffering injury or the threat thereof because of import surge resulting from the government’s unilateral tariff reduction program and/or tariff commitments in ASEAN and WTO.

 J.                  THE WAY FORWARD

         Sustained advocacy and public information campaign on the culture of fair competition

       Drafting of a competition policy bill incorporating international best practices including competitive neutrality, legislative review and access regimes

       Act of Congress

       Competition authority as a constitutional body

       Multilateral/Regional/Bilateral Agreement on Competition Policy