7Update Enewsletter Volume-1 No.4

A bi-monthly, internationally circulated e-newsletter of the CUTS-Centre for International Trade, Economics & Environment (CUTS-CITEE), which has been designed to disseminate information about the “7 UP Project”, in addition to reporting interesting newsitems, which have been reported across the globe on competition and other related issues.

The 7-Up Project is a 2 year research and advocacy programme being conducted by the Centre with the support of DFID, UK for a comparative study of competition regimes of seven developing countries of the Commonwealth.

Editor’s Note

In this edition of the 7-UpDate, we inform you about the progress of the 7-Up Project: comparative study of competition regimes in seven developing countries of the Commonwealth, which was launched in September 2000 and will conclude in August 2001. More importantly, we would also like to use this forum to report and/or comment on some major issue, which has cropped up during this period. That said, we carry an important debate in this issue around predatory pricing in the USA, culled from the Business Week of 14 May 2001.

The case involves the American Airlines against whom an action, brought forth by the US Justice Department failed, and the commentator believes, would also meet a similar fate in appeal. It is indeed a milestone, which will establish new precedents in anti-trust acquis. The issue revolves around the difference between ‘predatory pricing’ and ‘vigorous price competition’.

We would welcome comments from readers, and look forward to hearing from you.

I. PROJECT PROGRESS

This was yet another important period for the 7-Up Project, as it is popularly known. The project entitled “Comparative Study of Competition Regimes in Select Developing Countries of the Commonwealth”, is being implemented by CUTS, Jaipur with the support of DFID, UK. The countries selected for the study are India, Pakistan, Sri Lanka, Kenya, South Africa, Tanzania and Zambia.

The Project is running in its third quarter now and following is a brief report of its progress during the months of March and April 2001.

1.1 Field Survey
During the above- mentioned period, the fieldwork of the project was completed to a large extent. The fieldwork was based on a comprehensive questionnaire, which was sent to the country researchers, some time back, to collect information from their respective Competition Authority. This phase of the project, i.e. Phase-I, deals primarily with the institutional framework for enforcing competition laws in project countries and so the questionnaire mainly looks at this aspect of the Competition Authority. The questionnaire was prepared after a detailed deliberation on the subject by partners, project advisors and various other experts.

Most of the partners were able to get the questionnaire filled from the authority and collect the relevant data. The process is expected to be completed by the end of the month.

1.2 Phase-I Report
Based on the above field survey and survey of existing literature, the country researchers are required to prepare a draft report. Partners are in the process of collecting information from the Authority and compiling this information into a report.

A format for preparing the report was suggested to the researchers by Prof. Rakesh Basant, the core-researcher of the Project. The draft report would be sent to Prof. Basant for his comments and would be finalised after incorporating his comments therein. This final draft of the report would then be discussed at the National Reference Group Meeting.

1.3 National Reference Group
One of the most important activities completed during this period was the formation of the National Reference Group by the project partners. Almost all the partner countries finalised the members of their NRG and decided the date of their meeting. The draft report would be presented at the meeting and comments and suggestions that would surface thereat, would be taken into consideration while preparing the final report of Phase-I.

The NRG would deliberate on the inputs prepared in each country and create a base that would be used for launching advocacy for strengthening competition culture.

1.4 Outreach
During the period under review, a monograph and a newsletter were published in the context of the Project.

II. MAJOR NEWS & VIEWS

1. Predatory Pricing: Cleared for Takeoff
Commentary by Dan Carney

When a federal judge threw out the Justice Dept.’s “predatory pricing” case against American Airlines Inc. on Apr. 27, it wasn’t even front-page news in most cities. But the ruling, which the Administration is not expected to appeal, will likely have an impact well beyond the airlines. “This case represented the department’s best efforts to fashion a predatory-pricing doctrine for the New Economy,” observes Washington antitrust attorney Robert A. Skitol.

Best – and for now, probably last. The suit’s failure means the virtual end of predatory pricing as an anti-trust issue for the foreseeable future. But that does not mean the problem will go away. Instead, the judge’s ruling opens the door for dominant companies to wage bare-knuckles price wars against pesky smaller competitors. The consequences could be especially serious in New Economy industries such as software, chips, and computer hardware.

Unimpressed. Here’s why. To win a predatory-pricing case, trustbusters traditionally had to prove that a company sold products or services for less than its average variable cost. But Justice Dept. lawyers realized this would be almost impossible to do against American. Why? Because the airline industry, like high tech, has high fixed costs and low marginal costs. The big expense is buying equipment. Once a flight is scheduled, the marginal cost of providing a seat for an additional passenger is peanuts—plus a Coke, maybe.

So Justice attorneys argued that the test should be updated. Specifically, they suggested that U.S. District Judge J. Thomas Marten, based in Wichita, should determine whether there was any business justification for American’s aggressive pricing, other than driving away competition.

Under that definition, trustbusters thought they had a great case. Every time a fledgling airline tried to get a toehold in the Dallas market, for example, American met its fares and added flights. As soon as the rival retreated, American jacked fares back up. Between Dallas and Kansas City, for instance, American’s average one-way ticket, was $108 before low-cost startup Vanguard Airlines Inc. entered the market in early 1995. That prompted American to cut fares to $80 and almost double the number of daily flights, to 14. When Vanguard gave up in December 1995, American jacked up prices to $147 and scaled back the number of flights. Justice lawyers even had memos from American execs plotting the upstarts’ demise.

Alas, Judge Marten would have none of this. Unimpressed, he stuck to the old definition of predatory pricing. “Americana priced its fares consistently above its average variable costs,” Marten wrote. While Marten acknowledged that predatory pricing existed, he doubted that judges would be able to distinguish it from good, old-fashioned competition. “Identifying [predatory pricing] in the particular case without chilling aggressive, competitive pricing is far beyond the capacity of any antitrust tribunal” he wrote, quoting from a well-known antitrust treatise.

“Sole Survivor” Now that the average-variable-cost standard has been etched into law, it will be a lot easier for dominant companies to drive their rivals out of business. “This effectively means there can be no price predation” in industries with low variable costs, says New York University law professor Eleanor M. Fox. Beyond airlines, these industries are primarily found in New Economy sectors. Most of the cost of making software, chips, and prescription pills, for example, is in research and development. Once that money has been spent, the cost of making additional units is tiny. In these businesses, aggressive pricing can leave dominant companies “as the sole survivor,” says analyst Roger Kay, of IDC in Framingham, Mass.

Indeed, Intel and Dell Computer have recently begun aggressively cutting prices. Nobody is accusing them of illegal predation. But in the wake of Marten’s decision, they may be able to lower prices into previously unexplored territories.

Of course, low prices sound great for consumers. And they frequently are. But so is competition. Marten’s ruling, by putting whole parts of the economy off-limits to predatory-pricing suits, could wind up costing some consumers a lot more than peanuts.

2. Don’t Blame American Airlines for Trying to Compete: Robert E. Cooper, Partner, Gibson, Dunn & Crutcher, Trial Counsel for American Airlines Inc., Washington.

[Dan Carney’s commentary] on Judge J. Thomas Marten’s dismissal of the antitrust action brought by the Justice Dept. against American Airlines Inc. missed one of the central points of the debate generated by the case and ignored decades of antitrust law (“Predatory Pricing: Cleared for takeoff,” News: Analysis & Commentary, May 14). The court properly rejected the Justice Dept.’s proposed new legal standard because it would have branded vigorous competition illegal, and in so doing, chill the very conduct the antitrust laws are meant to protect. Judge Marten applied long-accepted antitrust principles governing price competition-principles that courts have repeatedly employed to distinguish between predatory pricing and the vigorous price competition the antitrust laws encourage.

The Justice Dept. was blaming American for competing. There was no dispute that it was the new entrants, not American, who set the prices. American did nothing more than match those prices and add capacity to ensure seats were available at the new, lower price levels. If the Justice Dept. believes that the antitrust laws need updating to reflect the “New Economy” of which Mr. Carney writes, then it should pursue a legislative remedy open to public debate and consideration.

III. FORTHCOMING EVENTS

The project partners have finalised the dates of the National Reference Group Meetings. The NRG would deliberate on the draft Phase-I report prepared by the partners and create a base that would be used for launching advocacy for strengthening competition culture. The following are the dates of these meetings:

India: “Symposium on Existing and Proposed Competition Law of India”- 27th June 2001
Contact Address:
Dr. Pradeep Srivastava, National Council of Applied Economic Research, Parisila Bhawan, 11 Indraprastha Estate, New Delhi 110 002
Ph: +91-11-337 8860/337 9861-63, 337 9865-66/337 9868 Fx: +91-11-332 7164/9788
Email: psrivastava@ncaer.org Website: www.ncaer.org

Pakistan: 25th June 2001
Contact Address:
Hafiz Aziz-ur-Rehman
The Network for Consumer Protection, House No. 60-A, Street 39, Sector F-10/4, Islamabad
Email: netcp@apollo.net.pk; Ph: 92-51-2281755/226 1085/226 0133/2256895

Sri Lanka: 19th June 2001
Contact Address:
Malathy John
Law & Society Trust (LST), 3, Kynsey Terrace, Colombo 8
Ph: +94-1-691 228/684 845/989 843, Fx: +94-1-686 843; Email: lst@slt.lk

Kenya: 13th June 2001
Contact Address:
Ms Betty Maina
Institute of Economic Affairs (IEA), Bishop Garden Tower, 3rd Floor,
Bishops Road, P. O. Box 53989,
Nairobi, Kenya
Ph: (254 2) 717402/716231/721262; Fax: (254 2) 716231; Email: instecon@nbnet.co.ke

South Africa: 29th June 2001
Contact Address:
Dr. Garth Le Pere,
Institute for Global Dialogue, 8th Floor, Braamfontein Centre, 23 Jorissen Street, Braamfontein, Johannesburg, P. O. Box 32571, South Africa 2017
Ph: +27 11 339 6585; Fax: +27 11 339 6616; E mail: info@igd.org.za

Tanzania: 15th June 2001
Contact Address:
Ms Flora Musonda
The Economic & Social Research Foundation, 51 Uporoto Street,
Ursino Estates, P.O. Box 31226, Dar es Salaam
Ph: +255-22-276 0260/758; Fx: +255-22-276 0062; E mail: esrf@esrf.or.tz

Zambia: 18th June 2001
Contact Address:
Mr. L.J. Chingambo
Institute of Economic and Social Research, Munali Road (off Great East Road),
P.O. Box 30900, Lusaka
Ph: +260-1-294 131/673; Fx: +260-1-294291; Email: inesor@zamnet.zm

IV. NEW PUBLICATIONS

1. All About International Investment Agreements
This briefing kit for the general reader provides an overview of recent trends in the proliferating number of bilateral and regional investment agreements. The kit highlights the key issues in these agreements and considers past initiatives and prospects at the multilateral level. (64pp #0102, Rs 20/$5)

2. ReguLetter, No.2, March 2001
This is the second issue of the quarterly newsletter of the 7-Up Project. It carries a brief description of the progress of the 7-Up Project, news on industrial restructuring, corporate governance, financial sector, utilities and an article on Kenya’s competition law. The leader on the cover speaks about global approaches to competition policy like move to set up a Global Competition Forum and response to these developments. The next four issues of ReguLetter (including this issue) would carry extracts from the Global Competition Review survey, “Rating the Regulators.” The survey appraises the abilities, and assesses the efficiency of some of the most important national and supra-national agencies shaping the business environment of the 21st century. ($15/Rs 50 p.a.)

3. Consumer Protection in the Global Economy
This monograph outlines the goals of a consumer protection policy and also speaks about the interaction between consumer protection laws and competition laws. It also highlights the new dimensions about delivering consumer redress in a globalising world economy, which raises jurisdictional issues and the sheer size of the market. (38pp #0101, Rs 20/$5)

4. Contours of a National Competition Policy
This briefing paper is produced as a part of the 7-Up Project to inform, educate and provoke debate on trade, competition and investment issues. The paper covers the constituent elements of national competition policy and analyses the development considerations of different aspects of the policy. These elements would together form a comprehensive framework to ensure that a country reaps the benefits of competition between firms while achieving its national development objectives.

CONTACT US

CUTS Centre For International Trade, Economics & Environment (CITEE)
D–217, Bhaskar Marg, Bani Park,
Jaipur 302 016, India,
Ph: 91.141.2282821
Fax: 91.141.2282485
Email: cuts@cuts.org