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
The Ist Phase of the 7-Up project is now on the verge of completion. The last two months have been the most important period for the project. This was the period when the field survey was carried out by the country partners and the draft reports were also prepared. The draft reports were discussed in the National Reference Group (NRG) meetings of each of these countries. Interestingly, the deliberations in these meetings were not limited to the country reports. The participants discussed all the issues that they thought important to instill a healthy competition culture in the economy.
Out of the seven project countries, in three, the competition laws are relatively new. Two countries are in the process of adopting a new law while two others are considering adopting a new law. In the countries with a new law (Tanzania, Zambia and South Africa), the NRG meetings deliberated mainly on the issues of enforcement and the interface between the competition authority and the regulatory authorities. In the countries that are in the process of adopting a new law (India and Sri Lanka), the NRG attempted to evaluate the existing competition regime and on the basis of that came out with some suggestions regarding the proposed competition law to make it more effective. In the other two countries (Kenya and Pakistan) the NRG members were almost unanimous in feeling the need for a new competition law in the changed economic scenario both at home and outside.
In all these countries, NRGs were of the opinion that the competition law should be able to address their development concerns and protect their national champions against unfair competition from the TNCs. They were equally concerned about the effectiveness of domestic competition law to take care of anti-competitive practices in the globalising environment. However, they stopped short of recommending a multilateral competition framework, as they were not very sure of the implications of such a framework.
The NRGs also felt that it was essential to have a good advocacy and support base to enforce the laws effectively. At the same time they recognised the need for a strong consumer movement in ensuring that. They also recognised that the consumer movement in these countries (with the exception of India) was rather weak, and needs to be strengthened.
In this edition, we have carried a brief on the project progress and the viewpoint on anti-trust and innovation. Views and comments of the readers on the same are welcome.
Happy reading!
7-Up Team, CUTS
PROJECT PROGRESS
This was the most crucial period of the first phase of 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 the last quarter of its first phase and the following is a brief report of its progress during the months of May and June 2001.
1. Phase-I Country Report
During this period, the country researchers prepared the draft phase-I country reports. These reports have been prepared on the basis of the information and data collected from the respective Competition Authorities in these countries. A comprehensive questionnaire, dealing primarily with the institutional framework for enforcing competition laws in project countries, was sent in advance to the researchers for the purpose of collecting the requisite data.
2. National Reference Group (NRG) Meetin gs
The formation of NRG comprising of various stakeholders of the Project and organising their meeting was one of the most important activities of the first phase of the project. NRGs were formed in the project countries and the NRG meetings were organised during this period. These meetings were attended by CUTS staff as well.
The draft phase-I country report was presented at the meeting and in some countries it was also sent in advance to the NRG members. The comments and suggestions that emerged were then incorporated for preparing the Final Phase-I Country Report.
The NRG deliberated on the inputs prepared in each country and a base that would be used for launching advocacy for strengthening competition culture in these countries was created.
The Final Phase-I Country Reports have been sent to Prof. Rakesh Basant, the core researcher of the Project, for a comparative analysis of the same. Prof. Basant would prepare a synthesis of these reports which would be presented and deliberated at the Phase-I culmination meeting of the Project to be held on 7-8th September in Goa, India.
3. Outreach
ReguLetter No. 3 June 2001
During this period, the third issue of the “ReguLetter” was also published. It is a quarterly newsletter of the CUTS Centre for International Trade, Economics & Environment, being published under the project. The purpose of this newsletter is to provide a forum, in particular to the civil society, to understand the issues clearly and promote a healthy competition culture in the world. It covers developments relating to competition policy and economic regulations
ZCC Publications on Competition
Under the 7-Up Project, CUTS has published five booklets and 10 posters on Competition for the Zambia Competition Commission (ZCC) which observed a Competition Day in Zambia on 28th June. The publications have been produced with the hope that this will inspire other countries to also take up similar publications to create awareness, which will enable the development of a healthy competition culture.
VIEW-POINT: Anti-trust & Innovation
Old Bottle for New Wine
The roll-out of Windows XP by Microsoft on October 25 is expected to revive debate in diverse fora
about the compatibility of US anti-trust policy and laws with emergent information technologies.
According to reliable media reports, some State attorneys general in the US, encouraged by the appeals court ruling that Microsoft did, in fact, violate the Sherman Anti-trust Act by bundling its Internet Explorer browser with its operating system (OS), are now preparing to level the charge that its Windows XP will result in the company occupying larger areas of prime real estate in cyberspace.
The basis for this charge? The bundling of MSN Messenger, Microsoft’s Passport authentication technology and a new Windows Media Player that burns CDs and plays DVDs, streaming video and Internet music with Windows XP which, in terms of ubiquity, is expected to rival Windows 95.
Over 30 companies, including Apple Computer, Adobe Systems, Corel, Intervideo, Netopia, Real Networks and Symantec, fear that they will wind up as roadkill on the information highway if Microsoft is allowed to incorporate these features in Windows XP.
While their stand-alone products are indubitably superior to the features bundled with Windows XP, these companies fear that the average buyer will just buy or go along with the Microsoft product to save themselves the bother of picking up third-party offerings.
Microsoft has been characteristically laconic in its dismissal of these concerns. It has maintained that it is simply trying to improve its products in a fiercely competitive market so that it continues to deliver value to its customers. And, just in case people thought that it wasn’t serious about what it was saying, Microsoft has announced the withdrawal of Sun Micro system’s Java technology from Windows XP. This means that Web applications that run on Java won’t work on XP without the installation of additional software.
Who is wearing the white hat in this particular showdown on main street? It’s very, very difficult to tell.
The official version is that Microsoft is wearing a black hat here because, when customers opt for bundling because it gives them immediate gratification and ease-of-use, they are basically stifling competition and, thereby, ensuring higher prices down the line.
But life isn’t that simple.
In order to understand why it isn’t (at least, in this particular case), we’ll have to get a hang of the basics of the so-called New Economy and the ways in which it works differently from the so-called Old Economy.
But before we get into that, it might be worth the while to check out the history of anti-trust doctrine per se which, as we shall see, wasn’t all that simple either.
The roots of anti-trust doctrine lie in need to protect and help consumers. However, historically, the evidence has been that the doctrine and the laws embodying it have been used to hinder efficient corporations that have increased output and lowered prices. Cynics argue that this has happened because the doctrine was never a pro-consumer one at any point of time and that it was formulated in order to protect some firms from the efficiency of other firms. In order to buttress their position, they cite the fact that virtually every anti-trust action has involved two or more firms and hardly ever consumers and firms.
Others, less cynical in their orientation, have been inclined to the view that the anti-trust doctrine and the attempts to put it into practice have not worked because those involved – economists, regulators and so on – have not been able to define clearly certain basic concepts such as competition and entry barriers. For instance, does the lowering of prices by a firm constitute competition or an attempt to monopolise the market? And then again, does heavy expenditure incurred by a firm on research and development, advertising and so on enhance entry barriers, thereby stifling competition and hurting the interests of the consumers?
Backing up a little, we find that micro-economic theory, from roughly the 1940s to the 1960s, was pretty much based on what economists refer to as the perfectly competitive equilibrium model which embodied the assumption that competitively structured markets tended towards equilibrium in which price, marginal cost and minimum average cost were all equal and in which consumer interests were, thereby, protected optimally. It followed that if firms advertised or if they achieved economies of scale that other firms could not or if they achieved a level of market share which allowed them to control prices, they were working against the interests of the consumers.
Inevitably, such firms were viewed then as candidates for prosecution under anti-trust laws.
In the 1970s and 1980s, however, the Chicago School economists trashed this theory and demonstrated that the co-relation presumed to have existed between market concentration and profit didn’t hold good in all cases. At about the same time, Austrian economists put forward the argument that real world divergences from perfect competition do not necessarily mean market failure or, for that matter, justify anti-trust action. They went to say that products should be differentiated if the market itself was differentiated, that firms should advertise if adequate information was not available to consumers and that lower costs achieved by firms through innovation must be allowed to wipe out less innovative firms. And then, as a clincher, they pointed out that people were getting dominant firms mixed up with monopolistic entities…
And now for anti-trust policy in the context of the New Economy. Let’s assume for the moment that anti-trust policy and laws are entirely unambiguous – and then figure out why people say that they create a whole bunch of problems when hooked up to emergent information technologies.
The anti-trust doctrine was developed in the context of smokestack economies characterised by multi-firm, multi-plant production of physical goods such as cars and steel and cement and cigarettes and so on. In as much as this production was undertaken on a multi-firm multi-plant basis, the economies of scale were limited at the plant and firm-levels. Inevitably, average costs rose with output. Further, smokestack economy enterprises required high capital investment and were characterised by stable market shares, relatively slow innovation and extended entry/exit cycles. New Economy firms are, in a manner of speaking, the mirror image of these enterprises. They enjoy much higher economies of scale and, consequently, the total average costs of their products fall across output. They require less capital investment, run on extremely high levels of innovation and have accelerated entry/exit cycles. Most significantly, they benefit from economies of scale in consumption owing to what is referred to as network externalities.
New Economy companies are different from Old Economy outfits in another extremely important respect: their principal output is intellectual property. Intellectual property has a unique feature – it has extremely high fixed costs relative to marginal costs. That is, it’ll cost you a bomb to create intellectual property but, once you’ve created it, the cost of making additional copies is very low. In fact, in the case of software, it is so low that it might as well be zero. That is just great for customers, right? Wrong. The problem here is that intellectual property has to be given very high levels of protection under law. If this is not forthcoming, everybody will jump on board for a free ride and innovators may not be able to recover even the cost of their innovations.
And so, we have a situation in which protection will actually increase production – even while deflecting demand to more expensive substitutes.
There goes the very basis of the anti-trust doctrine …..
Regulators are aware of all this. Thus, Robert Pitofsky, Chairman of the US Federal Trade Commission, addressing a recent conference on anti-trust, technology and intellectual property held at the Berkeley Centre for Law and Technology (University of California), said that “it is unduly simplistic to assert that intellectual property is like all other forms of property” but added that “it is also unduly simplistic to conclude, as some have urged that because of differences, anti-trust enforcement has little or no role to play when it comes to market power based on intellectual property”
Anti-trust, but Pro-innovation
According to Robert Pitofsky, while comprehensive empirical data is lacking, there is a widely-held view that markets in the New Economy are characterised by an increased rate of innovation, relative case of entry and instability of market shares. Consequently, cartels and monopoly power in intellectual property markets will necessarily be short-lived and, in any event, will be “defeated more quickly and efficiently by market forces such as new entry than by any band of bureaucrats.”
He told the conference: “On average, market power probably is less durable in the hi-tech sector of the economy. As a result, it is unlikely that any dominant firm will eclipse completion for 50 years to the extent and in the way Alcoa dominated the aluminium market in the first-half of the 20th century. Nevertheless, we have seen that systems designed to encourage and protect innovation – patents and copy rights – can be and often are used to barricade a market against entry by new rivals. It also appears that network efforts occur more frequently in sectors of the economy characterised by intellectual property. Brand name recognition and reputation for reliability can create substantial advantages for incumbents. Finally, practices illegal under the anti-trust laws such as exclusionary conduct or intimidation tactics available only to very large firms can themselves impede entry by more efficient challengers. Market dominance for ‘only’ 15 or 20 years can take enormous resources out of the economy and, by excluding innovative new entrants, foreclose alternative paths of technical development”
How, then, can intellectual property rights be protected and innovation fostered without the erosion of consumer welfare?
According to Pitofsky, as in most other areas of anti-trust, most cases involving intellectual property that raise serious anti-trust problems are settled with conditions rather than litigated. “Because areas of the economy characterised by intellectual property usually are dynamic rather than static, reliable predictions are difficult. This is a problem across-the-board, but it particularly applies to designing remedies that alleviate competitive problems without unduly interfering with innovation incentives.
He said that among the issues that need to be addressed are:
- The need for caution among enforcement officials and courts in imposing remedial conditions so as not to undermine innovation;
- The need for special attention to be given to the duration of orders, with duration often curtailed, because market changes in hi-tech markets with much intellectual property are likely to make those long-term orders obsolete if not downright harmful; and
- The need, when network effects are present, for special attention to designing remedies that ensure reasonable access to the bottleneck product(s) or service(s).
Forthcoming Events
7-Up project: Phase-I culmination meeting, 7-8th September, Goa, India
The Phase-I culmination meeting of the 7-Up project will be held on 7-8th September in Goa, India. The meeting would take stock of the first phase output, i.e. the Phase-I country reports and would also deliberate on the synthesis of these reports prepared by Prof. Rakesh Basant, the core researcher of the Project. The meeting would also chalk out a plan of action for the Pahse-II of the project which would deal with cross-border issues.
For more information: http://cuts-international.org/forthcoming-events.htm#7-Up
Regional meeting for the Asia-Pacific: New Dimensions of Consumer Protection in the Era of Globalisation, 10-11th September, Goa, India
Consumer Unity & Trust Society is organising a meeting on “New Dimensions of Consumer Protection in the Era of Globalisation,” on 10-11th September 2001, in Goa, India, together with UNCTAD and Consumers International.
The meeting is being held for the Asia-Pacific region and will bring together leaders in consumer policy, mainly from civil society, and also from government and business sector from the region.
The objective of the meeting is to better inform the Expert Group that has been called upon by UNCTAD to discuss “Consumer Interests, Competitiveness, Competition and Development.” in Geneva in October 2001.
For more information: http://cuts-international.org/forthcoming-events.htm#Asia-Pacific
CONTACT US
CUTS Centre For International Trade, Economics & Environment (CITEE)
D–217, Bhaskar Marg, Bani Park,
Jaipur 302 016, India,
Ph: +91(0)141-228 2821
Fax: 91.141.2282485
Email: cuts@cuts.org