Category: Competition

Competition As A Factor Of Market Clearing And Pareto Efficiency

Introduction

Competition is a divisive subject which has led to differing approaches to how it is modelled. The most widely accepted is the neoclassical view, which argues the benchmark is perfect competition, equilibrium is market clearing and pareto efficient. Market clearing is where the demand for goods equals the supply of goods so that there is no leftover surplus. Whilst Pareto efficiency is where resources cannot be reallocated to make one individual better off, without making another worse off, hence, goods are allocated efficiently. The Austrian view supports that competition leads to markets clearing and pareto optimality but argue it is more a process than a state. The Marxian view disputes claims that markets clear and are pareto efficient, competition is viewed as inefficient due to the pursuit on profit maximisation.

Main

Neoclassical View

The neoclassical view benchmarks perfect competition, arguing it can be achieved if there are many small firms producing a homogenous product with no restrictions on entry into or exit from the industry. Assuming the absence of economies of scale, the equilibrium outcome of perfect competition is pareto optimal. The view supports welfare theorems which link pareto efficiency to perfect competition. Competition is fought through price and quality of products, as such the more participants in the market the better.

Structure-conduct-performance paradigm show below in figure 1 demonstrates that when there are fewer firms there are potential pareto improvements. In a monopoly firms can create barriers to entry into the market. This prevents competition from becoming perfect meaning price is above marginal cost, and it is possible that profits become abnormal. Price is predicted to be higher and output lower under monopoly than under a comparable situation of perfect competition, as well as greater welfare losses. When in monopoly or oligopoly stage, firms have an incentive to collude prices which goes against the neoclassical theory.

Perfect competition concept does not involve any rivalry, all firms are in harmony. Firms are price takers and the actions of other firms has negligible impacts on the industry, each firm operates in a vacuum where actions do not influence other firms. This may overlook the impact that both implicit and explicit collusion may play when there are fewer firms involved. However, collusion may be hard to follow as the other firm may “cheat” if it has the incentive to do so. Any deviation in a slightly lower price or higher quantity makes it more profitable for the firm and this may prevent collusion from being widespread.

The Austrian View:

The Austrian’s view competition as a process rather than a state. Perfect competition is only achieved when the process of competition has exhausted itself. This approach does not view the process of competition reaching a final state unlike the Marxian view. Entrepreneurs are key individuals who recognise and take advantage of opportunities. The existence of economic profit is essential to spur on entrepreneurs.

Schumpeter’s (1942) idea of “creative destruction” suggests new ideas are initially highly profitable but as a result any previous market power may be undermined which has the potential to be costly. Firms chase profits until they are gradually eroded, when this occurs competition is deemed perfect. Any existing market power can be undermined by further entrepreneurship. The invention of a new product creates a monopoly position for a firm introducing a product. Gradually other firms catch on and develop close substitutes reducing the high levels of profit from the monopoly.

Classical/Marxian:

The Marxian view depicts firms as profit seeking, the competition over profits inevitably leads to conflict. Firms are aware that collusion can bring higher profits than under competition meaning it is often in a firm’s interest to set prices higher and produce less than the demand. Under a Marxian perspective competition is not pareto optimal. Suspending or removing rivalry is advantageous to a firm as it can seek higher profits. As such competition is not desirable to firms and if they aim to achieve long term profits it may be in their interest to remove competition.

The pursuit of profits leads firms to seek out opportunities to increase profits by moving into highly profitable areas. Lange (1937) argued free competition leads to a pursuit of maximum profit, but as many firms chase the profits they are eroded away. As such, capital filters from areas of low to high profitability, which over time equalises profits over different sectors.

Competition is widely perceived as for markets as a whole, because of this it is unlikely market clear or are pareto efficient. Firms are viewed as price makers which has large implications as this means that competition is fought through non-price mechanisms like advertising.

In the structure-conduct-performance approach monopoly and competition are opposites in that one increasing, decreases the other, however, this may not be the case. Marxists argue that monopoly spawns from competition. But competition may cease to exist in oligopoly and monopoly markets.

Monopoly capitalism is the theory that increasing returns to scale causes competition within markets to become unstable. A process of concentration begins where firms expand in size internally through investment. Externally growth is achieved through the process of centralisation by mergers and acquisitions. The two processes together result in markets dominated by a few firms, where price competition is limited, accept to deter new entrants or to eliminate weaker rivals. It makes sense to expand market share through aggressive price tactics to strengthen market position until there are few firms left. Baran and Sweezy (1966) recognise the tendency for surpluses to rise as few firms remain and are unable to singlehandedly dominate the market, so instead implicitly collude prices to gain a rate of profits higher than in competitive markets. The theory has its critics as technical change can drive increased competition which is often neglected.

Conclusion

Competition may lead to market clearing and pareto efficiency when it is perfect, but to achieve anywhere close to perfect competition, state intervention is needed. Marxian analysis of monopoly capitalism seems more relevant than the neoclassical view of structure-conduct-performance paradigm as most markets are dominated by few firms. A critique to the Marxian view outlined by Sawyer (1989) is that managers in control of firms may have differing goals to the owners, this has led to claims of the “soulful corporation” where managers operate for the greater good rather than the benefit of the owners. Managers as “soulful” individuals may be excessive as they often have bonuses dependent on performance for the firms which largely discredits this critique. Clifton (1977) argues that larger firms can implement competitive strategies with greater intensities, this implies with fewer small firms, competition would be greater. Auberach and Skott (1988) reinforce this view by stating the lowering of the costs of communication and transport have meant in recent years international competition than ever. Competition is unlikely to lead to markets clearing and pareto optimality because firms attempt to maximise profits. This creates a reluctance to perfect competition from firms where profits are minimal, consequently for the majority competition does not lead to markets clearing and a pareto efficient outcome.

Monopolistic Competition in the Clothing Industry

Understanding Monopolistic Competition in Fashion

Monopolistic competition, by definition, is when an industry has many firms that offer similar products and services but not completely identical or the perfect substitute. In monopolistic competition, there are not many barriers to exit or enter— making it easy for many firms to sweep into the market and offer similar products. The perfect example of monopolistic competition is the retail and fashion industry— specifically fast fashion. The fashion industry is one of the biggest industries in the world with hundreds of thousands of different brands, both big and small, comprising of it. Although the products are very similar, each product varies in quality and the materials used to make the clothing item. In this essay, I will explain the correlation between fast fashion and monopolistic competition— as well as how this causes copyrighting problems within the industry.

To understand the fashion industry, it is first important to understand how monopolistic competition works. Monopolistic competition consists of many firms in the same industry competing for and targeting the same costumers to buy their products. Production differentiation is what sets different firms and brands apart from one another and is what makes a consumer want to buy a product. While clothing items may look similar, as stated before, each product varies in quality and the materials used to make the clothing item. Clothing items are differentiated through price, quality, reliability, design, and uniqueness. The purpose of product differentiation is to market a product and make it more desirable than others being offered in the market. Therefore, these factors are very important in consumer decision-making, specifically price, because if one brand prices rise and go beyond a consumer’s willingness to pay, then the consumers would choose to buy from a different brand offering a similar product. Another point in monopolistic competition is that consumers will often compare the price and quality of each close substitute in the market and make a decision based on the price and quality combined. This is the point at which the fast fashion industry and monopolistic competition intersect.

The Intersection of Fast Fashion and Monopolistic Competition

In the fashion industry, new brands emerge, whether they or big or small, all the time. The goal of each brand is to sell the best product— the product that is the most differentiated and unique compared to the others. In the world of fashion, fast fashion is a fairly new term. According to the Merriam-Webster dictionary, fast fashion is defined as “an approach to the design, creation, and marketing of clothing fashions that emphasizes making fashion trends quickly and cheaply available to consumers.” In the 1990s, the New York Times coined the term to describe the brand Zara (Rauturier). In 2019, Zara continues to be a fast-fashion brand as well as other popular brands such as Zaful, Fashion Nova, Urban Outfitters, Forever 21, and H&M, for example. These brands are huge components of the industry and yet they are all almost identical and “copycat” versions of each other. Within the fashion industry, besides fast fashion brands, many small creative clothing brands exist and because these brands are so unknown, it makes it a lot easier for bigger brands to completely steal a product.

The Issue of Copyright and Idea Theft in Fashion

In the article “Fashion Brands Steal Design Ideas All the Time. And It’s Completely Legal” by Chavie Lieber, it discusses the problem of bigger and established brands stealing product ideas in the fashion industry. Brands such as Zara, Old Navy, Fashion Nova, and Urban Outfitters, to name a few, are all guilty of stealing from known to lesser-known brands all the time. In the article, Lieber made a point to say: “Big fashion brands rip off small ones all the time, the most prolific offenders being fast-fashion companies, whose entire business model revolves around copying trends and bringing them to market quickly.” Monopolistic competition in fashion revolves around copying trends, making these trends more appealing than other brands, and then bringing them into the market faster than other competitors. Sadly, in the fashion industry, there are no copyright laws protecting designers’ creations and ideas— this is why big brands are able to get away with identically copying ideas with really no legal repercussions. In the article, a small clothing company called Mère Soeur, owned by Carrie Anne Roberts, was blatantly ripped off by Old Navy. Roberts designed a shirt with the phrase “Raising the Future” written on it and soon after, Old Navy began selling knockoffs of the t-shirt. After receiving backlash on multiple forms of social media, Old Navy pulled the shirt from their website and emailed Roberts saying that because “…Roberts didn’t trademark the phrases “Raising the Future” or “The Future,” and does not have a trademark for the font or graphic design of the shirts, she has zero legal rights to them,” (Lieber). This very issue of copyrighting in the fashion industry stems from monopolistic competition because fast fashion moves so quickly in terms of production and selling.

Economic Implications and Legal Challenges in Fashion

For example, if Fashion Nova, a notorious copycat brand, was to copy the design of a smaller designer and sell it as their own, they would mark down the price but they are only able to do this by downgrading the quality of the clothing item. The consumer then faces the decision of whether to buy the more expensive but better-quality piece from the smaller designer, or cheaper worse quality item from Fashion Nova. There is a tradeoff between quality and affordability. Although there is a tradeoff, trends change very quickly and if a clothing piece is trendy in that very season or moment, customers and consumers would be more likely to buy the item that costs less if it is only going to be worn a few times. This results in fast fashion brands successfully being able to steal ideas and get recognition for them while facing no consequences.

While it is very evident that big brands copying and stealing ideas with no consequences is very wrong in a moral standard, it does not seem that way from an economics point of view. Sadly, it is often not seen as a negative or a problem because of how well the economy benefits from the fashion industry. “America’s GDP for fashion is at $350 billion,” said Brittany Rawlings, a fashion law attorney. Because the fashion industry is worth $350 billion, Congress is afraid that if fashion designs are protected, the economic growth will be stunted or come to a halt. Also, experts Kal Raustiala and Christopher Sprigman, who wrote the book The Knockoff Economy: How Imitation Sparks Innovation, fear that enforcing copyright laws could create a hostile environment that makes it hard for brands to enter and exit the industry with ease— especially smaller brands that have not established customer loyalty. Because the industry is doing so well without having any copyright laws in place, the question on whether or not the fashion industry should have them still exists. Raustiala argues that the industry does so well because there are no copyright laws in place— “Copyright has an intent behind it, and the intent is to protect creators so that they continue creating. When we looked at fashion, we saw an industry that was very, very creative and puts out tons of new ideas every season and has done that continuously for decades,” he says.

Consumer Responsibility and the Future of Fashion Industry

Besides economic benefits, many believe that copycats in fashion are the reason why the fashion industry continues to be successful. The average household cannot afford to buy luxury items from brands such as Gucci, so fast fashion companies create a copycat item, giving mass consumers the opportunity to buy into it, thus creating a trend. Christopher Sprigman, author of The Knockoff Economy: How Imitation Sparks Innovation, argues that “…Copycats help create trends and then help destroy them, paving the way for new ones to take their place. Without copying, the fashion industry would be smaller, weaker and less powerful.”

In contrast, some experts also believe the lack of laws are failing the fashion industry (Pike). As a designer, rights should be given to protect one’s creativity and ideas and these rights should not be violated. In the United States, American fashion is considered a manufacturing industry rather than a creative industry (Lieber) and that is why fashion is not protected in the same ways as other creative industries such as art, film, and literature (Pike). Because no laws have been put into place, some designers have begun to use the power of social media as a tactic against copycat designs by using their platform to call out stolen designs. In addition, some designers have also begun creating clothing and garments that are harder to replicate and using more expensive materials and fabrics. Although designers may seem to be the only ones facing a problem in this situation, consumers also hold a level of responsibility. Consumers are responsible when they choose to buy a cheaply made knockoff product as there is harm to the original designer, their brand, and reputation.

Final thoughts

In conclusion, the fashion industry is a very great example of monopolistic competition. Because copycat products are so prominent within the industry, the consumer is faced with the decision to buy an inexpensive and cheaply made clothing item or a quality product made with good materials that are slightly more expensive. In the fashion industry, designers are not protected through copyright laws which raises the question of whether copycat items are generally good or bad. Many experts believe that the industry does so well because there are no laws in place while some experts also believe the lack of laws is failing the fashion industry’s designers. The fashion industry today continues to be a $350 billion industry— an industry where new brands emerge constantly, selling similar but differentiated products. This system will either continue to expand the industry or copyright laws will be put into place and allow designers to have rights to their own ideas and creations.

Interjurisdictional Competition For Economic Development In Kenya

Introduction

In 1956 Charles Tiebout in his article “A Pure Theory of Local Expenditure” introduced the notion that decentralization leads to superior variation in the provision of local public goods (goods that are tailored to better suit local population). He introduced the Tiebout model, a model that seeks to attest that decentralization is the solution to the “free rider” problem in local governments and that interjurisdiction competition leads to the provision of public goods at a peak level, as it places competitive pressure on local jurisdictions.

Boyne (1996) defines interjurisdiction competition as; competition that is promoted by a fragmented structure that has many authorities, competition that is enhanced by a high level of local autonomy that will encourage innovation and diversity and competition that is strengthened by local authorities who are heavily reliant on local sources of revenue.

Interjurisdiction competition motivates local governments to do more than just provide public goods, it helps them fight corruption, reduce waste of resources and curb spending on non-productive public goods, so as to provide more growth thus promoting infrastructure and attracting mobile capital.

In contradiction to the rewards of local government competition scholars also argued that the fear of capital outflows restricts governments from providing welfare services, environmental regulations, and non-productive public goods that citizen’s value. Tanzi (1996) argued that there exist many imperfections in the local provision of services that may prevent the realization of benefits from decentralization. Dillinger and Webb (1999) found that decentralization in Columbia has created enormous fiscal problems by creating unsustainable fiscal deficits for both the national and subnational governments. Decentralization has also been unable to mitigate corruption in the country caused by drug cartels. (Dillinger & Webb, 1999)

However, Capital mobility is said to promote a “race to the bottom” mentality in social and environmental policy, both among subnational governments within decentralized states and among countries competing. For good or ill, competition for capital is thought to shift government priorities away from non-productive public spending toward business-friendly investments.

China, for example, has a centralized political authority but keep their economy decentralization. Leaders in Beijing use political incentives to achieve local compliance with their ruling strategy and specific policies. The core of political centralization lies in the Chinese Communist Party’s (CCP) monopoly of authority over the management of political and economic elites at all government levels. The personnel system determines the distribution of power in this one-party state, and scholars argue that it serves as an effective mechanism to align local leaders’ incentives with the preferences of top Party leaders (Zuo, 2015).

Effects of Interjurisdiction competition.

By granting local governments the power to autonomously raise and distribute revenue, or by allowing subnational leaders to adapt national policies to local contexts, authoritarian states can build more efficient economic institutions that cater to local strengths. County governments will form and divide executive and legislative duties differently to suite their unique needs.

Different government forms may lead to different development policies, reflected in industry recruitment efforts. Counties that chose to hire independent professional managers for executive functions may enjoy greater technical knowledge or professionalism than those relying upon elected officials to fill these roles.

Financial burden can provide counties with the drive for aggressive industry recruitment. Counties with financial burdens value economic development more highly as their alarming financial distress will motivate them to adopt reductions and introduce incentives in an attempt to relieve their financial distress by more aggressively pursuing for economic development.

However pursuing industry recruitment does not mean that the counties are aggressively pursuing economic development. Budgetary pressures only make counties value economic development more highly, greater fiscal distress increases the probability of adopting related incentives but financially constrained governments are unable to sustain the short term cost of the offered incentives, such as recruitment effort, that are needed to obtain the longer term development benefits.

Local Governments with a higher rate of unemployment or a rising rate of unemployment are expected to benefit more from industry recruitment than the better placed Counties as the counties faced with the challenge of unemployment value economic development more highly and this will force them to invest in efforts that will increase recruitment.

Interjurisdiction and the Economic Development of Kenya

Decentralization has different characteristics, policy implications, and conditions for success. Differences among the frameworks for decentralization of public functions are, however, not clear – cut. Instead, they comprise of a continuum – ranging from a centralized framework to the federal system. Devolution is one form of decentralization framework that lies within the continuum. Devolution is generally defined as a process of transfer of political, administrative and fiscal management powers between central government and lower levels of government, primarily operating at city and region levels (Potter, 2001). It is not just a linear process of power transfer from national to sub – national level but also involves some degree of cooperation between the different levels of government. Other frameworks that lie between are the de – concentration and delegation frameworks. The level of decentralization is determined by several factors. These include; (i) the degree to which the sub – national unit can exercise administrative powers, in terms of recruiting and controlling employees, responding to citizens’ feedback and altering services and budgets to match local preferences; (ii) Ability of the local government unit to exercise political authority in terms of initiating policy and overseeing its implementation; and (iii) the local government influence on revenue and expenditure decisions.

In Kenya the government had a unitary system and structure of government and this meant that planning and administration was mainly done at national level. However when the Kenyan government implemented its new constitution in August 2010, it began to actively implement efforts to decentralize its administration and planning thus creating local authorities and districts whose main purpose would include the provision of easy access of government services for its citizens (Sunkuli, 2011).

The new constitution of Kenya at article 1(3) and (4) establishes two levels of government; the national and county levels of government . Decentralized government give powers of self-governance to the people and enhance the participation of the people in the exercise of the powers of the state and in making decisions affecting them. The constitution thus promotes social and economic development and the provision of proximate, easily accessible services throughout Kenya and it ensures equitable sharing of national and local resources throughout Kenya for poverty alleviation and employment creation. The national government will be responsible for policy functions such as revenue collection and security.

Unlike Kenya who voted for the new constitution that lead to decentralization. In 1998 Mozambique through the United Nations Development Programme (UNDP) created a pilot project of decentralized district planning and financing in Nampula province. The project sought to strengthen the capacity of provincial and district administration and communities to plan, finance, implement, and monitor development as well as promote popular participation in the process.

The projects long run objectives were to achieve sustainable planning and financing of local development programs, improve local governance, promote social economic development and poverty reduction in selected rural districts and to generate insights to inform the national debate on decentralization and democratization.

The Mozambican government later took ownership of the project and local communities’ participation in the project through their consultative councils strengthened citizens’ sense of project ownership. By decentralizing through the project there was a link that was formed between local communities and district administration thus helping local communities understand the work of district administrators and their own civic rights and obligations. The problems and needs of the district were better articulated and the overall result being improved governance.

Project implementation generally promoted the Mozambican government’s ownership of the project. In turn, local communities’ participation in the project through their consultative councils strengthened citizens’ sense of project ownership. Project implementation created a link between local communities and district administration thus helping local communities understand the work of district administrators and their own civic rights and obligations. The problems and needs of the district were better articulated and the overall result being improved governance. After evaluation was done the project resulted in sustainable livelihoods and more capital assets (Juma, 2011).

Fiscal decentralization improves the efficiency of the public sector and it leads to economic growth. In Kenya the success of fiscal decentralization can be measured by investigating the rate of flow of resources from the central government to the sub-national governments (Menon, Mutero, & Macharia, 2008).

Conclusion

Economic development has been shown to be the only way in history to save people from widespread poverty and discontent, as it empowers citizens economically as well as politically. Poor governance undermines civic and business groups, which can in turn lead to even worse governance as these members of civil society are ill-equipped to provide a proper check on governments. Because of this chain of events, it is no surprise that poverty and bad governance are highly correlated. This potential vicious cycle makes promoting better governance a vital goal for citizens as well as the international community.

In Kenya, it is important to scale up the decentralized initiatives that are working for greater and faster successes. A government report on fast tracking the achievement of MDGs rooted for strengthening of Coordination, reporting and monitoring systems between government departments and development partners and communities.

Global Competition Law. Uber: An (Un)solved Problem

1. Introduction

We were all accustomed to the traditional taxi services, but this sector was not showing signs of evolution and users have to accept the service as it is. Then, the situation changed when online-enabled car transportation service like Uber appeared. Uber provides a service, which connects drivers with passengers by using a mobile app. The consumers download the Uber app and can use it to find a driver which is located close by. It has benefits over taxis such has track the location of the car until it arrives and get an alarm when the car arises. However, it’s not only benefits… this brought some problems that we can’t ignore. We propose to present this problems and try to answer them.

First of all, we have to understand Uber business model to see the legal nature of the services that Uber provides to their clients. So, we will see if we have a real transport service or otherwise services of the information society. Then, we will see if we have any problems or concerns with Uber that should involve antitrust authorities. And at last, we will analyze the polemic question “Uber vs. Taxis” and linked problems, such as if we have or not a taxi monopoly.

2. Uber Business Model

Uber makes their users lives much more easier. However, there’s no consensus about its characterization. But, we can say that “it evokes the phenomenon of the sharing economy because it fully exploits resources that would otherwise be underutilized. It provides transportation services without being subject to parts of the national regulations governing taxi services. It can be considered an ‘information society service’ because of its digital platform.”[footnoteRef:1] However, we have to say that “sharing” is not the perfect description of the services on digital platforms like Uber.[footnoteRef:2] In Fact, Uber matches drivers with those who needs a taxi driver, which allows enables individuals to communicate and collaborate more effectively and efficiently.[footnoteRef:3] In fact, unlike online stores, Uber doesn’t directly provide a service. But, the true is that the users pay and drivers work for gain. Uber is not a web page or a mobile app hosting the transactions between drivers and consumers. What Uber does is provide an electronic payment system, ensuring that the price works dynamically, charge a fee for every exchange and ensures quality of service for both partes. “In other words, Uber falls somewhere along a spectrum between purely hosting platforms and direct service providers”.[footnoteRef:4] [1: MARGHERITA COLANGELO and MARIATERESA MAGGIOLINO, Uber: a new challenge for regulation and competition law?, In: Market and competition law review, Vol. 1, nº2 (Oct. 2017), page 2.] [2: GIANA M. ECKKHARDT and FLEURA BARDHI, The Sharing Economy Isn’t About Sharing at All, Harv. Bus. Rev. (Jan. 28, 2015), https://hbr.org/2015/01/the-sharing-economy-isnt-about-sharing-at-all.] [3: TALIA G. LOUCKS, Travelers Beware: Tort Liability in the Sharing Economy, 10 Wash. J.L. Tech. & Arts 10 (2015), pages 329 and 330.] [4: VANESSA KATZ, Regulating The Sharing Economy, 30 Berkeley Tech. L.J. 30 (2015), pages 1067, 1071-1072.]

Maybe this incorrect between Uber platform and sharing economy is like a scape to avoid the regulation for off-line services. It may be that the new technologies have actually deprived of meaning some of the rules set forth by the existing regulatory schemes and thus encouraged a change in the mindset of regulators.[footnoteRef:5] [5: NATHAN CORTEZ, Regulating Disruptive Innovation, Berkeley Tech. L.J. 29 (2014), page 175.]

2.1. Transport services or services of the information society?

When we are talking about Uber services, to know what rules should be applied, the main question is if are looking for a transport service or for a service of the information society.

If we evaluate Uber as information society, then it can benefit from Article 1 Number 2 of Directive 98/34/EC32 which defines information society service as a normally provided service for remuneration at a given price, through electronic means, from a distance on an individual request of a recipient.[footnoteRef:6] [6: European Parliament: Directive 98/34/EC of the European Parliament and of the Council, available online: http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CONSLEG:1998L0034:20070101:EN:PDF.]

“Uber platform, through which it operates, meets all of the parts of this definition: the service is provided upon an individual request of a recipient (rider submits request through a platform, driver also notifies of his/her availability through the same platform); the services are provided for remuneration (rider pays the fair for a ride, from which driver receives 80% and the rest is deducted by Uber); the service is provided at a distance (driver and rider communicate through virtual platform); and the service is provided by electronic means (Uber application via internet).”[footnoteRef:7] Although Uber doesn’t have any car, there are some features that make it more than a “simple” information society. Actually, it’s not wrong to say that Uber drivers are not independent contractors but employees of the company, because it’s Uber who fixes the prices, so Uber drivers have no control on the price mechanisms. The payments are made through the app, so they can’t request more than what is stipulated. So, driver receives his payment through Uber and not the opposite. “This shift of control over the remunerations, as well as Uber’s complete control over the prices shows that Uber’s involvement in transportation providing processes goes beyond just facilitation of information exchange. Uber’s role should not be interpreted in a formalistic way, but looking at its overall policies.”[footnoteRef:8] [7: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, page 14.] [8: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, page 15.]

This totally shows us that Uber should not be considered just an information society but also a “cash distributor”. Uber should not be considered a truly information society, not should be seen as a truly intermediary and, because of this, we have to mention it as a service linked to transportation.

3. Uber Antitrust Law

“Uber exists and grows because, by matching users and drivers via its platform, it exploits the interdependencies that occur between these two different demands: the demands of transportation and the demand of driving. The antitrust analyses suggests that Uber platforms are a system of interoperable software combined in a complex architecture that is nevertheless flexible enough to embrace new components.”[footnoteRef:9] In other words, Uber can diversify its business like it did when created Uber eats. They can add associate other products and services to the platform, which produces different consequences. In a way, this means that the competition occurring in digital markets is dynamic because platforms can easily enter new markets by offering new and innovative functionalities.[footnoteRef:10] In other way, “the same capacity of developing new services may permit Uber to profit from preemptive strategies that produce exclusionary, though not necessarily anticompetitive, effects.”[footnoteRef:11] [9: MARGHERITA COLANGELO and MARIATERESA MAGGIOLINO, Uber: a new challenge for regulation and competition law?, In: Market and competition law review, Vol. 1, nº2 (Oct. 2017), page 10.] [10: JEFFREY EISENACH and THOMAS M. LEONARD, Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace. Boston: Kluwer Academic Publisher, 1998.] [11: MARGHERITA COLANGELO and MARIATERESA MAGGIOLINO, Uber: a new challenge for regulation and competition law?, In: Market and competition law review, Vol. 1, nº2 (Oct. 2017), page 10.]

Uber, by entering in transportation markets, with already established base of costumers, raise their rivals costs and force them to use less efficient and lower quality technologies that make their offer less valuable than the new offer.[footnoteRef:12] But, actually, the antitrust law can’t say anything about the prices charged by Uber. In fact, the prices practiced by Uber, or in technical terms the ‘dynamic price system’, turns out to be a market where prices adjust almost instantaneously, according to supply and demand. This dynamic price change with different factores like: (a) company internal metrics; (b) competitors prices; (c) matching of supply and demand in real time; and (d) other elements that might affect the transportations. [12: STEVEN C. SALOP and DAVID T. SCHEFFMAN, Raising Rivals’ Costs, The American Economic Review 73 (1983), page 267.]

A different issue, connected to prices, is whether the pricing system of Uber works as a “hub and spoke” tool, that is, as a central instrument – the “hub” – that coordinates the prices that drivers – the “spokes” – apply.[footnoteRef:13] This theory basically explores if the Uber’s algorithm was manipulated to reduce competition between drivers, to fix their prices. But, if this algorithm work as Uber decelerate it works, that is reflecting how the market demand and supply change over time, no kind of collusion occurs and the case of two drivers charging the same price should be regarded as a coincidence and not as a behavior resulting from collision. [footnoteRef:14] [13: MAURICE E. STUCKE and ARIEL EZRACHI, Virtual Competition. Harvard: Harvard University Press, 2016, pages 50-55.] [14: MARGHERITA COLANGELO and MARIATERESA MAGGIOLINO, Uber: a new challenge for regulation and competition law?, In: Market and competition law review, Vol. 1, nº2 (Oct. 2017), page 11. ]

Uber offers certain services to its users, as we have already analyzed. And while it offers these services and people are adhering to them, it collects data from its users, which ends up withholding them. Thus, the more data you can collect, the better your ability to improve service and earn money. But does this fit into the antitrust law? Well, we have to say no. Because we are talking about market features that don’t depend on business practices. And because that data collected is a byproduct of an activity, which aims to improve the service and consequently consumer comfort. And so, because of this, it can’t be forbidden by antitrust law.

A final and big important question is directly related with competition authority itself. The antitrust law has no great concern with the question of whether or not consumers are well informed. We can not deny that in fact there were situations in which the antitrust authorities intervened against the counterfeits that appeared in the market, but we are talking about cases where the wrongdoing has already occurred. What should happen is prevention, education and empowerment by these authorities, because this falls within the scope of antitrust law. In fact, the information is a product and because it’s a product, antitrust law can be used to prosecute firms that explore the market power damaging its proper operation by reducing the quantity and the quality of the information conveyed to consumers. [footnoteRef:15] So, if it were proved that Uber manipulates its systems, should be an intervention by the antitrust authorities, because we would be towards a dominant position. [15: MARK PATTERSON, Antitrust law in the new economy. Harvard: Harvard University Press, 2017, pages 33-38. ]

We can’t deny that Uber changed the competitive dynamics in the transportation but we can’t say that should be a concern by the competitive authorities, as we analyzed in this point.

4. Uber vs. Taxis

It was not a long time ago that Uber appeared, changing the transport industry. This made taxi drivers upset and created a lot of conflicts. We can’t deny the benefits of Uber against taxis. Uber presented different options for different type of users and this made transport market reach another level.

One of the main reasons that led to the displeasure of taxi drivers was the different treatment between Uber and taxi drivers. Taxi drivers are subject to very strong regulations, being one of the most heavily regulated in the majority of countries all over the world, with varying degrees of difference in the forms of quantity regulation, quality regulation, market conduct regulation and price regulation.[footnoteRef:16] However, taxis fares always remain expensive while the service quality changes between drivers. The biggest concern is the control of entry by authorities setting the maximum number of taxi operators. The idea is that if the entry was not controlled, then we would have an excessive number of taxis. And an excessive number of taxis would create a competition out of control between them, what would be bad for the market itself, affecting the quality of the service. And would cause congestion and pollution, what would be terrible for everyone. [16: OECD, Taxi Services: Competition and Regulation, 2007, page 19.]

In most countries, regulation has failed to achieve expected results in this sector. First, because the control over the entrance led to a lack of service provision, especially at peak hours. Secondly because such tight control over prices and quality of service has meant that taxi companies did not improve their service. But, the results that come from the deregulation that has been tried in some countries are not unanimously shared by economic literature, even if the majority are in favor of it.[footnoteRef:17] [17: ADRIAN T. MOORE and TED BALAKER, Do Economists Reach a Conclusion on Taxi Deregulation?, Economic Journal Watch 3 (2006), page 109.]

When Uber appeared it got worse. Through technological advances Uber created a new way of operating in the transport market, questioning the taxi service, which led to a need to reform the rules. The use of internet mobile technology to match drivers with users has created unprecedented competition in the taxi industry.[footnoteRef:18] Taxi operators claimed that Uber competes unfairly with them for failing to comply with regulatory requirements. [18: JUDD CRAMER and ALAN B. KRUEGER, Disruptive Change in the Taxi Business: The Case of Uber, American Economic Review 106 (2016), page 177. ]

4.1. Taxis Monopoly

First of all, we need to understand what is a monopoly, what “taxi” means and which services could compete in the same market.

We can defy monopoly as a dominant state of a particular business operator, which is either the only subject providing a particular service of its kind, or its share of the market of particular product/service is close to 100%.[footnoteRef:19] [19: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, page 12.]

As we have already mentioned, the regulations imposed on taxi market normally involve a restriction on the number of taxis operating and competing with each other in a certain place, but not in a way that there is only one operator, which would mean that there was no competition. So, whenever authorities establish a certain number of taxi licenses for a particular location, there is always more than one to maintain competition. Those taxi companies that got a license, still have to compete with each other, despite the limited number of licenses. So, we can say that regulating taxi market itself doesn’t automatically mean granting a monopoly.

Even so, we have to question whether there is a monopoly granted to taxis, allowed by governments through compulsory licenses by the means of imposing mandatory licensing, as a of picking up individual passengers by individual cars and transporting them for remuneration to their individually requested destination.[footnoteRef:20] So, by prohibiting new companies such as Uber from transporting individual passengers in individual cars to their destination, which are therefore the same as taxis but not covered by the licensing criteria established by the authorities, are authorities allowing a monopoly of taxis? This “monopoly” would be allowed to justified by social questions, safety, comfort and access for passengers during all day even in uninhabited areas. [20: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, page 12.]

We can’t use the term “monopoly” for this. This term is used to describe individual business, economic subjects, entities dominating a certain market with no or very few and weak competitors and not to describe a group of entities competing with each other.[footnoteRef:21] So, taxi companies competing between themselves as a group, can’t be considered as a monopoly, even if they are protected by some sort of regulation, which means they don’t have to face more and new competitors over time. [21: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, page 13.]

We can not deny that these regulations limit competition to a certain level, but not at a monopoly level, unless they eventually form a cartel or merge, and start to operate a single identity.

4.2. Uber, Taxis and Antitrust Law

Other relevant question that we have to explore: supposing that taxi regulations were applied to Uber, should antitrust law act against Uber because it doesn’t comply with regulations of taxi services? Uber’s services have increased the ‘catalog’ of available transport, with the benefit of lower prices than traditional taxis. Thus, we conclude that the existence of Uber and its economic activity is not anticompetitive within the meaning of antitrust law, because it does not harm the consumer. And this does not change even if Uber’s business harms taxi drivers. This doesn’t mean that antitrust authorities support those entities that act beyond the law. We can say that Uber and taxis should act on the same plan. This doesn’t happen because authorities have limited powers. They can forbid anticompetitive agreements, mergers, and monopolistic practices, but they cannot force Uber to comply with taxi regulations through commitments or obligations, or exempt taxi drivers from those regulatory obligations to which Uber is not subject. Thus, we conclude this point saying that when the authorities can actually do something, they do, they act. However, there are issues there are not in their power.

4.3. Relevant Norms

“Under the “Services Directive”[footnoteRef:22], Article 9 Number 1, which provides that Member States should not make access to a service activity or its exercise “subject to an authorization scheme unless the following conditions are satisfied: (a) the authorization scheme does not discriminate against the provider in question; (b) the need for an authorization scheme is justified by an overriding reason relating to the public interest; (c) the objective pursued cannot be attained by means of a less restrictive measure”. These 3 conditions are cumulatively mandatory for the state in order to be legally allowed to impose an authorization on service providers under EU law. Prohibiting Uber, and especially its individual partner drivers from picking up passengers, while other taxi services could perform such tasks under certain conditions, does constitute discrimination. Even though this restriction on provision of services could be justified by public need, however, there still are less restrictive options available. Rather than banning, the authorities should design appropriate regulations to accommodate new developments on the market. Therefore, Uber bans are illegal under the directive mentioned in this paragraph.”[footnoteRef:23] [22: European Parliament: Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market, available online: http://eur-lex.europa.eu/legal- content/EN/TXT/HTML/?uri=CELEX:32006L0123&from=EN. ] [23: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, pages 15 and 16.]

According to the Article 49 of Treaty of the Functioning of the European Union (TFEU)[footnoteRef:24], any citizen of EU member state is free and allowed without restrictions to set up and establish state branches or subsidiaries in any other member. Even though it is operating in another member state, instead of the citizenship of the person, should be applied the same laws and regulations as undertakings established by local citizens. Thereby, Uber branches that are established in one EU member state and are expanding to another, have the right to compete with other locally established in there. By this, we can say that when a court forbids new competitors from entering the market, because of taxi regulation preventions, is a violation of Article 49 of TFEU. [24: European Union: Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union (TFEU), available online: http://eur-lex.europa.eu/legal- content/EN/TXT/HTML/?uri=CELEX:12012E/TXT&from=DE.]

According to the Article 102 of the TFEU[footnoteRef:25] abuse of dominant position on the market by an undertaking or a group of undertakings, which may directly or indirectly result in setting up unfair prices, hindering technological developments on the market, is prohibited. “Even though the situation of those taxi firms that have obtained licenses amount of which was artificially limited by the national or local authorities, does not amount to a monopoly, as their situation does not result from their internal agreements, but just from the decisions of the authorities and as they still compete among each other, however, it still might amount to dominance and its abuse, especially if the regulator has set a maximum charge rates. The artificial reduction of potential competitors on the taxi market results in unfairly high prices, as well as in limitation of production. These practices are violations of Article 102 of TFEU.”[footnoteRef:26] Nowadays, in Portugal, Uber is already regulated, but there are other places that don’t have our scenario. In this countries, where Uber still operates with no regulations, while traditional taxi firms still have to comply with licensing requirements, we can say that we have a reversed abuse of dominance by Uber, because it competes with others on which it has benefits. But, the true is that Uber didn’t took advantage from this increasing the prices. Anyway, by doing this, governments passively grant exclusive rights to Uber. So, the governments should equalize this situation to avoid violation of article 102 of the TFEU, because taxis and Uber are both transport services, as we have seen. [25: European Union: Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union (TFEU), available online: http://eur-lex.europa.eu/legal- content/EN/TXT/HTML/?uri=CELEX:12012E/TXT&from=DE ] [26: LAURA BARAINSKY, ESMA GUMBERIDZE and MOHAMMAD NURUL, Uber and Taxi Regulations: are Member States preserving a legal monopoly to the detriment of consumers?, page 17.]

5. Conclusion

In this paper we had the chance to analise the impact that Uber caused in transport market and as a primary issue, the conflicts with taxi drivers. Uber created a new way of operating in the transport market, questioning the taxi service. But, before we analyzed Uber business model and we concluded that we are dealing with a a transport service and not with a service of the information society, because it ceases to be a true intermediary from the moment that establishes prices, which means drivers are not independent as genuine service providers. Then, we understood that Uber shouldn’t be a concern by the competitive authorities. While Uber offers certain services and people add to them, it collects data from its users, which ends up withholding them. And the more data you can collect, the better your ability to improve service and earn money. We saw that this doesn’t fit into antitrust law because this is market features that don’t depend on business practices. This aims to improve service and consequently consumer comfort. And so, because of this, it can’t be forbidden by antitrust law. Authorities should improve prevention, education and empowerment, because this falls within the scope of antitrust law.

We also analyzed that we don’t have a taxi monopoly, because taxi companies competing between themselves as a group and the term monopoly “is used describe individual business, economic subjects, entities dominating a certain market with no or very few and weak competitors and not to describe a group of entities competing with each other.”

We conclude that the existence of Uber and its economic activity is not anticompetitive within the meaning of antitrust law, because it does not harm the consumer. And this wouldn’t change even if Uber’s business harms taxi drivers. We also conclude that Uber and taxis should act on the same plan and this doesn’t happen because authorities have limited powers. They do what they can do!

Amazon: Competition Is The Best Policy

Amazon is considered to be the biggest e-commerce platform that specializes in online retail, cloud computing, digital content and competes in thirty other industries. Amazon was established by Jeff Bezos on July 5, 1994, and began its venture as an online book shop, however later it extended to selling video/music content, computer games, hardware, clothing, furniture jewelry, toys, and AI services. Recently in 2017, Amazon has acquired Whole Foods Market chain for around 14 billion US dollars. It’s believed that Amazon acquired Whole Foods in order to compete with Walmart. The company currently has around 647000 employees and this number keeps increasing due to the rapid expansion through different industries. Amazon was able to attract lots of customers due to its fast delivery service and lowered prices. The company was able to thrive because it was based online and there were no expenses for space rent as in the cases of brick and mortar stores. Amazon’s formula of success belongs to the ability to embrace innovation and creating new markets that never existed before. Amazon Inc. competes against many firms including Walmart, Google, Apple, Microsoft, and Home Depot. Due to its massive success, Amazon was even declared to be a Business killer due to the fact that it led to Toys R Us to declare Bankruptcy. The President of the United States, Donald J. Trump tweeted many times about how Amazon is hurting companies, avoiding taxes and taking away jobs. A few companies that are affected by Amazon are Barnes & Noble, Macy’s, Blue Apron, Foot Locker and many other brick and mortar stores.

The Wall Street Journal recently published an article about Amazon’s Food Delivery falling short and affecting customer loyalty. The author of the article, Heather Haddon gave an example of how Amazon can’t meet the requirements of their newly implemented grocery shopping available through Whole Foods by stating that: “Kelly Hills ordered a sour-dough loaf from Whole Foods recently but was offered a jalapeno cheese bread instead. Her so-called shopper either a contract worker employed by Amazon or Whole Foods staff member tasked with compiling delivery orders had opted to put decaf coffee in her bag instead of whole roasted coffee beans and celery instead of celery root and single seltzer flavor rather than a variety.” Ms. Hills said that if she was very frustrated by these bizarre substitutions. The problem is that Amazon wasn’t able to come up with a new and improved inventory-management system and opted to use the old inventory system that Whole Foods had before. This problem might also be a result of Amazon.com running separately from the newly acquired Whole Foods.

Throughout the years the company has competed against multiple strong competitors. As Porter’s Five Model suggests, during this analysis, all five forces are going to be discussed and broken down. The competitive rivalry is considered to be a strong force and a great player in Amazon’s day to day business. Most retail companies are aggressive and show competitive power against each other. For instance, Walmart is a direct competitor of Amazon due to the rapid expansion of Walmart in the e-commerce sector. In addition to that Walmart has the brick and mortar stores, a fact that directly affects Amazon. No everyone is comfortable with online shopping and therefore Walmart is able to serve both markets, online and offline. Now that Walmart has established its online presence it can compete with Amazon through low switching costs online. Because of the extreme external factors, Amazon needs to put more emphasis on competition and thoroughly analyze the company based on the Five Forces.

Amazon is often affected by its suppliers that control the products that are sold on Amazon.com. Based on Porter’s Model this is the bargaining power of Amazon inc’s suppliers and is considered to be a moderate force. For instance, when Amazon is promoting its own line of clothing (Amazon Basics) it is launching a promotion campaign that advertises the items online at a very low price. If the suppliers change their mind and increase the price of manufacturing or impose a higher minimum purchase quantity then Amazon will be directly affected by this and forced to sell the product at a price that creates enough revenue. Porter’s Five Forces Model describes this force as a moderate threat but combining all the suppliers together it’s clear that this becomes a strong force. In order to avoid such problems, the company has to take care of the external factors develop strategies that can lock in deals with all suppliers. Due to the fact that Amazon’s mission statement is all about the customer-centric approach, this also makes the company vulnerable in front of its customers (Bargaining power of Amazon’s Customers/Buyers). The low-rated products are the ones that have problems or quality issues and therefore it affects sales. In order to prevent this strong force, Amazon is listing the best products to come up as first during a product search and even has a badge that says “Amazon’s choice”. Amazon considers this strong force as a major one and takes all the responsibility through a very responsive customers service and low priced products.

Another point from Porter’s model is the threat of substitutes or substitution and is considered to be a strong force. It’s well known that Amazon competes with eBay, Etsy, and Walmart. It’s been proven that customers can easily switch from one online retailer to another if they find better prices. Most of the millennials compare prices between online shops before making a purchase. There is a huge list of smartphone applications such as ShopSavvy, BuyVia or Honey that allow comparing prices across multiple websites and finds the lowest price possible. Nowadays online shoppers look at price and delivery time as the two most important factors that contribute to their decision. This is why Amazon is now trying to create its own delivery company in order to make this process even faster. To make shipping even faster, Amazon is experiencing with new ways of shipping such as Drone Air Shipping that could bring down the shipping time to hours or even minutes depending on the location. Full-scale drone testing projects are currently taking place in the UK and Europe. Amazon understood that the fourth point of Porter’s model can play a big role in the long-term success of the company.

Last but not least, the Threat of New Entrants is considered to be a weak force because Amazon is a well-established e-commerce platform with years of experience and rich knowledge about its customer’s needs. It’s very hard for new entrants to compete on price with Amazon because Amazon has become an empire with its own manufacturers, warehouses and so on. It would probably take many years and billions of dollars to create a new company that would directly compete with Amazon and even if that happens, Amazon might have an eye on these companies from their early stage. Therefore, the fifth force of Porter’s model represents a minor issue for Amazon’s success.

In conclusion, Amazon remains to be one of the biggest players in the online retail industry. The fact that it is one of the oldest companies in this sector of the economy gives it a major competitive advantage. Even though the company is very successful in the online retails, it still needs to create new methods that could improve the Grocery shopping service because not taking care of this problem will only hurt the customer loyalty. Developing new strategies and adopting a new inventory-tracking system is a must for surviving in this competitive world.

The company might also partner with Instacart Inc. which is the biggest grocery delivery service. Being aggressive and trying to dominate each sector of the economy isn’t always the best way.

Sainsbury’s-Asda Merger in Doubt over ‘Extensive Competition Concerns’: Critical Analysis of Article in the Guardian

Introduction

An article published on 20 February 2019 by the Guardian discusses the concerns associated with the merger of two supermarket giants, ASDA and Sainsbury’s. The article resolves around Competition and Markets Authority (CMA) finding “extensive competition concerns” while investigating the proposed deal. Media has raised an issue concerning consumers and welfare, which are threatened by the potential merger. Many industrial economics topics are implied in the article, these include horizontal merger, welfare, market definition, etc. In this essay I will aim to focus on welfare implications and why anticompetitive mergers are of serious concern to the regulatory authorities. First, this essay will explore the extensive economics literature regarding the subject, then analyse the article with empirical evidence. ASDA and Sainsbury’s have currently put the deal on hold, in attempt to resolve the issues.

Horizontal merger is a merger or business consolidation that occurs between two or more firms in the same industry, that were previously competitors. Generally, firms merge to maximise efficiency, productivity and sizable gains. This can be achieved through price manipulation and monopolising a local market. By merging, firms aim to exploit their strength and newly obtained market share to maximise profits. Economic theory suggests that consumers always suffer welfare losses, specifically for larger horizontal mergers.

Literature review

Economic literature regarding the drawbacks and dangers of horizontal mergers indicate two major issues. The two main hypotheses “consumer protection” and “market concentration hurdle” (Ning Gao, Ni Peng, Norman Strong, 2017) are the anticompetitive products of the merger. Competition authorities are interested in both, protection of the customers and the market. In a more empirical approach (Tiago Pires, Andre´ Trindade, 2017) focuses on the effects on variety and prices, which will clearly be affected. In economic theory, such a major market consolidation is almost certainly going to increase the prices across all firms in the market. In a study by (Robin A., Prager T. and Timothy, 1998) price effects are empirically examined in mergers which substantially increase market concentration. Their findings illustrate an increase in market price and a significant shift in market power caused by the merger. In a different study conducted by (Emilie Dargaud and Carlo Reggiani, 2015) both positive and zero price effects are said to be possible outcomes of a horizontal merger. In the groceries and general merchandise market it is unlikely that no effect on the market price will be observed, due to high competition on prices and their volatility.

Product variety is another important aspect regarding horizontal merger frequently covered in economics literature. Theoretically a horizontal merger should decrease the product variety, as the jointly owned stations have no more incentive to compete. (Steven T. Berry and Joel Waldfogel, 2001) discover that theory alone cannot predict the effect on variety. Using an OLS regression the study discovers the opposite, indicating that consolidation promotes product variety. Another study in industrial organisation argues that a successful horizontal merger decreases product variety but becomes more efficient and concise, alternatively there will be an inefficient increase in product variety (Haimanti Bhattacharya and Robert Innes, 2016). In the context of a merger between two sophisticated and experienced giants, such as ASDA and Sainsbury’s the latter is unlikely. There are many competing theories regardless this subject. The outcome is very market dependent and situational. Product variety promotes consumer welfare, but high prices do not. The effect on welfare therefore can be very complex and difficult to predict.

Another important measure of success is efficiency. Intuitively a merger should have increased efficiency. Economic theory suggests that improved efficiency is expected, mostly because of economies of scale. Market power can grant lower operating costs as well as more resources to optimise the supply chain. In a recent study by (Alison Chapin and Stephen Schmidt, 2019) it is pointed out that when larger firms horizontally merge, they often exceed the efficient scale. In economics theory at a certain point beyond economies of scale, a firm becomes more inefficient with each extra unit of output. (Gamal Atallah, 2016) conducts a very relative subject, focusing on oligopolistic markets with homogenous goods. He finds that in such cases generally all mergers lead generates efficiency gains. The newly merged entity can gain different types of efficiencies: technological, scale, supply chain. In industrial organisation these may result in long term reduction of marginal costs and operating costs, sustaining long term efficiency gains.

A study on antitrust case selection among horizontal mergers, (Ning Gao, Ni Peng, Norman Strong, 2017) argues that there is strong empirical evidence suggesting that horizontal mergers are most often motivated by efficiency gains rather than anticompetitive purposes. Competition is what protects customer surplus, however in the groceries and general merchandise market with only few firms dominating the market consumers might suffer due to anticompetitive behaviour. The gain in market power can easily drive up the prices and boost producer surplus at the expense of consumer surplus. Literature suggests that consumer protection is most likely not of high priority to the competition authorities.

Article analysis

The article focuses on Competition and Markets Authority’s concern of the merger causing numerous anticompetitive issues in the market. “CMA said the merger would create a ‘substantial lessening of competition at both a national and local level’” (The Guardian, 2019). ASDA is a British supermarket retailer owned by the US Walmart. According to Kantar Worldpanel data, ASDA currently has 15.5% UK’s grocery market share. Sainsbury’s has control of 15.7%, resulting in the potential merged entity’s market share of 31.2%, which would overtake the current dominant giant Tesco’s with its 27.7%. CMA is concerned with having almost 60% of the market split between two firms.

Although economic theory suggests an increase in market price, Mike Coupe, the chief executive of Sainsbury’s promises a 10% price reduction. This can be achieved through efficiency gains obtained from the merger, as the marginal costs can decrease significantly. However, this promise, according to industrial economics literature, will not be kept in the long run. With such a drastic change in market consolidation, the prices will inevitably increase, perhaps negating the initial 10% price cut.

The CMA laid out limited options for the two firms to follow. These include calling off the deal all together or “requiring the merging companies to sell off a significant number of stores and other assets” (The Guardian, 2019). The requirement is slightly farfetched and aggressive by the competitive authorities. Despite the legislation that can be put against the deal ASDA and Sainsbury’s say that they will press on with the deal. Such conflict can be very detrimental for the two giants.

The article also points out that the merger can lead to a reduction in the quality of choice for the consumers. I do not agree with that statement, as mentioned by (Haimanti Bhattacharya and Robert Innes, 2016) variety will most likely decrease but impove the efficiency and quality of the products. The merged entity will most definitely not make such a mistake in the short run specifically as they will be vulnerable to losing the newly obtained market share with the added pressure from the media and CMA.

The article suggests that the merger will be harmful to consumers, however CMA does not seem to be as invested in protecting consumers as it is in protecting the overall UK’s grocery market balance. The study conducted by (Ning Gao, Ni Peng, Norman Strong, 2017) supports the argument that the merged entity is most likely focused on efficiency and market gains rather than disrupting the competitive nature of the market.

The fourth largest firm in the grocery market Morrisons, which occupies 10.5% of the market share (Kantar Worldpanel data, 2019), raised its concerns of the proposed deal to the CMA. Morrisons argued that the new entity would lead to a duopoly in the market and severely damage the competition (RetailGazzette, 2018). Morrisons, supported by economic theory, believes that prices would spike and the competition between the newly two leaders in the market could become less fierce. Tesco has also made a comment about the merger, mentioning that there would be very few customer benefits and no incentives to lower the prices. Economic theory suggests that if substantial efficiency gains can be achieved a reduction in prices is possible in order to increase the competitive advantage.

Conclusion

The 10-12bn pound deal is certainly going to impact UK’s market for groceries and general merchandise. Despite the extensive literature on horizontal mergers and its implications it is hard to predict how the merger will influence the prices, efficiency and consumer welfare. I think that the newly merged entity, if the deal does happen, will reduce its prices in the short run to attract investors, please the consumers and CMA. In the long run the anticompetitive issues will most likely arise as two firms will own 60% of the market.

Reflection on Competition: Opinion Essay

As I walk out the door into the courtyard, I’m caught off guard by the blaring sun. It’s summertime. The grass is vivid and freshly cut. Birds can be heard chirping in the distance. There are no clouds in sight, giving way to scalding temperatures. And, on that day, one that seemed like the hottest day of the year, I am wearing a suit.

The occasion was a competition at the end of MITE, a program introduced me to the process and cooperation of engineering. I had spent two weeks working on an engineering-based project, which happened to be a robot, with a group. At the end of the program, our robot would compete in a competition against other robots to see which team had created the most effective one. Along with this, my group and I would have to present the robot and the many engineering processes that had been considered throughout the course of the program. The competition was the easy part, as I had previously participated in events such as FIRST Robotics. The presentation, however, was an entirely different story. I could present the project in a small group without much stress and anxiety. But the thought of 10 people, even if the majority were parents, sent my heart racing.

I continue walking through the courtyard until I reach the building I would be presenting in. I use the small towel in my hand to wipe away the sweat that continued to reappear, no matter how many times I had wiped it away. The heat isn’t helping my situation. As I enter the building, I am met with a face full of air conditioning.

“Finally. Something to help me cool off and calm down,” I think to myself.

The air conditioning was able to stop the sweat, thankfully, but the stress continued to mount. With the feeling of impending doom approaching, I sat through the competition, smiling to myself as the robot easily succeeded. I nearly forgot about presenting until the competition abruptly ended, much like a daydream during class. My heart began picking up the pace again. Even with such a familiar topic, I still had trouble keeping myself from shaking. I was absolutely terrified of public speaking, and terrified by the fact that I would be judged on it.

I enter the presentation room and quickly set up the PowerPoint along with my team. Just as we were finishing the setup, the parents and judges began to swarm into the room. I began to panic, more so than I already had. I felt embarrassed. I could feel my face as it turns the bright red that it usually becomes when I’m nervous. Everyone sits down, and the sound in the room drops to nothing. The presentation starts. My partners take the first few slides, so all I can do is sit and listen to the clock ticking in my head as the time slowly increase towards my part. The mouse clicks. It’s the first of my slides. I pause, as the voices of doubt and anxiety scream in my conscience. I take a breath, and I began.

Believe it or not, I survived the presentation by taking it slowly and thinking about what points I needed to get across. Three times over, to be exact. And, to be honest, it wasn’t all that bad. I have a tendency to overthink even the simplest of things, this being one of the many instances. Each time I get past another presentation, though, I feel more confident in my abilities. I know life is going to be more stressful than talking in front of a small group of people. I’m well aware of this. And, much like the presentation, I will work myself up about the many things thrown my way. But I know that each anxiety-riddled situation I live through will help me throughout life.

Competition in the Market and Application of Competition Law

Introduction

The Cartel has been defined as the “supreme evil of antitrust” shaking the foundations of an ethical structure of the existing competition in the market. In 1996 the European Union introduced the concept of the leniency programme to ease the Commission’s burden and time in detecting cartel. Leniency programme gives immunity or discount in fine to the first undertaking in the cartel, reporting the Commission. Prior to the leniency programme cartel were mostly detected by own initiatives, customer complaint, notification or other such methods which were time-consuming and by the time the investigation concluded the cartel had already affected the market flow for an adequate time period. The first cartel detected by the leniency programme was in 1998 in the British sugar case. In the recent decade, leniency has become a common detection method for the Commission.

This essay will discuss and look into the utmost concern of the authorities to look into the policies adopted by the firms engaged in a cartel for the ethical conduct of the business. The leniency provision has opened the doors to debate upon its deterrent effect on the firms. An analysis in the manner of deterrence to expose and curb cartel in an efficient and effective way has been made with the introduction of the leniency programme when the application is brought by the undertaking which had taken enough compliance programme. The essay also discusses on the discounts granted in fines in the Leniency programme if is justified when the company has taken adequate steps to comply with the Competition law prior to the formation of the cartel to discourage its employees from getting involved in any act violating the Competition law. Lastly, the essay has established a relationship between leniency application, deterrence and compliance mechanisms adopted by the undertakings.

Legislative mechanisms

Treaty of Functioning of the European Union (TFEU) lays two prominent rules for the policy of European Antitrust law. Article 101 of the TFEU states that if two undertaking by mutual consensus fixes some share in the market or the price to dominate the market it leads to the creation of a cartel. “Charging unfair prices, limiting productions or by refusing to innovate to the prejudice consumers” are some of the examples of prohibitions of firm dominating the market solely to abuse its position is laid down in the Article 102 of TFEU. The National Competition Authorities are the competent authorities to look into applications of the Articles 101and 102. A complaint filed before the Commission undergoes the similar procedure as the complaint filed by other legal methods. However, in “cartel cases, the fine is increased by a one-time amount equivalent to 15-25% of the value of one year’s sales as an additional deterrent and the maximum level of fine is capped at 10% of the overall annual turnover of a company.” The European Commission amended the Leniency Notice in 2006 where the provision that the undertaking involved in the cartel to receive immunity essentially has to give evidence and information about the cartel to the Commission first. The company giving out the information about the cartel voluntary has to submit the Corporate Statement either in a written or oral medium by disclosing its identity. The EU guidelines on methods of setting fines state that the undertakings having cooperated with the Commission effectively beyond the Leniency notice or any legal obligation, the basic amount of the fine may be reduced by the Commission. However, for the undertaking to qualify for immunity it has to fulfill some of “additional qualifications” such as submitting the application procedure according to the administrative procedure of the Commission. The business is also expected to end the cartel after submitting the application still upon the desire of the Commission the business may involve in the cartel even after the application to conserve the solidarity of the inspections.

Jurisprudential views in deterrence

Deterrence is an integral element to enforce the Competition law and policy. In many instances, the employees individually involved in the cartel are not penalized and the company they are associated during the formation of the cartel has to indemnify for the losses to the authorities. The technology advancement has made the communication easier and forming a cartel has become easier with just a call.

Detecting, prosecuting and punishing the offender are the three rules of Becker’s theory of deterrence. Werden and Simon, competition economists disagreeing with the Beckerian approach in law enforcement specifically in the cases involving cartels have opinioned that fines are less costly for the society thus are given priority than the imprisonment in the competition law cases. The prison sentences for a short period of time leaves a psychological and medicatic result on the people prosecuted with the white collar-crime and the expense is cheaper than paying heavy fines by the corporations. The different views on fines are ‘charging fines against firms and individual employees can be relatively less effective than imprisonment of the managers, because firms are protected by limited liability and they can easily indemnify managers by paying their own fines when they acted in the interest of the firm. On the other hand, the design of the optimal sanction against corporations should consider that firms can be sanctioned both by the market and by the presence of a principal-agent problem between shareholders and managers, and between managers and their subordinates.’ There is a possibility that the business involved in the cartels are not always motivated by profit margins but also are the result of some personal gain of the employees. Therefore undertakings take the recourse of strong compliance mechanism to curb the practice of the cartels by its employees to avoid the deterioration of the organizational image. It is important to note that the deterrence in some jurisdiction are civil in nature whereas some have criminal sanctions for the cases involving infringement of competition law. Imposing criminal sanctions in the infringement of competition law evolved in Europe with Ireland criminalizing the infringements of antitrust law in 1996. Some of the non-EU countries like the US, Japan and Korea have also imposed criminal sanctions for the undertakings involved in the cartels. The criminal sanction in the cases involving cartel has a clear deterrent effect in the undertakings as they can imbibe more compliance mechanism to keep a check on its employees. It can be argued in support of the criminal sanction that the individual involved in the cartels when are imposed with punishment cannot be indemnified by the business undertakings and leaves a direct impact on the individual. The deterrence effect of the charging high fines because of the involvement of a few people in the cartel also creates an imbalance in the financial structure of the whole organization which may act as a barrier to the healthy competition in the market of a specified product.

The judges and the bodies generally do not favor charging high fines as the firms may reduce its credibility and there is a possibility for the firm to get bankrupt which will reduce the deterrence effect of the firm. Buccirossi and Spagnolo, competition economists taking into consideration the standards laid down in the ‘Beckerian’ cost-benefit methodology’ have argued that the European Commission sanctions have left a very little deterrence effect prior to implementation the leniency programme. Leniency programme is a beneficial tool to investigate in an existing cartel if the level of sanction increases. However, Buccirossi and Spagnolo state that higher level of sanction does not qualify imprisonment as an effective mechanism to deter an individual. Imprisonment as a medium of sanction in the leniency programme has its own disadvantages as the government has to spend more to keep up the prison cells. In determining the amount of fine it is also important for the fine amount to exceed the profit which the undertaking gained from the cartel.

Cartel culture and participation in leniency programme

Cartel culture is common among the business enterprises having its trade in metals, oil and pharmaceuticals. The singularity among these businesses is the oligopoly market. The oligopoly market is dominated by a few firms and there are very few small firms in the market operating its business in these products so formation of cartel becomes easier with such economic structure. The firms having a large-scale operation to remain supreme form a cartel fixes the price collusively. In the enforcement of law relating to a cartel, the loss incurred by the enterprises by any of the cartel member cheating should be more than the profit earned from the cartel. The participation of the firms differs from the enforcement of the law. It is pertinent to note that while determining the necessary conditions for the sustainability of any illegal agreement the disproportionately of the loss from cheating and gain from the cartel plays an important role which is known as ‘incentive compatibility or self-enforcing constraint’.

The grant of immunity from fines to encourage the compliance may be beneficial partially when the mechanism is not existent in the organization. However, it is also difficult to give discounts in fines when the cartel is formed between the enterprises registered with a different jurisdiction. The difficulty in the enforcement of immunity can be discussed with the Archer Daniels Midland (ADM) case. ADM, an agriculture processing company based in Illinois, the US was found guilty in the cartel involved with international lysine and citric acid in 2003 by the European Commission. The cartel initially involved three international companies namely Ajinomoto from Japan, Masaru Yamamoto from Korea and ADM from the US and later joined by the five subsidiary companies of the existing companies in the cartel. The cartel first met in Mexico in June 1992 followed by their meeting in Paris in the same year in October to discuss and fix the future price schedule. In the first meeting, ADM was dominated by the two undertakings and there was disagreement in the cartel for the equal distribution of the share in the market. A fake agenda and later an imaginary lysine association was put forth in the second meeting in Paris by ADM without leaving an impression on the members of the cartel about their future course of action to approach the law enforcement authorities. ADM started to cooperate with FBI soon after the conclusion of the meeting in Paris. To get substantial evidence the meetings held after 1992 were recorded in the form of audio and video recordings. The cartel continued till 1995 until the FBI raided ADM’s Decatur and Heartland Lysine office in Chicago. The Japan, home office of Heartland Lysine and Ajinomoto was duly informed about the raid and the evidence was destroyed but some of the documents were left unnoticed while destroying the evidence which was stored at the house of the individual representing Ajinomoto. When the investigation was initiated by the authorities the President of the ADM Europe food additive division, Barrie Cox was interviewed in order to determine the amount of fine. The ‘immunity agreement’, a plea agreement was entered between the government and the President to negotiate and settle the charges on the organization. It was established by the authorities that only the President of the ADM’s food division would be exempted from any charges and the CEO and the President and the Board of Director, Andreas and Wilson respectively who participated in the meeting would not get an exemption from any plea agreement. Subsequently, ADM concurred to pay a fine of $100 million and also consented that the employees would cooperate with the government. In the District Court’s appeal by Andreas and Wilson, it was contented as a defense that the cartel continued till 1995 to deceive the other members of the cartel in pursuance to help the authorities with evidence. However, their active participation in determining the sales and price level in the market per se amounted to the violation of the antitrust law and they were aware of the consequences of the act with the knowledge of the act. ‘Effect theory’ originating from the Gypsum case played a prominent role in deciding the final decision of the ADM’s case. The court held that the ‘the defendants must have intended to “help accomplish” the known goal of the conspiracy is entirely consistent with the reasoning and holding of U.S. Gypsum.’ According to the effect theory, the criminal intention includes the intent of the undertaking to enter into an anti-competition agreement and the steps taken by it in cartel conspiracy.

In the year 2000, the parties were presented before the European Court of Justice. One of the key points in the decision of the case was to determine the validity of the method applied for fining. The Commission held that the market structure plays a vital in analyzing the method of calculation of the fine and that the EUR 20 million is a hefty amount and is imposed only in very serious infringement cases. The Commission while looking into the deterrent effect of the fines stressed upon the undertaking’s prior knowledge for the commission of any anti-competitive act. The principle of ‘equal treatment’ enshrined in the Article 7 of the European Convention for the Protection of Human Rights and Fundamental Freedoms was considered while reducing the fine imposed by the Commission by US 9th Circuit Court.

In such a peculiar situation when some of the cartel members are a non- EU members the conflict of jurisdiction arises. The fairness and equal treatment of the undertakings are possible when the principle pillars of the law are similar in nature. The ECJ held that the fairness was not observed by the courts of the US and the sanction conferred was restricted to the undertakings involved in the cartel of the US and ordered the Commission to bear ‘one-tenth of the cost incurred’ by ADM and the remaining amount of the fine was to be borne by ADM.

Thus the complexity of the law of different jurisdictions and forming a focal point in delivering the final judgment has been one of the most challenging parts in the Leniency applications. Further, the applicant’s involvements in the cartel in dominating the market and prices also have to be taken into consideration while fixing the amount of fine. Nevertheless, the involvement of the top management of the undertaking in forming a cartel shakes the foundations of the compliance mechanisms adopted by the undertaking.

Importance of compliance mechanism in determining the deterrence

Compliance methods are the steps taken by the undertaking to make the employees aware of the consequences of the formation of a cartel. If the employee of a firm engages in forming a cartel after taking steps to adhere against anti-competition practices the intensity of the deterrence is affected by the level of its compliance. Beckenstein and Gable, antitrust economists found in a survey with the independent and in-house US antitrust practitioner’s that ‘frequency of violations of the Sherman Act and on the causes that led firms to commit them’ that the ignorance of the law and ‘ambiguity in law’ were the prominent reason for the anti-competitive practices. The Nielsen and Parker research exhibit a market-oriented result stating that the compliance level is determined by the scale of business operation. Thus, the larger the scale of the business more is the compliance mechanism required.

According to the Office of Trade Fair’s report on ‘The impact of competition interventions on compliance and deterrence’ the three basic pillars of compliance are ‘knowledge and awareness of competition law, sanctions and enforcement, and voluntary compliance measures’ respectively. Knowledge and awareness help the employees of the firms in limiting their activities to dominate the market. It also helps the undertakings to avoid any breach in the anticompetitive practice and also to keep a track of the legally identified risk areas. It is interesting to note that the liability of the infringement by the subsidiary companies rests with the holding company. Sanction and enforcement encourage the management to ensure to have a strong compliance mechanism to prevent the undertaking against the penalty. Lastly, voluntary compliance measure is the measures taken by companies to implement the agenda to build a strong compliance network within the undertaking. Leniency policy is one of the most important tools for an undertaking in determining the deterrent effect.

It has been questioned by many jurists if the companies having taken strong compliance mechanisms granted heavy discount in fines in leniency programme is justified or not. The steps taken by the Commission in deciding the fines of the Leniency application clear that compliance cannot be taken as a sole method to get discount as the undertakings can set up a compliance method after fling the Leniency application to avail the discount in fines. In the case of Arriva, no discount in fines was granted as the Office of Trade Fair found during the investigation that the senior managers trained in the compliance programme were actively involved with the cartel. Thus, by making a logical analysis between the deterrent effect and compliance programme adopted by an undertaking it can be deduced that the compliance is an effective tool in determining the credibility of measures taken by an undertaking to curb any anti-competition practice but it is an easy tool for a company to escape from the heavy fines.

Conclusion

To conclude leniency and compliance form the part of the same thread to escape a heavy fine. However, compliance may be taken as an excuse to be granted a discount in fines only in certain exceptional cases where the top management is not involved in the cartel and the undertaking has taken sufficient means to comply with the leniency policy. The effect of deterrence can be determined if the undertaking filing the leniency application suffers a loss in production after the payment of the fine. Thus, the grant of heavy discount in fine is not justified when the undertaking has taken sufficient compliance mechanisms to prevent the formation of a cartel. The effect of deterrence after granting heavy discounts in fines can be described in the words of Robert McNamara, an American business executive, ‘One cannot fashion a credible deterrent out of an incredible action.’

Correlation of Competition and Efficiency

The relationship between competition and stability is also ambiguous and dominated by two schools of thoughts in theoretical literature: “competition-fragility” and “competition-stability” hypotheses. The competition fragility hypothesis (also called as franchise value paradigm), states that increased competition among banks leads to greater banking risk-taking and thereby, greater financial fragility. This is because intense bank competition results in a reduction in market power as well as profit margin, which weakens the franchise value of banks. Therefore, in order to cover the losses from the decline in the franchise value, banks will have greater incentives to take on more risks for profits. This view is in literature theoretically modeled by Furlong and Keeley (1989) and Keeley (1990). Using a model of risk-taking by banks with two periods and two states, Keeley (1990) shows that as competition increases in the banking market, risk-taking by banks also increases and becomes contagious. Allen and Gale (2000) corroborate this finding in a model of competition and risk-taking aimed at demonstrating the agency problem.

They pointed out that when firms are debt-financed (e.g. deposits for banks), managers acting in the interest of the shareholders have an incentive to take excessive risk since the manager’s performance is assessed based on quarterly returns, with debt holders bearing the downside risk while the shareholders benefit from upside potential return. As a corollary, Hellman et al., (2000) noted that stiff competition leads to financial institutions making riskier investments in order to generate sufficient profits for shareholders or in order to maintain their market share, thereby engendering financial stability. Besanko and Thakor (1993) show that increased competition leads banks to take greater risk because of eroding the informational rents initiated from relationship banking activities. This leads banks to decrease their incentives to screen potential borrowers, thereby, resulting in decline in credit quality of banks. As a general view of this hypothesis, deregulation which results in more bank entry and competition, leads to greater fragility. Likewise, Murdock and Stiglitz (2000) assert that more competition with lower bank margins can have a negative impact on prudent behaviour of banks, thereby, resulting in more risk taking. The competition fragility hypothesis thus argues that increased competition leads to greater risk taking by banks and thereby greater fragility in banking system. In other words, higher levels of competition, increase instability risk.

The competition-stability hypothesis of Boyd and De Nicolo (2005) on the other hand, assumes competition in both loan and deposit sides of the market. Focusing on the deposit side of the balance sheet, it is assumed that banks can earn higher rents since they pay lower deposit rates in less competitive markets. However, in a moral hazard environment, as in Stiglitz and Weiss (1981), on the lending side of the market, banks can charge higher interest rates to borrowers in a less competitive market. The higher borrowing rates may enhance the risk-taking behaviour of banks and thus, leading to an increase in the default risk of banks. This view, which is also called the ‘risk shifting’ paradigm, generally suggests that higher levels of competition results in more, rather than less stability.

Martinez-Miera and Repullo (2010) extend the Boyd and De Nicolo model by introducing imperfect correlation across borrowing firms’ default probabilities. As in the Boyd and De Nicolo model, their model also covers “risk shifting effect”, in the sense that more competition leads to lower loan rates, lower default and bankruptcy risk and lower risk-taking by banks. However, because their model allows for imperfect correlation across firms, it suggests the existence of “margin effect”, which purports that lower loan rates decrease overall bank revenues, and therefore, this would probably lead to greater bank risk-taking and bank failures. Thus, the resulting net effect between bank competition and financial stability is not clear, since these two effects work in opposite directions. Specifically, based on Martinez-Miera and Repullo (2010) model, the margin effect is shown to dominate the risk-shifting effect in more competitive markets, implying that more competition in a market increases bank risk-taking, and thus, results in greater financial fragility. On the other hand, the risk shifting effect is shown to dominate the margin effect in a more concentrated banking market, suggesting that increased competition leads to lower bank risk-taking and bank failure risk in such markets.

In short, the competition stability hypothesis argues that competition improves financial system stability due to its effects on lowering lending rates thereby reducing probability of default and consequently systemic risk (Nicolo & Jalal & Boyd, 2006). Higher levels of competition therefore result in more (rather than less) stability.

The relationship between competition and efficiency in banking is not so clear-cut and empirical findings are mixed. For instance, Beck and Hesse (2006) using bank-level data set on the Ugandan banking system during 1999-2005, found that market structure played a limited role in determining bank efficiency in Uganda. Instead, the found that bank-level characteristics, such as bank size, operating costs, and composition of loan portfolio explained a large proportion of cross-bank, cross-time variation in spreads and margins.

Banyen & Biekpe (2020) examined the causal relationship between bank competition and efficiency in five regional economic zones of Africa over the 2007–2014 period using data from 405 banks from 47 African countries. The results show a steady rise in bank competition and efficiency in Africa and the five sub-regional markets overtime. The results also support the quiet life hypothesis in Africa, especially in the East African Community, Arab Maghreb Union and Southern African Development Community.

Moyo (2018) investigated the relationship between competition, efficiency and soundness in the South African banking sector. The study used a data set of 17 local and international banks for the period 2004–2015 and stochastic frontier models to analyse efficiency. They found that the impact of competition on efficiency depended on the measure of competition used. When using the Lerner index there was a negative effect of competition on efficiency while the opposite was true when using the theoretically robust Boone indicator.

Buchs and Mathisen (2005) assessed the degree of bank competition and efficiency with regard to banks’ financial intermediation in Ghana. Using panel data, they found evidence for a non-competitive market structure in the Ghanaian banking system, which they opined could have been hampering financial intermediation. The authors argued that the structure, as well as the other market characteristics, constitutes an indirect barrier to entry thereby shielding the large profits in the Ghanaian banking system.

Schobert (2008) used quarterly data for Czech banks to investigate the relationship and causality between competition and efficiency. Using the Granger-causality-type analysis, the findings supported a negative causality only running from competition to efficiency. Based on the results, the author rejected the intuitive ‘quiet life’ hypothesis and concluded that a negative relationship existed between competition and efficiency in the Czech banking system.

Using a unique database for 74 countries and for firms of small, medium, and large size, Demirguc-Kunt, et al (2004) assessed the effect of banking market structure on access of firms to bank finance. They found that bank concentration increases obstacles to obtaining finance, but only in countries with low levels of economic and institutional development. They noted that the effect is exacerbated by more restrictions on banks’ activities, more government interference in the banking sector, and a larger share of government-owned banks.

Competition and Monopoly Power

Introduction

Current business opt to exist mainly in monopoly form so as to secure a large percentage of the market. Existence of these firms may be due to state decisions that privilege some businesses from competition (Foss & Klein, 2018). Such firms operate in less competition and goods have no substitutes. However, these enterprises cause a decrease in economic development due to saturation of supply in less fields.

Klein’s View of Monopoly

Klein’s view monopolies as corporations that are secured by the state to solely provide certain goods and services. He argues that such markets are characterized by few sellers but a large margin of buyers (Foss & Klein, 2018). Klein’s conjecture is that monopolists obtain their pricing methods from substantial sources such as, if the seller possess one unit of the good (Amir, Gama & Maret, 2019), if there exists multiple choices of the goods or if multiple sellers have the same reservation prices.

According to Klein, the state influences creation of monopolies in several ways. For instance, the government may provide patent rights of ownership to specific firms (Foss & Klein, 2018). The state also may offer exclusive grants, licenses and charters to businesses or even provide tariffs and quotas to some corporations.

Solution to Monopolies

In order to restrict existence of incumbent firms, Klein argues that the government may opt to reduce barriers to entry of firms in the market. He also argues that the government should pave way for business and not to interfere with such operations.

Klein claims that the anti-trust policy is an ‘ex post facto’. He affirms that the policy is only suitable for only an available relevant market which is practically hard to define (Kaiser, 2018). He argues that the strategy is long lasting only that firms are dynamic and keep changing over time.

I concur with Klein’s contend on monopolies. He assesses the advantages of such syndicates as well as their impact on business economy in the long run. For an efficient business society, competition is critical (Foss & Klein, 2018). Therefore, the government should opt to advocate for many businesses to ensure a diverse business environment.

Conclusion

Competition is a key factor that navigates the course which businesses take. Therefore, existence of monopolies despite their essentialness, should be limited. This helps create an advanced business economy full of competitive ideas that help yield a better society.

References

1. Amir, R., Gama, A., & Maret, I. (2019). Environmental quality and monopoly pricing. Resource and Energy Economics, 58, 101109.
2. Foss, K., Foss, N. J., & Klein, P. G. (2018). Uncovering the hidden transaction costs of market power: A property rights approach to strategic positioning. Managerial and Decision Economics, 39(3), 306-319.
3. Kaiser, B. (2018). Antitrust and Regulation in American Economic History. The Oxford Handbook of American Economic History, 2, 325.