Honest competition

PUBLISHED : Thursday, 10 February, 2011, 12:00am
UPDATED : Thursday, 10 February, 2011, 12:00am

As Hong Kong debates the introduction of a competition law regime, it is important to remember why this is such a good idea. British experience suggests that, even in an economy founded on free markets and competitiveness, a system of competition enforcement can bring substantial benefits.

An efficient economy will have competition as a key component. But competition is not an end in itself. By providing strong incentives for businesses to develop and innovate, competition encourages efficiency and boosts productivity. Consumers benefit from this process through increased quality, availability and choice of products/services, and lower prices.

These propositions are largely uncontroversial. But it is sometimes said that an economy that is already competitive does not need a system of enforcement to oversee the operations of the market; the process of rivalry can be left to look after itself. This is, in my view, misguided. Competitive markets are ones where customers, not governments, determine which firms prosper. But government does have its role to play.

As Adam Smith observed, competing for business is hard work, and firms are tempted to avoid the rigours of competition by co-operating with their rivals. There is a constant temptation to use illegitimate means to force exit, block entry or limit the effectiveness of rivals. Governments have a key role to play in policing the rules of the game - making sure that firms win by outperforming their rivals, not by conspiring with them against their customers.

Of course an overzealous or bureaucratic regime would not be beneficial, but a well-designed system based on the rule of law, with strong judicial oversight, should avoid such excesses; it would be naive in the extreme to assume that a policy of laissez faire would suffice and that competition law was unnecessary.

So, if some oversight of market forces is needed, what scale of harm are we talking about? In Britain, cartels have been found in various industries, including banking, construction and education. Cartels are estimated to cost the British economy at least GBP1 billion (HK$12 billion) annually, with overcharging for cartelised goods typically around 20-25 per cent; and that is even with a relatively strong and effective regime, which claims annual direct benefits to consumers from cartel prosecution equivalent to about HK$1 billion.

More insidious is the abuse of market power. Abusive conduct has been uncovered in a range of British markets such as energy, bus transport and the supply of pharmaceutical products. Market power leads to inefficient prices, estimated in Britain to cost as much as 1 per cent of gross domestic product, that is, the equivalent of some HK$175 billion annually. But these costs would be dwarfed if dominant firms were allowed to stifle innovation. Small businesses play a key role in oiling the wheels of economic activity, and are a vital source of innovation and growth. Effective competition law is particularly helpful to these small businesses, who have the most to lose from abuse by major operators.

Competition enforcement sends a strong signal of deterrence, which greatly multiplies the effect of direct enforcement. This arises not only through fines and penalties; it is often the shaming effect of bad publicity that resonates most loudly.

Many of the worst restrictions on competition come from the effects of regulation and other governmental measures that make market entry difficult. Competition authorities are important and vocal advocates for easing such restrictions, and can help identify likely bad effects on competition of new governmental measures.

In conclusion, this is an important opportunity for Hong Kong to show its alignment with its trading partners, the vast majority of whom apply competition law, and to enhance its position in the worldwide market place. It is also a chance to bring important guarantees for small businesses and consumers, while allowing efficient businesses of all kinds to grow and prosper.

Peter Freeman, CBE, QC, is chairman of Britain's Competition Commission