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Making business fair

PUBLISHED : Wednesday, 07 December, 2011, 12:00am
UPDATED : Wednesday, 07 December, 2011, 12:00am

Why we need competition laws

Competition is good because it benefits the consumer. Companies have to make good products at a fair price or consumers will simply buy other products. Yet sometimes companies get so big and powerful that they no longer face any competition. It is called a monopoly.

This enables a company to set whatever prices it wants, which harms the interests of consumers. That's why we need competition laws - to ensure that markets don't end up being dominated by monopolies.

How competition laws work

Like most laws, competition law limits or forbids certain actions. There are mainly three types of actions that are subject to legal scrutiny:

- Anti-competitive agreements

Example: If a big company asks one of its suppliers not to supply a smaller company.

- Abusive behaviour

Example: If a big company cuts its prices so that a smaller company is forced out of business.

- Mergers

Mergers are when companies buy parts or the whole of another company. A joint venture is when two or more companies work together for a common goal. Both of these can lead to a monopoly. But the companies involved can defend their plan by proving their merger will benefit the consumer.

History and development

Anti-monopoly laws can be traced back to Roman times and the Middle Ages, when prices of grain and salt were so high that the government needed to intervene. In Britain, the earliest competition law cases date back to 1599.

This kind of law became especially important in the late 1990s and 2000s. By 1980, 40 nations had such laws. By 2008, the number rose to more than 100, including China.

To have a closer look at how the law works, we will examine the competition (anti-trust) legislation of two countries. The United States has some of the most established competition legislation in the developed world. Brazil, meanwhile, is an example of a developing country with relatively recent competition laws.

United States

The United States was one of the first countries to establish formal competition laws with the enactment of the Sherman Act. Despite its initial success, the Sherman Act was designed only to target individual firms. This flaw was quickly exploited by the invention of the single holdings company. A holdings company is a parent company which owns several smaller companies. These smaller companies can then pretend to be independent firms.

To tackle this problem, the Clayton Act and the Federal Trade Commission Act were enacted in 1914. The new legislation allowed competition laws to be more flexible and more general to cope with a rapidly changing business world. This model is now used as a blueprint for competition laws around the world.

Brazil

Although the Conselho Administrativo de Defesa Economica (Cade) was established back in the 1930s, anti-competitive laws were not in place until the 1980s, when they became part of Cade's policy. The laws have three objectives:

- Repressive Role

If the council finds a company has broken the law and harmed competition, it will be fined.

- Preventive Role

Before they can merge, companies have to apply to the council for approval.

- Education

The council is responsible for educating local businesses about the laws and regulations.

Microsoft

Let's take a look at a famous case. In the 1990s, the US government and several European countries all filed civil suits against Microsoft for allegedly abusing its monopoly in the PC market.

Microsoft integrated its Internet Explorer web browser into Microsoft Windows. This meant that Windows users were discouraged from using other browsers, because Internet Explorer was already installed.

The judge claimed that by pushing Windows users to use only one browser, Microsoft was stifling innovation, harming both the consumer and the industry. But opponents argued that it was only by earning enough money that Microsoft could afford to make its innovations. They also said that because so many people would be forced to use Microsoft products, the products would be cheaper and this would benefit the consumer.

Hong Kong

The government submitted a competition bill to the Legislative Council in early March. It is a draft of a full competition bill that will apply generally to all businesses in Hong Kong. The bill's structure is similar to other competition laws across the world. It has what it calls the three 'conduct rules'. The first deals with 'agreements, decisions and concerted practices' (i.e. anti-competitive agreements). The second rule is concerned with 'abuses of substantial degree of market power in a market' (i.e. abusive behaviour). The third regulates mergers.

A competition commission would be set up to deal with complaints regarding breaches of the law. A competitions tribunal consisting of judges from the High Court will adjudicate disputes. Companies will be subject to a maximum penalty of 10 per cent of their global turnover if they are found to have violated the law. Damages or interim injunction orders (when the court orders some action to be performed) can also be imposed. The chief executive and the commission have the right to exempt certain industries from the law. Selected sectors (such as water and electricity) are also exempt.

Critics highlight the bill's omission of a formal objective statement of the kind found in the US Clayton Act and the EU Competition Act. They say the law seems more concerned with the ability of smaller firms to compete. Its lack of formal objectives will likely pose a challenge for the courts.

Conclusion

With competition laws being introduced globally, it has become inevitable and necessary for Hong Kong to enact its own competition laws.

However, in drafting such legislation, the objectives of the policy must be defined clearly in a way that fits the social needs of the territory.

It is hoped that debates in Legco over the following weeks will help clarify the issues.

What we should be striving for in a competition law is a state of affairs where our society is the ultimate winner.

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