Predatory Pricing Reform Rides the Marrakech Express

 

As I noted yesterday, last week the 13th Annual Conference of the International Competition Network (ICN) released two new sets of recommended best practices.  Having focused on competition assessment in my prior blog, I now turn to the predatory pricing recommendations. 

Aggressive price cutting is the essence of competitive behavior, and the excessive application of antitrust enforcement threatens to deny consumers the benefits of lower prices and to the extent it chills such discounting.  That is why the U.S. Supreme Court’s Brooke Group decision, which limited predatory pricing    

As then FTC Chairman Tim Muris observed in 2003, in highlighting the importance of combating government-imposed competitive restraints, “[a]ttempting to protect competition by focusing solely on private restraints is like trying to stop the flow of water at a fork in a stream by blocking only one of the channels.  Unless you block both channels, you are not likely to even slow, much less stop, the flow. Eventually, all the water will flow toward the unblocked channel.”  Indeed, anticompetitive government regulations that restrict entry, protect state-sponsored firms, and otherwise dampen the competitive process are legion, and widely viewed as imposing far greater harm to consumer welfare than the purely private restraints traditionally condemned by antitrust.  Because they operate openly and are backed by the enforcement power of government, public restraints, unlike private restraints, cannot be undermined by market forces, and thus are far more likely to have sweeping and harmful long-term effects. 

The FTC and other competition agencies have employed “competition advocacy” to argue against particular anticompetitive government restrictions, but those efforts historically have been limited in number, scope, and effectiveness.  Despite the huge potential welfare benefits from lifting anticompetitive restrictions, those restraints typically are the fruits of successful lobbying by private beneficiaries of competitive distortions, or by “public interest” groups which trust rule by government fiat over market forces.  Moreover, consumers at large are generally ill-informed about regulatory harms and the costs to organize them in favor of reform efforts are prohibitive.

Recently, however, international organizations, including the Organization for Economic Cooperation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD), and the World Bank, have stepped forward to highlight the costs of public sector regulatory restraints and to help competition agencies spot and advocate against different sorts of restrictions.  Building on these initiatives (and in particular the OECD’s Competition Assessment Toolkit), the ICN’s Advocacy Working Group drafted Recommended Practices on Competition Assessment (RPCA) that the ICN adopted and released as a new consensus product in Marrakech.

The RPCA apply broadly to proposed and existing legislation, regulations, and policies that may restrict competition.  Recognizing that government competition agencies differ greatly in their capacities and ability to influence other government bodies, the RPCA note that competition assessments can take many forms, ranging from recommendations drawn from application of general economic theory to resource-intensive competition impact assessments, with many variations in between.  The RPCA stress that they are intended to provide guidance, not require particular assessments, and that government entities other than competition agencies can carry out valuable assessment work. 

The RPCA provide a comprehensive “soup to nuts” template for agencies tasked with assessments, comprising both process-related and substantive elements:

  • A competition assessment should identify an existing or proposed policy that may unduly restrict competition and evaluate its likely impact on competition;
  • Competition agencies should advocate for a policymaking environment that promotes consideration of competition principles (including delineation of legal authority and openness to outside sources of advice);
  • A transparent process should be used to conduct assessments;
  • Agencies should focus assessments on types of restrictions that pose the greatest threat to competition, and design selection criteria (which are described) to prioritize competition assessment among other advocacy activities;
  • Agencies should consider institutional arrangements and relationships with policymakers in building assessment programs (practical advice designed to enhance the political viability of assessments);
  • Agencies should consider whether a competitive restriction is reasonably related to the goals of the policy under review and whether the policy goal could be achieved without harming competition or in a less restrictive manner;
  • A competition assessment should start by identifying and considering the goals and objectives of the policy in question and review prior work in the area;
  • Agencies should consider how a policy’s restrictions are likely to influence the market structure and behavior of firms and customers in the market or neighboring markets;
  • Once a restraint and its possible competitive effects have been identified, agencies should evaluate the likely competitive effects on the basis of sound economic theory, and, where feasible, on empirical evidence; 
  • Agencies should carefully consider the form of competition assessment most appropriate for a particular situation (i.e., agencies should be free to issue a formal or informal opinion with flexibility as to the manner of delivery);
  • Agencies should seek to deliver a competition assessment in a timely fashion; and,
  • Agencies should engage with interested third parties (e.g., policy organizations and domestic peer agencies) to promote policymakers’ consideration of an assessment.

The RPCA shine particularly bright in providing a concise yet nuanced evaluation of the sorts of restraints that are most likely to undermine the competitive process, including a cogent discussion of barriers to entry, exit, or expansion within a market; of policies that control how firms are allowed to compete in a market; of policies that shield firms from competitive pressure; and of policies that control the choices available to consumers.  The RPCA also highlight the value of attempting, where feasible, to derive quantitative welfare estimates of the costs of particular restrictions, based on a neutral metric and other tools of economic analysis.  Over the next year further work will be done on cataloguing existing case studies that contain welfare estimates and on the derivation of a metric.

The RPCA are no short-term panacea, but rather a practical manifesto for long-run regulatory reform.  They shed a useful spotlight on categories of economically harmful regulations that occur in a wide range of countries – not just in historically state-dominated economies.  Rent-seeking is ubiquitous, and regulations too often reflect wealth-destructive competitive limitations masquerading in public interest dress in all sorts of jurisdictions, including the United States.  Given the recent rapid rise in U.S. regulatory activity, the identification of U.S. federal and state government rules that undermine competition surely will remain a target-rich zone for competition advocates.  It may be hoped that, over time, when the political tides yield greater support for economic liberty, the lessons of Marrakech may point the way to repealing welfare-destructive regulatory impositions across the globe.