Slides for SA Comp Pol.pdf

ECON202: MARKET STRUCTURE & MARKET POWER (cont’d) Economic Concentration & Competition Policy in SA Market concentration in SA – historical factors: SA economy’s roots in mining → conglomerates Heavy govt involvement in the economy (parastatals, assistance to industry) Racial...

ECON202: MARKET STRUCTURE & MARKET POWER (cont’d) Economic Concentration & Competition Policy in SA Market concentration in SA – historical factors: SA economy’s roots in mining → conglomerates Heavy govt involvement in the economy (parastatals, assistance to industry) Racial discrimination (land, enterprise, labour) Inward-looking policies & market isolation Small market size → concentration levels for SA industries are high i.e. many sectors dominated by a few big firms Competition law & authorities in SA: Competition Act (No. 89 of 1998) → Competition Commission www.compcom.co.za → Competition Tribunal www.comptrib.co.za → Competition Appeal Court www.compcom.co.za/the-competition-appeal-court-rules/ Prohibited practices (Chp 2 of Act) Restrictive horizontal practices prohibited (firms sell similar product) → must not prevent/lessen competition → no price fixing no dividing markets Restrictive vertical practices prohibited (1 firm supplies other firm input) → must not prevent/lessen competition → no minimum resale P  Abuse of a dominant position e.g. → excessive P → require/induce supplier or customer to not deal with competitor → refuse to give competitor access to essential facility when economically feasible to do so Firm is considered ‘dominant’ in mkt if: has at least 45% of mkt has at least 35% but less than 45%, unless it can show it does not have mkt power has less than 35% but has mkt power Merger Control (Chp 3 of Act) Horizontal / Vertical mergers above a threshold need to notify Comp Comm. Competition Commission will consider: → prevent/lessen competition? → technological, efficiency or other pro-competitive gain? → public interest grounds? South African competition policy: main goal: free & competitive business environment (allocative efficiency) also: macro-economic goals / public interest “The purpose of this Act is to promote and maintain competition in the Republic in order – (a) to promote the efficiency, adaptability and development of the economy; (b) to provide consumers with competitive prices & product choices; (c) to promote employment and advance the social and economic welfare of South Africans; (d) to expand opportunities for South African participation in world markets and recognise the role of foreign competition in the Republic; (e) to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and (f) to promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged persons.” Economic framework Structure-conduct-performance (SCP) Analytical approach *1* Correct definition of mkt. → product mkt → geographical mkt Defn too broad → underestimate concentration Defn too narrow → overestimate concentration Concentration Levels Indicate market power of firms How to measure for competition policy purposes? Concentration indices measure: → scarcity of firms → inequality in size of firms  Four-firm concentration ratio (CR4) shows how much of an industry is dominated by the biggest 4 firms. e.g Sales Firm 1 R150m Firm 2 R100m Firm 3 R80m = R400m Firm 4 R70m Firms 5-25 R50m TOTAL R450m CR4 = R400m ⇒ 88.9% R450m Problem: 2 industries with same CR4 can behave differently due to firms not taken into account. Herfindahl-Hirschmann index (HHI) HHI = sum of squared market shares for all firms in market e.g. 5 firms prior to merger: Firm 1 - 40% of market Firm 2 - 30% Firm 3 - 20% Firm 4 - 9% Firm 5 - 1% HHI = (402 + 302 + 202 + 92 + 12) = 2982 ⇒ Now assume 3 & 4 merge: Firm 1 - 40% Firm 2 - 30% Firm 3 - 29% Firm 4 - 1% HHI = 3342  HHI varies from near zero (perfect comp) to 10 000 (monopoly) American merger guidelines: 0 → 1000 = unconcentrated mkt 1000 → 1800 = moderately concentrated 1800+ = concentrated Barriers to entry Threat of entry disciplines firms Developing countries → govt regulation ⇒ competition policy should focus on removing barriers