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COMPETITION POLICY IN TRANSITION:
LESSONS FROM PERU Barak Y. Orbach*
Abstract
This paper studies the case of Peru in order to analyze prevailing misconceptions
regarding the role of competition in transition economies. The impacts of these
misconceptions on the transition to a market economy are examined and assessed. In
particular, the role of potential competition and the belief that a review of potentially
anticompetitive mergers would entail inappropriate bureaucratic control of private
economic activities are examined. The paper provides a general framework to analyze
competition policy in transition economies.
1. Introduction ............................................................................................................................................. 2
2. Why is Competition Policy Important in Transition Economies? ...................................................... 6 2.1. The Market Transition and Competition Policy .............................................................................. 6
2.1.1. The Doubts.................................................................................................................................. 6 2.1.2. The Validity of the Doubts .......................................................................................................... 9
2.2. The Importance of Competition Advocacy and Competitiveness Promotion................................ 12 2.2.1. The Public Sector...................................................................................................................... 12 2.2.2. The Private Sector..................................................................................................................... 15
2.3. The Role of Enforcement............................................................................................................... 16 3. Indecopi: An Umbrella Agency for Promotion of Free Market ........................................................ 21
* SJD Candidate and John M. Olin Fellow in Law and Economics, Harvard Law School. This paper was largely written during my visit in Lima in the summer of 1999. I would like to thank Indecopi and PromPerú for their hospitality. For conversations, comments, and criticism I am grateful to Beatriz Boza, Armando Cáceres, Maureen Cunningham, Alejandro Falla, Louis Kaplow, Welby Leaman, Ross Lipson, Lauro Locks, and Mariana Sahurie Galmidi. For Financial support I thank the John M. Olin Center for Law, Economics, and Business at Harvard Law School.
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4. The Conceptual Framework of Umbrella Agencies ........................................................................... 24 4.1. Practical Impediments to Policy Implementation .......................................................................... 24 4.2. Antitrust ......................................................................................................................................... 26 4.3. Consumer Protection ..................................................................................................................... 29 4.4. Barriers to Entry ............................................................................................................................ 31 4.5. Intellectual Property....................................................................................................................... 36
5. Lessons from Peru’s Competition Policy ............................................................................................ 38
1. Introduction
In Lima there are over 250,000 cabs that are faced with aggressive competition and
provide cheap and good services. Less convenient but also much cheaper are the combis,
minibuses that run on fixed routes and stop everywhere on their way to pick up or to drop a
passenger who pays about 30 cents a ride. Some of the taxi and combi drivers may not
have heard about Adam Smith but, nonetheless, on the road they seem to understand the
rules of competition and capitalism. These drivers, as the rest of their peers from the
Peruvian informal sector, symbolize the new forces of competition in Peru.1
These drivers, however, do not represent all the players on the Peruvian scene and
even they forget several economic principles when pushing a cart at the supermarket or the
department store. In Peru, as in other transition economies, misconceptions and
misunderstandings of the role of competition and its mechanisms are widespread. This
phenomenon hinders the expansion of competition in the markets and is often coupled with
1 For a comprehensive study of the informal sector in Peru and its economic significance, see HERNANDO DE SOTO, THE OTHER PATH: THE INVISIBLE REVOLUTION IN THE THIRD WORLD, (El otro sendero, trans., 1989). See also: Enrique Ghersi, The Informal Economy in Latin America, 17 CATO J. 99 (1997) (Awarding the Peruvian informal sector for the success of Fujmori’s reforms); William E. Kovacic, Designing and Implementing Competition and Consumer Protection Reforms in Transitional Economies: Perspectives from Mongolia, Nepal, Ukraine and Zimbabwe, 44 DEPAUL L. REV. 1197, 1206-1209 (1995) (Arguing the importance of the informal sector in designing competition policies in transition economies).
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another obstacle to expansion: opposition from those who understand that competition will
cause them losses. Indeed, scholars and practitioners who have encountered these
impediments to competition have stressed the goals of assimilating economic norms and
fostering the public’s confidence in capitalism.2 Simply put, this emphasis is directed to
lower the costs of transition to a market economy. When the new norms are unknown or
distrusted, the social costs of adapting to these norms go up. This bottom line, however, is
frequently too obscure in the literature that is generally focused on the potential impacts of
interest groups upon the transitional processes.3
This paper studies various implications of misconception costs in designing and
implementing competition policy. In misconceptions I include all the forms of imperfect
information about the dynamics of competition and the role of the state in the competitive
process. The basis of my analysis is the necessity to identify and treat misconception costs
separately from other types of transition costs. For example, in the transition to a market
economy there may be practical differences between reactionary interest groups that are
threatened by the loss of anticompetitive rent and those groups that oppose the reforms
because they misunderstand the advantages therein. Likewise, if regulating competition is
2 See, for example, Bernard Black and Reinier Kraakman, A Self-Enforcing Model of Corporate Law, 109 HARV. L. REV. 1911 (1996); A.E. Rodriguez and Malcolm B. Coate, Limits to Antitrust Policy for Reforming Economies, 18 HOUS. J. INT’L L. 311 (1996); A.E. Rodriguez and Malcolm B. Coate, Competition Policy in Transition Economies: The Role of Competition Advocacy, 23 BROOK. J. INT’L L. 365 (1997); Kovacic, Designing and Implementing Competition and Consumer Protection Reforms in Transitional Economies, ibid; WORLD BANK AND OECD, A FRAMEWORK FOR THE DESIGN AND IMPLEMENTATION OF COMPETITION LAW AND POLICY (1999).
3 Transition costs and, in particular, those that are associated with losses of agents, characterize every legal transition. Therefore, their analysis can be assisted to a large extent by the literature of legal transitions. This literature seems to be ignored by the contributors of the antitrust writing about transition economies. See, for example: Michael Graetz, Legal Transitions: The Case of Retroactivity in Income Tax Revision, 126 U. PA. L. REV. 47 (1977); Lawrence Blume, Daniel L. Rubinfeld, and Perry Shapiro, The Taking of
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mistakenly associated with the old regime of oppressive state intervention, such regulation
is likely to be faced with strong opposition. Or, a third instance, identifying that the
competitive Peruvian taxi drivers do not shop for lower gasoline prices may be useful in
devising a policy to promote competition in the gasoline sector.4
The case of Peru illustrates the formation of competition policy in transition
economies and the prevailing misconceptions in economies with no tradition of capitalism.
Comparing to other transition economies, Peru is distinctive in its efforts to promote
competition. However, the obstacles to competition in Peru are not substantially different
from those in other transition economies.5 To a large extent, misconceptions of
competition result from unfamiliarity with its dynamics and not from geographic or
national factors. The promotion of competition in Peru is carried out by an ‘umbrella
agency’ that concentrates various regulatory powers. This institutional structure, which is
common in transition economies, often creates interchangeability between various
functions that may affect the transition and the study of the Peruvian case may assist in
analyzing the case of other transition economies.
Land: When Should Compensation be Paid, 99 Q. J. ECON. 71 (1984); Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509 (1986).
4 Following the long years of price control, Peruvian consumers often underestimate the importance of price comparison in the formerly regulated industries. See, Beatriz Boza, The Role of Indecopi in Peru: The First Five Years, in PERU’S EXPERIENCE IN MARKET REGULATORY REFORM, 1993-1998, 3, 32 appendix 1 (Beatriz Boza ed., 1998) (Official advertising about the importance of comparing gasoline prices presents differences of up to 28% between different gasoline stations).
5 See BEN SLAY ED., DE-MONOPOLIZATION AND COMPETITION POLICY IN POST-COMMUNIST ECONOMIES (1996); William E. Kovacic, Getting Started: Creating New Competition Policy Institutions in Transition Economies, 23 BROOK. J. INT’L L. 403 (1997); William E. Kovacic, Antitrust and Competition Policy in Transition Economies: A Preliminary Assessment (unpublished working paper, 1999).
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I analyze and assess various types of misconceptions as they are reflected at
Indecopi, Peru’s competition and intellectual property agency. In particular, I argue that
certain misconception costs are generated by the mistaken belief that ex-ante review of
potentially anticompetitive mergers would entail inappropriate bureaucratic control of
private economic activities, and by overestimation of the effectiveness of potential
competition. These conceptual biases are prevailing in Peru but not necessarily in every
transition economies. Nevertheless, in other countries the same misconceptions may
appear in other forms, and an important key to the success of competition policy is to
acknowledge their implications. The existing literature is focused, among other things, on
the symptoms of the misconception costs. This paper examines the syndrome.
The paper is organized as follows. Section 2 examines the question of why
transition economies need competition policy and the main goals of a desirable policy.
This section also studies apparent misconceptions that affect Peru’s competition policy and
refers to various policy issues such as involvement in the privatization process and
jurisdictional conflicts with other regulatory agencies. Section 3 briefly describes the
functional structure of Indecopi. This description, albeit technical, is required to
understand the conceptual framework of umbrella agencies. Section 4 examines several
ties of the conceptual framework and suggests a few refinements. Section 5 contains
concluding remarks.
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2. Why is Competition Policy Important in Transition Economies?
2.1. The Market Transition and Competition Policy
2.1.1. The Doubts
Transitions and reforms always involve costs and social uncertainty; otherwise,
there would be no impediments to such changes.6 In terms of opportunity costs, this price
is negatively correlated to the amount of available resources: the more available resources
the state and the citizen have, the smaller the sacrifice they have to make in order to
complete a transition. In a nutshell, this is the starting point of the cost-benefit analysis of
legal transitions. On the benefit side, the traditional, promised gains from adopting
competition policy are preserving allocative efficiency and arresting wealth transfer from
consumers and to price fixers and monopolists.7
Putting aside price fixing and other conspiracies, it is often argued that these gains
are relatively minor in developing economies, whereas the costs of attaining them are high.
In many of these countries, there are no ‘robber barons’ who have acquired control over
6 The transition from one legal regime to another is equivalent in many respects to the switching from one technology to another when the consumers incur switching costs. Such cost may prevent the transition (switch) to a better legal regime (technology). See generally: Paul Klemperer, Competition when Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade, 62 REV. ECON. STUD. 515 (1995).
7 These views may contradict each other in several aspects but, nevertheless, seem to combine the main interpretations for the intent behind enacting antitrust laws. See ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978), at 15-71; Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L. J. 65 (1982). At least in the United States there is a third main view, asserting that the Sherman Act was passed at the behest of particular non-consumer interest groups, such as small firms. See George J. Stigler, The Origin of the Sherman Act, 14 J. L. STUD. 1 (1985); Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT’L REV. L. & ECON. 73 (1985).
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important industries through mergers and consolidations.8 On the contrary, one of the main
reasons for poor economic performance in many industries is the insufficient scale of
businesses. Therefore, it is often argued that a competition policy, which expands beyond
cartelization cases, may be undesirable because of its costs. Monitoring mergers and the
behavior of big businesses is costly for the state and imposes various transaction costs on
private parties. The private costs of these activities allegedly deter firms from increasing
efficiency and, therefore, socially such activities can be harmful. As for the problems arise
from price fixing and alike, these - so it is sometimes believed – do not require a
comprehensive competition policy, and can be tackled through specific legal mechanisms.
For these reasons, several scholars and policymakers argue that the costs of designing and
implementing competition policy at the expense of other possible activities are irrational at
the present stage of many transition economies.9
Peru is characterized by the described economic conditions and, therefore, it could
not avoid the debate over the desirability of enforcing the rules of competition. Peru is an
economy in transition, which is trying to release itself from the chains of bureaucrats and
regulators who led to a deep economic crisis.10 Peru’s 1998 GDP was estimated at $62.4
8 Matthew Josephson documented the role of the first mega industrialists in the US economy in his book THE ROBBER BARONS (1934). This book has gained much popularity and so has the phrase “robber barons.”
9 Paul E. Godek, One U.S Export Eastern Europe Does Not Need, 15 REGULATION 20, 21(1992) (“Exporting antitrust to Eastern Europe is like giving a silk tie to a starving man.”); Paul E. Godek, A Chicago-School Approach to Antitrust in Developing Economies, 43 ANTITRUST BUL. 261, 262 (1998) (“For developing countries … antitrust may be unnecessary and potentially harmful encumbrance.”); Robert D. Cooter, The Theory of Market Modernization of Law, 16 INT'L REV. L. & ECON. 141, 162 (1996) (“Developing nations can accomplish many goals of antitrust policy through free trade without the state creating an enforcement bureaucracy. An antitrust bureaucracy may even diminish competition in the pursuit of its own interests.”).
10 See Manuel Pastor Jr. and Carol Wise, Peruvian Economic Policy in the 1980’s: From Orthodoxy to Heterodoxy and Back, 27 LATIN. AM. RESEARCH REV. 83 (1992).
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billion (approximately $2,520 per capita).11 Not surprisingly, this modest scale of the
economy is reflected in insufficient economies of scale in most of Peru’s industries.
Businesses in Peru are generally based on trust rather than on contractual mechanisms
because the latter cannot be enforced without efficient, formal institutions, which were not
common in Peru for many years until recently. As a result, achieving economies of scale
through complicated contracts along the production and the marketing chains has been
almost impossible.12 The few industries that enjoy economies of scale are largely the
former state-owned companies, such as in the telecommunication sector,13 but there are also
a few notable entrepreneurs who succeeded to acquire efficient scale and, consequently,
11 It is noteworthy that this GDP presents a growth of more than 45% since 1991. To understand these figures a comparison may be useful. In 1998 the GDP per capita in the United States was approximately $31,500, in Germany $23,950, in Argentina $8,260, in Chile $5,140, in Mexico $4,750, in Russia $4,720, in Brazil $4,380, and in Bolivia $1,050. In Latin America, Peru is ranked 7th in the GDP per capita. The first is Argentina and the four countries that are ranked below Peru are Columbia, Ecuador, Paraguay, and Bolivia. THE ECONOMIST INTELLIGENCE UNIT, COUNTRY PROFILE: PERU, 1999-2000 (Nov. 1, 1999), at 24; THE ECONOMIST INTELLIGENCE UNIT, COUNTRY REPORT: PERU, 1ST QUARTER 1996 (Feb. 16, 1996), at 3. PROMPERÚ, ANALYSTS’ VIEW ON THE PERUVIAN ECONOMY (JUNE 1999), 102.
12 These impediments to economies of scale are especially dominant in the informal sector. There are no up-to-date estimates of the scope of the informal sector. In 1986, De Soto estimated that the equivalent of 38% of the GDP and 60% of man-hours worked took place in the informal sector. DE SOTO, THE OTHER PATH, supra note 1. For implications of the reliance on trust, see Allen Kaufman and Lawrence Zacharias, From Trust to Contract: The Legal Language of Managerial Ideology, 1920-1980, 66 BUS. HIS. REV. 523 (1992) (Studying the implications of the transition from trust to contract in the US); Lisa Bernstein, Opting our of the Legal System: Extralegal Contractual Relations in the Diamond Industry, 22 J. LEGAL STUD. 115 (1992) (Studying the required formality among diamond dealers as the market expands). See, generally, DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE (1990).
13 In 1994, Entel and Compañía Peruana de Teléfonos, the two national telecom companies, were auctioned to Telefónica Internatinal. Telefonica brought upon the industry a dramatic revolution by replacing the infrastructure and tripling the number of lines. Telefonica del Peru profits in 1998 were $202 million and its return on equity in 1998 was 8.2%. The government’s announcement in August 1998 on opening the long-distance telephony market to competition attracted many international investors to compete on the 13 offered concessions. See Emerging Markets Re-emerge, BUS. WEEK (July 12, 1999), 75; Telecommunications Update, 13(5) THE PERU REPORT & PERU BUSINESS DIGEST 57 (May 1999); THE ECONOMIST INTELLIGENCE UNIT, COUNTRY PROFILE: PERU, 1999-2000 (Nov. 1, 1999), at 16. See also infra note 21.
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market power.14 It would be fair to state that generally market power in Peru characterizes
the traditional regulated industries and has not been acquired as of yet by the free-market
forces.15 Therefore, many people in Peru, including in its competition agency, doubt
whether state investments in detecting acquisition and maintenance of market power are
justified.
2.1.2. The Validity of the Doubts
In general, the doubts concerning the allocation of resources for competition policy
concentrate on the enforcement of the competition rules. It is argued that the marginal
productivity of enforcing the rules is relatively low and, therefore, the resources should be
allocated to the more immediate needs of the transition. This view, often associated with
‘Chicago School,’ tends to ignore the anticompetitive effects of unilateral behavior and
barriers to entry as well as the connection between competition, innovative process, and
growth.16 Furthermore, the underlying presumption of this view is unsound. A viable
transition to a market economy requires competition in certain markets and conditions for
competition in others. A transition is about stimulating competitiveness and competition,
and the role of the state is to facilitate it by lowering the transition costs. Without a
competition policy aimed at removing barriers to competition in the marketplace, such as
transition costs, dramatic changes in market performance are unlikely.
14 A remarkable instance for these entrepreneurs is Ellen Wong who established the prominent supermarket chain in Peru. E. Wong is a family-run business which emerged from a corner store. See Sector Report: The Supermarket Business, 13(1) THE PERU REPORT & PERU BUSINESS DIGEST 21 (Jan. 1999).
15 The term “market power” is used in this paper in its traditional antitrust sense: the capacity to charge prices above the competition level. See William M. Landes and Richard A. Posner, Market Power in Antitrust Cases, 94 HARV. L. REV. 937 (1981).
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In transition economies, competition is a new concept. Its rules are not fully
familiar to most of the players in the private and the public sectors. From the players’
perspective, the processes of learning the new norms and adjusting to new market dynamics
are costly and, therefore, their incentives to do so are reduced. For example, consumers
may not be aware to the disadvantages of brand loyalty because switching between brands
was impossible or meaningless when markets were regulated. Thus, consumers sometimes
stick to branded products even in the case of homogeneous goods, such as noodles and non-
patented drugs. Acquiring ‘intuitions’ or ‘rational preferences’ regarding the reliance on
brands is costly for consumers and may outweigh the prospective saving. On the supply
side, suppliers of non-branded products do not have incentives to invest in advertising the
disadvantages of brand loyalty because of collective-action problems. The profits of such
investment are likely to spread among the suppliers of the non-branded goods regardless of
the identity of the investors in advertising. Therefore, it is rational not to invest and to
garner the profits of others’ investment.
In short, in the absence of state ‘subsidy’ for learning costs, there is a grave threat to
the success of the transition. Competition advocacy and other activities that facilitate the
assimilation of market’s norms present such a subsidy. In conducting these activities, the
state enjoys scale economies that other players in the economy lack, and overcomes the
collective-action problems that plague these players. Investment in such activities is one of
the major challenges of competition policies in transition economies.
16 See Godek, A Chicago-School Approach to Antitrust in Developing Economies, ibid; Herbert Hovenkamp, Antitrust Policy after Chicago, 84 MICH. L. REV. 213 (1985) (Surveying the flaws of this view).
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Indeed, the presence of transition costs may not impede the success of the transition
in many markets. Nevertheless, if the transition is partial because it failed in some other
markets, its general success is threatened.17 Under partial transition, the liberalized markets
cannot perform efficiently at least at their contact points with the non-liberalized markets.
These inefficiencies are likely to be expressed by subsidy of one market by another, by
non-economic relative prices, and by input substitution. For example, if product X is
produced with inputs A and B, the market for A is competitive, and the market for B enjoys
protectionist privileges (or is dominated by one firm), the relative prices of A and B will be
distorted. As a result, if the quality of product X depends on the ratio of inputs A and B,
the quality may be suboptimal because the use of A and B is affected by their distorted
market prices.
The success of the transition to a market economy depends, therefore, on the
creation of competition rules and the promotion of competitiveness.18 Allocation of
resources only to other important needs may provide a certain temporary relief but may also
perpetuate the current situation and hinder the transition.
17 See, generally, Kevin M. Murphy, Andrei Shleifer, and Robert W. Vishny, The Transition to a Market Economy: Pitfalls of Partial Reforms, 107 Q. J. ECON. 889 (1992).
18 For competition advocacy, see A FRAMEWORK FOR THE DESIGN AND IMPLEMENTATION OF COMPETITION LAW AND POLICY, supra note 2, 93-100; Rodriguez and Coate, Competition Policy in Transition Economies, supra note 2. For the new commitment of the Latin American economies to reduce the intervention of the state in the markets, see Albert Fishlow, The Latin American State, 4 J. ECON. PERS. 61 (1990).
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2.2. The Importance of Competition Advocacy and Competitiveness Promotion
To illustrate the need for competition policy in order to facilitate the transition to a
market economy, it may be useful to highlight widespread barriers to competition in the
public and the private sectors in Peru.
2.2.1. The Public Sector
The public sector in Peru is, in many instances, the protector of anticompetitive
practices and dominant positions. Price regulation and protectionism are still believed by
many officials to be socially desirable. Many judges and officials in the executive branch
neither understand basic economic principles nor care to learn.19 Furthermore, corruption,
which is not rare in Peru, frequently results from misunderstanding of public agents of the
issues at stake and not necessarily from pure greediness. When the anticompetitive and the
competitive alternatives of an administrative or judiciary decision appear to be socially
equivalent, taking bribes from an interested side is presumably Pareto optimal. These
problems, rooted in the old regime, are well fed by lobbying of interest groups, and cannot
be easily solved. Competition advocacy is intended to assist public agents in making
informed decisions that affect the competitive process.20 Still, despite the
acknowledgement in the importance of competition advocacy, in Peru as in other transition
19 For a study of judicial efficiency in Latin America, including Peru, See Edgardo Buscaglia and Thomas Ulen, A Quantitative Assessment of the Efficiency of the Judicial Sector in Latin America, 17 INT’L REV. L. & ECON. 275 (1997).
20 For competition advocacy in Peru, see Armando E. Rodriguez and Kelly A. Hoffman, Why is Indecopi Focused on Competition Advocacy? A Framework for Interpretation, in PERU’S EXPERIENCE IN MARKET REGULATORY REFORM, 1993-1998, 197 (Beatriz Boza ed., 1998).
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economies, there are ongoing debates over its role in the privatization process and in
general economic regulation.
(a) Privatization. An important part of the transition to a market economy is the
privatization of state-owned companies. Theory and experience show that privatization
renders higher efficiency and reduces the incentives for protectionist policies.21 The state,
however, is not the only ‘bad’ owner. Many privatized companies have monopoly power
and this is one of their main sources of attraction to investors. This source of attraction
does not undermine the healthy and beneficial effects of the privatization process that are
reflected in higher productive efficiency. Furthermore, it is the acquisition of market power
through bidding in the privatization process that is likely to yield high offers.22 However,
the extent of the acquired market power varies between the potential acquirers according to
their specific characteristics and this factor should play a role in privatization decisions.
For a major competitor, for instance, the privatized company presents more market power
than for a new potential player. Therefore, a present competitor is likely to pay more for
the company. Likewise, a potential entrant may also pay more than other potential
21 See John Vickers and George Yarrow, Economic Perspectives on Privatization, 5 J. ECON. PERS. 111 (1991); Andrei Shleifer, State versus Private Ownership, 12 J. ECON. PERS. 133 (1998); WORLD BANK, BUREAUCRATS IN BUSINESS: THE ECONOMICS AND POLITICS OF GOVERNMENT OWNERSHIP (1995). The 1994 privatization of the national telephone companies in Peru, discussed in supra note 13, provides an arresting example for the efficiencies that brought upon by privatization:
1993 1998 The Change No. of fixed telephone lines (‘000) 660 2,012 +205% No. of public telephones (‘000) 8 43 +437.5% Average wait for installation of fixed line 118 months 45 days -98.75% Average cost of connection of fixed line $1,500 $170 -88.7% Source: THE ECONOMIST INTELLIGENCE UNIT, COUNTRY PROFILE: PERU, 1999-2000 at 16
(In 1998, the access to the Internet in Peru was still limited and expensive in American terms). 22 Telefonica, for example, paid for Peru’s national telephone companies about $2 billion in 1994. The
present market value of Telefonica del Peru is estimated in $3.425 billion. Emerging Markets Re-emerge, BUS. WEEK (July 12, 1999), 75.
14
acquirers because by acquiring its prospective competitor, rather than establishing a new
business, it assures a dominant position. In short, the identity of the acquirer is important
and not only its willingness to pay.
In general, when a bidder is in the market or has incentives to enter the market even
without acquiring the privatized company, the acquisition may have anticompetitive effects.
In addition, an acquisition by a major competitor (actual or potential) may also forestall
entry and inhibit competition because the size of the new firm may deter entry and facilitate
lobbying for tariffs and protectionism. In short, competition advocacy is invaluable in the
privatization process.23
(b) General Economic Regulation.24 The liberalization in Peru, or in any other
country, does not mark the end of regulated industries. Several industries, such as
telecommunications, energy, and transportation, will continue to be regulated to some
extent at least because of the need for standardization regulation. Debates over the
jurisdiction of competition regulation in these industries are very common. The regulatory
agencies of various industries very often argue that their specialization in the industry
makes them better regulators of competition in these industries. This specialization is
indubitable; however, it does not imply specialization in competition policy. Moreover,
this specialization refers only to a specific regulated industry and not to others. When the
competitive effects of specific inter-industry practices and mergers are examined, the
23 See generally: A FRAMEWORK FOR THE DESIGN AND IMPLEMENTATION OF COMPETITION LAW AND POLICY, supra note 2, 98-99.
24 For a comperative survey of this issue, see OECD, RELATIONSHIP BETWEEN REGULATORS AND COMPETITION AUTHORITIES (1999).
15
informational advantage of the regulatory agency is less significant (even if the industry
regulator is pro-competition). For these reasons, the involvement of ‘competition experts’
in the competitive process in regulated industries is required.25 There is another reason
which is more empirical. Regulated industries tend to be less competitive and this
historical experience of regulatory inefficiency has been the main motive for deregulation.
The worldwide failure of industry regulation to protect competition reinforces the
importance of the inclusion of regulated industries in the jurisdiction of specialized
competition agencies.26
2.2.2. The Private Sector
The public sector in Peru is not the only barrier to competition, even for the simple
fact that beyond office hours, the public agents become private agents. They buy groceries
and pay bills for consumption of electricity, communication services, and other goods.
These agents do not understand competition better after 5:00PM than between 9:00AM and
5:00PM and in this respect they are not exceptional. The norms and mechanisms of
competition have not yet been assimilated into the private sector in Peru. Consumers, for
example, are not fully aware to their rights and how to exercise them. Likewise, producers
frequently do not fully understand the advantages of branding and differentiating. As a
result of these misunderstandings, the market forces that are supposed to stimulate
competition are impaired.
25 Ibid, at 95-96 26 For competition and regulation see, generally, Sam Peltzman, Toward a More General Theory of
Regulation, 19 J. L. & ECON. 211 (1976); Sam Peltzman, The Economic Theory of Regulation after a Decade of Deregulation, in THE POLITICAL ECONOMY OF PRIVATIZATION AND DEREGULATION 168
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These market forces, demonstrated by Lima’s taxi drivers and other entrepreneurs,
have blazed the way for the transition but as of now they are not strong and sophisticated
enough to reap its benefits. Strengthening them and their confidence in capitalism and its
mechanisms are tasks for competition policy.27 There is no effective competition if a
significant portion of the players does not actively participate in the market because of
information problems. That is, a competition policy cannot be effective without the
coexistence of active players who internalize the important parameters, such as price and
quality, into their decisions.
2.3. The Role of Enforcement
As discussed, although there are voices that challenge the link between competition
policy and the transition, they are not convincing. Competition policy is required for the
success of the market transition. Therefore, resources should be allocated to guarantee the
effectiveness of the competition policy. Unfortunately, the logic of this view frequently
fades away when the implementation of the policy is discussed. In particular,
acknowledging the importance of competition advocacy and competitiveness promotion
seems to render underestimation of the necessity of enforcement. It is often argued that the
(Elizabeth E. Bailey, Janet Rothenberg Pack, eds., 1995); RICHARD H.K. VIETOR, CONTRIVED COMPETITION (1994).
27 Indecopi employs various programs to explain the advantages of competition and the competitive mechanisms. In addition, in order to deepen the penetration of the competitive norms, some of Indecopi’s services are decentralized through cooperation with agents from the private sector (trade associations and academic institutions). See Ross Lipson, Innovation in Decentralization: The Case of Indecopi (unpublished, 1999).
17
importance of enforcement of competition laws is of second degree and even undesirable at
the infancy stage of competition regime.28
There are barriers to competition that hinder the transition and that are related to
unilateral market practices and not only to the prevailing perceptions in the marketplace.29
For example, tying arrangements30 and territorial exclusivity31 are likely to induce
anticompetitive market structures and to perpetuate existing ones. These barriers to
competition lower the profitability of adapting to the mechanisms of capitalism. That is,
various business practices may adversely affect the speed of the transition and its success.
Competition policy is also required, therefore, in order to lower the transition costs
presented by common anticompetitive practices. Misunderstanding of this role of
competition policy is similar to any other wrong perception. The question of whether it is
socially desirable to undertake enforcement activities should be derived from the marginal
productivity of such enforcement compared to other tasks of the competition policy. To
apply this view, it would be beneficial to pay attention to two misconceptions that seem to
influence lawyers at Indecopi.
28 This is a common view at Indecopi and among several scholars. See, for example, Rodriguez and Coate, supra note 2. According to this view, enforcement is desirable mainly in cases of “naked” restraints of trade such as explicit price fixing.
29 Again, I do not discuss the effects of multilateral practices (cartelization) since these seem to be recognized. 30 A tying arrangement is a sale of two or more distinct products only in a package at a single price. For an
analysis of potential anticompetitive impacts of tying arrangements on markets see Louis Kaplow, Extension of Monopoly Power through Leverage, 85 COLUM. L. REV. 515 (1985).
31 Territorial exclusivity is a division of the geographic market between sellers which prevents competition in any geographic area. For discussion and empirical evidence see Willard F. Muller and Frederick E. Geithman, An Empirical Test of the Free Rider and Market Power Hypotheses, 73 REV. ECON. STAT. 301 (1991); Patrick Rey and Joseph Stiglitz, The Role of Exclusive Territories in Producers Competition, 26 RAND J. ECON. 431 (1995).
18
First, enforcement activities are often associated with the old regime of heavy-state
intervention. Perhaps because of this associative connection, the perceived marginal
productivity of enforcement is relatively low. More particularly, regulation of mergers and
joint ventures and any type of ex-ante regulation are associated with the old regime and are
considered to be harmful.32 In practice, however, there is no difference between mergers
and agreements among competitors; both may have anticompetitive effects. Likewise, the
distinction between ex-ante and ex-post is in many respects artificial. Prospective ex-post
outcomes have ex-ante impacts and, therefore, this distinction is presumably unfounded.
Wrong decisions can be made either ex-post or ex-ante and, thus, if regulation is in place,
corruption or ignorance are supposedly no less harmful under ex-post regulation. The
choice between ex-ante and ex-post should be associated with the transaction costs of the
regulatory process and practical problems such as the desirable remedies vis-a-vis the
possible ones. For example, in the case of conduct, ex-ante regulation is usually more
costly than ex-post regulation. Ex-ante detection of prospective conduct is speculative and
quite impractical, whereas ex-post detection of alleged illegal conduct is more reasonable.
Likewise, it is more reasonable to impose sanctions for past conduct than for hypothetical
prospective conduct. In contrast, in the case of structural changes, ex-ante regulation is
usually cheaper than ex-post regulation. The primary cause is that changing structure of
companies backward is prohibitively expensive and often impossible. For instance,
32 See, for example, Boza, The Role of Indecopi in Peru, supra note 4, 24: “Consistent with its respect for private initiative and autonomy, Indecopi does not interfere in private contracts and other business relations ex-ante. It is only ex-post, in cases when private efforts have failed, that Indecopi steps in to resolve conflicts and reestablish efficiency. This commitment reduces the possibility of corruption by taking government bureaucrats out of ongoing business decisionmaking process.”
19
divesting a firm after a merger is very costly, considering the technical complexity and the
trade secrets that have been exposed.
A second common misconception is that enforcement costs are perceived as the
costs of strict enforcement. In transition economies, strict enforcement cannot be efficient
for two major reasons. First, the new rules have not yet been assimilated and, therefore,
violations are very common and the costs of strict enforcement are likely to be beyond the
budget of the agency. Second, the multiple goals of competition enforcement, competition
advocacy and competitiveness promotion require a comparison of the marginal productivity
of the allocated resources for these goals. Given the scarcity of resources, strict
enforcement may have lower marginal productivity compared to the marginal productivity
of resources allocated to competition advocacy and competitiveness promotion. However,
these reasons do not address the situation under a regime of selective enforcement that is
aimed at highly anticompetitive practices. For example, mergers that presumably create
monopolies in concentrated industries with high barriers to entry, such as distribution and
services.33 Such a focus of the enforcement policy is likely to yield relatively high
marginal productivity. Therefore, the decision regarding the allocation of resources toward
enforcement should take into account the costs of the desirable scope of enforcement and
not the costs of strict enforcement.34
This task of optimal policy design is plainly a maximization problem of multiple
variables subject to a budget constraint. We want to maximize competitiveness through a
33 See discussion in subsection 4.4.
20
low-budget investment in a bundle of enforcement, competition advocacy, and
competitiveness promotion. Any independent reference to enforcement (or to any other
variable) is wrong.
An example for such a (wrong) reference can be found in a 1995 report of
Economists Incorporated analyzing Peru’s competition policy.35 Economists Incorporated,
an American consulting firm, was hired by Indecopi to study its competition policy and to
submit recommendations in various areas. Part of the recommendations in this report
addresses the adequacy of the sanctions for antitrust violations.36 These recommendations
endorsed the Beckerian punishment approach, namely, a limited scope of enforcement with
increased sanctions. Under such a regime presumably the same deterrence effects are
achieved as with broader enforcement with lower sanctions. That is, for any level of
deterrence the Beckerian approach supposedly suggests equivalent results for low
enforcement costs.37 This suggestion fails to realize that high sanctions may undermine the
public support for the competition policy. When the illegitimacy of anticompetitive
practices is misunderstood, high sanctions are likely to be perceived as unfair and unjust.
Moreover, by definition the Beckerian approach relies on ex-post remedies because the
Beckerian sanctions are imposed upon detection of offense. As already discussed, ex-post
remedies cannot always successfully address activities such as structural changes. In
particular, imposing Beckerian sanctions on merging companies is not always practical
34 See William Baxter, The Political Economy of Antitrust, in THE POLITICAL ECONOMY OF ANTITRUST (R. D. Tollison, ed., 1980).
35 ECONOMISTS INCORPORATED, COMPETITION POLICY IN PERU: REPORT AND RECOMMENDATIONS (Washington DC, Nov. 1995).
36 Ibid, at 34-37.
21
because of the potential economic consequences. Divesting merging companies and
imposing heavy fines on them may be harmful to an industry because of the burden on the
companies and, therefore, undesirable. Finally, competition laws are not a branch of the
criminal law although they may define criminal offenses. Sanctions in competition laws
are often intended to restore competition, rather than creating deterrence.
To sum up this point, enforcement activities may have high marginal productivity
that does not necessarily involve high costs. The costs and benefits of enforcement should
be taken into account in their right proportions when designing and implementing
competition policy.
3. Indecopi: An Umbrella Agency for Promotion of Free Market
Peru does not have a competition agency per se, but it has an umbrella agency,
Indecopi, which holds a wide range of regulatory powers aimed at facilitating the transition
to a market economy.38 Umbrella agencies are common in transition economies, albeit in a
smaller scale than in Peru. The reason for this integration of regulatory powers is mainly
financial, but as discussed in the process this integration is often conceptualized. The
assessment of this conceptualization is discussed in the Section 4.
37 See Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1968). 38 See, Kovacic, Designing and Implementing Competition and Consumer Protection Reforms in Transitional
Economies, supra note 1; Kovacic, Getting Started, supra note 5, at 404 n. 4, 417-418; Vladimir Capelik and Ben Slay, Antimonopoly Policy and Monopoly Regulation in Russia, in DE-MONOPOLIZATION AND COMPETITION POLICY IN POST-COMMUNIST ECONOMIES 57 (Ben Slay ed., 1996).
22
Indecopi is an acronym for the National Institute for Defense of Competition and
Protection of Intellectual Property.39 This acronym is used in Peru as a brand name to
symbolize the new spirit of the regulator and to assist in promoting norms of competition.40
Indecopi’s regulatory authorities can be grouped into four functions: antitrust,41
consumer protection, elimination of bureaucratic barriers to entry, and intellectual property
protection. These functions are consolidated under the primary cause of facilitating the
transition to a market economy through enforcement, advocacy, and promotion of
competition.42
Indecopi’s four functions are carried out by two chambers: the Free Competition
Chamber and the Intellectual Property Chamber. The Free Competition Chamber serves
the functions of antitrust, consumer protection, and elimination of bureaucratic barriers to
entry. This chamber has seven commissions: (a) Antitrust; (b) Consumer Protection; (c)
Unfair Advertising; (d) Bureaucratic Barriers to Market Access; (e) Dumping and
Subsidies; (f) Technical and Commercial Standards; and (g) Market Exit (bankruptcy). The
fourth function, intellectual property protection, is exclusively served by the Intellectual
Property Chamber and has three offices: (a) Patent; (b) Copyright; and (c) Trademark.
39 Indecopi was created by Decree Law 25868, published November 24, 1992. 40 For an extensive review of Indecopi, see PERU’S EXPERIENCE IN MARKET REGULATORY REFORM, 1993-
1998 (Beatriz Boza ed., 1998); KWANG W. KIM, INDECOPI: A CASE STUDY IN PERUVIAN AUTONOMOUS INSTITUTIONS (UNPUBLISHED MASTERS THESIS, FLETCHER SCHOOL OF LAW AND DIPLOMACY, 1998).
41 The term ‘antitrust’ in this paper is used in reference to regulatory mechanisms which are directly related to presumable anticompetitive practices and consolidations.
42 See Beatriz Boza, The Role of Indecopi in Peru: The First Five Years, supra note 4; Armando Cáceres, Competitiveness and Competition, in PERU’S EXPERIENCE IN MARKET REGULATORY REFORM, 1993-1998, 187 (Beatriz Boza ed., 1998).
23
Because the Free Competition Chamber has seven commissions to serve three
functions, it is useful to understand the philosophy behind the assignments of the various
commissions (see table 1 for a simplified description of Indecopi’s functional structure).
• The antitrust function - the Antitrust Commission directly (and by definition) serves the
antitrust function and its role is to eliminate anticompetitive practices in the Peruvian
economy.
• The consumer protection function – the Commissions of Consumer Protection and
Unfair Advertising are designated mainly to fulfill this function.
• The elimination of bureaucratic barriers to entry function – The Commissions of
Bureaucratic Barriers to Market Access and Dumping and Subsidies are directed to lower
and eliminate bureaucratic barriers to entry. These two commissions are focused on
barriers to entry which are created by the state and its agents. In addition, Indecopi’s
Commission of Technical and Commercial Standards serves as Peru’s national office of
standards, tasked with lowering technological barriers to entry. In many industries
standardization may be a significant barrier to entry because it protects the incumbent
firms. Thus, it is assumed that free provision of voluntary standards by the state and
mediation of standardization issues between various (actual and potential) players may
be beneficial. Finally, the Commission of Market Exit conciliates and mediates in cases
24
of bankruptcy and reorganization.43 This service is intended to lower exit costs which
can be conceived as barriers to entry.44
Table 1: Indecopi’s Functional Structure
Antitrust Consumer Protection Entry Barriers Intellectual Property
Departments 1) Antitrust
1) Consumer
Protection
2) Unfair Advertising
1) Bureaucratic
Barriers to Market
Access
2) Dumping and
Subsidies
3) Tech. & Comm.
Standards
4) Market Exit
The Intellectual
Property Chamber
4. The Conceptual Framework of Umbrella Agencies
4.1. Practical Impediments to Policy Implementation
As mentioned, although the origins of umbrella agencies are in budget reasons, the
integration is sometimes extended to be a regulatory philosophy that intertwines various
functions to a conceptual framework. Indecopi’s philosophy is an example for such
conceptualization, and in this section I examine its foundations.
43 For a description of the legal framework of the reorganization processes in Peru, see Ismael N. De La Piedra and Augusto C. Barrantes, Peru Eases Path to Reorganization, 16 INT’L FIN. L. REV. 41 (1997).
44 Entry to markets requires interactions with many players and often involves taking loans. The costs of these interactions are influenced, among other things, by the risk of insolvency and the prospective outcome of insolvency. Therefore, lowering the transaction costs of insolvency proceedings lowers the costs of entry. Apart from this role, the bankruptcy services that Indecopi provides are its main income source.
25
The following subsections discuss whether the integration of regulatory functions
may reduce the need for competition policy. This discussion is intended to highlight
potential problems in substituting the antitrust function with other functions. One main
advantage of such substitution must be made clear before analyzing the deficiencies:
Antitrust issues involve highly complex investigations and litigation that practically are
beyond reach in poor countries with scarce resources and limited number of trained
professionals. Particularly, in the absence of efficient judiciary, trials last years, their
outcome is unpredictable, and as a result the credibility of decisive regulatory actions is
undermined.
This could have been a chicken and egg problem: a poor country may not be able to
afford necessary conditions for the transition to a market economy, but without these
conditions it may never be rich enough to afford them. Fortunately, a transition (unlike
eggs) progresses gradually. ‘Imperfect substitutes’ may assist in creating preconditions for
the use of the ‘real thing.’ To put it in terms that were used above, regulatory powers
should be used according to their marginal productivity. If in certain aspects the marginal
productivity of competition policy is lower than those of other regulatory activities, the
substitutes (the other activities) are better for a certain time than the direct means
(competition policy).
Equipped with this understanding of the relations between regulatory powers, we
can now turn to examine their limits. First, in Subsection 4.2, I address the necessity of
comprehensive antitrust policy. Then, in Subsections 4.3-4.5, I examine the limits of other
means in substituting for antitrust policy in the long run.
26
4.2. Antitrust
Antitrust is first and foremost a legal device to stimulate competition by suppressing
anticompetitive practices and regulating market structure through merger review and
various remedies. A major problem in implementing antitrust policy is that there is only
very narrow agreement about the desirable scope of antitrust law and the appropriate policy
implications.45 In particular, the concerns are focused on the potential harms created by
regulatory intervention in the markets. In transition economies these fears are intensified
because of the fragile fabric of the economy, the lack of professional support, and the long
history of excessive intervention by state institutions.46
For these reasons, it is often argued that regulatory agencies in transition economies
should minimize their intervention in the markets and concentrate primarily on naked
anticompetitive practices, such as price fixing. Following this view, the official antitrust
policy of Peru is focused on behavioral aspects, as opposed to structural aspects.47
Namely, the emphasis is on firms’ conduct (either unilateral or multilateral), rather than on
changes in market structure.48 For example, a collusion between three suppliers to fix
45 See, generally: BORK, THE ANTITRUST PARADOX, supra note 7. 46 For a survey of these causes in transition economies, see Kovacic, Getting Started, supra note 5. For a
discussion of merger control in transition economies, see Kovacic, Antitrust and Competition Policy in Transition Economies, supra note 5.
47 The Peruvian competition law (Legislative Decree 701) covers two antitrust issues: abuse of dominant position (article 5) and restrictive practices (article 6). There is merger review in the electrical industry apparently because of political reasons related to the fact that Chilean producers supply a significant portion of the electricity in Peru. For analysis of the need for merger review in Peru, see ECONOMISTS INCORPORATED, COMPETITION POLICY IN PERU, supra note 37. For analysis of the need for merger review in transition economies, see A FRAMEWORK FOR THE DESIGN AND IMPLEMENTATION OF COMPETITION LAW AND POLICY, supra note 1, 41-92; William E. Kovacic, Merger Enforcement in Transition: Antitrust Contols on Acquisitions in Emerging Economies, 66 U. CIN. L. REV. 1075 (1998).
48 This emphasis characterized many developed countries at the early stages of implementing antitrust laws. In the United States, for example, following the ruling of the Supreme Court in Knight in 1895 and until its
27
prices is illegal, whereas a merger between these three suppliers, which supposedly renders
the same anticompetitive effects, is legal. Likewise, certain types of exclusive dealings are
illegal, but a vertical integration that yields the same anticompetitive outcome is exempted
from the scrutiny of the competition law. Indeed, economic theory dictates that market
structure and market performance are inseparable.49
One plausible result of prohibiting collaboration between competitors and having no
merger review is the incentive for firms to merge. This outcome is likely to have serious
anticompetitive effects presented in mergers to monopoly or oligopoly.50 In Latin America,
these anticompetitive effects may be illustrated in the soft-drink industry. The competition
in this industry in Latin America is one of the toughest in the world due to the
overwhelming success of local producers that compete against Coca-Cola, which generally
controls the global market. The Peruvian Inca Kola and the Brazilian Guarana, for
ruling in Northern Securities, the Sherman Act was interpreted as permitting mergers to monopoly. In Knight, the Supreme Court rejected the government’s challenge to a series of mergers that combined 98% of the country’s sugar refining capacity. United States v. E.C. Knight, 156 U.S. 1 (1895); Northern Securities Co. v. United States, 193 U.S. 197 (1904); George J. Stigler, Monopoly and Oligopoly by Merger, 40 AM. ECON. REV. 23 (1950); Martin K. Perry and Robert H. Porter, Oligopoly and the Incentive for Horizontal Merger, 75 AM. ECON. REV. 219 (1985). The Reagan administration’s antitrust policy was characterized by, among other things, neglect of traditional antitrust concerns, and particularly those which were related to structural considerations. For discussion of various consequences, see ROBERT J. LARNER, AND JAMES W. MEEHAN, EDS., ECONOMICS AND ANTITRUST POLICY (1989).
49 Antitrust is primarily an implication of industrial organization studies. Industrial organization literature virtually derived from the Structure-Conduct-Performance Paradigm which links market structure to the conduct of the firms that operate within it and, consequently, to market performance. Modern industrial organization is an elaboration of this basic paradigm originated by Joe Bain. See JOE S. BAIN, BARRIERS TO NEW COMPETITION (1956); Leonard W. Weiss, The Structure-Conduct-Performance Paradigm and antitrust, 127 U. PA. L. REV. 1104 (1979); Herbert Hovenkamp, The Antitrust Movement and the Rise of Industrial Organization, 68 TEX. L. REV. 105 (1989).
50 The merger to monopoly scenario can be illustrated by one of the classic cartel cases in the United States, Addyston Pipe & Steel Co. In this case six manufacturers of cast-iron pipe, who accounted 65% of the capacity in the relevant market, were convicted for price fixing and territory division. Several months after the conviction, the defendants merged into a single firm. At the time there were no legal tools in the U.S. to attack mergers (see ibid). United States v. Addyston Pipe & Steel Co., 85 Fed. 271 (1898). See, also: BORK, THE ANTITRUST PARADOX, supra note 7, at 199:
28
instance, have virtually blocked the expansion of Coke in Peru and Brazil, respectively,
through their prices and favorite taste. To overcome this relative weakness, Coke
employed one of the oldest antitrust tricks and acquired its competitors both in Peru and
Brazil. In Peru, the acquisition of Inca Kola provided the merging firms a market share of
more than 70% with merely 9% held by the biggest competitor, Kola Real.51 A similar
strategy was employed by Coca-Cola in Venezuela, which is one of the few markets in the
world in which PepsiCo has a larger market share than Coke. In this case, Coke asked to
acquire Oswaldo Cisneros, PepsiCo’s bottler and distributor in Venezuela. This merger
was blocked by ProCompetencia, the Venezuelan competition agency52
Again, much of the opposition to merger review in Peru stems from the association
of structural regulation with former, interventionist regime. Behavioral regulation that
examines conduct ex-post is perceived to be instructional, whereas structural regulation that
presumes conduct from market structure is perceived to be as interfering as the old regime
was. At least at Indecopi, this perspective is common among the lawyers but seems to be
unfavorable among the economists.53
51 Before the merger Inca Kola and Coca Cola had similar market shares of approximately 35% each. 52 See Coke’s Never-Ending Journey, 112 BEVERAGE WORLD 32 (1993); Beverages Update, 8(3) THE PERU
REPORT AND PERU BUSINESS DIGEST 67 (March 1999); Matt Moffett and Nikhil Deogun, Brazilians Like Coke, but what They Love to Drink is Guarana, WALL ST. J. (interactive ed., July 8, 1999); A.E. Rodriguez and Mark D. Williams, Recent Decisions by the Venezuelan and Peruvian Agencies: Lessons for Export of Antitrust, 43 ANTITRUST BUL. 147, 154-171 (1998). For Coke’s stratrgy to acquire market power through integrations with bottlers, see Constance L. Hays, Cola Makers Leave their Bottlers Flat, N.Y. TIMES (interactive ed., Dec. 11, 1999).
53 This confidence in regulation of behavior, which is prevalent among lawyers, is not idiosyncratic to Peru. See, RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (1976), 41:
“Since lawyers and judges are more comfortable with conspiracy doctrine than price theory, the displacement of emphasis from the economic consequences to the fact of conspiring is natural. But it is inconsistent with the effective antitrust policy…”
29
4.3. Consumer Protection
Both antitrust and consumer protection address situations in which a seller provides
the consumer with less than she would have gotten for the same price in a perfectly
competitive environment. For example, a producer can sell defected products if she is not
faced with competition and there is no consumer protection. In the presence of competition
or effective consumer protection, a producer is disciplined for selling defected products.
That is, in competitive markets or under effective consumer protection, firms are likely to
improve the safety of their products and to provide more information to the consumer.
Indeed, consumer protection and antitrust may serve similar purposes in mitigating the
symptoms of anticompetitive practices. The similarities are particularly salient when
antirust policy is focused on behavioral aspects. Consumer protection may presumably be
perceived as a bar to anticompetitive conducts that are illegal under the antitrust laws.
Therefore, certain interchangeability between antitrust and consumer protection is often
assumed. Notwithstanding, antitrust and consumer protection cannot fully substitute one for
the other, even if merely for the reason that the latter addresses to consumers, and not only
in settings of alleged market power, whereas the former also addresses to competitors and
competition in general.54
In transition economies, the interrelationships between antitrust and consumer
protection have another important role which is less weighty in developed economies with
54Several scholars argue that the only goal of antitrust policy should be allocative efficiency and not consumer welfare. In practice, however, antitrust agencies regard consumer welfare as the main goal. See Robert H. Bork, The Goals of Antitrust Policy, 57 AM. ECON. REV. 242 (1967). Cf. Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34
30
long traditions of capitalism and competition. As discussed, building the public’s
confidence and trust in capitalism and teaching the advantages of free competition
constitute critical goals in transition economies. Consumer protection often presents a
device to acquire broad public trust and assimilating norms of competition.
In countries in which intervention of state agencies in the marketplace is associated
with the ineffective, old regime, scrutinizing collaborations and combinations of
competitors are likely be misunderstood even by consumers. Similarly, when the business
culture is based on trust, prohibiting various types of vertical arrangements is likely to
undermine the public legitimacy of antitrust policy.55 This legitimacy is required to create
countervailing powers to the interest groups that are threatened by competition, and
consumer protection may serve to build it up.
Protecting the consumers’ interests against anticompetitive and deceptive practices
encourage consumers to demand more from sellers and to exercise their rights, and thereby,
to stimulate competition. At the same time, trust in the agency is developed. In Peru,
Indecopi undertakes this task at two levels: providing services for allegedly injured
consumers and education programs. The education programs are intended to empower
consumers by instructing them about their rights and anticompetitive practices in specific
industries or even certain firms.56 These programs are thoughtfully designed to encourage a
HASTINGS L. J. 65 (1982); Herbert Hovenkamp, Distributive Justice and The Antitrust Laws, 51 GEO. WASH. L. REV. 1 (1982).
55 See Kovacic, Designing and Implementing Competition and Consumer Protection Reforms in Transitional Economies, supra note 1; William E. Kovacic, The Competition Policy Entrepreneur and Law Reform in Formerly Communist and Socialist Countries, 11 AM. U. J. INT'L L. & POL'Y 437 (1996);
56 The education programs are directed to provide consumers with more information regarding prices, quality of goods and services, and shopping habits.
31
countervailing opposition to the interest groups that fight to preserve their anticompetitive
practices and privileges from the former regime.
4.4. Barriers to Entry
Barriers to entry are often the main obstacle to competition because incumbent
firms do not operate under the threat that their poor performance and high prices may
attract entrants who will take over their markets. When the costs of entry are significantly
high, potential competitors may have no means to fund entry or entry may be
unprofitable.57 Therefore, barriers to entry such as complex and costly regulatory
requirements may perpetuate inefficient market structures.
This acknowledgment of the interrelations between barriers to entry and market
performance constitutes the foundations of potential competition and contestable market
theories which seem to have a weighty influence on Peru’s policymakers.58 Potential
competition is a threat of increased rivalry within the market as opposed to existing rivalry
that is presented by actual competition. This type of threat exists when barriers to entry are
57 For the importance of the elimination of bureaucratic barriers to entry in Fujimori’s administration, see Laura Z. Hatfield, Revolutionary Changes Are Occurring in Peru, and the Future for U.S. Business Brightens, 113 BUS. AM. 23 (Mar. 2, 1992). For barriers to entry in general, see Harold Demsetz, Barriers to Entry, 72 AM. ECON. REV. 47 (1982).
58 For surveys of legal and economic literature about potential competition, see Richard J. Gilbert, The Role of Potential Competition in Industrial Organization, 3 J. ECON. PERS. 107 (1989); William G. Shepherd, Potential Competition versus Actual Competition, 42 ADMIN. L. REV. 5 (1990). For policy implications of potential competition, see Joseph Brodley, Potential Competition Mergers: A Structural Synthesis, 87 YALE L. J. 1 (1977); T. Dunfee & L. Stern, Potential Competition Theory as an Antimerger Tool under Section 7 of the Clayton Act: A Decision Model, 69 NW. U. L. REV. 821 (1975). For a thorough study of contestable market theories and their policy implications, see WILLIAM J. BAUMOL, JOHN C. PANZAR, AND ROBERT D. WILLIG, CONTESTABLE MARKETS AND THE THEORY OF INDUSTRY STRUCTURE (REV. ED., 1988). For implications in designing and implementing competition policies for transition economies, see Robert D. Cooter, The Theory of Market Modernization of Law, supra note 9, 161-162; Shanker A. Singham,
32
low and market prices are high or performance is poor. Under these conditions, the market
is presumably contestable and entry is expected because of the potential profits from taking
over a significant market share.59 For incumbent firms in a specific market, increased
rivalry means lower profits and, therefore, it is argued that potential competition disciplines
anticompetitive behavior almost as effectively as actual competition. Accordingly, when
there are potential competitors, it is argued that elimination of barriers to entry may
substitute for antitrust regulation especially in small economies.60
In Peru there are still many bureaucratic barriers to entry, which were inherited from
the previous protectionist regime. These bureaucratic barriers have made formality in Peru
very costly and, thereby, have pushed many Peruvians to the informal sector61 and barred
entry from abroad. In terms of transition costs, the higher the bureaucratic barriers, the
higher the costs to make the shift to a market economy. For these reasons, Indecopi
dedicates many resources to lower and eliminate these barriers. As discussed, the marginal
Shaping Competition Policy in the Americas: Scope for Transatlantic Cooperation?, 24 BROOK. J. INT'L L. 363 (1998).
59 Another important requirement for contestability is price rigidity. If the prices of the incumbent firms are elastic they drop upon entry and, consequently, making entry less profitable. Poor performance often comes with rigid prices especially when salaries are a major component of the expenses.
60 Elizabeth E. Bailey, Contestability and the Design of Regulatory and Antitrust Policy, 71 AM. ECON. REV. 178 (1981).
61 DE SOTO, THE OTHER PATH, supra note 1. One of the examples of these kinds of barriers is the attempts of various mayors in Peru to require all taxis to be painted yellow. Such a requirement would not have changed a thing for the informal taxi drivers but it could have had high costs for the first incorporations of taxis because many of them choose colors as brands. These municipal regulations were overruled by Indecopi’s tribunal.
33
productivity of this allocation seems to be perceived to be higher than the alternative of
allocating more resources to enforcement and, particularly, to merger review.62
This perception seems to be overgeneralized. The selection between various
enforcement activities is on a continuous spectrum and not a dichotomous choice. In the
case of harmful conduct, for instance, there was no decision to detect all the
anticompetitive practices, but rather certain types of practices and in a specific scope. As
of now, certain prohibitions against exclusive dealing were enforced but the question of
resale price maintenance has not been examined. Likewise, although price fixing is illegal
per se, not all the cases of alleged price fixing can be examined because of the limited
enforcement budget. Simply put, enforcement activities are prioritized according to their
perceived marginal productivity. From this perspective, it is inconsistent to ignore the
marginal productivity of scrutinizing mergers and joint ventures. At least in mature
industries that enjoy economies of scale, such enforcement activities are likely to be highly
beneficial.
Structural examination is especially important because, even in Peru, there are many
barriers to entry which are not bureaucratic. Barriers to entry are inherent to many
industries and can also result from legitimate business strategies. For example, entry into
62 See Ana Julia Jatar and Luis Tineo, Five Years of Competition Policy in Peru: Challenges in the Transition to a Market Economy, in PERU’S EXPERIENCE IN MARKET REGULATORY REFORM, 1993-1998, 215, 220 (Beatriz Boza ed., 1998):
“In Peru, merger and other economic concentrations are not subject to the competition law… The reasoning behind this … has conceptual and practical considerations. Peru’s efforts towards lowering entry barriers seem to be an adequate policy to offset the effects that some mergers may have in some markets. On the other hand, the Peruvian policy in favor of
34
retail industries by establishing chain stores requires large investments in capital and in
contracting with many suppliers. These necessary investments constitute significant
barriers to entry especially in countries with impaired capital markets. The existence of
strong corporations across the border (e.g., Andean countries in the case of Peru) does not
eliminate the barriers presented by the required investments. Therefore, if, for instance,
local producers merge vertically with distributors, the profitability of foreign entry may be
undermined because of the high costs of establishing a distribution chain.63 Likewise,
legitimate business strategies to acquire consumers’ loyalty through sophisticated branding,
advertising, and other mechanisms may also erect high barriers to entry.64 These
considerations should be taken into account at least in the case of mergers in industries such
as airline, banking,65 cement, retail, insurance, soft drinks,66 and milk.
mergers seems also to encourage the rationalization of the production process and the achievement of firms’ larger size and economies of scale.”
63 For this reason the acquisition of PepsiCo’s distributor by Coca-Cola in Venezuela was blocked. See supra note 51. The ice-cream industry in Peru may provide another example. In most of the world’s markets there is an aggressive competition between three international giants: Nestle, Unilever, and Mars. In April 1997, Nestle acquired D’Onofrio, the largest ice-cream manufacturer in Peru. Unilever efforts to compete with its brand Bresler failed and, essentially, it was driven out of the market. The merger between Nestle and D’Onofrio was not examined. Therefore, given the intentions of Nestle and Unilever to enter the Peruvian market, it is unclear whether this merger served competition or harmed it. See Mark Dixon, Bar Wars, 121 ACCOUNTANCY 32 (JUNE 1998); Nestle in Peruvian Purchase, FIN. TIMES (Apr. 9, 1997); Business in Latin America: Buy, Buy, Buy, ECONOMIST (Dec. 6, 1997); Peru: Overview on the ice cream market, S. AM. BUS. INFO. (Apr. 23, 1998).
64 See, for instance: Peru’s Simple but Popular Loyalty Program, 12 CREDIT CARD MANAGEMENT 8 (July, 1999) (Credit cards to attain consumer loyalty); Latin America The top 10 marketers, ADVERTISING AGE, International Supplement (Nov. 9, 1998) (Ranking six soft drinks among the top ten marketers in Peru in 1996-1997 by advertising spending; in the top five there are four soft drinks following Procter & Gamble); Peruvian Brewery Stirs Up National Pride, DAILY WORLD WIRE (Jul. 29, 1999) (Analyzing the success of Cristal Beer advertising); For analysis of a brand name as a barrier to entry, see Richard Schmalensee, On the Use of Economic Models in Antitrust: The RealLemon Case, 127 U. PENN. L. REV. 994 (1979).
65 See Omar E. Goyenche, Merge or Die, 107 LATINFINANCE 43 (June, 1999) (Describing the merger wave in the Peruvian banking industry in response to the competition in the industry).
66 See the acquisition of Inca Kola by Coca-Cola. See supra note 51. The beer industry is also highly concentrated. In 1996 the two major Peruvian beer manufacturers, Backus y Johnston Brewery and Compañía Nacional de Ceveza (CNC) merged. Following this merger the only serious competitors of the
35
Last but not least, empirical studies persuasively show that firms gain competitive
advantage in the global markets when they are faced with healthy competition in their
national markets.67 This robust conclusion, originated by Michael Porter’s seminal work,
implies that mergers to monopoly or to oligopoly do not tend to assist in merging into the
global economy. On the contrary, such mergers tend to cripple the operation of domestic
companies in the global markets. Furthermore, Porter’s premise seems to be irrelevant
from a competitive perspective. It is unclear why the success of privately-held companies
in the global markets warrants anticompetitive effects in the domestic markets. This
alleged justification implies a wealth transfer from domestic consumers to capital owners,
who are not necessarily residents or citizens. For example, in Peru the acquisition of Inca
Kola by Coca-Cola is justified only by the potential internationalization of Inca Kola.
Assuming this internationalization wish comes true, its prospective outcome is that the
owners of Inca Kola (Coca-Cola and the Lindley family) may increase the value of their
stakes partially at the expense of the Peruvian consumers.
new firm, Cerverceras Unidas Backus y Johnston, is Cervesur which produces, among others, the popular beer Cuzqueña. The tough competition that small Cervesur presents to Cerverceras is widely used as an exemplary argument against merger review in Peru. But this argument fails to take into account hypothetical scenarios of what would have occurred had there been no merger. Furthermore, and more importantly, even if the merger has indeed stimulated competition, it is not clear how the example can be generalized to a merger between the two remaining firms or to other markets.
67 MICHAEL E. PORTER, THE COMPETITIVE ADVANTAGE OF NATIONS (1998).
36
4.5. Intellectual Property
Intellectual property (IP) rights are granted by law in order to generate economic
growth.68 For this prospective growth and development, certain legal monopolies are
granted to those who succeed in creative activities in order to award them and to stimulate
others to undertake the risks of investments in these activities. Indeed, these awards may
put legal restraints on competition by conveying some market power to the owners of the
legal monopolies, and this is a source of perpetual confusion and controversy.69 Still,
creativity expands competition to nonprice parameters and it is widely agreed that the
competition for the legal rights itself is often socially more contributive than competition
between the sellers of a specific product.70 Simply put, a desirable competitiveness may be
obtained through the promotion of IP culture.
68 For the relationship between intellectual property and economic growth see generally: Zvi Griliches, Patents Statistics as Economic Indicators: A Survey, 28 J. ECON. LIT. 1661 (1990); Kevin M. Murphy, Andrei Shleifer, and Robert W. Vishny, The Allocation of Talent: Implications for Growth, 106 Q. J. ECON. 503 (1991); Richard A. Posner, Creating Legal Framework for Economic Development, 13 WORLD BANK RESEARCH OBSERVER 1 (1998).
69 See generally: WARD S. BOWMAN, PATENT AND ANTITRUST LAW: A LEGAL AND ECONOMIC APPRAISAL (1973); Louis Kaplow, The Patent-Antitrust Intersection: A Reappraisal, 97 HARV. L. REV. 1813 (1984). For a recent survey regarding practical implications of the intellectual property – antitrust intersection, see OECD, COMPETITION POLICY AND INTELLECTUAL PROPERTY RIGHTS (1998).
70 In economic terminology, competition in the market is static competition, whereas competition for the awards of intellectual property is dynamic competition. See, generally: JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY (1947). See also: U.S. Department of Justice and the Federal Trade Commission, 1995 United States Justice Department and FTC Antitrust Guidelines for the Licensing of Intellectual Property, §§1, 3.2, and in particular §1.0:
“The intellectual property laws and the antitrust laws share the common purpose or promoting innovation and enhancing consumer welfare… “[T]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition.” Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990).”
37
This view suffers from a vital flaw. Both healthy competition and IP culture rely on
understanding the mechanisms of capitalism, or at least acting as if such understanding
exists. Thus, the absence of these conditions is a barrier not only to competition but also to
IP culture. Moreover, IP rights indeed promote competitiveness in many instances, but
sometimes are used to exclude competition. That is, IP culture cannot be a substitute for
antitrust policy and must be supported by such policy.
The case of Peru illustrates this argument. In Peru IP culture is very incipient.71
Therefore, entrepreneurs who might start their way in pirating others’ goods and have
developed better products, frequently underestimate the economic advantages of product
differentiation and original branding. There are many folkloric stories about producers of
high-quality commodities who pirate famous brands although these brands sell
commodities of lower quality.72
This use of famous brands may be puzzling for marketing professionals because
consumers, who prefer the high-quality commodities regardless of the brand, must invest
resources to locate these small entrepreneurs. Economic logic dictates that through original
branding, high-quality producers can charge more because of savings in search costs for
consumers and the possibility to extend their geographic markets.73 Part of the reasons for
71 See J. Welby Leaman, Coke Bottles, Candy Bars and Combis: Building an Institution, in PERU’S EXPERIENCE IN MARKET REGULATORY REFORM, 1993-1998, 123 (Beatriz Boza ed., 1998).
72 Ibid. 73 See, generally: William M. Landes and Richard A. Posner, Trademark Law: An Economic Perspective, J. L.
& ECON. 265 (1987). An example of the success of branding and differentiating is the noodle industry in Peru. Noodles constitute a major consumption good in Peru and are sold in bulk or packaged. The encouragement of intellectual property culture led to a dramatic increase in the consumption of packaged noodles. From 14% in 1993 to 95% in 1996. Similar phenomenon, albeit less dramatic, occurred in the
38
this behavior is, again, misunderstanding of the mechanisms of capitalism.74 The same
misunderstanding that, to a large extent, hinders the expansion of competition.
5. Lessons from Peru’s Competition Policy
In transition economies there is no tradition of competition. Such a tradition
implies a general understanding of the marketplace’s mechanisms or at least functioning as
if such understanding exists. Absent this understanding (or functioning) the market forces
that are required to facilitate the transition to a market economy are impaired.
Unfortunately, enacting competition laws and importing competition policies from
developed economies cannot by themselves address this problem if they are not customized
to the widespread misconceptions that place hurdles against progress.
The case of Peru perhaps cannot represent all the types of misconceptions and their
implications; however, it may provide a general framework to analyze them. The Peruvian
case is a good one for this purpose because Indecopi is concerned with many of the
common misconceptions and tries to deal with them. These attempts in turn reveal
disagreements among Indecopi’s professionals who are partially driven by their own
misconceptions. That is, the regulator devises its policy under some uncertainty which is
higher than the uncertainty in countries with a tradition of competition. Such uncertainty
rice industry in which the consumption of packed rice increased from 18% in 1993 to 36% in 1996. PROMPERÚ, ECONOMIC PRESENTATION: ROADSHOW 1999, slide 60.
74 Other reasons are related to the formalization costs that branding and differentiating strategies involve. For example, registration of patents and trademark, incorporation, and any other contact with official authorities.
39
plays into the hands of the opposition to competition policy and, therefore, the task of
dealing with misconceptions is even harder.
The extensive literature on antitrust in transition economies counts misconceptions
among the many other difficulties in designing and implementing competition policies. It
seems, however, that the stress is on the symptoms, rather than on the syndrome itself.
Identifying the misconceptions and treating them separately, or as a second-best strategy
acknowledging them while designing the competition policy, constitute an important key to
the success of the transition to a market economy. Put simply, a good diagnosis is the key
to cure the illness.
40
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