Product market competition

Jens HøjOECD Economics Department

Prague lecture

Prague, 8 April 2013

Outline

• How can competition-friendly regulations help economic performance?– Main focus is on service

• What are the main obstacles to more competition?

Focus on the service sector because of high profits (mark-ups) and lack of international competition

A. Manufacturing

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

M ark-up B. Non-manufacturing

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

Mark-up

The economics of regulation and growth

• There are still large differences in GDP per capita levels and growth rates across OECD countries

• With US and Euro zone diverging over the recent past, after decades of convergence

• This is partly explained by differences in competitive pressures Negative effects on the two main determinants of GDP per capita

growth:

• labour productivity

• labour utilisation

GDP per capita

Labour productivity(output per hour worked)

Labour utilisation(hours worked per capita)

GDP per capita

Labour productivity(output per hour worked)

Labour utilisation(hours worked per capita)

Capital deepening (capital per

hour worked)

Multi -factorproductivity

Quality of capital

(vintage

and asset

composition )

Quality of labour

(skill mix )

Pure technicalprogress

GDP per capita

Labour productivity(output per hour worked)

Labour utilisation(hours worked per capita)

Hours workedper worker

Capital deepening (capital per

hour worked)

Multi -factorproductivity

Structural unemployment

rate

Labourforce

participation

Quality of capital

(vintage

and asset

composition )

Quality of labour

(skill mix )

Pure

technicalprogress

Employment rate

GDP per capita

Labour productivity(output per hour worked)

Labour utilisation(hours worked per capita)

Hours workedper worker

Capital deepening (capital per

hour worked)

Multi -factorproductivity

Structural unemployment

rate

Labourforce

participation

Labour market policies Product market policiesOther policies

Quality of capital

(vintage and asset

composition )

Quality of labour

(skill mix )

Pure technicalprogress

Employment rate

Competition policies affect GDP p.c. growth through various channels

Inappropriate service regulations slow down productivity growth 1

• Domestic and foreign investments are curbed:

– Firms enjoying product market rents have lesser incentives to expand productive capacity

– Regulatory burdens increase the cost of adjusting productive capacity

– FDI restrictions hinder entry of foreign affiliates

– Restrictive domestic regulations curb rates of return to FDI

• Firms do not converge to best international practice because:– Mild competitive pressures lessen incentives for adopting new

technologies (ICT)

– Barriers to entry and weak competition curb firm turnover (less “creative destruction”)

– Lack of foreign competitors (due to trade or FDI barriers) weakens technology spillovers

• This has negative effects throughout the economy:– Services are a crucial inputs in most economic activities

– Service inefficiencies translate in higher production and adjustment costs and lower productivity elsewhere

Inappropriate service regulations slow down productivity growth 2

Inappropriate service regulations hold down employment growth

• Firms hire less labour because:

– Rent-seeking restricts the level of economic activity

– Rent-seeking and inefficiency raises the cost of labour (higher wage premia/lower productivity)

• Structural adjustment towards employment generating service industries is hindered:

– Lower GDP per capacity compresses demand

– High service prices compress demand and stimulate home production of services (misallocation of skilled labour resources)

In sum: the service “growth engine” is stopped

GDP growth

Demand for servicesIncrease in services share of GDP

Absorption of unskilled employment in services

Competitive pressures in servicesLow costs of adjusting production

process to ICT use

ICT adoption/production in services

Contribution of ICT-using or producing services to

overall productivity growth

Productivity growth in services

Contribution to manufacturing productivity

growth through input/output linkages

◄

▼

►

◄

►

►

Benefits from services liberalisation (1)

• Investment, new entry and trade:

– Higher domestic investment rates (particularly in network industries)

– Faster adoption of Information and Computer Technologies (ICT)

– More entry of new firm

– Increased FDI integration and foreign affiliates’ activity

– Deeper services trade

Benefits from services liberalisation (2)

• Faster capital deepening and stronger competitive pressures imply:– Faster labour productivity catch up, directly in services

and indirectly in manufacturing • Higher wages/lower prices• Depends on human capital’s capacity to absorb and support

innovation (important for boosting consumer choice)– Partly due to faster multifactor productivity growth

• Lower product market rents and wage premia imply:– An increase in employment rates– An acceleration in the structural adjustment towards

employment-generating services

How to turn:• Fat lazy rent-enjoying capitalists

• into• Mean lean rent killing machines

• To• Boost growth

• And • Enlarge consumer welfare through lower

prices and larger choice of goods and services

Main obstacles to competition• Regulation (legal monopolies, collusive

behaviour, overly prescriptive regulation, Public service obligations, etc)

• Pro-competitive framework: – Abuse of dominant position–Collusive action (old guild system)–Secure a level playing field

OECD’s Product Market Regulation indicator (PMR)

• Turning a large set of qualitative data into a quantative measure:–State control

• Ownership and regulation–Barriers to entrepreneurship

• Adminstrative burdens, entry barriers, etc–Barriers to trade and investment

• Restrictions on FDI, tariffs, etc

PMR indicator: OECD Substantial reforms since 1998 Index scale of 0-6 from least to most restrictive

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5U

nite

d S

tate

s

Un

ited

Kin

gdom

Can

ada

Net

her

land

s

Icel

and

Den

mar

k

Sp

ain

Jap

an

No

rway

Fin

land

Aus

tral

ia

New

Zea

lan

d

Sw

itzer

lan

d

Hun

gar

y

Sw

eden

Ger

man

y

Aus

tria

Italy

Bel

giu

m

Po

rtug

al

Fra

nce

Ko

rea

Luxe

mbo

urg

Cze

ch R

epub

lic

Mex

ico

Tur

key

Po

lan

d

1998 2003 2008

Policies and growth

How to promote competition?• Improve framework conditions

– Remove barriers to trade and inwards FDI– Deterrence of cartels through effective sanctions

• Specific measures in inherently competitive sectors– Ease zoning laws (retail sector)– Abolish reserved monopolies (tobacco/alcohol)– Limit self-regulation/nationality requirements (professional

services)• Network industries

– Secure separation of monopoly and competitive activities– Reduce public ownership– Separate ownership and regulatory functions– Create infrastructure investment incentives

Competition policy 1• Institutional structure: independence and

transparency– Simpler institutional feasures without social partners and

interest groups (in councils)– Limit merger approvals of ministers and on non-

competition grounds (public interest criteria are non-transparent).

– Remove inconsistency with sector regulation and duplication of enforcement efforts

– Full coverage including public enterprises and market activities

– Engage in advocacy and consumer protections

Competition policy 2• Per se rules against horizontal price-fixing• Subject vertical agreements to a market

power test rather than per se rules• Subject abuse of dominant position to

deterrent sanctions (fines and jail)– Supplement with private litigation

• Introduce leniency (whistleblower) programmes to destabilise cartels and facilitate evidence gathering

Pro-competition regulation in retail distribution

• Facilitate establishment of new outlets (local monopolies) via less strict zoning regulation

• Liberalise shop opening hours (also internet driven)

• Remove regulation of promotional activities– Restrictions on sale periods– Prohibition of below-cost selling– Marketing practises

Pro-competition regulation in professional services

• To secure service quality and prevent market failure self-regulation impose:– Entry, access and residency requirements– Recommended or fixed prices– Exclusive right to exercise certain functions– Restrictions on advertising and business structures

• No evidence of improvements of consumer welfare, more of higher prices and less innovation

• Limit regulation of licensing, certification and registration to facilitate foreign entry.

• Ease restrictions on advertising, permitted business structures, exclusive rights, and mandatory membership of associations.

Common themes in networks • Enabling non-discriminatory third-party access (vertical

separation) => Ownership separation in rail and energy, but not in telecom (rapid technological changes)

• Supporting investment incentives to achieve successful reform in rail (clear responsibilities) and energy (downstream price regulation).

• Universal service obligations in a competitive environment (monopoly rights =>explicit compensation– Incumbents benefit from nation-wide networks and

reputation – Competitive tendering/ affordability = tax and benefit system

• Establishing a level-playing field with publicly-owned companies (avoid cross-subsidies and soft budget constraints) => privatisation and vertical separation.

Telecommunication prices in the OECD, USD PPP

Telecommunication• Independent regulator with sufficient powers

to secure non-discriminatory third-party access– Local loop unbundling (replace access prices with

charges and reduce permitted time)– Abuse of dominant position by incumbents in mobile

telecommunication on call termination – Require mobile operators to lease network capacity

(VMNOs) effective in reducing prices– Expand number of network operators

Electricity• Separation of vertically integrated incumbents• Competition possible in generation and retail,

but needs separation• Transmission (central gov) and distribution

(local gov) are natural monopolies – requiring strict network tariff regulation

• Establishing competitive wholesale markets (Nordic countries)

• Reduce concentration => breaking up incumbents

Air passenger transport• Privatisation of air transport – protection

against take-overs via foreign ownership restrictions and controlling stakes

• Lack of cabotage rights outside regional trade agreements

• Grand-fathering of landing and take-off rights• Government owned airports tend to have

high handling costs (entry barrier to no-frill low-cost carriers) and if not privatised have competitive tendering for ground handling services

Railways• Competition in freight transport (US)• EU directives aim at introducing competition in

international freight and passenger transport (limited success)

• Little progress in securing competitive domestic passenger transport– Separation of infrastructure and service provision– Competitive tendering for services– Problems of securing access to rolling stock, domestically

and internationally (safety, technical, and country-specific regulation)

– Inter-model competition is often restricted