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
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M ark-up B. Non-manufacturing
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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
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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
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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