Writers such as Adam Smith (1776) and Alfred Marshall (1890) emphasised the benefits of free entry to and exit from markets. The theory of “contestable” markets has acknowledged this insight, whereby it has established that the dynamic benefits of competition are obtained when it is relatively easy for new and more efficient firms to enter a market while older, less efficient ones are forced to upgrade or leave. Consequently, competition ensures that prices are kept as low as possible for consumers whilst opportunities are created for new firms, including small firms, to enter markets. In addition existing firms are under pressure to innovate. In the long run, this would lead to a wider variety of products and services and more efficient management techniques which would help to alleviate having to incur expensive research and development.
Competition / antitrust laws aim to keep markets as competitive as possible by preventing firms from engaging in strategies to limit competition. Competition / antitrust law generally comprises of merger control, abuse of dominance and cartel enforcement and were first introduced in Canada and the United States in the late nineteenth century. Such laws were subsequently adopted in many developed countries worldwide and a number of developing and Least Developed Countries (LDCs), including those in Africa, have also adopted some form of competition policy over the past decade. Now, more than 100 countries have competition laws.
There is, however, a widely held view that competition law in poorer countries should focus on cartel enforcement actions and competition advocacy, and should not include abuse of dominance or merger regulations because such countries face different economic challenges, that firms operating in such countries cannot achieve international competitiveness without economies of scale and that small economies require the creation of monopolies or substantial market power in the domestic market due to a lack of economies of scale.
There is no doubt that the economic challenges faced by the developed and developing and LDC economies are different. Whilst developed countries brace themselves for new technological development, developing countries are still under pressure to provide basic needs to society. Amongst the developmental challenges facing LDCs and developing economies are employment generation, basic infrastructure development, enhancing the inflow of foreign direct investment and removing supply-side constraints.
In a 2008 article in the Wisconsin Law Review, Brisick and Evenett1 ask “Should Developing Countries Worry About Abuse of Dominant Power?”. They observe that it is the very challenges and characteristics facing developing countries that make them prone to monopoly and abuse of dominance conduct that further inhibits the ability of developing countries to pursue economic growth and development, thus entrenching unequal income distribution and poverty in these markets. In particular, Evenett and Brusick list these challenges and characteristics as follows:2
- Most developing and LDC countries have poorly developed transportation and communication infrastructures. For example, the rail systems are usually not a viable means of transporting bulk loads in developing and LDC countries, and the excessive use of road / land transport further deteriorates the conditions of already damaged roads, implying that roads have to be (but are not) maintained continuously. This affects the degree of inter-firm rivalry in national markets and as a result, markets remain fragmented and small, often leading to anticompetitive practices by a single or a few local operators.
- Difficulties in securing financial capital in poor countries typically increase the barriers to enter and / or expand into industries for smaller players and result in some industries being characterized by a few large enterprises that enjoy a de facto monopolistic position.
- In respect of essential facilities such as banking and financial services, many poor countries still depend on a small number of banks that often provide limited banking services and charge high banking fees, further increasing the cost of doing business in such countries and stifling entrepreneurial behaviour;
- Further, many developing and LDC economies are dominated by the state, acting directly as the owner of state monopolies in key infrastructure industries or indirectly through the close links it entertains with national champions, which the state often seeks to promote. The dominance of the state can be at the expense of other domestic or foreign firms and can result in anticompetitive practices.
It is therefore clear that developing and LDC countries, by virtue of the unique challenges and constraints that they face, require competition laws that do not only focus on cartel enforcement actions and competition advocacy, but that also include merger and abuse of dominance regulations to effectively prevent and / or deter harmful anticompetitive practices by a single or a few local operators, large international firms and / or state owned enterprises.
However, another reason generally cited for the inappropriateness of abuse of dominance and merger control regulations in developing and LDC economies is that the technical expertise required to effectively evaluate merger and / or abuse of dominance cases (including both legal and economic expertise) is often beyond the capacity of these countries. This argument has some merit, as inefficient investigations unnecessarily raise the cost of doing business in such countries and may lead to incorrect and costly decisions.
In summary, therefore, developing and LDC countries (by virtue of the unique challenges and constraints that they face) require a competition law that effectively prevents and / or deter harmful anticompetitive practices by dominant local and international firms, as well as state owned monopolies. South Africa, for example, faces similar challenges, with a number of state owned, or previously state owned enterprises being monopolies in certain key infrastructure and other upstream industries. The South African competition authorities have investigated and imposed penalties on some of these enterprises for abusing their dominance in the markets in which they operate. However, the mere awareness of the competition laws and authorities of South Africa has also lead to a change in behaviour, spurring compliance to the provisions of the competition laws of South Africa by these enterprises.