Competition laws should definitely be concerned where products or services are priced below their variable costs.
Like particles behave unpredictably under zero gravity in physics; in economics what works well in a closed economy may not work that effectively in an open economy and vice versa. The current controls over monopolies, anticompetitive practices, abuse of dominant positions and mergers exercised by the Competition Commission of India (CCI) seem inappropriate for an open economy. Somehow, from the days of Joan Robinson, whose work on imperfect competition is the basis of such market interventions, lesser prices are taken to mean better consumer welfare in our socialistic mindset.
Indian telecom market, which has expanded solely based on cheap and cheaper prices, is an example of how non-remunerative prices can destroy consumer welfare and lead to shoddy services—you cannot even say ‘I love you’ to your beloved on cellphones these days without 3-4 call drops in between! As it stands today, India is a considerably more ‘open economy’ and particularly more so since ASEAN FTA, trade agreements with South Korea and Japan from where virtually most goods are available at zero duty at cheaper import parity prices, and from China despite duties.
Most manufactured goods can be freely imported—so how can anyone (or in collusion) control or manipulate prices and fix them beyond import parity prices? Conversely, if the Indian prices are lower despite nil-duty imports, it only signifies domestic industry being competitive—so what’s the grouse anyway? Indian firms would be exporting in such cases. In an open economy, the comparative competitive landscape is not just Indian firms, but includes other relevant supplying regions, say China, ASEAN, Japan, Korea and some others, over which CCI has no control.
Controlling only the domestic subset leads to loss of competitiveness. Bangladesh and Vietnam have taken a huge part of our share in textile trade (the prime reason for a bleak domestic employment scenario is textiles, potentially our largest employer) due to scale economies: average firm sizes in Bangladesh and Vietnam are 10-20 times that of India’s. In some cases, a single machine or unit in China manufactures what the entire Indian industry manufactures or consumes. Scale is an essential component of efficiency and competitiveness and restrictions on them are self-destructive.
Indian regulators have often gotten into the morals of pricing—the very antithesis of free markets. Indian agricultural produce markets are the most ‘perfect’ competitive—many tiny producer-sellers and many individuals buying: the ideal of any Robinsonian economist. Yet from time to time, tomato and onion prices fluctuate like an ECG graph whose needle has come unhinged—much more violently than tractor prices, airline prices, white goods and electricals. Should CCI get into controlling onion and tomato prices and underlying market practices? These have more impact on the daily lives of more people on the brink than many manufactured goods.
Does collusion work in India? Price is the main driver for most consumer decisions. It’s not unusual to find a Mercedes buyer bargain for a free key chain. In markets where demand curves have high elasticity, there is limited scope of manipulating prices by firms: small hikes in prices will drive away lots of customers to alternative products. Competition legislations are relevant more for elastic demands.
Collusive price hikes would lead to reduction in sales in price-sensitive markets. But who would volunteer to take these cuts, like Saudi Arabia does for OPEC? If demand is weak, most players would want to jostle with others and gain market share. If demand is inelastic and hefty price increases are possible with small cuts in production (few such examples in India: can washing machine manufacturers cut production by, say, 5% and achieve 25% price jumps?), will any player cut his volume and watch others make money at his expense? Preposterous.
As economist William Baumol concluded over half a century ago, firms are more guided by sales maximisation and other such proxies than profit maximising in their behaviour. Collusion requires cooperation. Where sly and open evasion of every rule or tax laws are the norm, gentlemen agreements or voluntary self-controls in India are unthinkable. We are terribly competitive in our behaviour: otherwise you won’t see such uncouth queue-jumping or impatient driving or ‘one for each day in year’ number of national-level political parties. Giving up for greater good is just not in our bloodstream.
The right focus
Why be concerned with B2B transactions when both parties are informed, experienced and likely to behave rationally and not psychologically pressurised? Far more collusive behaviour is witnessed in B2C transactions, say, between a doctor (prescribing tests upon irrelevant tests, refusing an operation unless you pass the ‘show me the money’ tests), drug firms and diagnostic labs, or between lawyers, a legal system completely under their thumb, and hapless clients. To focus on such B2C transactions would be far more welfare additive. CCI should focus more on beefing up enforcement and delivery of consumer protection laws.
Competition laws should definitely be concerned where products or services are priced below their variable costs. A society not paying variable costs is wasting resources. Such cases in telecom, power and petroleum pose huge systemic risks to the financial system. In any case, why would an Ola or Uber recover less than variable costs unless it is to drive away competition and start exploiting when others have folded up. Such practices are a matter of larger concern, but don’t seem to merit the attention of our CCI.
Competition laws should not be concerned with products that can be imported at zero duties or are being imported in large quantities despite duties or products of discretionary expenditure. Why be concerned with scale or prices of consumer electronics, white goods or cars, except to ensure that contractual obligations are adhered to and people are not ‘cheated’? Let the consumer choose to stay away.
Competition laws should kick in only when firms reach one-half of ASEAN’s biggest capacity. It can be applicable for lifesaving drugs or non-discretionary products. Others can be followed up based on surveillance or based on grievance from end-users. There are several areas where there are no market structures or performance of existing ones is poor. The commission should work out structures in those areas (for example, market structures for electronic waste, scrapped automobiles, vehicle parking, rural finance and insurance, public distribution system, etc).
CCI, in our open economy context, seems more a status symbol pining to belong to economic fashion street. If Make-in-India refuses to get up, sub-scale will be one key reason and legislations like CCI will have a lot to answer for. India badly needs to consolidate and scale up for cost competitiveness.
By: V Kumaraswamy
Author of ‘Making Growth Happen in India’. Views are personal