For competition, let the market take over

By Benedict Chong

Milton Friedman, a Nobel Prize winner and notable free-market economist within the ranks of the Chicago school of economics once said: “One of the great(est) mistakes is to judge policies and programs by their intentions rather than their results”. Legislators of state laws and regulations tend not to consider the real and actual effects of their policies, instead focusing on what they believe to be the true intention of its passage.

The result is a malinvestment of economic resources and lowered competitiveness of the economy. For instance, legislative bodies voting for populist crop subsidies to lower farming costs fail to consider that the monies required to finance such programs are actually siphoned from other more productive sectors of the economy.

In Singapore, the Competition Act was first enacted in 2004 and aims to “protect consumers and businesses from anti-competitive practices of private entities.” The three activities forbidden under the Act are:

1. Agreements, decisions and practices which prevent, restrict or distort competition;
2. Abuse of a dominant position;
3. Mergers that substantially reduce competition.

Any repudiation of these prohibitions will result in financial penalties, the sum and severity being at the discretion of the Competition Commission Singapore (CCS), the regulatory body established in 2005 to administer the Act. In the nine years since CCS was formed, the Act has been exercised numerous times in response to price fixing allegations and abuse of dominant positions.

In view of the purpose of CCS, the recent announcement granting TigerAir and Scoot Airlines antitrust immunity will undoubtedly raise many questions. Both airlines will now be able to legally collaborate in price fixing and flight scheduling. Antitrust immunity will also grant both airlines the ability to collude without any threat of possible antitrust action taken against them.

The Singapore government would then likely direct attention at how such a policy was implemented and followed through by the US government through the Department of Transport. However, justification through numbers is no justification. The question here is whether CCS should be involved in any deliberation between two airlines – or any types of businesses, for that matter – attempting to deal with each other.

This case serves up the possibility that the Act itself is anti-competitive, since it grants enormous market power to the arbitrary will of regulators. Concentration of such economic power raises the possibility of both corruption and regulatory capture where businesses CCS are supposed to regulate attain influence in CCS operations.

Such situations are extremely common in self-professed free economies such as USA and the Eurozone economies. It is thus unwise to assume the impossibility of such a scenario in Singapore.

Prevent monopolies and price control?

No doubt, there are naturally many advocates of antitrust laws, and it is worth reviewing their core arguments.

The most common argument is that antitrust laws limit monopoly power. With antitrust laws, these advocates point out, companies will not be able to freely monopolise the market supply of consumer goods and services, hike prices and increase profits surreptitiously. Such actions are deemed by them to be detrimental to consumer welfare.

But the intervention of state institutions such as CCS through punitive measures do not always result in the enhancement of consumer welfare/surplus. Instead, such non-market interventions have been proven to be deleterious to both economic efficiency and consumer welfare.

In fact, it might even be speculated that the entry of state power into the market has limited consumer choice. For instance, in Singapore, the prohibition of satellite televisions, ham radios and numerous mandatory licensing schemes to conduct business, all done in the name of efficiency and security, might even be detrimental to consumer choice and welfare. Satellite television for instance will provide free and easily available broadcast to the consumer. Why then, is it not legal to own one if it enhances consumer options, which is an inferred goal of CCS?

Past precedents in the exercise of this arbitrary power to enact punitive measures against monopolies have largely backfired. Consumers eventually had to pay higher prices than when the monopoly was in existence.

Standard Oil, for example, held monopoly control of the energy market in USA before it was broken up by Teddy Roosevelt. But the charge that it had set exorbitant prices is but a myth advanced by politicians with personal agendas. In fact, recent evidence shows that Standard Oil had consistently lowered prices of kerosene/gasoline and the antitrust action taken against it had led to higher prices paid by the consumer.

Indeed, if regulating monopolies is the prerogative of CCS, then Temasek and GIC would have been shut down upon formation. Given their undue power and influence over domestic markets, such entities should have been scrutinised more closely. Yet, it would appear that CCS has left both goliath organisations mostly unmolested.

Promoting honesty and innovation?

Another argument advancing the benefits of antitrust legislation is its promotion of honesty and independence in companies, through threats of legal action. This argument proposes that consumers will benefit as competition is enhanced and prices are lowered. But this argument, like all other assertions, is just that. They fail to comprehend the structure of the corporation and its links with the ultimate regulator, the consumer.

Every business entity seeks to make profits and enrich its shareholders and/or managers. Analysis of a monopoly tends to conclude at this point and regulators start enacting/enforcing various rules and regulations which serve only to stifle creativity and innovation. Instead of enlarging or providing boxes to think out of, regulators take away entire boxes.

The missing link is that companies are competing for consumer dollars. These dollars work in similar ways to a democratic election. Companies providing goods and services deemed desirable will have their cash registers ringing while entities solely interested in generating profits without covetable products will endure losses. Only the strong survive in a starkly Darwinian free market environment.

By stepping in and determining with abstract and convoluted mathematical gymnastics whether a monopoly is abusing its market power by charging excessive prices, regulators become vote brokers. Consumers can no longer freely vote with their dollars. These companies are either punished with financial penalties or forced to break up. Even the pecuniary fines do not go the consumers.

The word “honesty” is also largely defined by the arbitrary will of regulators. By hiring lawyers and legal professionals to interpret obscure clauses in the antitrust legislation, compliance costs escalate and reduce available finances for innovation. Ultimately, consumers who are supposedly the beneficiaries suffer from prices that could have been lower and products which could have been better.

Regulating the companies and deciding penalties for lawful contravention arbitrarily dilutes or recues entirely consumer power.

Competition, mismanaged

Singapore’s inability to prevent monopolies and encourage innovation, so as to bring benefits to consumers, is apparent not just in isolated examples. According to the World Bank, Singapore is a developed market economy with the world’s most business friendly regulatory environment for local entrepreneurs, and among the world’s most competitive economies. Yet, the notable absence of any highly successful and independent entrepreneur would easily defeat that statistic.

Singapore’s open economy is anchored by both the services and manufacturing industries with a recent drive towards productivity led growth through economic restructuring – another example of economic (mis)management by the state.

Perhaps in the Singapore example of managing competition, Milton had it down pat. CCS has been obtrusively busy with administering standards to prevent monopolies, that it likely lost sight of the fact that this is usually best sorted out by market forces in an open economy.

What we saw in the latest case of TigerAir and Scoot demonstrated that attempts to maintain competition often lead to its impediment. In cases where the market should have been left on its own, so as to bring value to consumers, the interference of the State can only do more harm than good.