Competition Policy
Faisal Basri
The broad objective of competition policy is to help ensure that market economies deliver high and rising standards of living. More specifically, competition policy primarily seeks to prevent firms from protecting or expanding their market shares by means other than greater efficiency in producing what consumers most want at the lowest possible prices. In some jurisdictions, competition policy has important secondary objectives such as contributing to market integration or preserving a freedom to compete.[1]
Competition policy has two main branches. The first consists of advocacy whereby competition agencies encourage other branches of the government to adjust their policies so as to interfere as little as absolutely necessary with market competition—for example, in the development of regulations. The second branch is competition law enforcement. As law enforcers, competition agencies investigate and prosecute or prohibit agreements which either exclude competitors or substitute collusion for competition. They also prohibit monopolization or abuses of dominant position whereby enterprises unilaterally restrict actual or potential competitors. Finally, most competition agencies prospectively review mergers to ensure these are not used as a means to eliminate or restrict competition. Virtually all of competition law enforcement requires access to a great deal of highly specific, often confidential information concerning the workings of actual markets and individual firms. It also requires sensitive judgments and tradeoffs to be made concerning the economic effects of various types of conduct and mergers.
More specifically, the aim of the competition policy is to minimize the economic inefficiencies created by the behavior of anti-competitive firms. There are two sources of economic distortion instigating market failure. First, market externalities allowing firms with market power to eliminate competitor by unfair conduct. Second, government intervention itself is creating market distortion and economic inefficiency. The source of the first is the firms’ behavior, while the second is the government intervention.
The Law No.5/1999 covers the above basic objectives and spirit—and parallel to the previous explanation of this paper—as stated in the Elucidations: “Therefore, it is deemed necessary to promulgate the Law concerning the Ban on Monopolistic Practices and Unfair Business Competition intended to establish legal procedure and provide equal protection to all entrepreneurs in an effort to create a fair business competition. This law provides legal guarantee to further motivate the acceleration of economic development in an effort to improve the public welfare, and as the implementation of the spirit of the 1945 Constitution.
Several unfair conducts, such as collusive action and competitor elimination, may be done by the firm to win competition unfairly. Collusive action is the behavior of several firms to set price altogether or to set market division so that maximizing each firm’s profit. The trait of the collusive may be concealed (tacit collusion) and transparent (explicit collusion). The example of explicit collusion is the cartel of firms.
Meanwhile, the behavior of competitor elimination are vertical restraint and predatory pricing. Vertical restraint is the set of relationship between suppliers and producers or between producers with distributor. Predatory pricing occurred where a firm temporarily charges particularly low prices in an attempt to deter market entry by new competitors, to drive out existing competitors, or to discipline competitors.
In
Indonesia , there are several anti-competitive conducts:
(i) Anti-competitive conduct to eliminate competitor. The conducts are in term of strategic vertical integration, resale price maintenance and market division.
(ii) The conduct of firms with support or endorsement of the Government. Such as the cartel of business associations.
(iii) The conduct of state-owned enterprise.
The most anti-competitive conduct in
Indonesia is the second and the third category. This means that Government is the ultimate source of anti-competitive conduct, either because of the distortive policy or because of the ownership in state-owned enterprise and the tendency to protect the market of the realm of the state-owned enterprise.
The competition policy does not comprise of the anti-monopoly law only but also the deregulation and economy liberalization. The anti-monopoly law aims at controlling the anti-competitive conduct of the firms. On the other hand, deregulation and liberalization aims at preserving the role of market mechanism by minimizing the distortive government intervention.
COMPETITION IN
INDONESIA
One way to review the level of competition at the market is by looking at the market structure. The indicator to be used is the concentration ratio measuring the occupation of market share of the big firms to the total of the market. Market with high level of concentration means that the big firms have great market share. This allowed firms to conduct the anti-competitive behavior, such as price setting, cartel or market division.
According to Table 1, that the concentration ratio of the four big firms (CR-4) 3 digit ISIC shows a high score in 1990, as much as 58.46 and in 1995 as much as 56.57. The indices score of CR4 in 1990 and 1995 is higher than that in 1985 even though actually the Indonesian Government has issued some deregulation policies since 1983. The standard deviation of CR-4 in 1990 and 1995 are as much as 24.47 and 22.84 respectively, which are higher that that in 1985, show that the level of spread is getting larger. This means that the hiatus between the market share of the big firms and that of the small firms is getting larger.
The tendency of the increasing of the score of concentration ratio index is more significant if we look at the average index of the 5 digit ISIC CR-4. In 1990 and 1995, the 5 digit CR-4 as high as 71.50 and 68,99 respectively. The CR-4 indices in 1990 and 1995 increase higher than that in 1985 with 55.89 magnitude. That phenomenon is the same as the movement of standard deviation of 5 digit CR-4 which increase in 1990 (54.07) and in 1995 (52.49). The standard deviation, which is higher than that in 1985 (50.09), shows a larger hiatus of the market share occupation between the big firms and the small ones.
Just as shown in Table 2, the sum of the industries with CR-4 index 70% or more increases from that in 1985 (32%) become 54% in 1995. Meanwhile, the sum of industries with CR-4 index less than 30% is decreasing.
Some industries with highly accelerated CR index are professional equipment, non-electrical machinery, non-metal mineral, fabricated metal and printing & publishing. While industries with decreasing CR index are clothing, furniture and fixture, shoe, porcelain, beverages and basic mineral glass.
There are three reasons explaining why CR in an industry is high (Shauki, 1999). First, reason pertained to the level of technology that is the utilization of the economies of scale. To some industries, a high level of economies of scale is compulsory because of the high cost of technology or the high price of fixed asset. Moreover, with small market share, such industries contain only few firms. Classified in this type of industry are chemical industry, petroleum refining, petroleum product, capital goods industry and durable goods industry such as basic metal industry, non-metal, fabricated metal, non-electrical machinery, electrical machinery, transportation equipment and professional equipment.
The second reason pertained to the high efficiency of the dominant firm or innovation, eliminating competitor or creating barrier to entry for potential competitor. The high level of concentration at such industry because of the efficiency and innovative reason is an advantage for the economy. Classified in this kind of industry are processing and preserving meat with score of CR index 65,88% (1995), even though its Effective Rate of Protection (ERP) is as low as –1 (Table 3).
The third reason pertained to the anti-competitive conduct of the firms by preparing the excess of production capacity, collusion or predatory pricing. The concentration of this type is disadvantage for the economy because their conduct increasing prices and creating dead weight loss of economy. Classified in this type of industry are cement and plywood.
THE SOURCE OF COMPETITION PROBLEM
In
Indonesia , like in other developing countries, the government set the development goals and tried to reach them by market intervention. Example of such goals: foreign reserve saving, technology transfer or creation of job opportunity. The market failure has become so many times the escape-goat to make right of the excessive Government intervention, from the chosen of the strategic industry to the implementation of policy instrument. Such view contained implicitly a faith that the Government intervention is superior to market mechanism.
In many times, such intervention creating distortion since confining competition, emerging economic inefficiencies. Besides, the process of decision making is full with lobby of the vested interest of the rent-seeking group. The policy taken may be bias to certain vested interest. The probability that the correct policy taken to correct the distortion is small since the decision making process is not objective so that the decision is not precise. Moreover, the Government intervention created a new distortion. What actually happened is the government failure since they try to amend market failure.
Several cases indicating how the role of government is actually only to make goal of the interest of certain groups. The most vulgar case is
Timor national car program, which is aimed at technology transfer but then to be bias to the advantage of the former President’s son. The case of PT. PAL, an Indonesian shipping company, aimed at the development of shipping industry but later it monopolize the market of ship, making the national marine industry die. The source of the competition problem in
Indonesia is completely shown in Table 3.
In
Indonesia , there is a high correlation between the level of protection and the level of concentration. The higher the level of protection of an industry, the higher the probability that an industry have a high level of concentration with orientation of domestic market. Table 5 contains the list of industry with 5 digit ISIC having high level of concentration with low export performance and low level of Real Effective Rate of Protection (RERP). RERP is defined as the corresponding increase in its real value added per unit, where real value added per unit obtained by deflating nominal value added by the nominal wages.
COMPETITION POLICY AND INVESTMENT
Competition Policy comprises of the anti-monopoly and sound competition law, economy deregulation and liberalization. The anti-monopoly law regulates the firm behavior in order not to abuse its market power so that the market mechanism works with low level of Government intervention.
Liberalization or deregulation of trade and investment becomes very important in order to keep the market mechanism works well. The trade liberalization allows an output market of an industry open and competition allows the price to reach an efficient level, maximizing resource allocation.
Liberalization or deregulation of investment invites the inflow of capital that is really aimed at to do an efficient economic activity, not of the rent-seeking capital. If a market is a protective one, it is not impossible that the capital inflow is the capital looking for quick profit and emphasized at huge gain in short in term of economic rent. The projects chosen will be the short term project. Investors will hold the domestic partner having access to the power elite. If a new business chances proliferate return in long term and need a big amount of capital, investors will hold the power elite to get a “warrant” from the power elite directly for its business sustainability. It is no exception that these kinds of lobbies have anti-competitive trait.
Therefore, investors or entrepreneurs should be given a leeway to develop their own long term vision so that they are free to choose the best business aspect they will go through, which is concurrently the best for the whole economy. The minimal position of the Government is at least not to bother the process to choose of the investors. The best way the Government can do is to develop an incentive and disincentive mechanism based on the long run and unequivocal vision. With such mechanism, the Government may herd the economic actors to move to the optimal array of the economy.
Table 6 shows the result of a survey by JETRO conveying the most important investment problem in 1996 are unexpected cost and complex tax system. Unexpected cost is actually the money spent out to bribe the public officer. The second is rising wages, and the next consecutively are tariff duties and red tape, competition with other companies and labor problems. In 1997, the most important problem is exchange rate fluctuation. The monetary crisis is mentioned as the main cause. Still, the problem of unforeseen cost and complicated tax system become the second rank. Next are rising funds, market condition and labor problems.
It should be pointed out that in none of the other ASEAN countries included in JETRO Survey (
Malaysia ,
Philippines ,
Singapore and
Thailand ) was the “complexity of administrative procedures” and the related problem of “unexpected costs” mentioned as a major problem by the Japanese firms. The only other Asian country where this problem was mentioned as the number one problem was
China .
The fact that the ranking of problems faced by these Japanese firms operating in Indonesia has been quite similar to the ranking of problems mentioned since the early 1990s indicated that despite the successive deregulation measures since the mid 1980s, investment licensing procedures and other administrative requirements continue to be more cumbersome, time consuming, and costly.
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[1] Joanna R. Shelton Deputy Secretary-General, OECD), “Competition Policy: What Chance for International Rules?” Paper presented at the WILTON PARK CONFERENCE 545: THE GLOBAL TRADE AGENDA.
