27 April 2015

Competition issues in the Pacific

“Competition policy” encompasses the range of policies, laws, regulations, decisions, and government actions that aim to promote competitive behavior between business undertakings and rationally address any circumstances in which competition might not be efficient or might conflict with other important social objectives. As such, competition policy forms an important part of national economic policy.
Competition policy is an increasingly important theme in PSDI and is now a focus area for activity in its own right. It is especially important in Pacific island economies because of the trade-offs between small market size and economic efficiency. Lack of competition allows firms to restrict output and/or raise prices without losing sales and reducing profitability because there are no (or few) other suppliers from which consumers can purchase a particular good or service. This is often the case with basic necessities (i.e., electricity, water, and other utilities). A lack of competition may also allow firms to reduce the quality of their products while maintaining prices or ignore market pressure for change. Such outcomes are clearly against the interest of consumers, and reduce overall efficiency and growth prospects. Competition policy may advance a variety of objectives, such as:
  • ensuring market efficiency,
  • encouraging entrepreneurship and innovation,
  • supporting good governance by restricting opportunities for rent-seeking behavior,
  • supporting equality of access to economic opportunities,
  • enhancing the climate for investment, and
  • promoting sustainable and inclusive economic development.
Competition is also a far preferable alternative to price controls, which have been widely used in many Pacific island economies. Price controls distort domestic production and fail to increase supply. These then result in raised prices.
The economic value of competition between firms stems from three types of benefits:
  • Better allocation of resources. In competitive markets, producers respond to price signals so that consumers can obtain the amounts of goods and services they require at the price they are willing to pay. In a competitive framework, producers do not restrict outputs and raise prices.
  • More efficient production. The pressure of competition forces suppliers to produce their goods or services at the lowest cost possible. To maximize their profits, suppliers must find the most efficient ways to produce their goods or services.
  • Innovation. Under competitive conditions, producers are more likely to innovate and develop new products and methods of supplying products. Domestic competition prepares local businesses to better compete in regional and international markets.
Competitive pressures also help minimize supply costs and keep producers mindful of consumer demands and market trends. For the public, the benefits of competition are apparent when competition is contrasted with monopoly (or a market structure where there are only a few suppliers, which may attempt to collude). In a monopoly,
  • the quantities of goods and services available may be restricted,
  • goods and services may be outdated and produced at higher cost than necessary, and
  • consumers may be charged higher prices than they would pay in a competitive market.
However, the relative size of economies in the Pacific implies that some sectors cannot support many competitors. In some sectors, economic efficiency dictates that only one or two suppliers serve the domestic market. This does not mean, however, that competition has a small role to play in Pacific island economies. On the contrary, it strengthens the case for competition policy and competition law. Effective competition law deters suppliers that might otherwise attempt to engage in anticompetitive conduct.
To date, PSDI assistance with competition policy has been focused on three countries: the Cook Islands, Papua New Guinea, and Samoa. This will expand on both the country and regional levels as part of the third phase of PSDI 2013-19.