Culled from THISDAY
What is competition? According to Richard Wish, competition is the struggle or contention for superiority and it is seen to mean ‘a process or rivalry between firms…seeking to win customers business over time’. There is a growing consensus that markets deliver a better outcome than state planning and central to the idea of markets delivery (effective or not) is the existence (or non existence) of competition.
It is important to assess the effects of competition on an economy, in particular, the Nigerian economy. To do this, one must first look at what an economy with perfect competition looks like and then compare it to an economy with monopolies and oligarchy.
Perfect competition It entails a collective effort to win over the consumer through lower prices and better products. Where there are numerous sellers or producers servicing the needs of buyers for a particular product or service, each seller or producer tends to adopt strategies that would endear them to the buyers. In other words, the producers or sellers compete with one another for the patronage of the consumers. This competition can be in the form of lower prices, better quality products, greater efficiency, wider choices and other value added services that are not obtainable in a monopoly. Richard Whish states that social welfare is maximised in conditions of perfect competition. Social welfare, a term we are not too familiar with in Nigeria, is the well being of the entire society. Social welfare is not the same as the standard of living but rather it is the quality of life that includes, amongst other things, the availability of essential social services. He goes on to say that society’s wealth overall is maximised by allocative and productive efficiency. A proper competition policy and law would operate to ensure that interventionist policies for industrial development do not place undue burden on the consumers and the economy. It would adopt an empirical approach to balance the industrial policy objectives with the need to maintain competition. In the absence of a competition policy and law, it is easy for vested interests to appropriate legitimate policy objectives and distort it for the benefit of few individuals.
Competition law enforced by an independent authority would scrutinise these measures and discard those that do not meet the necessary tests. The relationship between economic power and political power is never a hidden one. If a country operates an economy where markets are deliberately distorted in order to enrich a few persons, those persons would continue to have leverage on political power.
A very recent example of such competition during the first quarter of 2014 is what has been happening in the telecoms industry. Airtel (I believe although its arguable) started ‘borrow me credit’ a phrase familiar in Nigeria and as a result all other phone networks followed suit from MTN to Etisalat. A clear example of competition symptoms; lower prices, better quality products, greater efficiency, wider choices and other value added services.
As stated above by Whish, allocative and productive efficiency maximises a nations wealth. We will now assess them.
Allocative/Productive Efficiency According to Pareto where allocative efficiency exists in perfect competition, the resources are allocated between different goods and services in such a way that it is not possible to make one better without making the other worse. Allocative efficiency occurs when there is an optimal distribution of goods and services and taking into account consumers preferences. Quintessentially, where the value the consumer places on a good or service equates to the cost of the resources used up in production, it is said the allocative efficiency is achieved. To put it more simply, where at an output level the price is equal to the marginal cost of production so the consumer pays the lowest cost possible for the product, for the producer to make a real profit he will ensure maximum production.
The second thing Whish discusses is productive efficiency. According to him, it is said to be achieved when a producer is unable to sell above the cost (customers will desert him) and naturally will not sell below it (he’ll make no profit) and if he was to sell above the cost other producers will move into the market and effectively push him out of the competition and they as a result will make a profit. They will produce on an efficient basis so that they can earn a greater profit. Quintessentially, it forces producers to incur the lowest cost possible in order to earn any profit at all.
Without venturing too far into economic and financial principles it is note worthy to see why competition is crucial in such an emerging economy. From a legal perspective it is an exploitative preventative measure. It stands to defend the innocent consumers from cartels, monopolies and oligarchs and their non-consumer friendly (but power and profit friendly) philosophy. It is still hard to believe while the world was enjoying the use of mobile telephones in the early to late 90s, Nigerians were still being charged a fortune to have landlines and mobile telephones were compared to the utmost of luxurious items.
As stated above, this article intends to show, amongst other things the effect of monopolies and cartels on an economy however, all that is required of the reader is to look at what competition in Nigeria looks like today and you need not look farther. It is a perfect example of imperfect competition.
Competition Aim/Purpose The aim of competition policy and law is not just to ensure that there are many suppliers in the market for particular goods and services but to ensure that such suppliers play according to a set of rules that would make it difficult for any of the suppliers or the suppliers as a group to lessen or eliminate competition in the market. Basically, competition policy and law realises that the mere presence of many suppliers does not automatically result in a competitive market. This is because one of the suppliers may have the market power to undercut the other suppliers and make it difficult for them to operate in the market or out-rightly force them to close shops, and then the dominant supplier would enforce non-consumer friendly prices.
SEC/ISA The Securities and Exchange Commission (SEC) and the Investment and Securities Act (ISA) provide a vague competition policy regarding mergers stating that they should not ‘restrain competition’. But this is inadequate especially for an economy such as Nigeria’s. Although, competition policy provides the overall framework for ensuring that the economy is free from market distortions resulting from anti-competitive structures and conducts, competition law is one of the tools of achieving this objective. A competition policy seeks to mainstream the virtue of competition into all the relevant policy areas such as trade and industrial policy, investment policy, macro-economic policy, privatisation and deregulation policy, etc. and as previously stated, it represents a government’s deliberate effort to safeguard the proper functioning of the economy competitively.
Competition Prohibitions Competition law addresses issues relating to market structure and market conduct, behaviour or practices by firms. Market structure speaks about the level of concentration (the number of firms) in the particular market, the ease with which a new firm can enter the market and the substitutability of the products or services in that market. Competition law usually frowns at sparsely concentrated markets, i.e., markets having one supplier/firm (monopoly) or having few suppliers/firms (oligopoly), especially when the possibility of new suppliers entering the market is very slim and the products or services do not have close substitutes. What happens in this type of market is that the suppliers are able to determine the supply, set the price and put other unfair conditions on the consumers. We can be sure that no consumer likes to be caught-up in a market where s/he has no choice. In Nigeria, we used to have government monopolies on telecommunications in the Nigerian Telecommunications Limited (NITEL) and power in the former National Electric Power Authority (NEPA).
Some of the conducts or practices that a competition law prohibits and punishes include: abuse of dominant position of market power; another is collusion among firms to lessen or eliminate competition. Collusion is said to be horizontal when it is between or among firms at the same level of the supply chain who should ordinarily be competitors.
Collusion can also be between the seller of the finished product or a service and the supplier of the inputs needed for making the finished product or providing the service. Cartels are classified as collusive agreements.
Another aspect of collusive practice that would be of utmost importance to competition law in Nigeria is the issue of bid rigging in public procurement. Apart from corruption in the public procurement process, another likely reason why government contracts are usually over-priced could be because the contractors agree among themselves to bid at artificially high prices with the understanding that one contractor would bid slightly lower to win the contract with the mutual understanding it will be taken in turns.
The Federal Competition Bill The federal competition bills introduced in 2014 amongst many are ‘priority economic bills’ as put by the Minister of Trade and Investment Dr. Olusegun Aganga. The bill presents the opportunity to address the many issues laid out above. We will look at the bill briefly but critically.
The bill attempts to address the gaps and inconsistencies in markets’ buying and selling structure and the concepts of consumerism. It was evident that the various federal bodies created to govern or regulate market prac- tices that could potentially pose a threat to competition, for instance, the Competition and Antitrust Reform Committee were not so effective, however the committee worked with the Bureau of Public Enterprises to create a competition policy in Nigeria and as a result their work, came up with the Federal competition Bill. The Bill attempts to create an anti competition regulator empowered to punish anti-competitive practices and to regulate all industry practices in every sector in Nigeria.
Poignant to Nigeria’s needs, the bill addresses the issues of ‘abuse of dominant position of market power’ (sections 25-28 Federal Competition Bill (FCB)) defining what constitutes abuse as ‘ restricting the entry of any person into the market; restricting the entry of any person in competition with the dominant firm into any market; preventing or deterring any person from engaging in competitive conduct in that market; or eliminating any person from that market’.
‘Regulatory pricing’ (sections 34-37 FCB ) and sections 18-24 deal with contract arrangements and restrictive practices, further lessening competition. What is further noticeable about the bill is that it binds all trade within and outside of Nigeria so far as it affects the Nigerian markets (this also includes Nigerian shareholding in non-Nigerian countries, regardless of whether they are domiciled in Nigeria or not (Section 15 FCB ). Furthermore, the bill is retrospective, section 18-19 of the bill nullifies contracts that either restrict competition or exclude it irrespective of when the bill is passed into law or not. Clearly this raises questions of whether this is just or not and brings to light some of the issues within Nigeria as to why we have yet to devise actual competition laws to regulate anti-competition.
Conclusively, the point here is that no successful economic reform agenda can be executed without accompanying regulatory framework that would support the smooth functioning of the reformed sectors. The result of privatising and liberalising some major sectors without a competition law can be catastrophic to the economy, that is, the private investors are left to behave as they choose at the detriment of the consumer and the economy. However, the Federal Competition Bill provides a silver lining. It provides regulatory framework on the clamp down of anti-competitive behaviour. This is good for an economy as vast and un-codified as Nigeria’s.
Joshua Olomo is a legal practitioner, based in Lagos.
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