If all goes well, the report of the competition policy committee will be out by the end of this month. It will be interesting to see how much good economics it contains. Assuming, with good reason, that there won't be very much wrong with its economics, can one be so sanguine about the other leg on which a good competition policy stands -- good law?
Even if one were to give the drafter of the new competition law the benefit of the doubt and assume that it will be broadly all right, another worry remains: how will their intersection work for the new economy? Specifically, has the competition policy committee -- which consists, apart from one academically-oriented exception, of old economy types -- wondered about the problem? I suspect not.
But if the general direction in which the world is moving is any indication, there could, for instance, be the issue of what are called `category-killers' in Net business. These are net firms which, typically, account for over 90 per cent of the market share in the business in which they are. Amazon.com is the best known case in point. But there are scores of others in different niche businesses.
The way a firm becomes a category-killer is simply by exploiting the old, first-comer advantage. It gets in there first, offers a unique service, and does so exceptionally well. The results are predictable: the creation of an entirely new market, its quick expansion and an even quicker accretion to the firm's market-share because this firm has created the new market in the first place.
There is an exact equivalence between its growth and that of the market. Thus, for all practical purposes, a monopoly is created. But, since there are no formal entry barriers, competition soon begins. Great, you might say, so what's the problem? But, in fact, this is where the plot thic-kens. In the old economy, a monopolist or a market dominator needs to actively use its market power or the political connections of its owners and/or managers to prevent competition.
Conventional competition policy and competition law enter the picture at this point. The idea to is to ensure that there is no active sabotage of competition. But what if there is no need for an incumbent to use any active methods to prevent competition? What if the very nature of the business prevents competition?
No problem, say the economists. This is a case of natural monopoly which everyone knows has to be regulated. Actually, no. Category-killers are not natural monopolies which exist only or mainly because the cost of entry into the business is so high. Water supply, power, old-style phone networks are good examples of those.
In the case of Net business, in contrast, the entry cost is negligible. Anyone -- even an economist -- can set up business at a fraction of his annual income. In that sense, category-killers are not a natural monopoly. They merely look like that because of the way the business works. Their dominance thus has nothing to do with the concerns of old economy competition policy such as formal entry barriers, price collusion, market rigging, etc.
The market share develops more out of the Net users' habit. You simply click on to the familiar site and carry on from there. To use an analogy, it is like the route you take to office everyday. First right, second left, right again and then straight till you fall into the ditch, that sort of thing. Mindlessness, therefore, is an important attribute on the demand side.
On the supply side, it is simply the old increasing returns to scale which comes into play -- but with a critical difference this time. In the category-killer game, you have infinitely increasing returns to scale. Indeed, if anything, it is this last which is the most important determinant of the fact whether you are a category-killer or not. It is this alone which ensures the gradual withering away of competition.
So my respectful question to my namesake who heads the competition policy committee is this: Sir, have you given this thing a thought? If not, will you do so now, before the law gets fully drafted by your colleague? Alternatively, if you think the issue is not important, will you tell everyone why. Or, if you have indeed taken category-killers into account, will you air your views so that there can be some public discussion?
The key issue, to my mind, would be that if a Net firm acquires its dominant position because of infinitely increasing returns to scale, then, whether or not it is abusing its market power -- which is the key test for the competition policy to come into play -- would have to be determined by the trend of prices on offer.
If prices are continuously falling in real terms, there is no abuse of market power and vice versa. There are bound to be other considerations as well which have not occurred to me. One way or the other, it would be very useful to include a discussion of e-commerce in the competition policy. That might delay the report, but for a civilisation that has waited 3,000 years for it, what is a few more weeks?
