Enforcing Competiton: The Prospects For Jamaicas Growth

One of the most significant recent changes to Jamaica’s commercial landscape has been the introduction of competition into the telecommunications sector. The end of the monopoly era in telecommunications has brought about investment, innovation, and consumer choice. Jamaica can learn from this experience and extend the benefits of competition to other areas of the economy. This, in fact, is the mandate of the Fair Trading Commission (FTC).

The importance of competition is well-acknowledged in advanced economies. The businesses of commercial giants such as IBM, AT&T, Alcoa, British Airways Microsoft and General Electric have been subject to considerable scrutiny by regulatory agencies in their efforts to maintain competition. As a result, a whole industry of specialized lawyers, economists and other consultants on competition has emerged, and it is now quite rare for a major business magazine to be released without an article that spotlights competition. Jamaica’s success in the telecommunications arena makes it likely that what has become commonplace in North America and Europe will become increasingly applicable here. The role of competition and the prospects for competition policy are therefore relevant to our policy makers, business community and consumers.

In a competitive market, firms constantly try to gain an advantage over their rivals by increasing efficiency or offering more attractive terms to customers. This competitive process encourages the development of improved products and, in the long run, enhances economic growth and living standards. It lies at the heart of any successful market economy and is crucial to the protection of consumers’ interests and the efficient allocation of resources. Competition is the core of the theory of “creative destruction” which postulates that economic growth is driven by innovation. In the process, new innovations replace old ideas, leading to the destruction of old methods, processes and even firms. The firms that survive are the fittest and most adaptable – until they are displaced, that is.

To embrace competition, Jamaica must accept that inter-firm rivalry means that firms that we uphold as icons may die as new and innovative ones emerge. The decline or break-up of our dominant firms may not reflect the results of bad public policy or inactive government. Instead, the replacement of these firms by more aggressive or innovative new rivals may offer the best prospects for re-energising the island’s economy. The benefits of competition justify its cost. With competition, consumers are able to select the supplier who offers the best deal. As firms try to outdo one another, they are driven to offer lower prices, better quality and improved service – in sort, to offer a better deal. This leads to new innovations, improved efficiency and productivity and ultimately strong economic growth.

Studies suggest that the economic impact of competition can be significant. In the UK, for example, economists estimate that GDP could be between 3.9 – 7.2% higher if markets were fully competitive. This result also applies to the developing world. In Peru, an estimate of 5% is obtained. These findings suggest that increased competition could be an important element to Jamaica’s efforts to achieve economic growth.

A recently released report by the McKinsey Global Institute, studied the underlying factors behind US productivity growth between 1995 – 2000. In this period, the US experienced a labour productivity growth rate of 2.5%. This is significantly higher than the average growth rates of 1.4% for the years between 1972 – 95, and close to the 2.9% average growth rates of the golden age of 1947–72. It was found that structural factors, in particular product, process and process innovations, were the most important factors explaining the productivity growth jump, with changes in product market regulation also contributing in select instances. However, underlying all this, “heightened competitive intensity was a crucial catalyst in many sectors responsible for the aggregate productivity acceleration”.

A spin-off from improved domestic productivity as a result of competition is international competitiveness. Michael Porter, the guru of the theory of competitive advantage, states that “active domestic rivalry is strongly associated with international success”. Firms that are used to a rough fight at home will be fit and ready for a fight in the global scene. Porter goes on to argue that few roles of government are more important to the upgrading of an economy than ensuring vigorous domestic rivalry.

In recognition of the importance of maintaining competition, governments are increasingly enacting legislation and establishing agencies to protect competition. The oldest competition legislation dates back to the Sherman Act that was set up in the US in 1890. In Jamaica, the FTC was set up under the Fair Competition Act (FCA) in 1993. Its mandate is to protect consumers and to safeguard against anti-competitive practices.

The FCA speaks to issues such as misleading advertising, sales of goods above advertised prices, refund policies and warranties. In addition, it prohibits two categories of anti-competitive practices. The first are agreements that restrict competition. These include agreements in which suppliers effectively set the prices at which their goods may be resold by distributors or retailers. Market sharing and collusion are also prohibited by the FCA, as are agreements that “bundle” or “marry” unrelated products. The implications of bundling is that some players may, instead of offering a better product, use their dominance in one market to leverage their position in another, causing a reduction in competition. Suppliers may also be prohibited from discriminating against buyers by setting terms and conditions that place them at a competitive disadvantage in relation to other more favoured customers.

Even informal or unwritten arrangements such as “gentleman’s agreements” may fall within the scope of the Act.
The second category of prohibited practices is the abuse of a dominant or monopoly position in the market. A dominant firm may run afoul of the law when it exploits its market power by charging excessively high or discriminatory prices or by placing onerous conditions on its buyers. The Act also limits “exclusionary behaviour” by dominant Jamaican businesses. These firms may be prohibited from setting up exclusive dealerships or from setting prices below their costs as a means of driving their competitors from the market.

Dominant firms may also be required to grant access to facilities that they control if other firms require access to these facilities in order to compete. Digicel might argue, for example, that interconnection access to Cable & Wireless’s land lines is essential to its ability to offer a full mobile service and is therefore required under the FCA.

Competition authorities such as the FTC tend to take aim at a nation’s dominant enterprises. As such, their actions are often highly controversial. This was certainly the experience of the US Department of Justice when it sought to break up Microsoft and the European Union when it prevented a merger involving General Electric. It was also the recent experience of the Peruvian competition agency when it sought to end a cartel between Peruvian poultry farmers, an investigation which eventually led to a total penalty of US million on the firms involved. Jamaica’s competition authority is still young. As its activities expand, its policies and approach are likely to get our attention.