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Balancing Competition and Regulation

December 21, 2015
During my time at the Federal Trade Commission this past summer, I had the opportunity to experience firsthand some of the challenges faced by the government in balancing competition and regulation. In many countries, law, bureaucracy and regulations have significantly diminished competition among firms. In order for an economy to flourish and succeed, governments should craft and orient their policies towards reforms focuses on maximizing competition and efficiency.

by Peter Aun, W’16

This means that competition and efficiency should be the main driver that lawmakers use to guide their decision making in all economic and regulatory policy decisions. These two factors, competition and efficiency must be included in all policy making frameworks and should be maximized and encouraged in all decision making and the crafting of regulations.

Most lawmakers often have the impression that competition and regulation are often at odds with each other and could never go hand in hand. However, regulations and competition actually go hand in hand, as they both have the same goals of preventing illegitimate acquisition and exercising of market power and facilitating the efficient allocation of resources. Thus, there is an immediate need to recognize the mutually reinforcing nature of competition and regulations. Lawmakers should approach regulation policy and competition policy with the knowledge of the mutual benefits that coherent regulation and competition policies brings to a nation.

Let us now examine some of the avenues that the government could pursue to strike the right balance between competition and regulation. Firstly, governments could employ measures to ensure successful regulatory reforms. These reforms include establishing the right industry rules, the right institutions to stimulate competitive culture and the right industry structures.

In order to institute reforms that maximize both competition and efficiency, the right structure must be in place before other reforms can occur. There have to be competitors in the market before there can be competition in the market. Research has also shown that privatizing monopolies is usually a poor policy. Furthermore, the negative effects of monopolies persist for a long duration of time and monopolies take a long time to be disbanded. Thus, monopolies are a bad starting point for countries. To rectify the problem of monopolies in a nation, countries should break up monopolies into different competing firms before privatizing or deregulating it. This is consistent with the general principle that regulatory reform should not just allow competition but it should foster it.

The second major reform to maximize competition and efficiency in a nation is to establish the right rules. Some examples of establishing the right rules includes instituting an effective competition law and ensuring a strong adherence to this law through vigorous enforcement and by minimizing the number of exemptions to this law. Such rules are especially important to ensure that the benefits of competition are not diluted by poor enforcement of domestic competition laws or private anti-competitive conduct. Poor enforcement of domestic competition laws by enforcement agencies would only encourage anti-competitive behavior to flourish, and this phenomenon would dampen the government efforts in fostering competition in the market. While some sectors would be exempted from these competition laws, lawmakers and enforcement agencies has to revise these exemptions on a regular basis to curb and prevent anti-competitive behaviors in these industries.

Finally, fostering a competitive culture in the country is vital. There is a long road ahead in building a strong competition culture, even in developed nations that have long adopted strict domestic competition laws and efficiency driven approach in their policy making. The first step in creating a competition culture in the nation is for all stakeholders and lawmakers to understand the benefits that competition brings to industries and to the nation and the commitment needed by all parties involved in maintaining and fostering a competition culture in the nation. There is a lack of understanding of the importance and benefits that competition brings to a nation, especially in many developing countries. There is also a lack of understanding of how competition policy is strongly linked to many other basic pillars of economic development in a country.

There are definitely many challenges that governments face in instituting economic reforms that maximize both competition and efficiency. But if governments craft and orientate their policies by creating the right structure, establishing the right rules and fostering a competition culture in the country, they are making significant progress in creating a competitive and successful economy.

References:

  1. The OECD Report on Regulatory Reform, Summary (June 1997), at 6.
Crandall, R. and Ellig, J., Economic Deregulation and Customer Choice: Lessons for the Electricity Industry, George Mason University, Center for Market Processes, (1997), at 2-3.

  2. M. Dutz and M. Vagliasindi, “Competition Policy Implementation in Transition Economies: An Empirical Assessment”. Paper submitted to the OECD’s Global Forum on Competition, (CCNM/GF/COMP/WD(2002)13 at 9), 14-15 February, 200
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