Competition is one of the key drivers of excellence. Without the threat of being outsmarted and outpaced in potentially every facet of our endeavours, there is a high probability that elements of complacency and mediocrity set in. By pursuing self-interested goals and engaging in competition – guided by what is referred to as the invisible hand in elementary economics – every agent in the economy contributes to a common societal optimum.
This notion of self-interest is perfectly applicable to businesses seeking to “kill” the competition, undercut rivals, compete fiercely, or poach customers. This is, for all intents and purposes, the beauty of competition and free market economics as it leads to better quality products, cheaper prices and technological advances.
Alas, the market does not always function as it should, leading to market failures which require regulatory intervention, either when sellers exploit customers or when they exclude competitors to the detriment of society’s total welfare. Competition policy is designed to address this market failure with a view to ensure that “effective competition” prevails and that consumer welfare is safeguarded.
The Maltese Competition Act came into force on February 1, 1995, and admittedly shook the economic and cultural foundations of the local scenario which was, around that time, still nestled in protectionism, state monopolies and oligopolistic business structures. The setting up and implementation of competition rules were driven in tandem with the march towards market liberalisation, setting the scene for Malta’s EU accession a decade later.
As a society we have come a long way from the attitudes which at first opposed and resisted the advent of competition rules. Businesses now understand the competition parameters in which they must operate and are generally aware of the implications resulting from infringing anti-trust rules. Nevertheless, there still exists a knowledge gap with respect to the full extent of how competition rules impinge on day-to-day business operations. This stems not so much from the lack of conscientious effort in embracing competition rules, but rather from the complexity of applying such rules to real life business cases.
The Maltese Competition Act adopts a straightforward prohibition-based stance on anti-competitive agreements and concerted practices, and abuses of dominance. However, due to the enhanced focus on adopting an economic “effects-based approach”, rather than a legalistic “form-based approach”, what is considered anti-competitive crucially depends on the outcomes (effect), rather than the type (form) of business practices. While this invariably improves welfare, it potentially creates complexity and misunderstanding.
Questions such as “Is a price below cost anti-competitive?”, “Does discriminatory pricing lead to consumer harm?”, “What is considered to be an excessive price?”, “Does a market share of over 40 per cent signify dominance?”, or “Does the newly opened pastizzi shop next to another identical pastizzi shop represent unfair competition?” are quite common. Apart from the last question – which to no one’s surprise should be answered in the negative – the answer to these questions is almost always a disappointing “It depends...”. Without delving into details, it suffices to say that economics plays an enormous role in anti-trust cases, especially in developing a credible and coherent theory of consumer harm and in defining the market parameters or framework of investigation. Ultimately, courts should rely on the economic metric of welfare and efficiency – by way of productive, allocative and dynamic efficiency – to decide whether a particular conduct is detrimental to competition.
Fines in relation to infringement are neither small nor dismissible, and investigations by the relevant authorities can be protracted and disruptive to business operations. In this regard, it pays for businesses to adopt a pro-active approach in ensuring that competition rules are being adhered to. This is especially relevant to large companies which have a dominant position in the market. While dominance or substantial market power per se is not prohibited, abusive actions by dominant players which restrict competition are considered anti-competitive. The same can be said for when firms, either intentionally or otherwise, form collusive agreements or engage in concerted practices whereby competition is restricted, distorted or prevented. Unfortunately, due to Malta’s small size, our tightly knit business community is particularly susceptible to this kind of conduct.
Ultimately, businesses have a lot to gain by learning to harness the specificities of competition policy and tip the scale in their favour – not only can they become aware of when competitors might be acting anti-competitively, but they can also learn how to respond to market dynamics at the margin, within the ambit of the legal framework.
Steve Stivala is an assistant manager at KPMG in Malta providing management consulting and competition economics services.