It appears to be quite timely and appropriate that the Nobel Prize in Economics has gone to Jean Tirole, whose major contribution has been in the area of market domination by a small set of firms and the regulatory action to be taken in this context. This has become a controversial issue in our country given the approaches taken to deal with critical resources such as mining or spectrum.
In the aftermath of the various crises in capitalism, the issue of crony capitalism has always been at the forefront where it has been argued that there are close connections between industry and the government, be it in East Asia or the USA, which indirectly encourage such market domination. Even in India, RBI has been blunt on hinting at this phenomenon.
Tirole has argued that in segments where there are monopolies or oligopolistic structures, companies tend to dominate the market and guide the prices in a desired direction given their strength. It can be through higher price or lower output, though the latter becomes difficult when there is free-trade and the product can be procured from outside. While price controls have often been spoken of, the issue is one of fixing the same and ensuring that profits are kept under check. However, with the advent of technology firms can minimise their costs and yet reap the benefits of higher profit through the fixed price. As there is no way to check the exact cost involved, monitoring the same becomes difficult.
We have seen this kind of structure in several industries like telecom, refining, banking, media, etc, where there are entry barriers in terms of costs and regulation, where market domination through alliances becomes common. Often industry associations work in this direction to ensure that this pricing power is exercised. While governments try to control cooperation between players, at times it could turn out to be counterproductive when it comes to sharing technology or patents.
There are several issues that need to be addressed. The first is to identify cases of market capture. This is important because it gets strengthened in four ways, especially when there is crony capitalism. First, markets, when dominated by a few firms, are driven by the structures of these companies and the consumer ends up paying a higher price all through. In India, we have seen how prices first come down when market share is to be increased and competition tackled and then prices start increasing once domination is reached. This has been witnessed in the electronics sector where this reverse curve has emerged.
Second, policies in the area are framed under pressure from these interest groups, which again works in maintaining this equilibrium for these firms. Often, one hears of how policies have been geared towards favoring specific companies. The issue becomes tricky, as Tirole's solution is to have in place such a framework which ensures more competition. But if this framework can be influenced by this oligopoly, then a solution will not be easily forthcoming.
Third, such domination also helps them secure a larger share of credit from the banking system. However, in our case, RBI's company and group exposure norms, which are more on the basis of prudence rather than 'credit capture', work well.
Lastly, the regulators are often pressurised to cooperate with the dominant group. Here, the political links could play a role in furthering these linkages. To ensure that such regulatory capture is not there, we need to have more transparency in the regulatory structures.
It is here that Tirole says that we need to have more regulation to control these firms. The use of competition laws comes to mind where countries need to design them to ensure that there is no misuse of the majority position. While one cannot increase the number of players by statute, there need to be adequate and empowered regulators to check the practices being pursued and ensure that there is fair play. There are however, some issues which come up here.
First, there can be several measures used to corner the market. Distribution of freebies is a way to push up sales. How does one stop this? Undercutting prices under the garb of introductory or promotional offers distorts the market place. The recent case of discounts being given in large amounts by e-commerce sites did raise a controversy as it, in a way, out-competes the other players. Clearly, there need to be rules in place to control such activity.
Second, how does one deal with patents. Here, the pharma industry would be in the frame as a lot goes into research when a patent is procured. Is it unfair play or a reward for superior knowledge?
Third, how does one deal with mergers as the raison d'etre of any takeover or buyout is to increase market share. Can we ensure that such deals do not end up giving disproportionate market power to these firms?
Fourth, what about public monopolies? Often, contracts are given by these monopolies based on the lowest-bid criteria. The bidder, who is a significant player on the buy-side, then cuts costs and quality to complete the contract. This happens often in road projects where there is an oligopolistic structure of bidders and often, they work in a manner such that they distribute the contracts between themselves. There needs to be regulation here, too, to ensure that the bidding process is transparent and that the contract is honored in true spirit.
Based on Tirole's theory, the key to having a more competitive structure is to ensure that we have regulation that cannot be influenced by industry. There is a call for transparency and fair play. Probably, in our structure the checks created by CAG in a way keeps watch on our policy approach. But this has to be done dexterously so as not to go back to the inhibitive license raj and MRTP days where enterprise was dissuaded.
No comments:
Post a Comment