Big is beautiful

Fashions come and go, but beauty has nothing to do with business. Large means exploitation of economies of scale and scope and that reduces costs of production. If those lower costs are passed on to consumers, what is wrong with being large? Large makes it easier to enforce regulatory standards, even bring consumer pressure. If thousands of buses, taxis, trucks and auto-rickshaws in Delhi are instead run by three or four large fleet operators, what will be terribly wrong? As a counterpoint to that notion of perfect competition, we have yet another figment of the imagination, a single producer or monopoly. The world of monopolies is also fast disappearing, thanks to changes in technology and possibilities of unbundling. Rarely, not even in the broad infrastructure sector, will one find examples of what used to be called natural monopolies, situations where technical reasons warrant a single producer. For everything in the world, there are now substitutes, except in instances of unnatural monopolies. Unnatural monopolies are situations where government licensing restrictions lead to monopolies. It seems very difficult to give up the legacies of the Hazari Committee (1955), the Mahalanobis Committee (1964) and the Dutt Committee (1965), all contributing to the Monopolies and Restrictive Trade Practices (MRTP) Act (1969).

Industrial licensing led to monopolies, of the unnatural kind, and other problems. But instead of treating the disease of licensing, we decided to clamp down on concentration of power. This distrust of the large is reinforced by another mindset, that somehow public sector monopolies are preferable to private ones. A large Indian/Air India market share is fine, but a Jet/Sahara one less so. This is doubtful logic. Apart from anything else, a public sector monopoly tends to be completely open-ended. Exit is impossible. There will be subsidies from the budget in case of losses. Faced with competition, consolidation and shakeouts in any sector are inevitable, including aviation and telecom. If Indian/Air India are not autonomous enough to function according to commercial principles and handle the competition, that is a completely separate problem. Nor should the interests of smaller operators become a national interest issue. This is not to suggest that competition descends like manna from heaven. Had that been the case, competition policy instruments wouldn’t have been necessary. Nor would we have needed the Competition Commission of India (CCI). Developed countries also have competition policy instruments. The debate should be about what form these instruments take; security is a different matter altogether.

Unfortunately, we always react to market shares, the structure aspect of competition policy. Jet/Sahara, if it works out, will have a market share of more than 50 per cent, perhaps 60 per cent on the Delhi-Mumbai sector during peak hours, perhaps even more for parking bays in Mumbai and Delhi. However, such dominance is a static concept and fresh entry and other changes should break down market shares unless there are barriers in the way of fresh entry, including those created by the government.

The point thus is not dominance per se, but what use is being made of the dominance, something CCI also stresses. Except for mergers and acquisitions, no sensible competition policy instruments therefore focus on market shares alone. With mergers and acquisitions, there is a special problem, because there can be significant transaction costs in breaking up a combined entity once a merger or acquisition has taken place. In similar vein, we shouldn’t be bothered about performance aspects of competition policy either, meaning high prices or profitability. Again, unless there are entry barriers, these will be broken down and are not sustainable. It is certainly fashionable to talk about predatory pricing. Predatory pricing is a situation where one artificially lowers prices to drive out the competition, and once competition is ousted, raises prices thereafter.

But in practice, predatory pricing is impossible to test a priori. One only knows this post facto, when the damage has been done. Incidentally, if one takes predatory pricing seriously (most newspaper pricing practices, for example, should be prohibited). There is an apocryphal joke about competition policy based on pricing and concerns three CEOs who were in hell. The first charged a lower price than the competitor and was there because of predatory pricing. The second charged a higher price and was there because of monopolistic pricing. The third charged the same price and was there because of collusion.

What we should instead do is to recognise the transition from licensing to regulation and focus on conduct-type competition policy, that is, unfair and restrictive business practices. The former concerns relations between a firm and consumers, while the latter concerns relations between a firm and its rivals. The former is the province of the Consumer Protection Act, the latter of CCI or similar regulators. However, mindsets are difficult to change and therein lies the problem. Many people are still in love with the MRTP Act and the MRTP Commission.

The writer is secretary-general, PHDCCI