Use the noodle on competition law

Peter Wong and Wong King Ming (The Standard, 26 February 2008)

Attempts to fix prices have led to a government proposal for legislation. But beware: regulations of that nature are a double-edged sword Peter Wong and Wong King Ming

Because of government efforts, the Hong Kong and Kowloon Vermicelli and Noodles Manufacturing Industry Merchants’ General Association has withdrawn the call for its members to increase prices by 20 to 25 percent.

The government opposed the proposed hike because price-fixing is a definite no-no in the world’s freest economy. But the question remains whether the attempt could have succeeded. History and economics provide the answer – no.

In 1960, the major oil-producing countries set up the Organization of the Petroleum Exporting Countries to fix oil prices at a more favorable level, but ultimately failed. Cooperation to fix prices in a cartel is not easy as the parties involved don’t necessarily have identical interests and cannot ensure others will follow the agreement.

The history of OPEC shows us the result – most members produced over the limit of what was agreed upon and ultimately caused the price to fall.

Evidently, even oil, which is difficult to replace short term, could not be set to whatever price level the oil producing countries wished. So, how could noodle prices be set by the association?

If the group successfully fixed prices at a higher level to enjoy “excessive profits,” other businesses would jump in to compete to undersell it. There are always substitutes for consumers, and it is easier to have substitutes for noodles than for oil.

However, the attempt to fix prices has led to a government proposal for a fair-competition law. But beware: like any legislation, competition laws are a double-edged sword. Ideas such as the abuse of market dominance, tied sales and bundling are too vaguely defined, and such undefined points will cause uncertainties.

Excessive legislation breeds excessive and cumbersome politics, resulting in more bureaucracy, a reduction of competitiveness and sometimes infringement of citizens’ rights. It is inevitable that some companies will use this legislation to take out opponents.

Because of the size of lawyers’ fees, which only big firms can afford, it’s no wonder the outcome of the competition law consultation revealed that small and medium-sized enterprises are especially worried about the proposed new law.

British Nobel Prize-winning economist Ronald Coase said of the anti- trust law in the United States: “When the prices went up, the judges said it was monopoly. When the prices went down, they said it was predatory pricing, and when they stayed the same, they said it was tacit collusion.” His statement reflects the ambiguity of “fair competition.” Whichever way prices change, the same allegations will follow.

No one opposes the government’s wish to promote fair competition, but from oil to noodles, competition is due to increased market openness and less regulation, including legislation, as well as consumers’ freedom of choice.

This is the only feasible way our government can promote competition. The government should strive to break through any privileges or legislation which protect monopoly industries, such as the electricity market.

The government can integrate the electricity network so the two power companies can compete. Or, like the aviation industry, it can liberate Hong Kong’s fifth-freedom rights, which govern which commercial airlines can land where.

Judging from the agreement of the government and the power companies, the new Scheme of Control Agreements allow a monopoly. The sincerity to promote fair competition is doubtful.

The government does not want to confront existing monopolies, but wants to promote fair competition by across- the-board, vague legislation, which is inefficient and creates negative superfluidities in the economy.

What is even more trying is that the fair-competition law consultation paper proposes that the government can exempt individual industries as appropriate, one of the reasons being in case anti-competitive behavior actually results in a public benefit that outweighs the harm to consumers.

Evaluating “public benefit” can never objectively be achieved, and if attempted, the government will foster a privileged class. Society will not benefit, but will suffer from this competition policy legislation.

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