“Competition policy is… not only about the survival of the fittest but also about the protection of the weak and the pursuit of social goals.”
Introduction
The global market is a tough nut to crack. A company must be competitive enough in order to penetrate this market. Today’s competition for business supremacy has always been a battle. It’s a battle on who will be the best, a battle that the end winner will be determine by the company’s ability to compete against other competitors. Competition is like a bottle neck road, who ever goes in first always have the advantage against the other. Because the domestic and international market undergoes a never ending phase, an organisation must be capable to adapt to these constant changes. A company’s capacity to change should be given consideration. Discrepancy between an organisation capacity and the demands of its customers results in an inefficiency, either in under-utilised company resources or unfulfilled customers. Maybe, most of the organisations today want to initiate a management system and strategy that could maintain the organisations’ capability, strength and competitiveness. And this is important for the management teams and the organisations per se that they would always be open minded for changes that they might encounter in order to cope and adapt to the latest development that are happening within and outside their environment. Businesses are continuously evolving just to maintain progress and being competitive. However, being competitive should conform to the laws in order to avoid abuse and business monopoly. These are the laws provided not only for the companies to survive in the stiff competition but this is also to protect the weak and pursuit social goals.
With this consideration, this paper will be discussing the issues concerning competitive law, the law that enhances competition in the market but suppresses the abuse emerging from such competition. In Europe, competition law or the so-called antitrust law in United States of America is a law that regulates the exercise of market power by large companies, governments or other economic entities. In the EU, it is an important part of ensuring the completion of the internal market, meaning the free flow of working people, goods, services and capital in a borderless Europe. There different factors that contributes to the development of this law such as the issue of cartels, monopolies, commoditisation, liberalisations and mergers.
The Competition Law
Basically, the creation of the competition law was the attempt of the government to regulate competitive markets for goods and services, leading up to the modern competition or antitrust laws around the world today. If we review the earliest records and traces back the efforts of Roman legislators to control price fluctuations and unfair trade practices, we would discover that through the Middle Ages in Europe, Kings and Queens repeatedly cracked down on monopolies, including those created through state legislation. Basically, the English common law doctrine of restraint of trade became the antecedent to modern competition law. And this development was actually the basis of United States antitrust statutes, which in turn had significant influence on the development of European Community competition laws after the Second World War. With these changes, the focus has moved to international competition enforcement in a globalised economy.
The conventional way of viewing operations of businesses as an interaction involving the product, the market, and the organisation would appear to be significantly insufficient in the current trends in the cutthroat, globalise and internationalised mode of conducting trade. Marketing strategies are essential in making companies survive, especially if these have large market segments to deal with in the first place. With a considerable number of players in the business industry, continued existence and sustained effort to compete would entail considerable work for every organisation. This is especially true with the low-cost companies that holds majority of the markets worldwide. However, in the past years, these low-cost companies have been giving these internationally established huge organisations a run for their money, at least in the European market.
Leaving the problem of defining the relevant market aside, what is the impact of increasing the size of the market on concentration? This question is particularly relevant when considering the impact of competition and liberalisation, since one of the major impacts of economic competition through liberalisation is a larger market. At first blush, a larger market should result in less concentration, since the market should now be able to support more firms. Improved market size may not always result in less intense markets. The reason lies in downcast costs, costs that cannot be earned once they are incurred, even if production is stopped. Sutton shows that while an inverse relationship exists between market size and market concentration when sunk costs are exogenous to the firm, this relationship does not hold when sunk costs are endogenous. Sutton identifies two forms of endogenous sunk costs, advertising and research and development (R&D) that are likely to place a lower bound on the level of concentration as market size increases. Concentration has a lower bound because companies typically find it desirable to expand their advertising and R&D expenditures as market size increases. The result is higher sunk costs, which in turn means less competition in order to ensure that firms are profitable. Import liberalisation took place over a large spectrum of goods.
The Monopolies and Restrictive Trade Practices Act required that expansion of foreign ventures needed prior approval was lifted. Foreign brand names could be used by domestic industry having connections with foreign firms. Over time, the size of the negative list of exports and imports shrank. Previously there was a dividend-balancing requirement for foreign ventures, which meant that dividend payments to a foreign party over the first seven years from the date of commercial production had to be balanced by export earnings. With regards to the context of investment liberalisation, the global free trade of industries offers significant effect to the trade development of certain country. Primarily, countries trade because of the difference in resources which they possess. The efficiency of producing goods and services for the people varies from one country to another because of the different natural, human and capital resources they have as well as the ways by which such resources are combined. The production of a good or service is characterised by an opportunity cost which is referred to the amount of another good that could have otherwise been produced. As such, it is more efficient that the goods to be produced are those with the lower opportunity cost and instead increase the production of the good to be traded for those with higher opportunity cost.
Moreover, the impact of globalisation has paved the way for the liberalisation and enhancing the competition of certain markets. This entailed the reduction of trade barriers and restrictions. The benefits presented by this resulted to the increasing amount and significance of international trade.
Fundamentally, the development of open market presents benefits to the society. Trade is often regarded by theorists as the impetus for economic prosperity. The impact of the increase in trading is reflected by the flourishing of the cultures such that of Egypt, Greece, Rome as well as East India and China. Moreover, free trades foster comparative advantage. The trading of goods without barriers is beneficial to countries especially if one has gained more efficiency in the production of goods and services that are needed by the other country.
The issue of Commoditisation as Basis of Competition Law
In accordance to the basis of development of competition law, the issue of commoditisation, globalisation and liberalisation always play significant role in global market. Given that commoditisation enables the production of the same types of products without consideration to the inventors or the first producers, there are problems for businesses in this phenomenon. First, commoditisation increases competition to the expense of the innovator of the product as others begin to produce the same products. Second, in view of the first, commoditisation affects pricing of products, which can be called “war on prices” as producers begin to influence consumer purchases through pricing techniques. These two problems are discussed individually in the following paragraphs.
First, that commoditisation intensifies competition is an inevitable occurrence because of the reality of many competitors entering the market. This development in global market also conforms to the governing law and competition law. According to Jonash (2000, p.24), “competitors copy success” when they copy specific products just because they foresee the acceptance of consumers in the market. In that scenario, the product transforms into a commodity where its distinction from the original is no longer identified. When products become commodities, this means market demands are high and that demand will be stable enough because of the necessity to buy such products. Thus, commoditisation offers opportunities for other producers to venture in the market because of the high and stable demand on commodities. In other words, commoditisation brings about the proliferation of suppliers, which increases the competition.
The presence of too many competitors bring much stress to the originator of the product that if marketing techniques are inefficient, could lose the market share to new comers or new producers of the products. This makes commoditisation one of the driving forces for product differentiation (Lowe, 2004), which will be discussed later on. Product differentiation is a type of marketing technique to gain competitive advantage, in this sense, is evidence of intense competition in the market brought about by commoditisation.
Intense competition in the market leads firms to closure when they become the losers. Due to commoditisation, firms that original produced the product faces challenges as they doubt the profitability of commodities given the presence of new producers that may provide commodities at lower prices yet with less capital compared to the innovators. This only means that those firms that originally produced the products are much affected by the intense competition because in the first place, they are the ones that ventured with much capital on the development of the product. Thus, latecomers because of commoditisation gain competitive advantage against original producers.
Second, due to the intense competition in the market, price competition happens, which is not favourable to firms. This pertains to downward pricing, which is not favourable to the originator of the product that became commodities consider the case of HP’s laser jet printers featured earlier. According to Applbaum (2004), “as supplies of product increases or as competitors flourish in the market, the quantity of the product rises while the price drops in response, for the sake of competition” (p. 53).
Price competition is a hard competition for firms especially when considering the quality of products that needs to be produced. Thus, not only do the firms suffer but also the consumers. Because of lower prices of commodities, consumers tend to settle on cheaper priced commodities without considering the quality of the goods. As the cliché say, there is no such thing as free lunch and as the price of commodities lower; this takes its toll on the quality of the commodities. According to Hendersen and Petersen (2002), commoditisation decreases the value of products in the mere sense of quality because competitions are based on price that is set to compromise the quality. Thus, it appears that there is no pure winner in commoditisation because although it seems that consumers benefits from many suppliers, the reality is that consumers suffer from low quality commodities. An example of this is goods from China, which are much cheaper than other goods, produced elsewhere, the “made in China” products seem to have been commoditised worldwide as it is exported in every parts of the world. However, there is the quick sense of knowing that products made in China have low quality yet these products heightens commoditisation because of the cheap price tag.
In other words, companies that can lower their price may have compromised the quality of products. An example of this is on the car manufacturing industries. As cars become commoditised, firms settle in cost cutting so that they could go with the flow of price competition. This may mean transferring productions to low-wage countries or changing suppliers with cheaper priced raw materials. To provide a specific example based on observation of today’s car industry, the emergence of subcompact cars, which started in Europe in consideration of the narrow streets, has now become a commodity because of high fuel prices. Today, we see the emergence of new models produced in Asia, the cheaper ones are those without safety features and uses low-end materials. Even though that is the case, the market for the cheaper cars tends to be higher compared to those of the expensive subcompacts. This implies that consumers are not open to pay extra on more quality goods such as safety and comfort. Thus, commoditisation increases price competition, which in turn makes products become less dependable.
More important, commoditisation, as it is based on price in accordance to competition law, “drags down all of the company’s products or services” (p.24). Commoditisation does this by shrinking profit margins. Based on the law of supply, the higher the price of the product, the higher the supply because this is where firms produce profit. However, as the price shrinks, firms tend to produce less given that there are other competitors in the market. In other words, firms with a newly launched product may not be able to actually enjoy the success of original products because of commoditisation where other firms tend to just copy the product and sell it at lower price to beat the original producer.
Conclusively, the scope of the commoditisation problem is on intense competition that fails other firms even the ones that started the product and the competition on price. Price competition takes its toll on the quality of the product, which is also covered in the scope of the problem. In this regard, the value of the product is not based on quality anymore, but based on the price that is more attractive to consumers.
Liberalisation: Competition Law Development
It is debated whether it is possible to liberalise markets successfully by means of introducing unrestrained competition only, or whether it is necessary to have regulators to supervise the opening of markets in adversarial administrative proceedings. Presenting these as the only options, however, oversimplifies the issues involved. That simple opposition suggests that sectoral authorities--which are federal regulatory agencies having jurisdiction over a particular industry--and competition authorities--which are federal agencies with broad jurisdiction over all industries limited to the issue of fostering competition--are antagonistic and that an unrestrained market might, on its own, resolve the problems of liberalisation. This view, however, ignores the fact that competition authorities can and do intervene in the market to prevent anti-competitive behaviours such as unlawful agreements and abuse of a dominant market position. Although it is true that regulators often must consider issues related to competition, it is also important to have persons with specialised knowledge of the regulated industries working for these authorities, as well as people qualified for activities specific to the regulator's job, such as the granting of licenses.
With this, we may say that competition law can prepare the path to market liberalisation. The most common and important problem appearing in newly, or soon to be, liberalised sectors--but also in the phase just preceding liberalisation--is likely the abuse of dominance. Actually, the traditional monopolist is necessarily dominant and will remain so for many years. Furthermore, new competitors often rely on input supplied by the former monopolist, such as access to local or universal networks, leading to disputes concerning refusals to deal and discrimination. Companies with a dominant position in a market risk violating competition law if they refuse access to facilities essential for competition. Typically, the facility is one that cannot practically or reasonably be duplicated, and access by the firm's competitors is feasible for the owner and necessary for competition. Competition issues are governed by the competition law. The law is the result of a strong political willingness to maintain and improve the competitiveness of the economy.
In this era of globalisation in which competition issues governed by competition law, foreign investment and international movements of commodities have become the trend among globalised markets. Fundamentally, globalisation brings an improved standard of living to the third world countries and wealth to the first world countries. While countries are making their way to globalisation and international trade in particular, some economies remain steadfast on their trade policies which hinder economic development.
The occurrence of free trades leads to more allocation of resources between and among countries. Such will result in lower prices of commodities, more employment and the increased output of the economy. Indeed trade policies are the core element to the overall design of the economic development.
Ultimately, market liberalisation paves the way for greater opportunities for economic development. As the resources are allocated more efficiently, the country can focus its efforts on its comparative advantage goods. Comparative advantage goods refer to the advantage in terms goods distinct in an area or country, which gives its business an advantage over competitors. The advantages that are likely to be gained from liberalism include the reduction of manufacturing costs and the low prices of goods. As such, the economy will be boosted and is able to compete in the international market.
The apparent impact of liberalisation in the economic success has indeed prompted countries into the process of transition. Transition occurs in a country when changed of certain process, progress and development in economy was attained. However, such process entails the reduction of barriers and the implementation of trade policies. International organisations that promote the reduction of barriers on international trades offer assistance to countries that aim to open its market to the free trade.
The Challenges Posed by Competition Law
In the past 15 years, as nations across the globe realised the importance of opening their economies to trade, exports products from developing countries and least developed countries have dramatically increased. According to UNIDO, the share of exports from developing nations has risen twice as fast as export products around the globe between 1985 and 1997 and by year 1997, these nations accounted for 26.2% of trade manufacturing. What is even more striking from this finding is the idea that nearly 70% of these developing nation’s share of export products has come from only 10 developing nations.
With this intensive shift in trade industry, major restructuring and reformation of domestic production has been prevalent. In most least develop countries; most industrial and service sector organisations are small in scale. Such firms account for the size of formal industrial and informal industrial employment in major countries. Most of the studies on the effect of competition law, rules and regulations on productivity of small enterprises show some surprising and quite essential findings and results. First, the standard notion is that openness of a country’s economy to trade impacts plan size, as enterprises adopt efficient and effective technological facilities. Herein, the premise is that in contrast to the policies of protectionists, such idea may permit relatively inefficient enterprise to survive. Openness of economy also increased foreign competition which is expected to drive inefficient national or domestic producers to attempt to enhance productivity firms by waste eliminations, adopting more modern technologies, external economies of scope and scale or to shut down. Hence, the efficiency impacts of trade liberalisation through Competition Law, is observed in an increase in an average plant size among small scale industries and probably lower average costs.
In a study made by Tybout, the result shows the opposite of the aforementioned. The study reveals that increases in penetration of imports and reductions in security are associated and connected with reductions and not increased in the average plant size. Hence, rather than enhance efficiency immediately, an essential finding of this study is that trade liberalisation may work against the small firms’ scale efficiency in the short run. Moreover, if there are gains of effectiveness, the result is relatively small. The experience of some firms in the past 15 years supports the findings of Tybout.
Tewari’s studies also revealed that when liberalisation of trade enhances the productivity of small enterprise it is presumably largely due to improvements or intra-plan which are unrelated to external and internal scale economies. Such notion is a critical point, because it has been find out those improvements in productivity came from institutional improvements like decrease in managerial slack and waste eliminations. This is also due to technological enhancements like heightened incentives and investments for technological modernisation, better access to best quality intermediate and capital goods as well as understanding and knowledge of developed production processes and practice.
Further studies also find that there might be a series to the adoption of these developments. Research finds that enterprise which integrates organisational changes and technological innovations like the ability to enhance product quality, inventory reduction and turnaround time reduction, or proceeded technical changes with management changes (soft technologies) leaned to be much more productive and efficient than trade liberalisation.
The evidence of some small firms highlights the essence of non-scale factors to enhance small enterprise performance. In some studies, there was dramatic focus on enhancing profitability by energy audits and waste eliminations. Enterprises across sectors have reported that implementing these strategies and regular small enterprise support organisation will likely to affect small firm’s performance. This is similar among industries which have adopted innovative technologies and those which have expanded scale.
With regards to this, there is an agreement in many firms that outward oriented regulations are more likely to assist long-run growth if technology diffusion is widespread among small enterprises of a nation through international transactions and trades. Such notion may happen in various ways, first enterprise may acquire innovative technologies by importing reverse engineers, or by using new intermediate and capital goods or by integrated relationships with foreign buyers to whom these firms export.
Aside from these, the development of competition law brought by globalisation and trade liberalisation also affects small enterprises. As the process of globalisation gathers pace and as international competition intensifies, slight differences in the terms of access to the various markets can have a substantial effect on the commercial success or failure of a firm. Market access can be decisively influenced by the presence or absence of competition rules and the rigor with which they are enforced. The WTO is seen as becoming anachronistic for not being able to address competition issues. Some have suggested that it is time the multilateral trade system acquired a global competition authority.
The inclusion or not of competition provisions has sparked a vigorous debate. Those against have basically advanced two broad arguments. The first argument claims that there is no need to internationalise competition law and that the cost of doing so will be high and may affect small organisations. The second emphasises the fundamental incompatibility between trade and competition policies.
Conclusion
In the development of competition law, liberalisation, globalisation, commoditisation and sectoral regulations are closely related and often interact. Of course, one could argue that "the market"--in other words, effective competition--should be the sole determinant of providers' attitudes toward customers, in particular the services to be supplied and to whom and in what quantity. Then, a situation would develop where only competition authorities intervene, because the sectoral regulator would have disappeared from the scene. From the previous discussion, liberalisation in accordance to competition law continues to be regarded as a major element of economic reforms in most countries. In the majority of developing countries, it is an important component of the structural adjustment package sponsored by multilateral institutions. It has become geographically more widespread and has increasingly involved the telecommunications, energy and water sectors. Foreign investment linked to liberalisation has also become more prominent in developing countries. However, while liberalisation can bring about benefits under certain conditions, transfer of ownership is by no means a sufficient condition for improved performance of firms and setting off economic growth.
This especially holds for developing countries that face a lot of challenges as have already been discussed in the preceding paragraphs. In their study, Adam, Cavendish and Mistry observe that developing countries have realised that achieving the benefits of investment liberalisation takes longer for them than for western industrial nations because their economic infrastructure is not as well developed. They do not have the sophisticated capital markets and well-established regulatory structures that are necessary to make rapid progress.
In other words, if liberalisation with respect to competition law is to benefit the developing countries, the challenges facing these countries have to be properly identified so as to inform policy makers and the necessary actions have to be taken to overcome them.
In addition, the governments must regularly inform the public about the goals of competition law and liberalisation and explain how achieving these goals benefit their citizens and nations. Governments must also carefully analyse the political impediments to investment liberalisation and must develop plans to eliminate them. Introducing more market competition and effective state regulation may be crucial in ensuring that economic performance improves. In addition, a wider range of institutional issues, including improving political, legal, management and financial capacity within countries will affect the impact of investment liberalisation on performance when investment liberalisation occurs in low-income countries.
With respect to competition law, liberalisation and openness should be promoted which will in turn promote market discipline, competition, better corporate governance and public accountability. Disciplined and prudential regulations should be introduced in the financial sector where incomplete liberalisation has taken place. This can help prevent the continuation of state directed credit to funds, which often lead to misallocation of resources.
In summary, the development of competition law faces several obstacles & challenges which all have to be tamed by countries’ governments before substantial benefits can be realised. It is worth noting that competition law can improve economic performance but performance improvement heavily relies also on other structural reforms like liberalisation and regulation and the ability of developing countries to overcome the numerous challenges that they face during the investment liberalisation process.
Bibliography
Adams, C., Cavendish, W and P.S. Mistry, ‘The Financial and Operating Performance of Newly Privatised Firms: An International Empirical Analysis, (1996)” in T. Anderson and P. Hill, eds.
Applbaum, K. The marketing era: From professional practice to global provisioning. (2004).New York: Routledge.
Henderson, S. & Petersen, A. Eds. Consuming health: The commodification of health care. (2002). London and New York: Routledge.
Jonash, R. Product innovation: Staying ahead of the competition. (2000).USA Today, 128 (2656), 24.
Lowe, S.C. Marketplace masters: How professional service firms compete to win. (2004). Westport, CT: Praeger.
Markusen, James R., Thomas F. Rutherford, and Linda Hunter, “Trade Liberalisation in a Multinational-Dominated Industry (1996), Journal of International Economics, 38: 95-118.
Suranovic, S., ‘The Infant Industry Argument and Dynamic Comparative Advantage’(2004), International Trade and Policy Lecture Notes, viewed on 09 April, 2009,
Sutton, J., Sunk Costs and Market Structure (1991). MIT Press. Cambridge, MA.
Tewari, M and Goebel, J. Small Firm Competitiveness in a Trade Liberalised World; A case of Tamil Nadu. (2002).
Tybout, JR. “Manufacturing Firms in Developing Countries: How Well doThey Do, and Why?” Journal of Economic Literature, (2000). Vol. Xxxviii, No. 1, March.
UNIDO (R. Kaplinskly and J. Readman). Integrating SMEs in Global Value Chains. UNIDO, Vienna. (2001).
Why Nations Trade, EcEd Web Economics Lesson, viewed on 09 April, 2009,
Introduction
The global market is a tough nut to crack. A company must be competitive enough in order to penetrate this market. Today’s competition for business supremacy has always been a battle. It’s a battle on who will be the best, a battle that the end winner will be determine by the company’s ability to compete against other competitors. Competition is like a bottle neck road, who ever goes in first always have the advantage against the other. Because the domestic and international market undergoes a never ending phase, an organisation must be capable to adapt to these constant changes. A company’s capacity to change should be given consideration. Discrepancy between an organisation capacity and the demands of its customers results in an inefficiency, either in under-utilised company resources or unfulfilled customers. Maybe, most of the organisations today want to initiate a management system and strategy that could maintain the organisations’ capability, strength and competitiveness. And this is important for the management teams and the organisations per se that they would always be open minded for changes that they might encounter in order to cope and adapt to the latest development that are happening within and outside their environment. Businesses are continuously evolving just to maintain progress and being competitive. However, being competitive should conform to the laws in order to avoid abuse and business monopoly. These are the laws provided not only for the companies to survive in the stiff competition but this is also to protect the weak and pursuit social goals.
With this consideration, this paper will be discussing the issues concerning competitive law, the law that enhances competition in the market but suppresses the abuse emerging from such competition. In Europe, competition law or the so-called antitrust law in United States of America is a law that regulates the exercise of market power by large companies, governments or other economic entities. In the EU, it is an important part of ensuring the completion of the internal market, meaning the free flow of working people, goods, services and capital in a borderless Europe. There different factors that contributes to the development of this law such as the issue of cartels, monopolies, commoditisation, liberalisations and mergers.
The Competition Law
Basically, the creation of the competition law was the attempt of the government to regulate competitive markets for goods and services, leading up to the modern competition or antitrust laws around the world today. If we review the earliest records and traces back the efforts of Roman legislators to control price fluctuations and unfair trade practices, we would discover that through the Middle Ages in Europe, Kings and Queens repeatedly cracked down on monopolies, including those created through state legislation. Basically, the English common law doctrine of restraint of trade became the antecedent to modern competition law. And this development was actually the basis of United States antitrust statutes, which in turn had significant influence on the development of European Community competition laws after the Second World War. With these changes, the focus has moved to international competition enforcement in a globalised economy.
The conventional way of viewing operations of businesses as an interaction involving the product, the market, and the organisation would appear to be significantly insufficient in the current trends in the cutthroat, globalise and internationalised mode of conducting trade. Marketing strategies are essential in making companies survive, especially if these have large market segments to deal with in the first place. With a considerable number of players in the business industry, continued existence and sustained effort to compete would entail considerable work for every organisation. This is especially true with the low-cost companies that holds majority of the markets worldwide. However, in the past years, these low-cost companies have been giving these internationally established huge organisations a run for their money, at least in the European market.
Leaving the problem of defining the relevant market aside, what is the impact of increasing the size of the market on concentration? This question is particularly relevant when considering the impact of competition and liberalisation, since one of the major impacts of economic competition through liberalisation is a larger market. At first blush, a larger market should result in less concentration, since the market should now be able to support more firms. Improved market size may not always result in less intense markets. The reason lies in downcast costs, costs that cannot be earned once they are incurred, even if production is stopped. Sutton shows that while an inverse relationship exists between market size and market concentration when sunk costs are exogenous to the firm, this relationship does not hold when sunk costs are endogenous. Sutton identifies two forms of endogenous sunk costs, advertising and research and development (R&D) that are likely to place a lower bound on the level of concentration as market size increases. Concentration has a lower bound because companies typically find it desirable to expand their advertising and R&D expenditures as market size increases. The result is higher sunk costs, which in turn means less competition in order to ensure that firms are profitable. Import liberalisation took place over a large spectrum of goods.
The Monopolies and Restrictive Trade Practices Act required that expansion of foreign ventures needed prior approval was lifted. Foreign brand names could be used by domestic industry having connections with foreign firms. Over time, the size of the negative list of exports and imports shrank. Previously there was a dividend-balancing requirement for foreign ventures, which meant that dividend payments to a foreign party over the first seven years from the date of commercial production had to be balanced by export earnings. With regards to the context of investment liberalisation, the global free trade of industries offers significant effect to the trade development of certain country. Primarily, countries trade because of the difference in resources which they possess. The efficiency of producing goods and services for the people varies from one country to another because of the different natural, human and capital resources they have as well as the ways by which such resources are combined. The production of a good or service is characterised by an opportunity cost which is referred to the amount of another good that could have otherwise been produced. As such, it is more efficient that the goods to be produced are those with the lower opportunity cost and instead increase the production of the good to be traded for those with higher opportunity cost.
Moreover, the impact of globalisation has paved the way for the liberalisation and enhancing the competition of certain markets. This entailed the reduction of trade barriers and restrictions. The benefits presented by this resulted to the increasing amount and significance of international trade.
Fundamentally, the development of open market presents benefits to the society. Trade is often regarded by theorists as the impetus for economic prosperity. The impact of the increase in trading is reflected by the flourishing of the cultures such that of Egypt, Greece, Rome as well as East India and China. Moreover, free trades foster comparative advantage. The trading of goods without barriers is beneficial to countries especially if one has gained more efficiency in the production of goods and services that are needed by the other country.
The issue of Commoditisation as Basis of Competition Law
In accordance to the basis of development of competition law, the issue of commoditisation, globalisation and liberalisation always play significant role in global market. Given that commoditisation enables the production of the same types of products without consideration to the inventors or the first producers, there are problems for businesses in this phenomenon. First, commoditisation increases competition to the expense of the innovator of the product as others begin to produce the same products. Second, in view of the first, commoditisation affects pricing of products, which can be called “war on prices” as producers begin to influence consumer purchases through pricing techniques. These two problems are discussed individually in the following paragraphs.
First, that commoditisation intensifies competition is an inevitable occurrence because of the reality of many competitors entering the market. This development in global market also conforms to the governing law and competition law. According to Jonash (2000, p.24), “competitors copy success” when they copy specific products just because they foresee the acceptance of consumers in the market. In that scenario, the product transforms into a commodity where its distinction from the original is no longer identified. When products become commodities, this means market demands are high and that demand will be stable enough because of the necessity to buy such products. Thus, commoditisation offers opportunities for other producers to venture in the market because of the high and stable demand on commodities. In other words, commoditisation brings about the proliferation of suppliers, which increases the competition.
The presence of too many competitors bring much stress to the originator of the product that if marketing techniques are inefficient, could lose the market share to new comers or new producers of the products. This makes commoditisation one of the driving forces for product differentiation (Lowe, 2004), which will be discussed later on. Product differentiation is a type of marketing technique to gain competitive advantage, in this sense, is evidence of intense competition in the market brought about by commoditisation.
Intense competition in the market leads firms to closure when they become the losers. Due to commoditisation, firms that original produced the product faces challenges as they doubt the profitability of commodities given the presence of new producers that may provide commodities at lower prices yet with less capital compared to the innovators. This only means that those firms that originally produced the products are much affected by the intense competition because in the first place, they are the ones that ventured with much capital on the development of the product. Thus, latecomers because of commoditisation gain competitive advantage against original producers.
Second, due to the intense competition in the market, price competition happens, which is not favourable to firms. This pertains to downward pricing, which is not favourable to the originator of the product that became commodities consider the case of HP’s laser jet printers featured earlier. According to Applbaum (2004), “as supplies of product increases or as competitors flourish in the market, the quantity of the product rises while the price drops in response, for the sake of competition” (p. 53).
Price competition is a hard competition for firms especially when considering the quality of products that needs to be produced. Thus, not only do the firms suffer but also the consumers. Because of lower prices of commodities, consumers tend to settle on cheaper priced commodities without considering the quality of the goods. As the cliché say, there is no such thing as free lunch and as the price of commodities lower; this takes its toll on the quality of the commodities. According to Hendersen and Petersen (2002), commoditisation decreases the value of products in the mere sense of quality because competitions are based on price that is set to compromise the quality. Thus, it appears that there is no pure winner in commoditisation because although it seems that consumers benefits from many suppliers, the reality is that consumers suffer from low quality commodities. An example of this is goods from China, which are much cheaper than other goods, produced elsewhere, the “made in China” products seem to have been commoditised worldwide as it is exported in every parts of the world. However, there is the quick sense of knowing that products made in China have low quality yet these products heightens commoditisation because of the cheap price tag.
In other words, companies that can lower their price may have compromised the quality of products. An example of this is on the car manufacturing industries. As cars become commoditised, firms settle in cost cutting so that they could go with the flow of price competition. This may mean transferring productions to low-wage countries or changing suppliers with cheaper priced raw materials. To provide a specific example based on observation of today’s car industry, the emergence of subcompact cars, which started in Europe in consideration of the narrow streets, has now become a commodity because of high fuel prices. Today, we see the emergence of new models produced in Asia, the cheaper ones are those without safety features and uses low-end materials. Even though that is the case, the market for the cheaper cars tends to be higher compared to those of the expensive subcompacts. This implies that consumers are not open to pay extra on more quality goods such as safety and comfort. Thus, commoditisation increases price competition, which in turn makes products become less dependable.
More important, commoditisation, as it is based on price in accordance to competition law, “drags down all of the company’s products or services” (p.24). Commoditisation does this by shrinking profit margins. Based on the law of supply, the higher the price of the product, the higher the supply because this is where firms produce profit. However, as the price shrinks, firms tend to produce less given that there are other competitors in the market. In other words, firms with a newly launched product may not be able to actually enjoy the success of original products because of commoditisation where other firms tend to just copy the product and sell it at lower price to beat the original producer.
Conclusively, the scope of the commoditisation problem is on intense competition that fails other firms even the ones that started the product and the competition on price. Price competition takes its toll on the quality of the product, which is also covered in the scope of the problem. In this regard, the value of the product is not based on quality anymore, but based on the price that is more attractive to consumers.
Liberalisation: Competition Law Development
It is debated whether it is possible to liberalise markets successfully by means of introducing unrestrained competition only, or whether it is necessary to have regulators to supervise the opening of markets in adversarial administrative proceedings. Presenting these as the only options, however, oversimplifies the issues involved. That simple opposition suggests that sectoral authorities--which are federal regulatory agencies having jurisdiction over a particular industry--and competition authorities--which are federal agencies with broad jurisdiction over all industries limited to the issue of fostering competition--are antagonistic and that an unrestrained market might, on its own, resolve the problems of liberalisation. This view, however, ignores the fact that competition authorities can and do intervene in the market to prevent anti-competitive behaviours such as unlawful agreements and abuse of a dominant market position. Although it is true that regulators often must consider issues related to competition, it is also important to have persons with specialised knowledge of the regulated industries working for these authorities, as well as people qualified for activities specific to the regulator's job, such as the granting of licenses.
With this, we may say that competition law can prepare the path to market liberalisation. The most common and important problem appearing in newly, or soon to be, liberalised sectors--but also in the phase just preceding liberalisation--is likely the abuse of dominance. Actually, the traditional monopolist is necessarily dominant and will remain so for many years. Furthermore, new competitors often rely on input supplied by the former monopolist, such as access to local or universal networks, leading to disputes concerning refusals to deal and discrimination. Companies with a dominant position in a market risk violating competition law if they refuse access to facilities essential for competition. Typically, the facility is one that cannot practically or reasonably be duplicated, and access by the firm's competitors is feasible for the owner and necessary for competition. Competition issues are governed by the competition law. The law is the result of a strong political willingness to maintain and improve the competitiveness of the economy.
In this era of globalisation in which competition issues governed by competition law, foreign investment and international movements of commodities have become the trend among globalised markets. Fundamentally, globalisation brings an improved standard of living to the third world countries and wealth to the first world countries. While countries are making their way to globalisation and international trade in particular, some economies remain steadfast on their trade policies which hinder economic development.
The occurrence of free trades leads to more allocation of resources between and among countries. Such will result in lower prices of commodities, more employment and the increased output of the economy. Indeed trade policies are the core element to the overall design of the economic development.
Ultimately, market liberalisation paves the way for greater opportunities for economic development. As the resources are allocated more efficiently, the country can focus its efforts on its comparative advantage goods. Comparative advantage goods refer to the advantage in terms goods distinct in an area or country, which gives its business an advantage over competitors. The advantages that are likely to be gained from liberalism include the reduction of manufacturing costs and the low prices of goods. As such, the economy will be boosted and is able to compete in the international market.
The apparent impact of liberalisation in the economic success has indeed prompted countries into the process of transition. Transition occurs in a country when changed of certain process, progress and development in economy was attained. However, such process entails the reduction of barriers and the implementation of trade policies. International organisations that promote the reduction of barriers on international trades offer assistance to countries that aim to open its market to the free trade.
The Challenges Posed by Competition Law
In the past 15 years, as nations across the globe realised the importance of opening their economies to trade, exports products from developing countries and least developed countries have dramatically increased. According to UNIDO, the share of exports from developing nations has risen twice as fast as export products around the globe between 1985 and 1997 and by year 1997, these nations accounted for 26.2% of trade manufacturing. What is even more striking from this finding is the idea that nearly 70% of these developing nation’s share of export products has come from only 10 developing nations.
With this intensive shift in trade industry, major restructuring and reformation of domestic production has been prevalent. In most least develop countries; most industrial and service sector organisations are small in scale. Such firms account for the size of formal industrial and informal industrial employment in major countries. Most of the studies on the effect of competition law, rules and regulations on productivity of small enterprises show some surprising and quite essential findings and results. First, the standard notion is that openness of a country’s economy to trade impacts plan size, as enterprises adopt efficient and effective technological facilities. Herein, the premise is that in contrast to the policies of protectionists, such idea may permit relatively inefficient enterprise to survive. Openness of economy also increased foreign competition which is expected to drive inefficient national or domestic producers to attempt to enhance productivity firms by waste eliminations, adopting more modern technologies, external economies of scope and scale or to shut down. Hence, the efficiency impacts of trade liberalisation through Competition Law, is observed in an increase in an average plant size among small scale industries and probably lower average costs.
In a study made by Tybout, the result shows the opposite of the aforementioned. The study reveals that increases in penetration of imports and reductions in security are associated and connected with reductions and not increased in the average plant size. Hence, rather than enhance efficiency immediately, an essential finding of this study is that trade liberalisation may work against the small firms’ scale efficiency in the short run. Moreover, if there are gains of effectiveness, the result is relatively small. The experience of some firms in the past 15 years supports the findings of Tybout.
Tewari’s studies also revealed that when liberalisation of trade enhances the productivity of small enterprise it is presumably largely due to improvements or intra-plan which are unrelated to external and internal scale economies. Such notion is a critical point, because it has been find out those improvements in productivity came from institutional improvements like decrease in managerial slack and waste eliminations. This is also due to technological enhancements like heightened incentives and investments for technological modernisation, better access to best quality intermediate and capital goods as well as understanding and knowledge of developed production processes and practice.
Further studies also find that there might be a series to the adoption of these developments. Research finds that enterprise which integrates organisational changes and technological innovations like the ability to enhance product quality, inventory reduction and turnaround time reduction, or proceeded technical changes with management changes (soft technologies) leaned to be much more productive and efficient than trade liberalisation.
The evidence of some small firms highlights the essence of non-scale factors to enhance small enterprise performance. In some studies, there was dramatic focus on enhancing profitability by energy audits and waste eliminations. Enterprises across sectors have reported that implementing these strategies and regular small enterprise support organisation will likely to affect small firm’s performance. This is similar among industries which have adopted innovative technologies and those which have expanded scale.
With regards to this, there is an agreement in many firms that outward oriented regulations are more likely to assist long-run growth if technology diffusion is widespread among small enterprises of a nation through international transactions and trades. Such notion may happen in various ways, first enterprise may acquire innovative technologies by importing reverse engineers, or by using new intermediate and capital goods or by integrated relationships with foreign buyers to whom these firms export.
Aside from these, the development of competition law brought by globalisation and trade liberalisation also affects small enterprises. As the process of globalisation gathers pace and as international competition intensifies, slight differences in the terms of access to the various markets can have a substantial effect on the commercial success or failure of a firm. Market access can be decisively influenced by the presence or absence of competition rules and the rigor with which they are enforced. The WTO is seen as becoming anachronistic for not being able to address competition issues. Some have suggested that it is time the multilateral trade system acquired a global competition authority.
The inclusion or not of competition provisions has sparked a vigorous debate. Those against have basically advanced two broad arguments. The first argument claims that there is no need to internationalise competition law and that the cost of doing so will be high and may affect small organisations. The second emphasises the fundamental incompatibility between trade and competition policies.
Conclusion
In the development of competition law, liberalisation, globalisation, commoditisation and sectoral regulations are closely related and often interact. Of course, one could argue that "the market"--in other words, effective competition--should be the sole determinant of providers' attitudes toward customers, in particular the services to be supplied and to whom and in what quantity. Then, a situation would develop where only competition authorities intervene, because the sectoral regulator would have disappeared from the scene. From the previous discussion, liberalisation in accordance to competition law continues to be regarded as a major element of economic reforms in most countries. In the majority of developing countries, it is an important component of the structural adjustment package sponsored by multilateral institutions. It has become geographically more widespread and has increasingly involved the telecommunications, energy and water sectors. Foreign investment linked to liberalisation has also become more prominent in developing countries. However, while liberalisation can bring about benefits under certain conditions, transfer of ownership is by no means a sufficient condition for improved performance of firms and setting off economic growth.
This especially holds for developing countries that face a lot of challenges as have already been discussed in the preceding paragraphs. In their study, Adam, Cavendish and Mistry observe that developing countries have realised that achieving the benefits of investment liberalisation takes longer for them than for western industrial nations because their economic infrastructure is not as well developed. They do not have the sophisticated capital markets and well-established regulatory structures that are necessary to make rapid progress.
In other words, if liberalisation with respect to competition law is to benefit the developing countries, the challenges facing these countries have to be properly identified so as to inform policy makers and the necessary actions have to be taken to overcome them.
In addition, the governments must regularly inform the public about the goals of competition law and liberalisation and explain how achieving these goals benefit their citizens and nations. Governments must also carefully analyse the political impediments to investment liberalisation and must develop plans to eliminate them. Introducing more market competition and effective state regulation may be crucial in ensuring that economic performance improves. In addition, a wider range of institutional issues, including improving political, legal, management and financial capacity within countries will affect the impact of investment liberalisation on performance when investment liberalisation occurs in low-income countries.
With respect to competition law, liberalisation and openness should be promoted which will in turn promote market discipline, competition, better corporate governance and public accountability. Disciplined and prudential regulations should be introduced in the financial sector where incomplete liberalisation has taken place. This can help prevent the continuation of state directed credit to funds, which often lead to misallocation of resources.
In summary, the development of competition law faces several obstacles & challenges which all have to be tamed by countries’ governments before substantial benefits can be realised. It is worth noting that competition law can improve economic performance but performance improvement heavily relies also on other structural reforms like liberalisation and regulation and the ability of developing countries to overcome the numerous challenges that they face during the investment liberalisation process.
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