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Abuse of dominance and its effects on economic development


Adams, Michael (2008). Abuse of dominance and its effects on economic development. In: Qaqaya, Hassan; Lipimile, George. The Effects of Anti-Competitive Business Practices on Developing Countries and their Development Prospects, United Nations. New York: United Nations, 571-629.

Abstract

Rules on abuse of dominance are used to find a balance between three objectives: 1) ensuring enough competition between firms in order to force them to be efficient and to compete on merit, 2) allowing a certain degree of profitability so that companies have incentives to become more efficient, and 3) achieving an equal distribution of wealth and business opportunities among different sectors of society. While the discussion in developed countries focuses on the first two aspects in order to maximize innovation and growth, developing countries may also want to consider the third dimension and include the reduction of inequality and poverty as objectives of abuse of dominance laws. But even the relationship between the first two aspects tends to vary among regions, because investment depends on factors that differ between developing and developed countries. These factors sometimes contradict each other and it is crucial to find a sound balance between them. Firstly, since developing economies often have smaller markets and, therefore, a lower equilibrium number of firms that can exploit economies of scale and operate efficiently, markets in developing countries are more likely to be concentrated. Furthermore, entry barriers tend to be higher and capital markets are often less developed, which causes obstacles for firms trying to compete with a dominant company. Secondly, large firms play a different role regarding their investment activity in developing countries than they do in more developed economies. Established firms can be important for less developed economies to have a sufficiently high level of investment in production. In such countries, the benefits of increased investments may outweigh efficiency losses that can arise from a more lax treatment of dominant firm conduct. Thirdly, distributional aspects may be especially important for developing countries. Smaller firms, which often represent poorer sectors of society, may have to be given better chances to compete against large dominant companies. Competition law can be used for such public interest issues, but it is crucial that the law gives clear guidance on how these objectives should be balanced against other objectives such as efficiency. The comparison of the EU and the US regarding abuse of dominance shows that significant differences exist even among developed countries. One reason for the disparity is differing assumptions about what types of conduct are harmful and how difficult it is to differentiate them from other conduct. The 'access to market principle' of the EU arises from the assumption that restrictions of market access are harmful to the economy and that a harmful conduct can be distinguished from other, not harmful, conduct. On the other hand, the 'non-intervention principle' of the US is based on the assumption that the distinction of such conduct is difficult, that there is great danger of prohibiting behaviour that is efficient and that the unnecessary prohibition of efficient conduct is severe. One conclusion from the comparison is that these assumptions should be analysed and be grounded on the economic reality. How likely and severe errors of competition authorities are can, for example, be assessed in an analysis of past decisions and their effects on the economy. Support of developing countries' competition authorities in analysing their own cases and the impact of their decisions on the economy would therefore be valuable.

Rules on abuse of dominance are used to find a balance between three objectives: 1) ensuring enough competition between firms in order to force them to be efficient and to compete on merit, 2) allowing a certain degree of profitability so that companies have incentives to become more efficient, and 3) achieving an equal distribution of wealth and business opportunities among different sectors of society. While the discussion in developed countries focuses on the first two aspects in order to maximize innovation and growth, developing countries may also want to consider the third dimension and include the reduction of inequality and poverty as objectives of abuse of dominance laws. But even the relationship between the first two aspects tends to vary among regions, because investment depends on factors that differ between developing and developed countries. These factors sometimes contradict each other and it is crucial to find a sound balance between them. Firstly, since developing economies often have smaller markets and, therefore, a lower equilibrium number of firms that can exploit economies of scale and operate efficiently, markets in developing countries are more likely to be concentrated. Furthermore, entry barriers tend to be higher and capital markets are often less developed, which causes obstacles for firms trying to compete with a dominant company. Secondly, large firms play a different role regarding their investment activity in developing countries than they do in more developed economies. Established firms can be important for less developed economies to have a sufficiently high level of investment in production. In such countries, the benefits of increased investments may outweigh efficiency losses that can arise from a more lax treatment of dominant firm conduct. Thirdly, distributional aspects may be especially important for developing countries. Smaller firms, which often represent poorer sectors of society, may have to be given better chances to compete against large dominant companies. Competition law can be used for such public interest issues, but it is crucial that the law gives clear guidance on how these objectives should be balanced against other objectives such as efficiency. The comparison of the EU and the US regarding abuse of dominance shows that significant differences exist even among developed countries. One reason for the disparity is differing assumptions about what types of conduct are harmful and how difficult it is to differentiate them from other conduct. The 'access to market principle' of the EU arises from the assumption that restrictions of market access are harmful to the economy and that a harmful conduct can be distinguished from other, not harmful, conduct. On the other hand, the 'non-intervention principle' of the US is based on the assumption that the distinction of such conduct is difficult, that there is great danger of prohibiting behaviour that is efficient and that the unnecessary prohibition of efficient conduct is severe. One conclusion from the comparison is that these assumptions should be analysed and be grounded on the economic reality. How likely and severe errors of competition authorities are can, for example, be assessed in an analysis of past decisions and their effects on the economy. Support of developing countries' competition authorities in analysing their own cases and the impact of their decisions on the economy would therefore be valuable.

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Additional indexing

Item Type:Book Section, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:2008
Deposited On:09 Feb 2012 14:04
Last Modified:05 Apr 2016 15:35
Publisher:United Nations
Free access at:Official URL. An embargo period may apply.
Official URL:http://www.unctad.org/en/docs/ditcclp20082_en.pdf
Permanent URL: https://doi.org/10.5167/uzh-58692

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