In January 2018, the Competition Commission of Singapore (CCS) announced that 5 electronics parts companies have been found guilty of pricing-fixing and were collectively fined a record S$19.5 million dollars.
That however paled in comparison to the S$3.5+ billion dollar fine imposed on Google by the European Union. To spell it out, that would be more than S$3,500,000,000!
In most cases, the purpose of a fine would be to punish, and deter, and it isn’t too different in most cases of Anti-Trust fines.
Anti-Trust fines can get so large because:
- They reflect the severity of the offense (against society), measured in dollar value. As the offender is usually a very big company, the “appropriate” fine would be correspondingly big.
- The need for deterrence against similar cases is great given that Anti-Competitive behaviour can be highly damaging to long-run societal interests in equitable resource allocation.
But actually, high Anti-Trust fines do not merely reflect the severity of the offense. They also reflect the fact that Anti-Trust enforcement is easier said than done.
What are Anti-Trust Laws?
In general, Anti-Trust Laws discourage firm behaviour that:
- Stifle competition “unfairly”.
- Conspire with other firms to distort the market to its advantage.
In Singapore, these laws are enshrined in the Competition Act, which empowers a government body known as the Competition Commission of Singapore (CCS) to monitor and enforce these laws.
Actions by firms that the Competition Act prohibits include:
- Price-fixing – Making agreements with other competitors on the price to be charged.
- Restricting output – Reducing quantity supplied with the intent causing higher prices due to chronic shortage.
- Participating in agreements involving customer or market sharing – Firm collusion.
- Sharing pricing or volume information (current and future) – This is similar in outcome as the above point.
In addition, the CCS actively monitors for firm mergers that could lead to market dominance or market share abuse. It can launch investigations on its own motion, or review the firms’ merger to assess the impact to the market.
In the event a firm has been found to have infringed on these set of rules, it may become liable for:
- Directives aimed at modifying its behaviour positively.
- Fines of up to 10% of the revenue in Singapore for each year of infringement up to a 3 years.
- Civil Suits from parties adversely affected by the infringements.
For more information about Anti-Trust regulations in Singapore, you may visit this site.
Understanding the Essence of Deterrence.
For many of us, we think of “deterrence” as a form of “enforcement”. A way to keep baddies toeing the line. A way to stop a crazy North Korea from starting a nuclear war.
But to understand the true essence of “deterrence”, we will need to look from the perspective of the target audience (i.e. companies in this case).
A deterrent to a company, is something that discourages it from engaging in such undesirable behaviour. Objectively, a deterrent can be seen as expected punishment.
Quantitatively, the expected punishment can be calculated by multiplying the probability of being found guilty of the act, and the size of the fine in monetary terms.
The tendency of the firm to engage in anti-competitive behaviour is usually inversely proportional to the perceived deterrence size (expected punishment). In other words, a high level of expected punishment reduces the likelihood of the offence being committed, and vice versa.
The high level of fines compensate for the low probability of being found guilty.
So based on our above discussion, it would seem that the key to discouraging bad behaviour would be to raise the deterrence level. Unfortunately, JC Economics often say nothing about how hard it is to enforce Anti-Trust policies.
As a result, to ensure that the deterrence of the fine stays relevant, the difficulties in enforcing Anti-Trust policies will have to be compensated by increasing the size of the fines.
But why are Anti-Trust Laws so difficult to enforce?
Anti-competition is “obviously” wrong and wrongdoers will not tell.
With the CCS guidelines clearly spelt out and publicly accessible, and high profile cases often being publicised, you would be hard-pressed to imagine firms with less than noble intents leaving any incriminating evidence for any to see – if they can help it.
At least in the case of Singapore, CCS takes the above-the-board approach, and this usually means gathering sufficient evidence to:
- Launch a full-scale investigation.
- And then legally associate them with the relevant offenses (i.e. charging them).
- And then decide on the appropriate measure and/or punishment.
You can see that this will probably be a long and drawn-out affair. Let’s look at some previous high-profile cases:
- Penguin Ferry / Batam Fast Ferry (5 years): Offense began in 2007, found guilty in 2012.
- SISTIC (4 years): Offense began in 2006, found guilty in 2010.
- Singapore Chemi-con / Nichicon / Rubycon / ELNA / Panasonic (21 years): Offense began in 1997, found guilty in 2018.
And the list goes on – but you get the picture: It takes a really long time to discover, investigate and punish Anti-Trust perpetrators.
Secrecy is the byword for wrong-doing and this results in a lower probability of detection, followed by a long period of investigation before the final verdict, before which you would be innocent till proven guilty. A fascinating account of these investigations can be read here.
Lack of competition may not always be bad.
Most seasoned students would have known by now that having a few highly dominant players in the market may not always be bad news. Common advantages of such a market structure include:
- Economies of Scale, which may result in cost savings passed on to consumers.
- Additional capital for the company to engage in R&D, resulting in better products over the long-run.
- Stability to the market and products offered over the long-run.
The situation therefore gets tricky for policymakers, because their over-arching mandate is to maximise societal welfare (i.e ensure the best possible outcomes for society as a whole).
At what point should anti-competitive behaviour be stopped despite benefits being passed on to consumers?
A straightforward answer to this would be to adopt a “let-the-product-speak-for-itself” approach. In other words, Anti-Trust regulators need not act as long as the dominant status of a company is achieved through the competitiveness of the good or service produced.
Unfortunately, the situation can often get hazy. Consider Network Effects, where the benefit of consuming a good or service is enhanced by another’s consumption of that same good or service. Well-known examples include the “Big 5” – Apple, Google, Facebook, Microsoft and Facebook.
In such cases, the companies do not usually engage in “classic” anti-competitive behaviour (e.g. predatory pricing, collusion, “unfairly” influencing the market to its advantage). In fact, they do not need to.
Network Effects often ensure ever-increasing take-up rates, until a point where the company becomes impossible to dislodge at all from its dominant status. By that time, it would be fair to assume that consumers would be at the mercy of the company – which is exactly the situation Anti-Trust regulations seek to avoid.
For good or for bad though, Anti-Trust regulators have bitten back, and Google was fined more than S$3.5bn for using its search engine to “unfairly” promote its products.
From the perspective of Network Effects, it makes a lot of sense to build an ecosystem of products that would give customers a seamless experience. But there is a thin line between that, and eventual monopoly status, which can ironically be used against consumers who had benefited from this arrangement!
Human Ingenuity is always one step ahead of the law.
When it comes to regulations in a free market, a general sequence of events tends to emerge:
- An act that harms societal welfare is perpetrated.
- Affected parties demand for regulations targeted at diminishing such acts.
- The regulators accede and respond with modified regulations.
- The perpetrators modify their behaviour and look for loopholes to exploit.
- The cycle repeats when loopholes are successfully exploited.
The main takeaway is that society is not static and regulations can get outmoded, even if the negative fundamental motives (e.g. greed, malice etc.) they aim to curb don’t.
But it isn’t always because individuals or companies out-wit regulators. Many times, it is also because regulations are not always so straightforward in creation, implementation, and even interpretation.
A few examples illustrate this point well:
- When first introduced, peer-to-peer ride-sharing (e.g. Grab and Uber) were not subject to any particular set of rules, because they are not transportation companies in the traditional sense. As a result, they were not regulated like the taxi industry was. Thus the playing field was not level and coupled with anti-competitive behaviour such as steep discounts for both drivers and commuters, regulators eventually stepped in with new measures.
- It was a similar story with bike-sharing (e.g. Obike, Ofo, Mobike). There were few rules to play by initially, and eventually, faced with indiscriminate parking make worse by the companies flooding the market with many bicycles to out-do their competitors, regulators stepped in as well with new measures.
- After years of secrecy shrouding the search results ranking process, the European Union may introduce new regulations to force greater transparency, and reduce the likelihood of anti-competitive behaviour on such impactful search platforms as Google, Facebook and Amazon.
Fundamentally, regulations are a codified set of rules that aim to guide behaviour in society. They are meant to be rigid and this usually means strict interpretations to the word, causing various types of companies and actions to fall through the gap.
Also, in most cases, this codification process is not instantaneous because regulators are cognizant of the fact that their policies have major repercussions on society. As a result, the response to what eventually is recognised to be negative action tends to be slow.
Basically, Anti-Trust laws are really difficult to enforce.
Companies are usually anti-competitive by nature, as they seek to increase their influence over the market by increasing their market share.
Anti-Trust regulations are meant to reduce the harmful effects of such actions, but given the contexts laid out above, it seems abundantly clear that it can be a tall order more often than not.
So the next time you see yet another news article on a big Anti-Trust fine being levied on a company, you should know better!
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