Big and Special
by Stella Luz A. Quimbo
July 31, 2018
At the recent Competition Law Asia conference held in Singapore, the conference chairman reminded participants what Spider-Man once said: with great power comes great responsibility. By “power”, the conference chairman was, of course, referring to market power, rather than the abilities of a superhero.
Market power is what competition law seeks to address. It is what gives businesses the ability to profitably increase prices above the competitive level. Big businesses, because they have a large share of the market, are thought to have market power and can dictate prices.
Nothing in the Philippine Competition Act (PCA) suggests that monopolies are prohibited. Bigness, per se, is not unlawful. Bigness can lead to good outcomes, especially when the business exhibits economies of scale, such that operating at a larger scale can reduce production costs. What is unlawful is if such bigness is used in a way that harms market competition in a significant way. If bigness is used by firms to “foreclose markets”—e.g., preventing smaller firms from accessing essential inputs or preventing customers from purchasing from small rival firms—then such bigness can be unlawful.
According to jurisprudence, a big or dominant firm has a special responsibility “not to allow its conduct to impair genuine undistorted competition on the common market” (Michelin NV v. European Commission). This has been interpreted as a negative responsibility: There are certain behaviors that dominant firms must abstain from, including those that will cause prices to substantially increase or quality to significantly deteriorate.
Under the PCA, a firm that has a market share of at least 50 percent is considered “dominant,” although this presumption is rebuttable. The firm can argue and show proof to the contrary despite having this market share. Similarly, the Philippine Competition Commission (PCC) can deem a firm “dominant” despite a market share lower than 50 percent.
The PCA deals with competition concerns arising from dominance in two general ways.
One way is through Section 15, which prohibits abuse by dominant firms. This includes predatory pricing, i.e., temporarily lowering prices to a level that brings losses to the firm, with the intent of driving away competitors, whether actual or potential.
The other way is an ex ante approach by way of merger control, which is the subject of Sections 16 to 23 of the law. When firms come together to merge, and (i) when the size of the transaction is sufficiently large (i.e., P2 billion in assets or revenues) and (ii) when the size of either party is sufficiently large (i.e., P5 billion in assets or revenues), these firms are subject to a compulsory notification requirement. This means that they are not allowed to consummate the transaction until after the PCC has reviewed and cleared it. Clearance is granted when the PCC assesses that the transaction—which results in the creation of a larger firm—would not strengthen the market power of the merged firm in a way that substantially increases prices, reduces quality or limits consumer choices.
In a recent decision, the PCC found that the proposed acquisition by Chelsea Logistics of 2Go could result in a significant increase in market power and, hence, a substantial lessening of competition. The merging parties are both involved in the business of supplying roll-on/roll-off passenger and cargo-shipping services, and directly competing in several legs, for example, Cebu-Cagayan de Oro, Cebu-Ozamis, etc. Each of these legs is considered a relevant geographic market, and PCC found that, in some of these legs, the merger will result in the creation of a dominant supplier, with market shares exceeding 50 percent.
Last April the PCC initiated a motu proprio review of Grab’s acquisition of Uber, largely because the transaction puts Grab in a position of dominance in the market for on-demand private transportation online booking services. With the acquisition by Grab, Uber exited the market, causing Grab’s market share to increase to over 90 percent. The PCC suspended its review after Grab offered voluntary commitments to address the competition concerns raised by the government agency. The PCC and Grab are in talks, which, if fruitful, will result in PCC accepting the commitments.
Dominance is a nice thing. It can be a badge of honor, if dominance was arrived at by eliminating rivals through innovation and efficient operations. It can be a virtue, if dominance is used to facilitate activities that improve overall market efficiency. However, it can also be a dangerous weapon to exploit or exclude, making the playing field less even. Bigness can be special, but it comes with special responsibility and, hence, invokes special attention from regulators.
Commissioner Stella Luz A. Quimbo is an academician who served as a professor and the department chairman of the University of the Philippines School of Economics prior to her appointment in the Philippine Competition Commission. She was also Prince Claus professorial chair holder at Erasmus University of Rotterdam in the Netherlands from 2011 to 2013. Commissioner Quimbo has an extensive research portfolio in the field of health economics, industrial organization, microeconomics, education, poverty, and public policy and regulation.
(Originally published on Business Mirror’s Competition Matters column on July 31, 2018 here.)