Competition authorities and regulators: Twinning or tweening?
by Stella Luz A. Quimbo
May 29, 2018
The Philippine Competition Commission (PCC) is the country’s competition authority. It is not a sector-specific regulator like the Bangko Sentral ng Pilipinas which regulates all types of banks, or the Securities and Exchange Commission which is the regulator and registrar of the corporate sector. The Land Transportation Franchising and Regulatory Board, which regulates all types of public land-based transportation, is also a sector regulator.
Often, there is confusion on what the PCC’s mandate is, vis-à-vis that of sector regulators. For high-profile cases that involve, for example, mergers of firms that operate in a highly regulated sector, we are often asked: what can and should the PCC do in this situation? Is the PCC stepping into the jurisdiction of the sector-specific regulator?
The PCC and sector-specific regulators differ in two ways.
First, their mandates differ. Sector regulators are primarily tasked to address “market failures” in a sector. For example, sector regulators regulate natural monopolies. These use technologies that require huge amounts of capital and in order to minimize fixed costs, have to operate at a very large scale relative to total market size. This is the reason it makes sense for only one firm to operate. Water and power distribution companies are examples of natural monopolies. These companies operate under the guidance of sector regulators, which would typically have a say on the most important business decision: pricing.
Another important reason for why markets fail and thus, require regulation, is “information asymmetry.” When consumers do not have perfect information on the quality or safety of a product or service while suppliers do, regulators step in to ensure that quality or safety is assured.
On the other hand, the PCC’s mandate is not sector specific. Its mandate is economy-wide. The PCC can enforce Section 3 of the Philippine Competition Act (PCA) against “any person or entity engaged in any trade, industry and commerce in the Republic of the Philippines.” Section 4 of the PCA defines an entity as “any person, natural or juridical, sole proprietorship, partnership, combination or association in any form, whether incorporated or not, domestic or foreign, including those owned or controlled by the government,
engaged directly or indirectly in any economic activity.”
The purpose of a possible PCC intervention, however, is specific to competition. The PCC is mandated to prohibit anticompetitive agreements and conduct, abuse of dominant position, and anticompetitive mergers or acquisitions. The PCC’s task is to identify situations where a firm’s market power is increased or is already excessive in a way that consumers are adversely affected by way of high prices, poor quality or limited choices. According to Section 32 of the PCA, the PCC has “primary and original jurisdiction in the enforcement and regulation of competition-related issues.”
Hence, when firms in a highly regulated sector merge, such merger clearly falls under the jurisdiction of the PCC. It has the power to review the merger, and if the review points to possible harms to consumers because of the merger, the PCC is vested with the power to prohibit the said merger.
Second, competition authorities and sector regulators have varying “comparative advantages”: each one can do something better than the other. The technical knowledge and expertise of competition authorities differ from that of sector regulators. Sector regulators will develop a deep knowledge of the kind of technology used by the regulated firms. Sector regulators typically know the amount and type of capital expenditures. As such, they can regulate prices based on average costs, if such is allowed by their mandate. On the other hand, a competition authority such as the PCC has expertise in identifying market power and situations where such market power is exercised by firms in a way that is detrimental to consumers.
Hence, it is futile to have disagreements over jurisdiction. Rather, the best approach for the competition authority and sector regulators is to coordinate. A conversation between the PCC and sector regulators on how to share each other’s expertise and information would be for the benefit of the public. In fact, Section 32 of the PCA urges the PCC and sector regulators to “work together to issue rules and regulations to promote competition, protect consumers and prevent abuse of market power by dominant players within their respective sectors.” The framers of the law must have foreseen that best sector outcomes are achieved through a genuine cooperation.
So, are competition authorities and regulators twinning or, rather, tweening? In the field of animation, tweening is the process of generating intermediate frames between images so that one image evolves smoothly into the next image, thus creating the illusion of motion.
Tweening is precisely what PCC and sector regulators need to do. That is to work together so that decisions are coordinated, and sectors remain dynamic.
Commissioner Stella Luz 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 May 29, 2018 here.)