Competition Commission is being distracted by market inquiries

The Competition Commission may be wasting resources in undertaking market inquiries as they are expensive and yield little results, says Dr Phumudzo S. Munyai.

IT’S become common for South African politicians to blame slow economic growth in the country on private sector corruption, anti-competitive market structures and abuse of market power by dominant firms.

Although this is sometimes simply a cover for the government’s own poor performance, the fact is that historically South Africa’s economy has been deeply anti-competitive. Private sector players have a strong leaning towards anti-competitive conduct. The task of fixing the fault lines rests with the Competition Commission.

The principal way the Commission meets its mandate is through investigating and prosecuting cases of suspected anti-competitive conduct brought by complainants or initiated of its own accord. The other way it can fight anti-competitive behaviour is by launching a market inquiry. This is a formal investigation into the general state of competition in a particular sector.

Industries that have faced market inquiries include banking, healthcare, the retail grocery sector, transport and the market for data in the telecommunication sector. Market inquiries are meant to complement the core functions of the Commission, which is to investigate and prosecute instances of anti-competitive conduct.

While these procedures are reactive in nature, market enquiries by contrast are seen to represent a more proactive approach in competition law enforcement.

But market enquiries may also prove to be a burden on the Commission. And I believe that they’re distracting it from its core function of busting clear or promising cases of anti-competitive conduct.

Strengths and weaknesses

The advantage of market inquiries is that they’re a proactive weapon in the Commission’s arsenal against industry-wide anti-competitive practices.

Importantly, they provide the Commission with information and insights into the dynamics and workings of particular industries. And the Commission can use information gleaned through an inquiry to determine appropriate enforcement action and policy intervention. Market inquiries can also shake up industries and force incumbents to stop anti-competitive behaviour.

But enquiries also have their weaknesses.

The Commission is unable during market inquiries to use its powers to enter and search premises and take possession of things and information it can use as evidence against implicated firms. As such market inquiries rely on the goodwill of respondents who must answer questions fully and honestly. In reality, this doesn’t always happen.

And experience shows that the offence of perjury (lying under oath) hasn’t been enough of a deterrent to stop people from lying, or telling half-truths to the Commission.

On top of this, the fear of personal criminal liability as a result of the cartel offence is a disincentive for directors of companies to tell the truth when they’re called upon to provide evidence in market inquiries. This means in order for their outcomes to be credible, market inquires depend largely on the cooperation of affected firms and industries. This is not always feasible.

General enquiries

Another issue is that market inquiries are only general inquiries into the state of competition in a particular market. They are not investigations into the conduct of individual companies. Because of this, the findings of a market inquiry - even when they go against particular companies - don’t automatically constitute a legal finding of wrongdoing against an individual firm.

This means any firm implicated by a market inquiry doesn’t face any immediate consequences. For action to be taken against any firm implicated, the Commission must initiate a fresh and specific investigation or complaint against it. This raises the question: what then is the role of market inquiries? Is it just information gathering? If so, are there no efficient ways of doing so?

There is also little evidence that market inquiries do improve competitiveness. This is because even when measures more aggressive than market inquiries have been taken, for example record breaking fines being imposed against some firms, anti-competitive behaviour hasn’t stopped in many sectors.

In fact, in some industries it has increased. For example, the 2006 Competition Commission inquiry into the banking sector did not foster a culture of competition in that sector.

Research conducted to assess the impact of the Commission’s banking inquiry shows that the inquiry didn’t result in any appreciable consumer benefits, particularly lower banking fees as a result of increased competition. And a number of banks are currently being prosecuted for price fixing.

Another shortcoming is the time it takes to complete a market inquiry. Because market inquiries cover entire sectors, they are lengthy processes. This has the potential of weakening subsequent competition investigations or complaints against particular firms. This is because any firm implicated in a market inquiry has time to get rid of evidence that might prove their involvement in anti-competitive practices.

And lastly, market inquiries are a drain on the resources of the Commission. They cost a lot of money, require the appointment of people with expertise in a targeted industry, and absorb Commission staff who might otherwise be able to pay more attention to its core work.

Alternatives

Of course, market inquiries attracts good publicity and public sympathy for the work of the Commission. But the interests of South Africans would be served better if the Commission focused on its core mandate - the investigation and prosecution of clear cases of suspected anti-competitive behaviour, regardless of industry in which they occur.

The Commission’s limited resources should be channelled towards fulfilling this important goal.

To enable this to happen, market inquiries should be done by state departments or regulatory authorities in affected industries. A precedent exists for this: the 2004 banking enquiry commissioned by the South African National Treasury and Reserve Bank.

• Dr Phumudzo S. Munyai, Senior Lecturer: Competition Law, University of South Africa
• This article was originally published on The Conversation. Read the original article.

SUBSCRIBE FOR FREE UPDATE: Get Fin24's top morning business news and opinions in your inbox.

Read Fin24's top stories trending on Twitter: Fin24’s top stories