Competition Policy in Hong Kong: Merger Control and Treatment of SMEs

1
Competition Policy in Hong Kong Merger Control
and Treatment of SMEs

• Ping Lin
• Department of Economics
• Lingnan University of Hong Kong
• Asian Competition Forum
• 10-11 December 2007

2
Benefits of Competition

• Economic efficiency in a perfectly competitive
  market
• Allocative efficiency Optimal allocation of
  available resources
• Static Dynamic efficiency

3
Market Competition Not Perfect

• Competition law
• To safeguard competitive process
• To correct market distortion
• To achieve welfare maximization

4
Competition Law Not Intervention to Market

• Rules of the game
• To outlaw anti-competitive conduct and to improve
  market discipline
• To contribute indirectly to economic freedom and
  prosperity
• Competition law NOT against any players

5
Competition Law in Context

• Coverage of competition law in general
• Horizontal constraints
• Abuse of market dominance
• Mergers and acquisition

6
Greater Need for Competition Law in Small Market
Economies

• Gal (2003) Market forces alone cannot achieve
  efficiency in small market economies
• Market distortion even more pronounced in small
  market economies

7
Probability of occurrence

• 2004 EBRD and World Bank Survey of 28 countries
• 19.73 of firms consider anticompetitive
  practices of competitors as major obstacles for
  their business,
• 23.45 say they are moderate obstacles.
• 2005 UK(OFT) study showed nearly a quarter of
  SMEs believe they have been a victim of
  anticompetitive practices. Only a minority would
  report it.
• Similar evidence from recent World Bank Survey.

8
CPRC Report (2006)

• Review Effectiveness of Hong Kongs competition
  policy
• Recommendations
• Introduction of a cross-sector competition law,
• Enforced by independent Competition Commission.
• MAs not be covered, however.

9
Social Benefits and Costs of Mergers

• The Williamson Trade-off
• Efficiency gains (econ. of scale, econ. of scope)
• Only merger specific efficiencies are relevant.
• Social costs (reduction in competition, DWL)
• Coordination effect
• Unilateral effect
• Entry
• Merger review Balancing efficiency enhancing
  effects against potential competition reducing
  effects

10
Anti-Competition Effects of Mergers

• The unilateral effect
• The merged entity AB has stronger incentive to
  raise price than stand-alone companies (A or B),
  in markets of differentiated products.
• The coordination effect
• Mergers may make collusion more likely (in more
  homogeneous product markets)

11
The Need for Merger Control in Hong Kong

• Small-economy arguments
• Scale economies are more important for small
  economies,
• so MAs are more likely to be socially
  beneficial.
• so MAs tend to occur in already highly
  concentrated industries, and entry barriers are
  more likely to be high, gt MAs are more likely
  to be socially harmful.

12
The Need for Merger Control in Hong Kong

• Type I error (falsely finding abuse) vs. Type II
  error (falsely not finding abuse)
• A policy not covering MAs gives more weight to
  the harm of Type I errors than to Type II errors.
• A balance must be struck.
• It is hard to believe that a duopoly-to-monopoly
  merger is not anti-competitive, even in small
  economies.
• So completely ignoring Type II errors could be
  very costly to society.

13
Conduct regulation is no substitute for merger
control

• Some hold the view that as long as there are
  effective safeguards against anti-competitive
  conduct, it might well be superfluous to control
  merger
• since a corporation enjoying market dominance and
  engaging in anti-competitive conduct would in any
  event be caught under the law.
• However, lost competition as a result of a merger
  cannot be restored by regulating the behaviour of
  the combined firm ex post (Chen and Lin ,2007).
• E.g., post a duopoly to monopoly merger,
  competition is absent no matter how the
  government regulates the new firms conduct.

14
An illustration The Staples-Office Depot Merger
in the US (1997)

• Market definition (OS Superstores)
• Direct estimates of the mergers effects on
  prices
• Price comparison between cities where Office
  Depot and Staples currently competed and those
  where they did not.

15
Average price differentials in Staples-Office
Depot (from Kwoka White, Antitrust Revolution,
2004)
16
The Staples-Office Depot Merger (1997)

• FTCs econometric analysis using store-level data
  (Kwoka White, 2004)
• An average of 7.3 increase in overall prices
• Efficiency gains 1.4
• Passing through rate 15
• Net increase in price 7.1 7.3 - 0.15x1.4
• (A total surplus approach may be more proper for
  HK)
• The merger was blocked by the court.

17
Staples-Office Depot Merger Contd

• Stock-market Event study (additional evidence)
• The proposed merger would raise the value of
  OfficeMaxs shares by 12 (Warren-Boulton and
  Dalkir, 2001)
• Thus, the S-OD merger would likely be
  anticompetitive.
• Aftermath (Kwoka White, 2004, p.72)
• Both S and OD expanded.
• Most of the efficiencies the parties could have
  expected from the merger were achieved without
  the detrimental price effects from the merger
  (and without much delay).

18
Implications for Hong Kong?

• Mergers can be anti-competitive, even when they
  generate efficiency gains.
• Economic analysis (including econometric
  estimations) can help predict effects of a merger
  on competition and consumers
• Absence merger control, the type II error may
  prove too costly in Hong Kong.
• Hong Kong should not rush in excluding merger
  control in its competition law.

19
Proper Merger Control Regime for Hong Kong

• Should take into account small economy features
• Safe harbours should be broader than those in
  other/large economies.

20
Merger Guidelines (2004)in the Telecom Industry
of Hong Kong

• Market definition (SSNIP test)
• Safe harbours
• CR4 test
• Combined mkt share less than 15 or
• Combined mkt share between 15 and 40 AND
  industry CR4 lt 75.
• HHI test (the US threshold points)
• Unconcentrated industry, 0,1000,
• Moderately concentrated industry, 1000, 1800,
  Dlt100
• Highly concentrated industry, 1800,10000, Dlt 50

21
Merger Guidelines (2004)in the Telecom Industry
of Hong Kong

• Factors to look at
• unilateral and co-ordination effects
• removal of maverick
• barriers to entry
• Potential competition
• countervailing buying power
• import competition
• technological change
• efficiency defence
• etc.

22
Recent Dealing by the OFTA

• Seven merger transactions were considered
• Acquisition of PCCW by China Netcom (2005)
• Acquisition of Sunday by PCCW (2005)
• Acquisition of Peoples by China Mobile (2005)
• Joint Ownership pf CSL and NWPCS (2006)
• Change of Ownership of Asia Netcom and C2C (2006)
• Acquisition of PacNet by Asia Netcom (2007)
• Acquisition of AsiaSat Holdings by GE Capital
  Corp. (2007)
• All were approved.
• TAs dealing has been permissive (see Lin and
  Fung, 2007).

23
Comments on the Safe Harbors in the
Telecommunications Industry of HK

• The HHI test is exactly the same as that in the
  US.
• As an alternative test, the HHI safe harbor is
  narrower than the CR4 safe harbor
• I.e., The HHI test is stricter than the CR4 test
• (see figure 1)

24
A Proposal

• Adopt a modified version of the telecom merger
  control to cover the entire economy
• Stick to the same CR4 test (among the most
  lenient in the world, and for consistency)
• Relax the HHI test (so that it is more comparable
  with the CR4 test)
• One possibility is to use the following new
  decision points (Lin and Fung, 2007)
• Unconcentrated industry, 0,1500,
• Moderately concentrated industry, 1500, 2500,
  Dlt200
• Highly concentrated industry, 2500,10000, Dlt
  100

25
Concerns of SMEs

• SMEs skeptical of new legislation, used to
  laissez-faire
• Concerned about high compliance costs, and
• Prohibitive litigation costs, if unwittingly
  fallen foul of the law
• Reluctant to confront big players in court for
  fear of retaliation.

26
Partial Exemption of SMEs (Chen and Lin, 2007)

• SMEs are exempt from provisions governing
• Abuse of dominant position
• Merger and acquisition
• Are liable for price-fixing violations, however.

27
SMEs to be better off with a law (Chen and Lin,
2007)

• SMEs better off in a fair play
• Compliance costs can be kept down
• SMEs can be exempted from certain prohibitions
  (mostly within safety zones), hence minimal need
  for legal advice
• Door open to sue under the law, if victimized
  nowhere to seek justice without a law (infinitely
  high legal costs).

28
Concluding Remarks

• Small economy does not rule out anti-competitive
  mergers. The harm of type II errors should not be
  underestimated.
• Conduct regulation is no substitute for merger
  control.
• A lenient merge control regime is recommended to
  take into account features of a small economy.
• A modified version of the merger control regime
  in the telecom industry seems suitable.
• Partial exemptions for SMEs can be justified on
  economics ground.

29

• - Thank you -
• Ping Lin
• Department of Economics
• Lingnan University
• plin_at_ln.edu.hk

30
Concluding Remarks

• Small economies demand a greater need for
  competition policy
• Merger control with large safe harbors seems
  appropriate for Hong Kong
• A leniency program is highly recommended to
  combat cartels.

31
Thank you!

• Ping Lin
• plin_at_ln.edu.hk