Competition law: an Alice in Wonderland fantasy

If we asked the Mad Hatter from Alice in Wonderland to explain why the European Commission imposed a fine of 397 million euros on Microsoft in 2004 for adding a Media Player to its Windows programme at no extra cost to the consumer, even he would have difficulty in coming up with a plausibly convoluted reason. Mario Monti, the EU’s Commissioner for Competition’s explanation was that it ‘was best for competition and consumers’.

Huh? So depriving consumers of freebies so as to allow others to compete for their business with inferior offerings is good for them? Would the Mad Hatter have understood this one? He might have been mad, but he was not stupid. Attempting to understand the Commission’s decision is as difficult as finding a rational answer to the riddle posed by the Hatter to Alice at the Mad Tea Party: ‘Why is a raven like a writing desk?’

SA’s own Competition Commission is not exempt from behaving in a somewhat inexplicable manner. Is there a rational explanation for dragging SAA through competition hearings, spending a huge amount of money on legal costs, and imposing a fine of R100m on the state-owned enterprise when all the Commission’s legal and administrative expenses, and eventually, all SAA’s costs ended up being paid by taxpayers? What puts this into the Mad Hatter category is that some time after SAA paid the fine of R100m into the coffers of the Treasury, the Treasury added another R3.9bn of taxpayers funds and handed the money straight back to re-capitalise SAA. Lawyers gained, the Competition Commission staff gained, the taxpayers lost. Even the Mad Hatter would have great difficulty in explaining why all these people attended the Mad Tea Party.

In fact, the Mad Hatter would have difficulty in understanding any of the illogic on which competition law is based. According to competition law, or antitrust law as its American inventors call it, three of the most heinous crimes that firms can commit are predator pricing (charging less than competitors), price gouging (charging more than competitors), and collusion (charging the same price as competitors). Can we blame the Mad Hatter for asking, ‘Is there any other kind of price?’

The intent behind their behaviour is supposedly an important factor in the sorry saga of entrapment of firms. The astute March Hare, one of the guests at the Mad Tea Party, poses the following questions: ‘Are firms attempting to extract the largest possible net profit for themselves out of their dealings with their customers? Are they attempting to dominate the markets in which they operate by attracting consumers to buy from them and not from their competitors, even if it means driving their competitors out of the market? And will they attempt to monopolise their industries by taking over other firms so as to achieve a comparative advantage over their competitors?’

All three of the activities described in the March Hare’s questions, especially if innovative pricing strategies are used, or they become ‘dominant’, could land firms in trouble for indulging in so-called ‘anti-competitive behaviour’, a term that, strangely enough, seems to be applied to the most competitive firms. However, if firms do not pursue such objectives, they neglect their duty towards their shareholders. And paradoxically, most of the time, they will not be serving consumers as effectively as they could.

Caterpillar, who tends towards the Socratic approach, always expects clarification: ‘What do you mean by that? Explain yourself!’

Alice, after careful thought: ‘Surely, if the butcher, the baker and the grocer are all doing their best to please the customers, and they are not cheating by giving them short weight or something bad like that, then it doesn’t matter how they set their prices. If customers don’t like the prices or the quality, they will refuse to buy whatever is being offered. If customers stop buying, the prices will soon come down.’

Caterpillar: ‘But what if there are no other suppliers?’

Alice: ‘There will always be other butchers and bakers, grocers and other suppliers to provide the things people want. If bakers agreed to charge the same very high price for the kind of bread most people eat I think their game would not last. People who feel that the price is too high would start buying other kinds of bread and other kinds of food, and the bakers would have to reduce the supply of bread because they would sell fewer loaves. And then the bakers would start cheating on each other by secretly selling to some customers at lower than their agreed price. If lots of profit can be made by selling bread at lower prices, many new bakeries would open. Only two things can interfere with this.’

Caterpillar: ‘And what would that be?’

Alice: ‘If the price they agreed to charge is less than they could have got anyway, or, if the government has given special licences or privileges to the bakers playing the prices game, making it difficult for other people to start bakeries or to supply cheaper bread.’

Caterpillar: ‘I don’t know why you keep going on about bread, in the absence of fraud, surely this is a matter between bakers and their customers?’

Mad Hatter: ‘Not if you are invited to a Mad Tea Party, it isn’t! And, by the way, I don’t know why a raven is like a writing desk.’

Alice: ‘I’ll stop all talk of bread, but ‘tis obvious to me, and clear for everyone to see, that competition law or whatever it might be, is no friend of the consumer no matter what is said. I’d trust my local grocer, my butcher or my baker, not to overcharge or badly treat me, when all is said and done, if up the road or down the road, there is or could be, for every one that is, another one.’

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article/ 11 December 2007 Policy Bulletin 26 May 2009

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