Does Hong Kong Need a Competition Law?
Professor Leonard K Cheng, Department of Economics, School of Business and Management, Hong Kong University of Science and Technology, was the Foundationís guest speaker on 23 April 2002. This is the text of his speech.
Good afternoon, ladies and gentlemen!
Let me first thank the Hong Kong Democratic Foundation for inviting me to explore with you whether Hong Kong needs a competition law. I am very delighted to have this opportunity.
My work was made somewhat easy as a result of three unrelated developments that all occurred within the last several weeks. First, I received a huge number of unexpected and repeated email exchanges that led me to a recent publication by Professor Michal Gal of New York University. She focuses on economic size as a factor in the design and implementation of competition policy. She has also confirmed for me the scarcity of writings on competition policy in small economies. Second, just about two weeks ago I learned from Dr. Victor Hung of the Consumer Council about an UNCTAD conference on competition policy that was held in Hong Kong last week. Even though I did not learn much from the international bureaucrats, I did get hold of a useful reference on competition laws in the world. Third, I recently received a forthcoming publication by Professors Edward Chen and Ping Lin of Lingnan University that reviews Hong Kong's sector-specific approach to competition policy. They also ask the same question that is in front of us today, namely, does Hong Kong need a competition law?
In November 1996 the Consumer Council recommended enacting a comprehensive competition law and establishing a Competition Authority and an Appeal Body to enforce the law.
In case you may be interested, the following are the primary references for the preparation of my speech today:
With this background, let me refine the question before I proceed to its answer. The original question posed is "Does Hong Kong Need a Competition Law?" In order to answer this question, we must have an understanding of what kind of competition law is being considered, because having a bad law may be worse than having no law at all. Thus, I shall spell out what I regard as a sensible competition law for Hong Kong, given the theory behind competition laws and the experience with competition laws in other economies, in particular in relatively small and open economies like Hong Kong. We also need to form an opinion about the adequacy of Hong Kongís present sector-specific competition policy in order to decide whether there is a need for a sensible competition law.
The SAR Governmentís Sector-Specific Competition Policy Framework
Is the government's policy statement binding on private firms? What is its usefulness if it is not even willing to ban the most blatant forms of anti-competitive practices such as price fixing and bid rigging?
A Sensible Competition Law
As a background, let me briefly summarize for you the competition law proposed by the Consumer Council:
Article 1: To prohibit explicit horizontal and vertical agreements;
Article 2: To prohibit abuse of dominant position;
Article 3: To control "complex monopoly";
Article 4: To control mergers and acquisitions.
The competition law proposed by the Consumer Council is overly intrusive because it bans "vertical agreements" whereas a sensible approach would be to apply the "rule of reason." Vertical agreements are problematic if they are associated with dominant firms, and that is already covered by Article 2. The competition law is overly aggressive because complex monopoly as spelt out in Article 3 is hard to understand, even to professional economists.
What do I regard as a sensible competition law for Hong Kong? I believe, like most competition laws, it should include three key articles, namely,
In addition, it should also include other articles that spell out the functions and powers of, and procedures to be followed by authorities that administer the law.
I have argued elsewhere that there should be an article that prohibits the abuse of power by corporations owned by SAR government and other governments in China. Since the definition of enterprises to be covered by a competition law includes those created or controlled by governments (p.12, Model Law on Competition), I now realize that a separate article is unnecessary.
(Nevertheless, I should emphasize that administrators of the SAR's competition law should not be intimidated by companies with government background, not even if the companies are owned by Chinaís State Council. There have been charges of soft attitudes toward some government owned enterprises from the Chinese mainland with regard to the listing and information disclosure of H-shares and red-chips. Inability to maintain high standards in the conduct of business in Hong Kong will no doubt damage Hong Kongís international reputation, with adverse effect on the long-term interests of both Hong Kong and China.)
I should also emphasize that in the administration of the competition law, guidelines that are adopted in big economies such as the US and the EU may have to be modified to suit Hong Kong's needs, i.e., the need of a small open city economy. For instance, when market structure parameters such as market shares are used to decide what constitutes a dominant position and whether mergers and acquisitions should be approved, it would be optimal for a small economy to be more tolerant of market concentration than a big economy because the costs of sacrificing economy of scale to achieve lower market concentration would normally be larger for a small economy than for a large economy. This is a main theme of Prof. Michal Gal's article, and was a point I made in my 1998 book.
Other things being the same, a higher degree of market concentration may be less of a worry if openness means foreign firms are viable potential entrants. In this connection, I should emphasize that Hong Kong's free trade policy does not translate into easy access to segments of the domestic markets that are not globally tradable. The degree of added market contestability contributed by foreign firms depends on whether foreign firms are able to enter domestic markets sufficiently easily.
Hong Kong's free trade policy does not translate into easy access to segments of the domestic markets that are not globally tradable.
Hong Kong Needs a Competition Law
After reviewing Hong Kong's current competition framework, its actual working in the telecommunications and broadcasting sectors (the only two sectors that are subject to explicit competition provisions that are typically found in competition laws adopted by developed economies), and a lack of explicit competition provisions for other industries, Professors Chen and Lin have raised three concerns. Their first concern is that is a level playing field is guaranteed only in a small number of industries. Since some of the industries without explicit competition provisions may not be adequately competitive, there is no safeguard of fair competition and economic efficiency in these industries. I agree this is a serious problem.
The government argues that a comprehensive competition law that applies to all industries is an "overkill." Thus, a more desirable approach would be to have different rules for different sectors. If appropriately different rules are indeed set for different industries, that would be good. However, in reality, rules are set only for two industries, and virtually no rules are set for all the other industries. Even horizontal agreements such as price fixing are not banned but to be dealt with on a case by case basis.
The government's argument against banning horizontal agreements does not stand up to close scrutiny. Explicit cooperation and implicit collusion among competing firms improve efficiency without hurting the interest of consumers only if they do not reduce market rivalry, which means that they are small firms belonging to a competitive fringe. Usually the efficiency gains are small (because there are alternative means of cooperation such as merger and acquisitions), but the costs of allowing larger firms in the same industry to cooperate or collude would be relatively more significant. To prevent the latter from happening in the absence of an legal prohibition would impose an excess burden on the competition authority. The costs and benefits associated with banning or not banning horizontal agreements would argue for a ban. That may be why in most, if not all, jurisdictions with competition laws, horizontal agreements are illegal per se.
Their second concern is the dual role of industry regulators as judges in competition matters, hence leading to possible public perception of unfairness. Unlike Chen and Lin, I am not as concerned so long as the firms involved have a chance to appeal to an independent agency, say the court, against the regulators' rulings on competition matters (e.g., abuse of dominant position).
Their third concern is that there is no legal provision to deal with mergers and acquisitions. Even the Telecommunications Ordinance does not provide a legal basis in dealing with such matters. I agree with this concern, but it is an issue about the coverage of the competition policy more than an issue about the relative desirability of a competition law vis-ŗ-vis a non-legal-based competition policy.
Besides the above three concerns, Professors Chen and Lin's put forward two additional arguments in support of a comprehensive competition law for Hong Kong. First, they argue that without a competition law there will be a lack of active public participation in the enforcement of competition policy to offset the passivity of government regulators. Second, they question the credibility of COMPAG as a serious promoter of competition in Hong Kong. I agree with both arguments.
To sum up, my own arguments for a sensible comprehensive competition law for Hong Kong are as follows.
(One should not forget that government officials seemed to be confusing the issues (such as international competitiveness and intensity of competition in domestic markets) and concocting silly arguments why price fixing and other forms of collusion should not be banned for the sake of economic efficiency and consumer welfare.)
When Hong Kong's major trading partners apply strong pressure on Hong Kong directly or through the WTO, the SAR government will have no choice but to introduce a competition law and to enforce it.
Prospect: No Competition Law for Hong Kong Any Time Soon
The above does not necessarily represent the views of the Foundation.