How To Safeguard Competition

The election programme of the ruling Lithuanian Conservative Party proclaimed a broad-based promotion of competition. Yet, government decrees adopted in the past few months run counter to this position.
Violations of free competition are constant and numerous. In late 1997, by way of illustration, monopoly rights were granted to the state-run company, “Lithuanian Telecommunications” (“Lietuvos telekomas”). In the sugar industry, tariffs on import were raised, turning the production of sugar into a most profitable business at the expense of 3,7 million Lithuanians.
These are just two of myriad examples. While trying to uncover them, one should bear in mind that a great many violations of competition take more sophisticated forms and therefore are difficult to detect. This article provides insight into the essence of competition and the forms of its violation.
Most people claim that they favour competition and do not dispute its merits. It is universally recognised that no one should be deprived of the freedom of choice. That the best methods of production, the best quality, the most progressive forms of organisation and the lowest prices can be achieved only by way of competition. What’s more, that the essence of competition is that it is the consumer-not the parliament, government, the State Competition and Consumer Protection Service or the business elite-who gives a verdict on who is to thrive and who to go bust.
The Right to Choose Versus the Freedom to Choose
The first and most essential challenge confronting the champions of competition is posed by a very empirical dilemma: what if there is only one winner of a competitive battle, a firm that has squeezed its rivals out of business by making them shut down or go broke?
Many people who uphold the right to choose tend to protect at least the last of the rivals of the market leader. In many cases the state will shore up that outsider by extending to him some kind of aid or imposing restraints on the leader, which is a fairly common occurrence. It may pass an antitrust law (to curtail business concentration) or ban the terms of contracts unfavourable to the competitor (to prevent the abuse of a dominant position) or regulate prices. It may fix prices that will be not too high-so as to protect the consumers, and not too low-to protect the competitors. In short, all possible measures will be undertaken to prevent the market leader from beating his last rivals.
Such safeguarding of consumers’ “right” to choose leads to the inadvertent violation of voluntary contracts, the kernel of a competitive system. Curbing concentration, regulating prices or restraining voluntary private agreements regarding prices and market shares can cause the delusion of competition. People will see several sellers of the same product or providers of the same service, but there will be no free competition.
The aforesaid measures have more implications. They will prevent the parties involved from developing the most effective size of enterprise, the most suitable price mechanism and the most useful business connections for that matter. For if there is room in a market for only one seller, there is no conceivable justification for taking artificial measures to stimulate the existence of others or for curbing the growth of that only one.
By doing this, we repudiate the biggest accomplishment of competition, the guarantee that only the best and the most effective will win. Lawmakers should keep their assessment criteria to themselves, conceding their position to the consumer, the only real judge of competitive rivalry. It is only the market that can determine how many shoemakers or bakers are needed, provided it is neither “assisted” nor impeded. No one should oppose the answer “one” either.
Competition and a Free Market
The wish to “help” the market protect competition stems in most cases from one of three imaginary scenarios. One of them runs as follows: in a free market, which hosts a number of sellers, one gains a foothold, ousts, one way or another, his rivals from the market and starts dictating its terms to the consumer.
Another storyline is that several sellers agree to exact excessively high prices, share the market and, again, start dictating their terms.
And the third, and fairly threatening, scheme is that the ownership of a state-run giant has been vested in “dishonest” private hands, turning it into a tool for blackmailing the populace.
All of the three scenarios rest on the fallacy that the consumer has no choice but to buy expensive low-quality products. In a free market, a monopoly unconstrained by the consumers cannot develop for at least two reasons.
To begin with, it is not only products of the same kind that compete. Railway, for example, competes with automobile, marine and air transport; new information technologies compete with books, etc.
Second, even if there is only one seller in a free market, he must behave as if there were a whole host of competitors. In a perfectly competitive environment firms face competition from potential new entrants. In the absence of customs duties, licenses or other restrictions, they can spring up any time. The more negligent the market leader is with regard to his clients and potential rivals, the stronger the probability that competitors will enter the industry.
Regulation Erodes Competition
Regrettably, many-especially the officialdom-tend to disregard the self-regulating and self-protecting mechanisms of the market. For politicians, it is much more acceptable to regulate the market. Doing this under the cloak of protecting competition is the most suitable way. Regulating the market is indispensable in attaining covert political ends, such as protecting domestic producers or buttressing sinking enterprises.
The actual cost of satisfying such needs entails escalating prices, “who-knows-why” bankrupt firms, and restricted freedom of choice. And again, these consequences are attributed, not to the conduct of the state, but to the “defects” of the market, which can allegedly be rectified.
Illusory mechanisms for safeguarding competition, curbing monopolies and shielding consumers-mechanisms that are easy to recognise from the measures employed and coercion used-inevitably inhibit the true ones.
When market entry is obstructed, the threat of potential competitors is reduced. When one sector of economy is afforded exclusive conditions in the form of tax breaks, subsidised credits or other corporate welfare programmes, those without political favours are put at a disadvantage and become inferior and redundant.
Any government concern for competition or consumer rights diverts the attention of politically connected businesses from the consumer, damages the competitive environment, and elevates the choice of the government above that of the consumer.
Even the competition law, the purpose of which is to secure the framework for competition, undermines the tenets of a free market, the only system that can provide a truly competitive milieu. Regrettably, the new competition bill in Lithuania reflects this tendency by echoing the provisions of the European Union, provisions that render the state the “guardian” of competition but at the same time tolerate destructive government interventions in competition and completely grind down the freedom of contracts.
Under this law, anyone who opts to sell his goods in a more creative way than a marketplace retailer may come to be accused of worsening the competitiveness of his rivals. Let me mention, by way of illustration, discounts afforded to farmers or permanent customers. Are they to be viewed as discrimination of other economic agents?
Another example. Let us presume that two entrepreneurs have decided to open stores in the same neighbourhood. Naturally, it is not expedient to have two stores one by another when there is plenty of “vacancies” for other undertakings. Yet, if those two get together and adjust their plans, they will defy the competition law, for their agreement may be viewed as “market sharing.”
The fact that the same law gives officials the right to befriend the “violators” with all kinds of exemptions also points to the absurd and pointless restriction of voluntary contracts. Since exemptions may be carved out for both business sectors and individual enterprises, those who fall into the category of competition violators will only have to approach the officialdom to be let off the hook.
There is no point in expecting the law which outlaws parties that have reached mutually beneficial agreements to be effective. The next year is very likely to see one or another show trial whose victims will be, not monopolist enjoying dominant positions, but “inconvenient” competitors. The state, in turn, will make a fool of itself by adopting such laws and seeking to outwit the market, for mutually beneficial deals will occur anyway. They will simply go unreported and undetected.
Coercion as the Enemy of Competition
Competition may be violated in myriad ways, including illegal coercion of competitors or consumers and unfair competition. Yet, the most serious breaches of competition are triggered not so much by private agents but by government interventions, when the competitive environment is deformed by “lawful” regulations in the form of varying tax rates, licenses or quotas.
There is one feature which is peculiar to all real, not imaginary, violators of competition. That feature is coercion. The state-just like any ordinary violator, blackmailer or swindler-does not know the limit where and when coercion can be used. The victim does not care where the coercion comes from-an ordinary violator or one hiding under the cloak of Robin Hood. The competition bill leaves all this unaddressed. Governmental coercion is tolerated while law-abiding private undertakings confront direct imputations of fraud and deception.
Shielding Competition From the State
The purpose of the state is to protect every person and the whole society from coercion. The coercion that encroaches on free competition is no exception. The law in general and competition law in particular should be targeted at fighting both “private” and “governmental” coercion. The fight against violations of individual rights-such as fraud, theft, intimidation and restriction of liberties-should employ criminal measures. Private persons whose interests are violated in this way can invoke the institution of civil responsibility. As you can see, the instruments, though imperfect, do exist.
The situation is more complex in case of the abuse of official power, since it involves several problems. To begin with, the state has to fight against itself. Second, it has to refute speculative arguments of “common good.” Finally, government coercion is in most cases “authorised” by law. This is exactly the reason why the competition law must address this problem.
Competition law and a supervisory competition service should act as a check on the activities of the state, for traditional instruments provided by civil law are too unwieldy in contending with the state. The proposed bills have been set on the wrong path. They infringe on the bedrocks of competition, that is, voluntary contracts and voluntary action.
Lithuania lacks political will and commitment to cut back on the size of government even in the spirit of the European Union, which is invariably emphasised in all political and legal discourses. Even though it cannot boast of being a champion of limited government, the EU legislation does put a ban on providing aid to, or discriminating against, individual economic agents. For Lithuania, even this task seems to be too hard, for attempts are focused at best on gaining passage for EU rules in their entirety, rules which are doubtless of different relevance in Lithuania and the EU. That which is a restriction on government aid in the EU is its encouragement in Lithuania.
The overriding goal of the new competition bill seems to be harmonisation of Lithuanian standards with those of the EU. Rather than giving the state a disputable “arsenal” of tools for protecting competition from make-believe perils, it would be more expedient to at least ensure that the state does not damage the framework for competition. To distinguish the real threats to competition from the alleged ones, one should keep in mind that competition is about voluntary contracts and voluntary action, therefore its restraining is invariably destructive and intolerable.