Competition harms created by administrative legislation: a new approach to an ancient problem


by, María Pilar Canedo Arrillaga, Professor at the University of Deusto and Jean Monnet Chair

Competition law has a general aim of protecting markets against those actors that, for different reasons, break the rules of the game and obtain an extra-benefit harming competitors, consumers and society in general.

The traditional approach to competition law is to focus attention on undertakings – generally the most powerful because of different reasons – that find in the absolute freedom of laissez faire, the best opportunity to maximize their particular benefits not taking into consideration the general interest. Articles 101 and 102 of the Treaty of the Functioning of the EU have been the most relevant tool to fight these practices both by the European Commission and the national or subnational authorities.

In the former 20 years attention has been given by different international Organizations (OEDC, UNCTAD) to the role played by the State in the harms generated in the markets. Article 107, TFUE (dealing with State Aid) was since the beginning of the European Market one of the concerns of the EU institutions but a new approach is needed in this field.

The many different levels of administration (central Governments, regions, provinces, mayors) have the power to create legislation that reduces competition by creating entry barriers in markets or by generating discrimination between economic actors.

Those administrations have an incredible economic power when they enter into public procurement procedures in order to guarantee services and products to de citizens. If those administrations don’t impose the principles of efficiency in their procedures, the services received by the population will be more expensive and will have lower quality.

In those cases the traditional tools that the competition agencies apply do not prove useful to fight the harm caused to society. Therefore a new approach needs to be found if we want to guarantee innovation, competitiveness, job creation and equality of opportunities for the different actors.

The administration harms competition through legislation in different ways in most of the cases alleging to have a reasonable aim that justifies the limit to competition. Those limits are, of course, not only reasonable but even needed in modern social protecting societies.

No one would consider irrational a legislation that limits competition accepting a right of exclusivity in a situation where this limit is the only acceptable way to guarantee the access of a relevant number of citizens to public services like transport, education, health…

This being said, we see legislations that protect incumbents in different markets just for the fact that those companies or entities have been offering a service in a particular way for years.

Taxi drivers are an almost universal example of this situation. Taxi licenses or medallions were created in a historic moment when the transport service was not accessible to a relevant percentage of population. In those moments, creating a system that guarantees that individual cars were accessible to almost anyone under regulated commercial circumstances could be considered reasonable.

The system was nevertheless created in a way that closes the market to new entrances for years stablishing a monopoly that has reduced quality in the service and, in several cases, has increased prices in a non-reasonable way.

After years of social development and because of the development of new technologies, in most of the cities in Europe, this service needs to be rethought for the good of users.

Nevertheless the lobby of taxi drivers has been powerful enough to convince legislators in different parts of the world to limit the possibilities of entry in the markets (and therefore reducing the capacity for job creation), the possibility to introduce innovation in the sector and therefore the possibility of price reduction and better services for citizens.

Limits in the number of licenses; limits in the number of hours that a car (not the driver) can circulate; limits in the characteristics of the cars; limits to publicity; tax bonus, or different requirements not related to the aim of the rule are common in the regulations of taxis.

New services are sold to society as a devil enemy of tradition that will end with an absolutely perfect service that we were receiving, as citizens, in our own benefit. Nothing could be more untrue.

These regulatory limits can be seen in many other sectors of sharing economy (like hotels, cars…), and in many other aspects of our societies (professional services, pharmacies, port workers…).

Historically the administration has seen those possibilities of legislation as a way to solve local problems in a more efficient way, something that explained several movements of decentralization in administration. Sometimes, we should not have to forget, this has been a way to hide corruption and to create ways to protect those actors that were closer to power.

We need to consider that those explanations don’t exist anymore. In nowadays societies, when an administration wants to take one of those decisions it should have to follow a toolkit to check whether the limits imposed by legislation are acceptable.

First of all, the administration needs to find a market failure that needs to be corrected by the limits to competition. If the market can allocate resources with no administrative intervention, it shouldn’t have to exist.

The need of intervention identified, the legislation should have to look for the most limited restriction to competition possible. This implies a needed respect to the principle of proportionality of the foreseen measure and therefore, if there is a way of solving the market failure with less harm to the market, the second option should have to be taken.

The third principle that needs attention is non-discrimination. The different measures taken by the legislation cannot benefit certain actors in relation to others.

Regrettably the European societies are really used to this kind of problems but our legal systems are not prepared to fight them.

Those practices cannot be considered agreements between undertakings or abuses of dominance and therefore Articles 101 and 102 do serve to stop those practices.

Advocacy of competition through reports is certainly needed. In a relevant number of cases, the persons in charge of the changes in the legal system are captured by the lobbies that convince them that their private benefit is the benefit of the society.

It is necessary that we have powerful competition authorities with capacity to prove, through economic and legal analysis that alternatives are possible and can quantify the harm to the society that is made by those pieces of legislation.

In some countries, like Spain, a very powerful tool has been introduced in the competition law (art. 13 Ley 15/2007 de Defensa de la Competencia). It recognizes the capacity of competition authorities to challenge in Court the pieces of administrative legislation that create harm in competition and therefore in society. It is the judiciary power the one that analyses the legislation and applies the mentioned principles of necessity, proportionality and non-discrimination.

For achieving this aim, independent authorities, from the administration and the lobbies, with independent legal and economic services need to enforce the competition law and sensitive Courts to the new needs of society are also determining.

Anyway, the only way to change this kind of historical situation is to convince society of their rights and needs (contrary to those of the lobbies in most of the cases). Only mature societies that are able to defend their interests will be able to really lead this change.

Picture credits: Tools  by Café.

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