Empowered, dynamic competition authority essential to elevate Malaysian economy

The government’s plan to introduce amendments to two Acts governing competition in Malaysia is a welcomed development. In a well-functioning economy, competition is the fuel that drives firms to be better in their business and deliver appropriate value to consumers.

In most product market, large-scale production results in lower average cost per goods produced. But, such scale is also expensive to establish and operate, setting a high barrier to entry for newcomers. This market structure where a few big firms dominate an industry is known as oligopoly.

An efficient oligopoly market structure is supposed to work like this – if there is perfect competition, firms will produce goods at lower prices and be sufficiently motivated to innovate and introduce new products of better quality and variety.

However, we know in real life, markets are rarely perfectly competitive. There are a variety of reasons for this but the two types of market failures that can be regulated by competition authorities are collusion and market concentration.

The temptation to collude is only natural as Adam Smith described in ‘Wealth of Nations’: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Most businesses wish they can raise prices at will, like an unregulated monopoly. However, due to dispersion of market power between a few big companies in oligopolies, monopolistic behaviour has to be coordinated. Apart from being illegal in most countries, collusions can be challenging to arrange. Long held rivalry and mutual suspicion exist naturally between competitors and it is not uncommon that ill feelings between executives can get in the way of price fixing.

Another way of obtaining market dominance is to merge or acquire a rival – if you can’t beat them, eat them. Not all mergers and acquisitions have negative consequences for consumers. But, the ones which give rise to concentrated market power will likely do. That is why the Competition Act 2010 amendment, to give the Malaysia Competition Commission (MyCC) more power to scrutinise mergers, is overdue.

Historically, anti-competitive regulation, or antitrust as they are known in the United States, are consumer protection focused. However, in recent years, economists and regulators have also turned their attention to another form of market dominance, one that affects workers.

Monopsony is the mirror of monopoly, where in the latter, a market only has one seller, while in the former, there’s only one buyer. In an imperfect market for labour, when there is only a single, or few colluding buyers of labour, employers have considerable leverage. Workers who do not have other options would often accept lower wages and poorer working conditions. Just as in the case of monopoly, to check monopsony power, scrutiny of mergers that could lead to concentrated market dominance is an essential public interest exercise.

The economy will continue to change and pose evolving challenges. Without an up-to-date competition authority, we have one less important tool to meet the challenges of tomorrow, especially ones posed by the digital economy.

How do you for instance, begin to answer the various challenges the gig economy poses for our young people and the economy in general, without understanding the power of the few platforms offering jobs in the industry? What about the nation’s labour supply and quality in the long run?

Skilled professionals invest time and money upfront to get good paying jobs. Monopsony power could make workers reluctant to make that commitment as they see prevailing wages to be too low as return on investment. That is not an alien idea anymore. I’m sure most of us have heard someone say higher education is no longer worth the time or money. Some workers may also opt to migrate for better wages and working conditions.

And then there’s the challenge of promoting innovation in our economy. Malaysia is looking to become a start-up and regional digital hub. Nascent innovative firms may fall victim to “killer acquisitions,” in which already established big players eliminate competitive threats by acquiring start-ups.

Researchers at University of Chicago have suggested the kill-zone acquisition phenomenon is another product of the digital age. Unlike conventional counterparts, digital products often don’t charge consumers for their products. The free-to-use concept helps generate user data, which is sold to advertisers. Hence, the usual tactic of competing by cutting prices cannot be deployed by start-ups. Facing this reality, innovative start-ups may not have the incentive to go all the way, and instead, sell the business for a fraction of their potential worth.

Technology behemoths of today are start-ups of yesterday. But during the early days of the dot.com boom, start-ups competed against each other and not against giants. Once they become the trillion dollar giants they are today, they become monopolistic, difficult to dislodge, and maybe hard to break up, as American regulators are finding out. We need to understand this dynamic as we traverse our own digital economy path.

In a study conducted in the United States, researchers document that antitrust lawsuits brought by the government between 1971 and 2018 permanently increased employment by 5.4 per cent, and business formation by 4.1 per cent. In other words, competition regulation enforcement leads to persistently higher levels of economic activity in targeted industries.

An empowered and dynamic competition authority should be an essential part of our present and future economy. Contrary to some thinking, it is not the brake that pauses industry. Working correctly, it sets conditions for industry dynamism and innovation. Hire good economists and lawyers for MyCC and equip it with powers fit for the future.

The views expressed here are the personal opinion of the writer and do not necessarily represent that of Twentytwo13.

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