Perfect competition is a hypothetical construct. The heroic assumptions of perfect competition are such that rarely will we find examples of perfect competition in the real world, not even in agricultural markets. The pure competitive model is a figment of the imagination. It only exists in text books of economics. We do, however, have a theory of perfect competition, perhaps I should say the theory of perfect competition.
A monopoly is also exceedingly rare, though not non-existent. In a similar vein, we have the theory of monopoly. In reality, we confront markets that do not possess attributes of perfect competition. Nor are they examples of monopolies. There is no ‘the’ theory of imperfect competition or imperfect monopoly. There are multiple theories. Hence, when policy uses the lens of either perfect competition or perfect monopoly, there can be errors of judgements. In passing, the answer is contingent on the definition of a ‘market’. A market is a theoretical construct. It is not a ‘mandi’ one walks into. One of the key assumptions in theoretical expositions of perfect competition is a homogeneous and undifferentiated product, where products are perfect substitutes for each other. For example, one might argue that there are only two cola manufacturers in the world or only two aircraft manufacturers in the world. As these examples illustrate, it isn’t that simple.
There is a certain approach more advanced economies have taken towards monopoly, competition, anti-trust and development of efficiency and competitive markets. For various reasons, there are economies where markets generally exist. Will the approach be different in an emerging economy like India, where markets don’t generally exist? Does the government have a role in creating the market? SEBI’s role is a case in point. If the government, that is, a public entity, has a role in creating the market as a producer, is there a potential conflict between the role as a producer and the role as a regulator?
There is often a conflict between consumer interests and anti-trust policies and one shouldn’t brush this tension under the carpet. For instance, are predatory pricing or dumping through exports (imports) bad? The answer is not as obvious as we think. Both are good for consumers. They lead to lower prices. It is possible this is only true in the short run. Once competition has been driven out, in the longer run, prices might increase. That may be possible, even plausible, but it is not axiomatic. Economists distinguish between ex ante (in advance) and ex post (afterward, subsequently). Ex ante, in these cases, we do not know. We will only know ex post.
Historically, anti-trust policies have based themselves on SCP -- structure, conduct and performance. Of these, structure and market shares have been the historical obsession. We used to think of natural monopolies, where the attribute of the market was such that there couldn’t be more than one producer. Thanks to technological advances and possibilities of unbundling, most such instances of national monopolies no longer exist. Railways or electricity are instances. If monopolies exist, that’s because government policies mandate it. As an example, issuing currency, fiat money, is a monopoly, because only Central banks are allowed to perform that function. In the absence of licensing that prevents entry, why should we be bothered about market shares and structure? A new entry will whittle down high existing market shares. Market shares aren’t static. They are dynamic. An enterprise’s action can certainly prevent entry. That’s the reason we talk of restrictive business practices. But that’s the domain of policies about conduct, not structure. The only limited counter-argument, ex ante, about the consequences of structure is that ex post costs of breaking up an enterprise may be very high. Hence, prior approval for mergers and acquisitions.
The ex ante versus ex post dilemma becomes even more pronounced for something like big data, with avowed economies of scale and scope, network effects and feedback loops. Is the regulatory focus consumer protection or anti-trust? Consider the third strand of the SCP paradigm, performance, defined in terms of price or profitability metrics. In any event, as with structure, creative destruction whittles down high prices and profitability. There are indeed consumer issues, privacy, ownership, etc. But beyond this, is there any empirical data to demonstrate big data harms consumer welfare? Not quite, because consumer data has been monetized and charges imposed on intermediaries. What does it mean to look at non-price aspects in performance? Are these sufficiently objective and transparent?
As with traditional sectors, for big data too, the issue boils down to conduct and restrictive business practices, interpreted as access to data, forcible data sharing, data portability and algorithmic transparency. In evolving jurisprudence, one should be clear about what one is regulating and why. There is a danger of presuming, ex ante, knowledge about the dynamics of competition, thereby stifling innovation and efficiency in the process. In addition, when the nature of big data is cross-border, regulation is not easy to enforce.
Consumer interests are different. But anti-trust regulation is warranted only in instances of demonstrated market failure. For big data, the theoretical or empirical literature is not very convincing, not yet. The evolving jurisprudence in advanced economies, which varies, needs to be viewed in that light. Given the history of excessive State intervention in India, it is best to be cautious and hesitant. Regulation is not as neutral as we think it is. It is also subject to lobbying and regulatory capture.
Chairman, Economic Advisory Council to the PM