Market Not A Jungle, But A Garden; Needs Tending

Competition is a complex notion. Its neither observable, nor easily experienced. Monopolists are invisible. They creep into our lives unannounced and don’t ‘vacate’ it.

The Indian consumer enjoys more choices than ever before. Oodles of products, countless brand names, mean a plethora of choices, and yet over the last decade the rise of the dominant players is diminishing choice. Sectors not ‘dominated’ by monopolies are dominated by the duopolies i.e., two organisations own significant market share and dictate customer behaviour (think switched off ACs, cancelled rides, surge pricing, festival prices, long wait times). Many sectors are turning into two-horse races.

The choice between different consumer products is often a mirage. The choice between different retailers is equally illusionary. The pattern of diminishing choice and rising concentration reflects a profound change. Its mirroring the decades preceding the economic reforms. The top 20 companies take away over 75 per cent of corporate profit. It was only 40 per cent when the reforms were ushered in.

There is increasing evidence of the dominant players colluding both on prices and features. Monopolies have strong pricing power and a broader moat, making competition difficult. They fortify the moat by adding distinctive ‘stickiness’ features, bundling products etc. Monopolies have more, and cheaper access to capital. They use this effectively to consolidate, bankrupt competitions or acquire them eventually, improving cost synergies; and garnering market share. They price down the competitions, capture both the shelf and mind space (using data effectively, advertising efficiently), even shut others out by luring away customers and dangling freebies.

*Ability & intent to raise prices, squash competition. A critical detriment for the economy.

There are other means as well. Many overt, some equally covert. They use patents, mergers, and acquisitions to obtain industry dominance and prevent market entry. They deny consumers’ choices. The overwhelming goal is to neutralise competitors, instead of product innovation or service differentiation. Competition elimination is an investment that is recouped with higher prices once competitors have been squeezed out. Size and capital expedites the penetration to a journey of profitability.

A Crux study across 18,000 consumers 1,200 retailers and 150 small service providers and manufacturers provides support and abundant evidence of the larger players enjoying disproportionate power.

Regulators have devised and developed several methods and apply robust tools to measure the degree of competition, and yet (often) the indicators are indeterminate, interpretations are indistinct and even blurred. Tools and their accuracy, authenticity of the methodology to reliably measure, track, and compare the competitive intensity of the market is always in question, leaving much to interpretation. Decisions are invariably taken in isolation. Our institutions lack the capacity.

*Competition ‘watch and action’ is a science

Regulators need to adopt a holistic approach. Each measure of competition provides only limited information, but together offer useful insights. Regulators often make the mistake of using competition measures at industry or firm level data, neither of which are robust enough to assess the efficacy of competition. Antitrust markets are typically narrower than industries.

Measurement must go beyond ‘constant’ performance indicators (mark-ups, profits etc.) and market share. It must equally study dynamic measures like market share volatility, entry and exit rates, average age of firms, concentration ratios, and rank. Focus must be to capture competition as a continuous and dynamic process of rivalry. Regulators must measure and index the ‘threat and incentives’ that rivals apply on each other.

Gorillas use purchasing power and leverage to nudge, bend or force their suppliers to lower prices and ‘surrender’ more and more of their profits. It in turn, results in suppliers cutting wages, outsourcing production, invariably manifesting as poor quality, less innovation, and inflation.

Similarly, and now increasingly common, are the instances of the monopolies ‘refusing’ to serve customers, particularly those who yield lower profits. In a frail economic structure, the lack of ‘substitutes’ can, and often

do shut down business. It has a ripple effect, weakening the economy. People understand that the consumer choices are manipulated and limited by the dominant players. Less understood and not appreciated is the fact that apart from consumers, several others in the value chain suffer too.

India has a strong anti-monopoly policy; it’s the implementation that is the concern, allowing, even permitting organisations across sectors to grow large, and equally dominant. A Crux insight supports this notion, pointing to a regulatory leniency over the past few decades, which has driven concentration across markets and segments.

*Regulators erroneously view monopolies in terms of ‘number’ of companies

Monopolies do not just effect horizontal integration, bestowing the merged entity with ‘controlling’ market share, and thereby pricing power. Though that’s the most visible aspect. Domination is also about the control through the vertical integration of the entire value chain ie., from production, retail, and service.

Monopolies constantly want more for doing less. It’s the early seed of greed, and equally the lack of satisfaction when they get more. The tendency fuels rapacity. It is entitlement and potentially dangerous. Monopolies across the world are associated with crony capitalism, corruption, equality dilution, cost-push inflation, and damage not only the economy but also the democratic system. The ecosystem suffers.

One option for policy makers would be to dismantle monopolies by splitting them. The short-term solution (until competition comes in) is to set a price cap. However, this has limitations and more often than not, fails to protect consumers. Regulators in developed economies have pushed monopolies to unbundle and even separate the offerings into smaller competing entities. However, in practice they face legal blockades. ‘Persuading’ companies to accept and adopt the rate-of-return pricing formula has worked particularly in the utilities sector.

Governments have a larger role to play. Shortsighted officials try squeezing maximum revenue when they ‘auction and offer’ resources, contributed to the undesirable trend of the dominant player, eventually monopolising the industry. The judiciary, interpreting the law in letter, has perpetuated the rot. Several experts in the study bemoan that the mushrooming of the monopolies and duopolies could even imply the government losing control of some parts of the market.

The regulators need to reign in ‘corporate consolidation’, ‘bad mergers’ and equally bad auctions. Their duty is to protect the interests of all stakeholders and not just the shareholders.