Having an interest in using data science for social good requires background in the domains outside of my formal knowledge. I try to read around the problems interspersed around us and, in some cases, even controlling our lives. In many cases we are not even aware of them; we don’t understand them; or think they do not affect us. Recently, one of my friends showed me an offline course in this exact direction. There is this long list of readings to get acquainted with the general themes where social good is required and we can work towards solving them using data sc. Here is the course page - SIL 802, Winter 2017: Data Science for Development.

I will read this list of papers and try to summarize them here. The first in the series is the paper titled - Why is Competition Important for Growth and Poverty Reduction [PDF].

The Jargon

Lets discuss some commonly used words in the paper.

  1. Competition: By Competition, we mean the Business Competition. The competition between firms to surpass each other in terms of profits, services, products, rates and, customers. There are many factors by which you can measure competitiveness which we’ll discuss later.

  2. Competition Law: Competition is so important for an economy and the markets, that there are even Competition Laws implemented to keep the competition fair and encouraging. It prevents proliferation of bad factors - unfair trade practices, anti-competition behavior, etc.

  3. Poverty: Here, in this post, poverty is contextual. With respect to big companies, early stage start-ups are poor. With respect to tax paying population (mostly urban), non-tax payers (mostly rural) are poor. Then there is that unfortunate category of population who can’t even afford the basic human needs - Food to feed themselves, Clothes to protect themselves and House to peacefully sleep at night. They are extremely poor.

  4. Competition Policy: The government policy that govern the competition in markets. A good competition policy makes the markets competitive and fair for all. A sound competition policy achieves better markets, better investor confidence, and also equal opportunities to SMEs (Small and Medium-sized Enterprises).

The Research

This paper talks about the effect of competition on the poverty and growth, in an economy; the barriers to the competition and; how competition policy is connected with Growth and Poverty. The paper also presents a toolkit - Competition Assessment Framework - to solve a challenging problem - the problem of identifying where competition is weak, and how to foster more effective competition to encourage economic growth and reduce poverty. This toolkit will help policy makers of a developing country to mitigate this problem.

I summarize the points under two sections - barriers and how competition is helpful.

Barriers to the Competition

Many factors influence the level of competition. And they are prevalent specially in developing countries.

  • Inappropriate government policies;
  • Unnecessary market entry and exit barriers;
  • Anti-competitive practices by the big firms;
  • Markets dominated by big firms with close ties to government;
  • Powerful entities blocking necessary reforms;
  • Bid-rigging for government provided infrastructure and services;
  • Lack of awareness on the part of govt. about the ways competition is being harmed;
  • Unsure, on government’s part, to identify where barriers to competition exist.

This list is not in anyway exhaustive. All these factors diminish opportunities for growth and innovation.

How Competition Helps

  • Competition facilitates greater equality of opportunity by breaking down the barriers to fair competition;
  • Effective competition creates more space for the entrepreneurs and SMEs to grow by reducing opportunities for corruption;
  • Competitive public procurement increases the effectiveness of expenditure on publicly provided services, such as education and infrastructure;
  • Competition gives companies continuous incentives to make their production and distribution more efficient, to adopt better technology, and to innovate.
  • Effective competition enhances a country’s competitiveness (ability of its firms to compete in export markets, or against imports in its home market). Research has found that the existence of a competitive environment in domestic markets is one of the most significant factors promoting the international integration of nations’ industries.
  • Effective markets enabling choice, encouraging innovation and providing goods and services at lowest possible prices, lead to improving living standards of the poor.
  • Small entrepreneurs (including farmers) benefits if entry-exit barriers are low, if they can purchase and sale at fair prices.
  • Effective competition prevents practices like bid-rigging and helps government to provide more/better infra/services from the allocated budget. Recipients of government funded services, usually, low income families, are able to gain further from this.

Real life examples

The paper discusses the competition in African and Asian countries. It points out the pain points, citing examples from various countries.

  • The 2005 Report of the Commission for Africa (CfA) pointed out that, in Africa, the “lack of competition in services, such as sea and air transport raise(s) costs significantly”, and suggested that, reforms such as maritime deregulation leading to a satisfactory level of competition “could reduce freight costs by 25-50 percent.”
  • A database on media allegations of anti-competitive behaviour in Sub-Saharan Africa for the ten years to December 2004, revealed a wide range of competition concerns in the region. There are frequently reported allegations for everyday commodities such as sugar and flour. Other practices identified included those affecting the prices of inputs needed by manufacturers, and practices hurting farmers as buyers of inputs (e.g. fertilizers and animal feed), and as sellers of outputs such as cotton, tea, coffee and tobacco).
  • The role that vested interests can play in restricting competition. For example, when plans were underway in Egypt to develop a competition law, opposition to the plan allegedly was organized by a leading MP who owned a dominant steel mill.
  • The strength of competition depends both on the conduct of firms and “the external environment in which they compete, the state of infrastructure, legal framework and the effectiveness of the financial system.” Barriers to competition are often the result of government regulations, and private sector firms frequently find the regulatory burden a major disincentive to doing business. Moreover, cumbersome regulation for starting a business is associated with lower productivity and higher levels of corruption. Such barriers tend to hit small firms the hardest.

These are just a few examples from a long list of examples the authors cited. There are examples on price and quality of transport services, privatization of state owned enterprises, telecommunications in Zambia.

There a few examples for the positive effects of competition such as increasing competition among the cell phone service providers in Africa, benefited the small farmers who were able to make better decision of where to market their produce.

Competition Assessment Framework (CAF)

Each economy is different, and the factors effecting competition need to be dug out. The paper presents the framework to equip the policy makers with operational tools to identify and assess the nature and impact of competition barriers.

The CAF suggests that valuable insights can be obtained on how competition policy can be applied in the interests of economic growth and poverty reduction, by assessing the state of competition in key sectors of the economy, and, where competition is weak, identifying the causes and possible remedies.

The CAF asks questions in 8 steps. For each theme a conclusion is made which finally helps in deciding what action needs to be taken. The 8 steps are-

  1. How to select sectors and markets for assessment

    A sector should be important to economy/consumers and should lie under the possibility of having competition problems.

    The questions address the sector’s role in the economy, its importance for the consumers, evidence of concern about prices or availability of the sector’s products, the record of the sector’s past performance, entry barriers and the level of market concentration in the sector. Some major sectors are agriculture, construction, distribution, energy, finance, manufacturing, telecommunications and transport.

  2. Identify the relevant markets and the competitors

    This section includes a set of questions designed to identify the relevant market or markets in the sector. A sector could contain a number of separate “markets” in the economic sense, and, as the state of competition might vary considerably between them, each must be considered separately.

  3. Examine the market structure

    The questions in this section outline how to assess the level of concentration in the market, that is, the market shares of the major participants. While high concentration does not necessarily indicate high market power, it is often a significant factor in controlling market behaviour.

  4. Look for barriers to entry

    This step seeks to establish whether there are any significant barriers to entry. The questions examine natural barriers, strategic barriers, regulatory and policy barriers and gender-based barriers.

  5. Ascertain if government policies or institutions limit competition

    This section reviews the legislation, policies and institutions of governments at all levels (national, state and local) that might adversely impact on the level of competition in markets. These include - licensing restrictions, FDI restrictions and trade barriers. Other points under review are - if state-owned enterprises receive any preferences that might restrict competition by the private sector, if procurement practices harm competition by not being fair and transparent, regulation of markets, trade policy and industrial policy, etc.

  6. Consider vested interests

    Vested interest may be personal, corporate or institutional. In many situations there will be stakeholders who either oppose or favour the increase of competition in a market. The questions in this section seek to identify the objectives, power and influence of these stakeholders.

  7. Look for signs of anti-competitive conduct by firms

    Major points under focus are - abuse of dominance [1] (exploiting consumers and/or excluding competitions), collusion among competitors (cartels[2]) (domestic cartels are more prevalent), possible impact of mergers and acquisitions. The mergers can harm the competition if the purpose of the acquisition was only to eliminate the competitor as a separate organization.

  8. Draw conclusions

    Review the conclusions made from the previous steps and form an overall view on the current state of the competition in the country/region.

Paper Closing

Everyone should understand the beneficial impact of effective competition and of competition policy on an economy. Competition can help encourage both domestic investment and FDI, because it bolsters investor confidence by setting a consistent framework within which the business sector operates. More effective competition reduces opportunities for corruption and rent seeking, and creates more space for entrepreneurs and SMEs (Small and Medium Enterprises.)

Just having a good law is not enough. The introduction of a competition law needs appropriate steps:

  • Supporting policies;
  • Effective enforcement;
  • Governments must recognize adequately the impact of other legislation and regulations on competition;
  • An open media and an informed judiciary;
  • Politicians must be committed to wanting to make markets work well;
  • Help build the technical capacity needed.

To be fully effective, a competition policy must be supported by a culture of competition, where the objectives of the competition are widely understood and form a natural part of the background to the decisions made by the government, firms and the consumers. Civil society and a vigorous consumer movement in particular, can play a constructive and valuable role in the development of a culture of competition.

Indian Context

This is a short primer on the history of Competition Act/Law in India. This introduction is mostly derived from the wiki page and this overview of the Act. If someone wants to get the whole deal (61 pages), they can go to Competition Commission of India website [PDF].

Introduction to the Act

The earliest version of competition law was set up 2 decades after Indian independence. In 1969, Monopolies and Restrictive Trade Practices Act (MRTP Act) was enacted after it’s introduction in the Parliament in 1967.

In 1999, three decades after the enactment of the act, then Finance Minister, Yashwant Sinha, in his budget speech, said-

The MRTP Act has become obsolete in certain areas in the light of international economic developments relating to competition laws. We need to shift our focus from curbing monopolies to promoting competition. Government has decided to appoint a Committee to examine this range of issues and propose a modern Competition Law suitable for our conditions.

Following this, a draft Competition Law was prepared by the end of 2000, following which it was passed in December 2002. The MRTP act was repealed in 2009.

Competition Commission of India (CCI) is the statutory body to enforce the The Competition Act, 2002, throughout India. It is their duty to eliminate practices having negative effects on the competition in India. CCI can be approached to report any unfair competition practices. Commission also has the power to inquire into the events taking place outside India, but having adverse effect on competition in India[3]. I found this bit really interesting, having authority for the acts done outside India (there might be other laws having such power, but I am not studying such acts or law, so don’t know about them). There have been some major cases (BCCI, Google, etc.) violating the Law (listed here).

There are three major elements in Competition Act, 2002-

  1. Anti-competitive agreements
  2. Abuse of dominant position
  3. Combinations

Anti-competitive agreements

Entities (enterprises, persons, cartels, etc) entering into agreements, with respect to, production, supply, distribution, storage, acquisition or control of goods or provisions of services, which cause (or likely to cause) an appreciable adverse effect on competition in India, are anti-competitive in nature. Such agreements are deemed void by the Act.

An agreement can happen by any arrangement - written, oral, formal, informal, or any other concerted action. There are two kinds of agreements for participating entities-

  1. Horizontal Agreements: Agreements between rivals or competitors. For eg. cartelization.
  2. Vertical Agreements: Agreements between independent enterprises. For eg. between producers and suppliers or between producers and distributors.

Some exemplars of agreements which can adversely effect the competition-

  • Determine prices (sales or purchase), directly or indirectly;
  • Limit or control production, supply, markets, technical development, investment or provision of services;
  • Share the market or source of production or provision of services by allocation of, inter-alia[4], geographical area of market, nature of goods or number of customers or any other similar way;
  • Directly or indirectly result in bid rigging or collusive bidding.

Abuse of dominant position

The Act prohibits any enterprise or group from abusing it’s dominant position (market power, able to operate independently of the competitors, or affect its competitors or consumers or the relevant market in its favour). The existence of dominance is not looked down upon unless it’s abused. The abuse of dominant position can be when the enterprise or group-

  • Imposes, directly or indirectly, unfair or discriminatory conditions in purchase or sale of goods;
  • Limits or restricts production of goods or provision of services or technical or scientific development relating to goods or services;
  • Create hindrance in entry of new operators;
  • etc.

This dominant position is apropos to the relevant market decided by the CCI by considering product market or relevant geographical market. There are some guiding points in the Act to determine the relevant product market and relevant geographical market.

  1. Relevant Product Market

    • Physical characteristics or end-use of goods;
    • The price of goods of services;
    • Consumer preferences;
    • Exclusion of in-house production;
    • The existence of specialized producers;
    • And the classification of industrial products.

  2. Relevant Geographical Market

    • Regulatory barriers;
    • Local specification requirements;
    • National procurement policies;
    • Adequate distribution facilities;
    • Transport costs;
    • Language;
    • Consumer preferences;
    • And need for secure or regular supplies or rapid after – sales services

Even with the above points, it must not be that easy to determine the relevant market and consequently, the dominant position as well.

Combinations

Combinations is a term used collectively for acquisition[5] of control, shares, voting rights and assets, and mergers[6] and amalgamations[7]. The Act prohibits entities from entering into a combination which causes (or likely to cause) an appreciable adverse effect on competition in India. These combinations shall be void. Of course, the adverse effect is seen in the relevant market determined by CCI as explained in the previous section.

Measuring the Effects

Till now we looked at the paper where the authors discussed about the effect of competition on Poverty and Growth. And, to improve the state of competition in a country, they proposed a framework to form an effective Competition Policy. With respect to India, we broadly discussed how the Indian Competition Law is structured and what all it covers.

After reading all this material, I wanted to see if better competition really means less poverty. I wanted some kind of way to measure it. I wanted to see it in the data. I wanted to profile India on competition and poverty.

According to UN’s Human Development Reports, from 1990 to 2015, India’s Human Development Index (HDI) has consistently increased from 0.428 to 0.624. India was placed in the medium bucket. A country scores higher HDI when the lifespan is higher, the education level is higher, and the GDP per capita is higher. This indicates that development did happen, and this can be further drilled down. But, due to time constraints, I’ll end it here.

I’ll need to get the census data across various verticals, prepare a common data model, find out a method to measure the level of poverty and competition, find a relationship between them both and then do hypothesis testing to see if the effects are not random. This is not a weekend project.

Interesting Directions

  • While reading the material and looking the terms on Google, I read about Planned Obsolescence. Planned Obsolescence happens when a product is designed with an artificially limited useful life, so it’ll become useless after a certain period of time. Light bulb is a famous example on the internet of this concept, where they are produced to die sooner than their actual lifetime. Then there are printer ink cartridges where we need to get a new one instead of getting them refilled, etc etc. There are many examples. I wonder, if this can come under abuse of dominant position? Do planned obsolescence affect competition? If yes, how?

  • Nash Equilibrium, a game theory concept, where the optimal outcome of a game is one where no player has an incentive to deviate from his chosen strategy after considering the opponent’s strategy. Overall, an individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. A game may have multiple Nash Equilibria or none at all. How are Nash Equilibrium and competition connected? Can it be said that, if there is a Nash Equilibrium in the market then the competition will be fair and effective? Or importantly, is it even that simple to apply Nash Equilibrium this way?

Note: The interpretation of the Law is my own (or derived from other articles on the web). I am not an authority on the subject.



Glossary

1: Dominance is possible where a firm has strong market power that results from a high market share combined with barriers to entry. ⤴

2: Now that’s a term I have only heard in movies, that too, in the context of drug suppliers. A Cartel is a group, of producers (and hence, they have the power) whose goal is to increase their collective profits. They usually engage in controlling selling prices. The short wiki page is insightful. ⤴

3: To deal with cross border issues, Commission is empowered to enter into any Memorandum of Understanding or arrangement with any foreign agency of any foreign country with the prior approval of Central Government. ⤴

4: Inter-alia - A Latin term for “Among other things”. This is a term used in legal proceedings to provide one example out of many. ⤴

5: When one entity purchases the business of another entity, it is known as Acquisition. The acquiring company will be bigger in size than the acquired company. ⤴

6: The merger means the fusion of two or more than two companies voluntarily to form a new company. Generally, the sizes of the participating companies are similar. ⤴

7: Amalgamation is the combination of one or more companies into a new entity. An amalgamation is distinct from a merger because neither of the combining companies survives as a legal entity. Rather, a completely new entity is formed to house the combined assets and liabilities of both companies. ⤴