IssuesRaisedintheHouseBillsonCompetition submittedonOctober7,2010to TheCommitteeofTradeandIndustryoftheHouseof Representatives

By DanielJ.Fitzpatrick,Esq. ProfessorofComparativeCommercialLaw SanBedaCollegeGraduateSchoolofLaw* This paper is being submitted in response to a request for comments on several House bills that would establish a new competition law framework. This request was sentto theAmerican Chamber ofCommerce,ofwhich the authorisa member. Withtheshorttimeavailableitwasimpossibletoreviewindepththeeight billsonwhichtheCommitteeofTradeandIndustry(theCommittee)hassolicited comment. Instead, the comments in this paper raise concerns with several of the largerpolicydirectionsreflectedintheeightbills. The papers recommendations to the Committee can be summarized as follows: A consolidated bill on competition should focus on combating cartels through the use of direct evidence gained from conspirators turning in their brethren. Amnestyarrangementsforsuchinformantshaveprovenveryeffectiveinother countriesinbustingcartels. A consolidated bill should contain very demanding requirements for labeling a company a monopoly. The provisions that recognized joint monopolies or sharedmarketdominanceshouldbeabandoned.Actionsthatharmconsumers throughcollusivebehaviorcanbeaddressedthroughtheprovisionscombating cartels.

*TheauthorisamemberoftheAmericanChamberofCommerceandtheWashington,D.C.Bar.He

hasadvisedgovernmentsinKazakhstan,Azerbaijan,andKosovooncompetitionlawandpolicy.He currentlyteachesAmericanCompetitionLawatSanBeda.Hisopinionsarenotnecessarilythoseof theAmericanChamberofCommerceorSanBedaCollegesGraduateSchoolofLaw.

Restrictions on the behavior of a company labeled a monopoly should be confinedtothemostegregiouspractices.Outsideofthisnarrowlistofactivities itissimplytoodifficulttodeterminewhathurtsconsumersandwhatdoesnot. A preapproval process for mergers of large competitors in the same markets shouldbeestablishedonlywithassurancesthatitwillnotunnecessarilyhamper mergersthatcreateefficienciesandotherwiseenhanceconsumerwelfare. AnenforcementregimeshouldfocusontheDepartmentofJustice(DOJ)taking theleadoninvestigationsofillegalarrangementsamongstcompetitorstoraise pricesorotherwisereduceoutput.TheDepartmentofTradeandIndustry(DTI) should focus on merger approval and supporting the investigations of the DOJ. Privatesuitsshouldbethemainmethodofpolicingthebehaviorofsinglefirm monopolists.Trebledamagesshouldnotbeallowed,astheyarelikelytocreate spurioussuitsandencouragelitigantstobribejudges. The DTI should take the lead on competition advocacy, at the very least to identifytoCongressvariousgovernmentcreatedbarrierstoentry,encouraging theirremovalwheretheyservenocompellingoffsettingpublicpurpose.

I.

ThePolicyDeclarationsintheVariousBills
Severalofthebillsnotetheobjectiveofadvancingandprotectingconsumer

welfareintheirdeclarationsofpolicy.However,thisgoalisdilutedbyothergoals such as preventing the concentration of economic power in the hands of wrongdoers,andpenalizingallformsofunfairtrade. Whiletheselattergoalsarelaudable,theyarethemeanstoanend:enhanced consumer welfare. Consumers are better off when they have various choices at reasonableprices.Thesechoicesresultfromvigorouscompetitioninmarketswith fewentrybarriers.Suchanenvironment,dependingonthecircumstances,maynot necessarilyrequiremanycompetitors. Given that most business competitors hate competition, it is important for judges, prosecutors and policy makers facing complaints from smaller or less efficientbusinessestounderstandthatthegoalofacompetitionlawistoprotecting competition rather than the competitors themselves. Sometimes protecting competitorscanservethegoalofprotectingcompetition,butnotalways.Wherea conflict arises between protecting competitors and protecting the welfare of consumers(intheformoflowerpricesandgreaterchoices)thelatterchoiceshould

prevail. In the United States, for instance, complaints by competitors of low cost pricing by rivals (characterized as predatory pricing in law suits) almost always fail because courts have come to realize that such price wars, even if they drive someweakercompetitorsoutofbusiness,aregenerallygoodforconsumers.1

II. The Means of Identifying Monopolies or Companies Enjoying a DominantPositionintheMarketPlace

Most of the bills contain language on monopolization. These provisions determine whether a firm (or sometimes a group of firms) should be branded a monopoly and thus required to meet a higher standard of conduct in the marketplace. Several of the bills refer to such firms as having market power or holdingadominantpositioninthemarket.Fromaneconomicstandpointtheyall basicallymeanthesamething.Regardlessofwhatwecallthem,suchfirmshavethe powertoreduceoutput(withoutthethreatofcompetitorstakingtheircustomers) inordertoraisepricesaboveacompetitivelevel. Animportantthoughtexerciseatthispointistoconsiderhowmanyfirmsin the Philippines have this power right now. Certainly Meralco and Manila Water have such power, but this is checked (at least theoretically) by rate regulation. Outside the highly regulated public utility sphere it is extremely difficult to name eventwoorthreefirmsthatmightmeetthiscriterion. The risk here is that soon after passage of this law, the Philippines might havedozensofcompaniesthatwillbeaccusedofbeingmonopolies.Thiswilllead to higher legal and administrative costs as companies and competition authorities fightoverunclearlegalstandardsonwhethertoapplythislabel. Toavoidthis,thestandardsforapplyingthemonopolylabelshouldbeboth carefully written and quite demanding. Otherwise, the provisions for identifying andregulatingmonopoliesshouldbedroppedentirely.

1Formoreonpredatorypricing,seePartIIIA.

Mostofthebillswouldallowcompetitionauthoritiestoapplythemonopoly label if a company has at least fifty percent (50%) of the relevant market. Up to three firms can be found to be joint monopolists if they collectively hold seventy percent(70%).Someofthebillswouldallowcompanieswiththesemarketshares toarguethatotherfactorsinthemarketplacelimittheirpower.2Otherbillsdonot, noting that the firms meeting the market share criteria shall be deemed a monopoly.3 This percentagebased criterion is far less objective than it sounds. This is because the denominator in the equationthe relevant marketis an extremely elastic concept. A relevant market is normally made up of both a product (or service)componentaswellasageographicone.Forinstance,anevaluationofthe marketpowerofAyalaCinemaswouldlookattheserviceitprovides(maybemovie exhibitions)andtheplacesitprovidesthem(maybeMetroManila). But that is before the lawyers come in. Attorneys for the competition authorities would argue that the geographic component is far smaller than metro Manila, perhaps the Makati Central Business District (thereby increasing the percentage share attributed to Ayala). Attorneys for Ayala Cinemas would argue that the product/service component should include all forms of passive visual entertainment such as television, live performances, and DVDs (thereby reducing Ayalasmarketshare).Giventhespeedbywhichcasesnormallymovethroughthe judiciary,thedebatecouldbeendless. Thesimplestsolutiontothisconundrumistoletthemarkettakecareofnon regulatedmonopolies.4Thishasbeenthedefactosolutionuntilnow.Untilthereis aclearshowingthatasubstantialnumberofnonregulatedmonopoliesareravaging
2Forinstance,HouseBill1583mentionsthatsuchfirmswouldbedeemedprimafaciea

monopolist.Aprimafaciefindingisafindingthatcanberebutted.
3Forinstance,HouseBill1980,Section6andHouseBill1007,Section6. 4Absentgovernmentmandatedentrybarriers,thehigherpriceschargedbymonopolistsattract

competition,eventuallyerodingtheirmarketpower.Theprototypicalmonopolistafewyearsback wasMicrosoft.WithAppleandGoogleattackingitfromallsides,itsdaysofenjoyingmonopoly power(ifiteverdidenjoyit)aresurelynumbered.

consumersinthemarketplace,themonopolizationlanguageintheconsolidationbill shouldbedropped. If reliance on market dynamics is not an acceptable alternative, then considerable effort should be spent on crafting language that more accurately reflects the dividing line between monopolies and ordinary competitors. Such criteriashouldincludethepotentialentryofnewcompetitorsandtheaffectofprice increasesonthelevelofconsumption.Insteadofhavingmarketsharepercentage creating a presumption of monopoly, the market share figure should be used to createasafeharborforfirms.Forinstance,thelanguagecouldestablishthatno firm having a market share below fifty percent (50%) could be considered a monopolist,regardlessofotherfactors. The language of any consolidated bill could also be crafted to limit the vagaries of defining the relevant market. For instance, the consolidated bill could create a presumption that with respect to durable goods, the relevant geographic market should encompass the Philippines (at the very least) unless substantial evidenceindicatesotherwise. Finally,thenotionofshareddominanceorjointmonopolies(i.e.,companies with combined shares of over 70% of the relevant market) should be dropped. WhilesomejurisdictionssuchastheEuropeanUnionhaveembracedthisconceptit is likely cause confusion in application in the Philippines. All the bills contain provisions on collusion among firms to raise prices, divide up markets, or limit production.Lettheseprovisionstakecareofsuchbehavior.Tocreatetheconcept of a joint monopoly is overkill. It would likely confuse many judges5 and give competitionauthoritiestwobitesattheapple.

5Itiscertainlynotunusualtofindjudgesstrugglingwiththeobtuselanguageandcomplexconcepts

inacompetitionlaw.Indeed,formorethanahundredyearsU.S.judgeshavestruggledto consistentlyandconstructivelyinterprettheShermanActandrelatedlegislation.

III.

TypesofActivitiesthatwouldbeProhibitedundertheVariousBills
The bills describe various practices worthy of punishment. They generally

break down into two broad categories: (a) those committed by monopolists, joint monopolists,ordominantfirmsand(b)thosecommittedbyeveryoneelse.

A.

ConductbyMonopoliesorDominantFirmsworthyofPunishment

Many of the bills contain sections entitled Abuse of Monopoly Power or DominantPosition.Actionsfallingunderthiscategoryinclude,butarenotlimited to:

Predatorybehaviortowardscompetitors(betterknownaspredatorypricing) Pricefixing Bidrigging Marketallocation Pricediscrimination Exclusionaryarrangements Tieinarrangements Boycotting

One need not study competition law to recognize that several of these actions requirejointconduct.ThusiftheCommitteechoosestodroptheconceptofshared dominance and joint monopolization, then items such as bid rigging and price fixing(whichrequire,bydefinition,multipleparticipants)canbeomittedfromthis list.Thisisnottosaytheywouldberenderedlegal.Instead,theywouldbetreated asillegalactivitiesundertherubricofcartelizationorsomesimilarterm(seenext section). Therehasbeenaconsiderableamountofdebateastothetypesofconductby a single firm monopolist that should be considered illegal. The problem is one of falsepositives.Manytimesitisnearlyimpossibletodetermineconclusivelythat the actions of a single firm monopolist are indeed harmful to consumer welfare. Firms are punished unnecessarily, reducing incentives to pursue activity that is in theconsumersinterest.

Takepredatorypricing.Theimageisthatofthegreedymonopolistslashing prices, putting competitors out of business and then raising prices afterwards to ravageconsumersandgarnerunwarrantedprofits.Itsagreatstory,onetoturnthe headsofjudgesandcapturetheattentionofnewspapers.Theonlyproblemisthat itismoremyththanfact.Mostpricewarsarehugewindfallstoconsumers.Lookat the prices of cell phones or their pricing plans over the last ten years as one example. Itisnotdifficultthoughforacompetitortocharacterizesuchproconsumer behavioraspredatory.Theresultwillbeacomplaint,aninvestigation,andabattle of experts before ajudge. Fiftyorsixtymillionpesos andfive orsixyearslater,a decisionwillbeissued,which,bythatpoint,willnolongerberelevant,themarket havingmovedon.Toavoidsuchhassles,largefirmswillthinktwicebeforepricing aggressively.Makinglowpricespotentiallyillegalwillthusironicallydeterthevery behaviorthatfansofcompetitionwishtoencourage. The same problem befalls price discrimination. Theoretically, price discrimination is something that monopolists do. But not all price discrimination resultsinharmtoconsumers.Oneneedonlylooktothevariousexceptionsinthe billsthatattempttoparsebetweenlegalandillegalpracticesinthisarea.6Itwillbe extremelydifficultforbothfirmsandjudgestoknowthedifference.Thisendsupas a fertile ground for lawyers. High legal costs and needless litigation will be the result. IftheCommitteedecidestoclarifythatthefocusofabuseofmonopolypower ordominantpositionshouldbeonsinglefirms,thenaparticularlyhelpfuldocument is a set of guidelines issued by the U.S. Department of Justice under the Bush administration.7Theyattemptedtoestablishstandardsforregulatingtheconduct
6See,e.g.,HouseBill1007,Section7(g)(identifyingfiveexceptions).

7U.S.DeptofJustice,CompetitionandMonopoly:SingleFirmConductunderSection2oftheSherman

Act(2008).Severalofthestartingassumptionsfortheseguidelinesarepotentiallyapplicabletothe Philippines:

The Sherman Act protects the competitive process but not individual competitors. Distinguishing beneficial competitive conduct from harmful exclusionary or predatory

of monopolists that were sound, clear, objective, effective, and administrable. Theseguidelineswerecontroversialinthatsomecommentatorssawthemasunder inclusive as to the types of activities by a single firm monopolist that could be considered illegal. Nevertheless, they could provide useful guidance to the Committeeinitsdraftingefforts,especiallyiftheCommitteebelievesthatprudence andconservatismareimportantinestablishingalawaspotentiallyfarreachingas thatreflectedintheproposedbills.

B. ConductamongstCompetitorsworthyofPunishment(i.e., Cartelization)
Most of the bills contain a section entitled Cartelization which identifies arrangements amongst competitors that should be deemed illegal. The activities enumeratedinthebillfiledbyCongressmanBenitezisillustrative:

Agreementstofixsellingpriceofgoodsorothertermsofsale; Agreementstolimitsupplyoroutput; Agreementstodividethemarket,whetherbyvolumeofsalesorpurchaseor by territory, by type of goods sold, by customers or sellers, or by any other means; Agreements to exclude or limit dealings with particular suppliers or sellers fromsupplyingorsellinggoods,orcustomersfromacquiringorbuyinggoods; Agreements applying dissimilar conditions to equivalent transactions with otherparties,therebyplacingthematacompetitivedisadvantage;and Agreements making the transactions in particular goods dependent upon otherconditionswhichhavenoconnectionwiththesubjectofthetransaction.

The agreements here fall well within those that are normally prohibited under a competitionlaw.Thefirstthreearealmostalwaysheldinviolationofthelawwith littleneedforeconomicanalysisofharmfuleffects.Thelatterthreeusuallyrequire

conduct often is difficult.

Standards under the Sherman Act should prevent conduct that harms the competitive process, but should avoid overly broad prohibitions that suppress legitimate competition. Standards under the Sherman Act should be understandable and clear to businesspeople and judges and must account for the possibility of error and administrative costs in their application.

additional proof of actual harm to competition in order to be condemned as anti competitive. But the biggest concern with this approach involves the means of proof. Severalwouldallowforaprimafaciedeterminationofcartelizationonthebasisof parallel price movements. For instance, Section 5 of House Bill 1583 contains the followingparagraph: There shall be a prima facie case for the existence of a cartel if and when the Department of Trade and Industry (DTI) or concerned regulatoryagencyfindsthattwoormorepersonsorfirmscompeting forthesamerelevantmarketperformuniformorcomplementaryacts among themselves which tend to bring about artificial and unreasonable increase in the price of any goods or when they simultaneouslyandunreasonablyincreasethepricesoftheircompeting goods thereby lessening competition among themselves. (Emphasis added) Itisnotunusualforcompetitorstomakepricingdecisionsbasedonthedecisionsof theircompetitors.Anygasstationownerwithacompetitorontheothercornercan testify to that.8 And it is not unusual that during periods of commodity inflation, consumerwatchdogswillcomplainwhenpricesappeartoriseapparentlyinunison orinsomeotherlockstepfashion. Allowing a prima facie case against firms that set prices in relation to their competitors has the potential forcing many firms to prove a negative. Yes, prices went up. Yes, we were aware of what our competitors are doing. But no, we didnt conspiretodoso.Provingthislatterfactmightbedifficult. Duringtimesofeconomicdistress,governmentsarealltootemptedtotake populistmeasuresagainstcompaniesraisingprices.Whilepoliticallypopular,these measuresusuallybackfire,eitherbydiscouraginginvestment,causingshortagesor otherwiseunderminingthefreedomofcontractandtheruleoflaw.Thereisgood causetobeconcernedthatthesamethingwillhappenhere.

8Economistsrefertothisasconsciousparallelism.

Abetterapproachistorelyondirectevidenceofaconspiracytoraiseprices, forinstancethetestimonyofoneofthepartiestotheconspiracy.Suchtestimony and other direct evidence has recently been more effective in busting cartels than resort to circumstantial economic evidence alone. A sensationalized but nevertheless instructive example is the antitrust investigation depicted in The Informant,a2009filmstarringMattDamon.Mr.DamonplayedMarkWhitacre,an executiveforADMMidland,acompanywhosemottowasOurcompetitorsareour friends.Ourcustomersaretheenemy.ADMMidlandproducedlysine,anadditive toanimalfeedusedtomakechickens,cows,pigsandotherlivestockgrowfaster. As the film illustrates, ADM Midland conspired with several other large producersoflysinetoraisethepricesoverthecourseofseveralyears.Thecartel wasbroken,itsmembersfined,anditsorganizersjailedaftertheFBI,workingwith Whitacre,wasabletocompiledirectevidenceoftheconspiracy,includingtestimony andtapedconversations. Thelysinecasewasatthetimeunusual.Butitmaynotbesointhefuture. Competition authorities have increasingly relied on amnesty programs that immunize from liability the first members of an illegal cartel to turn their co conspirators in. Several of the House bills contain language that would establish suchprograms.See,forexample,HouseBill1583,Section13andHouseBill1980, Section21.9 TheCommitteeisthusurgedtorejectthenotionofacompetitionregimethat allows the authorities to charge firms with price fixing based on circumstantial evidence of price parallelism, leaving the accused to prove that no agreement existed. Rather, the consolidated bill should encourage conspirators to produce direct evidence of the conspiracy, with the economic evidence of parallel pricing usedassupportthattheconspiracyactuallypushedthrough.

9Repealoftheprohibitionofpartiestoaconspiracytapingeachothersconversationswouldeven

furtherthegenerationofsuchevidence.

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IV. Preventing the Formation of Monopolies through Merger of Competitors

Ingeneral,competitionlawsshouldencourageeffectivecompetitorstogrow and gain market share through superior performance. That drivetosucceed createswealthforsocietyintheformofbettergoodsandservices,morejobs,and stock dividends. Reflecting this, several of the bills acknowledge the role that superiorproduct,businessacumen,orhistoricaccidentcanplayinthecreationof legitimatemonopolies. Thecreationofmonopoliesthroughmerger,however,ishardertodefend.If two large competitors agree to merge operations in order to reduce competition, thisissomewhatakintoaconspiracytorestraintrade.However,unlikepricefixing agreements, such mergers often times have off setting benefits, such as increasing efficienciesandenhancingtheabilitytocompeteinternationally. It is for these reasons that even the most vocal skeptics of competition law enforcementacknowledgetheneedforsomesortofpremergernoticeandapproval processwhenthemergingpartiescontrolsubstantialpartsofthesamemarket.The risk here is that an overly inclusive regime will clog the system with approval requestswhileaninefficientregimewillblockmergerswhileapplicationspileup. Several of the bills contain merger provisions. They need to be looked at more closely to ensure that any approval regime would be able to effectively and quickly distinguish between mergers that enhance efficiency and those where the offsettingreductionofcompetitionwouldharmconsumers.Ifthiscannotbedone with any certainty, then the better practice would be to eschew any notification procedureinfavorofreducingbarrierstoproductsandservicesbeingprovidedby overseascompetitors.

V. The Various Enforcement and Advocacy Regimes that would be EstablishedundertheProposedBills

Thebillsproposevariousarrangementsforenforcingthecontemplatedlaw oncompetition.SomecontemplatetheDepartmentofJustice(DOJ)workingclosely

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withtheDepartmentofTradeandIndustry(DTI).Otherscontemplatethecreation ofanewFairTradeCommissionthatcouldbothinitiateinvestigationsandimpose penalties.10 Others would allow for private enforcement, with prevailing complainants entitled to treble damages. On the judicial side, some bills would request the Supreme Court to allocate cases under the contemplated competition lawtocourtsthatwouldsemispecializeinsuchmatters. None of the bills however, appear to address one of the biggest threats to competition: governmentcreated barriers to entry. Neither markets nor lawsuits effectively combat these barriers. This should be addressed through alternative means.

A.

EnforcementofaCompetitionLaw

Establishing the right implementation regime takes more than simply knowledge of international best practices. It is crucial to understand fully the political economy and the capacities of the respective agencies contemplated to enforcethelaw. Further complicating matters is the need to tie the enforcement aspects of the law closely to its substantive provisions. For instance, a competition law offeringincrementalchangefromthestatusquomightbeenforceablethroughonly marginal changes in existing agency personnel and procedures. By contrast, an ambitious competition law might require a completely new agency to have it properlyenforced. Asastartingpointafewobservationsthatmightbeofsomeuse:

Having two agencies, such as the DOJ and the DTI share enforcement responsibilitieswilllikelyleadtodifficultiesincoordinationandconsistency. Vesting the DOJ or DTI with enforcement authority over a broad range of violations would likely requireconsiderable resources in training in order to properlypreparetheirpersonneltoinvestigateandprosecutecases.

An entirely new agency such as the Fair Trade Commission will likely take yearstofullyfund,equipandstaff.
10See,e.g.,Chapter5ofHouseBill1980.

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Designating courts that would hear cases under the competition law would work so long as there are a sufficiently few number of them and the judges remainwiththemlongenoughtogainandutilizeexpertise. Leaving enforcement to private parties motivated by possible treble damage awards will likely lead to spurious lawsuits and greater incentives to bribe judgestoobtainfavorableoutcomes. This paper has suggested that if a competition law is indeed necessary, it

should focus on cartels, merger control, and perhaps some of the more egregious aspects of single firm monopolistic conduct. Taking this into account, combined withtheaboveobservations,leadstoanenforcementregimeoutlinedasfollows: 1. Allow the DOJ to handle investigation of, and collection of evidence regarding, conspiracies to fix prices or reduce output (i.e., cartelization). This is familiar ground with the DOJ. They have investigated conspiracies and worked with informantsonnumerousoccasions.TheDepartmentsexpertisewiththerules undertheAntiWireTappingActishelpfulaswell. 2. The DTI should handle merger approval and serve as an expert on the circumstantial evidence of cartelization. This is in line with their core competencies. They would supplement rather than overlap with the efforts of theDOJ. 3. Suitsagainstabusivepracticesbymonopoliesshouldbebroughtprimarilythrough privateactions.Trebledamages,however,shouldnotbeallowed.

B.

CompetitionAdvocacy

BeyondenforcementthereisanadditionalrolefortheDTI.ThePhilippines sorely lacks an official advocate for competition. Meanwhile, as noted above, numerousregulationsatboththenationalandlocallevelsinhibitcompetition.Itis extremelydifficulttocreatealegalsolutionundercompetitionlawtogovernment created monopolies or barriers to entry. The only practical solution is a political one. To facilitate debate on the merits of government barriers to entry, the DTI should be empowered and required to advocate for a more competitive climate withinthePhilippines.Attheveryleast,theagencyshouldberequired,annuallyor triannually, to identify in a report to Congress, areas where government rules restraincompetition,andwhethersuchrulesarejustified.Evenmoreambitiously, theDTIcouldbevestedwiththerighttofilesuitswiththeSupremeCourttoannul

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unjustifiedbarriersongroundsthattheyviolatetheprocompetitionnormsinthe Constitution.

VI.

Conclusion
Craftinganeffectivecompetitionlawisnoeasytask.TheCongressmanand

Committeemembersshouldbecommendedfortheirefforts.Itishopedthatthese andothercommentssolicitedbytheCommitteewillcontributetoalawthattruly promotescompetitioninthePhilippines.

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