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Competition for-the-market

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This presentation by Chris Pike, OECD Competition Division, was made during the discussion “Competition for-the-market” held at the 18th meeting of the OECD Global Forum on Competition on 6 December 2019. More papers and presentations on the topic can be found at oe.cd/cmkt.

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Competition for-the-market

  1. 1. COMPETITION FOR-THE-MARKET Chris Pike Competition Expert, OECD Global Forum on Competition Paris 6 December 2019
  2. 2. Competition for-the-market: When products have characteristics that lead firms to compete to be the supplier of a whole market of products or services, rather than for market share. 1. Natural monopoly – Based on the productive technology generating large economies of scale 2. Publicly funded monopoly – Where the good would otherwise not be provided, and the government as sole purchaser selects to purchase exclusively 3. Legally protected monopoly – Products which lack close substitutes, and which enjoy the benefit of barriers to entry in the form of protected property rights. 4. Platform monopoly – Products which lack close substitutes, and which enjoy the benefit of barriers to entry in the form of direct or indirect network effects. While competition-in-the-market may not be possible, concessions are a key tool for driving at least some competition in categories 1 & 2 4 types of competition for-the-market
  3. 3. Advocacy Challenges Use competitive incentives? Yes In-the-market For-the- market No Direct provision Privatize (& regulate?) Decisions: Regulate? (Regulated?) Concession Before offering a concession consider, and do not underestimate the difficulty & cost of: • Can you write a sufficiently complete contract specification? • Can you enforce the contract? (eg if concessionaire tries to renegotiate) ?
  4. 4. • Are the bidding requirements sufficient to ensure the winner can provide the service? • Are the bidding requirements light enough that they permit a sufficient variety of bidders? • Should you divide the contract into lots or award a single contract? • Do you put caps on the number of lots that can be awarded to a single bidder? • How do you overcome incumbency advantages (e.g. asymmetric information)? • How much transparency, and at what stage? - risk of facilitating bid-rigging? • Do you allow joint bidding? And when? • Does the entity offering the concession have incentives aligned with taxpayers and users on whose behalf they work? • What fall-back options are available in the event of contract default? • Is it possible to use a continuous auction? – Grant a concession that requires the winner to self-assess the value of the concession, and to pay a tax on that self-assessed price. – Include in the contract that the concessionaire must release the concessionary contract to any bidder that pays the self-assessed price. Concession design
  5. 5. • Market definition: Is a concession a relevant market? – Seller (govt.) can’t switch, buyers (users) might, but often cannot. – If the concession is the relevant market then market definition is of little value. • Clustering markets: – It might make sense to cluster the markets that are defined if the same set of firms might credibly bid (but this requires competitive assessment) • Change of control: Is the concession an undertaking, the award of which constitutes a change of control? – E.g. would the concessionaire generate and retain revenue, while taking decisions on the employment of assets to deliver the service, for which it would bear part of the commercial risk? – We should be very sceptical of suggestions that the seller of a concessionary right can retain complete control of the concessionaire offers. Enforcement in concessionary markets
  6. 6. • Competitive assessment: Analytical tools to assess strength of potential competition: – Past bidders: Participation, Win/loss, Winner/runner- up, Margin or Probit analysis. – New bidders: Need to assess the strength of new bidders • Risks of; – anticompetitive remedies, e.g. prohibiting participation – exclusion - e.g. via predatory bidding – exploitation despite the opportunity to prevent it through the terms of the contract? – collusion, see OECD guidance on detecting bid-rigging Enforcement in concessionary markets (2)
  7. 7. Thank you for your attention! Chris Pike chris.pike@oecd.org 7 http://www.oecd.org/competition/globalfo rum/competition-for-the-market.htm

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