When does a business become too big and too important to be allowed to compete?

This might appear to be an odd question. However it seems to be an issue facing large technology companies, such as Google, as well as some domestic Australian businesses, such as the large supermarkets Coles and Woolworths.

Google is being investigated by the European Commission to see if they have breached competition laws by favouring their own related products and sites. See for example here and here.

Our major supermarkets have been warned by the competition regulator about how they treat their suppliers. There may be issues if, for example, a major supermarket favours its home brand products compared to competing branded products. See here.

While Australian supermarkets may appear to be a long way from the Internet search giant Google, the economic and legal issues are essentially the same. When does the supplier of one product become so essential to other firms that it cannot legally cross-promote or cross-sell if this harms those other firms?

So when is access to the shelves of a particular supermarket chain so essential that the owner of the supermarket is not allowed to favour its store brands over other branded products? And when did Google become so big that its search results must be, in some sense, the competitively neutral?

Competition laws necessarily place restrictions on large firms that have market power. These restrictions are not faced by smaller, less successful businesses. But judging any abuse of market power must be handled very, very carefully. An abuse of market power and tough, pro-competitive behaviour, look very similar. Effective competition hurts competitors – and competitors will complain about it. But the whole point of competition is to undermine your competitors, increase your market share and make more profit. And this is completely legitimate, and indeed highly desirable, if this competition leads businesses to become more efficient, offer superior service or quality to customers, or innovate and sell desirable new products.

Unfortunately, competition laws tend to be worded in terms of the effect of behaviour on competitors. For example our own Competition and Consumer Act considers whether a firm with market power has taken advantage of that market power with the purpose of harming competitors. This forces the courts to try to distinguish between pro-competitive and anti-competitive behaviour, which can be very difficult. And it encourages less successful businesses to try to use the law to mute competition.

So perhaps it is time to rethink the law. Perhaps the question should not be whether a firm with market power has harmed its competitors but rather whether the business has behaved in a way that harms consumers. Has a firm with market power taken advantage of that market power for the purpose of harming consumers either directly or indirectly in either the short or long-term?

Now, a consumer-centric law will be no easier to enforce than the current law. But it has two benefits. First it places the emphasis on the thing that we really care about – whether the market is working in the long-term interest of consumers. And second, it may reduce the attempts by businesses to use competition laws to reduce competition.

 

2 Responses to Is Google too big to compete? (The problem with competition laws)

  1. rabee says:

    This is really interesting. 

    So why aren’t consumer-centric and market-power-competitor centric laws the same in the long run?

     

  2. […] King at Core Economics has a corrective for the dinner-party talk on market power and […]

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