How the Federal Economic Competition Commission fights for workers and consumers in Mexico

Mexicans are familiar with the impact of economic cartels on their pockets and the economy. Even though the country has stricter antitrust laws than its peers in the Organization for Economic Co-operation and Development (OECD),  it has an economic competition problem in sectors such as banking, telecommunications, and other critical industries, which are highly concentrated and offer prices that are higher than in other countries, according to research by the Mexican central bank, Banco de México.

For example, recently, the Federal Economic Competition Commission (COFECE), the independent agency created to enforce the Mexican Constitution—which prohibits monopolistic practices except in certain areas of state control, such as oil extraction and nuclear power generation— discovered and sanctioned a cartel of real estate brokers.

The cartel operated around Lake Chapala, in the state of Jalisco. It set commission rates above 7 percent for transactions of a certain size. Following the COFECE fine, real estate sales in the area doubled in relation to the national real estate industry! Faced with lower commissions, consumers bought more real estate through brokers, boosting overall sales.

A new World Bank research reviews almost 30 years of COFECE research and measures its effects on the Economic Census, which records all economic data in each industry every five years. The results show that after the Commission fines cartels and eliminates these practices, sales increase in the entire affected sector.

The analysis shows that wages and employment also rise when cartels are broken. They restrict output and raise prices, hurt workers by creating fewer jobs, and potentially reduce productivity (by decreasing incentives for firms to innovate or encourage unproductive firms to exit) by keeping wages low.

Thus, when sanctioning an economic cartel:

• Industry´s productivity increases
• More and better paid jobs are created
• Profit margins fall

In fact, a rough calculation considering the number of sanctions each year suggests that those of COFECE represent approximately half of one percent of the growth of the Gross Domestic Product per capita each year.

Unlike in the United States—where the Sherman Act prohibits attempts to monopolize a market but not private monopolies outright—in Mexico, COFECE investigators disclose a description of the relevant market in all their inquiries, including those where they do not find illegal behaviors.

Research shows that when cases are closed without penalty, sales and wages fall, but profit margins grow. This may indicate that even after investigations, harmful monopolistic practices may go unpunished, since the burden of proof required by law for a sanction is quite high.

In the Chapala case, COFECE discovered a written agreement to set brokerage fees, but clear evidence is not always found, and liability is difficult to prove. With more resources, more industries could be investigated in depth, generating more evidence and more convictions. The budget of the Federal Trade Commission of the United States is approximately 10 times that of COFECE, but the per capita income in that country is only 7 times higher.

A relevant role in Mexico

In Mexico, antitrust law was applied from the Presidency until the creation of today's COFECE, whose officials investigate high prices, respond to public complaints, and operate a procedure similar to a trial in which economic agents are fined if there is evidence of illegal monopolistic practices. In 2020, the OECD reported that its regime was in line with internationally recognized practices and respected by antitrust law professionals.

Due to its relevant antitrust role, it is important to ensure the institutional strength of COFECE and to maintain an adequate number of Commissioners in the Plenary that carries out trials, to safeguard plurality. Today, only five of the seven Commissioners are installed: the pending ones must be replaced so that the Commission guarantees the defendants a fair trial.

Mexico's strict antitrust laws set an example for many countries, including the United States. COFECE has conducted research on economic activities that produce around 40% of national production.  Their work is hard and technical and can go unnoticed. The World Bank research shows that their work has substantial benefits for consumers and workers. Strong government support can ensure even greater benefits.