Flatten the coronavirus curve, but don’t flatline competition

Rising mark-ups, superstar firms, “killer acquisitions” and competition among digital platforms—for the past few years, academia and policymakers have been increasingly concerned about lack of competition. But in the face of a major economic recession caused by the coronavirus disease, does competition still matter?

We say definitely, for at least two big reasons. First, competitive prices for goods and services will matter even more in the weeks and months to come. Households will have reduced incomes, and firms will depend on competitively priced inputs for financial recovery. Second, the economic crisis may affect smaller firms and market entrants more than the big powerful firms.

Emergencies like COVID-19 require extraordinary measures. Single-source procurement, more than 1.3 trillion euros in state aid in the EU, and antitrust exemptions in at least 10 countries plus the EU—these may all be justified in a time of unprecedented shocks to supply and demand. Yet, response and recovery policies are not necessarily at odds with competition principles.

The remedies to deal with this pandemic can be designed in many ways, with some safeguarding competition more than others. Governments can still consider competition among the criteria for choosing the right intervention.  Right now, consumer welfare will be achieved by dealing with the pandemic, while maintaining as much economic stability as possible. In the mid to long term, consumer welfare also requires preserving competitive and contestable markets.

Governments should consider the medium-term consequences of emergency interventions. Temporary measures should avoid locking in behaviors or market structures that would permanently lower competition and hurt consumers.  Allowing price-fixing cartels or implementing price controls will facilitate collusion and lower consumer welfare, even after the measures are lifted. In South Africa, cartels emerged from markets with a history of price controls. In Moldova, price controls were counterproductive and have led to higher – not lower – prices for certain food products.  

Do’s and don’ts: Case by case

Coordination among competitors. With supply chains heavily interrupted, there may be a need for firms to coordinate to ensure delivery of essential goods and services. While such coordination or information sharing among competitors may be unlawful, several agencies are now explicitly allowing it (see Australia, Germany, Mexico, UK, US). However, this type of coordination should be distinguished from fixing prices or bid rigging. In the past, crisis cartels have been justified by the public interest. But allowing firms to agree on price increases or coordinate reductions in capacity can harm consumers in a critical moment.  Governments may have other tools to secure jobs or prevent bankruptcies, including wage subsidies or even bailouts. In sum, do allow firms to temporarily coordinate in essential goods and services, as long as it is in the interest of consumers. Don’t allow price-fixing or bid rigging.

Mergers. Firms may formally pool resources and expertise to deliver critical medical supplies. Such joint ventures should be expeditiously approved. Upcoming industry consolidation may involve an increase in merger activity. Claims about impending insolvency to defend a proposed merger should be reviewed carefully to avoid concentration of market structures that unnecessarily and irreversibly reduce contestability.  In sum, do accelerate merger review in critical sectors, and consider permanent shifts in industry features and demand when reviewing and clearing mergers. Don’t discard remedies for operations with potential harm to competition in sectors that are likely to fully recover.

Subsidies. Widespread, flexible and rapidly delivered subsidies are critical to prevent insolvencies, massive lay-offs and disruptions in payment chains. Simple, clear and transparent procedures, communicated swiftly, can ensure that the support is as accessible as possible to all players in the market. While investment financing is typically preferable to outright support for firms’ operations, the severity of the current situation may merit blank checks. If subsequent rounds of support for recovery are targeted to specific firms, this should be done with caution, so as not to distort the level playing field or favor connected firms. In sum, do provide time-bound subsidies to a wide range of firms as soon as possible. Don’t implement support that could provide undue advantages to specific firms.

Bailouts and nationalizations. In sectors that are hard hit by the travel bans, such as transport, insolvencies would involve great social costs. Public interest criteria – including continuity of service – may merit bailouts by the government or transfer of ownership from private shareholders to the public.  These should avoid rescuing firms that were already failing. State-owned enterprises (SOEs) can play a key role in delivering emergency goods and services. But governments should also refrain from engaging in production or service delivery in industries that can be served by the private sector. The role of SOEs should be assessed in order to ensure that bailout packages are not exclusively and unnecessarily favoring a dominant SOE. In sum, in the short term, do rescue firms, especially if they were otherwise solvent and well performing. In the medium term, don’t sustain failing firms or initiate commercial activity in otherwise contestable sectors.   

Price controls generally risk worsening shortages. In the short term, decisions on controls cannot possibly be made on technical grounds and enforcement would tie up already scarce human resources. Platforms and other digital solutions to provide households with information on prices in their vicinity can address individual price hikes. To alleviate households struggling to afford essential goods and services, direct cash transfers or vouchers can be alternatives that do not distort price signals. Consolidated government procurement in the health sector also reduces prices. In sum, do facilitate price comparisons and transparency. Don’t promote price controls – especially not indefinitely, fixed (as opposed to maximum prices) and for a wide range of goods.

What can competition authorities do? They should, first and foremost, encourage social distancing. Enforcement activities will need to be delayed, and priority should be given to merger review. Authorities can still communicate that they will prosecute any ongoing anti-competitive practices, once regular enforcement activity can resume. Competition agencies can give guidance to industries on the activities that are exceptionally permitted. Authorities should actively monitor government interventions and propose gradual adjustments to emergency programs that safeguard contestability and a level playing field.

Now is the time to protect citizens’ health and the economy’s stability. Policymakers can do so while choosing actions that do not jeopardize consumer welfare and firms’ competitiveness in the medium term.