Response to public discussion document : "Promoting competition : maintaining our economic drive"

In response to the Government’s public discussion document on the way forward for competition policy in Hong Kong, we are pleased to submit this paper for consideration. In summary, our response is as follows.\n1. We have no hesitation to say that a competition law for Hong Kong is necessary, if not long overdue. Our analysis is based on the economic efficiency that a competition law will promote and the market distortion that it will cure. Contrary to what some may believe, small market economies are more prone to anti-competitive conduct, due to their unique features of high industry concentration, substantial entry barriers, and high level of aggregate concentration.\n2. Laissez-faire does not guarantee fair competition. Given their tremendous costs to society, a reasonable amount of evidence of anti-competitive behaviours will justify a law. A competition law will also protect Hong Kong consumers from international cartels originated from other countries, whose damages are estimated to far outweigh the costs of setting up and enforcing a law.\n3. An unbiased competition regime should be extended to all sectors of the economy, in light of the deficiency of a sector-specific approach. We see two main drawbacks of the latter approach: misallocation of resources of the economy in the long run due to the different rules set for different sectors; and a credibility problem that arises when the very same agency acts as both the traditional industry regulator and competition policy enforcer. Nor is it fair to target certain industries of the economy.\n4. On the scope of the proposed competition law, we recommend a broad approach covering anti-competitive conduct as well as market structure. In terms of market structure, we do not mean anti-monopoly, as monopoly per se is not anti-competitive. It is only the abuse of monopoly (via predatory pricing, tying and bundling etc) that would be scrutinized. We argue that mergers and acquisitions (M&As) need to be regulated, as they can be motivated by market power considerations as well as efficiency gains. Reduced competition as a result of a merger cannot be reversed by regulating the behaviour of the merged firm ex post. We recommend a light-touched merger control regime with the adoption of large safe harbours, on the justifications that the importance of scale economy in Hong Kong sometimes necessitates a certain degree of rationalization.\n5. On the enforcement front, we recommend the set-up of a competition authority empowered with investigative function (plus the power to issue civil injunctive orders) and a specialist tribunal with adjudicative function (the Canada model). It combines the benefits of expertise (of the competition authority) and the safeguards from bias (with independent adjudication), and leads to a high degree of transparency.\n6. In terms of sanctions, we propose that punitive fines and director disqualifications be imposed on offenders of hardcore cartels (price fixing, market sharing and bid rigging), and monetary fines, civil or administrative, on all other competition infringements. This is to balance the severity of sanctions against the gravity of harm, and to achieve the necessary deterrent effect against blatant behaviour.\n7. We strongly recommend that a leniency program be included in the competition law to encourage whistle-blowing. Whistle-blowing is more effective (if not the only possible means) to detect and lead to successful prosecution of hardcore cartels, as demonstrated clearly by the recent experiences in the US and the EU.\n8. We recommend “partial exemption” of small and medium sized enterprises (SMEs) from the new law, similar to the US approach. In our view, exemptions of SMEs from regulations of M&As and abuse of dominant position can be justified on economic efficiency grounds. However, price-fixing (market sharing and bid rigging as well) benefits the sellers more than it hurts consumers and hence should be prohibited by law.\n9. The safety zone provided by the partial exemption scheme would help reduce SME’s compliance costs and protect them from excessive litigation. At the same time, the law would enable SMEs to sue other players, an option not feasible absent the law, thereby making them better off.\n10. No adverse presumption in law should be construed against any type of enterprises, small or big, domestic or foreign. A competition law should neither penalize big players if they are efficient, nor protect small players if they are inefficient. The law is to protect the competition process, not competitors. The government is recommended to do more to educate the public about the nature and essence of competition law.

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