ISET Economist Blog

A blog about economics in the South Caucasus.

A New Competition Policy for Georgia

In recent weeks there has been a lot of talk about alleged monopolies and cartels in Georgia, and Georgia’s future competition policy. With few exceptions this debate has been pathetic. The debate has been dominated by politicians or businesses with a vested interest in the outcome. Even worse the framework of the debate is often provided by self-proclaimed experts with no actual expertise.

According to the debate monopolies and cartels are pervasive in Georgia. Seemingly almost every sector of the Georgian economy is not competitive, either because firms collude or a monopoly is abusing its market power. But should we believe conventional wisdom? Is there actual evidence for all these alleged cartels or monopolies? What should make us suspicious of the various claims is the basic fact that cartels, or monopolies that abuse their market power, are incredibly hard to detect and identify. Incredibly hard to detect and identify even for large, well-experienced, and competent competition regulators such as the USDOJ Antitrust division or the European Commission Directorate-General for Competition. In contrast, all it takes to identify a cartel in Georgia is self-confidence, ignorance of industrial economics, and a microphone.

A telling example is a set of two studies by what is probably Georgia’s best think tank, Transparency International  Georgia. These two studies look at the retail markets for gasoline and pharmaceuticals, and the food industry. These studies discuss the main competitors, and present some data on market shares and prices and their evolution over time. Looking at Transparency’s data with an economist’s eye it shows that at best all three markets are competitive, and at worst that the alleged cartels are doing a damn good job of obfuscating the evidence. But in an interesting twist – see also this analysis at "Competition in the Georgian Retail Gasoline Market" – the studies’ conclusions suggest that these markets are likely to be dominated by cartels and are not competitive. It’s either chutzpah or incompetence, but regardless of what is behind these absurd conclusions Transparency’s good reputation ensured that the findings of these studies were taken as facts. And not as the nonsense they are. They framed the debate, and were taken as additional evidence for what everyone seems to believe anyway. Cartels and monopolies are truly everywhere in Georgia.

But are they? Truth be told, I don’t have a definite answer. And no one in Georgia – except the businesses involved – should have either. It’s just too difficult to detect and identify a cartel. As difficult as trying to catch a black cat in a dark room. But ignoring the fact that non conclusive evidence is likely to appear, the available evidence suggests that three of the main alleged non-competitive sectors – retail gasoline, retail pharmaceuticals, and banking – are likely to be competitive. In fact, the banking sector might almost be too competitive, as too much competition discourages long-term lending relationships between clients and banks.

Leaving the question of whether certain sectors are competitive or not aside, a few lessons for Georgia’s future competition policy can be learned. The fact that evidence for the existence of a cartel or a market power-abusing monopoly is hard to uncover imposes a large burden on any future Georgian competition authority. But the same problem is faced by competition authorities in other countries, and ways have been found to mitigate this problem. Broadly speaking competition authorities rely on two strategies. One, to give incentives to cartel members to whistleblow, and incentives for cartels to break up by themselves. Second, to not focus on detecting cartels or monopolies but to create an environment that reduces the probability of successful and stable cartels or monopolies.

The first is an acknowledgment of the fact that virtually all cartels that have been detected have so because criminal evidence has surfaced. Here sticks and carrots can do the trick: Competition law should provide immunity to whistleblowers and those who cooperate with the competition authority, and should provide substantial penalties to those whose misconduct has been identified.

The second strategy is a much broader strategy that involves not just competition authorities, but also other institutions and policymakers. In a narrow sense competition authorities have to ensure that existing firms, in particular those with a dominant market position are not abusing their market power. This in particular includes restrictions on anticompetitive practices and merger controls. In a broader sense the likelihood of cartels and monopolies can also be reduced by creating a market framework that encourages competition. For a small economy such as Georgia this means open borders and free trade, ensuring that Georgian firms face competition from abroad. It also means low entry barriers for new firms, raising the likelihood that sectors with excessive profits will attract new firms and new competitors.

Taken together these policies will foster competitive markets in Georgia. These policies should be the focus of the new government. And not clumsy or politically motivated attempts to identify and label cartels and market power-abusing monopolies.

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Guest - Lintu on Sunday, 18 November 2012 01:59

Georgia is a small country and here everyone knows everything and no one needs a proof for the fact that we have monopolies

And gasoline and pharmaceuticals are the top sectors with monopolies :)

Georgia is a small country and here everyone knows everything and no one needs a proof for the fact that we have monopolies And gasoline and pharmaceuticals are the top sectors with monopolies :)
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