Competition policy has a very significant role to play in the transition economies of Central Europe, according to a new CEPR Report by John Fingleton, Eleanor Fox, Damien Neven and Paul Seabright. The reallocation of resources across industries has not been as radical as expected, and new and existing corporate control mechanisms are not yet fully effective. If the carrot of profitability is having limited impact, the stick of competition may have to do correspondingly more work.

Factors like free trade, free entry to markets and foreign direct investment, which encourage product market competition in established market economies, are still relatively ineffective in the transition economies. As a result, market concentration and the behavioural habits of companies are still a matter of concern.

The authors note that the development of competition policy in the Visegrád countries – the Czech Republic, Hungary, Poland and Slovakia – has been impressive. Competition laws and institutions were introduced in all four countries during 1990 and 1991 and a large body of case law (over 1,200 decisions) has since been established. The laws are broadly similar to those of the European Union (EU) under the Treaty of Rome, reflecting the approximation required by the association agreements between the EU and the Visegrád countries.

The national competition offices have a relatively high political profile. In policy debates in all of the countries, they have been staunch advocates of greater competition, even in the face of government sympathy for interventionist lobbying. Their ability to win the argument, though, is limited.

The adoption of competition policy was relatively uncontroversial at the beginning of the transition. Some saw it as a way to soften the rigours of the market; others as a way to open up markets. But this consensus is dissipating, especially as interest groups realise that competition policy may block transactions that benefit them and so are tempted to bring pressure to bear on the decision-makers.

How have the competition authorities performed? Their caseload reveals a preponderance of cases in which companies abuse their position of dominance, a lenient approach towards mergers and a surprising lack of action against hard-core cartels, such as bid-rigging, price-fixing and market-sharing agreements.

The case law suggests that clear standards have still to emerge. Smaller market participants clamour for the attention of the enforcement authorities in an attempt to reverse ‘unfair’ outcomes which result from their bargaining power. Governments are inclined to use competition offices to control prices or to implement industrial policy objectives. But the authors of the CEPR report identify three problems that could be remedied within the existing framework of their laws.

First, many of the abuse of dominance cases involve allegations of unfair bargains or unfair strategies in a contractual relationship. A relatively small proportion of the authorities’ resources is devoted to monopolistic abuses that impair market entry or expansion. But if the agencies concentrated most of their resources on improving markets, clamping down on cartels and monopolistic exclusions, as well as seeking to persuade other agencies of the virtues of pro-market policies, they could play a much stronger role in market reform.

Second, the competition officials and judges are still learning. In some cases, the analysis of what is a market, whether a company is dominant, and whether a practice helps or hurts competition needs improvement. Sometimes there are technical shortfalls; at other times, there may be a conflict of goals.

Third, it is not clear that the business community sufficiently knows and understands the competition rules, nor that the sanctions for violations are a sufficient deterrent. Greater clarity in the law, heavier fines and more publicity and advocacy regarding the law are needed.

More fundamentally, the authors argue, there is a case for some institutional reform to improve the transparency of competition policy and to guarantee the political independence of the competition offices. They recommend that trade, industrial and competition policy decisions should be taken by separate institutions, with clear written reasoning for decisions.

To enhance political independence, individuals deciding cases and the heads of the competition offices should be appointed in a manner that insulates them from external pressure. Financial independence of the competition offices would also be extremely helpful, insulating them from political pressure, exercised via the budgetary process.

The association agreements with the EU require the Visegrád countries to approximate EU competition policy in principle. This is a positive development because it adds urgency to the development of competition policy, something which is central to the transition process. But the authors argue that there does not seem to be a strong case for further detailed approximation of the laws in preparation for integration into the EU’s internal market. The remaining differences between the law and its application in the Visegrád countries and in the EU are not ones that matter for the integration of factor and product markets nor for the readiness of the Visegrád countries for EU membership.

Given the nature of the problems faced by transition economies, the book concludes that further forced approximation of the detail of the law may not be beneficial, either in terms of moving the law and its application closer to that of the EU, or in furthering the purpose of approximation. It may even reduce the overall readiness for membership of the countries concerned. At best, it would risk deflecting attention from the more serious problem of ensuring that the application of competition law and policy remains reasonably objective in the face of the substantial political pressures to distort it for the private advantage of particular interest groups.