Introduction
In Africa (as in other jurisdictions), abuse of market power is investigated after the fact. After an anticompetitive act is committed, investigations begin. Competition analysts then measure the adverse effect or substantial lessening of competition by a dominant market player. This blog examines why pre-emptive market assessments are necessary in increasingly dynamic markets and prescribes proactive methods for understanding market structures, utilized in other jurisdictions. For Africa, capacity building for a thorough understanding of markets built on the traditional SCP paradigm of the Theory of Industrial Organization is vital. Especially in view of an envisaged supranational AfCFTA Competition Authority. The blog concludes with why pre-emptive tools such as market concentration tools, market studies, public education/advocacy, and data intelligence units should be in the enforcement toolkit of African competition authorities.
Are African markets competitive? The case for rising market power in Africa
The impact of limited competition on Africans is this: Africans pay on average significantly higher prices (compared to developed and emerging economies) for most “food, clothing, and health services—items that tend to carry a larger weight in the consumption basket of low-income households”.[3] On the flip side, firm level data shows that firms in Africa are significantly profitable. Findings from 39 sub-Saharan African countries for the period of 2000-2017 are that average profitability of firms are higher (by about 10-20%) than in emerging and developed countries, indicating significant market power of firms in Africa [3]. In simple words, firms win, consumers, especially low-income households become poorer. For example, cement prices in Nigeria are 240% above the global average [4]. The top 3 cement companies, Dangote, BUA Cement and Lafarge (result of a 2015 merger between Lafarge and Holcim) have market shares of 60.6%, 21.8% and 17.6% [7]. These firms profitably increase revenues yearly by astronomical amounts. Dangote Cement saw its profit after tax in 2020 rise by 37.7% [5]. This is mirrored in other markets in the country (i.e. sugar), regardless of the fact that Nigeria is one of 3 countries in the world with the highest share of the extremely poor (India and Democratic Republic of Congo, being the other two) [6].
A report released by McKinsey in June 2023 showed that of the 345 companies with revenues of $1 billion or more in Africa, roughly 40% are headquartered in South Africa (147 companies) [1]. Countries like Nigeria (23), Ghana (4), Kenya (1), Burkina Faso (1) and Tanzania (1) are 5 of the 14 countries that make up 80% of output on the continent [1][2]. This suggests that asides South Africa (which has one of the continent’s strongest competition authorities), only few extremely profitable firms dominate markets. Though Africa records significant market barriers due to inefficient regulatory and trade regimes, another conclusion is that of competition failure and the absence of a competition culture on the continent, allowing entire sectors to be controlled by a few.
The World Economic Forum’s Global Competitiveness Index (GCI) also highlights low levels of competition in sub-Saharan African countries because of less intense domestic and foreign competition [7]. This is corroborated by the Bertelsmann Transformation Index (BTI).
An interesting juxtaposition is a finding from the OECD.
“Abuse of dominance, or monopolisation, continues to be one of the most challenging and debated areas of competition law, between 2015 and 2020, abuse of dominance cases remained stable or declined in most regions across the world. OECD countries have investigated on average eight to nine cases between 2017 and 2020, while non-OECD countries’ record has been slightly lower, ranging from four to six in the same period (OECD, 2022)” [8].
Limited reports of abuse of dominance cases in Africa may mean such abuses are entrenched, so much so that effective competitors have accepted their ‘small’ place in markets. Also, the dwindling abuse of dominance cases may not only be the result of deeper competition issues in markets, which are sabotaging the efforts of Competition authorities (at least in African countries where such authorities exist), but the methods of identifying and investigating abuse of dominance (market power) cases.
When investigating anticompetitive conduct, evidence gathering is done within strict timelines and is dependent on the munificence of market participants in providing information. Competition authority responses are reactive ceteris paribus. Under such pressures, a lot can be overlooked. In South Africa, for example, as is the case in developed jurisdictions, investigations of abuse of dominance cases are lengthy and resource intensive. The Competition Commission of South Africa (CCSA), though highly efficient in evidence gathering, is still prone to unsuccessfully prosecute abuse of dominance cases [9]. Hence, a different approach is necessitated. Proactiveness would help authorities identify risk factors in markets before cases are initiated.
Categorizing market structure and market power analysis: Why and How
Why: SCP paradigm
The traditional SCP framework was developed in 1959 by Joe S. Bain Jr as an analytical framework for industrial organization analysis [9] (with inspiration from Chamberlain and Robinson’s theory of industrial organization). The SCP utilizes an inductive approach that suggests that market structure (S) (i.e. no of firms or degree of market concentration, product differentiation and market entry conditions) determines how competitors conduct themselves (C) (pricing behaviour and response strategies to competitors) [10] [11][12]. This would determine Performance (P) (i.e. profitability, innovativeness, markups/profits and firm efficiency) [11]. Thus, competition analysts should be equipped to provide answers to questions on market structure, necessary for competition law enforcement because market characteristics reveal potential competition problems in markets.
How: Pre-emptive tools
This section provides a guide to the adoption of the SCP paradigm and identifies proactive tools for competition law enforcement. Proactive tools are important because policing the competition/market landscape is what competition practitioners do, but so far, this policing is done after the fact. Akin to a police officer who catches culprits after a murder has been committed. Though, less of an unsung hero is the law enforcement officer that uncovers the murder scheme before it is hatched. Pre-emptive competition analysis works in this manner. It equips competition analysts with tools that identify market features that make an abuse of dominance likely or that reveal “red flags” in a market.
The following will allow for effective competition law enforcement in Africa through a proactive understanding of markets and market power.
Market Concentration tools
To understand the spread of ownership in a market, the most potent tool in the toolkit of a Competition Analyst is a market concentration tool. Upon initiation of a market complaint, understanding how broad or narrow, physical, or online or upstream or downstream; market definition and market power analysis depend on an understanding of the ins and outs of a market. Competition analysts identify the structural features of a market, the extent of it and how firms are distributed across a market. This analysis is usually done when a complaint about a market has come to the attention of competition authorities.
A market concentration tool is a game changer and should ideally cover:
Degree of market concentration: Sectors and sub-sectors of the economy, levels of the market or industry value chain (manufacturers, suppliers, retailers and distributors), number and size[13] of market participants at each value chain[14], number of employees, import ratio[15].
Product differentiation: Product use, substitutability and homogeneity of intermediate inputs.
Entry conditions: Entry and exit rates (business registration and de-registrations), sunk costs, list of regulatory barriers per market.
Having such market information on hand allows African competition authorities fully understand the structure of different economic sectors and sub-sectors. The dynamic and near-real time updatability of this tool using multiple data sources and indicators should be kept in mind and the availability of firm-level data. African competition authorities can identify priority sectors that raise competition concerns, which are fodder for egregious anticompetitive acts. The CCSA is the first competition authority in Africa to launch a very detailed market concentration tracker report in November 2021 with some underlying data from Statistics South Africa [16].
Market studies
A market study (inquiry), is a vital instrument of a country's competition authority. It is a formal inquiry into the general state of competition in a market without necessarily referring to the conduct of one (or more) firms [17]. Market studies are a supplement to the investigative work of competition or market authorities and are initiated by market or competition authorities. I wrote a blog on market inquiries here that discusses why African authorities should invest in conducting market inquiries.
Data intelligence units
From the foregoing, one can conclude that competition enforcement and data are inextricably tied. In 2022, Isabella Lorenzoni, a doctoral researcher in the Faculty of Law, Economics and Finance of University of Luxembourg made a case for competition authorities to add to their investigation arsenal technological tools like AI and digital analytics capacity. These tools are proactive, for uncovering whether anti-competitive acts, which would ordinarily escape the lens of competition authorities can be uncovered, and to enhance work efficiency and limit human error.
In other jurisdictions, there has been an uptake of digital analytics capacity. The Italian competition authority utilized AI and ML techniques to investigate Amazon to uncover price discrimination and collusion on the online platform, Spain’s National Commission on Markets and Competition (CNMC) created the Economic Intelligence unit for data mining and forensic analysis and the UK CMA has a Data, Technology and Analytics (DaTA) unit that uses natural language processing for reviews of documents submitted to the UK CMA [18][19]. The Canadian Competition Bureau has the Digital Enforcement and Intelligence Branch to provide intelligence expertise to it's other directorates [20]. African competition authorities should invest in capacity such as Data Science/Analytics, Data Engineering, Econometricians and Price-monitoring capacity, to conduct complex analytics. This can be supported with cross-continent/regional collaborations across the data units of competition authorities for knowledge sharing.
Public education and advocacy
Having a front facing advocacy or public affairs division enhances relationship management and approachability, key virtues for liaisons with other regulatory agencies, market participants and the public. Creating a system that empowers consumers to know that markets can have competition issues through advocacy is important. Public education and advocacy cannot be divulged from proactive enforcement, because 'competition-educated' consumers are incentivized to report abuse of market power. Ultimately, they pay the 'high price' of such infractions. Consumers need to know what competition infractions look like and know the avenues through which these can be communicated. This can be through awareness initiatives, workshops, and programs that sensitive market participants. The South African Competition Authority has an Advocacy division that embraces these roles [21].
Conclusion
African competition authorities (and soon enough, AfCFTA’s Competition Authority), are newer entrants to the competition/anti-trust space and it is in the interest of the continent to better understand the structure of markets in Africa. This is because market structures that facilitate less intensive rivalry among competitors are the antithesis of competition policy and competition law enforcement. Working towards a competitive market structure is the goal [22]. An understanding of market structures is the base for assessing dominance and market power. In Lina M. Khan’s words, the Chair of the US Federal Trade Commission, “capturing the architecture of market power in a modern economy” is vital.
Reference
IMF Working Paper, 2020, Competition, Competitiveness and Growth in Sub-Saharan Africa by Reda Cherif, Sandesh Dhungana, Xiangming Fang, Jesus Gonzalez-Garcia, Miguel Mendes, Yuanchen Yang, Mustafa Yenice, and Jung Eun Yoon
Competition, Competitiveness and Growth in Sub-Saharan Africa
Nigeria raps dominance of large cement firms hampering economy | Reuters
Nigeria’s biggest cement producers rake in N1.47tn revenue - Punch Newspapers (punchng.com)
World Bank Group: Poverty and Shared Prosperity Report 2022: Correcting Course
https://www.imf.org/-/media/Files/Publications/REO/AFR/2019/October/English/ch2.ashx
Structure-Conduct-Performance Paradigm - an overview | ScienceDirect Topics
IMF Working Paper, 2020, Competition, Competitiveness and Growth in Sub-Saharan Africa by Reda Cherif, Sandesh Dhungana, Xiangming Fang, Jesus Gonzalez-Garcia, Miguel Mendes, Yuanchen Yang, Mustafa Yenice, and Jung Eun Yoon
Size would be dependent on output, revenue, demand or capacity in each market or industry.
Having this split between, large, medium and small (or micro) scale or SMEs.
methodologies-to-measure-market-competition-2021.pdf (oecd.org)
COMPETITION POLICY AND SMALL ECONOMIES: Note by the Secretariat (oecd.org)
Author's bio
Oluwatobi Ogundele's economics experience and interests have been in the areas of competition law and policy, health and migration. She has masters degrees in Economics and in International Public Policy with specialization in International Economic Relations and Global Governance.
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