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Commercial Education Society of Australia

Understanding Competition Policy
Kathleen McKenzie

Kathleen McKenzie

There is a lot of controversy, argument, misinformation, emotion and lack of real understanding of competition policy. We can all see the changes to the public sector and the private sector with vocational education and training (VET).

We all seem to understand as consumers what global competition policy means—look at the supermarket products, the clothing, textile, footwear industry, the manufacturing industry to name a few.

However, we have always believed that that VET did not fit into that category. This is a short overview of competition policy and how it can and does relate to VET.

International organizations such as the Organization for Economic Co-operation and Development (OECD), the European Union (EU), the World Bank, the Asia-Pacific Economic Co-operation (APEC) and the Association of South East Asian Nations (ASEAN), emphasize that the adoption of competition policy encourages efficiency and economic growth (Aldaba 2008). Williams (2007) observed that when competition policy is implemented fairly, it encourages market-oriented economies to grow. He also states that competition policy cannot be implemented identically in multiple countries. This is because the economy of every nation varies in terms of government style, affordability and culture. In order to achieve an effective level playing field for competition policy, the players must have transparent dealings, be non-discriminatory and act fairly.

Initially, Australia did not play a part in shaping international competition policies because it was seen as too prosperous, while, at the same time, too remote.

In Australia, competition policy came to the fore when the then Prime Minister, the Hon R J Hawke stated (1991) that those government enterprises should not enjoy a competitive advantage if there were potential competitors in the same market. Hawke defined the purpose of competition policy as ensuring empowerment in the marketplace that would maximize greater productivity and efficiencies. This has effectively come to mean 'in the public interest' (Commonwealth NCP 2002).

Before competition policy reform, inter-company rivalry or anti-competitive measures were referred to as 'restrictive practices', 'the law of monopolies', 'tariffs' and 'restraints of trade'.

Competition policy in Australia started with finance, knowledge-based industries and telecommunications were gradually dismantled. However, Australia faced another problem of the geographical indicator (GI) factor. The GI refers to the origin of products such as 'Parma ham', 'Basmati rice', Chablis, Parmesan, Roquefort, Barossa Valley, Mount Lofty Ranges and more, all of which associate with the reputation of a product with an area of production.

With such global diversity, it is difficult to make sense of a singular concept of competition policy. Arguments range from the promotion of social welfare achieved through increases in efficiency as the primary goal, to trade liberalization being achieved through decreased monopolization and market dominance, to countries accumulating too much economic power to a way of synchronizing demand to bring about speedy market transformation. With such global diversity of objectives, it is difficult to make sense of a singular concept of competition policy. Thus, categorizing competition policy into eight categories might give us a better picture. These eight categories would include competitive neutrality, consumer choice, consumer welfare, competitive advantage, free market, value creation, market power and economic development.

Competitive neutrality is defined as government enterprises operating under the same conditions as private firms. Its aim is to include savings to government from better use of public infrastructure and capability in the provision of community services obligations.

Competitive neutrality is a way of leasing the management of public services to private operators to provide operational efficiencies and return on investment that government agencies may not have been able to deliver. Examples of this include the NSW Arthur Gorrie Correctional Center from 2007 to 2012 to the GEO Group, the construction, part-ownership and operation of the M1 Eastern Distributor (71.35%), M5 Motorway (50%), M4 Motorway (50.61%) and the tendering of NSW electricity to private and public companies helped government agencies to save $64 million in the financial year 2005–2006.

Consumer choice sees the community as shareholders in the goal of easing barriers to trade, not just through minimizing price, but in also driving competitors to create value for their consumers.

An examination of consumer choice in selected public services suggests that health care, education and social security are continuing courses of action rather than one-off occurrences in which the choice for both the consumer and the provider are rarely about acquiring products for total use. It is more about community and individual needs.

Consumer welfare does not refer to the provision of welfare by the state. It refers to the promotion of efficiency of delivering increased levels of welfare to the populace. There are numerous examples of government attempting to maximize expenditure in social services for the benefit of the consumer including the Australian government health rebates by way of Medicare and the Pharmaceutical Benefits Scheme. On the other hand, consumer welfare for government services becomes more problematic in so-called 'thin' markets such as rural and remote communities which cannot be serviced as cheaply as densely populated areas and so become an economic burden under national competition policy.

Competitive advantage should be the outcome of superior performance that includes innovation and creativity. The company delivers the same benefits as its competitors but at a lower cost, that is, it is a cost advantage. When a company delivers benefits that far outweigh its competitors, it is referred to as a differentiation advantage. The Argentine Beef industry is an example of cost advantage, whereas the Israel fresh citrus fruit industry used cost differentiation through its use of niche markets.

Free markets give rise to individual firms competing to produce quality outcomes at the lowest cost per unit. Since no firm can sustain producing a similar product while maintaining an appropriate rate of profit, the outcome ultimately leads to change and innovation. Free markets encourage people to make decisions on how to spend their own money and that enhances trade. The free market in Australia encompassed contracting out employment services to profit, not-for-profit, community and religious organizations to participate in job training and individual assistance, thus reducing welfare.

Value creation focuses on increasing the prosperity of the investors. This means that the cost may not be a major factor in determining how parties come to an agreement on a particular enterprise. For example, in the case of private-public housing, investors may or may not be indifferent to affordable housing, but seek an economic advantage, while a community-based, religious organization may see more value in more than economics. Another example is Facebook and Linkedin. From the public's point of view Facebook is seen as superior in that it is free and contributes to society, while Linkedin appears to be a better business model because it charges for premium services. Value creation can be achieved even when competitive policy goals come from two different directions.

Market power is the ability of a firm to influence the price of a product or service above a competitive level without losing a significant share of its business to rivals. Market power can be influenced by economically strong customers such as the monopoly of telecommunications companies until technology changed the competition. Apple opened the iTunes store and persuaded music companies to make their libraries available.

Finally, economic efficiency and economic development are inextricably linked through appropriate legislation for successful competition policy. Until the mid-20th century, the government's role was that of producer. The government depended on the taxpayer to underwrite the cost. Technological innovation changed all of that because it enabled outsourcing to government services to private providers, for consumers to gain from a liberalized market and to boost the welfare of the broad community by fostering efficient production.

These are considerations of competition policy. Competition policy has spread to all areas of the economy as a method to ensure greater consumer empowerment in the marketplace and to maximize productivity and efficiencies. This means that VET sector is just another of the areas open to competition policy.

Kathleen McKenzie MAA FCES FRSA FIPS
June 2012

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