COMPETITION is a marvellous thing. In virtually all fields, from sports to business, it forces people to strive, innovate and attain new heights of excellence. It is particularly important in business, since excellence here also means a better deal for consumers and a persistent rise in productivity which alone can banish poverty, and raise living standards.
This is a major reason to welcome foreign companies into India. Their entry yields other gains, like an inflow of hard currency. But the real advantage of foreign investment lies in furthering the competitive process in pushing all economic actors to new peaks of performance using the best technology and organisational methods in the world.
Those who say foreign companies and brands will crush Indian ones are wrong. We have cases galore of Indian companies beating foreign companies. Videocon and BPL have hammered Philips in TV, Nirma has beaten Surf, Rasna has knocked out Tang. In general the entry of foreign companies and brands has meant more competition, not a foreign monopoly.
However, some new forms of foreign investment threaten to reduce competition. Coca Cola wants to enter India by buying out the brands of Parle (like Thums Up.Limca and Citra). Gillette is negotiating for the purchase of a 49 per cent stake in the house of Malhotra, the market leader in razor blades with brands like Topaz. Given the ongoing quarrels and likely split in the Malhotra family, such a deal could leave Gillette with a controlling stake.
In both these cases the foreign company will end up with a market share exceeding two-thirds. Should such acquisitions be prohibited on anti-monopoly grounds?
When Pepsi entered India, it increased competition. Rivals like Parle increased their bottle size from 200 cc to 250 cc with no increase in price, implying a big price cut per cc. The imminent entry of 7-Up forced Parle to come up with a rival brand, Citra, which ultimately triumphed in the marketplace, Consumers benefited in terms of price and range of choice.
Precisely the opposite is now proposed. Coca Cola is negotiating to buy out Parle’s brands. Coke maintains the fig leaf that it will market Parle’s brands in addition to its own, and thus increase competition. In practice Parle’s brands will die out, and the market will see a straight Coke-Pepsi fight.
Will this be a duopolistic situation militating against consumer interest? The answer is not entirely clear. Coke and Pepsi dominate most countries but it would be absurd to say that they have a cozy arrangement not to compete. On the contrary, their global battle is more fierce than in industries having a dozen competitors.
Nevertheless, a three-way battle between Coke, Pepsi and Parle will serve the consumer interest better. It will present the consumer with a greater range of brands, and improve the chances of Indian brands becoming strong enough to go multinational. So there is a case for banning the Coke-Parle deal on anti-monopoly grounds. The same logic applies to the Gillette-Malhotra deal.
Some people will say that mergers and acquisitions are part of any market economy, and that the logic of economic liberlisation means the government should not interfere. This is not true. All capitalist countries allow acquisitions but also use anti-monopoly laws to thwart monopolistic mergers.
Modern economic theory and practice is much more relaxed about monopolies than was the case two decades ago, since in a fast-changing, globalising world, most monopolies turn out to be temporary and hence illusory.
In an open economy where imports are allowed, even if an industry has only one producer he has no monopoly since consumers can switch to imports. The theory of contestable markets shows that the mere possibility of a rival entering the field can force companies with an apparently monopolistic position to nevertheless! charge competitive prices. The loss of $ 8 billion suffered recently by IBM shows that even what looks like the most secure monopoly can be illusory in an era of fast-changing technology.
Indian laws on dominance have failed to recognise this, and need changing. It is ridiculous to think that a market share of 25 to 33 per cent amounts to dominance. In the US, courts have held that monopoly power can reasonably be assumed if a company’s market share exceeds 66 per cent. Even this monopoly power can be transient, as IBM’s case has shown.
India bans consumer goods imports, and even if these are allowed soon, they will bear high duties. So India is not an open economy with fully contestable markets. In such circumstances it is appropriate to worry about industries where any one company gets a market share exceeding 66 per cent. If a company achieves such dominance through excellence in competitive conditions – as in the case of Bajaj Scooters – that is fine. If Coca Cola achieves dominance by beating its rivals in the Indian market, that too is acceptable. But we should not allow such dominance through mergers which reduce competition.