Competition Impact of Government Initiatives

Benefits of competition

Competition contributes to the well-functioning of markets. With competition, businesses are incentivised to become more efficient, which in turn allows them to charge lower prices for their products and services. Businesses are also incentivised to innovate to improve the quality and range of their offerings that cater to the evolving tastes and different preferences of their customers. As a result, consumers enjoy competitive prices, more choices and higher quality products and services. The entry and exit of businesses as a result of competition also ensures that the most efficient and dynamic businesses remain in the market and they have the capability and resources to expand, innovate and seize opportunities. In the longer term, competition leads to an increase in productivity, ensures the economy remains competitive and supports sustainable economic growth.

How government participations in markets impact competition

There are instances where the market mechanism does not provide the necessary goods and services, or does not provide them in the “right” quantities, and it may be necessary for government to participate in markets. Government participations in market can take different forms, depending on the rationale for the intervention and the particular characteristics of the markets affected. It is also inevitable that they impact competition in the affected markets.

Type of government participations in markets

Reason(s) for intervention

Impact on competition

Government as seller

To provide essential public goods and services, e.g. public utilities.

To directly participate in industries at an early stage of development to provide essential infrastructure and spur economic growth.

This may crowd out private sector competitors that are willing to provide the same public goods and services.

Subsequent divestment of government-owned companies or assets to the private sector may affect the market structure of the industry concerned, such as creating a private monopoly, leading to less competitive outcome.

Government as buyer

To acquire inputs for providing essential public goods or services, e.g. public utilities, public housing etc.

The structure of government tender and the specifications may affect the ability of suppliers to participate due to manpower, financial or technical requirements. For example, tenders that unnecessarily require the use of specific technology may restrict the participation of companies which may otherwise be able to provide a comparable service or product using different technologies. This may limit the ability of market players offering competing technologies to expand and in turn discourage further entry into the market.

The design of government tender also plays an important role in mitigating the risk of bid rigging. For example, a tender that is designed to allow many potential bidders to participate will make it more difficult for companies to collude on their bids. Request for detailed bids (e.g., itemised prices) will allow for greater scrutiny of the bids to understand the price variations.

Government regulation

To protect public safety, e.g. workplace health and safety regulations, or consumer protection through product safety standards.

To achieve socioeconomic policy objectives, e.g. ensuring affordability of essential goods and services through price regulation.

Issuance of licences or setting service standards may raise entry barriers, reduce the number of competing options available to consumers, and reduce competitive pressure on incumbents.

Price controls may restrict or reduce incentive for sellers to compete on pricing and may also result in under-provision of goods and services in the long run due to cut back in the necessary investment.

Taxes and subsidies

To provide government with revenue to perform public duties and provide public goods and services.

To modify business/consumer behaviour, e.g. to encourage investments in technology, to reduce congestion and pollution, to discourage smoking, etc.

Taxes targeted at specific products or services may unwittingly create an uneven playing field by channelling consumers towards substitutes that are not subject to tax.

Inefficient businesses that would have exited the market under competitive conditions may be “sponsored” by subsidies to remain in the market as they do not face competitive discipline to improve and innovate .

Government influence

To foster industry self-regulation.

To avoid the risk of implementing overly restrictive regulations as firms typically have access to better and more timely market information.

This approach allows rules to be implemented quickly (compared to regulation) and be more responsive to changes in market conditions.

As part of the industry self-regulation, it is common for firms to agree, through the industry association, on a set of industry-wide standards.

Self-regulation initiatives may cause private sector firms or associations to inadvertently infringe the prohibitions of the Competition Act or dampen competition and impede market developments more generally. For example, recommendations of minimum or maximum prices may lead to price convergence and discourage price competition; while fixing of trading conditions may limit choices for consumers and reduce incentives for firms to innovate.

Competition assessment of government initiatives

Government initiatives (be it in the form of policies, subsidy programmes/initiatives, regulations etc.) are often important for promoting and protecting public policy or interest. However, some government initiatives can have a substantial impact on competition. Although the prohibitions in the Competition Act do not apply to activities, agreements or conduct of the government, any statutory body or any person acting on their behalf, government agencies are strongly encouraged to assess the impact of their initiatives on competition in the affected markets during the early part of their internal process and consider alternative options to reduce any adverse impact on market competition. To assist government agencies to understand the competition impact of their initiatives, CCCS has published on its website the "Government and Competition: A Toolkit for Government Agencies" ("Toolkit") and the Competition Impact Assessment Checklist ("CIA Checklist"). To find out more, read the next page on Competition Impact Assessment.

Government agencies can also approach CCCS for advice on the likely competition impact of their initiatives and alternative options that can reduce the adverse impact of their initiatives on market competition.