Who needs competition?

Last week, the Jaipur-based NGO, CUTS, organised a series of seminars on competition law and policy. Everyone took it for granted that competition was better than monopoly because monopolies restrict output and charge higher prices whereas competition has the opposite effect.

The liberalisation of the civil aviation and the telecommunications industries came in for repeated mention as proof of these propositions.

Such was the consensus amongst economists and others that it seemed worth stirring things up a bit by questioning the received wisdom. That is, are monopolies really that evil, and is competition really so wonderful?

There is practically no evidence in favour of monopolies and against competition. Then it occurred to me that, as always India can be relied upon to swim against the current and that I needed to go no further than our own doorstep.

All the proof that is needed to show that monopoly is better than competition can be found right here. I refer, specifically, to the Indian Railways, the state electricity boards, the water boards and so on, but other monopolies qualify as well.

All three mentioned above are monopolies but far from reducing output, raising prices and making excessive profits, they have increased output, lowered prices and made huge losses! If ever economic theory was stood on its head, it is here.

I raised these issues at the CUTS seminars but no one came up with a valid refutation of the proposition I was making, namely, don't automatically assume that monopolies always lead to socially in optimal outcomes and, vice versa, that competition leads to optimal ones.

Diehard defenders of competition will argue that ownership makes a difference, inasmuch as the public sector is under no obligation to show profits because it receives subsidies from the exchequer. And the Department of Telecommunications monopoly was as horrible as any you could get.

But what if you cap profits? Would a public monopoly be okay then? Besides, nowhere in the literature is ownership mentioned as the special case that defies received wisdom, which is that regardless of ownership, monopolies are always bad.

In India, at any rate, that does not seem to be the case. Thus, although government monopolies are excoriated, they have done an extraordinary job in achieving the same results as competition, perhaps even better.

They charge next to nothing from the bulk of the consumers and they keep on expanding output via new trains, more coaches, more electric and water connections and so on. Passenger fares on the railways can't be any lower and capacity is constrained by low investment, but not deliberately.

Ditto for electricity and water. Ninety-seven per cent of India exchanges, including rural exchanges, are now connected by optic fibre. These will be "lit" by the end of this year. I am sure you get the point. It is irrelevant for the final outcome that this is the result of populism.

A case can, of course, be made about the non-price aspects, namely, quality of service. But looking around at the sectors that have been liberalised, I can't help wondering if this aspect is not exaggerated.

The private airlines have ceased to offer services that are markedly superior to what Indian Airlines offers. On short domestic flights punctuality is the most important thing. The Indian Airlines record is better at present.

The same can be said of the private telecom services providers. I have been trying to get Airtel to give me a Wi-Fi connector for my DSL connection, but without success because the company's marketing emphasis is on selling more landlines. Get another connection, I was told, if you want us to install Wi-Fi. In terms of outcome, this is no different from what the old DoT would have said.

India's airports, perhaps rightly, come in for a great deal of criticism. But again the problem there is not that the Airports Authority of India is a monopoly (airports are always monopolies everywhere).

The problem is lack of investment in them. Indeed, it is a marvel that given the constraints of space and equipment, the employees at the airports manage so well.

In any case, when price elasticities are high, as they have to be in low income countries, quality is an issue only for the high income groups. The rest prefer a service, any service, at low prices, never mind the quality.

It can also be showed that a monopoly, because it does not have to compete for market shares, will offer a wider variety of products and services at different prices whereas competition will force everyone towards the same standardised minima. TV and the colas are good examples.

In short, the Left has a valid point because the case against public sector monopolies is far from proved. Neoclassical economists had better try harder.