PRIME Minister Datuk Seri Anwar Ibrahim said the government is reviewing all monopolies currently existing in the economic system to ensure that the public enjoy fair and better services.
All ministries have been asked to study the rationale behind allowing monopolies so that there would be a fair assessment of the issue.
This is a welcome statement as open and competitive markets are the fuel that drive Malaysia’s free-market system so that consumers reap the benefits of a vigorous marketplace: lower prices, higher quality products and services, and spur greater innovation.
One may recall that Pakatan Harapan’s (PH) election manifesto has pledged to dismantle monopoly in the food and essentials sectors to encourage healthy competition, curb excessive profiteering and encourage entrepreneurship.
What is the state of monopolies in Malaysia? In general, the formation of monopolies has resulted in barriers to entry that prevent or discourage potential competitors from entering a market.
Barriers to entry can range from the economies of scale that lead to natural monopoly; control of a physical resource; legal restrictions on competition; patent, trademark and copyright protection; and practices to intimidate the competition like predatory pricing (setting low prices to try and force rival firms out of business), buying up the competition, or hoarding a scarce resource, among others.
Negative effect of monopoly
In most countries, including Malaysia, monopolies can be established by a government. Natural monopoly is formed as government responds with regulation or ownership of public services, provision of utilities, staple food and medical supplies. The easiest way to become a monopoly is by the government granting a company exclusive right to provide goods or services.
For example, BERNAS has a monopoly to import rice; PUSPAKOM holds the monopoly for motor vehicle inspection; Telekom Malaysia Bhd (TM) for landline telecommunications, Tenaga Nasional Bhd (electricity supply, Pharmaniaga Bhd (medical supplies to government hospitals) and FOMEMA (monitoring and supervising medical tests for foreign workers).
We also have duopoly which is a type of oligopoly where two firms have dominant or exclusive control over a market as in the case of sugar imports (MSM Malaysia Holdings Bhd and Central Sugars Refinery Sdn Bhd).
What’s so bad about a company amassing monopoly power? Do monopolies actually benefit consumers as in the case of public utilities? Do corporates’ consolidations and mergers undermine consumers’ interests?
Monopolies are generally considered to be bad for consumers and the economy. With dominant market power, they not only stifle innovation and entrepreneurship but can also lead to price gouging and deteriorating product/service quality stemming from lack of alternative choices and rising inflation.
Nevertheless, we cannot generalise that all monopolies are necessarily bad, especially those coming from a consolidation of businesses due to the business synergy and sustainability as well as changed circumstances (market and industry trend).
Some have argued that monopolies were acceptable in sectors that involve huge investment costs and have strategic purposes, especially when private investors are too risk averse to venture.
Breaking monopoly
How to break a monopoly? It is clear from experience that it normally takes a very long time for monopolies to be eroded. It is generally better to break up a monopoly into a number of competing firms before it is de-regulated.
The regulatory reform should not just allow competition but should foster it. Four pillars of successful regulatory reform are having (i) the right commitment; (ii) right market structures; (iii) right rules; and (iv) right regulatory institutions.
The most important pillar is a commitment at the highest political level – the ‘buy-in’ and active support of ministers, political actors and industry stakeholders to drive regulatory reform efforts.
Ultimately, the government as the market rule-maker and interventionist needs to limit monopolies’ power by breaking, curbing and regulating them.
The government can formulate a legal framework or competition policy or anti-trust act to curb and regulate monopolies to protect consumers’ interest. These can be affected through price capping – limiting price increases; regulation of mergers; breaking up monopolies through a removal of barriers of entry (liberalisation of licensing; sell off parts of the business); investigations into cartels and unfair practises; or punishing anti-competitive practices and nationalisation.
It is important to establish the right rules that is adopting an effective domestic competition law by minimising the number of exemptions from the law, and by backing them with vigorous and strong law enforcement by an independent competition law authority.
With enforcement of the Competition Act 2010 (CA 2010), the competition commission can safeguard the process of free and fair competition in commercial markets by curbing anti-competitive behaviour for the benefit of consumer welfare and efficiency of enterprises.
Managing monopoly
Competition should be introduced to all activities to the maximum extent possible, including minimising any restriction or distortion of competition to achieve socio and economic welfare to safeguard public interest.
Concerted efforts between the regulator and economic agents must be made to identify segments of the industry or market that can support new or more competition by taking the necessary steps to introduce competition in the identified market segments.
The government must ensure that the legislation and regulations, policies, practices and procedures are highly transparent and predictable by providing certainty to domestic stakeholders and foreign investors’ confidence that the rules will not flip-flop and indiscriminately changed.
A high degree of regulatory oversight is needed in a segment of an industry or market in which market power is concentrated to ensure that prices remain reasonable and commensurate with the service quality delivered. No customers or market participants are victimised by undue discrimination.
Competition does not mean exploitation. It is necessary to operate the competitive system of free enterprises in a transparent manner.
In gauging the market concentration power, the industry stakeholders should be given all possible information by government and their own associations so that they may act with knowledge and not on impulse. For example, temporary over-production or under-production can and should be avoided by disseminating timely information and update of current market conditions to ensure an orderly functioning of market system and price determination.
The government can consider to establish a Bureau of Industrial Economics which is tasked with adequate powers to supplement and supervise the collection of industrial statistics by trade associations.
This bureau should disseminate current statistical and other information regarding market conditions; helping businesses to make well-informed decision and to encourage the functioning of orderly markets.
A realistic and credible system of business regulation has to reach more than consciously immoral acts. The community is interested in tangible economic results and must be protected from unfair business practices as well as moral wrongs.
Practical and effective controls over blind economic forces must be taken to curb business monopoly from paralysing the system of free enterprise. – April 16, 2023
Lee Heng Guie is the executive director at Socio-Economic Research Centre (SERC) Malaysia.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
