July 1, 2007

THE recent Nets fee increase and the Competition Commission of Singapore's ruling that it is not anti-competitive have generated much debate and perhaps some measure of criticism.

In a brief press release posted on its website, the Commission concluded that the Nets fee increase 'does not amount to an infringement of section 47 of the Competition Act' and hence the Commission will 'not be taking any further action with regard to Case's complaint'. Section 47 of the Competition Act prohibits dominant undertakings, such as monopolies, from abusing their position in the market.

At first glance, the Commission's ruling may appear underwhelming.

Case, the consumer watchdog, has passionately argued that Nets has a monopoly on the market, and its fee increase is an abuse of its dominant position in the market as retailers have no alternative but to accept the increase.

A closer inspection of the Commission's statement, however, reveals that the Commission's reasoning is based on sound and widely accepted competition law principles.

We are not privy to the information available to and considered by the Commission. Its detailed analysis of the fee increase - and one can safely assume that its considerations and reasons are far more substantial than its brief press statement - is not publicly available.

However, a significant clue is the Commission's observation that 'alternative payment methods, such as credit, debit and ez-link cards, are available to consumers'. This suggests that the Commission concluded that Nets is not a monopoly in the relevant market.

Almost all investigations into alleged abuses of dominance begin with an analysis into the relevant market. The competition regulator must first identify the relevant market as it provides a frame of reference for an analysis into whether the behaviour is an abuse of dominance.

Given the Commission's conclusion on alternative payment methods, it is likely to have taken the view that the relevant market here is sufficiently broad, and includes payment services provided by credit cards, debit cards and ez-link cards.

One concept frequently used in defining relevant markets is that of substitutability. Put simply, products which are close substitutes to the focal product, in this case the Nets facility, should be included in the relevant market as consumers would be willing to switch to these substitute products (demand side substitutability) or suppliers could easily start producing the focal product (supply side substitutability).

If the Commission finds that the services provided by credit, debit and ez-link cards are close substitutes for the Nets cashless payment system, then the relevant market would be broader, and Nets may not be dominant in the market, let alone be considered a monopoly.

While some may disagree with the Commission's conclusion (which is hardly surprising given the complexity and difficulty in defining markets), the general approach adopted by the Commission is uncontroversial from a competition law perspective.

Another facet to the Commission's ruling is its pronouncement that 'it is generally not in the Competition Act's purview to review or regulate pricing decisions'. This reluctance to interfere with pricing decision is significant, as it indicates that the competition watchdog views price regulation as the exception, rather than the rule.

Again, such an approach is in line with conventional competition theory. Many competition regulators are hesitant to interfere with price increases as the general presumption is that market forces should be left to dictate pricing.

Excessive or exploitative pricing are believed to be self-correcting due to competitive forces.

The capping of prices, while it may increase consumer welfare in the short term, is also likely to have detrimental effects in the long run as it discourages innovation and investment.

It is noteworthy that the European Commission, with over 40 years of competition regulation, has rarely found it necessary to condemn excessive pricing, and has in fact publicly noted that it does not want to behave as a price regulator. This, I suggest, is the correct approach as competition law seeks to help consumers, not through direct price intervention, but by fostering an efficient marketplace.

At the end of the day, the lesson from this is that not every price increase by a sizeable entity raises anti-competitive concerns.

The Commission's press release, however, ends with an intriguing coda, where it notes that it will not take further action 'at this point in time'. Only time will tell whether there will be more twists and turns to this episode.