Tuesday, June 19, 2007

HK Needs Better Competition Law Lawyers, NOW

Peter McMillan up at HK Competition Law brings my attention to a submission made by the HK Law Society in response to the government's consultation on whether HK needs a competition law conducted earlier.

I am particularly disturbed by the writer's lack of understanding of basic industrial organization theory. For example, the author argued that the MTR and KCR merger is OK although it would reduce competition after the merger as long as lower prices are expected post merger.

1) first of all, let's get the facts right. MTR (HK's underground railway) and KCR are pretty much STATE-OWNED ENTERPRISE though the former has a bit of shares listed on the HK stock exchange. Check this out. The government own's over 75% of the listed MTR and the KCR is a plain vanilla SOE, period.

So the reason why you get lower prices after merger (which reduces competition) is that it is a political decision, not an economic one.

2) Failing to see this, the author, or whoever is writing the submission for the Law Society, misapplied the efficency argument as espoused by UC Berkeley economist and one of the pioneer of the New Institution Economics Oliver Williamson which claims that sometimes merger which reduces competition might be a good thing because of improved production efficiency (an increase in producer surplus if you really insist on technical jargon). But the Willamsonian tradeoff as it is known in the literature does entail a RISE IN PRICES, NOT LOWERED ONES post merger. Otherwise, there wouldn't be a tradeoff, wouldn't it?

The bottomline of the Williamsonian tradeoff is that merger which reduces competition should be allowed as long as the loss in the consumer welfare post merger is offse by efficiency savings in production costs.

3) More ridiculous and laughable is that the author actually used the MTR-KCR merger as sort of a JUSTIFICATOIN for the anti-competitive nature of the lawyers club!

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