Economic Survey - United States 2004: Product market competition

Send

In what way could competition policy be improved?

The economy’s good performance for more than a decade can in part be traced to regulatory reform efforts in a broad range of industries, aimed at enhancing competitive forces as a means to improving efficiency, thereby stretching production possibilities. These efforts began in the 1970s and accelerated in the 1980s and have meant that competitive forces have now been stronger in the United States than in most other OECD countries for some considerable time. Robust product market competition has probably increased pressures for flexible adaptation in labour markets. This, in turn, has favoured the quick adoption of productivity enhancing technologies and the re-employment of workers displaced both by such innovations and by trade liberalisation. Nonetheless, despite favourable productivity trends and the generally pro competitive thrust of policies, improvements remain possible in various areas.

Indices of regulations affecting product market competition

0-6 indicator from least to most restrictive

1. Includes barriers to competition and state control.
2. Includes trade and FDI restrictions.
Source: Nicoletti and Scarpetta (2003).

Since basic competition law has not changed for decades, antitrust policy has evolved through court decisions. By international comparison, penalties and enforcement are severe, and private litigation is unusually important. The high risks of sanctions and treble damages for violations have encouraged efforts to undo or weaken enforcement actions and often entailed exemptions, special treatment or anti competitive state regulation. Several changes seem appropriate:

Anomalous exemptions from law or jurisdiction should be eliminated to improve coherence and promote competition.
The antitrust immunity of government enterprises should be terminated; it has no logical basis, and, indeed, no other OECD country exempts government related firms from competition enforcement.
State constraints on competition should be vigorously challenged under the Interstate Commerce clause, as they undermine the national commitment to rely on competitive forces.

What are the challenges regarding intellectual property rights?

The strengthening of intellectual property rights (IPRs) since the early 1980s has been accompanied by an expansion in R&D and a surge in patents. Some problems have followed the shift to stronger IPRs, notably the increase in patent litigation. The United States has greater patent protection than most of its trading partners. The significant protection afforded to IPRs is one factor contributing to the much higher level of branded drug prices and hence of health spending than in other countries. In assessing whether the strength of patent rights in the United States has moved beyond the optimal level, the question is whether too much current income and output is sacrificed for the additional innovation generated. While a comprehensive assessment of the costs and benefits of IPR policies is still lacking, some measures may be advantageous, including:

Considering the adoption of an opposition system for patents similar to that in the European Union (giving broader rights for grants to be challenged), with a view to limiting litigation costs and improving the quality of the patent review process.
Making agreements that stop entry by generic drug firms through payments from branded drug firms illegal, while maintaining the possibility of patent dispute settlements without payments.

What measures should be taken to further promote competition in telecommunications?

The telecommunications industry has changed significantly over the last 20 years in response to both rapid technological progress and regulatory reform. Competition for long distance service entered a new phase in the mid 1980s when AT&T was broken up, and the 1996 Telecommunications Act then began the national effort to spur local service competition. Over this period, alternative infrastructure competition and cable broadband competition have also emerged. While local service competition has recently taken root, policy changes may still be needed to ensure that entry in local voice services and broadband are not thwarted by dominant carriers. These changes should also be compatible with the need to increase overall investment by all carriers in advanced network facilities that provide broadband access to all areas. In this respect, an early resolution of outstanding policy issues would be desirable, in particular:

Given its positive effects on competition in local voice services and on investment in new services, unbundling of certain network elements should be continued for the foreseeable future where competitors’ ability to enter is impaired.
With a view to aiding broadband deployment, unbundling requirements for incumbent telephone carriers should be maintained, and cable firms should be required to open their lines using older technology to independent internet service providers.
Reviewing the inter carrier compensation regime, including reduction of current access charges, should be high on the policy agenda.

How can efficiency and competition in the electricity sector be improved?

Regulatory reform in the electricity sector was driven by many of the same factors that had influenced efforts in telecommunications: successful liberalisation in other industries, technological progress and dissatisfaction with induced distortions to prices across states and different customers. Unlike in other areas where the United States has often been a leader in reform, US experiments followed those in a number of other OECD countries. Despite the opportunity to learn from such experience, their success has been decidedly mixed. Although the California meltdown in 2000 01 reflected flaws in the regulatory framework rather than the impact of competition, it has chilled enthusiasm for reform throughout the country. Nonetheless, the August 2003 blackout in the northeast has highlighted the urgency of policy measures to increase regional transmission integration and encourage investment in generation and transmission in order to both improve security and efficiency. A number of initiatives could improve efficiency through increased competition, including:

Encouraging the integration of electricity markets, which have developed on a state by state or small region basis, by implementing a proposed standard market design.
Commencing reforms to the transmission system, which is currently characterised by balkanised asset ownership, in order to ensure efficient investment in capacity.
Removing distortions to competition that are implemented through tax and subsidy systems (such as differential tax treatment of public utilities) or that arise from public ownership of some electricity generators.

--------------------

The full edition of the OECD Economic Survey for the United States is available from: