"It is the opening that matters most."

 

"These reforms dismantled the import quotas and regulatory walls that had kept Australian manufacturers comfortable and unchallenged for the better part of a century. Industry had to compete with the world. Not because a regulator told firms to behave, but because Japanese cars and European appliances were suddenly on showroom floors, at prices local manufacturers could not match.

"Yes, competition law played a part. But the real transformation came from opening the economy.

"Take household appliances. During the reform period, the number of local manufacturers shrank and the industry became more concentrated. By the logic of competition law, this should have been a disaster. Fewer producers means less competition. Consumers should have suffered.

"They did not. Prices fell and choice exploded. Tariffs on refrigerators dropped from 47.5 per cent to 5 per cent. In 1999, the Productivity Commission studied what had happened. It attributed the gains to trade reforms that reduced “barriers to market entry,” not to competition law. Anyone in the world could now sell a fridge in Sydney.

"The economist Israel Kirzner, now 96 and long overdue for a Nobel Prize, spent his career at New York University making exactly this point. His work shaped my own doctoral research in the law and economics of competition.

"Kirzner’s central argument is that competition is not a snapshot of how many firms happen to sit in a market at any given moment. It is a process, driven by entrepreneurs spotting opportunities and entering markets to challenge incumbents. A market with two players can be fiercely competitive if both know a third could arrive tomorrow. A market with twenty can be sleepy if regulation keeps the twenty-first from showing up.

"Hawke and Keating grasped this, perhaps instinctively. The way to make an economy competitive is to open it up, let foreign goods in, let new businesses form and remove the barriers that protect incumbents from challenge. Competition law can help keep the game honest once the field is open.

"But it is the opening that matters most."

~ Oliver Hartwich from his post 'Dismantling the competition myth'