Competition Impact of Government Initiatives

Type of government participations in markets

Reason(s) for intervention

Impact on competition

Government as seller

To provide essential public goods and services, e.g. public utilities.

To directly participate in industries at an early stage of development to provide essential infrastructure and spur economic growth.

This may crowd out private sector competitors that are willing to provide the same public goods and services.

Subsequent divestment of government-owned companies or assets to the private sector may affect the market structure of the industry concerned, such as creating a private monopoly, leading to less competitive outcome.

Government as buyer

To acquire inputs for providing essential public goods or services, e.g. public utilities, public housing etc.

The structure of government tender and the specifications may affect the ability of suppliers to participate due to manpower, financial or technical requirements. For example, tenders that unnecessarily require the use of specific technology may restrict the participation of companies which may otherwise be able to provide a comparable service or product using different technologies. This may limit the ability of market players offering competing technologies to expand and in turn discourage further entry into the market.

The design of government tender also plays an important role in mitigating the risk of bid rigging. For example, a tender that is designed to allow many potential bidders to participate will make it more difficult for companies to collude on their bids. Request for detailed bids (e.g., itemised prices) will allow for greater scrutiny of the bids to understand the price variations.

Government regulation

To protect public safety, e.g. workplace health and safety regulations, or consumer protection through product safety standards.

To achieve socioeconomic policy objectives, e.g. ensuring affordability of essential goods and services through price regulation.

Issuance of licences or setting service standards may raise entry barriers, reduce the number of competing options available to consumers, and reduce competitive pressure on incumbents.

Price controls may restrict or reduce incentive for sellers to compete on pricing and may also result in under-provision of goods and services in the long run due to cut back in the necessary investment.

Taxes and subsidies

To provide government with revenue to perform public duties and provide public goods and services.

To modify business/consumer behaviour, e.g. to encourage investments in technology, to reduce congestion and pollution, to discourage smoking, etc.

Taxes targeted at specific products or services may unwittingly create an uneven playing field by channelling consumers towards substitutes that are not subject to tax.

Inefficient businesses that would have exited the market under competitive conditions may be “sponsored” by subsidies to remain in the market as they do not face competitive discipline to improve and innovate .

Government influence

To foster industry self-regulation.

To avoid the risk of implementing overly restrictive regulations as firms typically have access to better and more timely market information.

This approach allows rules to be implemented quickly (compared to regulation) and be more responsive to changes in market conditions.

As part of the industry self-regulation, it is common for firms to agree, through the industry association, on a set of industry-wide standards.

Self-regulation initiatives may cause private sector firms or associations to inadvertently infringe the prohibitions of the Competition Act or dampen competition and impede market developments more generally. For example, recommendations of minimum or maximum prices may lead to price convergence and discourage price competition; while fixing of trading conditions may limit choices for consumers and reduce incentives for firms to innovate.