Competition Law for State-Owned Enterprises

David E.M. Sappington & J. Gregory Sidak


State-owned enterprises (SOEs), also known as public enterprises, are owned by governments rather than by private investors. SOEs compete directly with private, profit-maximizing enterprises in many important markets. SOEs can have strong incentives to engage in anticompetitive activities that serve to expand the scale and scope of their operations. Competition law for SOEs, however, is a body of jurisprudence to which U.S. courts and legislators have made little direct contribution. In contrast, the European Commission’s Deutsche Post decision in 2001 is an important step in the development of a competition law for SOEs. In this article, we develop a theoretical framework that explains why SOEs might engage in anticompetitive behavior. We propose a legal standard to analyze such behavior, and we argue that this standard should be more stringent than the legal standard applied to private firms.

We begin in Part II by examining the EC’s decision in the Deutsche Post case. The EC correctly found that pricing below long-run average-incremental cost (LRAIC) is inappropriate for both profit-maximizing firms and SOEs. However, a higher price floor may be appropriate for SOEs. The arguments in Parts III through V explain why. Part II also reviews standard multiproduct cost concepts, including LRAIC.

Part III examines the objectives of an SOE and the prices it will set when it pursues the identified objectives and faces no pricing restriction other than the restrictions imposed by competition in non-reserved markets. We identify conditions under which an SOE will choose to set prices below marginal production costs, even though such prices generally are considered to be predatory, and thus anticompetitive. In addition, we discuss the methods that an SOE might employ to relax a binding prohibition against below-cost pricing. We examine an SOE’s incentives to raise the costs of existing rivals and to erect barriers to keep potential rivals from entering relevant markets. Finally, we examine the implications of an SOE’s being able to achieve cost advantages in a non-reserved market by virtue of its statutory monopoly in a reserved market. These advantages can result from economies of scope between the reserved market and the non-reserved market-economies of scope that the SOE’s rivals are denied the opportunity to achieve.

Part IV explains why SOEs may have greater ability than private firms to act anticompetitively. This enhanced ability arises in part from the expanded powers and special privileges that often are extended to SOEs. These powers and privileges can help to ensure that an SOE, unlike its private competitors, does not need to recoup the costs of its anticompetitive behavior by subsequently raising prices in non-reserved markets.

Part V presents a framework for assessing the drawbacks to using the SOE’s LRAIC as the standard for determining whether the SOE’s prices in non-reserved markets are anticompetitive. Although this standard is appropriate for evaluating allegations of predatory pricing by private firms, we argue that it generally is not appropriate for SOEs. The price floor for an SOE typically should exceed the SOE’s LRAIC. The extent to which the price floor should exceed the SOE’s LRAIC depends upon a number of factors that we identify. We also explain why it is that, even though certain common benchmarks may constitute reasonable price floors in some circumstances, different price floors may be more appropriate in other circumstances. We articulate case-specific guidelines that explain the extent to which price floors should be raised above the SOE’s LRAIC.

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