Single bidding in Europe is back, and you should be worried

In the run-up to the OECD Global Anti-Corruption & Integrity Forum on 30-31 March 2017, Jeroen Michels and Patrycja Breskvar of the OECD Directorate for Public Governance look at the danger of distorted competition in Europe today.

Let’s imagine for a moment, you are taking part in an online auction for a piece of designer furniture and you are the only bidder – it’s your lucky day, right? Now imagine you wanted to take part in the bidding, but somehow the auction was set up to undermine your participation. You have little chance now of bringing that Philippe Starck chair home. Frustrated? Of course!
Now consider this: single bidding and rigged procurement processes appear to be back in Europe.

The threat of distorted competition in Europe is emerging – according to Tenders Electronic Daily (TED), 30% of calls for tender across Europe received only one bid in 2015, double the amount from a decade ago. Considering that European governments’ procurement expenses accounted for around €1.9trl in 2015, the equivalent of one fifth of GDP, the risk of bid-rigging and collusion poses real economic implications. Incidents of hampered competition, such as the case of Britain’s Nuclear Decommissioning Authority, who bent the assessment of tender requirements in order to back up the Cavendish Fluor Partnership in a £7bn tender, raise serious concerns, as do the problematic practices observed in Slovenia over the 2015 Christmas period, whereby single-bids were the case in 50% of procurement contracts announced. As a recent Economist article accurately points out, the newest members to the EU appear to struggle the most with reduced competition in procurement. Croatia is the dubious winner here, with 43% of government contracts unchallenged in 2015, Hungary, Slovakia and Romania are just some of the close runners-up.

Just as you felt the blow of hampered competition in your attempt to buy a coveted Philippe Starck chair, society as a whole pays the ultimate price for collusive activity and rigged bids.  Not only does unfair competition restrict the access of buyers and suppliers which is a major hindrance on the path to a prosperous economy, it also results in poorer quality of goods and services obtained by the public sector. This undermines public trust in government operations and has negative effects on the whole policy-making process.

When addressing the issue of bid-rigging, resources such as the Recommendation on Fighting Bid Rigging in Public Procurement, the OECD Competition Assessment Toolkit, the OECD Recommendation on Public Integrity and the OECD Public Procurement Toolbox are resources to explore. Supporting the implementation of the OECD Recommendation on Public Procurement, the OECD Public Procurement Toolbox is an online knowledge sharing platform aimed at policy makers and public procurement practitioners and organises content by principles, country cases and assessment. A constantly evolving toolbox, its content can be modified according to the needs of the public procurement community.

Passionate about this issue? Then get out of your designer chair and come join the debate at the 2017 OECD Global Anti-Corruption & Integrity Forum on 30-31 March 2017 in Paris. This global multi-stakeholder event brings together public and private sectors, civil society and academia in order to present the latest insights on anti-corruption & integrity.

Useful links

  • Check out the Forum agenda for sessions that interest you.

The public sentiment runs deep. Over half of the citizens in developed countries distrust their government and a yawning trust gap is emerging between the elite and mass populations. Among the key factors cited by citizens to explain the prevailing distrust are “wrong incentives driving policies” and “corruption/fraud”. Economic growth is at stake and the toll on society is already significant.

Rolf Alter, Director of the OECD Public Governance and Territorial Development Directorate @raltergov on OECD Insights Read the full article

While one corruption scandal follows another, committed integrity defenders are relying more and more on behavioral sciences to design compliance systems and anti-corruption policy measures – Are we hardwired for corruption or for integrity? Read the full article

The end of the bargain? And should we worry?

Price elasticity. And vice versa.
Price elasticity. And vice versa.

In the run-up to an OECD Competition Committee roundtable discussion on 30 November 2016, Chris Pike of the OECD Directorate for Financial and Enterprise Affairs looks at the concerns and the opportunities created by the increased scope for personalised pricing in the digital economy.

We’ve all felt it – the rush you get when you find a great bargain at a price way less than you would happily have paid. But will these moments continue in the digital world as shopping moves online and the scope for firms to charge different prices to different customers increases?

In the era of big data and automated pricing algorithms, firms, using increasingly sophisticated analytical tools, can – with increasing accuracy – use huge volumes of information to model and predict our willingness to pay for a product. This helps them identify how much extra profit they might have extracted from any given transaction, and if they wish, to adjust and personalise their prices accordingly to extract that profit.

Reports suggest that more than 500 sellers on Amazon Marketplace have been identified as using algorithmic pricing and that at some retailers prices can differ by 10-30% for identical products based on the customer’s location, the device they’re using, proximity to a rival’s brick-and-mortar store (paywall) and characteristics including browser configuration.

An early example is Safeway, a grocery store with a mobile app that sends personalised promotional offers on specific products to shopper’s mobile devices as they walk around the store. These could be based on the current or forecast weather, products previously purchased, regularity and history of purchasing that product, complementary products purchased that day, and whether the location of their mobile device suggests they have already passed the aisle. Whether the customer uses the offer or not, the firm can use that information in its pricing algorithm to predict the discount required for like-minded consumers.

Moreover, this information might be added to in future, particularly as data is generated by the ‘internet of things’ (online devices in cars, kitchen devices, and health devices). For example, what were they doing prior to shopping? When did they last eat? Is there an appointment they are late for? Which rival stores do they use? Which rival stores are located on their route home? What’s in their calendar for the next week? What’s on their digital shopping list (or that of other family members)? Have they ordered takeaway that week? Do they have family visiting?

So this could be really bad news for consumers that would in any case buy the product; what if Amazon now realises that I’m willing to pay a frankly irrational amount of money for the new Hot Chip album? Are they seriously going to charge me 300 euro for it? Well, if they had an exclusive on it, then they might do. Would that be exploitative? Price gouging? Should competition agencies investigate? Maybe.

But, it could also mean they set a price of 3 euro to my dad who would never dream of paying 15 euro for it, since in the digital world reproduction is effectively costless so this is all profit. It would also increase the incentive for the band to make another album, which would be great, though at some point we might wonder whether this incentivises the right things.

Moreover, if I can get it elsewhere then the information that I value the product at 300 euro has little value. So big data should be less valuable in more competitive markets? Might its value even help us identify uncompetitive markets? Again, perhaps. But, if I can’t get it elsewhere, that is if they have market power, then what?

Well firstly we should recognise that consumers might not be defenceless, they might react by withholding information and services have been developed to provide anonymity (paywall). By making it more difficult for firms to estimate a consumer’s valuation these can disrupt discriminatory pricing schemes. Alternatively, consumers might start to demand compensation for providing the information.

And even if consumers are individually vulnerable, there might be small things we can do to help empower them. For example while personalised pricing is not yet widespread, a more common approach is to send personalised coupons. These change the effective price without changing the list price and this framing can make it more acceptable to consumers who would otherwise resent being charged personalised prices. The risk of offending a sense of fairness is perhaps key, and may lead to firms facing boycotts. This may explain the proposal that firms using personalised pricing schemes should have to declare transparently to consumers that they are doing so. They might for example be required to specify whether the personalised price is higher than average or the range of prices that they are charging for the product in question.

So, the effects of personalised pricing could go either way, and they could often benefit consumers, particularly those on small budgets, so we can’t go blundering in and prohibit all price discrimination. What to do then? Traditionally competition agencies would look at price discrimination where it was used to exclude a rival, and perhaps if it threatened to distort competition in a downstream market. They have been understandably reluctant to challenge price discrimination in final consumer markets. As a default position, a presumption that price discrimination is often competitive and good for consumers is entirely sensible. However, as this discrimination becomes near perfect in its execution, and the scale of potential harm to consumers increases, the risk calculus changes and so agencies and lawmakers may need to become more open to complaints and more active in requiring transparency on pricing policy.

Links

This post is based on an OECD Secretariat paper on price discrimination

OECD Roundtable on Price Discrimination (30 November 2016)

Big Data: Bringing competition policy to the digital era

Data-driven innovation: Big data for growth and well-being

OECD Competition Committee Best Practice Roundtables

Disruptive innovation and competition in Latin America and the Caribbean

forumIn the run-up to the Latin American and Caribbean Competition Forum in Mexico-City on 12-13 April 2016, James Mancini, OECD Directorate for Financial and Enterprise Affairs looks at the competition enforcement challenges and advocacy opportunities around disruptive innovations in Latin America and the Caribbean

”Disruptive innovation” is a popular term among researchers, businesses, consultancies and journalists discussing market change. While there is some debate about the precise application of the term, the phenomenon it describes is redefining markets around the world and the Latin American and Caribbean region is no exception. Disruptive innovations in the region are fundamentally challenging traditional business models and regulatory frameworks.

Several recent examples originate from mobile technologies introduced by both large players from outside the region and locally-developed businesses. With respect to mobile taxi-hailing applications, for instance, Uber competes with local companies such as Tappsi and Easy Taxi. Financial services innovations in the region also use web and mobile technologies to target segments of the population that are cut out of traditional markets. These innovations include the development of alternative credit scores using social media and transaction data (e.g. mobile telephone top-ups), allowing low-income individuals without borrowing history to access loans that would otherwise be unavailable. Other innovations include low-cost remittance services that offer payment via utilities companies and gift cards, and mobile telephone-based electronic payment services that may evolve into a wider range of financial services. In both the financial and taxi sectors, disruptors face incumbents with established business models and extensive regulation.

In this environment, competition authorities have an opportunity to ensure that disrupted markets remain competitive ones, and therefore that consumers will benefit from innovation. This will require both conventional and novel approaches.

Competition authorities should first ensure that competition laws are enforced in disrupted markets as they are in any other market, despite the challenges that may arise. This requires an understanding of the economics underlying enforcement tools rather than the rigid application of rules of thumb. For instance, when defining a market (the prerequisite for analysing competitive effects), competition authorities are challenged by rapidly-changing markets whose boundaries may not be clear. Both overly broad and overly narrow approaches to this exercise carry significant risks of which authorities must be aware. Two-sided markets (e.g. markets for platforms that allow buyers and sellers to transact[1], such as Airbnb and eBay) must be recognised and analysed using methodologies that do not simply treat each side as a separate market. Authorities also need to be alert to more typical issues, such as disruptors abusing a dominant position in a market and incumbents engaging in anticompetitive conduct to prevent disruptor market entry. Anticompetitive acquisitions of disruptive innovators by incumbents need to be prevented. While new approaches may be required to identify these acquisitions, they should be dealt with using established approaches.

Authorities should also advocate in favour of competition when disruptive innovations affect regulated markets, which they often do by operating outside of existing regulatory frameworks. The avoidance of regulation is core to the business model of some disruptive entrants who seek to innovate in markets where regulation favours the status quo. As disruptors begin to capture segments of existing markets, incumbents call for regulations to be applied equally. This can have significant implications for the ability of disruptive innovations to produce consumer benefits. Sector regulators therefore face the challenge of balancing fairness, consumer protection, the promotion of competition and any other goals their regulation seeks to achieve.

Often, however, regulators are unwilling or unable (without legislative change) to unilaterally adapt to, or choose to ignore, innovative new entrants to their respective markets. As a result, the default response is often to attempt to prevent the operation of disruptive innovations, as has generally been the case with Uber. This approach probably has the greatest impact on smaller disruptive entrants without the resources to pay fines and undertake legal action to gain market access. In this context, competition authorities can consider being a part of, or triggering, an evaluation of existing regulatory frameworks, making use of their advocacy toolbox in order to ensure that competition and innovation are kept at the forefront.

There are many potential tools available to authorities to undertake competition advocacy in regulated markets, depending on the powers granted to them by legislation. Market studies can play a role in the early identification of competition issues and in enhancing knowledge of a market. To this end, the OECD is working with Chile, Colombia, Costa Rica, Mexico, Panama and Peru to help these jurisdictions develop their market study methodologies. In some cases, however, the identification of markets on the verge of, or undergoing early-stage, disruption can be challenging. Holding preliminary open hearings with interested stakeholders and tasking authority staff with monitoring markets for potential disruption are potential solutions, although authorities may wish to ensure that such efforts do not detract from traditional enforcement resources. Authorities can also engage in regulatory advocacy, commenting on proposed regulation and participating in the design of regulatory frameworks in response to market disruption, including the reduction of competition-limiting regulation and the development of new pro-competitive measures.

Competition authorities can also play a role in fostering collaborative links between disruptors and regulators. This encourages transparency over conscious non-compliance with regulations and can enable regulators to consider adapting their approaches to disruptors in a proactive way, rather than responding to violations in an atmosphere of controversy. As a result, outright bans on disruptor activities could be avoided in favour of regulatory adjustments. Adopting a facilitative advocacy approach could be advantageous for competition authorities in terms of encouraging the resolution of regulator/disruptor conflicts, avoiding the stifling of competitive innovations through regulation, and facilitating a broader assessment of the need for certain sector regulations given their competitive impact. Such efforts can benefit regulators, market participants and, ultimately, consumers. The OECD’s Competition Committee has identified “digital economy and innovation” and “market studies” as strategic priorities for its work over the coming years in order to help promote this outcome.

Useful links

This post is based on a background paper for a session on disruptive innovations in the Latin America and Caribbean Competition Forum (12-13 April 2016)

OECD work on market studies in Latin America

[1] For further information regarding two-sided markets, please see, for instance, Rysman, Marc (2009), “The Economics of Two-Sided Markets”, Journal of Economic Perspectives, 23(3), https://www.aeaweb.org/articles.php?doi=10.1257/jep.23.3.125.

Subsidies in Aviation: The elusive flight towards fair competition

A380_on_ground_front_shotAlain Lumbroso, economist at the International Transport Forum

Subsidies in aviation are almost as old as air transport itself. Most if not all countries at one point or another have provided public funding to some parts of their aviation value chains, be it air carriers, airports or air navigation services such as air traffic control.

This year, much attention has been focused on three Gulf carriers. Their strong growth and increasing market share, especially between Europe and points east and south, has generated concern from competitors that they are being unjustly subsidised and thus distorting the marketplace. Is this a legitimate concern or simply old-fashioned protectionism?

Although each side makes an eloquent case in the ongoing debate, some arguments do not pass muster. For example, while operating in a labour union-free environment can certainly reduce costs, it is by no means a subsidy. Airports the world over receive generous public subsidies which are passed on to their customers, the airlines. Although airlines who hub at a subsidised airport benefit most from the subsidy, it’s tenuous to affirm that a specific airline gets a subsidy and not others. Likewise, benefits accorded under US bankruptcy laws to any company that places itself under its protection should not be considered a subsidy, nor should provisions in competition law that permit the issuance of anti-trust immunity to help companies perform better together. A key point to remember here is that sovereign jurisdictions have the right to set their own labour, fiscal, bankruptcy and competition policies and legislation and, of course, as they vary country by country, they will confer comparative advantages or disadvantages to companies operating in those countries.

As accusations fly back and forth, it’s worth considering what actually constitutes a legal subsidy in aviation. Or what constitutes a balanced and fair competitive landscape, often referred to as a “level playing field”. Or fair competition for that matter. Unfortunately, none of these terms are actually defined for aviation, and simply adopting a commonly-accepted definition from other sectors may be an effective intellectual shortcut but has no basis in law.

What constitutes an acceptable subsidy is clearly defined for other industries. For example, the General Agreement on Trade and Tariffs defines what a subsidy is for the international trade of goods, but it is mute on what constitutes a subsidy in air transport, or any other service for that matter. The General Agreement on Trade of Services has so far failed to define what constitutes a subsidy and, in any case, specifically excludes air transport services from the agreement. Thus, reasonable people can disagree on what constitutes fair competition, especially when no competition law is broken.

The Chicago Convention of 1944, the key legal foundation of international aviation, speaks of equality of opportunity but not equality of outcomes. In that respect, operating in a low cost, low-taxation, non-unionised environment is opened to all airlines operating in the Gulf, with the local carrier benefiting the most simply because it has a higher concentration of flights there. The Chicago Convention only makes a single mention of subsidies, in Article 54i, where it tasks the International Civil Aviation Organisation (ICAO) Council to collect and publish information about public subsidies in aviation but fails to put an obligation on countries to report them or to set any kind of boundaries as to which type of subsidies are permitted and which are not.

While much focus has been on monetary subsidies, one cannot discount the impact of public policies and how they can favour domestic carriers. A prime example of this is how nearly all countries in the world outlaw cabotage, meaning that the domestic market is reserved for domestic carriers only, or, in the EU, that the intra-EU market is reserved for EU carriers. This can be a significant advantage for US, EU, Chinese, Japanese and Canadian air carriers, while remaining meaningless for carriers from smaller countries. A second example is how a number of countries negotiate air services agreements in a way to try and favour their home carriers rather than simply improving connectivity for travellers and shippers. Defending the interest of national carriers can arguably be a reasonable policy goal, but such a policy does have a very positive value for home carriers which does not show up in any accounting balance sheet.

Finally, one should note that most countries inject some sort of public funding into international aviation and that there exists no law, convention or treaty that forbids it or sets boundaries for country interventions, with the exception of the EU which has a legal framework for State-Aid of the air transport sector but applies only unilaterally to EU member countries, airlines and airports. While much of the attention has been on two countries and three carriers, most if not all countries have a rich history of public financing of the air transport value chain which continues to this day. Applying the remedies suggested by the Partnership for an Open and Fair Skies to all countries who have financially supported in some way their air transport industry, including the US, would significantly dampen efforts to liberalise global aviation and curtail the benefits that come from operating in an open and free market. And even when all public funding has ceased, the stock of subsidies has enabled the creation of the same global carriers and global hubs who are today calling for an end to subsidies in order to restore fair competition to the air transport industry.

So what could be done? Three things:

  1. In the absence of a clear legal framework defining acceptable and unacceptable behaviour, the first step is somewhat obvious: defining rules of conduct of what actually constitutes fair competition. Most likely through the auspices of the ICAO, countries must first define what is an acceptable and an unacceptable subsidy, a concept that right now is left wide-open to the interpretation of parties with a vested interest.
  2. Countries should agree on a mandatory, transparent and uniform reporting system for public subsidies that would inject some much needed transparency to the issue and avoid the volleys of accusations and counter-accusations we have witness this year.
  3. A binding arbitration process, preferably through ICAO, will need to be put in place and permit one country to file a complaint against another. Arbitration could lead to a monetary penalty paid by the country who granted unfair subsidies to the country whose carriers suffered from unfair competition. This monetary penalty would avoid the present situation where perceived wrongdoing is punished through traffic rights restrictions, in effect imposing a quota on the international trade of service, the most harmful of outcomes.

Useful links

ITF work on air transport

ITF Discussion Paper: What do we mean by a level playing field in aviation?

ITF Research Report: Liberalisation of Air Transport. Summary: Policy Insights and Recommendations

ITF Country-Specific Policy Analysis: – Air Service Agreement Liberalisation and Airline Alliances

Visualise well-being and win a trip to Mexico!

BLI InitiativeWikiprogress is running an infographic and data visualisation contest, with the prize of a paid trip to Guadalajara, Mexico to attend the 5th OECD World Forum on the 13-15 October 2015 for the top 3 winning entries. The winners will be awarded with a certificate of recognition during a special session of the Forum. The competition is open to all individuals, both amateurs and professionals. We especially would like to encourage the participation of young people and one of the prizes will be reserved for entries from under 26-year olds.

The aim of the contest is to encourage participants to use well-being measurement in innovative ways to show how data on well-being give a more meaningful picture of the progress of societies than more traditional growth-oriented approaches; and to use their creativity to communicate key ideas about well-being to a broad audience.

Contestants are asked to create an infographic or data visualisation that addresses one or more of the following questions:

  • How do well-being levels vary between countries, or within countries?
  • How do well-being levels vary for different population groups (e.g. for young people, the elderly, by gender, etc.)?
  • Why is it important to look beyond purely economic indicators (such as GDP) for a better picture of people’s current or future well-being?
  • How can the multi-dimensionality of well-being be effectively communicated to the general public?

Deadline for Submissions: 24 August, 2015

For more information on the contest and how to send your entry, click here.

Useful links

OECD Better Life Index

OECD Better Life Initiative

OECD Regional Well-Being

Map of well-being initiatives

Draw a datum and win a trip to Paris plus $2500 spending money!

Click to enter the competition

Growing up in Scotland, you learn that we invented everything from heat and light to the deep fried Mars Bar (for people who want a heart attack but don’t want to wait). I could go on, but the list is long and the transition to what I’m supposed to write about will get even harder, so you’ll forgive me if I tell you right now that I’d never heard of William Playfair until I started this article. Born in 1759 in the parish of Liff and Benvie (which I’d never heard of either), Playfair invented the line graph, circle graph, bar chart (used in his 1786 Commercial and Political Atlas) and the pie chart (in his 1801 Statistical Breviary).

Later in the century, famous nurse and less famous statistician Florence Nightingale developed a kind of pie chart, the polar area chart, to show that dirty hospitals had killed more British soldiers than enemy action in the Crimean War. Military operations are also behind what Edward Tufte of Yale University calls “probably the best statistical graphic ever drawn”, Charles Minard’s chart showing the losses of Napoleon’s army in Russia, along with temperatures, time and locations.

Tufte himself is a professor of statistics but he’s more widely known for his criticisms of how slidewares are used (here’s Peter Norvig’s suggestion on how Lincoln could have improved the Gettysburg Address using PowerPoint) and for his work on data visualisation. And that’s the subject of this post. We’re offering a trip to the OECD Forum in Paris next spring for the best visualisation of data from Education at a Glance, published this morning. The winner will also receive a $2500 prize courtesy of GE.

The theme is “Return on education”. The report says that people with higher (tertiary) education can expect to earn 55% more on average in OECD countries than a person without tertiary education. Those who have not completed secondary education earn 23% less than those who have.

We’ll supply the raw data and your design will be judged on understanding, originality and style. It “should encourage comparison across the countries, and should reveal the individual statistics that go into these indicators. Additional education or economic data from the Education at a Glance or other OECD publications may also be included.”

Deadline for entries is Friday, November 2, 2012, 11:59 pm EDT and we’ll announce the winner on Wednesday, November 14.

Good luck!

Useful links

If you’d like to have a go but don’t have much experience, take a look at Shawn Allen’s course at the School of Visual Arts. You’ll find lots of good advice and examples, including the ones I used here, as well as links to software.

 OECD work on education