Monopsony: the Missing Element under Ethiopia's Anti-Competition Law

Mar 19 , 2022
By Yehualashet Tamiru Tegegn

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Monopsony allows strong players in the market to push wages down to reduce labour costs and maximise their profits, worsening economic inequality. Ethiopia is trying to address this problem using labour regulations. It should look to its anti-competition laws, writes Yehualashet Tamiru Tegegn (yehuala5779@gmail.com), a lawyer, consultant and researcher.

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There are some fundamental issues of economic organisation when a society lives together. It entails what to produce, how much, by whom, to whom, using what resource, and for what reward. These are perhaps the main fundamental questions any economic theory tries to address. In addressing these main issues, there will be three critical organs: sellers, buyers and government. Hoping to enhance their profit, sellers might attempt to engage in anti-competitive behaviours. This will affect the buyers, the market and the economy at large. The government is entrusted to regulate such anti-competitive behaviours.

The theory suggested by mainstream economists largely does not fit the real world. They presume the existence of perfect competition in the market, which in turn is based on five basic assumptions.

The first is that there are sufficient numbers of producers in the market that act independently of each other with more or less the same impact and size in the market. The other assumptions are that the sellers in the market are primarily motivated by profit maximisation; that all of these producers have the same product offered to the market; and that all the means of production have the same level of value and productivity with no free-riders in the economy. The final, yet essential, assumption is information symmetry between the seller and the buyer about the market. The buyers have the same knowledge and expertise as the seller who made the product. However, none of these assumptions is practical in real life.

The market economy relies on individual self-interest and the dynamic force in the economic system. On the other hand, traders may seek to increase profits by methods like price fixing and cartels. Such behaviour by dishonest traders distorts the market and ultimately paves the way for unfair trade competition. The anti-competitive traders will eliminate the broader market opportunity and possibility. This necessitates government intervention.

In the biggest economy in the world, the United States, it was only in 1890 that anti-competitive regulation was initiated by Senator John Sherman, who introduced two separate yet interrelated bills: the bill on rights and the charter of liberty. The US Supreme Court stated the very purpose behind these bills in a case:

"The Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade," it put forward. "It rests on the premise that the unrestrained interaction of competitive forces will field the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social situations."

In this regard, Ethiopia’s experience is not much different but historically much ahead of the US. As far as the modern legal system of Ethiopian can be tracked, it was the Fetha Negest that can be cited as comprehensive law.

"Whatever involves fraud in sale is bad. And it is forbidden to estimate price unjustly to forbid what is permitted or to obstruct the purchase of basic necessities like food, cloth or shelter as to greatly increase their price,” it states.

Immediately following the Italian occupation, there was quite a shortage of supply of basic goods and merchants began to demand inflated prices beyond and above the market value. To avert this, the government introduced anti-competition laws. Through this proclamation, the precursor to a Trade Ministry was given the mandate to fix a maximum price of all imported products and prevent any hoarding of essential commodities. The same Ministry was mandated to regulate prices in the service industry.

This law mainly dealt with price regulation, which is one but not the only aspect of anti-competition law. It was only in 1963 that Ethiopia enacted the first comprehensive legal framework to regulate anti-competitive behaviour, which was ultimately promulgated as a proclamation.

Under this, unfair trade practice was defined as, “The act of any one person or of several persons by way of actual or tacit agreement, arrangement or informal understanding having or designed to have the direct or indirect effect of restraining or injuring trade or the free competition therein or any monopolistic, profiteering or discriminatory activities which operate or are likely to operate against the interest of public whether consumers, producers, dealers or others.”

The growth of the private sector was completely halted after the Dergue, a provisional military government, took power and subsequently adopted socialist forms of government and economic ideology. Between 1974 and 1991, the role of the private sector was insignificant. The then government passed a proclamation that prohibited trade practices that were considered to be contrary to fair business practices.

However, after the fall of the Dergue regime, the EPRDF came up with a new economic structure and ideology. Because of privatisation and trade liberalisation, competition amongst traders became inevitable. In the free-market economic system that the current government has opted to follow, maintaining free and fair competition between traders by prohibiting anti-competitive behaviours is not only enhancing market efficiency but also beneficial to the community at large. With this in mind, the government issued a trade practice proclamation.

The prevailing consumer protection and anti-competitive regulation incorporated three main objectives that can be used as justifications for its presence. The first and foremost objective is promoting free and fair competition between producers. The second is controlling monopolies. The third is safeguarding public health and safety.

The term monopoly envisages a scenario where there is only one supplier in the market. This type of monopoly is common and frequent, but this is not the only form. There is also monopsony. Joan Robinson, a renowned economist, first used the term, referring to a single or dominant buyer in the market with multiple suppliers.

One of the objectives of the proclamation is the protection of consumer welfare. There is a misallocation of resources both in monopoly and monopsony. There is a restriction of supply to create artificial price inflation and a limitation of demand to create artificial price deflation in the market, respectively. Monopsony in the labour market is similar to monopoly in the product market. In monopsony, the firm or the employer is a price maker rather than a price taker.

On its face value, price deflation seems very attractive for consumers. However, this monopsony problem in the labour market causes depression of wages and huge economic inequality. As there are not enough competitors in the market that force them to push wages up, they can reduce labour costs to maximise their profit.

For instance, if there is a non-poaching agreement between firms not to hire each other’s employees, such an agreement not only limits the movement of labour but also depresses wages below the market price as there is no opportunity to be hired by others in the same industry.

In this case, there is a price effect transfer from the worker class to that of consumers as they get a reduced price product, which in turn increases consumption. But the workers always receive a lower wage than what the market provides.

Ethiopia's existing law only condemns the supplier-side of anti-competition behaviours but does not indicate that any merger between firms could be challenged for its injury on the buyer-side of the anti-competition effect. For now, anything related to employment seems to be governed by a separate legal regime called labour law. However, the distinction between labour and anti-competition law is what A. Litwinski, an economist, described as “Siamese twins unhappily separated at birth.”

Labourers need to bargain for higher wages. However, this wrongly assumes that the bargaining power between the labourers and monopsony firms is comparable. It will not be true until monopsony is regulated using competition laws rather than labour proclamations.

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PUBLISHED ON Mar 19,2022 [ VOL 22 , NO 1142]

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