Competition Law in Guatemala: Are the Foundations Correct?

We have been hearing that, as a country, we “urgently need” competition law and that without it, we will not emerge from poverty. However, the situation is not quite as straightforward.

Firstly, we do have a competition authority and we also have competition laws. What is the problem then? From an economic understanding of the matter, I dare to think that those calling for this law do not understand the dynamic process of the market: competition.

They are spreading the notion that, without the law, there are and will be market concentrations and high prices. However, one does not necessarily lead to the other. High prices usually arise when entry barriers are very high. We have two types of barriers:

    1. Natural barriers to the economic process.
    2. Artificial barriers created by laws.

This is where the party gets lively. In a dynamic and unregulated competitive process, concentrations may lead, in some cases, to high prices for a good or service. However, this is positive for the market itself as it indicates that there is room for improvement in the good or service and to offer it at a better price and/or better quality. Since the market is not regulated by laws, the barrier to entry will be the reputation (commercial fame) of the current supplier or capital requirements, or both.

Fame keeps the consumer captive, while capital requirements keep competitors at bay. Once someone can break through these barriers, their position will falter, and new competitors will enter that market. Now, with regulated markets, the barriers are not fame or capital, but laws. There isn’t much a private agent can do against that.

A current example is the recently proposed Consumer Protection Framework Law. Such laws create enormous barriers to entry that are impossible to overcome for new agents, mainly small and medium-sized ones. Similarly, they favor the large ones who now see their interests protected by these regulations.

Likewise, price controls, licenses, quotas, government procedures, and permits. Not to mention, competition laws that are beginning to become barriers themselves against the dynamism of the market.

Why are they proposed? Because there are schools of economics that start from a serious mistake: the model of perfect competition. It is a flawed model that prevents the competition process itself. When we pretend that there exists an extensive group of suppliers with equitable market shares, forced by law, we cause a slowing down of the competition process. Competition seeks such efficiencies that it leads to natural concentration, challenged by potential competition. These concentrations are what create space to want to risk, fame or capital, to compete for the large portion. A competition law with the idea of perfect competition hinders that incentive, generates a new barrier to entry, and causes an inefficient process in the market that harms the consumer.