Between Sheltered Giants and Glorified Weaklings:

Monopolies and Perfect Competitions in the Philippines

 My father was a monopolist. Everybody knows him, at least in our neighborhood. He used
to wake up at 2:00 in the morning, ride a jeep from Las Pinas to Paranaque. Whenever my friends
asked what my father had been doing for a living, I simply told them he sells coffee. He became a
favorite by guaranteeing a quick delivery of their morning coffee wherever they were, even if they
were half a kilometer away, selling fish in Bulungan. Only when I grudgingly met him one day to
ask for my baon that I realized he quite literally monopolized the market. Thus, I am biased
towards Peter Thiel, Donald Trump’s economic advisor and billionaire founder of paypal, when
he declared that “competition is for losers” [1].
Competition and self-interest are the two opposing forces of Adam Smith’s Invisible Hand.
Self-interest is the motivator of the economic activity, which guides the choices of the people to
prioritize their own benefit and gain. Left unchecked, this force might lead to corruption and
cheating. A competitive environment regulates the self-interest of the people in the marketplace.
The only way to sell is to have cheaper and better products. If a seller takes advantage of his
customers in any way, the customers will flock to his competitors.
In the real world, there are cases where state interventions becomes necessary. The
government has the capacity to correct market failures from externalities like pollution. For
example, if a factory release pollutants to a river, the government might intervene by regulating
the production of the factory or by taxing the polluter [2].
The ideal degree of self-interest, competition, and state intervention has been subject to
debate for hundreds of years. Adam Smith in his book The Wealth of Nations (1776) advocated
Laissez-faire, a market free from government intervention. Das Kapital (1867) led to Marxian
movements, which supported a system where the state has the complete control over the entire
economy. In the 20th century, Keynesian economics and other numerous theories were developed.
Oscillations in capitalism and among economic theories proved that situation is not reducible to
black and white [3]. In the same way, listening to the deafening disputes on the dynamics of
competition and the necessity of antitrust laws around the world, it can be argued that the resolution
lies somewhere in between the extremes.
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In 2015, I had the chance to be a student assistant in a government project. I was thrilled.
It was my first paying work. My job was to arrange the bidding specifications for electronic
components and equipment. However, instead of receiving the details from my senior, I was asked
to find a random supplier online and then narrow the bidding specs such that only the particular
supplier would fit the terms of reference. The rationale was that a long bidding process will only
cause unnecessary delay for relatively low-cost materials. Before I could finish the work, I was
transferred to a different project. However, that particular incident still bothers me. It was unethical
at best and illegal at worst.
The importance of fair competition seems obvious. Jose Rizal opened his own sari-sari
store in Dapitan to fight with the Chinese merchants, who according to him “do nothing but cheat
the Indios” [4]. He even organized the Cooperative Association of Dapitan Farmers to break the
Chinese monopoly on hemp by improving their products and reducing the barriers to entry [5]. By
introducing competition, he intended to cut cost, have access to more options, and produce higher
quality products.
A monopoly is inherently less efficient than a perfect competition. By having exclusive
control of resource, a monopoly has the power to control the price by limiting the output. Thus,
monopolies like the Chinese monopoly in Dapitan, have the natural ability to raise its profits at the
expense of the consumers. Google for example, who has a dominant market position, has 100 times
higher profit margin than the competitive airline industry. As monopolies already have the power
to dictate the price, they may have no incentive to drive down their average cost.
Less competition also meant less consumer choice. The dismal state of internet connection
in the country, partly due to the duopoly in the telecom industry, has lead Chinese tech billionaire
Jack Ma to quip that “it’s no good” [6]. More resources allocated to branding can also prevent new
competitors from entering. As a student assistant, I personally experienced unintentionally
favoring suppliers with dominant market position over newer firms.
Most dangerous of all, monopolies and dominant firms have the tendency to remain in
power. Firms may intentionally reduce the price to bankrupt its competitors. Refusal to deal is
another anti-competitive behavior [7]. In a vertical refusal, dominant firms refuse to do business
with a supplier or customer unless they comply with certain obligations. In 2010, CDO Foodsphere
complained that the voluntary loyalty program of Century Pacific Group is anti-competitive [8].
The program gave incentives to retailers that only sell Century products, blocking the entry of
CDO products in local outlets. A form of horizontal refusal to deal are cartel agreements, like the
recent garlic cartel where the traders agreed to create an artificial shortage of garlic [9].
 Finally, concentrated markets also have more power to influence the government to change
the rules to benefit the lobbying companies. Giant firms and monopolies have the terrifying ability
to be self-perpetuating.
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My father failed to adjust to the advent of cheap coffee vending machines. Without
constantly searching for ways to generate a superior, more convenient and cheaper product, he lost
his business. Economists argue that monopolies have no incentive to innovate. However, Federico
Etro of University of Milan argues that a monopoly acts more competitively than previously
thought and consequently, invests higher in research and development than in perfect competition
[10].
In Zero to One (2014), venture capitalist Peter Thiel presents his provocative argument that
competition is for losers. According to him, monopoly is the natural order of things especially in
the tech industry. Google, Facebook, Amazon, and similar tech giants were dominant players in
their markets, but they are some of most innovative companies of all time. The most dominant
firms actually has more incentive to keep innovating than other players and stay on top.
It is important to note that the state already protects firms that became dominant due to
brilliant innovations. Patents are forms of temporary government-granted monopolies. Thus,
patents are usually seen as barriers to entry for new firms. Supposing we wanted to achieve a
perfect competition to maximize efficiency, then the power of patents and licensing agreements
should be softened. However, this also suppresses the incentive to innovate.
In perfect competitions, ruthless rivalry drives down profit. Thus, firms become fixated to
achieving marginal gains. Due to its high profits, monopolists can afford to allot more resources
to research, its workers, and its social responsibility in the world. Monopolies also enjoy
economies of scales where the average product cost decreases with product quantity. Dominant
firms become large enough to cut the overall price.
The brutal cutthroat atmosphere also strains the competitors. In Thiel’s example, three
Michelin stars Bernard Loiseau said in 2003, “If I lose a star, I will commit suicide.” After a
newspaper implied his restaurant would shortly lose its status, Loiseau killed himself [1].
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Obviously, there is both merit and flaw in Thiel’s arguments. In today’s world, we are
used to listening to the most radical views that we forget that there is a middle ground, a synthesis
of the extremes. Thiel presents a seemingly compelling argument for monopoly and against
competition. However, his critique only revolves around perfect competition, not competition per
se. Prof. Peter Klein in his review of Thiel’s book said it best, “A better title: Perfect Competition
Theory Is for Losers" [11].
Economist Philippe Aghion published a paper showing an inverted-U relationship between
market concentration and innovation. In August 2017, Anna Bykova confirms this relationship
using empirical evidence on the Russian manufacturing industry [12]:
“…there is an inverted U-shape relationship between innovation and
concentration: starting from a very concentrated market, new entrants will
increase competition and incentives to innovate. However, at some point this
effect will reverse and more competitors will wear away potential profits
from innovation, which will decrease investments in R&D.”

This meant the there is an innovation peak between the monopoly and perfect competition.
Thus, the objective is to find the ideal market concentration for an industry to achieve optimum
innovation and provide a trade-off between the merits of a highly profitable monopoly and a highly
efficient perfect competition. An excellent method of controlling the market concentration is using
competition policies.
The 1987 Constitution already provided an anti-monopoly provision. In 1997, the Supreme
Court said, “Section 19, Article XII of our Constitution is anti-trust in history and in spirit. It
espouses competition. [13]” However, a Philippine Competition Act was only passed in 2015. The
law creates a Philippine Competition Commission (PCC), a government entity solely focused on
ensuring fair competition in the market.
One of the functions of the PCC is reviewing Mergers and Acquisitions (M&A) in the
market. This prevents firms from unfairly obtaining market power and preventing firms from
actually abusing those powers [7]. The review of M&As can be valuable tool for the state to steer
the market towards its optimum market concentration.
As expected, critics of the law are vocal and insistent. Jemy Gatdula from the
Businessworld said, “The Philippine Competition Act works on this quite simplistic assumption:
monopolies are bad and government is the solution” [13]. Sadly, the only simplistic assumption is
his own statement.
 Reality is more nuanced than hasty generalizations. Competition policy by itself can never
address all market failures and economic issues. It redistributes opportunities, not income, for all
firm sizes and economic classes. Regulations and other state-intervention strategies can
complement competition policies in achieving a healthier and fairer Philippine market.

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References:
[1] Peter Thiel, “Zero to One”, 2014
[2] International Monetary Fund, “What Are Externalities?”, 2010 retrieved from
http://www.imf.org/external/pubs/ft/fandd/2010/12/basics.htm
[3] Wolff, Richard D., “ Contending Economic Theories”, 2012
[4] Bryan Anthony C. Paraiso, “Did Rizal consider Retracting while in Dapitan?”, NHCP
[5] Dipolognon, “Rizal’s Exile in Dapitan”, 2010 retrieved from
http://dipolognon.com/dapitancom/rizal%20sa%20dapitan2.htm
[6] Ian Nicolas Cigara, “Jack Ma tests internet in Philippines: Not good”, Philippine Star, 2017
[7] Erlinda M. Medalla, “Understanding the New Philippine Competition Act”. Philippine
Institute for Development Studies, 2017
[8] GMA News, “DTI won't stop Century Tuna's 'monopolistic' practice”, 2010
[9] Paolo Romero, “Cynthia Villar hits resurgence of garlic cartel”, Philippine Star, 2017
[10] The Economist, “Slackers or pace-setters?”, 2004
[11] Peter G. Klein, “Peter Thiel on Monopoly and Competition”, MISES WIRE, 2014
[12] Anna А. Bykova, “The Impact of Industry’s Concentration on Innovation: Evidence from
Russia”, Journal of Corporate Finance Research, 2017
[13] Jemy Gatdula, “Now is not the time to rush a competition law”, 2015