Competition enforcement plays an important role for policymakers. Used as a tool to maximize the benefits of a market economy, competition enforcement protects consumer welfare while cultivating innovation with a total welfare perspective. Accordingly, there are numerous possibilities to integrate competition enforcement into the overall economic policies.
Policymakers should use a cautious approach while defining the function of competition enforcement. This includes establishing a balance between short-term policies to protect consumer interests and long-term policies to nurture a competitive market structure. In periods of economic turbulence and hyperinflation, policymakers tend to prioritize the short-term protection function of competition law over its long-term impact on maintaining structural competitiveness.
This balance is particularly important for emerging economies such as Turkey. As an emerging economy, Turkey's public policies follow a multidimensional agenda. This includes remedying acute issues including hyperinflation and currency fluctuation, while enhancing the investment landscape by improving corruption ratings and restructuring incentives1. Accordingly, it is critical to determine a meaningful and efficient function for competition law enforcement in the context of overall economic policies.
This issue has recently come under the spotlight in Turkey, amid a stark warning issued by the Minister of Treasury and Finance.
Şimşek's comments
Turkey's tax administration launched an investigative campaign against unjustified price increases. As part of the popular discussion on price gauging, unjust price increases are usually defined as pricing behaviors that are not justified by an increase in costs or other economic factors. Minister of Treasury and Finance, Mehmet Şimşek, highlights that these pricing behaviors are prone to cartelization and anticompetitive conduct. Spearheading Turkey's economic policies, Şimşek was specifically mandated to lower inflation and combat devaluation amid formation of the current cabinet.
In a statement last week, Şimşek said he would not allow companies with market power to abuse their dominance by such pricing conduct. Şimşek's comments targeted bad actors that unjustly increase their prices while evading taxes by falsifying earning reports. Drawing a straight line between tax evasion and anti-competitive behavior, Şimşek states that tax evasion creates an unfair market structure. In turn, such bad actors achieve more market power and continue abusing their position by establishing price cartels and hindering consumer welfare.
Şimşek's statements come as a strong warning to the business community operating in the country, which is a part of his ongoing efforts to restore trust in the Turkish economy. While Şimşek does not specify which policy tools he will use to implement this investigative campaign, the Competition Authority and Tax Audit Board seem to be the tip of this spear.
Indicators of potential violations
Şimşek's comments also introduced new indicators for potential violations of competition rules and tax codes. For instance, Şimşek indicates that the Ministry will scrutinize companies with profit margins above the sector average but do not reflect such increase in their tax declaration will be scrutinized. In other words, the Ministry indicates that it will consider profit margins above the market trends as a sign of potential violation.
Similarly, companies with earnings below market trends will be scrutinized for potential tax code violations. The Ministry plans to focus its investigation on the tax records of the last five years.
Şimşek also set forth that they will compare domestic prices of products with their prices in foreign countries. If the price of a product in foreign countries is considerably lower than its domestic price, and such difference cannot be explained by import costs (such as customs tax, transportation, or warehousing), the Ministry will scrutinize this as a potential violation.
All in all, Şimşek's comments indicate that regulators will be chasing new indicators for potential violations of antitrust rules or the tax code. Such indicators include increasing prices while costs remain stable, having profit margins that exceed market trends, or declaring diminished earnings to mitigate tax burden. Şimşek also indicates that the Ministry will scrutinize companies with considerable market power or that control a significant portion of the market via cartelist behavior with other players.
Reflections on Şimşek's comments
Undoubtedly, competition law is a useful tool to scrutinize price increases and investigate whether there is anticompetitive conduct behind such pricing behavior. That said, competition law is not a suitable enforcement tool to determine unjust pricing behaviors, especially in the absence of anticompetitive conduct. Hence, it is important to distinguish the root cause of the pricing behaviors in the market and deploy an accurate policy tool to combat its impact on consumers.
While Şimşek's comments indicate that the Ministry plans to take decisive action against actors that abuse the Turkish economy, the policy tools to be used in such endeavor remains to be seen. The Ministry has a great arsenal of tools, policies, and authorities to interfere with bad actors. Sectoral regulators and the Competition Authority also have their designated enforcement practices. Accordingly, policymakers need to establish effective communication and delegate regulatory responsibilities in a meaningful and efficient manner. In the absence of a centralized regulatory strategy, different public authorities may scrutinize similar issues, which would raise redundancy and inefficiency. It is also up for debate in the legal chambers whether enforcement action that target high prices provide effective an solution.
Nonetheless, Şimşek's comments raise a red flag for the Turkish business community. Bad actors that hinder consumer welfare via tax evasion or anticompetitive conduct are likely to face regulatory scrutiny and hefty penalties. As Turkey concentrates its efforts on remedying hyperinflation and creating a competitive investment landscape, regulatory authorities will remain an essential tool to implement the overall economic policies.
Footnote
1. For additional context on the interplay between inflation and competition law, please refer to here.
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