Regulatory Reform, Competition, and Innovation

Discussions of competition and
regulatory reform typically focus on price and quantity
effects. But improving certain infrastructure services can
also stimulate entry, and competition in user industries
downstream, allowing new firms to enter, incumbent users to
offer new products, and rivalry to intensify. The authors
present a case study of how innovations in road freight
services affect selected downstream users of those services
after regulatory reform. After a period of rigid regulation,
and heavy government interference, Mexico in 1989 developed
a new policy framework for road transport, with free entry,
and market-based price setting. The result: faster, more
reliable trucking has allowed user companies to offer new,
previously unavailable products, and to reach new areas with
existing products. Cheaper, more customer-responsive
trucking services have allowed logistical innovations in
user firms, and some user firms have decided not to keep
their own fleets of trucks, but to outsource trucking
services on the open market, thereby converting fixed costs
to variable costs. For one fertilizer company, the benefits
of reform included a ten percent improvement in operating
margin. Successful reform requires careful planning and
execution, and political support at high levels. Regulatory
reform also profoundly changes the sectoral institution
formerly responsible for the regulation. Enough resources
should be provided to help organizations in the reformed
industry make the transition to the post-reform environment
- helping with such tasks as defining the organizations new
role, and facilitating the redeployment of staff. The
national competition agency can help greatly in laying the
groundwork for reform by making a compelling case for the
reforms expected benefits. After reform, the competition
agency should also help with enforcement, to ensure that the
cozy, cartel-like behavior stimulated by tight entry
restrictions does not persist. In Mexico, three strong
interventions were required to discipline attempted
anti-competitive practices in the trucking industry in the
years following reform.