Eric Schmidt, CEO of Google, believes that a Yahoo / Microsoft tie-up would be awful for the Internet. Schmidt issued the vague sequitur that we should all beware of, “the things that it has done that have been so difficult for everyone.” Of course, everyone knows that Microsoft is the Great Satan, so it stands to reason that anything they do should be regarded as automatically the equivalent of making baby stew.

Here, though, it is Google – owner of 62.9% of all Internet searches ($16.4 bn in ad revenue) – which dwarfs any tie up (Yahoo-Microsoft have a combined search share of 15.7% and $ 9.8 bn in ad revenue). Could it be that Google is trying to pull a Microsoft and protect its home-turf advantage from a healthy rival?

The Shock of Protectionism

Recent respondents to my weekly newspaper column here in Cape Town have expressed shock – shock – that businesses appear to actively seek protection from their competitors. Such protection naturally increasing prices and hurts consumers.

One of the easiest ways to raise barriers to competitors is through calls for the patriotism of consumers. South Africa has become one of the most regular claimants against dumping from foreign business rivals at the World Trade Organisation. For those of you not acquainted with the business strategy, I shall briefly digress.

It may horrify you to know that some countries have lower costs of labour, rent and taxes than do others. Products made there are, therefore, somewhat cheaper. When imported – even with the cost of distribution and import tariffs added on at the border – they are still cheaper than manufactures produced locally. Sometimes the results are a tad unusual. For instance, while the breast-meat of chickens is very popular in the US, thighs, wings and legs are less desirable. Eager to divest themselves of this part of the bird, US distributors sell it for quite low prices around the world.

South African companies find it hard to compete against this and so they have won a case against US chicken distributors allowing for large fines (tariffs) to be imposed at the border. This helps local producers keep their margins firmly in place and defrauds local consumers. US prawn fisherman won a similar dispute against farmed prawns sourced from China.

Suing foreign competitors for “dumping” products by selling them for less than local firms is very popular. It appeals to xenophobia and nationalism by declaring that “jobs will be lost due to the predations of these evil foreigners”. At the same time it allows businesses to keep their prices high. It is now known as the “third rail” of US trade policy.

Monopolies make slaves of us all

Companies that trade their monopoly power into influence to keep competitors out of their markets are justly held to account. So too are companies that collude with their competitors to raise prices. However, governments confuse the issue through promoting such anti-competitive behaviour in their chosen industries. Agricultural subsidies are one hefty example. Why not subsidies to US software designers?

A tax allowance given to one chosen industry is equivalent to a special tax levied against all that industry’s foreign competitors at the border. Given that other industries are consumers of the favoured industry, this raises all prices for them. American corn farmers (who receive hefty subsidies) are in competition with American software writers (who don’t). If corn farmers are protected from competition they can charge more. They pass those costs on to their customers. Many of their customers are software writers (who, even if they don’t eat corn, may eat beef which does). Higher corn prices become higher programming costs. A tax supporting corn farmers becomes a tax decreasing the competitiveness of American software programmers.

Price controls are another way that governments like to imagine they can “protect” consumers from the perils of competitive markets. Venezuela is currently out of coffee and milk. Price controls have made it impossible to import coffee, and farmers no longer milk cows when the cost of doing so is higher than what they’re allowed to charge. Closer to home (South Africa) the government’s price controls on pharmaceuticals have meant that first-line antibiotics – such as Amoxycillin – will soon be unavailable.

Not content with this state of affairs, the South African government is to introduce price controls on gas as well as legislative monopolies to protect gas suppliers.

Bulls to the wall

Price controls are like slavery; forcing people to provide their labour at a price other than it is worth. As slave-owners discovered; slaves work to their lowest ability, not their best. So too with monopolies.

A good government approach to competition is one that promotes it and keeps the competitors fighting it out, no matter how tired they are. Try and imagine a sports match with protectionism, monopolies and anti-dumping laws?

Anti-dumping? A rookie hotshot isn’t allowed to play because he costs less than the opposing team’s seasoned veterans. Monopolies? Only one team is allowed to earn advertising revenues and use them to build up their player base. Protectionism? Our star player has a cold; the opposing team has to send three of their players off to keep things even.

Good competition policy works a bit like an all out bull-fight. Even when they beg for mercy you keep them in the ring; so that the blood and bones of the losers become fertile soil for the growth of the next generation of champions.