In July 2017, it will be 70 years since Asia's first-ever antimonopoly law came into force in Japan. In the early years following its introduction, regulators had great difficulty enforcing the law. However, as deregulation and globalization became the norm of the Japanese economy, the enforceability of competition policy improved significantly through a substantial increase in the rates of administrative surcharges and stricter application of the law. Implemented in more than 120 countries around the world, competition law has now become a critical piece of legal infrastructure upon which businesses operate whether in Japan or abroad.
Today, Japan's competition policy is coming to a major turning point, as the country is faced with two big trends: 1) a rapid decrease in population and 2) the advent of the fourth industrial revolution. In what follows, I would like to explore the future directions of Japan's competition policy in keeping with these two structural changes.
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First, Japan needs to cope with an unprecedented demographic challenge, i.e., a rapidly declining and aging population. In response to the shrinking domestic market, some companies have been making structural adjustments to reduce excess capacity. Typical examples include the merger of Nippon Steel Corporation and Sumitomo Metal Industries, Ltd. as well as that that of JX Holdings Inc. and Tonen General Sekiyu K.K.
An analysis of steel companies' financial data for the past 10 years shows that the degree of market concentration as measured by the Herfindahl-Hirschman Index (HHI) has decreased globally but increased in Japan (Table). Although a more detailed analysis is required, we can see that the consolidation of the Japanese steel industry is a phenomenon unique to Japan, a country faced with a rapid population decline.
Table: Changes in the Degree of Market Concentration (HHI)
||Market growth (%)
|Source: Created by the author based on Capital IQ. The degree of market concentration and the size of markets are based on total gross revenue.
The consolidation of industries have two contradictory effects. One effect is to restrain competition resulting from a decreasing number of companies, and the other is to create synergy and improve efficiency. While the former effect is detrimental to consumer interest, the latter is beneficial. Thus, which of the two effects the Japan Fair Trade Commission (JFTC) expects to dominate has a significant influence on its decision over whether or not to approve a proposed merger.
Meanwhile, it is known that the size of market shares held prior to a merger does not constitute sufficient information for the JFTC's decision making over proposed mergers. As such, the JFTC has been conducting detailed examination, including quantitative economic analysis, as needed on a case-by-case basis.
For instance, in the case of a merger in a region with a declining population, where users' bargaining power is relatively weak and competitive pressure from outside is unlikely, it is no wonder that the effect of restraining competition is deemed to outweigh that of improving efficiency. Indeed, in a series of retail merger cases reviewed in the past several years, the JFTC ordered merging companies to sell some of their outlets to other operators as a remedial measure to resolve anticompetitive concerns.
At the same time, however, attention must be paid to the possibility that users may leave the region when the resulting anticompetitive effect is too strong. Even in the absence of any substantial competitive pressure from nearby regions, the scope of the market defined from the perspective of those on the demand side extends beyond the region's geographical boundaries, if the same goods and services are available in places to which users have relocated. In this case, the anticompetitive effect of a merger is limited.
A rapid decrease in a regional population, combined with a lack of progress in much needed reorganization of domestic industries, may result in the unavailability of certain essential services in the region. In cooperation with other government agencies, the competition authority needs to explore ways to enhance industrial competitiveness in a way conducive to the interest of users.
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The second challenge facing Japanese competition policymakers is market concentration associated with the advent of a digital economy. In the information technology (IT) industry, the degree of market concentration has increased in tandem with the remarkable growth of the market (Table). The fact that the degree of market concentration is rising in the world of the Internet, which is supposedly the leading advocate of a free and open environment, has been drawing much attention from U.S. and European competition authorities.
Behind this development is the fact that the advancement of IT and computers has made artificial intelligence (AI) commercially viable as a tool to achieve a significant increase in productivity.
In the area of business to consumer (B2C) services, a business model that seeks to earn advertising revenue by combining AI with search engines was quick to emerge and take root. By offering search engines free of charge, Internet service providers not only collect information from consumers as to what words they use in a search query but also link the information to the relevant email accounts and video data, thereby monetizing highly precise user information. Consumers, for their part, view advertisements and other information finely tuned to their preference in a timely manner in exchange for offering information on the words used in a search query and their browsing history to service providers.
By collecting multidimensional information on diverse consumers, service providers can further customize services to individual consumers. The greater use of customized services by targeted consumers will lead to further accumulation of data on such consumers. When there is synergy between the accumulation and use of data, the relationship is described as having a network effect. A situation in which network effects are at work generates clear winners and losers, i.e., those capable of accumulating data and those who cannot, resulting in an oligopolistic market.
In recent years, U.S. and European competition authorities have been taking a closer look at the relationship between data collection and market concentration. In 2016, German and French competition authorities—the Bundeskartellamt and the Autorité de la concurrence respectively—published a joint report on data collection and its implications for competition law. The U.S. Federal Trade Commission has also published a paper on big data. As a matter of concern from the perspective of competition law, U.S. and European authorities point to the possibility that data hoarding by incumbent players may deprive newcomers of opportunities to provide new services. Indeed, such practice may hamper the revitalization of industries by nipping the buds of technological innovation.
Likewise, in the sphere of manufacturing, concerns are growing over data collection amid the rapid penetration of AI technologies in business-to-business (B2B) services. With the introduction of sensor and other relevant technologies to factory floors and research and development (R&D) laboratories, which have not been subject previously to data collection, it is now becoming possible to visualize Japan's spearhead manufacturing technologies by collecting and utilizing big data.
Such visualization is desirable in that it enables manufacturers to improve the efficiency of factory and R&D operations. At the same time, however, there arises concern that Japanese manufacturers may end up having their ways of working imitated by overseas rivals. When analyzed quantitatively, R&D or production know-how becomes easily reproducible on computers, enabling overseas manufacturers to replicate the technologies held by Japanese manufacturers. In this regard, the promotion of the fourth industrial revolution is a double-edged sword that comes with the risk of losing Japan's competitive advantage in manufacturing.
In other words, we are entering the era in which companies cannot afford to ignore data, whether they compete in B2C or B2B services.
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This suggests that we have reached a stage where we must consider a competitive environment for data collection and utilization, going beyond the traditional competitive policy framework that is confined to goods and services. Given the reality that it is virtually impossible for the general public and consumers to keep track on how data on themselves are shared and utilized by service providers, the ownership and utilization of data should be clarified as is the case for goods and services.
A new concept called "personal data store (PDS)" is emerging as a mechanism designed to encourage individuals to manage their own personal information by having service providers return collected data to their original owners. While applying this concept to the world of B2B services, the government should launch an across-the-board discussion with the aim of establishing the rights of ownership to data and the rights to use data.
In order to strengthen the competitiveness of Japanese industries, it is imperative to create an environment that enables the safe and secure circulation and utilization of data. The competition authority must establish an organizational structure and develop expertise needed to investigate and crack down on problematic behavior such as hoarding data or otherwise distorting completion unfairly or unlawfully.
The Basic Act on the Advancement of Utilizing Public and Private Sector Data entered into force in December 2016, and the revised Act on the Protection of Personal Information is set to take effect in full in May 2017. However, it is only with the presence of a competitive playing field that the circulation and utilization of data, as provided for under these laws, will truly improve the convenience of people's lives.
>> Original text in Japanese
* Translated by RIETI.
March 22, 2017 Nihon Keizai Shimbun