Volume 43, Number 170,
July-September 2012
Economic Competition in Mexico:
A Much Needed Debate
Rogelio Huerta
Date submitted: August 2, 2011. Date accepted: January 25, 2012
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INTRODUCTION

The purpose of this essay is to debate with one of the persons responsible for Mexico’s economic competition policy, as well as dialogue with the errors that Ernesto Estrada (2010) makes, from my point of view, in his article published by El Colegio de México on the conditions for economic competition in this country. This essay does not seek to demonstrate the empirical conditions within which competition develops in Mexico, and does not use any statistical information regarding competition and productivity in recent years in the country. As such, the essay does not refer to a particular period in Mexico’s economic history. Rather, this work presents theoretical objections to statements from the previously mentioned author, and references non-orthodox theories of micro-economic thought. This essay seeks to confront the “single neoclassical way of thinking” about theories that have been set forth from a heterodox point of view.

Ernesto Estrada’s work (2010:125) entitled “Economic Competition” appears in the book Microeconomía (The Microeconomy), edited by El Colegio de México as part of its “Los grandes problemas de México” (“Key Problems for Mexico”) collection. He is referenced as the General Director for Economic Studies in Mexico’s Federal Competition Commission. The work begins by mentioning the following: “Economic literature and empirical evidence indicate the market competition reduces prices of goods and services for the consumer and drives productivity and economic growth.” Starting a study on economic competition in this way implies a lot. Here, we will focus on implications related to the discipline of economic theory. Specifically, I will use theoretical relationships between prices and profit margins, competitiveness, productivity and economic performance of firms in their competitive fight. I will show that competition intensity does not push prices downwards, that profit margins can be reduced due to reasons unrelated to price reductions, and that it is false to say that institutions that regulate competition bring about price reductions. Finally, in this sense, it will be demonstrated that improvements in Mexico’s productivity indicators, which also brought about cost reductions, are not necessarily due to technological improvements but rather to lower levels of employment.

Let us suppose that the author E. Estrada has a thorough, or at least substantial, knowledge of literature on economic competitiveness. His knowledge would lead him to conclude that in the theoretical models, the greater (or more intense) the competition, the lower prices for goods and services fall for the final consumer. This is one of the most important conclusions of conventional microeconomic theory. However, when his essay is read closely, doubts arise regarding his knowledge.

Known economic science and available literature do not allow us to state unequivocally that competition reduces prices. Thus, if the number of competitors increases in a market, and this pushes supply above demand, this could lead to a disappearance of bidders. Conversely, if demand exceeds supply, the quantities offered through the use of installed leisure capacities would increase. These are the conclusions we can draw from post-Keynesian microeconomic theory (see Sylos Labini, 1998; Steindl, 1979; Lavoie, 2005, among others).

It is worth proposing a few questions to define the objective of Estrada’s research. Under what conditions can a competition policy reduce prices? In light of this question, more related questions arise. What is understood by market price reduction? How can we establish a relationship between competition and prices? The question regarding market price reduction may seem rhetorical, but it is not. For some people, price reduction for a good or service does not mean absolute reduction, but rather a drop relative to other goods. That is, even though the absolute price may have gone up, these economists say it has fallen in relative terms. From this point of view, if a price of a good goes up by x percentage – and prices for all other existing goods go up by a higher percentage – the consumer would say that prices for all goods have gone up, while an economist would observe that in relative prices, the price for the first good has fallen. For that reason, it is important to clarify what is understood by price reduction for goods and services for the consumer. In a partial equilibrium model, price reduction implies an absolute drop in prices. In a general equilibrium approach, beyond the relative fall in a particular price, a reduction in general prices is called deflation.

Regarding Estrada’s declaration that “empirical evidence indicates that market competition reduces prices of goods and services for the consumer,” we would have to investigate, in statistical terms, what has really occurred with the evolution of general price levels in Mexico since our country opened up to foreign competition. At first glance, any observer could note that since 1994, and even before, since 1986 (when Mexico joined the gatt), the general level of prices has not fallen. On the contrary, the year on year tendency has been upwards. It can be said that prices for merchantable products rose less than for non-merchantable goods and services due to greater competition, a result of opening up to foreign markets. This may be true, but it does not mean that the price for merchantable goods fell. Rather, what we have experienced is a lower growth rate in domestic prices. Now if we talk in terms of relative prices, then it can be said that prices fell for some goods, even though the general level of prices rose.

This work will also touch briefly on the section of the original declaration from the article referenced, which refers to the fact that market competition drives productivity and growth, as both topics deserve further investigation. We will focus on the relationship between competition and price movements and profit margins.

* Professor of Economics at the unam. E-mail:rhuerta@unam.mx

Published in Mexico, 2012-2017 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 192, January-March is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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