How Governments Promote Monopolies: Public Procurement in India

• Date: 01 November 2019
• Published date: 01 November 2019
• DOI: http://doi.org/10.1111/ajes.12300
• Author: Yugank Goyal

How Governments Promote Monopolies:

Public Procurement in India

By Yugank goYal*

abstract. Government officials exert tremendous power when they

buy goods and services from private companies. By setting the terms

and conditions under which public procurement takes place, public

officials help determine which companies will thrive and which ones

will fail. This is one of the important ways governments help create

and sustain monopolies in the private sector. But since the bidding

process to sell products or services to the government is supposed to

be an open and fair competition, how does it become skewed toward

businesses that already dominate markets? We examine a particular

source of bias: the eligibility criteria for bidding in public procurement

tenders. These criteria often allow a few large, private companies to

bid on government contracts, but they exclude a large number of

small and medium-sized enterprises. We study the terms by which

offers are solicited in India through tenders floated for transportation

projects: roads, highways, bridges, and civil construction. We find that

the eligibility criteria impose an unnecessarily heavy burden on small

firms, potentially knocking them out of the competition and

discouraging them from participating in other procurement processes.

In this way, the process reinforces monopolies instead of breaking

them up. While this study focuses on India, the results also apply to

similar economies.

1. Introduction

As powerful economic subsystems, monopolies influence every aspect

of society.1

In any society where economic power is concentrated

in the hands of a small number of business owners, the aspirations

of a majority of people will be frustrated. If most capital flows into

a few large businesses, fewer people can start their own successful

American Journal of Economics and Sociology, Vol. 78, No. 5 (November, 2019).

DOI: 10.1111/ajes.12300

© 2019 American Journal of Economics and Sociology, Inc.

*Associate professor of economics, O.P. Jindal Global University. Email: ygoyal@jgu.

edu.in

1136 The American Journal of Economics and Sociology

businesses. Society wastes entrepreneurial skills by forcing millions of

people to work for wages instead of applying their own capacity for

innovation and management. Consumers lose because the range and

quality of items for sale is restricted, and prices are likely to be higher

for the goods and services that are produced. The base of democracy

is undermined as the wealth gap enables elites to dominate politics.

Large, monopolistic companies directly influence politics. In some

cases, governments have been elected or defeated according to how

much sympathy they are perceived to offer to monopolies. In all of

these ways, the entire society suffers when the rules governing an

economy allow an imbalance to develop that limits competition and

allows markets to be dominated by a few large companies. Even on

an international scale, monopolies affect negotiations ranging from

climate change to foreign investments. The power of monopolistic

companies is both pervasive and damaging.

Standard economic theory informs us about the sources of monop-

olies. Samuelson and Marks (2003: 365–366) discuss capital require-

ments in some industries that restrict entry to a very limited number

of large companies. Nicholson and Snyder (2007: 379) point to the

relevance of economies of scale, which are generally associated with

declining marginal costs of production. Ayers and Collinge (2003) em-

phasize the technological superiority of companies that gain a dom-

inant position in markets. Baumol and Willig (1981) note that lack

of substitutes and high sunk costs often form barriers to entry of

competitors. Blind (2004) analyzes how control of a natural resource

or network externalities can contribute to the formation of monopoly

power. There is a vast literature over several centuries that dwells

upon the role of political influence and rent-seeking in the creation

of a monopoly.

A particularly interesting aspect of a monopoly is the barrier to

entry. Anything that restricts (socially beneficial) competition is a bar-

rier to entry. Two types of barriers to entry have been frequently

discussed by other authors: structural and strategic (Geroski and

Jacquemin 1990). Structural barriers consist of relatively fixed con-

ditions related to costs and technologies, such as scale economies,

sunk costs, high capital costs, and product differentiation. Strategic

1137How Procurement Policies Promote Monopolies

barriers are erected by incumbent firms in the form of limit pricing,

predatory pricing, patents and other intellectual property, and other

actions taken to block competition. Some barriers that seem to be

structural are actually strategic because they are based on the conduct

of incumbent firms (Kotsios 2010).

A third type of barrier consists of regulatory barriers put in place

by governments (Geroski 1991; Parker and Stead 1991; Church and

Ware 2000; OECD 2005; Bitzenis 2009). Regulatory barriers can be

divided into three categories. The first one consists of restrictions on

production created through licensing requirements. The second group

involves international trade. Tariffs, import quotas, dumping (selling

surplus goods below cost), price fixing, subsidies, and tax exemptions

are all tools that can help one company gain an advantage over com-

petitors. Governments may also bias the market by making loans to

specific firms as part of a policy to protect domestic industry against

foreign competitors.

The third category of regulatory barriers consists of laws or poli-

cies that practically favor some firms over others even if the rules are

facially neutral. This article is an investigation of one type of barrier

within the third category. The focus here is on the understudied phe-

nomenon of public procurement and the social and economic effects

of how it is managed. The evidence produced here reveals huge dis-

tributional consequences of the design of tender and bid procedures

in India. Those procedures favor large firms over smaller ones by

erecting unnecessarily difficult eligibility criteria that firms must meet

even to apply.

I study select tender documents in transportation projects: roads,

highways, bridges, and civil construction. Transportation is a sector

that has been deemed “rent thick” because there are various sources

of unearned income associated with corruption in the contract pro-

cess and with the real estate aspects of this sector (Gandhi and Walton

2012: 12). As a result, this sector attracts large, politically connected,

private firms that hope to participate in the massive volume of work

and are often more interested in political kickbacks and the locational,

rent-generating aspects of projects than in the actual performance

of construction work. The procurement process effectively excludes