THE Daewoo bus service has established a name for itself in providing good quality service for intercity travel. Starting from the Lahore-Islamabad route on the motorway, the service has expanded to many other routes and now seems to connect a fairly large number of cities across the country.

The service is not the cheapest but nevertheless of good quality. And Daewoo charges a premium for the quality it provides. It has even segmented the market on some routes, on the basis of comfort.

If you have recently travelled on the motorway you would have noticed a number of buses resembling those of the Daewoo service and painted in similar colours. Sometimes they are from Daewoo, the bus manufacturer, but are not part of the Daewoo service (Sammi buses). Clearly, imitators are trying to benefit from the brand name the Daewoo bus service has established.

The question is, how much imitation should be allowed to competitors and when does it become unfair to Daewoo which has spent money and effort in building its brand name. It enjoys a premium in prices because of that. New entrants in the market have not done that. If they successfully imitate the appearance of Daewoo and take some customers away, they benefit through imitation and deception but they hurt Daewoo and they could, if they lure enough customers away, damage the market.

Theoretically, if imitators take enough customers away and Daewoo has to cut back on quality or service due to declining revenues, the market gets hurt and the customer pays the price.

On the other hand, if we draw the bounds against competition too widely, for example by limiting the entry of other players on some routes, we give Daewoo too much power and also hurt the customers as they cannot get the benefits of competition amongst suppliers. What are the right limits on competition and substitutability? This should be an important question for any authority that is regulating competition, like our Competition Authority, but it is not a topic that has been focused on much in Pakistan.

Copyrights and trademarks are also ways of doing the same. Clearly, no one can produce Coca Cola, but they can produce colas. They cannot copy the shape of the classic Coke bottle, but they can come close — but how close?

This varies from case to case but it does seem that where there is a reasonable chance of customers getting deceived into thinking that they have the original product when they have an imitation, then it should not be allowed.

This does narrow the field a little, but not completely. And the Daewoo example is enlightening here. One of the competitors uses the same buses, of the same colour so that even if one is close to the bus it is hard to say whether or not it is a Daewoo bus. And it is only one written line, on the side of the bus, that distinguishes the competitor from Daewoo.

Is this not too much for a market that has a lot of customers who are not literate? If someone were to make a cola bottle exactly the shape of the Coca Cola bottle, barring a small groove at the bottom and write Coco Cola instead, would this still not be too close? Would you, as a regulator looking after the interests of all parties to ensure fair competition, not question the intention of the competitor in imitating the established name?

This is not a trivial question as how these issues are decided and the decisions implemented can have significant impacts on the growth of firms, the incentives of firms to make investments and on creating brand names.

Take another example. A lot of summer lawn producers complain that competitors copy their successful designs very quickly. But if the original investor cannot make profits out of his/her design we take away the incentives of companies for innovation and this will hurt growth and for all. Equally, we should not bar people from even imitating after a reasonable time as that will bring about the benefits of competition. To establish where the line should be drawn we need a very active regulator who understands the issues at stake and acts quickly and decisively. Once a few precedents are set the market will start to behave in a more orderly fashion.

Where smaller investments are concerned, Bhayyai ke kebab, Benazir Kulfa, Chaman ki ice cream and Dar ul Mahi, and each city will have many such examples — mine happen to come from Lahore. Even if many people open shops or offer the ‘original’ thing after a name has become prominent, it does not matter much.

The cost, in terms of lost welfare, to sellers as well as buyers, is relatively small. If the benefit lost was larger the original producer is likely to get his product name or its characteristics registered and/or copyrighted. But as investments get bigger the potential losses, to the producer, for both consumers and the economy, become substantial. In such cases, a clearer regulatory framework and more vigilant implementation are needed.

I do not know if Daewoo has considered the issue and tried to go to the Competition Authority or the courts with a case against competitors. They might feel that our regulatory/judicial system is too slow/ineffective for effective remedy. But they would have a pretty good case if they actually went to these bodies and these bodies had some understanding of the issues such cases entail.

In general, more competition is better for all concerned. Consumers gain in terms of competitive prices and, in some circumstances, better service. Companies are kept on their toes to work on innovations and society gets growth and development. But the environment for fostering competition needs to be crafted and it need not happen on its own and cannot be taken as a given. From some of the examples in the market it looks like we have not yet started thinking about this a whole lot in the Pakistani context.

The writer is senior adviser, Pakistan at Open Society Foundations, associate professor of economics, LUMS, and a visiting fellow at IDEAS, Lahore.

fbari@osipak.org