Anti-competitive practices

Competition law
Basic concepts
History of competition law Monopoly and oligopoly Coercive monopoly Natural monopoly Tacit collusion Barriers to entry Herfindahl–Hirschman Index Market concentration Market power SSNIP test Relevant market Merger control
Anti-competitive practices
Monopolization Collusion Formation of cartels Price fixing Bid rigging Product bundling and tying Refusal to deal Group boycott Essential facilities Exclusive dealing Dividing territories Conscious parallelism Predatory pricing Misuse of patents and copyrights
Enforcement authorities and organizations
International Competition Network List of competition regulators
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Anti-competitive practices are business or government practices that prevent or reduce competition in a market. Antitrust laws ensure businesses do not engage in competitive practices that harm other, usually smaller, businesses or consumers. These laws are formed to promote healthy competition within a free market by limiting the abuse of monopoly power. Competition allows companies to compete in order for products and services to improve; promote innovation; and provide more choices for consumers. In order to obtain greater profits, some large enterprises take advantage of market power to hinder survival of new entrants. Anti-competitive behavior can undermine the efficiency and fairness of the market, leaving consumers with little choice to obtain a reasonable quality of service.

Anticompetitive behavior refers to actions taken by a business or organization to limit, restrict or eliminate competition in a market, usually in order to gain an unfair advantage or dominate the market. These practices are often considered illegal or unethical and can harm consumers, other businesses and the broader economy.

Anti-competitive behaviour is used by business and governments to lessen competition within the markets so that monopolies and dominant firms can generate supernormal profits and deter competitors from the market. Therefore, it is heavily regulated and punishable by law in cases where it substantially affects the market.

Anti-competitive practices are commonly only deemed illegal when the practice results in a substantial dampening in competition, hence why for a firm to be punished for any form of anti-competitive behaviour they generally need to be a monopoly or a dominant firm in a duopoly or oligopoly who has significant influence over the market.

Anti-competitive behaviour can be grouped into two classifications. Horizontal restraints regard anti-competitive behaviour that involves competitors at the same level of the supply chain. These practices include mergers, cartels, collusions, price-fixing, price discrimination and predatory pricing. On the other hand, the second category is vertical restraint which implements restraints against competitors due to anti-competitive practice between firms at different levels of the supply chain e.g. supplier-distributor relationships. These practices include exclusive dealing, refusal to deal/sell, resale price maintenance and more.

Types

• Dumping, also known as predatory pricing, is a commercial strategy for which a company sells a product at an aggressively low price in a competitive market at a loss. A company with large market share and the ability to temporarily sacrifice selling a product or service at below average cost can drive competitors out of the market,^[1] after which the company would be free to raise prices for a greater profit. For example, many developing countries have accused China of dumping. In 2006, the country was accused of dumping silk and satin in the Indian markets at a cheaper rate which affected the local manufacturers adversely.^[2]
• Exclusive dealing, where a retailer or wholesaler is obliged by contract to only purchase from the contracted supplier. This mechanism prevents retailers to lessen profit maximisation and/or consumer choice.^[3] In 1999, Dentsply entered a 7 years court complaint by the U.S, the dental wholesaler had been successfully sued for using monopoly power to restrain trade using exclusive dealings within contract requirements.^[4]
• Price fixing, where companies collude to set prices, effectively dismantling the free market by not engaging in competition with each other. In 2018, travel agency giant, Flight Centre was fined $12.5 million for encouraging a collusive price fixing plan between 3 international airlines from between 2005 and 2009.^[5]
• Refusal to deal, e.g., two companies agree not to use a certain vendor. In 2010, Cabcharge refused, on commercial terms, to allow its non-cash payment instruments to be accepted and processed electronically by Travel Tab/Mpos' system for the payment of taxi fares. Travel Tab/Mpos requested access to the instruments but Cabcharge refused twice. Penalties for the first and second refusal were $2 million and $9 million respectively.^[6]
• Dividing territories, an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories. Also known as 'market sharing', a practice in which businesses geographically divide or allocate customers using contractual agreements that include non-competition on established customers, not producing the same goods or services and/or selling within specific regions.^[7] Boral and CSR formed a pre-mix concrete cartel and were penalised for bid rigging, price fixing and market sharing at an amount over $6.6million and a maximum of $100,000 on each of the 6 executives involved. The companies had agreed to recognise clients as belonging to suppliers without competition over regular meetings and phone conversations. Company market shares were monitored to ensure the agreement was not breached - this led to over-charging on construction quotes which were used by federal, state and local government projects.^[8]
• Tying, where products that are not naturally related must be purchased together. This incumbent strategy forces the buyer to purchase an unnecessary product from a separate market, implicitly lessening competition in various markets by increasing unnatural barriers to entry as entrants are unable to compete on a full line of products nor on price.^[9] In 2006, Apple iTunes iPod lost a $10 million 10 year antitrust case when iPods sold between September 2006 to March 2009 that were only compatible with tracks from the iTunes Store or those downloaded from CDs.^[10]
• Resale price maintenance, when a manager sells to a distributor, the resale price is agreed to not fall below a specified minimum value. However, when the retail price decreases, the manufacturer does sell more products. This is interesting from a management perspective.^[11] This strategy is controversial, and the benefits are to protect some inefficient small stores or manufacturers from competition threats. But at the same time, this strategy can easily lead to the level price cartel of brand operators.
• This type of monopoly occurs when a firm can efficiently supply the entire market due to economies of scale, where larger production leads to lower costs. For example, in some cases, utilities (such as those providing electricity or water) may operate as natural monopolies due to high infrastructure and distribution costs.
• Technology monopoly， This type of monopoly occurs when one company has exclusive control over a particular technology or innovation, thus enabling them to dominate the market. For example, a company that owns a patent for a breakthrough technology may have a technology monopoly.
• Legal loopholes，This type of monopoly occurs when the government grants a company exclusive rights or privileges to operate in a particular market. For example, patents and Copyrights provide temporary monopolies to inventors and creators to encourage innovation and creativity

Also criticized are:

• Absorption of a competitor or competing technology, where a powerful firm effectively co-opts or swallows its competitor rather than see it either compete directly or be absorbed by another firm
• Subsidies from government which allow a firm to function without being profitable, giving them an advantage over competition or effectively barring competition
• Regulations which place costly restrictions on firms that less wealthy firms cannot afford to implement
• Protectionism, tariffs and quotas which give firms insulation from competitive forces
• Patent misuse and copyright misuse, such as fraudulently obtaining a patent, copyright, or other form of intellectual property; or using such legal devices to gain advantage in an unrelated market
• Digital rights management which prevents owners from selling used media, as would normally be allowed by the first sale doctrine.

Horizontal mergers

Horizontal merger refers to improving efficiency by reducing consumer distortion of firm choice and price heterogeneity. When two companies with similar products or product characteristics merge horizontally, there is less competition. However, a net social benefit can be created, because when the two companies fight a continuous price war due to fierce competition, it will strongly distort the choices of consumers.^[12] Horizontal mergers can also easily lead to a monopoly, reducing consumers' choices and indirectly harming consumers' interests.

Vertical mergers

The Chicago school of economics argues that vertical mergers, usually formed under anti-competitive intention, may be pro-competitive to eliminate double marginalisation.^[13] A chain of monopolists under can cause prices that extract beyond consumer surplus as wholesalers mark up prices, retailers have the power to transfer this cost price onto the retail price.

Effects

"I Like a Little Competition"—J. P. Morgan by Art Young. Cartoon relating to the answer J. P. Morgan gave when asked whether he disliked competition at the Pujo Committee.^[14]

Monopolies and oligopolies are often accused of, and sometimes found guilty of, anti-competitive practices. Anti-competitive incentives can be especially prominent when a corporation's majority shareholders own similarly sized stakes in the company's industry competitors.^[15] For this reason, company mergers are often examined closely by government regulators to avoid reducing competition in an industry. Although anti-competitive practices often enrich those who practice them, they are generally believed to have a negative effect on the economy as a whole, and to disadvantage competing firms and consumers who are not able to avoid their effects, generating a significant social cost. For these reasons, most countries have competition laws to prevent anti-competitive practices, and government regulators to aid the enforcement of these laws.

The argument that anti-competitive practices have a negative effect on the economy arises from the belief that a freely functioning efficient market economy, composed of many market participants each of which has limited market power, will not permit monopoly profits to be earned...and consequently prices to consumers will be lower, and if anything there will be a wider range of products supplied.

A key distinguishing factor that separates anti-competitive behaviour from innovative marketing and fair competition is that most of the aforementioned types of anti-competitive behaviour are only deemed unlawful if the firm that is committing the behaviour is a dominant firm within the market to the extent where their action will have a significant influence on market behaviour. If the firm engages in such behaviour has a position of substantial market share, so much so that they are able to generate supernormal profits and force smaller companies out of the industry then it is most likely deemed unlawful.

Opponents of robber barons believe that the realities of the marketplace are sometimes more complex than this or similar theories of competition would suggest. For example, oligopolistic firms may achieve economies of scale that would elude smaller firms. Again, very large firms, whether quasi-monopolies or oligopolies, may achieve levels of sophistication e.g. in business process and/or planning (that benefit end consumers) and that smaller firms would not easily attain. There are undoubtedly industries (e.g. airlines and pharmaceuticals) in which the levels of investment are so high that only extremely large firms that may be quasi-monopolies in some areas of their businesses can survive.

Many governments regard these market niches as natural monopolies, and believe that the inability to allow full competition is balanced by government regulation. However, the companies in these niches tend to believe that they should avoid regulation, as they are entitled to their monopoly position by fiat. In some cases, anti-competitive behavior can be difficult to distinguish from competition. For instance, a distinction must be made between product bundling, which is a legal market strategy, and product tying, which violates antitrust law. Some advocates of laissez-faire capitalism (such as Monetarists, some Neoclassical economists, and the heterodox economists of the Austrian school) reject the term, seeing all "anti-competitive behavior" as forms of competition that benefit consumers.

Reduce competition: Anticompetitive practices lead to less competition in the marketplace, which leads to limited choice for consumers, higher prices, and less innovation. When firms engage in anticompetitive practices that eliminate or reduce competitors, such as collusion, abuse of market power, or mergers and acquisitions, it may result in reduced competition and discourage new competitors from entering the market. This can lead to higher prices, lower product or service quality and less incentive to innovate.

Distorted market dynamics: Anticompetitive behaviour distorts market dynamics and undermines the level playing field for all market participants. When some companies engage in unfair or anti-competitive practices, it can create an uneven playing field that puts small businesses or new entrants at a disadvantage and leads to market distortions, reduced competition and potentially harmful consequences for consumers and the economy.

To mitigate the negative effects of anti-competitive behaviour, effective competition laws and regulatory mechanisms are needed to promote fair competition, protect consumer interests and maintain a level playing field for all market participants. Enforcement of competition law, promotion of competition and fostering a culture of competition in the business environment help to ensure that markets are competitive, innovative and beneficial to consumers and the economy as a whole.

Common actions

Unfair competition includes a number of areas of law involving acts by one competitor or group of competitors which harm another in the field, and which may give rise to criminal offenses and civil causes of action. The most common actions falling under the banner of unfair competition include:

• Matters pertaining to antitrust law, known in the European Union as competition law. Antitrust violations constituting unfair competition occur when one competitor attempts to force others out of the market (or prevent others from entering the market) through tactics such as predatory pricing or obtaining exclusive purchase rights to raw materials needed to make a competing product.
• Trademark infringement and passing off, which occur when the maker of a product uses a name, logo, or other identifying characteristics to deceive consumers into thinking that they are buying the product of a competitor. In the United States , this form of unfair competition is prohibited under the common law and by state statutes, and governed at the federal level by the Lanham Act.
• Misappropriation of trade secrets, which occurs when one competitor uses espionage, bribery, or outright theft to obtain economically advantageous information in the possession of another. In the United States, this type of activity is forbidden by the Uniform Trade Secrets Act and the Economic Espionage Act of 1996.
• Trade libel, the spreading of false information about the quality or characteristics of a competitor's products, is prohibited at common law.
• Tortious interference, which occurs when one competitor convinces a party having a relationship with another competitor to breach a contract with, or duty to, the other competitor is also prohibited at common law.
• Anticompetitive agreements: Firms may enter into agreements that limit competition, such as agreements to fix prices, limit production or supply, or divide markets. These agreements harm competition, reduce consumer choice and lead to higher prices or lower quality products or services.
• Mergers and acquisitions that harm competition: Mergers and acquisitions that result in a significant reduction in market competition may be considered anticompetitive. This may include actions such as acquiring a competitor to eliminate or reduce competition, or merging to form a dominant market player who may engage in anticompetitive behaviour.
• Exclusive deals or tie-in arrangements: Companies may enter into exclusive deals or tie-in arrangements that require customers or suppliers to trade with them exclusively or purchase one product or service in order to obtain another. These practices can limit consumer choice and limit competition by preventing competitors from entering major distribution channels or markets.

Various unfair business practices such as fraud, misrepresentation, and unconscionable contracts may be considered unfair competition, if they give one competitor an advantage over others. In the European Union, each member state must regulate unfair business practices in accordance with the principles laid down in the Unfair Commercial Practices Directive, subject to transitional periods.

Anti-competitive practices in different market systems

Based on the research from Long in 2018, it observed that, the Anti-competitive is not only an industry regulation behavior, but also a modern industry characteristics for stakeholders to compete in within an fair market system. Meanwhile, the research results also significantly involved the economic theories to predict the relevant encouragement. This article explained the relevant variables in determining the extent of anti-competitive markets too. While in perfectly competitive market, the anti-competitive practices is not necessary, since each business already have full information on their competitors pricing, strategy and major actions. While, in the monopolist market system, the anti-competitive practices will become a  significantly useful method to reduce the manipulation of business giants and potential colluding actions. Furthermore, the research emphasized the market conduct of state monopolies is no different from that of other firms and market power serves as the motivation for anti-competitive behaviour of firms.

The effectiveness of anti-competitive practices in national stabilization

Meanwhile, in description of the economic approach, the anti-competitive practices is also a useful approach to sustain a stabilized economic development and national welfare. With the implementation of anti-competitive practices, it will effectively remove the market inefficiencies and eliminate the dead weight loss from the economic viewpoint. As firms engage in the fair competition act with the government regulations and laws. There is sufficient evidence to conclude that, the utilization of anti-competitive practices can dramatically reduce the phenomenon of black market, hence improves the investment incentives on aggregate demands. In general, with the effective implementation of anti-competitive practices, the whole economy will expand into a further prosperity with less crowing out effects.

See also

• Amazon.com controversies § Anti-competitive practices
• Anti-competitive practices of Apple Inc.
• Competition law
• Loss leader
• Natural monopoly
• Parker immunity doctrine
• Predatory pricing
• Price discrimination
• Trade regulation law
• Embrace, extend, and extinguish
• Category killer
• European Union competition law
• Unfair business practices
• United States antitrust law

References

External links

• https://web.archive.org/web/20031224114200/http://usinfo.state.gov/journals/ites/0299/ijee/klein.htm

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