Anti-competitive Behavior

There are certain markets that are consistently investigated by the competition authorities because of allegations of anti-competitive behavior. Critically evaluate the characteristics of these markets which lead to these allegations.

A competition is an enduring and pervasive fact of business life (McAleese, 2004). The European commission defines competitions as a situation in which firms or sellers "independently strive for buyers' patronage in order to achieve a particular business objectives, for example, profits, sales, or market share" (Glossary of term used in EU Competition policy). Richard Whish refers to competition in the commercial world as "a striving for the custom and business of people in the market place" (Richard, 2005). According to Fourie and Smit (1999) there are number of different uses, definitions and concepts of the term 'competition' depending on whom one is and for what purpose one wants to use the definition. The ordinary consumer view of completion is that of rivalry between contestants, as in sport. Under this view, there is a winner, and someone "gets the bone". This view is sometimes referred to as the intuitive view. Similarly the business person's view of competition is same to the intuitive view of rivalry, but with more intense challenges of trying to gain an advantage over other competitors. Competition is take as process whereby firms strive against each other to secure custom for their products, i.e. it represents the activity rivalry of firms for customers; thus the nature of competitions is such that enterprises compete to outsmart their competitors (CUTS Monograph on Investment and Competition Policy)

Competition law is an economic law; it is about the behaviour of economic agents. Economics provides a theoretical basis for the law; it also provides the tools with which to analyse markets and competition within them (Bruce and Wilks, 2001). As J. Brandeis once said "A lawyer who has not studied economics.... is very apt to become a public enemy" (Richard 2005). Therefore, for a proper appreciation of competition law it is important to have an understanding of the economic concepts inherent in the law. T

hus it will be fare to say that the healthy competitions in market can benefits consumers in enhancing efficiencies, incentivizing innovation and increasing consumer welfare. The consumer also benefits through wider choice, better products and services and more competitive prices. But unfortunately it is not a case and competitions in the market can be suppressed or negated through anti-competitive practices by enterprises, these are often referred to as market failures. If competition is to be maintained and its benefits are to be reaped by society, including the consumers, such anti-competitive practices must be restrained, and to do so is the primary purpose of competition authorities. Anti-competitive practices are generally considered in three categories; cartels and other anti-competitive agreements, abuse of dominant position (monopolization) by an enterprise, and anti-competitive mergers. These cause harm to consumers and society in varying degrees (Dhall, 2008).

Some of the common anti-competitive practices adopted by industries to capture market and entrust their monopoly in market can be broadly classified into the following overlapping categories, which are discussed below in brief.

Monopoly and cartels; are the most pernicious form of anti-competitive activity. A World Bank Background Paper shows that in 1997 in developing countries imported US $ 81.1 billion worth of goods from industries that had seen price-fixing conspiracy during the 1990s (Levenstein, Margaret and Valerie Suslow, 2001). The OECD'S Global forum on Competition, 2001, contains a list of 26 cartels and bid rigging cases reported by 12 developing countries (OECD, 2001). Monopoly benefits from barriers to competitors entering the market and thus gains pricing power (caused by market dominance, if not just bigness) a practice that is (conventionally) antithetical to competitions welfare gain. The barriers enable the monopoly to maintain its supply constraint, monopoly profits, and the dead weight loss of consumer of welfare (Mckenzie, 2009). For example, Microsoft the software giant in 1998 took to court for using its considerable dominance of the operating system market, protected by so called applicants "barrier to entry,'' to 'bolt' its internet Explorer web browser to its Windows operating system and thus to destroy browser competitor Netscape and undercut competitions and welfare- supposedly. Cartels are arrangements among firms that produce and sell the same product for the purpose of exacting and sharing monopolistic rents. Most commonly, they accomplish this by agreeing on a relatively high benchmark price for their product that none of the member firms are permitted to underbid (i.e. price-fixing cartels), by dividing the market by geographic territory or customer segments and granting each other monopoly power in separate localities/ segments (i.e. market-allocating cartels) or by conniving on tendering buds (bid rigging), etc (Mehta, Mitra and Dube, 2008). Such types of the anti-competitive practices are common in petrol product markets (gas, diesel and LPG) where explicit collusion is common (Tsang, 2000).

Oligopoly is a market structure with only a few suppliers because of "natural" or "artificial" factors. Oligopolistic firms could engage in heated competitions, and the market may become "contestable", whereas on the other hand, cartels may be formed by collusion among players with market power in an oligopoly. Efficiency and welfare loss would also result. Regulation or competition policy would be possible response by the authority.

Abuse of dominant position; when a market is "dominated" by a player with "power" among a number of much smaller suppliers, it is neither monopoly nor oligopoly in the strict sense (Tsang, 2000). According to Fair Trade commission abuse of dominant position occurs where a firm holds a position of such economic strength that follows it to operate without being significantly affected by competitions and it's engage in conduct that is likely to impede the development or maintenance of effective competitions ( Predatory pricing in a market is a good example of abuse of dominant position where the firm sells at below incremental costs/average variable costs/ "avoidable cost") with the objectives of driving out competitors. Some of the other common types of abuse by dominant firms include tied selling, exclusive dealing, market restriction and price squeezing.

Horizontal restrictive practices have traditionally been considered the most damaging of all anti- competitive practices and therefore are most susceptible to punitive action. Some of the common horizontal restrictive practices are price fixing, collusive bidding/bid rigging, market division, customer allocation/ joint boycotts (refusal to sell) and finally sales and production quotas. Price fixing is a practice when there is an agreement between firms to fix or raise price to restrict competition and earn higher profits. Collusion bidding/bid rigging is a common practice among competitive firms where all agree to submit a common bids, and coming to consensus about firms agreeing to submit the lowest bid by rotation and thereby each getting a certain amount of contracts, thus eliminating price competition. Such practices are regarded as the cardinal offence in the US, Canada, UK and other jurisdictions and they often result in a criminal penality if proven guilty (Tsang, 2000). In a competitive market it is usually notice that the firs are indulge in dividing the market by geography territory or customer segment and granting each other monopoly power in separate localities/ segments (i.e. market-allocating or customer-sharing cartels), agreeing to restrict output (output restriction cartels) or by conniving on tendering bids (bid rigging), etc

Vertical restrictive practices also comes under competitive scrutiny, are usually contractual arrangements between suppliers (manufacturers) and distributors (retailers), which extend beyond arms-length pricing (Kububa, 2008). They are usually motivated by the desire for vertical control from the principal (manufacturer) to his agent (retailer). In other words the manufacturer tries to implement his authority over its retailer who sells its products within its sets guidance. This includes resale price maintenance, where a manufacturer and its distributors agree that the latter will sell products of the former at certain prices at or above/below a price floor/ceiling. And also can find in exclusive dealing where a retailer or wholesaler is 'tied' to purchasing from a supplier and resale price maintenance (whereby retail price is fixed by the producer or price floors or ceilings are imposed on the distributors). Vertical restrictive practices is also quite similar to the term 'abuse of dominance' refers to anti-competitive business practices that a dominant firm may engage in to maintain or increase its market power. "Exploitative conduct" under abuse of dominance covers certain practices in which the dominant firm uses its market power to exploit other market participant without directly affecting the structure of the market, i.e. through price discrimination, and by paying low prices to suppliers. "Exclusionary conduct" is aimed directly at preserving or exacerbating anti-competitive aspects of the structure of the market, i.e. the firms creates or maintains monopoly power by refusing to deal with a competitor, through predatory pricing, or by engineering an increase in the costs faced by rivals (Anderson et al,1999).

Unfair trade practices: they refer to practices which are regarded as against "fair competition", such as "damages to other reputation" and "unfair or discriminatory standards" (Tsang, 2006). According to Mehta (2008) UTPs are the practices that directly disadvantage the consumer such as misleading claims and advertising, conditional selling, excessive pricing, discriminatory pricing and other misrepresentations. These are per se illegal under competitions laws, and only proof of occurrence is required to justify punitive actions. Among the above overlapping categories of anti-competitive behaviors, vertical practices are more controversial (Tsang, 2006). Another factor that can lead to unfair trade practices includes the merger and acquisition as means of engaging in anti-competitive practices, especially if the merger results in firms acquiring market power. Completion law is aimed at establishing whether a merger or acquisition results in a substantial reduction in completion in the market. Mergers that have such an outcome are normally prohibited, or approved subject to conditions that ensure minimization of damage if there are some benefits to the pubic generated by such mergers (Mathis and Dwar, 2008)

The structure of a market can profoundly affect the conduct and financial performance of its firms. Firms may have various options or possibilities, ranging from perfect competitions at one extreme to monopoly at the other. These categories are briefly described in Table below. Associated with each category is a range of Herfindahls that is common to all the market (Besanko, Dravove and Schaefer).

Table 1: Four Class of Market Structure and The Intensity of Price Competition

Nature of Competitions

Range of Herfindahls

Intensity of Price Competion

Perfect Competition

Usually below .2


Monopolistic Competition

Usually below .2

May be Fierce or light, depending on product differentiation.


.1 to .6

May be fierce or light, depending on interfirm rivalry


.6 and above

Usually light, unless threatened by entry.

According to Besanko, the table given above is constructed on basis of range and is only suggestive. For example, the table suggests that if there are only two competitors in a market, they will not behave competitively. But some markets with only two firms could experience fierce price competitions, with prices near marginal costs. On the other hand, price competition can be all but nonexistent in some markets that have five competitors or more. Thus, they suggested that that to assess the circumstances surrounding the competitive interaction of firms to make conclusions about the intensity of price competition, rather than rely solely on the Herfindahl or other measure of concentration.

Countries across the globe are reforming their economies, and undertaking privatization and deregulation. As they do so, the forces of completion some increasingly onto the centre state of the economy (Dhall, 2008). In the following paragraph an effort has been made to describe different market structure.

The model of perfect competition is the economic model that usually comes to an economist's mind when thinking about competitive markets. In the perfect competition paradigm there are many buyers and sellers of the product, the quantity of products bought by any buyer or sold by any seller is so small relative to the total quantity traded that changes in these quantities leave market prices unchanged, the product is homogeneous, all buyers and sellers have perfect information and there is both free entry into and exit out of the market (Walker, 2006). A perfectly competitive market is said to achieve both allocated efficiency and productive efficiency. The combined effect of allocate and productive efficiencies is that society's welfare overall is maximized. Consumer welfare is also maximized in such a situation. Allocative efficiency is achieved when the goods are produced in the quantities desired by society, and it is not possible to make anyone better off without making someone else worse off. Productive efficiency is achieved when goods are produced at the lowest possible cost, that is, as little of society's wealth is expended in the production process as is necessary. Competition also enhances dynamic efficiency in that it spurs innovation, development of new products and technological growth (Dhall, 2008).

To summarize the competitive competition assumptions, the market features following characteristic which are;

* Price is equal to marginal cost;

* Price is equal to average cost (thus implying that marginal cost is equal to average cost); and

� No firms makes positive economic profits.

If perfect competition is at one end of the spectrum, at the other end is monopoly. Here, there are many buyers but only one seller, who is a monopolist and who is in a position therefore, to increase prices and reduce the volume of supply (Liebenstein, 1996). In this situation there is allocative inefficiency, which is also referred to as deadweight loss. In economic theory, however, the objection to monopoly is not only that the monopolist is able to charge excessively and reduce production, but also that monopoly is inefficient. The inefficiency arises out of higher costs, for example, through higher remuneration and excessive staff. A monopolist may also waste resources by maintaining excess capacity or indulging in excessive product differentiation. This situation is also referred to as X-inefficiency, the term first used by Liebenstein (1996).

However, neither the paradigm of perfect competition nor that of monopoly provides adequate descriptions of competition in most industries. While the models of perfect competition and monopoly provide a good basis for understanding the basic economic principles, particularly in illustrating the detrimental welfare consequences of monopoly, neither model provides a solid framework on which to base policy prescriptions. These models ignore the interaction between firms and how this interaction may affect the outcomes of the competitive process. In the model of perfect competition, each firm is so small that it can put as much or as little for sale on the market without affecting the market price. For this reason, a firm in a competitive market has no reason to worry about what other firms will do when it makes its own plans. For example, a farmer selling his product in an international market does not consider whether his output will affect the market price but instead takes the market price as a given that he cannot affect. At the other extreme, the monopolist can directly set the market price as it has no rivals to worry about (Bork, 1993).

Thus to conclude it will be fair to say that the healthy competition in the markets can bring various advantage by enhancing efficiencies, new innovation and increasing consumer welfare. The consumers also get opportunity to wider choices, better products and services due to competitions in the market. But there is not usually a case in a reality and gives labor to various conflicts between consumers and firms. As seen above the industries can various means of anti-competitive practices, ranging from horizontal to vertical practices, to price-fixing to cartels etc. to capture the markets and exercise its monopoly. The basic objective of such practices is to maximize profit by increase prices of their commodity by following different anti-competitive practices. Later half of the discussion has seen different market structure range present in a market. The market range from perfectly competitive to monopoly and oligopoly has theoretically design to benefits consumers.


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