Anti-competitive practices
Encyclopedia
Anti-competitive practices are business
or government
practices that prevent or reduce competition
in a market
(see restraint of trade
).
Also criticized are:
or government backing.
Monopolies
and oligopolies are often accused of, and sometimes found guilty of, anti-competitive practices. 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 law
s 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 profit
s to be earned...and consequently prices to consumers will be lower, and if anything there will be a wider range of products supplied.
Some people 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 anti-trust 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.
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
or government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...
practices that prevent or reduce competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
in a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
(see restraint of trade
Restraint of trade
Restraint of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. In an old leading case of Mitchell v Reynolds Lord Smith LC said,...
).
Anti-competitive practices
These can include:- DumpingDumping (pricing policy)In economics, "dumping" is any kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market...
, where a company sells a product in a competitive market at a loss. Though the company loses money for each sale, the company hopes to force other competitors out of the market, after which the company would be free to raise prices for a greater profit.
- Exclusive dealingExclusive dealingExclusive dealing refers to when a retailer or wholesaler is ‘tied’ to purchase from a supplier on the understanding that no other distributor will be appointed or receive supplies in a given area...
, where a retailer or wholesaler is obliged by contract to only purchase from the contracted supplier.
- Price fixingPrice fixingPrice fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
, where companies collude to set prices, effectively dismantling the free market.
- Refusal to dealRefusal to dealRefusal to deal is one of several anti-competitive practices forbidden in countries which have restricted market economies. For example:-History:...
, e.g., two companies agree not to use a certain vendor
- Dividing territoriesDividing territoriesDividing territories is an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories. It is one of several anti-competitive practices outlawed in the United States. The term is generally understood to include dividing customers as well.For...
, an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories.
- Limit PricingLimit priceA limit price is the price set by a monopolist to discourage entry into a market, and is illegal in many countries. The limit price is the price that a potential entrant would face upon entering as long as the incumbent firm did not decrease output. The limit price is often lower than the average...
, where the price is set by a monopolist at a level intended to discourage entry into a market.
- Tying, where products that aren't naturally related must be purchased together.
- Resale price maintenanceResale price maintenanceResale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former's product at certain prices , at or above a price floor or at or below a price ceiling...
, where resellers are not allowed to set prices independently.
Also criticized are:
- Absorption of a competitor or competing technology, where the 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
- ProtectionismProtectionismProtectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...
, Tariffs and QuotasImport quotaAn import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....
which give firms insulation from competitive forces - Patent misusePatent misuseIn United States patent law, patent misuse is an affirmative defense used in patent litigation when a defendant has been accused to have infringed a patent. It has also been used to mitigate damages following a finding of infringement or justify a failure to pay contracted-for royalties...
and copyright misuseCopyright misuseCopyright misuse is an equitable defense against copyright infringement in the United States. Under this defense, a copyright infringer may avoid infringement liability if the copyright holder has engaged in abusive or improper conduct in exploiting or enforcing the copyright...
, such as fraudulently obtaining a patentPatentA patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
, copyrightCopyrightCopyright is a legal concept, enacted by most governments, giving the creator of an original work exclusive rights to it, usually for a limited time...
, or other form of intellectual propertyIntellectual propertyIntellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
; or using such legal devices to gain advantage in an unrelated market. - Digital rights managementDigital rights managementDigital rights management is a class of access control technologies that are used by hardware manufacturers, publishers, copyright holders and individuals with the intent to limit the use of digital content and devices after sale. DRM is any technology that inhibits uses of digital content that...
which prevents owners from selling used media, as would normally be allowed by the first sale doctrine.
Effects
It is usually difficult to practice anti-competitive practices unless the parties involved have significant market powerMarket power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
or government backing.
Monopolies
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
and oligopolies are often accused of, and sometimes found guilty of, anti-competitive practices. 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 law
Competition law
Competition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
s 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 profit
Monopoly profit
- Monopoly Profit - Basic Definition :In economics, a firm is a monopoly when, because of the lack of any viable competition, it is able to become the sole producer of the industry's product. In a normal competitive situation, the price the firm gets for its product is exactly the same as the...
s to be earned...and consequently prices to consumers will be lower, and if anything there will be a wider range of products supplied.
Some people 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
Economies of scale
Economies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
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
Product bundling
Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business , in the cable television industry Product bundling is a marketing strategy that involves offering several products for sale as...
, which is a legal market strategy, and product tying, which violates anti-trust law. Some advocates of laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....
capitalism (such as Monetarists
Monetarism
Monetarism is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation. It is the view within monetary economics that variation in the money supply has major influences on national output in the short run and the price level over...
, some Neoclassical economists
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, and the heterodox economists
Heterodox economics
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
of the Austrian school
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...
) reject the term, seeing all "anti-competitive behavior" as forms of competition that benefit consumers.
See also
- CartelCartelA cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...
- Antitrust law
- Predatory pricingPredatory pricingIn business and economics, predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices...
- MicroeconomicsMicroeconomicsMicroeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
- OligopolyOligopolyAn oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
- Price discriminationPrice discriminationPrice discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
- Natural monopolyNatural monopolyA monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
- Loss leaderLoss leaderA loss leader or leader is a product sold at a low price to stimulate other profitable sales. It is a kind of sales promotion, in other words marketing concentrating on a pricing strategy. A loss leader is often a popular article...
- Austrian schoolAustrian SchoolThe Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...