Anti-competitive practices

Last updated December 10, 2024

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 behavior 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 behavior 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 behavior can be grouped into two classifications. Horizontal restraints regard anti-competitive behavior 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 penalized 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 recognize 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 were 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.
Natural monopoly: 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 let 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.
Occupational licensing ^[12]^[13]

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.^[14] 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.^[15] 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.

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 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 behavior.
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.

In different market systems

Based on research from Long in 2018,^{[ full citation needed ]} anti-competitive practices are not only an industry regulation behavior, but also a modern industry characteristic 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. In perfectly competitive markets, anti-competitive practices are not necessary, since each business already have full information on their competitors pricing, strategy and major actions. However, in the monopolist market system, anti-competitive practices are a 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 behavior of firms.

Effectiveness for national stabilization

Anti-competitive practices are 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 an economic viewpoint. As firms engage in fair competition, they act within government regulations and laws. There is sufficient evidence to conclude that anti-competitive practices can dramatically reduce the phenomenon of black market, hence improving 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 crowding out effects.

Related Research Articles

A monopoly is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic competition to produce a particular thing, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices, which is associated with unfair price raises. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

An oligopoly is a market in which pricing control lies in the hands of a few sellers.

The Sherman Antitrust Act of 1890 is a United States antitrust law which prescribes the rule of free competition among those engaged in commerce and consequently prohibits unfair monopolies. It was passed by Congress and is named for Senator John Sherman, its principal author.

The Clayton Antitrust Act of 1914, is a part of United States antitrust law with the goal of adding further substance to the U.S. antitrust law regime; the Clayton Act seeks to prevent anticompetitive practices in their incipiency. That regime started with the Sherman Antitrust Act of 1890, the first Federal law outlawing practices that were harmful to consumers. The Clayton Act specified particular prohibited conduct, the three-level enforcement scheme, the exemptions, and the remedial measures. Like the Sherman Act, much of the substance of the Clayton Act has been developed and animated by the U.S. courts, particularly the Supreme Court.

In the United States, antitrust law is a collection of mostly federal laws that govern the conduct and organization of businesses in order to promote economic competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.

Price fixing is an anticompetitive 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.

Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always considered illegal. It can be used to attain objectives forbidden by law; for example, by defrauding or gaining an unfair market advantage. It is an agreement among firms or individuals to divide a market, set prices, limit production or limit opportunities. It can involve "unions, wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties". In legal terms, all acts effected by collusion are considered void.

The Federal Trade Commission (FTC) is an independent agency of the United States government whose principal mission is the enforcement of civil (non-criminal) antitrust law and the promotion of consumer protection. The FTC shares jurisdiction over federal civil antitrust law enforcement with the Department of Justice Antitrust Division. The agency is headquartered in the Federal Trade Commission Building in Washington, DC.

In the European Union, competition law promotes the maintenance of competition within the European Single Market by regulating anti-competitive conduct by companies to ensure that they do not create cartels and monopolies that would damage the interests of society.

Predatory pricing is a commercial pricing strategy which involves the use of large scale undercutting to eliminate competition. This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly. For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without making substantial loss. The aim is to force existing or potential competitors within the industry to abandon the market so that the dominant firm may establish a stronger market position and create further barriers to entry. Once competition has been driven from the market, consumers are forced into a monopolistic market where the dominant firm can safely increase prices to recoup its losses.

Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust law, anti-monopoly law, and trade practices law; the act of pushing for antitrust measures or attacking monopolistic companies is commonly known as trust busting.

In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing revenue. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. The size of the gap, which encapsulates the firm's level of market dominance, is determined by the residual demand curve's form. A steeper reverse demand indicates higher earnings and more dominance in the market. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.

In Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include the USA, Australia and Europe when it has a significant impact of substantially lessening the competition in an industry. When the sales outlets are owned by the supplier, exclusive dealing is because of vertical integration, where the outlets are independent exclusive dealing is illegal due to the Restrictive Trade Practices Act, however, if it is registered and approved it is allowed. While primarily those agreements imposed by sellers are concerned with the comprehensive literature on exclusive dealing, some exclusive dealing arrangements are imposed by buyers instead of sellers.

The Competition and Consumer Act 2010 (CCA) is an Act of the Parliament of Australia. Prior to 1 January 2011, it was known as the Trade Practices Act 1974 (TPA). The Act is the legislative vehicle for competition law in Australia, and seeks to promote competition, fair trading as well as providing protection for consumers. It is administered by the Australian Competition & Consumer Commission (ACCC) and also gives some rights for private action. Schedule 2 of the CCA sets out the Australian Consumer Law (ACL). The Federal Court of Australia has the jurisdiction to determine private and public complaints made in regard to contraventions of the Act.

In economics, market concentration is a function of the number of firms and their respective shares of the total production in a market. Market concentration is the portion of a given market's market share that is held by a small number of businesses. To ascertain whether an industry is competitive or not, it is employed in antitrust law and economic regulation. When market concentration is high, it indicates that a few firms dominate the market and oligopoly or monopolistic competition is likely to exist. In most cases, high market concentration produces undesirable consequences such as reduced competition and higher prices.

Supracompetitive pricing is pricing above what can be sustained in a competitive market. This may be indicative of a business that has a unique legal or competitive advantage or of anti-competitive behavior that has driven competition from the market.

In United States antitrust law, monopolization is illegal monopoly behavior. The main categories of prohibited behavior include exclusive dealing, price discrimination, refusing to supply an essential facility, product tying and predatory pricing. Monopolization is a federal crime under Section 2 of the Sherman Antitrust Act of 1890. It has a specific legal meaning, which is parallel to the "abuse" of a dominant position in EU competition law, under TFEU article 102. It is also illegal in Australia under the Competition and Consumer Act 2010 (CCA). Section 2 of the Sherman Act states that any person "who shall monopolize. .. any part of the trade or commerce among the several states, or with foreign nations shall be deemed guilty of a felony." Section 2 also forbids "attempts to monopolize" and "conspiracies to monopolize". Generally this means that corporations may not act in ways that have been identified as contrary to precedent cases.

Competition law theory covers the strands of thought relating to competition law or antitrust policy.

The Competition Act, 2002 was enacted by the Parliament of India and governs Indian competition law. It replaced the Monopolies and Restrictive Trade Practices Act, 1969. Under this legislation, the Competition Commission of India was established to prevent the activities that adversely affected competition in India. This act extends to whole of India.

Software monetization is a strategy employed by software companies and device vendors to maximize the profitability of their software. The software licensing component of this strategy enables software companies and device vendors to simultaneously protect their applications and embedded software from unauthorized copying, distribution, and use, and capture new revenue streams through creative pricing and packaging models. Whether a software application is hosted in the cloud, embedded in hardware, or installed on premises, software monetization solutions can help businesses extract the most value from their software. Another way to achieve software monetization is through paid advertising and the various compensation methods available to software publishers. Pay-per-install (PPI), for example, generates revenue by bundling third-party applications, also known as adware, with either freeware or shareware applications.

References

↑ Hemingway, Carole. "What is Predatory Pricing?". LegalVision. Archived from the original on 30 September 2020. Retrieved 18 October 2020.
↑ Windle, Charlotte (July 31, 2006). "China faces Indian dumping allegations". BBC News.
↑ "Exclusive Dealing". Australian Competition and Consumer Commission. ACCC. 9 January 2013. Retrieved 18 October 2020.
↑ "U.S. v. Dentsply International, Inc". The United States Department of Justice. 25 June 2015. Retrieved 19 October 2020.
↑ Pash, Chris (4 April 2018). "Flight Centre has been fined $12.5 million for 'price fixing'". Business Insider Australia. Archived from the original on 7 November 2020. Retrieved 18 October 2020.
↑ "ACCC v Cabcharge Australia Ltd". Australian Competition Law. AustFederal Court of Australiaralian Competition Law. Retrieved 22 October 2020.
↑ "Market sharing". Competition Commission (Hong Kong). Retrieved 22 October 2020.
↑ "Cartels case studies & legal cases: Queensland pre-mixed concrete cartel". Australian Competition and Consumer Commission. ACCC. 24 January 2013. Retrieved 23 October 2020.
↑ Shapiro, Daniel M; Khemani, R. S (1993). "Glossary of industrial organisation economics and competition law" (PDF). p. 83.
↑ Ware, James (22 December 2008). "Apple iPod iTunes Antitrust Litigation". United States District Court, N.D. California, San Jose Division. C 05-00037 JW. Retrieved 25 October 2020.
↑ Blair, Roger; Whitman, Joseph (2018). "Resale price maintenance: A managerial perspective". Managerial and Decision Economics. 39 (7): 751–760. doi:10.1002/mde.2920. JSTOR 26608277. S2CID 158821430.
↑ Katsuyama, Neil. "The economics of occupational licensing: Applying antitrust economics to distinguish between beneficial and anticompetitive professional licenses." S. Cal. Interdisc. LJ 19 (2009): 565.
↑ Gellhorn, Walter. "The abuse of occupational licensing." U. CHi. l. rev. 44 (1976): 6.
↑ Ralph M, Braid (2017). "Efficiency-enhancing horizontal mergers in spatial competition". Papers in Regional Science. 96 (4): 881–895. Bibcode:2017PRegS..96..881B. doi: 10.1111/pirs.12228 .
↑ "Antitrust Regulators Release New Vertical Merger Guidelines". CRS Legal Sidebar: 1–3. 21 July 2020.

External links

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[1] Hemingway, Carole. "What is Predatory Pricing?". LegalVision. Archived from the original on 30 September 2020. Retrieved 18 October 2020.

[2] Windle, Charlotte (July 31, 2006). "China faces Indian dumping allegations". BBC News.

[3] "Exclusive Dealing". Australian Competition and Consumer Commission. ACCC. 9 January 2013. Retrieved 18 October 2020.

[4] "U.S. v. Dentsply International, Inc". The United States Department of Justice. 25 June 2015. Retrieved 19 October 2020.

[5] Pash, Chris (4 April 2018). "Flight Centre has been fined $12.5 million for 'price fixing'". Business Insider Australia. Archived from the original on 7 November 2020. Retrieved 18 October 2020.

[6] "ACCC v Cabcharge Australia Ltd". Australian Competition Law. AustFederal Court of Australiaralian Competition Law. Retrieved 22 October 2020.

[7] "Market sharing". Competition Commission (Hong Kong). Retrieved 22 October 2020.

[8] "Cartels case studies & legal cases: Queensland pre-mixed concrete cartel". Australian Competition and Consumer Commission. ACCC. 24 January 2013. Retrieved 23 October 2020.

[9] Shapiro, Daniel M; Khemani, R. S (1993). "Glossary of industrial organisation economics and competition law" (PDF). p. 83.

[10] Ware, James (22 December 2008). "Apple iPod iTunes Antitrust Litigation". United States District Court, N.D. California, San Jose Division. C 05-00037 JW. Retrieved 25 October 2020.

[11] Blair, Roger; Whitman, Joseph (2018). "Resale price maintenance: A managerial perspective". Managerial and Decision Economics. 39 (7): 751–760. doi:10.1002/mde.2920. JSTOR 26608277. S2CID 158821430.

[12] Katsuyama, Neil. "The economics of occupational licensing: Applying antitrust economics to distinguish between beneficial and anticompetitive professional licenses." S. Cal. Interdisc. LJ 19 (2009): 565.

[13] Gellhorn, Walter. "The abuse of occupational licensing." U. CHi. l. rev. 44 (1976): 6.

[14] Ralph M, Braid (2017). "Efficiency-enhancing horizontal mergers in spatial competition". Papers in Regional Science. 96 (4): 881–895. Bibcode:2017PRegS..96..881B. doi: 10.1111/pirs.12228 .

[15] "Antitrust Regulators Release New Vertical Merger Guidelines". CRS Legal Sidebar: 1–3. 21 July 2020.

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