Anticompetitive practices are attempts by businesses to interfere with market forces – abuse of market power.
Unfair business practices refer to a wide range of business practices that artificially limit competition. By colluding together in this way, firms operate, or act together, as if they are a monopoly.
The essence of market competition entails letting businesses to gain advantage over rivals in both ethical and legal ways. By building on their advantages, not by exploiting their market position to the disadvantage. Or, detriment of other stakeholders – competitors, customers, suppliers or investors.
When a firm, or firms, engage in uncompetitive business practices, it will increase its relative market position and profits without providing goods and services of better quality. Consequently, this will negatively impact both businesses and the country.
For businesses, anticompetitive practices will result in limited choices of products for customers, artificially high prices and less innovation.
For the economy, there will be reduced output due to lack of competition, loss of economic efficiency and misallocation of scarce resources.
Horizontal restraints on competition
Generally speaking, horizontal restraints on competition primarily make other companies in the market worse.
- Monopolizing the market. It is not illegal for a company to be the market leader with the highest market share. It is not illegal either to charge customers ‘very high prices’. Neither is acting aggressively in order to get rid of competition. However, when a company violates the law trying to maintain or acquire a monopoly through unfair methods, this is not allowed. A firm with high market power (a monopolist) cannot act illegally to use its dominant position to prevent other businesses from entering the market, or exclude competitors.
- Dividing the market. Market sharing happens when two companies divide territories geographically, or allocate customers, by making a secret agreement. These companies contractually agree to stay out of each other’s way in order to reduce competition in the pre-agreed locations. Other methods of market sharing include non-competition on established customers. Or, not producing the same or even similar products.
- Price-fixing agreements. This form of collusion involves forming a sort of cartel between the businesses concerned which collude with each other to agree to fix prices at the high level. This action is illegal as it will effectively dismantle the free market by having those firms not involving in competition with each other. Another form of price fixing agreement is agreeing not to compete with each other directly to prevent driving prices down.
- Predatory pricing. Dumping happens when a major firm in the industry (a market leader) tries to block new competitors from entering the market by charging extremely low prices. This pricing strategy is all about selling certain products at an aggressively low price while making a loss. A company with large market share enjoys internal economies of scale, hence has the ability to temporarily sacrifice selling a product at below Average Cost (AC) to drive competitors out of the market. New businesses are unlikely to have the low-cost advantage enjoyed by large established businesses. Therefore, the new firm may find it hard to survive this extreme form of competition. After competitors are gone, the market leader will most likely raise prices for a much greater profit.
- Tying. Tying means that products that are not related to one another must be purchased together. Otherwise, neither of the products will be sold separately. This strategy forces the buyer to purchase an unnecessary product from a separate market.
Vertical restraints on competition
Generally speaking, vertical restraints on competition primarily make supplier-distributor/retailer relationships worse.
- Exclusive dealings. Under the exclusive agreement, a wholesaler or retailer is obliged by contract to only purchase products from the contracted supplier. Often those powerful suppliers use monopoly power to restrain trade using exclusive dealings within contract requirements. This mechanism prevents wholesalers and retailers to maximize profits as they are not able to buy supplies at the lowest prices. It also limits customer choices.
- Group boycott. This scheme occurs when two or more competitors refuse to conduct business with a specific company. Two manufacturers can agree not to deal with a certain vendor to purchase raw materials and components from. Any individual company can legally decide to stop doing business with another company or refuse to do business with another firm. There is nothing wrong with it. However, it is illegal to make an agreement among competitors not to do business with a targeted business. An illegal boycott can be a method of shutting a competitor out of the market, or preventing entry of a new firm into a certain market.
- Full-line forcing. Here, a major producer forces a wholesaler or retailer to stock up the whole range of products from that particular manufacturer. The buyer must purchase all kinds of products, not just the really popular ones. If the retailer refuses to buy the whole line of goods, then even the popular items will not be supplied at all any longer. And, the retailer will be forced to look for a new supplier, or even get out of business if not being able to find another supplier.
- Resale price maintenance. This happens when distributors and retailers are forced by the manufacturer to sell products at certain high prices which had been determined by the manufacturer. Smaller retailers may not want to agree to charge the prices pre-determined by the manufacturer as keeping prices artificially high is clearly a disadvantage for consumers. The producers will often argue that those high prices are an essential part of their branding and the earnings allow to pay for the costs of Research and Development (R&D) of new products.
How will the government respond to anticompetitive practices?
The government ought to identify any unfair business practices and stop them. Also, the authorities shall prevent these uncompetitive practices from happening in the future.
In most countries, governments have passed competition laws that make all of these anticompetitive practices not only unethical, but also illegal. These laws are known as ‘anti-trust policies’.
Otherwise, reduced competition on the market will lead to lower quality of products which will be sold for higher prices.
