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Competition Laws and Monopolistic Behaviour – Part II

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C. ANTI – COMPETITIVE STRATEGIES

Any Competition Law in developing countries should, in my view, excplicitly include strict prohibitions of the following practices (further details can be found in Porter’s book – “Competitive Strategy”).

These practices characterize markets in poor countries. They influence their economies by discouraging foreign investors, encouraging inefficiencies and mismanagement, sustaining artificially high prices, misallocating very scarce resources, increasing unemployment, fostering corrupt and criminal practices and, in general, preventing the growth that developing countries could have attained.

Strategies’ for Monopolization

Exclude competitors from distribution channels – this is common practice in many countries. Open threats are made by the manufacturers of popular products: “If you distribute my competitor’s products – you cannot distribute mine. So, choose.” Naturally, retail outlets, dealers and distributors will always prefer the popular product to the new. This practice not only blocks competition – but also innovation, trade and choice or variety.

Buy up competitors and potential competitors – There is nothing wrong with that. Under certain circumstances, this is even desirable. Think about the Banking System: it is always better to have fewer banks with bigger capital than many small banks with capital inadequacy (remember the TAT affair). So, consolidation is sometimes welcome, especially where scale represents viability and a higher degree of consumer protection. The line is thin and is composed of both quantitative and qualitative criteria. One way to measure the desirability of such mergers and acquisitions (M&A) is the level of market concentration following the M&A. Is a new monopoly created? Will the new entity be able to set prices unperturbed? stamp out its other competitors? If so, it is not desirable and should be prevented.

Every merger in the USA must be approved by the antitrust authorities. When multinationals merge, they must get the approval of all the competition authorities in all the territories in which they operate. The purchase of “Intuit” by “Microsoft” was prevented by the antitrust department (the “Trust-busters”). A host of airlines was conducting a drawn out battle with competition authorities in the EU, UK and the USA lately.

Use predatory [below-cost] pricing (also known as dumping) to eliminate competitors – This tactic is mostly used by manufacturers in developing or emerging economies and in Japan. It consists of “pricing the competition out of the markets”. The predator sells his products at a price which is lower even than the costs of production. The result is that he swamps the market, driving out all other competitors. Once he is left alone – he raises his prices back to normal and, often, above normal. The dumper loses money in the dumping operation and compensates for these losses by charging inflated prices after having the competition eliminated.

Raise scale-economy barriers – Take unfair advantage of size and the resulting scale economies to force conditions upon the competition or upon the distribution channels. In many countries Big Industry lobbies for a legislation which will fit its purposes and exclude its (smaller) competitors.

Increase “market power (share) and hence profit potential”

Study the industry’s “potential” structure and ways it can be made less competitive – Even thinking about sin or planning it should be prohibited. Many industries have “think tanks” and experts whose sole function is to show the firm the way to minimize competition and to increase its market shares. Admittedly, the line is very thin: when does a Marketing Plan become criminal?

Arrange for a “rise in entry barriers to block later entrants” and “inflict losses on the entrant” – This could be done by imposing bureaucratic obstacles (of licencing, permits andd taxation), scale hindrances (no possibility to distribute small quantities), “old boy networks” which share political clout and research and development, using intellectual property right to block new entrants and other methods too numerous to recount. An effective law should block any action which prevents new entry to a market.

Buy up firms in other industries “as a base from which to change industry structures” there – This is a way of securing exclusive sources of supply of raw materials, services and complementing products. If a company owns its suppliers and they are single or almost single sources of supply – in effect it has monopolized the market. If a software company owns another software company with a product which can be incorporated in its own products – and the two have substantial market shares in their markets – then their dominant positions will reinforce each other’s.

“Find ways to encourage particular competitors out of the industry” – If you can’t intimidate your competitors you might wish to “make them an offer that they cannot refuse”. One way is to buy them, to bribe out the key personnel, to offer tempting opportunities in other markets, to swap markets (I will give my market share in a market which I do not really care about and you will give me your market share in a market in which we are competitors). Other ways are to give the competitors assets, distribution channels and so on providing that they collude in a cartel.

“Send signals to encourage competition to exit” the industry – Such signals could be threats, promises, policy measures, attacks on the integrity and quality of the competitor, announcement that the company has set a certain market share as its goal (and will, thereforee, not tolerate anyone trying to prevent it from attaining this markret share) and any action which directly or indirectly intimidates or convinces competitors to leave the industry. Such an action need not be positive – it can be negative, need not be done by the company – can be done by its political proxies, need not be planned – could be accidental. The results are what matters.

Competition Laws should outlaw the following, as well:

‘Intimidate’ Competitors

Raise “mobility” barriers to keep competitors in the least-profitable segments of the industry – This is a tactic which preserves the appearance of competition while subverting it. Certain, usually less profitable or too small to be of interest, or with dim growth prospects, or which are likely to be opened to fierce domestic and foreign competition are left to the competition. The more lucrative parts of the markets are zealously guarded by the company. Through legislation, policy measaures, withholding of technology and know-how – the firm prevents its competitors from crossing the river into its protected turf.

Let little firms “develop” an industry and then come in and take it over – This is precisely what Netscape is saying that Microsoft is doing to it. Netscape developed the now lucrative Browser Application market. Microsoft was wrong in discarding the Internet as a fad. When it was found to be wrong – Microsoft reversed its position and came up with its own (then, technologically inferior) browser (the Internet Explorer). It offered it free (sound suspiciously like dumping) to buyers of its operating system, “Windows”. Inevitably it captured more than 30% of the market, crowding out Netscape. It is the view of the antitrust authorities in the USA that Microsoft utilized its dominant position in one market (that of the Operating Systems) to annihilate a competitor in another (that of the browsers).

Engage in “promotional warfare” by “attacking shares of others” – This is when the gist of a marketing or advertising campaign is to capture the market share of the competition. Direct attack is then made on the competition just in order to abolish it. To sell more in order to maximize profits, is allowed and meritorious – to sell more in order to eliminate the competition is wrong and should be disallowed.

Use price retaliation to “discipline” competitors – Through dumping or even unreasonable and excessive discounting. This could be achieved not only through the price itself. An exceedingly long credit term offered to a distributor or to a buyer is a way of reducing the price. The same applies to sales, promotions, vouchers, gifts. They are all ways to reduce the effective price. The customer calculates the money value of these benefits and deducts them from the price.

Establish a “pattern” of severe retaliation against challengers to “communicate commitment” to resist efforts to win market share – Again, this retaliation can take a myriad of forms: malicious advertising, a media campaign, adverse legislation, blocking distribution channels, staging a hostile bid in the stock exchange just in order to disrupt the proper and orderly management of the competitor. Anything which derails the competitor whenever he makes a headway, gains a larger market share, launches a new product – can be construed as a “pattern of retaliation”.

Maintain excess capacity to be used for “fighting” purposes to discipline ambitious rivals – Such excess capacity could belong to the offending firm or – through cartel or other arrangements – to a group of offending firms.

Publicize one’s “commitment to resist entry” into the market

Publicize the fact that one has a “monitoring system” to detect any aggressive acts of competitors

Announce in advance “market share targets” to intimidate competitors into yielding share their market share

Proliferate Brand Names

Contract with customers to “meet or match all price cuts (offered by the competition)” thus denying rivals any hope of growth through price competition

Get a big enough market share to “corner” the “learning curve,” thus denying rivals an opportunity to become efficient – Efficiency is gained by an increase in market share. Such an increase leads to new demands imposed by the market, to modernization, innovation, the introduction of new management techniques (example: Just In Time inventory management), joint ventures, training of personnel, technology transfers, development of proprietary intellectual property and so on. Deprived of a growing market share – the competitor will not feel pressurized to learn and to better itself. In due time, it will dwindle and die.

Acquire a wall of “defensive” patents to deny competitors access to the latest technology

“Harvest” market position in a no-growth industry by raising prices, lowering quality, and stopping all investment and advertising in it

Create or encourage capital scarcity – by colluding with sources of financing (e.g., regional, national, or investment banks), by absorbing any capital offered by the State, by the capital markets, through the banks, by spreading malicious news which serve to lower the credit-worthiness of the competition, by legislating special tax and financing loopholes and so on.

Introduce high advertising-intensity – This is very difficult to measure. There could be no objective criteria which will not go against the grain of the fundamental right to freedom of expression. However, truth in advertising should be strictly imposed. Practices such as dragging a competitor through the mud or derogatorily referring to its products or services in advertising campaigns should be banned and the ban should be enforced.

Proliferate “brand names” to make it too expensive for small firms to grow – By creating and maintaining a host of absolutely unnecessary brandnames, the competition’s brandnames are crowded out. Again, this cannot be legislated against. A firm has the right to create and maintain as many brandnames as it wishes. The market will exact a price and thus punish such a company because, ultimately, its own brandname will suffer from the proliferation.

Get a “corner” (control, manipulate and regulate) on raw materials, government licenses, subsidies, and patents (and, of course, prevent the competition from having access to them).

Build up “political capital” with government bodies; overseas, get “protection” from “the host government”.

‘Vertical’ Barriers

Practice a “preemptive strategy” by capturing all capacity expansion in the industry (simply buying it, leasing it or taking over the companies that own or develop it).

This serves to “deny competitors enough residual demand”. Residual demand, as we previously explained, causes firms to be efficient. Once efficient, develop enough power to “credibly retaliate” and thereby “enforce an orderly expansion process” to prevent overcapacity

Create “switching” costs – Through legislation, bureaucracy, control of the media, cornering advertising space in the media, controlling infrastructure, owning intellectual property, owning, controlling or intimidating distribution channels and suppliers and so on.

Impose vertical “price squeezes” – By owning, controlling, colluding with, or intimidating suppliers and distributors, marketing channels and wholesale and retail outlets into not collaborating with the competition.

Practice vertical integration (buying suppliers and distributionb and marketing channels)

This has the following effects:

The firm gains a “tap (access) into technology” and marketing information in an adjacent industry. It defends itself against a supplier’s too-high or even realistic prices

It defends itself against foreclosure, bankruptcy and restructuring or reorganization. Owning suppliers means that the supplies do not cease even when payment is not affected, for instance.

It “protects proprietary information from suppliers” – otherwise the firm might have to give outsiders access to its technology, processes, formulas and other intellectual property.

It raises entry and mobility barriers against competitors. This is why the State should legislate and act agasinst any purchase, or other types of control of suppliers and marketing channels which service competitors and thus enhance competition.

It serves to “prove that a threat of full integration is credible” and thus intimidate competitors.

Finally, it gets “detailed cost information” in an adjacent industry (but doesn’t integrate it into a “highly competitive industry”)

“Capture distribution outlets” by vertical integration to “increase barriers”;

‘Consolidate’ the Industry

Send “signals” to threaten, bluff, preempt, or collude with competitors

Use a “fighting brand” (a low-price brand used only for price-cutting)

Use “cross parry” (retaliate in another part of a competitor’s market)

Harass competitors with antitrust suits and other litigious techniques

Use “brute force” (“massed resources” applied “with finesse”) to attack competitors or use “focal points” of pressure to collude with competitors on price

“Load up customers” at cut-rate prices to “deny new entrants a base” and force them to “withdraw” from market;

Practice “buyer selection,” focusing on those that are the most “vulnerable” (easiest to overcharge) and discriminating against and for certain types of consumers

“Consolidate” the industry so as to “overcome industry fragmentation”.

This arguments is highly successful with US federal courts in the last decade. There is an intuitive feeling that few is better and that a consolidated industry is bound to be more efficient, better able to compete and to survive and, ultimately, better positioned to lower prices, to conduct costly research and development and to increase quality. In the words of Porter: “(The) pay-off to consolidating a fragmented industry can be high because… small and weak competitors offer little threat of retaliation”

Time one’s own capacity additions; never sell old capacity “to anyone who will use it in the same industry” and buy out “and retire competitors’ capacity.”

Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant
Self Love – Narcissism Revisited and After the Rain – How the West
Lost the East. He served as a columnist for Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International
(UPI) Senior Business Correspondent, and the editor of mental health
and Central East Europe categories in The Open Directory and
Suite101.

Until recently, he served as the Economic Advisor to the Government
of Macedonia.

Visit Sam’s Web site at http://samvak.tripod.com

Competition Laws and Monopolistic Behaviour – Part II
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About Sam Vaknin
Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He served as a columnist for Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com WebProNews Writer
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