11.2 Regulating Anticompetitive Behavior
3 min read•june 24, 2024
Anticompetitive behavior can harm consumers and stifle innovation. Companies use tactics like , , and to gain unfair advantages. These practices limit competition and often lead to higher prices and fewer choices for consumers.
Antitrust regulations aim to prevent these harmful practices and maintain fair competition. Laws like the Sherman Act and agencies like the FTC work to identify and stop anticompetitive behavior. They also regulate mergers to prevent excessive market concentration.
Anticompetitive Behavior and Antitrust Regulation
Common restrictive business practices
Top images from around the web for Common restrictive business practices
4.5 Price Controls – Principles of Microeconomics View original
Is this image relevant?
Collusion or Competition? | Microeconomics View original
Is this image relevant?
Reading: The Collusion Model | Microeconomics View original
Is this image relevant?
4.5 Price Controls – Principles of Microeconomics View original
Is this image relevant?
Collusion or Competition? | Microeconomics View original
Is this image relevant?
1 of 3
Top images from around the web for Common restrictive business practices
4.5 Price Controls – Principles of Microeconomics View original
Is this image relevant?
Collusion or Competition? | Microeconomics View original
Is this image relevant?
Reading: The Collusion Model | Microeconomics View original
Is this image relevant?
4.5 Price Controls – Principles of Microeconomics View original
Is this image relevant?
Collusion or Competition? | Microeconomics View original
Is this image relevant?
1 of 3
-
- Involve agreements between competitors at the same level of the supply chain
- Price fixing occurs when competitors agree to charge the same or similar prices for their products or services (gasoline retailers)
- Market allocation involves competitors agreeing to divide up markets geographically or by customer type to reduce competition (pharmaceutical companies)
- happens when competitors coordinate their bids to manipulate the outcome of a competitive bidding process (construction contracts)
-
- Consist of agreements between firms at different levels of the supply chain, such as manufacturers and retailers
- involves manufacturers setting a minimum or maximum price at which retailers can sell their products (electronics brands)
- requires a retailer to only sell a manufacturer's products and not those of competitors (beverage distribution)
- limit the geographic areas where retailers can sell a manufacturer's products (franchises)
Tying vs bundling vs predatory pricing
-
- Involve selling one product (the tying product) on the condition that the buyer also purchases another product (the tied product)
- Can be used to leverage in one market to gain an advantage in another market (Microsoft's of Internet Explorer with Windows)
- Example: A printer manufacturer requiring customers to buy its branded ink cartridges to use with the printer
- Bundling
- Offers two or more products together as a package, often at a lower price than if purchased separately
- Pure bundling makes products only available as a bundle and cannot be purchased individually (cable TV packages)
- Mixed bundling makes products available both individually and as a bundle, with the bundle offered at a discount (software suites)
- Predatory pricing
- Involves setting prices below cost to drive competitors out of the market
- The predatory firm incurs short-term losses with the goal of eliminating competition and then raising prices to recoup losses and earn higher profits
- Requires significant market power and financial resources to sustain losses in the short run (Amazon's pricing strategy in certain markets)
Application of antitrust concepts
- Market power
- Refers to the ability of a firm to profitably raise prices above competitive levels
- Factors to consider include market share, barriers to entry, product differentiation, and buyer power (Google's dominance in online search)
-
- A legal approach that weighs the pro-competitive benefits of a business practice against its anticompetitive effects
- Considers factors such as market power, intent, and the overall impact on competition and (exclusive contracts in the sports industry)
-
- Applies to certain practices, such as price fixing and market allocation, which are considered inherently anticompetitive and are illegal without further analysis
- No need to demonstrate actual anticompetitive effects or market power (price fixing in the airline industry)
-
- Defines the market in which the alleged anticompetitive behavior takes place
- Determined in terms of both product and geographic dimensions
- Helps determine the extent of a firm's market power and the potential impact of its actions on competition (the market for smartphone operating systems)
Antitrust Regulation and Enforcement
-
- Foundational U.S. antitrust law prohibiting monopolization and restraints of trade
-
- Government agency responsible for enforcing antitrust laws and promoting consumer protection
-
- Oversight of corporate mergers to prevent excessive market concentration ()
-
- Government efforts to maintain market competitiveness and prevent anticompetitive practices ()
Key Terms to Review (23)
Antitrust Regulation: Antitrust regulation refers to the laws and policies designed to promote and maintain competition in the marketplace by preventing monopolistic practices and other anticompetitive behaviors. It aims to ensure a level playing field for businesses and protect consumer welfare.
Bid Rigging: Bid rigging is a form of collusive behavior in which competing firms coordinate their bids to manipulate the outcome of a bidding process, often to the detriment of the party soliciting the bids. This anticompetitive practice undermines the integrity of the bidding system and can lead to higher prices and reduced quality for the goods or services being procured.
Bundling: Bundling is a pricing strategy where a company sells two or more products or services together as a single combined offering, often at a discounted price compared to purchasing the items separately. This practice is commonly used to increase sales, promote cross-selling, and create customer loyalty.
Competition Policy: Competition policy refers to the set of laws, regulations, and government actions aimed at promoting and maintaining a competitive market environment. It seeks to prevent anti-competitive behavior and ensure fair competition among businesses, ultimately benefiting consumers through lower prices, greater choice, and innovation.
Consumer Welfare: Consumer welfare refers to the overall well-being and satisfaction of consumers in an economic market. It is a measure of the benefits that consumers derive from the consumption of goods and services, taking into account factors such as price, quality, and choice.
Exclusive Dealing: Exclusive dealing is a vertical restraint where a supplier requires a buyer to purchase all or most of its products from that supplier, preventing the buyer from purchasing from the supplier's competitors. This practice can limit competition and raise concerns about anticompetitive behavior.
Federal Trade Commission: The Federal Trade Commission (FTC) is an independent federal agency in the United States responsible for protecting consumers and promoting competition in the marketplace. It enforces a variety of antitrust and consumer protection laws to ensure fair and honest business practices.
Horizontal Restraints: Horizontal restraints refer to agreements or practices between competitors at the same level of the supply chain that restrict competition. These types of restraints are often considered anticompetitive and are subject to regulation by antitrust authorities.
Market Allocation: Market allocation refers to the process by which the free market determines the distribution and utilization of scarce resources based on supply, demand, and the price mechanism. It is a fundamental concept in economics that describes how the market, rather than central planning, coordinates the production and consumption of goods and services.
Market Power: Market power refers to the ability of a firm or group of firms to influence the market price, output, and other market conditions. It is the degree to which a firm can exert control over the market by setting prices, restricting supply, or hindering competition.
Merger Regulation: Merger regulation refers to the set of laws and policies that govern the review and approval of mergers and acquisitions between companies. It aims to ensure that these corporate combinations do not lead to a substantial reduction in competition or the creation of monopolistic power in the market.
Monopoly: A monopoly is a market structure characterized by a single supplier of a good or service that has no close substitutes. Monopolies arise due to barriers to entry that prevent other firms from competing in the market, allowing the monopolist to set prices and output levels to maximize profits.
Oligopoly: An oligopoly is a market structure characterized by a small number of firms that collectively dominate the industry. These firms are interdependent, meaning the actions of one firm can significantly impact the others, leading to strategic decision-making and complex competitive dynamics.
Per Se Illegality: Per se illegality refers to a legal doctrine in antitrust law where certain business practices are considered inherently anticompetitive and unlawful, without the need for further analysis of their actual effects on the market. These practices are deemed illegal by their very nature, regardless of any potential procompetitive justifications or economic considerations.
Predatory Pricing: Predatory pricing is a pricing strategy where a dominant firm sets prices artificially low to drive out competition and establish a monopoly. It involves a firm temporarily accepting lower profits or even losses to eliminate rivals and then raising prices once the competition is eliminated.
Price Fixing: Price fixing is a form of anticompetitive behavior where competitors collude to set prices for a product or service at a certain level, rather than allowing prices to be determined by market forces of supply and demand. This practice restricts competition and can harm consumers by limiting their choices and inflating prices.
Relevant Market: The relevant market is a key concept in antitrust analysis, defining the scope of competition that is considered when evaluating the potential anti-competitive effects of a business practice or merger. It encompasses the products or services that are reasonable substitutes for one another from the consumer's perspective, as well as the geographic area where these substitutes are available.
Resale Price Maintenance: Resale price maintenance (RPM) is a vertical restraint in which a manufacturer sets the minimum price at which a retailer can sell its product. This practice aims to prevent price competition among retailers and maintain the manufacturer's desired price level for its goods.
Rule of Reason: The rule of reason is a legal standard used to determine the legality of business practices or transactions under antitrust law. It involves a comprehensive analysis of the actual competitive effects and potential pro-competitive justifications of the challenged conduct, rather than a per se prohibition. The rule of reason approach is central to the analysis of corporate mergers and the regulation of anticompetitive behavior.
Sherman Antitrust Act: The Sherman Antitrust Act is a landmark U.S. federal law passed in 1890 that prohibits activities that restrict interstate commerce and competition in the marketplace. It is a key piece of legislation in regulating anticompetitive behavior and promoting a free market economy.
Territorial Restrictions: Territorial restrictions are limitations placed on the geographic area within which a business can operate or sell its products. These restrictions are often used by companies as a strategy to control the distribution and pricing of their goods or services within specific markets.
Tying Sales: Tying sales refers to the practice of a company requiring customers to purchase one product or service as a condition of buying another, often unrelated, product or service. This strategy is used to leverage a company's market power and increase sales of its products, but can be considered an anticompetitive behavior that restricts consumer choice.
Vertical Restraints: Vertical restraints refer to restrictions or conditions imposed by a firm on its suppliers or distributors in a vertical supply chain. These restraints aim to control the terms and conditions under which products or services are sold, distributed, or used.