Terms of Competition Law

Cartel Example:
A cartel is a formal collusive arrangement among firms with the goal of increasing
profits

 Assess the role of competition and collusion in the formation of

cartels

 Cartel members cooperate to set industry price and output.


 Game theory indicates that cartels are inherently unstable. Each
individual member has an incentive to cheat in order to make
higher profits in the short run.
 Cheating may lead to the collapse of a cartel. With the collapse,
firms would revert to competing, which would lead to decreased
profits.
 OPEC, the Organization of Petroleum Exporting Countries,
provides an example of a historically effective cartel

Examples of Collusion

Collusion results when companies get together to make secret

agreements that are possibly unethical or illegal because they operate to
the detriment of a third party. While laws and regulations have been
enacted to help deter collusion between firms, such secret agreements do
still occur in various ways, as in sales, purchasing or advertising. A
practice known as "conscious parallelism" also produces the same effect
as outright collusion

a.Collusion in Sales
One way in which firms may collude, according to law and economics
professors Robert H. Lande and Howard P. Marvel, is by artificially
fixing prices for products or services. For instance, if virtually all
bananas sold in the United States were to come from three companies,
they could possibly get together and agree not to charge less than a
certain amount for their merchandise. In this way, by eliminating the
effect of market competition, the colluding firms force buyers to pay
more than they normally would in a free market, which would otherwise
naturally lead to lower prices as the competing firms tried to undercut
each other.

b.Collusion in Purchasing
Another way in which firms may collude at the expense of other parties
is through purchasing. Just as they can get together to set a minimum
price for the goods they sell, they can also get together to set a maximum
price for supplies that they purchase. For instance, several auto
manufacturers may get together and agree on a maximum price that they
are willing to pay for steel. This allows them to keep prices down
despite scarcity.

c. Advertising Restrictions

Firms may also collude with each other by restricting the amount of
information that consumers can know about their products through
advertising. This may mean that the parties involved agree not to give
technical facts about their products in ads, relying instead on generic
advertising methods designed to do little more than get customers'
attention and make them remember the product and brand. In their
paper, "The Three Types of Collusion," Lande and Marvel described
how the California Dental Association once made rules that prohibited
members of the association from publishing price-comparing
advertisements.

c.Eliminating Competition

When companies collude, the agreements they make may become of

little effect if new competitors enter the market who are not willing to
enter into the collusion. In such cases, colluding firms may try to
eliminate new competition by buying them out or restricting their access
to sales venues and suppliers. According to Lande and Marvel, after
colluding firms have eliminated competition, they are free to raise their
prices.

Conscious Parallelism

The practice of "conscious parallelism," according to Legal-

Explanations.com, is not strictly collusion because it does not come as a
result of any actual agreements between firms. Instead, it is a situation
that produces the same results of collusion without any actual
consultation taking place. It occurs as a result of a general feeling among
competitors that they should charge the same price for similar goods.
For instance, if one petroleum company raises its prices for gasoline due
to increased production costs, other petroleum companies may follow
suit even if they face no increased production costs of their own. This
allows them to increase their profit margin without fear of being
undercut by the first company.

Comity

Law The principle by which a court in one jurisdiction accept to a court

in another jurisdiction where either would have legal power to decide the
case, or gives effect to the laws, executive acts, or legal decisions of
another jurisdiction.
Law the principle by which the courts of one jurisdiction may give effect
to the laws and decisions of another, or may stay their own proceedings
in deference to those in another jurisdiction.
When one court defers to the jurisdiction of another in a case in which
both would have the right to handle the case. Usually this is applied to a
federal court allowing a state court to try a criminal case (either
exclusively or first) in which both a state and federal crime has
apparently been committed. Murder which also violates civil rights,
kidnapping across state borders, murder of a federal official, fraud
involving violations of both federal and state laws are examples of cases
to which comity may apply.
A consortium
A consortium is an association of two or more individuals, companies,
organizations or governments (or any combination of these entities) with
the objective of participating in a common activity or pooling their
resources for achieving a common goal.
The definition of a consortium is an association or alliance, or a legal
right of one spouse to have companionship and support with the other.

An example of consortium is several banks banding together.

a. An association or a combination, as of businesses, financial

institutions, or investors, for the purpose of engaging in a joint venture.
b. A cooperative arrangement among groups or institutions: a library
consortium.

c. An association or society.

A divestment (to be separate)

A divestiture or divestment is the reduction of an asset or business

through sale, liquidation, exchange, closure, or any other means for
financial or ethical reasons. It is the opposite of investment.

Example: Let's assume Company XYZ is the parent of a food company,

a car company, and a clothing company. If for some reason Company
XYZ wants out of the car business, it might divest the business by
selling it to another company, exchanging it for another asset, or closing
down the car company.
Why it Matters:

Optimists often look at divestitures as ways to streamline (i.e., "get back

to basics"), reduce debt, and enhance shareholder value. Pessimists may
view them as concessions that the divested assets were not performing
well.

Abuse of dominant position

A company can restrict competition if it is in a position of strength on a

given market. A dominant position is not in itself anti-competitive, but if
the company exploits this position to eliminate competition, it is
considered to have abused it.

Examples include:

 charging unreasonably high prices

 depriving smaller competitors of customers by selling at artificially
low prices they can't compete with
 obstructing competitors in the market (or in another related
market) by forcing consumers to buy a product which is artificially
related to a more popular, in-demand product
 refusing to deal with certain customers or offering special
discounts to customers who buy all or most of their supplies from
the dominant company
 making the sale of one product conditional on the sale of another
product.
The terms "upstream" and "downstream" refer to two different, but
equally important, aspects of marketing. Upstream marketing is focused
on strategy and the long-term market situation, while downstream
marketing looks at tactics and supporting the company sales team.
Distinguishing these types of activity can help build a bridge between
marketing and sales, benefiting both.

Duopoly
A situation in which two companies own all or nearly all of the market
for a given type of product or service.
A duopoly is a market condition in which two companies producing a
similar type of product have control over the market.
For Example:
The most popular example of duopoly is between Visa and Mastercard
who exercise a major control over the electronic payment processing
market in the world.
Pepsi and Coca-cola are the two major shareholders in the soft drinks
market. Airbus and Boeing are duopolies in the commercial jet aircraft
market.
Economies of scale
Different examples of how firms can benefit from economies of scale,
including specialisation, bulk buying and the use of assembly lines.
Examples of Economies of Scale include:

Tap Water – High Fixed Costs of a national network.

To produce tap water, the water companies had to invest in a huge

network of water pipes stretching throughout the country. The fixed cost
of this investment is very high. However, since they distribute water to
over 25 million households it brings the average cost down. However,
would it be worth another water company building another network of
water pipes to compete with the existing company? No, because if they
only got a small share of the market, the average cost would be very
high and they would go out of business. This is an example of a natural
monopoly – most efficient number of firms is one.

Specialisation – Car Production

Another economy of scale is in the production of a complex item such as

a motor car. The production process involves many different complex
stages. Therefore to produce a car you should split up the process and
have workers specialise in producing a certain part. e.g. a worker may
become highly specialised in the design of a car; another in testing e.t.c.
Specialisation requires less training of workers and a more efficient
production process. However, if you have several distinct production
processes it is most efficient to have a large output.

Bulk Buying – Supermarkets

Supermarkets can benefit from economies of scale because they can buy
food in bulk and get lower average costs. If you had a delivery of just
100 cartons of milk the average cost is quite high. The marginal cost of
delivering 10,000 cartons is quite low. You still need to pay only one
driver, the fuel costs will be similar. True, you may need a bigger van,
but the average cost of transporting 10,000 is going to be a lot less than
transporting 100.

Marketing Economies

If you spend £100 on a national tv advertising campaign it is only

worthwhile if you are a big national company like Starbucks or Coca
Cola. If your output is small, the average cost of the advertising is much
higher.

Risk Bearing – developing new drugs

To develop new drugs to treat illness takes considerable degrees of
investment and research with no guarantee of success. Therefore this can
only  be undertaken by pharmaceutical companies with significant
resources.

Container Principle. – more efficient transport and packaging.

If the surface area of a container increases by 100%, the volume it can

carry will increase by 200%. Therefore, transporting bigger quantities
leads to lower average costs.

Financial economies – a bigger firm gets a lower rate of interest on

borrowing

Economies of scope. Economies of scope is  different to economies of

scale though there is same principle of larger firms benefiting from
lower average costs.. This occurs when a large firm uses it existing
resources to diversify into related markets. For example, Once a firm is
producing soft drinks, it can use its marketing and distribution network
to start producing alcoholic drinks.

Hit and run competition

Hit and run competition occurs when a firm temporarily enters a market
and then leaves when supernormal(unnatural) profits are exhausted.

Hit and run competition is considered to be a feature of a contestable

market. A contestable market has low barriers to entry and exit.
Therefore, if firms in the industry are making supernormal profits, there
is an incentive for a new firm to enter and take advantage of the high
profits.

If the industry no longer makes supernormal profits, it is easy for the

firm to exit and leave without excessive costs.
The threat of hit and run competition may be sufficient to keep prices
and profits low. If the market is perfectly contestable, firms might wish
to engage in some form of limit pricing to avoid the disruption of hit and
run competition.

Example of Hit and Run Competition

If a type of clothing becomes particularly fashionable (for example the

Onesie), firms can set high prices and make supernormal profits.
However, this will encourage other firms to enter into the market and
also produce Onesies. If it falls out of fashion, some clothing firms will
leave that particular segment of the clothing market. Therefore, firms
may enter the ‘Onesie’ market for just a short time – a classic example
of hit and run competition.

Hit and run competition may also be highly seasonal. For example in the
peak of summer, being a tourist guide becomes quite profitable.
Therefore, some entrepreneurs may temporarily enter the market until
supernormal profits are exhausted at the end of the tourist season.

Requirements for Hit and Run Competition

 Good information about the profitability of the industry.

 Low barriers to entry and exit
 Low sunk costs. Sunk costs are unrecoverable and so will create a
costy exit – discouraging hit and run competition.

The Definitions of "Upstream" and "Downstream" in the Production

Process

"Upstream" and "downstream" are business terms applicable to the production processes that
exist within several industries. Industries that commonly use this terminology include the metals
industry, oil, gas, biopharmaceutical and biotechnology industries. Upstream, downstream and
midstream make up the stages of the production process for these and other industries.

Definition of Upstream
The upstream stage of the production process involves searching for and extracting raw
materials. The upstream part of the production process does not do anything with the material
itself, such as processing the material. This part of the process simply finds and extracts the raw
material. Thus, any industry that relies on the extraction of raw materials commonly has an
upstream stage in its production process. In a more general sense, "upstream" can also refer to
any part of the production process relating to the extraction stages.

Examples of Upstream Processes

In the petroleum industry, locating underground or underwater oil reserves characterizes the
upstream process. Additionally, the upstream process in this industry involves bringing oil and
gas to the surface. Extraction wells represent an example of a structure operating in this stage in
the process. The upstream stage in the production process may also manifest itself as a supplier
providing raw materials to manufacturers or other businesses that ultimately process the
materials.

Definition of Downstream
The downstream stage in the production process involves processing the materials collected
during the upstream stage into a finished product. The downstream stage further includes the
actual sale of that product to other businesses, governments or private individuals. The type of
end user will vary depending on the finished product. Regardless of the industry involved, the
downstream process has direct contact with customers through the finished product.

Examples of Downstream Processes

In the oil and gas industry, the downstream process consists of converting crude oil into other
products and then selling those products to customers. Thus, oil refineries represent structures
that operate within the downstream process. However, any kind of plant that processes raw
materials may qualify as operating within the downstream stage of production. A company that
combines both upstream and downstream processes is an integrated company.