SCIENTIFIC ARTICLE REVIEW

BUSI-1651 FUNDAMENTELS OF INTERNATIONAL BUSINESS STRATEGY

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Table of Contents

PART 1 8

PART 2 8
2.1 COMPANY’S SUMMARY 8

PART 3 14
3.1 ARTICLE’S SUMMARY 14

PART 4 14
4.1 SCIENTIFIC ARTICLE REVIEW 14
4.2 MARKET 14
4.3 COMPETITOR IDENTIFICATION 14
4.4 MARKET STRUCTURE 14

PART 5 14
5.1 CONCLUSION 14

BIBLIOGRAPHY 15

APPENDIX 15

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 PART 1

This scientific article review is based on the following web article:

Pooley, C.R., 1 August 2022. UK’s competition enforcer has shot itself in the foot. [Online]
Available at: https://www.ft.com/content/b008acfc-c20d-47f4-b32e-7bca5c904d67. Accessed
12 February 2023.

PART 2

2.1 COMPANY’S SUMMARY

JD SPORTS FASHION PLC, the organisation that was the focus of the article, will be
covered in this part. JD, a member of the corporate group "RS RUBIN AND FAMILY," has
developed its major retail fascia and JD into some of the UK's top retailers of name-brand
and private-label sports and apparel. It was formerly branded as "John David Sports PLC." It
was started in 1985 by a collaboration between two people named John Wardle and David
Makin. The registered business address of the corporation is Bury, United Kingdom.
Athleisure, Size, Open, JD, and First Sport are just a few of the brands the company currently
owns and operates throughout its 400+ outlets. With merchandise from brands including
Nike, Adidas, Lacoste, McKenzie, New Era, Puma, and more, the company primarily
conducts business through its locations in the United Kingdom. (ORBIS, 2022).

This company is involved in the retail sector, where it specialises in sports fashion and
outdoor garments, footwear, accessories, and equipment. As a multinational corporation, the
business operates on numerous continents, including Europe, Asia, North America, and
Australia (ORBIS, 2022). The following heatmap (Figure 1) demonstrates the geographical
location of the companies in the corporate group.

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Figure 1: The geographical footprint of JD SPORTS FASHION PLC (ORBIS, 2022)

PART 3

3.1 ARTICLE’S SUMMARY

JD, one of the UK’s largest retailers, has been at odds with the Competition and Markets
Authority (CMA) over its £90 million acquisition of Footasylum, a smaller rival. JD will sell
the offending business to private equity for £37.5 million. The transaction was minor in the
grand scheme of things, but the CMA argued that if Footasylum did not compete with JD,
UK consumers would suffer. JD spent three years attempting to obtain approval for a
transaction that provided a marginal increase in sales and was a strategic sideshow in

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comparison to its plans for US expansion. The UK’s CMA was overzealous in its application
of the rules on smaller acquisitions, resulting in a three-year time, effort, and financial waste.
The CMA investigation has been far more damaging to JD than the original deal deserved, as
its then-executive chair Peter Cowgill was caught on camera meeting with Footasylum’s boss
in a car park. JD disputed the CMA’s interpretation of events, but this brought to light
corporate governance concerns at a company that had long been a trailblazer in such matters.
Blocking the deal will not permanently harm the competition watchdog, but it was an
unnecessary step back (Pooley, 2022).

PART 4

4.1 SCIENTIFIC ARTICLE REVIEW

This part will analyse the subjects which constitute the topic "Market and Competitors” to
examine the relationship between the article and the theoretical topic. It will research the
market definition, its framework, its competitors, and how to assess them, as well as discuss
these subjects' characteristics and potential relevance to the aforementioned article.

4.2 MARKET

Prior to examining aspects encompassing the topic, it is critical to understand its emergence.
The concept market, according to Kenton (2021), is a physical or virtual environment where
both buyers and sellers can interact and exchange goods and services. As stated by Stigler
and Sherwin (1985), there must be a rate of exchange between the quid and quo. Therefore,
the market determines the supply and demand-driven prices for both goods and services.
However, three or more parties are necessary to foster competition and achieve market
equilibrium. As a result, a market definition is required.

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In relation to the article, JD is a member of the UK Retail industry. A fast-paced, dynamic,
and competitive market with more than 300.000 enterprises that generated about 500 bn
pounds in revenue in the UK in 2022 (Sabanoglu, 2022)1. Nevertheless, JD only sells apparel,
thus the niche market to which it belongs is the clothing retail industry, which has a total of
22.940 firms and an annual revenue of 41 billion pounds in 2022 (IBIS World, 2022).

4.3 COMPETITOR IDENTIFICATION

As previously indicated in the preceding subject, market definition is essential to achieve

balance when competition is introduced. This can only be conducted by antitrust agencies. To
deter anticompetitive behaviour, antitrust agencies such as the European Commission (EC)
investigate if corporations are abusing their market position or constructing any activity to
acquire a monopolised market. Thus, a market definition, commonly referred to as competitor
identification, is required to identify monopolist (Besanko, et al., 2017). Moreover, The EC
(2022) states that market definition is a method for determining the boundaries of
competition between companies. In addition to providing a framework for competition
analysis, it is an important step in determining the competitive restrictions affecting a supplier
of a particular good or service (The Office of Fair Trading, 2004).

Consequently, what constitutes a competitor? Besanko et al. (2017) define this concept as:
“… firms whose strategic choices directly affect one another”. Alternatively defined, two
firms are competitors if their strategic decisions negatively impact each other's performance.
Furthermore, a firm may face direct or indirect competition in a number of input and output
markets concurrently.

Nevertheless, utilising hypothetical questions to assess competition in practice is challenging.

As a result, we must employ the following approaches to competitor identification:

- Qualitative approach: Table 1 suggests that substitutes with several equivalent

attributes are likely to be close in comparison.

1
See Appendix A to observe the annual sales value of all retailing in Great Britain from 2005 to 2022 graph.

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 - Quantitative approach: Table 2 summarizes the methods used to establish whether
two firms are in the same market.

Table 1 – Qualitative Approach to Competitor Identification

This approach stems from the SSNIP (small but significant nontransitory
increase in price) criterion. Based on the economic theory of substitutes,
this criterion considers anyone who can produce a product that can serve as
a substitute to be a competitor. In summary, if a product possesses one of

Qualitative these characteristics that will cause a price change from one to another, we

Approach will consider it a substitute product.

Factors that determine whether two products are close substitutes:

- The products have the same or similar performance characteristics.

- The products have the same or similar occasion for use.
- The products are sold in the same geographical market.
Source: Besanko et al. (2017)

Table 2 – Quantitative Approach to Competitor Identification

This approach, also known as an empirical approach, is a data-driven

conversion of the qualitative approach that will facilitate in business
decision making.
Quantitative
Approach
Factors that determine whether two firms are in the same market:

- Cross-price elasticity of demand (regression analysis).

- Price correlations of the firms’ products (diversion analysis).
- Trade flow analysis (i.e., ad hoc and catchment area).

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Source: Besanko et al. (2017)

Concerning the article, the following conclusion can be used to assess whether
FOOTASYLUM LTD is a competitor of JD SPORTS FASHION PLC. First, due to the CMA
involvement, we can consider Footasylum a competitor under the Market Definition theory.
Implying that JD was developing any activity to gain additional market power by acquiring
and horizontally integrating into the market, prompting the intervention of the CMA, an
antitrust agency. Secondly, while they are not their largest rivals, the firms are direct
competitors since they compete in both input and output markets. In contrast, based on the
approaches for identifying competitors, the firms' apparel wear products are close substitutes
since they share the same performance attributes, usage occasions, and geographical markets.
Lastly, Eley (2018) claims in his paper that JD’s consistent performance was in contrast to
Footasylum's severe profit warning, implying that Footasylum's position favourably affected
JD's performance in 2018, before the acquisition of its rival Footasylum and its trial in 2019
(Kime, 2019).

4.4 MARKET STRUCTURE

According to the Structure, Conduct, Success paradigm, which Besanko et al. describe in
their book (2017), a market's structure can have a significant impact on the behaviour and
financial performance of its firms. Market structures can range from monopoly at one
extreme to perfect competition at the other. There are at least two additional broad types of
market structure that fall between these two extremes. These are oligopoly and monopolistic
competition. These marketplaces are often characterized in terms of their degree of
concentration. Several concentration measurements (Table 3 and 4) can be used to assess this,
which will determine the type of market structure (Table 5).

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Table 3 – N-firm Concentration Ratio (CR) measurement

This metric computes the aggregate market share of the market's N

largest enterprises. Generally, market shares are calculated based on sales
revenues, however, other criteria may be employed (i.e., production
capacity). Nonetheless, the N-firm ratio's only drawback is that it is
unaffected by changes in the sizes of the largest firms.

N-firm
This measurement ranges from 0-100, which depending on the
Concentration
percentage will define a market structure:
Ratio (CR)
- No concentration: 0 per cent equals perfect competition.
- Low concentration: 0 to 40 per cent may represent perfect
competition or an oligopoly.
- Medium concentration: 40 to 70 per cent is most likely to result in
an oligopoly.
- High concentration: 70 to 99 per cent may imply an oligopoly or a
monopoly.
- Total concentration: 100 per cent equals a monopoly.

Source: Besanko et al. (2017)

Table 4 – Herfindahl Index (HI) measurement

Herfindahl
Index (HI)
This metric is equivalent to the squared market share total of all the firms
operating in the market. Additionally, the HI measure is more informative
since it avoids the CR’s aforementioned problem.

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 The following is the formula for this measurement:

N
H=∑ S 2i
i=1

This measurement ranges from 0-1.0, which depending on the amount will
define the market’s concentration:

- Highly competitive industry: An HI below 0.01.

- Low concentration: An HI below 0.15.
- Moderate concentration: An HI between 0.15 and 0.25.
- High concentration: An HI above 0.25.

In terms of these ranges, an increase in the HI generally implies a decline

in competition and an increase in market power, and vice versa.

Source: Besanko et al. (2017)

Table 5 – Types of market structures

Market N° of Product Barriers to Influence

Example
Structure firms differentiation entry over price

Perfect
Many None None None Wool growers
competition

Monopolistic
Many Fair amount None Moderate Restaurant
competition

Moderate to Car
Oligopoly Few Fair amount High
substantial manufacturers

Local
Monopoly One None Impossible Substantial
electricity

Source: Own work

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Concerning the market section, we can infer from our current understanding that the market
JD belongs to tends to promote monopolistic competition. This is a result of the existence of
a large number of firms, slight product differentiation due to the wide variety of products
available in the clothing industry (horizontal differentiation 2), low to no entry barriers, and a
moderate influence over product price (Chamberlin, 1933). Although we don't have enough
data to compute the HI accurately, we may infer from the HI measurement range that there is
a low to moderate concentration given JD's yearly income 3. According to both hypotheses,
this suggests that while there are currently many firms, the market structure may be tilting
towards an oligopoly in the long run.

PART 5

5.1 CONCLUSION

We can infer that JD and FOOTASYLUM are rivals in a monopolistic market based on the
preceding sections of the article. Pooley (2022) claims in her article that the CMA rejected
the deal as it regarded it to violate the law since it seemed to be a tie-up between the two
firms. To support its claims, The CMA presumably used the Herfindahl Index to forecast how
a merger would affect customers and pricing (Besanko, et al., 2017). Additionally, Pooley
(2022) believes that the three-year exercise was a meaningless waste of everyone's time,
effort, and money in her paper. If you look at the wider picture in the long term, however, JD
is horizontally integrating and merging in the market, acquiring smaller competitors to gain
more market power, which can then lead to an oligopolistic market. In contrast, JD will be
able to use mergers with economies of scale and learning (Farell & Shapiro, 1990), to have
more control over the price, less competition, and avoid the Revenue Destruction Effect
while maximising their profitability (Besanko, et al., 2017). Nevertheless, this would also
have a detrimental effect on present and potential rivals because it would be more challenging
for them to enter the market, and depending on the other approaches JD employ, it might
have an impact on the potential customers.

2
See Appendix B to understand the definition of horizontal differentiation.
3
See Appendix C to observe the annual revenue of JD table.

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 BIBLIOGRAPHY
Besanko, D. et al., 2017. Competitor Identification and Market Definition. In: J. Wiley & S.,
eds. Economics of Strategy. s.l.:Wiley, pp. 156-161.

Besanko, D. et al., 2017. Market Structure and Competition. In: J. Wiley & S., eds.
Economics of Strategy. s.l.:Wiley, pp. 162-169.

Eley, J., 2018. JD Sports commits to bricks and mortar as profits rise. [Online]
Available at: https://www.ft.com/content/0bf8e56c-b587-11e8-bbc3-ccd7de085ffe
[Accessed 15 February 2023].

European Comission, 2022. Competition: Commission seeks feedback on draft revised

Market Definition Notice. [Online]
Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_22_6528
[Accessed 12 February 2023].

Kenton, W., 2021. Market: What It Means in Economics, Types and Common Features.
[Online]
Available at: https://www.investopedia.com/terms/m/market.asp
[Accessed 13 February 2023].

Kime, E., 2019. JD Sports agrees to buy remaining shares of Footasylum. [Online]
Available at: https://www.ft.com/content/f275b9ca-494d-11e9-bbc9-6917dce3dc62
[Accessed 15 February 2023].

ORBIS, 2022. Industry & activities. [Online]

Available at: https://orbis.bvdinfo.com/version-20221222/Orbis/1/Companies/report/Index?
backLabel=Back%20to%20Key%20information&format=548F90CD-738B-ED11-80D1-
00155D115311&BookSection=ACTIVITIES&seq=0&sl=1672762321719
[Accessed 10 February 2023].

Pooley, C. R., 2022. UK's competition enforcer has shot itself in the foot.. [Online]
Available at: https://www.ft.com/content/b008acfc-c20d-47f4-b32e-7bca5c904d67
[Accessed 12 February 2023].

Sabanoglu, T., 2022. Annual sales value of all retailing in Great Britain from 2005 to 2022.
[Online]

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Available at: https://www.statista.com/statistics/287912/retail-total-annual-sales-value-great-
britain/
[Accessed 13 February 2023].

Stigler, G. J. & Sherwin, R. A., 1985. The Extent of the Market. Journal of Law and
Economics, 28(3), pp. 555-585.

The Office of Fair Trading, 2004. Market definition: Understanding competition law.
[Online]
Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/
attachment_data/file/284423/oft403.pdf
[Accessed 12 February 2023].

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 APPENDIX

APPENDIX A - Annual sales value of all retailing in Great Britain from 2005 to 2022

Source: Statista.com (2022)

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APPENDIX B – Horizontal differentiation

Table 6 – Horizontal differentiation

It is said that horizontal differentiation occurs when consumers have

Horizontal idiosyncratic preferences, or if tastes vary significantly from person to
differentiatio person, and occurs when only some consumers prefer a product to
n competing products. One of the key origins of idiosyncratic preferences is
location and taste.

Source: Besanko et al (2017).

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APPENDIX B – Annual revenue of JD

Source: ORBIS.com (2022)

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