Consumers Association of Penang

Giving voice to the little people...since 1970

Restrictive trade practices in a free market

WE practice a free market system, but how free and competitive is it?

So what if the industries are dominated by a few players? What is wrong with that?

When there is less competition, the players in the market will be able to dominate it and fix high prices for their goods and services. It works to the company's advantage that there is no or very little competition. Where there is competition the companies may act to get rid of rivals. They may work among themselves to fix prices or divide the market among themselves to keep out competitors.
 
Such movements are commonly referred to as restrictive trade practices. Some of them are outlined below:

CARTELS

This is where two or more companies producing the same product get together to regulate prices for their own benefit. With a cartel it will be possible for the companies (as members of the cartel) to carry out the following:

Fix prices

The cartel will fix a price for which all members will sell their products. The move is to prevent price cutting, which is likely to happen when there is a lack of demand and companies slash price to get a slice of the market.

This explains why the local tile cartel was formed during the property slump of the 1980s and later abandoned when the property market became buoyant.

Collusive tendering

With collusive tendering, those who are bidding for a tender have already agreed among themselves who among will get the tender.

This practice is inherently anti-competitive since it contravenes the very purpose of inviting tenders that is containing goods or services on the most favourable prices and conditions.

Collusive tendering may take many forms, namely: agreement to submit identical bids; agreement as to who shall submit the lowest bid; agreement for the submission of cover bids (involuntary inflated bids); agreement not to bid against each other; agreement to "squeeze out" outside bidders and agreement designating bid winners in advance on a rotational basis. Such agreements may provide for a system of compensation to unsuccessful bidders based on a certain percentage of profits of successful bidders at the end of a certain period.

Market allocation

These agreements are designed especially to strengthen the position of a certain member by others agreeing not to compete in his designated market. Since each is the only company in the allocated market the end result is that each can act as a monopolist in the designated market.

Production or sales quota

A cartel will restrict members' production or sales when there is a surplus capacity or where the object is to raise prices.

Under such schemes, members frequently agree to limit supplies to a proportion of their previous sales. In order to enforce the quota, a pooling arrangement is often created whereby companies selling in excess of their quota are required to make payment to the pool in order to compensate those selling below their quotas.

Boycotts

Boycotts the refusal to purchase or supply certain goods is one of the most common means employed to coerce those who are not members of the cartel to follow a prescribed course of action.

Group boycotts maybe horizontal, that is, where cartel members agree to among themselves not to sell to or buy from certain customers. Boycotts may be vertical in nature, that is, involving agreements at different levels of the production and distribution stages, refusing to deal with a third party.

MARKET DOMINATION

Companies do not always have to form cartels to dominate the market; those in a dominant position can control the market.

A dominant position of market power refers to the degree of actual or potential control of the market by a company. The control can be measured on the basis of market shares, total annual turnover, size of assets or number of employees.

Where there are already laws on competition, they are likely to specify the percentage of market share which the company must hold in order to be considered to be in a dominant or monopolistic position. For example, a company with more than 30% share of the market may be considered to be in a dominant market position.

A company dominating the market can be said to be carrying out acts that are considered an abuse of its position when it does the following:

Predatory pricing

The aim is to drive the competitor out of business. The company sells goods at below cost to attract customers away from its rival. Once the rival is eliminated, it can raise its price.

Discriminatory pricing

This is closely related to predatory pricing. Discriminatory pricing is unjustifiably differentiation of prices (or even in terms of conditions) in the supply or purchase of goods compared with the prices of similar goods sold to favourable buyers.

Transfer pricing

This is where a parent company supplies goods to a subsidiary at very low prices in order for the subsidiary to have very low production costs. Competitors of the subsidiary will be supplied at excessively higher prices. As a result the subsidiary will be able to sell its goods cheaper — edging the competitor out of business.

Tied selling

Here the manufacturer forces the buyer to purchase other goods or services from him. The "tied" products maybe totally unrelated to the product that the buyer wants or it can be a product in a similar line.

Tying arrangements are normally imposed in order to promote the sale of slower moving products and especially those subject to greater competition from substitute products.

The manufacturer can impose the concept of "tied selling" by virtue of his dominant position in the market.

EXCLUSIVE DEALING

This is a practice whereby a company receives the exclusive rights to sell or resell another company's goods or services, usually in a designated area. As a condition for such exclusive rights the buyer must not deal in goods of the manufacturer's competitors.

The main purpose of such restrictions is to create a monopoly-type situation for the distribution and the sale of the particular goods; to make the entry of competitors difficult, thus securing maximum prices for the goods.

Resale price maintenance

Fixing the resale price of goods usually by the manufacturer or wholesaler is generally termed resale price maintenance.

With such a practice, the retailer is prevented from fixing his own profit margin. Should he sell the goods at a discount, the manufacturer will refuse to continue to supply him.

Market concentration

Concentration of market power is another source of restrictive business practices. Such concentration may occur when the following take place:

Mergers, takeovers and joint ventures

A merger occurs when two or more enterprises come together whereby the identity of one is lost and the result is a single company.

The takeover of one company by another usually involves the purchase of all or a sufficient amount of the shares of another company to enable it to exercise control over the company.

A joint venture on the other hand involves the formation of a separate company altogether.

Whatever the method used, the end result is the same. Integration of competitors into a single unit leads to growth of monopoly power. When it happens between small companies, while it may not necessary adversely affect competition in the market, it may nonetheless create conditions which can trigger further concentration of economic power and lead to oligopoly.

Interlocking directorships

This is a situation where a person is a member of the board of directors of two or more companies. Interlocking directorships can affect competition in a number of ways. They can lead to administrative control whereby decisions regarding investments and production are the result of common strategies among companies on prices, market allocations and so forth. It can also lead to reciprocal arrangements among the companies which agree not to compete with each other.

Interlocking directorships if not effectively controlled can be used to get around laws on restrictive business practices.