Understanding Antitrust Laws
1. Yes, I agree with this statement. Corporate or governmental practises that hinder or restrict competition in the market are known as anti-competitive practises. Techniques for limiting the degree of performance within a marketplace and bolstering the monopolistic power of established companies. One of the most difficult and controversial topics of competition policy is determining when a firm’s behaviour is an abuse of market power rather than a serious competition. Typical competition laws include measures forbidding dominant corporations from abusing their market dominance, as well as non-dominant firms from attempting to monopolistic markets.
Antitrust laws vary by state and federal legislation, but they all aim to prevent corporations from engaging in competitive activities that harm other businesses or consumers, usually smaller ones. These regulations are designed to encourage healthy competition in a free market by preventing monopoly power abuse (Coase, 2016). Companies compete so that their products and services improve, innovation flourishes, and consumers have more options. Some company activities may be pro-competitive; nonetheless, economic analytical tests and empirical legal cases are utilised to determine whether or not a corporate action is anti-competitive.
1. When rival companies agree to collaborate – for example, by raising prices to increase profits – this is known as collusion. Collusion allows businesses to increase profits at the expense of consumers while also lowering market competition (Stigler, 2008).
Collusion is viewed as harmful to consumers and the economy, governments regulate it heavily. The following are some of the outcomes of collusion:
- Consumers pay a high price. As a result, consumer surplus is reduced, and allocative inefficiency increases.
- Types of collusion that function as a barrier to entry can deter new businesses from entering the market.
- Profits from collaboration can make businesses complacent, causing them to forego innovation and productivity improvements.
- The drawbacks of monopoly are passed on to industry, but none of the benefits are passed on to consumers
- In times of unproductive business conditions, collusion may be used to save the industry and save businesses from going out of business, which would be detrimental to consumers in the long run.
- After problems with foot and mouth disease caused a drop in farm income in 2002/03, dairy suppliers attempted to utilise this justification.
- R&D Collusion profits may theoretically be put into R&D.
Collusion, not always, but sometimes has negative welfare connotations.
1. The rule of reason is the polar opposite of the Per Se Rule in that it places the burden of proof on the informant to prove the facts they claim or any anti-competitive agreements they assert. The act’s section 3 (1) could, and probably will, have a significant negative impact. The reason for this is that the application of the Rule of Reason, which places the burden of proof on the informant, has a significant negative impact because the preponderance of probability is used by the Competition Commission of India. As a result, Rule of Reason, rather than Per Se Rule, is used in Section 3 (1). Similarly, because there are different stages or levels in the production chain in Section 3 (4), the vertical agreements may have a significant negative impact. The Rule of Reason is used as a result (Luigi, 2014).
“Every contract, combination in the form of trust or otherwise, or conspiracy, in hindrance of trade or commerce among the several States, or with foreign nations, is declared to be prohibited,” according to the actual phrase.Horizontal price fixing agreements, horizontal market allocation agreements, bid rigging among competitors, some horizontal group boycotts by competitors, and sometimes tying arrangements are all regarded per se illegal under antitrust laws (Rober, 2013).
Even with these limitations, there is one notable exception to per se application. When parties form a joint venture or other pro-competitive structure, and the constraints are necessary to the venture’s or structure’s existence, a court may consider the restraints ancillary and apply a lower threshold, such as the rule of reason.
Consequences of Collusion
1. The Agencies’ antitrust enforcement policy in regard to competitor partnerships is outlined in these Guidelines. The Agencies expect that by establishing their general position, firms will be better able to choose whether they will challenge a competitor partnership or any of the agreements that make it up.
These Guidelines, on the other hand, will not be able to replace antitrust enforcement judgement and discretion. Each case is evaluated in light of its specific facts, and the Agencies use the analytical framework outlined in these Guidelines in a reasonable and flexible manner.
In general, the Agencies utilise ten years as a criterion for determining whether a rival collaboration is sufficiently permanent to be treated similarly to a merger. However, depending on industry-specific variables, such as technology life cycles, the length of this period may vary. Competitors must occasionally collaborate in order to compete in modern markets. Firms are being pushed toward more complicated cooperation by competitive forces in order to achieve goals including expanding into new markets, funding costly research projects, and reducing production and other expenses (William, 2015).
Collaborations like these are frequently not just beneficial, but also beneficial to competitors. Indeed, federal antitrust officials have only launched a few civil actions against competitor partnerships in the recent two decades. Nonetheless, the idea that antitrust rules are dubious of agreements between current or potential competitors may discourage the formation of precompetitive alliances. The Supreme Court uses two forms of analysis to establish the legality of a competitor’s agreement: per se and rule of reason analysis.
Certain forms of agreements are so likely to undermine competition while providing no major procompetitive gain that they aren’t worth the time and money it takes to investigate their impacts in detail. Such agreements are challenged as per se illegal once they have been identified.
Businesses might come together in a variety of ways. A company may buy all of its financial assets, all or some of its functioning assets, or a major portion of its outstanding securities from another company. Furthermore, two firms may merge by exchanging securities. Such transactions may be the result of a mutual treaty between the two companies, or they may be unwelcome, unforeseen, or even “hostile”—that is, the target company resists the acquisition. Any operation in which two autonomous actors are united into one, resulting in the bolstering of one and the annihilation of the other, is referred to as a merger (Frank, 2012).
Mergers are prohibited under the law if the result “may be considerably lessening competition or tending to restrict competition.” Horizontal mergers, which include two competitors, and vertical mergers, which involve organisations in a buyer-seller relationship, can both have this effect. A merger between rivals can reduce competition and hurt customers in two ways: (1) by allowing the merger to hike prices effectively on its own; or (2) by allowing the remaining companies to behave in a synchronized approach on some relevant dimension (unilateral effect). In either case, the merger may result in increased pricing, inferior quality, diminished service, or fewer options for consumers (West, 2008). As such competition authorities should pursue these two mergers.
Legal Boundaries for Corporate Actions
A horizontal merger eliminates a competitor and may change the competitive landscape, making it simpler for the remaining firms to work together effectively on cost, productivity, capacity, and other competitive factors. The agencies utilise market concentration as a starting point since it is a measurement of the number of competitors and their relative size. Mergers involving companies with significant market holdings in at least one market sometimes demand additional investigation. The larger the merging firms’ market shares and the greater the market dominance after the merger, the more are the chances that the agencies will demand additional study into the suggested merger’s potential consequences (Davies, 2012). During a merger enquiry, the agency looks for mergers that will either increase the chances of collaboration among firms in the relevant market if none existed before the merger, or make any existing organised interaction between the remaining firms more successful, complete, or sustainable. Competitors must be able to: (1) achieve a beneficial agreement for each player; (2) identify cheating (that is, aberrations from the plan); and (3) penalize cheats and reestablish the agreement.The coordination can take the shape of an actual understanding, such as committing to raise prices or limit production, or it can take the form of indirect coordination, in which case the coordination is achieved through subtle mechanisms. Because unspoken agreements are more difficult to uncover, and some apparent commitments may be liable to be prosecuted, firms may opt to collaborate silently rather than explicitly. The question is whether the merger enhances or creates the potential of the remaining firms to cooperate on some aspect of competition that is important to customers.
For Example: Competition regulators in the United States have contested a merger between premium rum producers. The creator of Malibu Rum, which accounts for 8% of market sales, attempted to acquire the maker of Captain Morgan’s rums, which has a market share of 33%. The top premium rum provider has a 54 percent share of the market. After the merger, two companies would control almost 95% of sales. The Commission objected to the merger, stating that it would make it more likely for the two remaining companies to work together to raise prices.
A merger could potentially give rise to a unilateral anticompetitive effect. This form of harm is most visible in a merger to monopoly, which occurs when the merging companies are the only rivals in a market. However, in marketplaces where the merging firms generate sales that buyers perceive are very close substitutes, a merger may allow for a unilateral price hike. The merged company may be able to hike prices successfully without shedding many sales after the merger. If a sufficient number of customers switch between the merged firm’s products rather than switching to other firms’ products, and other firms are unable to reorient their products to tempt customers away, such a price rise will be beneficial for the merged firm (Orbach, 2012).
For example: The merging of two manufacturers of nondestructive testing (NDT) equipment, which is utilised for quality control and safety in numerous industries, was contested by the competition authorities. Many clients preferred the combining companies’ offerings, and evidence proved that the two companies were usually head-to-head competitors. This beneficial rivalry on pricing and innovation would have been gone if the companies had merged. The firms agreed to divest the buyer’s NDT business to settle the Competition Commission’s assertion that the proposed merger was improper.
Vertical mergers involve companies that are in a buyer-seller relationship, such as a company merging with an input product supplier or a company integrating with a distributor of its completed products. Vertical mergers can result in considerable savings and better manufacturing or distribution coordination. However, some vertical mergers pose a competitive threat. A vertical merger, for example, can make it difficult for competitors to acquire access to a key component product or a key distribution channel. When a company merges, it gets the power and motive to limit its competitors’ access to important inputs and outlets (Frederic, 2012).
For example: The merging of an ethanol terminal operator and a gasoline refiner in the United States was disputed by competition regulators. Before the merger, an independent corporation with no gasoline sales restricted access to the ethanol supply terminal, which was used by refiners to manufacture specially blended gasoline. Following the merger, the acquiring refiner might disfavor its gasoline competitors by blocking access to the ethanol terminal or driving up the price of ethanol supplied to them, reducing competition for ethanol-containing gasoline sales and rising consumer costs. The merged firm was obligated to build an informational firewall as part of a consent agreement so that its refining subsidiary would not have privileged access or pricing.
Reference
Coase, H. 2016. “The Nature of the Firm”. Economica.
Stigler, J. 2008. “competition”, The New Palgrave Dictionary of Economics.
Luigi Z, 2014. “corporate governance”, The New Palgrave Dictionary of Economics
Frederic M. 2013. Industrial Market Structure and Economic Performance.
Orbach, B. 2012. “The Antitrust Curse of Bigness”. Southern California Law Review.
Rober M. 2013 . Microeconomics. Pearson.
William F. 2015. Managerial Economics (4th ed.). Wiley.
Frank, H. 2012. Microeconomics and Behavior (7th ed.). McGraw Hill.
West E.G. 2008 Monopoly. In: Palgrave Macmillan (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London
Davies, J. 2012. “The revolution in monopoly theory”.
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