Economics

(iii) New BRAND competition. Given dynamic change (advances in technology, changes in consumer tastes), a firm’s existing products stand to become obsolete. A supplier is thus obliged to introduce new brands or to redesign existing ones to remain competitive;

(c) low-cost production as a means of competition. Although cost-effectiveness is not a direct means of competition, it is an essential way to strengthen the market position of a supplier. The ability to reduce costs opens up the possibility of (unmatched) price cuts or allows firms to devote greater financial resources to differentiation activity. See also MONOPOLISTIC COMPETITION, OLIGOPOLY, MARKETING MIX, PRODUCT-CHARACTERISTICS MODEL, PRODUCT LIFE-CYCLE.

competition policy a policy concerned with promoting the efficient use of economic resources and protecting the interests of consumers. The objective of competition policy is to secure an optimal MARKET PERFORMANCE: specifically, least-cost supply, ‘fair’ prices and profit levels, technological advance and product improvement. Competition policy covers a number of areas, including the monopolization of a market by a single supplier (MARKET DOMINANCE), the creation of monopoly positions by MERGERS and TAKEOVERS, COLLUSION between sellers and ANTI-COMPETITIVE PRACTICES.

Competition policy is implemented mainly through the control of MARKET STRUCTURE and MARKET CONDUCT but also, on occasions, through the direct control of market performance itself (by, for example, the stipulation of maximum levels of profit).

There are two basic approaches to the control of market structure and conduct: the nondiscretionary approach and the discretionary approach. The non-discretionary approach lays down ‘acceptable’ standards of structure and conduct and prohibits outright any transgression of these standards. Typi-cal ingredients of this latter approach include:

(a) the stipulation of maximum permitted market share limits (say, no more than 20% of the market) in order to limit the degree of SELLER CONCENTRATION and prevent the emergence of a monopoly supplier. Thus, for example, under this ruling any proposed merger or takeover that would take the combined group’s market share above the permitted limit would be automatically prohibited;

(b) the outright prohibition of all forms of ‘shared monopoly’ (ANTI-COMPETITIVE AGREEMENT/RESTRICTIVE TRADE AGREEMENTS, CARTELS) involving price fixing, market sharing, etc;

(c) the outright prohibition of specific practices designed to reduce or eliminate competition, for example, EXCLUSIVE DEALING, REFUSAL TO SUPPLY, etc.

Thus, the nondiscretionary approach attempts to preserve conditions of WORKABLE COMPETITION by a direct attack on the possession and exercise of monopoly power as such.

By contrast, the discretionary approach takes a more pragmatic line, recognizing that often high levels of seller concentration and certain agreements between firms may serve to improve economic efficiency rather than impair it. It is the essence of the discretionary approach that each situation be judged on its own merits rather than be automatically condemned. Thus, under the discretionary approach, mergers, restrictive agreements and specific practices of the kind noted above are evaluated in terms of their possible benefits and detriments. If, on balance, they would appear to be detrimental, then, and only then, are they prohibited.

The USA by and large operates the nondiscretionary approach; the UK has a history of preferring the discretionary approach, while the European Union combines elements of both approaches. See COMPETITION POLICY (UK), COMPETITION POLICY (EU), PUBLIC INTEREST, WILLIAMSON TRADE-OFF MODEL, OFFICE OF FAIR TRADING, COMPETITION COMMISSION, RESTRICTIVE PRACTICES COURT, HORIZONTAL INTEGRATION, VERTICAL INTEGRATION, DIVERSIFICATION, CONCENTRATION MEASURES.

competition policy (EU) covers three main areas of application under European Union’s COMPETITION LAWS:

(a) CARTELS. Articles 85(1) and (2) of the Treaty of Rome prohibit cartel agreements and ‘CONCERTED PRACTICES’ (i.e. formal and informal collusion) between firms, involving price-fixing, limitations on production, technical developments and investment, and market sharing, whose effect is to restrict competition and trade within the European Union (EU). Certain other agreements (for example, those providing for joint technical research and specialization of production) may be exempted from the general prohibition contained in Articles 85(1) and (2), provided they do not restrict inter-state competition and trade;

(b) MONOPOLIES/MARKET DOMINANCE. Article 86 of the Treaty of Rome prohibits the abuse of a dominant position in the supply of a particular product if this serves to restrict competition and trade within the EU. What constitutes ‘abusive’ behaviour is similar to the criteria applied in the UK, namely, actions that are unfair or unreasonable towards customers (e.g. PRICE DISCRIMINATION between EU markets), retailers (e.g. REFUSAL TO SUPPLY) and other suppliers (e.g. selective price cuts to eliminate competitors). Firms found guilty by the European Commission of illegal cartelization and the abuse of a dominant position can be fined up to 10% of their annual sales turnover;

(c) MERGERS/TAKEOVERS. The Commission can investigate mergers involving companies with a combined world-wide turnover of over €5 billion (£3.7 bn) if the aggregate EU-wide turnover of the companies concerned is greater than €250 million. Again, the main aim is to prevent mergers likely adversely to affect competition and trade within the EU.

These thresholds still apply generally, but in 1998 they were reduced to €3.5 billion and €100 million, respectively, for mergers affecting the competitive situation in three (or more) EU countries in cases where the combined turnover of the companies exceed €25 million in each of the three countries.

Generally, where EU competition laws apply, they take precedence over the national competition laws of member countries. However, a subsidiarity provision can be invoked, which permits the competition authority of a member country to request permission from the EU Competition Directorate to investigate a particular dominant firm or merger case if it appears that the ‘European dimension’ is relatively minor compared to its purely local impact.

competition policy (UK) covers six main areas of application under UK COMPETITION LAWS:

(a) MONOPOLIES/MARKET DOMINANCE. The COMPETITION ACT 1998 prohibits actions that constitute the ‘abuse’ of a dominant position in a UK market. The OFFICE OF FAIR TRADING (OFT) is responsible for the referral of selected goods and services monopolies (both private and public sectors) to the COMPETITION COMMISSION for investigation and report and the implementation (where it sees fit) of the Commission’s recommendations.

A dominant position is defined as a situation where one firm controls 40% or more of the ‘reference’ good or service. (Under previous legislation, market dominance was defined in terms of a 25% market share). Abuse consists of acts that are harmful to the interests of consumers and other suppliers, e.g. charging excessive prices to secure monopoly profits and imposing restrictive terms and conditions on the supply of goods (see EXCLUSIVE DEALING, TIE-IN SALES, etc). The term ‘abuse’ can be broadly equated with that of conduct contrary to the ‘public interest’ – the benchmark used in previous legislation.

Defining the ‘reference’ market to establish evidence of market dominance can be problematic since it raises the issue of how widely or narrowly the boundaries of ‘the market’ are to be delineated (see MARKET, MARKET CONCENTRATION). Thus, the drinks market could be divided as between alcoholic and non-alcoholic drinks, and further divided into sub-markets as between, for example, the various types of alcoholic drink – the beer/lager market, spirits market, wine market, etc. Establishing abuse can also be a ‘grey area’. For example, high prices and profits may be condoned because they reflect exceptional innovation; on the other hand, low profits may not be a sign of effective competition but reflect the fact that the firm is grossly inefficient;

(b) ANTI-COMPETITIVE AGREEMENTS/RESTRICTIVE TRADE AGREEMENTS. The Competition Act 1998 prohibits outright agreements between firms (i.e. COLLUSION) and CONCERTED PRACTICES that prevent, restrict or distort competition within the UK. The Office of Fair Trading is responsible for monitoring ‘suspected’ cases of firms operating agreements illegally and can refer them for further investigation by the Competition Commission. The prohibition applies to both formal and informal agreements, whether oral or in writing, and covers agreements that involve joint price-fixing and common terms and conditions of sale, market-sharing and coordination of capacity adjustments, etc. (Under previous legislation it was possible to obtain exemption from prohibition if it could be demonstrated that an agreement conferred ‘net economic benefit’ – see RESTRICTIVE TRADE PRACTICES ACTS, RESTRICTIVE PRACTICES COURT.)

Although anti-competitive agreements are technically illegal, nonetheless there is much evidence that many such agreements have been driven ‘underground’ and are continuing to be operated in secret. This problem has been addressed by the authorities in encouraging ‘whistleblowers’ to come forward and supply them with information about illegal activities and also provisions in the Competition Act 1998 that allow officials to enter business premises without warning and to seize incriminating documentation. Under the ENTERPRISE ACT 2002, participation in illegal agreements has now been made a criminal offence, punishable by imprisonment;

(c) MERGERS AND TAKEOVERS. Originally, under the FAIR TRADING ACT 1973, the Office of Fair Trading (OFT), acting alongside the Secretary of State for Industry, could refer mergers and takeovers to the Competition Com-mission for investigation and report where (1) the combined firms already had or would have had a market share of 25% or over in a ‘reference’ good or service; (2) the value of assets being combined exceeded £70 million. Clause (1) effectively covered horizontal mergers and takeovers (see HORIZONTAL INTEGRATION) and clause (2) vertical and conglomerate mergers and takeovers (see VERTICAL INTEGRATION, DIVERSIFICATION/CONGLOMERATE INTEGRATION). Under the ENTERPRISE ACT 2002, the OFT was given sole responsibility for merger/takeover references but subject to an appeals procedure in disputed cases (see COMPETITION APPEALS TRIBUNAL).

Mergers and takeovers nowadays are mainly evaluated in terms of their likely competitive effects. Unlike in dealing with established monopolies, where past conduct can be scrutinised to establish harmful effects, mergers and takeovers are about the future, and predicting the likely future effects of a merger/takeover is problematic. Faced with this difficulty, the Commission tends to ‘play safe’ and recommend the blocking of most mergers/takeovers that reduce competition by significantly increasing the level of MARKET CONCENTRATION;

(d) RESALE PRICE MAINTENANCE (RPM). Manufacturers’ stipulation of the resale prices of their products is generally prohibited in the UK, although under the RESALE PRICES ACTS it is possible for a manufacturer to obtain exemption by satisfying the Competition Commission that, on balance, RPM confers net economic benefit. The OFT is responsible for monitoring manufacturers’ policies towards retail prices and can take action against ‘suspected’ cases of manufacturers attempting (illegally) to enforce RPM. Manufacturers can, however, take action against retailers who use their products as LOSS LEADERS;

(e) ANTI-COMPETITIVE PRACTICES. Various trade practices, such as EXCLUSIVE DEALING, REFUSAL TO SUPPLY, FULL-LINE FORCING, etc., may be investigated both by the OFT itself and (if necessary) by the Competition Commission, and prohibited if they are found to be unduly restrictive of competition;

(f) CONSUMER PROTECTION. The OFT is also charged with protecting consumers’ interests generally, both by taking action against unscrupulous trade practices, such as false descriptions of goods and weights and measures, denial of proper rights of guarantee to cover defective goods, etc., and by encouraging groups of suppliers to draw up voluntary codes of ‘good’ practice.

Where a particular dominant firm or merger case falls within the competition rules of both the UK and the European Union (see COMPETITION POLICY (EU)), EU law takes precedence. However, a subsidiarity provision can be invoked that permits the OFT to request permission from the EU competition authorities to investigate a particular dominant firm or merger case if it appears that the ‘European dimension’ is relatively minor compared to its purely local impact.

Fig. 26 Competitive advantage (of countries). The Porter ‘diamond’.

competitive advantage (of countries) the resources and capabilities possessed by a country that underpin its competitiveness in international trade (see COMPARATIVE ADVANTAGE). Countries per se do not trade – only persons and firms do. Persons and firms may possess their own unique resources and capabilities, which give them a competitive advantage over others. See COMPETITIVE ADVANTAGE (OF FIRMS). This can be enhanced by firms being able to contribute, and tap in, to a country’s resources and capabilities. Michael Porter has developed the so-called ‘diamond’ framework, which encapsulates this potential, consisting of four elements: factor endowments, demand conditions, infrastructure and firm strategy/structure/rivalry. See Fig. 26.

A basic starting point is a country’s factor endowments, such as plentiful (i.e. cheap) labour or skilled labour, raw materials and capital stock, together with its underlying scientific and technological infrastructure. With regard to demand conditions, it is not so much the size of the home market (although it is accepted that a large home base may be necessary to underpin economies of scale in lowering supply costs and prices) as its nature that matters. Porter emphasizes the importance of the presence of sophisticated and demanding buyers in stimulating the innovation and introduction of new products capable of being ‘transferred’ into global markets. The category of ‘related and supporting industries’ provides an important bedrock for competitive success through a network of suppliers and commercial infrastructure (see CLUSTERS). The final quadrant, ‘firm strategy, structure and rivalry’, Porter suggests, may be the most important of all, especially the element of fierce local competition. While international rivalries tend to be ‘analytical and distant’, local rivalries become intensively personal but nonetheless beneficial in providing a ‘springboard’ for international success. All these factors, it is suggested, are interrelated, creating a ‘virtuous circle’ of resource generation and application, and sensitivity in meeting customer demands.

competitive advantage (of firms) the possession by a firm of various assets and attributes (low-cost plants, innovative brands, ownership of raw material supplies, etc.) that give it a competitive edge over rival suppliers. To succeed against competitors in winning customers on a viable (profitable) and sustainable (long-run) basis, a firm must, depending on the nature of the market, be cost-effective and/or able to offer products that customers regard as preferable to the products offered by rival suppliers. The former enables a firm to meet and beat competitors on price, while the latter reflects the firm’s ability to establish PRODUCT DIFFERENTIATION advantage over competitors.

Cost advantages over competitors are of two major types:

(a) absolute cost advantages, that is, lower costs than competitors at all levels of output deriving from, for example, the use of superior production technology or from VERTICAL INTEGRATION of input supply and assembly operations;

(b) relative cost advantages, that is, cost advantages related to the scale of output accruing through the exploitation of ECONOMIES OF SCALE in production and marketing and through cumulative EXPERIENCE CURVE effects. Over time, investment in plant renewal, modernization and process innovation (either through in-house RESEARCH AND DEVELOPMENT or the early adoption of new technology developed elsewhere) is essential to maintain cost advantages.

Product differentiation advantages derive from:

(a) a variety of physical product properties and attributes (notably the ability to offer products that are regarded by customers as having unique qualities or as being functionally better than competitors’ products);

(b) the particular nuances and psychological images built into the firm’s product by associated advertising and sales promotion. Again, given the dynamic nature of markets, particularly product life cycle considerations, competitive advantage in this area needs to be sustained by an active programme of new product innovation and upgrading of existing lines. See COMPETITIVE STRATEGY, RESOURCE BASED THEORY OF THE FIRM, BARRIERS TO ENTRY, MOBILITY BARRIERS, VALUE-CREATED MODEL, VALUE CHAIN ANALYSIS.

competitive strategy an aspect of BUSINESS STRATEGY that involves the firm developing policies to meet and beat its competitors in supplying a particular product. This requires the firm to undertake an internal appraisal of its resources and capabilities relative to competitors to identify its particular strengths and weaknesses. It also requires the firm to undertake an external appraisal of the nature and strength of the various ‘forces driving competition’ in its chosen markets (see Fig 27), namely:

(a) rivalry amongst existing firms;

(b) bargaining power of input suppliers;

(c) bargaining power of customers;

(d) threat of new entrants; and

(e) the threat of substitute products.

The key to a successful competitive strategy is then:

(a) to understand fully what product attributes are demanded by buyers (whether it be low prices or product sophistication) with a view to;

(b) establishing, operationally, a position of COMPETITIVE ADVANTAGE that makes the firm less vulnerable to attack from established competitors and potential new entrants, and to erosion from the direction of buyers, suppliers and substitute products.

Fig. 27 Competitive strategy. (a) Forces driving competition in a market. (b) Three generic strategies. Source: Michael Porter.

There are three generic strategies for competitive success (Fig. 27 (b)): cost leadership, product differentiation and ‘focus’. Low costs, particularly in commodity-type markets, help the firm not only to survive price competition should it break out but, importantly, enable it to assume the role of market leader in establishing price levels that ensure high and stable levels of market profitability. The sources of cost-effectiveness are varied, including the exploitation of ECONOMIES OF SCALE, investment in best state-of-the-art technology and preferential access to raw materials or distribution channels. By adopting a PRODUCT DIFFERENTIATION strategy, a firm seeks to be unique in its market in a way that is valued by its potential customers. Product differentiation possibilities vary from market to market but are associated with the potential for distinguishing products by their physical properties and attributes and the experience of satisfaction – real and psychological – imparted by the product to consumers. General cost leadership and differentiation strategies seek to establish a COMPETITIVE ADVANTAGE over rival suppliers across the whole market. By contrast, ‘focus’ strategies aim to build competitive advantages in narrower segments of a market but, again, either in terms of cost or, more usually, differentiation characteristics, with ‘niche’ suppliers primarily catering for speciality product demands. See MARKET STRUCTURE, MARKET CONDUCT, MARKET PERFORMANCE, RESOURCE-BASED THEORY OF THE FIRM.