Anti-Trust Policy - Abuses of a Dominant Market… | tutor2u Economics
Study notes

Anti-Trust Policy - Abuses of a Dominant Market Position

  • Levels: A Level
  • Exam boards: AQA, Edexcel, OCR, IB

A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers

  • Competition authorities consider a firm's market share, whether there are credible competitors, whether the business has ownership and control of its own distribution network (achieved through vertical integration) and whether it has favourable access to raw materials.
  • Holding a dominant position is not wrong if it is the result of the firm's own competitiveness But if the firm exploits this power to stifle competition, this is an anti-competitive practice.

Anti-competitive practices are designed to limit the degree of competition inside a market.

Examples of anti-competitive practices

1.Predatory pricing also known as 'destroyer pricing' happens when one or more firms deliberately sets prices below average cost to incur losses for a sufficiently long period of time to eliminate or deter entry by a competitor – and then tries to recoup the losses by raising prices above the level that would ordinarily exist in a competitive market.

2.Vertical restraint in the market: This can happen in a number of ways:

  • Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturers product. These may be supported with long-term contracts that "lock-in" a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries).
  • Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area.
  • Quantity discounts: Where retailers receive larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's.
  • A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer.

3.Collusive practices: These might include agreements on market sharing, price-fixing and agreements on the types of goods to be produced.

Price Fixing and the Law

UK competition law prohibits almost any attempt to fix prices - for example, you cannot

  1. Agree prices with competitors or agree to share markets or limit production to raise prices.
  2. Impose minimum prices on different distributors such as shops.
  3. Agree with your competitors what purchase price you will offer your suppliers.
  4. Cut prices below cost in order to force a weaker competitor out of the market.
  5. Under the Competition Act 1998 and Article 81 of the EU Treaty, cartels are prohibited. Any business found to be a member of a cartel can be fined up to 10 per cent of its worldwide turnover. In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to dishonestly take part in the most serious types of cartels. Anyone convicted of the offence could receive a maximum of five years imprisonment and/or an unlimited fine.

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