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Misuse Of Market Power In Business’s

This week’s article is about Market Power. It higlights the business’s can be established on it, the positives and negatives of market power, the misuse of it and the provisions
13 Jun 2016 10:22
Misuse Of Market Power In Business’s

This week’s article is about Market Power. It higlights the business’s can be established on it, the positives and negatives of market power, the misuse of it and the provisions made under the Fiji Commerce Commision Decree(2010).

 

How can the market power of a business be established?

Market power arises when a business does not face competitive pressure when in conduct of trade or commerce in a given market. Both suppliers and buyers can have market power.

To assess a businesses’ market power, a wide range of relevant evidences have to be analysed like: market definition, market structure, entry and exit conditions, business behaviour and financial performance.

The level of rating given to a business when considered under the abovementioned analysis determines the level of their market power.

If rated high, then they are considered to have market power or substantial market power and their position to dictate the terms of trade and commerce for the market it is in higher than its competitors.

If rated low, then they are considered to have low market power and may be regarded as the vulnerable or weaker players in that market.

 

Negative Effects of Misuse of Market Power

Misuse of market power can be considered as the ability of a business to profitably sustain prices above competitive levels or restrict output or quality below competitive levels.

It has the ability and incentive to harm the process of competition in other ways; for example, by weakening existing competition, raising entry barriers or slowing innovation.

To take advantage of such powers for anti-competitive purpose, can harm competition and the conduct deemed illegal.

Effective competition delivers lower prices, better quality, more choice and greater innovation to Fijian consumers.

Sometimes a business with market power can take advantage of its market power to drive a competitor out of business or to prevent a new competitor from starting up.

This can reduce or eliminate competition from a market, harming consumers and the wider economy.

Because it has the ability to restrict to minimise choice of product by consumers, increase prices of goods and services and thwart future market innovations.

 

Ways through which Businesses

Gain Market Power

Common ways a business or businesses can gain more market powers include but not limited to the following:

  1. Firm Behaviour – Firms have for centuries engaged in behaviour to expand their market. Pursuing the acquisition of market power by offering consumers greater value than rivals is a form of competition that benefits consumers, and is not itself problematic.

However, when firms attempt to increase their profits through anticompetitive means—colluding with rivals, purchasing competitors, erecting barriers to entry to insulate their incumbency from competition, or other actions—society suffers.

It may also include business practices in which a firm or group of firms may engage in an understanding, agreements or covenants in order to restrict inter-firm competition to maintain or increase their relative market position and profits without necessarily providing goods and services at a lower cost or of higher quality.

 

  1. Mergers and Acquisitions – Two or more businesses in a given market merge to increase their market share.

It can happen when one business agrees to merge together with another into one or one buys off the other to increase its size or concentration.

Merger and Acquisition activity could leave the economy with more large firms and potentially less competition.

 

  1. Collusion – When two or more businesses in a given market engage in conducts such as Price-fixing, bid-rigging, and market-allocation agreements amongst themselves can harm competition and increase prices for consumers.

 

Likely Conduct of Businesses

Depicting Misuse of Market Power

 

Some likely indications of misuse of market are:

  1. Predatory pricing – When a business lowers its prices for a sustained period of time to drive a competitor or competitors out of the market.

For such behaviour to be illegal, a business must be pricing below an appropriate measure of cost.

  1. Refusal to supply – occurs when a business refuses to supply a competitor with an input, such as a raw material, or to give access to infrastructure, such as port services.

The competitor needs the input or infrastructure to be able to compete in downstream markets, where the business refusing to supply also operates.

  1. High access pricing – occurs when a business charges a competitor high prices for an input or access to the infrastructure needed to compete in downstream markets where the supplying business also operates.

This is sometimes referred to as a price or margin squeeze.

  1. Exclusive dealing – occurs when a business having contracts with retailers or distributors that allow them to only sell its products or a supplier under which the supplier agrees to supply only to that business.
  2. Tying and Bundling – occurs when a supplier makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product) from the supplier while bundling refers to situations where a package of two or more products is offered at a discount.
  3. Margin squeeze – Margin squeeze is where a vertically integrated undertaking with substantial market power supplies an important input to undertakings operating on a downstream market where it also operates, reduces or “squeezes” the margin between the price it charges for the input to its competitors on the downstream market and the price its downstream operations charge to its own customers, such that the downstream competitor is unable to compete effectively.
  4. Conditional discounts – involves a business offering customers a discount if they meet a certain condition.

For example, customers may be required to purchase a certain proportion of their stock or certain volumes from the business to qualify for the discount.

 

Provisions under the CCD2010

Section 66 of the Commerce Commission Decree 2010 (CCD2010) makes it illegal for any business with a substantial degree of market power to take advantage of that power to deter or prevent rival businesses from competing effectively.

The provision states that:

A person that has a substantial degree of market power in a market shall not take advantage of that power for the purpose of:

  1. a) Eliminating or substantially damaging a competitor of such person or of a body corporate that is related to such person in that or any other market;

 

  1. b) Preventing the entry of a person into that or any other market; or

 

  1. c) Deterring or preventing a person from engaging in competitive conduct in that or any other market.

 

Conclusion

Eliminating misuse of market power can result in the following:

 

nPromote economic efficiency and growth.

nLower prices and better products for consumers,

nProvide greater opportunities for workers and a level playing field for entrepreneurs and small businesses that seek to enter new markets or expand their share;

nHave the potential to improve living standards, channelling resources to productive uses and providing consumers with quality and choices.

nEnsures the market provides the best outcomes for society with respect to choice, innovation, and price as well as fair labour and business markets.

Next Week: Collective Tendering

For more information/details on Fiji Commerce Commission and Commerce Commission Decree 2010, visit our website on http://www.commcomm.gov.fj or join us on our Facebook page at https://www.facebook.com/commcomm.gov.fj

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