Mergers may turn competitive firms into a single organization with excessive market power. The customary justification for mergers is that they permit the merged firms to achieve scale economies that would otherwise be impossible. Such scale economies may in turn result in lower prices in the domestic or international market to the benefit of the consumer, but may alternatively reduce competition and result in higher prices. Equally important in this era of global competition is the impact of a merger on a firm’s ability to compete internationally
Mergers can be of the horizontal type (e.g. two manufacturers of pre-mixed concrete merge) or vertical type (a concrete manufacturer merges with a cement manufacturer). While mergers have indeed the potential to reduce domestic competition, this is less true today than in the past, when international trade was more restricted.
Cartels aim to restrict output and thereby increase profits. These formations are almost universally illegal in individual national economies. At the same time governments are rarely worried if their own national firms participate in international cartels.
While cartels are one means of increasing prices, price discrimination is another. For example, if a concrete manufacturer makes her product available to large builders at a lower price than to small-scale builders – perhaps because the large builder has more bargaining power, then the small builder is at a competitive disadvantage in the construction business. If the small firm is forced out of the construction business as a consequence, then competition in this sector is reduced.
Predatory pricing is a practice that is aimed at driving out competition by artificially reducing the price of one product sold by a supplier. For example, a dominant nationwide transporter could reduce price on a particular route where competition comes from a strictly local competitor. By ‘subsidizing’ this route from profits on other routes, the dominant firm could undercut the local firm and drive it out of the market.
Predatory pricing is a practice that is aimed at
driving out competition by artificially reducing the price of one product sold by a supplier.
Suppliers may also refuse to deal. If the local supplier of pre-mixed concrete refuses to sell the product to a local construction firm, then the ability of such a downstream firm to operate and compete may be compromised. This practice is similar to that of exclusive sales and tied sales. An exclusive sale might involve a large vegetable wholesaler forcing her retail clients to buy only from this supplier. Such a practice might hurt the local grower of aubergines or zucchini, and also may prevent the retailer from obtaining some of her vegetables at a lower price or at a higher quality elsewhere. A tied sale is one where the purchaser must agree to purchase a bundle of goods from the one supplier.
Refusal to deal: an illegal practice where a
supplier refuses to sell to a purchaser.
Exclusive sale: where a retailer is obliged
(perhaps illegally) to purchase all wholesale products from a single supplier only.
Tied sale: one where the purchaser must agree to
purchase a bundle of goods from the one supplier.
Resale price maintenance involves the producer requiring a retailer to sell a product at a specified price. This practice can hurt consumers since they cannot ‘shop around’. In Canada, we frequently encounter a ‘manufacturer’s suggested retail price’ for autos and durable goods. But since these prices are not required, the practice conforms to the law.
Resale price maintenance is an illegal practice
wherein a producer requires sellers to maintain a specified price.
Bid rigging is an illegal practice in which normally competitive bidders conspire to fix the awarding of contracts or sales. For example, two builders, who consider bidding on construction projects, may decide that one will bid seriously for project X and the other will bid seriously on project Y. In this way they conspire to reduce competition in order to make more profit.
Bid rigging is an illegal practice in which
bidders (buyers) conspire to set prices in their own interest.
Deception and dishonesty in promoting products can either short-change the consumer or give one supplier an unfair advantage over other suppliers.
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