Anticompetitive practices are practices adopted by businesses looking to increase their influence over a given market, also known as their market power. This influence almost always takes the form of a company attempting to manipulate the market in such a way that it can raise the price of its goods or services with few economic or legal consequences. In other words, companies use anticompetitive practices to reduce competition in the market to their own advantage, which may or may not be illegal depending on the circumstances.
TLDR: Companies use anticompetitive practices, some of which are illegal, in order to increase their market power. They do so in order to create monopolies or cartels that would force consumers to pay higher prices. Government agencies such as the Federal Trade Commission or the European Commission attempt to break up these monopolies or cartels using antitrust or competition law.
Perfect Competition
Under the hypothetical model of perfect competition in economics, any company that attempts to raise its prices above that of its competitors will lose all of its business. This is because consumers will simply choose to buy goods or services from businesses that offer a lower price, also known as the competitive equilibrium price. Naturally, the model of perfect competition in economics is based on certain assumptions that never hold in real life: a large number of buyers and sellers, identical goods or services, perfect information, and free entry or exit of firms.
Although the model of perfect competition is unrealistic, it can still be useful as a starting point from which to evaluate how companies might increase their market power. In contrast to perfect competition, a company with considerable market power can typically raise its prices without losing its business to its competitor(s). It should be noted that some practices used to increase a company’s influence over the market are completely legal. Product differentiation, for example, is the (legal) process by which companies try to distinguish themselves from their competitors in order to attract more consumers, typically through branding. This is why assumptions such as identical goods in markets rarely hold in real life.
Generally speaking though, anticompetitive practices are illegal, especially when they are related to the free entry or exit of firms. For example, companies looking to increase their market power might undercut the prices of their competitor(s), a strategy that is sometimes referred to as dumping in international trade (the idea here is that a company “dumps” cheap goods onto a foreign market). Under this strategy, a company takes a temporary loss in order to drive its competitor(s) out of the market. However, if and when the competitor(s) is (are) forced to exit, the company can then use its increased market power to force consumers to pay higher prices.
Monopolies and Oligopolies
If the “winning company” faces little to no competition, it can be considered a monopoly or a single seller. Amazon, for example, is often considered as having a monopoly over the online book market. If the “winning company” does face competition from a small number of similarly large and established companies, then the market can be considered an oligopoly. Often times, what might look like healthy competition in the market might actually be an oligopoly in disguise. This is because large multinational corporations, particularly those selling food or personal hygiene products, tend to own shares in tens if not hundreds of subsidiary companies, which may be considered an anticompetitive practice.
What might look like healthy competition in the market might actually be an oligopoly in disguise.
A subsidiary is a smaller company that is either partly or completely owned by a larger multinational company, although it tends to remain separate from its “parent company”. For example, the Swiss multinational corporation Nestlé owns shares and thus has control over companies as diverse as Nescafé, Perrier, Häagen-Dazs, Purina, L’Oréal and Gerber, a baby-food provider, as well as many, many more. In fact, only about 10 global companies — known as the Big Ten — control almost all of the world’s food supply, as well as much of the market for beauty, personal hygiene and cleaning supplies. (More information about the Big Ten and the subsidiaries they own, as well as how “ethical” they really are, can be found here).
Mergers and Acquisitions
One of the ways corporations like those in the Big Ten rise to multinational status is through what is known as mergers and acquisitions (M&A). In the case of a merger, two existing companies, often of about equal size, combine into one, new company. In the case of an acquisition, a larger company tends to buy out (or acquire) a smaller competitor, and this smaller competitor is then “absorbed” into the larger company. A large company might acquire a smaller competitor in order to “neutralize” its threat, as has been going on in the tech industry for some time. A larger company might also acquire a smaller company if it is looking to branch out or to expand into a new market.
In some cases, an acquired company is heavily integrated into the acquiring company with the two adopting similar business practices. Other times, however, the acquired company might remain somewhat independent, especially when it comes to “branding” (as we see with many subsidiaries). An acquisition may take place voluntarily through what is known as a tender offer, in which one party offers to “buy out” the other and the latter accepts. However, an acquisition can also take place through what is known as a hostile takeover, in which one party does not wish to be acquired by another but the latter does so anyways.
Horizontal vs. Vertical Mergers
Mergers and acquisitions can either be horizontal or vertical. A horizontal merger takes place when two companies of similar size who sell similar goods or services merge into one. (Or in the case of a horizontal acquisition, one company acquires a very similar competitor). A vertical merger takes place when one company mergers with another along its supply chain. (Or in the case of a vertical acquisition, one company acquires one of its suppliers). Vertical mergers or acquisitions allow companies to take advantage of what is known as economies of scale, the ability to reduce the cost of production (per product) by producing in bulk.
A large company might acquire a smaller competitor in order to “neutralize” its threat, as has been going on in the tech industry for some time.
The goal of any merger or acquisition is clearly to increase a company’s market power, although this is not always illegal. A merger or acquisition will be considered an (illegal) anticompetitive practice, however, if it is used to “neutralize” one’s competitors as in the case of many tech giants. Mergers and acquisitions among big companies also make it difficult for small and medium-sized enterprises (SMEs) who make similar products to compete in the market (thus erecting barriers to entry). SMEs might ultimately be forced to exit the market or merge or be taken over if they cannot compete. If big, established companies are not able to “kill” their potential competitors, however, they might try to form what is known as a cartel.
Cartels
A cartel is a formed when a number of corporations in a given market agree not to compete with one another. A cartel almost always arises in an oligopoly in which a handful of companies with semi-homogenous goods dominate the sector. It can be considered a kind of implicit merger in which — although rival companies do not legally merge with one another — they collude to ensure that their consumers are all forced to pay the same, higher prices, which is an anticompetitive practice sometimes known as price fixing.
Contrary to mergers and acquisitions, which, again, are not in and of themselves illegal, but sometimes require government approval, cartels are illegal. They are the result of informal negotiations between companies and, if discovered, they are often heavily penalized under national law. One of the most powerful international cartels currently in existence is the Organization of Petroleum Exporting Countries (OPEC), founded in 1960 by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, which aims to keep the price of petrol high.
Cartels can be considered a kind of implicit merger in which companies collude to ensure that their consumers are all forced to pay the same, higher prices.
In addition to price fixing, oligopolistic markets might give rise to the anticompetitive practice known as interlocking directorates, in which corporations might implicitly “collude” with one another by staffing their Board of Directors with the same individuals. Corporations tend to do this in order to align their various interests, or to at least “delude” the amount of competition between them. Other collusion-based strategies might include market sharing, in which two or more rival companies agree to “divide” the market among themselves, particularly geographically.
How do we Limit Anticompetitive Practices?
Although many continue to believe in the “free market”, the reality is that larger, more successful companies tend to gobble up their competitors, leading to a monopolization of many sectors of the economy. In addition to higher prices, anticompetitive practices also tend to lead to poorer choice and quality of consumer goods, not to mention less innovation. This is why antitrust law, as it is known in the US, or competition law, as it is known in the European Union (EU), tends to play such an important role.
The Trump administration is currently attempting to exercise much more control over the FTC, not to mention reduce its funding.
Antitrust law is governed in the United States primarily by the Federal Trade Commission (FTC), an independent federal executive agency that was created in 1914. It is also governed, in part, by the Antitrust Division of the Department of Justice. “Trust-busting”, or the breaking up of monopolies and cartels, was first instituted in large part by President Theodore Roosevelt. Roosevelt took up office during a period in US history known as the Gilded Age, which was marked by extreme wealth inequality as a result of unchecked corporate power, much like we are seeing today.
The FTC, like other antitrust agencies around the world, breaks up monopolies and cartels through a number of policies. They might force corporations to seek out FTC approval before a merger or acquisition can go ahead (or, conversely, they might stop a merger or acquisition). They might also force corporations who are deemed as having monopolistic power to sell off some of their holdings or shares in subsidiaries. If corporations are found to be engaging in anticompetitive practices, especially collusion, they may also face fines or penalties.
Antitrust in the Digital Age
Change in legal precedent in the 1970s meant that the FTC must now prove that a merger or acquisition would actively harm “consumer welfare”, meaning that it would raise prices for consumers. Naturally, this has made it difficult to combat powerful tech giants whose products are technically free to use, but remain controversial in light of data collection, usage and storage. Furthermore, tech giants might use advertisements to promote their own products over those of their competitors.
This can even be considered an anticompetitive practice known as exclusive dealing, in which one business party puts limits over another’s ability to buy or sell goods from a third, foreign party. In fact, the European Commission, the institution that governs competition law in the EU, thought so when they fined Google €2.42 billion for promoting its own shopping service, Google Product Search, over other similar services. This is an example of what might be considered a kind of “in-house” exclusive dealing.
A law that recently went into effect in the European Union known as the Digital Markets Act attempts to regulate the power of six Tech giants referred to as online “gatekeepers”.
The “consumer welfare” legal precedent also fails to take into account the antidemocratic implications of monopolies and cartels. Allowing private for-profit companies to hold a monopoly over online discussion poses some serious risks to freedom of expression, as we are currently witnessing with Elon Musk and Twitter/X. The European Commission, as compared to the FTC, has tended to be stricter with tech companies, as well as pharmaceutical companies. In another anticompetitive practice known as “evergreening“, pharmaceutical companies attempt to get additional patents for drugs that have already been patented but are now slightly modified. The EU has historically rejected many more of these patent requests than has the US.
At time of writing, the Trump administration is attempting to exercise much more control over the FTC, not to mention reduce its funding. The inevitable rise in corporate power also risks being imported to Europe as Trump attempts to force the European Commission to adopt a more lenient approach to competition law, specifically when it comes to the treatment of American tech companies. This comes in spite of (or perhaps as a result of) a law that recently went into effect in the European Union known as the Digital Markets Act that attempts to regulate the power of six Tech giants referred to as online “gatekeepers”.
What Can Consumers do?
In addition to the FTC, the European Commission and other antitrust government agencies around the world, there are a number of consumer advocacy groups that help to draw attention to corporations that abuse their market power or implement unethical or unsafe business practices. Although such advocacy groups do important work, it is nonetheless through public policy, laws, and antitrust proceedings that anticompetitive practices can be limited. This can help create an economy that is actually in the interest of workers and consumers rather than corporations!