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«The Centre for Co-operation with European Economies in Transition, created in March 1990, is the focal point for co-operation between the OECD and ...»

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GLOSSARY OF INDUSTRIAL

ORGANISATION ECONOMICS

AND COMPETITION LAW

ORGANISATION FOR ECONOMIC CO-OPERATION AND

DEVELOPMENT

FOREWORD

The Centre for Co-operation with European Economies in Transition, created in March 1990, is the focal point for co-operation between the OECD and central and eastern European countries and the former Soviet republics. Its major responsibility is to design and manage a programme of policy advice, technical assistance and training which puts the expertise of the Secretariat and Member countries at the disposal of countries engaged in economic reform.

In December 1990, the Council adopted a programme "Partners in Transition" for the purpose of providing more focused assistance to those countries that are more advanced in introducing market-oriented reforms and desire to become members of OECD. Additional activities which the Centre co-ordinates under this programme include reviews of the country’s economic situation and prospects; reviews of specific policy areas and the participation of the Partner countries in a number of OECD committees.

In all these activities, the Centre maintains close relations with other multilateral bodies with the mutual objective of ensuring the complementarity of respective efforts to support economic reforms in Central and Eastern Europe and the former Soviet Union.

This Glossary of Industrial Organisation Economics and Competition Law has been commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs in the framework of the Centre’s work programme, to assist officials, academics and policy makers in the reforming central and eastern European economies in their understanding of the basic concepts of modern microeconomics.

The Glossary has been compiled by R. S. Khemani, Adjunct Professor at the Faculty of Commerce and Business Administration, University of British Columbia, B. C., Canada and D. M. Shapiro, Principal, School of Community and Public Affairs, Concordia University, Montreal P.Q.

The Glossary is published on the responsibility of the Secretary-General of the OECD.

Salvatore Zecchini Director of the Centre for Co-operation with the European Economies in Transition Index of Terms Terms in bold type are defined and discussed in this glossary. Those in italics are cross-referenced or incorporated in the discussion of other related terms and concepts. (The column of figures below right indicates the corresponding term in the French version of the Glossary).

1. 2

–  –  –

105. Integration (See Vertical Integration)

106. Intellectual Property Rights

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Anticompetitive business practices in which a dominant firm may engage in order to maintain or increase its position in the market. These business practices by the firm, not without controversy, may be considered as "abusive or improper exploitation" of monopolistic control of a market aimed at restricting competition.

The term abuse of dominant position has been explicitly incorporated in competition legislation of various countries such as Canada, EEC and Germany.

In the United States, the counterpart provisions would be those dealing with monopoly and attempts to monopolize or monopolization of a market.

Which of the different types of business practices are considered as being abusive will vary on a case by case basis and across countries. Some business practices may be treated differently in different jurisdictions as well. However, the business practices which have been contested in actual cases in different countries, not always with legal success, have included the following: charging unreasonable or excess prices, price discrimination, predatory pricing, price squeezing by integrated firms, refusal to deal/sell, tied selling or product bundling and preemption of facilities. See Anticompetitive practices. See also I. Schmidt, "Different Approaches and Problems in Dealing With Control of Market Power: A Comparison of German, European and U.S. Policy Towards Market-Dominating Enterprises", Antitrust Bulletin, Vol. 28, 1983, pp. 417-460. And, F.M. Scherer and D. Ross, Industrial Market Structure and Economic Performance, Houghton Mifflin Co., Boston, 1990, Ch. 12, especially pp. 483-488.

2. Acquisition Refers to obtaining ownership and control by one firm, in whole or in part, of another firm or business entity. As distinct from a merger, an acquisition does not necessarily entail amalgamation or consolidation of the firms. An acquisition, even when there is complete change in control, may lead the firms involved to continue to operate as separate entities. Nevertheless, joint control implies joint profit maximization and is a potential source of concern to antitrust authorities. See also Takeover.

3. Administered Prices

Administered prices are prices set by firms that do not vary in response to short-run fluctuations in demand and supply conditions. This price rigidity has been viewed by some economists as arising from the exercise of market power.





Various research studies have been conducted attempting to link administered prices to concentration and inflation. What emerges from the findings is that there are differences across industries (and across countries) in the degree of price flexibility which simple models of market clearing cannot fully explain. However, researchers have been confronted with serious measurement difficulties, notably the fact that official price indices often do not reflect price discounts. For further details, see D.W. Carlton, "The Theory and the Facts of How Markets Clear", in R.

Schmalensee and R. Willig (eds.), The Handbook of Industrial Organization, North Holland, Amsterdam, 1989.

4. Advertising

Advertising helps manufacturers differentiate their products and provides information about products to consumers. As information, advertising provides many benefits to consumers. Price advertising, for example, lowers market prices.

Advertising that tells consumers about the existence of new products facilitates entry. On the other hand, by contributing to product differentiation, advertising may create market power by raising barriers to entry. Much empirical work has been carried out about the competitive effects of advertising, with no definitive results.

Aggregate Concentration 5.

See Concentration.

Agreement (to lessen or restrict competition) 6.

Agreement refers to an explicit or implicit arrangement between firms normally in competition with each other to their mutual benefit. Agreements to restrict competition may cover such matters as prices, production, markets and customers. These types of agreements are often equated with the formation of cartels or collusion and in most jurisdictions are treated as violations of competition legislation because of their effect of increasing prices, restricting output and other adverse economic consequences.

Agreements may be arrived at in an extensive formal manner, and their terms and conditions are explicitly written down by the parties involved; or they may be implicit, and their boundaries are nevertheless understood and observed by convention among the different members. An explicit agreement may not necessarily be an "overt" agreement, that is one which can be openly observed by those not party to the agreement. Indeed, most agreements which give rise to anticompetitive practices tend to be covert arrangements that are not easily detected by competition authorities.

Not all agreements between firms are necessarily harmful of competition or proscribed by competition laws. In several countries, competition legislation provides exemptions for certain cooperative arrangements between firms which may facilitate efficiency and dynamic change in the marketplace. For example, agreements between firms may be permitted to develop uniform product standards in order to promote economies of scale, increased use of the product and diffusion of technology. Similarly, firms may be allowed to engage in cooperative research and development (R&D), exchange statistics or form joint ventures to share risks and pool capital in large industrial projects. These exemptions, however, are generally granted with the proviso that the agreement or arrangement does not form the basis for price fixing or other practices restrictive of competition.

Allocative Efficiency 7.

See Pareto Efficiency.

Alternative Costs 8.

See Opportunity Costs.

–  –  –

10. Anticompetitive Practices Refers to a wide range of business practices in which a firm or group of firms may engage 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.

The essence of competition entails attempts by firm(s) to gain advantage over rivals. However, the boundary of acceptable business practices may be crossed if firms contrive to artificially limit competition by not building so much on their advantages but on exploiting their market position to the disadvantage or detriment of competitors, customers and suppliers such that higher prices, reduced output, less consumer choice, loss of economic efficiency and misallocation of resources (or combinations thereof) are likely to result.

Which types of business practices are likely to be construed as being anticompetitive and, if that, as violating competition law, will vary by jurisdiction and on a case by case basis. Certain practices may be viewed as per se illegal while others may be subject to rule of reason. Resale price maintenance, for example, is viewed in most jurisdictions as being per se illegal whereas exclusive dealing may be subject to rule of reason. The standards for determining whether or not a business practice is illegal may also differ. In the United States, price fixing agreements are per se illegal whereas in Canada the agreement must cover a substantial part of the market. With these caveats in mind, competition laws in a large number of countries examine and generally seek to prevent a wide range of business practices which restrict competition. These practices are broadly classified into two groups: horizontal and vertical restraints on competition. The first group includes specific practices such as cartels, collusion, conspiracy, mergers, predatory pricing, price discrimination and price fixing agreements.

The second group includes practices such as exclusive dealing, geographic market restrictions, refusal to deal/sell, resale price maintenance and tied selling.

Generally speaking, horizontal restraints on competition primarily entail other competitors in the market whereas vertical restraints entail supplier-distributor relationships. However, it should be noted that the distinction between horizontal and vertical restraints on competition is not always clear cut and practices of one type may impact on the other. For example, firms may adopt strategic behaviour to foreclose competition. They may attempt to do so by pre-empting facilities through acquisition of important sources of raw material supply or distribution channels, enter into long term contracts to purchase available inputs or capacity and engage in exclusive dealing and other practices. These practices may raise barriers to entry and entrench the market position of existing firms and/or facilitate anticompetitive arrangements.

Anti-Monopoly Policy 11.

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