11. Managing Global Competitive Dynamics
Competitive dynamics are the actions and responses undertaken by competing
firms. Competitor analysis is the process of anticipating rivals’ actions in order to
both revise and prepare a firm’s plan and prepare to deal with rivals’ responses
(you must not only know yourself, but also your opponents)
§1. Competition, Cooperation, and Collusion
Competing firms may have an incentive to engage in collusions, defined as
collective attempts to reduce competition.
- Tacit collusion firms indirectly coordinate actions by signaling their
intentions to reduce output and maintain pricing above competitive levels.
- Explicit collusion firms directly negotiate output and pricing and divide
markets.
o Leads to a cartel, an output-fixing and price-fixing entity involving
multiple competitors.
In addition to antitrust laws, collusions often suffers from a prisoners’ dilemma,
which underpins game theory.
What industries are conductive to collusion vis-à-vis competition?
- Concentration ratio the percentage
of total industry sales accounted for
the top four, eight, or 20 firms.
o The higher the concentration
ratio, the easier it is to organize
collusion.
- Existence of a price leader – a firm
that has a dominant market share and
sets “acceptable” prices and margins
in the industry – helps maintain order
and stability needed for tacit collusion.
- An industry with homogeneous products, in which rivals are forced to
compete on price (rather than differentiation), is likely to lead to collusion.
- An industry with high entry barriers for new entrants is more likely to
facilitate collusion than an industry with low entry barriers.
o New entrants are likely to ignore existing industry norms by
introducing less homogeneous products with newer technologies.
- Market commonality – the degree of overlap between two rivals markets
– also has a significant bearing on the intensity of rivalry.
o A high degree of market commonality may restrain firms from
aggressively going after each other.
§2. Institutions Governing Domestic and International Competition
The institution-based view advises managers to be well versed in the rules
governing domestic and international competition.
Formal institutions governing domestic competition are broadly guided by
competition policy, which “determines the institutional mix of competition and
cooperation that gives rise to the market system.” One branch is of particular
relevance called antitrust policy, which is designed to combat monopolies and
cartels. Competition and antitrust policy seeks to balance efficiency and fairness.
Globally it is difficult to argue who is right or wrong, but we need to be aware of
such crucial differences.
Competition and antitrust policy focuses on:
- Collusive price setting price setting by monopolists or collusion parties
at a level higher than the competitive level.
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Competitive dynamics are the actions and responses undertaken by competing
firms. Competitor analysis is the process of anticipating rivals’ actions in order to
both revise and prepare a firm’s plan and prepare to deal with rivals’ responses
(you must not only know yourself, but also your opponents)
§1. Competition, Cooperation, and Collusion
Competing firms may have an incentive to engage in collusions, defined as
collective attempts to reduce competition.
- Tacit collusion firms indirectly coordinate actions by signaling their
intentions to reduce output and maintain pricing above competitive levels.
- Explicit collusion firms directly negotiate output and pricing and divide
markets.
o Leads to a cartel, an output-fixing and price-fixing entity involving
multiple competitors.
In addition to antitrust laws, collusions often suffers from a prisoners’ dilemma,
which underpins game theory.
What industries are conductive to collusion vis-à-vis competition?
- Concentration ratio the percentage
of total industry sales accounted for
the top four, eight, or 20 firms.
o The higher the concentration
ratio, the easier it is to organize
collusion.
- Existence of a price leader – a firm
that has a dominant market share and
sets “acceptable” prices and margins
in the industry – helps maintain order
and stability needed for tacit collusion.
- An industry with homogeneous products, in which rivals are forced to
compete on price (rather than differentiation), is likely to lead to collusion.
- An industry with high entry barriers for new entrants is more likely to
facilitate collusion than an industry with low entry barriers.
o New entrants are likely to ignore existing industry norms by
introducing less homogeneous products with newer technologies.
- Market commonality – the degree of overlap between two rivals markets
– also has a significant bearing on the intensity of rivalry.
o A high degree of market commonality may restrain firms from
aggressively going after each other.
§2. Institutions Governing Domestic and International Competition
The institution-based view advises managers to be well versed in the rules
governing domestic and international competition.
Formal institutions governing domestic competition are broadly guided by
competition policy, which “determines the institutional mix of competition and
cooperation that gives rise to the market system.” One branch is of particular
relevance called antitrust policy, which is designed to combat monopolies and
cartels. Competition and antitrust policy seeks to balance efficiency and fairness.
Globally it is difficult to argue who is right or wrong, but we need to be aware of
such crucial differences.
Competition and antitrust policy focuses on:
- Collusive price setting price setting by monopolists or collusion parties
at a level higher than the competitive level.
1
