which of these is an example of illegal market allocation
Which of these is an example of illegal market allocation?
Answer:
Illegal market allocation is an anti-competitive practice where competing businesses agree to divide markets among themselves. This division can occur in various forms, such as geographic areas, customer bases, or specific types of products or services. Market allocation agreements restrict competition and often result in higher prices and reduced choices for consumers, violating antitrust laws.
Here’s an example to illustrate this concept:
Illegal Market Allocation Example:
- Geographic Market Allocation:
Suppose Company A and Company B are the only two major suppliers of a particular product in a country. Instead of competing with each other throughout the country, they agree that Company A will only sell in the northern region, and Company B will only sell in the southern region. This way, both companies avoid direct competition and can set higher prices without worrying about losing customers to the other.
Detailed Explanation:
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Definition of Illegal Market Allocation:
Illegal market allocation involves agreements between competitors to divide markets so that each competitor has a monopoly in their allocated segment. These agreements can be:- Geographic: Where competitors agree not to compete in specific geographic areas.
- Customer Allocation: Where they divide customers among themselves.
- Product Allocation: Where they agree to limit their product lines to avoid competition.
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Examples and Consequences:
- Geographic Market Allocation: As mentioned, if two companies, A and B, agree that A will only operate in the north while B operates in the south, this limits consumer choice and leads to higher prices.
- Customer Allocation: Two software companies agree that one will only sell to schools while the other sells to businesses, ensuring neither competes for the other’s customer base.
- Product Allocation: Two pharmaceutical companies agree that one will only produce and sell painkillers and the other will only produce and sell antibiotics.
These practices are illegal under antitrust laws, particularly in many countries like the United States, where the Sherman Antitrust Act prohibits such agreements because they hinder free and fair competition.
Legal Implications:
Competitors engaging in illegal market allocation can face:
- Fines and Penalties: Significant financial penalties imposed by regulatory authorities.
- Lawsuits: Lawsuits by affected competitors or consumers seeking damages.
- Reputational Damage: Loss of trust and credibility among consumers and business partners.
Summary:
Understanding illegal market allocation is crucial as it helps in identifying anti-competitive practices that can harm consumer interests and market efficiency. By ensuring competitive practices, businesses help maintain a healthy market environment with fair pricing and choices for consumers.
In summary, geographic market allocation, customer allocation, and product allocation are clear examples of illegal market allocation. These practices disrupt free competition, leading to legal actions against the involved parties.