Market Allocation is an agreement among competing businesses to divide markets among themselves. This practice aims to minimize competition, control geographical regions, customer segments, or specific products, thereby potentially increasing each participant’s market share and profitability. It is also known as market division or market-sharing.
Definition
Market Allocation is an anti-competitive strategy where competing businesses agree to split markets to avoid direct competition. This division can occur based on geographical areas, specific consumers, or certain product lines. Such agreements are typically illegal in many jurisdictions as they hinder free competition and exploit market conditions to the detriment of consumers.
Types of Market Allocation
Geographic Division
Businesses agree to control and operate exclusively in certain geographic areas. For example, Company A serves the northern region, while Company B serves the southern region.
Product-Based Allocation
Competing firms divide the market based on product lines. For instance, Company A focuses on product X, while Company B focuses on product Y.
Customer-Based Allocation
Companies agree on dividing customer types among themselves, such as Company A catering to institutional clients, while Company B focuses on individual consumers.
Special Considerations
Legal Implications
Market Allocation agreements are typically illegal under antitrust laws in many countries, including the United States (Sherman Antitrust Act) and the European Union (Article 101 of the Treaty on the Functioning of the European Union, TFEU).
Ethical Concerns
Apart from legal issues, these practices raise significant ethical questions as they undermine the principles of fair competition and harm consumer welfare by leading to higher prices and reduced choices.
Historical Context
Market Allocation has been a persistent issue throughout history. Notably, in the late 20th century, several high-profile cases emerged where multinational corporations were found guilty of such practices. These historical cases significantly influenced modern antitrust laws and regulatory frameworks.
Applicability and Consequences
Positive Aspects (Hypothetical Context)
- Stability in Market: Hypothetically can lead to more stable markets.
- Predictability: Easier forecasting and strategic planning.
Negative Aspects
- Reduced Competition: Leads to monopolistic control and less innovation.
- Higher Prices: Consumers may face higher prices due to lack of competition.
- Legal Penalties: Corporations involved in market allocation may face heavy fines and sanctions.
Comparisons
Market Allocation vs. Price Fixing
While Market Allocation involves dividing markets, Price Fixing involves agreements to set prices at a certain level. Both practices are anti-competitive and generally illegal.
Market Allocation vs. Product Differentiation
Product Differentiation is a legal and legitimate strategy where businesses compete by differentiating their products. In contrast, Market Allocation is an illicit agreement to avoid competition.
Related Terms
- Cartels: Groups of independent market participants who collude to raise market prices.
- Antitrust Laws: Legislation to promote competition and prevent unfair business practices.
- Monopolies: Markets dominated by a single entity, often compared with the effects of market allocation practices.
FAQs
Q: Are market allocation agreements always illegal?
Q: What are the penalties for engaging in market allocation?
Q: How can market allocation affect consumers?
References
- Federal Trade Commission (FTC). “Guide to Antitrust Laws”. Available at: ftc.gov
- European Commission, “Competition: Antitrust procedures in abuse of dominance”. Available at: ec.europa.eu
- Sherman Antitrust Act. United States Congress, 1890.
Summary
Market Allocation represents an agreement among competing businesses to divide markets, often leading to significant legal and ethical concerns. While theoretically offering stability and predictability, the practice is generally detrimental to market competition and consumer welfare. Understanding its types, implications, and historical context highlights the importance of enforcement of antitrust regulations to ensure fair competition.
