Market Division refers to an anti-competitive practice where members of a cartel agree to divide various segments of the market among themselves. This division can be based on geography, customer type, product type, or any other market segmentation criteria. The primary objective is to avoid direct competition among cartel members, thereby allowing them to maintain higher prices and maximize profits without the risks associated with market competition.
Types of Market Division
Geographic Market Division
In this form of market division, each cartel member is assigned specific geographical areas where they can operate exclusively. For instance, Company A and Company B, both part of a cartel, might agree that Company A serves the northern region while Company B serves the southern region.
Product-Based Market Division
This involves dividing the market based on product lines. For example, two competing firms agree that one will exclusively trade in product X while the other will deal in product Y.
Customer-Based Market Division
In this scenario, the division is based on customer segmentation, such as distinguishing between wholesale and retail customers or targeting different customer demographics.
Historical Context
Market Division practices have been observed throughout history, especially in markets where there is limited competition and high barriers to entry. These practices are often part of broader cartel activities and have been subject to legal scrutiny and intervention.
Notable Examples
- OPEC: The Organization of the Petroleum Exporting Countries has been historically accused of market-division practices to control oil prices.
- Electrical Equipment Industry (1960s): Several companies, including General Electric, were found guilty of dividing markets for electrical equipment in the United States.
Applicability and Legal Implications
Market division, as a practice, has significant implications for consumer welfare and market efficiency. It reduces competition, leading to higher prices, reduced innovation, and lower quality of goods and services.
Legal Framework
Market division is illegal in many jurisdictions under antitrust laws. In the United States, it is prohibited under the Sherman Act, which outlaws any agreement that restrains trade. The European Union has similar provisions under Article 101 of the Treaty on the Functioning of the European Union (TFEU).
Enforcement
Regulatory bodies, such as the Federal Trade Commission (FTC) in the U.S. and the European Commission in the EU, actively investigate and penalize companies found engaging in market division practices.
Related Terms
- Cartel: A group of independent businesses that collude to control prices and production.
- Antitrust Laws: Laws designed to promote competition and prevent monopolistic practices.
- Monopoly: The exclusive possession or control of the supply or trade in a commodity or service.
FAQs
Is market division illegal?
What are the penalties for market division?
How can market division be detected?
Summary
Market division is a collusive practice where cartel members agree to divide markets to avoid competition. This anti-competitive behavior leads to higher prices and reduced quality for consumers and is illegal under various antitrust laws worldwide. Regulatory authorities actively seek out and penalize market division to maintain market integrity and consumer welfare.
References
- Sherman Antitrust Act U.S. Code
- Treaty on the Functioning of the European Union (TFEU) Article 101
- Federal Trade Commission FTC
By understanding and recognizing the implications of market division, stakeholders can better appreciate the importance of competition in fostering a thriving economic environment.
