Friday, November 14, 2003

Strategic Alliances Here's an excellent analysis by U. of Wisconsin Law School professor Peter C. Carstensen. It's an excerpt from a paper on "Market Concentration and Agriculture" that he delivered at a Department of Agriculture conference in 2000. While Carstensen's specific topic is agribusiness, but its ideas are applicable to all the oligopolies we cover. Here's one except that struck me.  Non-merger collaborations among large firms allow them to coordinate their competition in order to create mutual power. The intended effect is to obtain a stronger market position. A few of these alliances might provide economically useful coordination if they create an efficiency-enhancing joint venture to produce or distribute new products. Such joint ventures also show that merger is not an essential element to effective entry into new lines of business. Other alliances, to the extent that we have any reliable information, are merely a mechanism to coordinate efforts among firms to limit their direct competition and ensure mutual strategies to build market power. It should be a source of real concern that we know so little about the scope and content of these alliances. The parties, except as required by law, do not make public disclosure of their agreements or how they are implementing them. Given the high levels of concentration both within markets and industry sectors as well as the growing vertical integration in these industries, such disclosure is essential to proper evaluation of these relationships. Once power in a market is concentrated in a handful of companies, they can settle into a pattern of being friendly competitors. This is often done through trade associations, which are nominally open to all participants in the market but are often cover for the backroom deals made between companies. As long as detectable price fixing is not part of it, regulators are often happy to let it all slide. But as we've seen, there's a whole host of things that companies can do under the guise of joint ventures or industry associations, beyond price-fixing. The RIAA (the recording industry trade association) has made itself notorious by legislating protection for its largest members, extending copyright laws, and setting up joint ventures between the Big Five recording companies, dictating standard terms to suppliers (artists) and distributors (retailers), and even (though they were caught) setting prices. And while the association claims too represent the whole industry, it clearly is owned by the Big Five. (In fact, a recent NPR story showed how a number of small recording firms were listed on the RIAA's Web site as members, when they had never joined and fought unsuccessfully to be de-listed.) Of course, when there is a wide-ranging association of a number of individual companies, associations may well represent the interest of the whole profession or market, such as the American Medical Association or the Printing Industries of America. But in industries that are controlled by a small number of players, the association becomes a facilitator for the cooperation of those companies in ways that otherwise might provoke antitrust action. 4:38:59 PM

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