Rationale for Collaboration of Rival Firms - Essay Example

Rationale for Collaboration of Rival Firms Some kinds of collaboration do exist between rival firms. These collaborations are formed to serve various purposes some of which is to increase and widen the profit margins of firms involved. However, there are collaborations formed out of necessity in situations where by individual firms cannot afford the cost of an undertaking. This happens in areas of primary research and pre- competition ventures with an agreement to part ways in future when set objects are achieved. Through this kind of collaboration, the global economy has witnessed rapid increase in new innovations and inventions in areas of science and technology. Firms collaborations require regulations so as to discourage and check anti-competitive collaboration behaviours such as cartels and dominant firms who may come together in order to hike prices, block market access and harm other competitors. Patents, copy rights and merger policies play a major role in promoting innovations and diversifying market. They also encourage firms to engage in costly R&D as their returns are assured. However, there should be well established antitrust policies to check some patents which in some instances have proved to be anticompetitive and protect inefficient small business. Rationale for Collaboration of Rival Firms Introduction Competitive markets are widely viewed as major drivers in fostering innovation. Competition regimes are conducive environment for innovation as companies learn from each other various techniques and strategies to improve their service delivery and products from their rivals in order to survive in the market. Nevertheless, global partners impact in bring a change in market structure might be a great impetus to economic growth and rate of innovation to the countries involved in a global arena in general. The countries therefore are advised to make reasonable and strategic competition policies that allows for certain degree of collaboration and partnering with rival firms (Shapiro, 2002, p.3) Shapiro (2002, p.3) is for competition policy that is based on economic reasoning rather than formalisms. For him this type of competition does and should not conflict with pro-growth and pro-innovation policies such as intellectual property rights and antitrust laws. For him there is no tension between competition policy that allows collaboration and intellectual property rights and antitrust laws. On the contrary, the competition policy based on pure economic reasoning will at the same time promote innovation of new ideas and new ways of doing things and the firms that facilitate these innovations will reap a great benefit in the process. This type of competition policy also seek to promote co-operation between firms so as to pull funds and ideas together to accelerate economic development which otherwise could have been dragged due to barriers to innovation and the perception of sole ownership of innovative ideas (Teece, 1986, p.297). As widely taken, competition policy affects the very fabrics of competition and business behaviour. The U.S economy impressive performance is linked to the competition that promoted innovations through antitrust policies such as patent rights, intellectual property right, and copyright just to mention a few. The assurance that whatever one invent have a right to enjoy the fruits of it for a given duration of time have been the motivation drive towards more innovation and large investment in R&D. Although the competition policy is seen as in conflict with patents and copy right laws, both works to stimulate innovation and subsequent commercialisation of technologies. Competition policy requires a firm to deal with its competitor through 'essential facilities' doctrine and 'reasonable royalty'. This invites the negotiations that may lead to mergers, license or even joint ventures and alliances. These are rationale of collaboration by rival firms thus improving global economy in the long run (Buckley and Casson, 1988, p.48). Competition policy can be used to diversify innovation across the economy. Here the idea is to introduce patents pools, joint ventures, licensing, cross licensing, alliances and mergers. In this process intellectual property rights are asserted which in turn will have drastic effect to research and development and actual pattern in the adoption of new technologies (Buckley and Casson, 1998, p.559, Shapiro, 2002, p.4). Areas of Collaboration The common areas of collaboration include; - training of scientific and technical personnel, funding for basic research, the tax issues of R& D expenditures, support for financial institutions that fund risky R&D activities and the scope of intellectual property rights (Shapiro, 2002, p.5). These areas have in the past proved difficult to be undertaken by one firm and the collaboration of another is needed. This is because acquired knowledge and technology is meant to benefit the entire world race and not few individuals. The new innovation irrespective of who have discovered it is intended to drive the world economy to greater heights. Factors that Affect Global Competition There are a number of influences towards global competition policy. First the as in case of U.S industrial policy which have considered antitrust laws in the light of promoting competitiveness as well as anticompetitive. Locally, the policy makers resolve bearing some anticompetitive loss in order to gain international or trans-national competitiveness. Trust laws have been viewed as behind the robust growth of U.S economy by Making U.S firms competitive in the international Market. However, this did not rule out some future re-examination of antitrust laws in U.S Local markets and its effects to the economy in general. In 1970s and 1980s saw the remove of what was called handicap of U.S antitrust (Fox and Pitofsky, 1997, p. 238) Another factor that influences, global competition is the trade policy both at local and international levels. A country may erect barriers of trade such as tariffs and trust laws. This in turn will lock out a potential competitor into a market thus leaving one firm in place. Internationally, countries may raise barriers of trade towards another so that they are able to be competitive. This was the case with the soaring of U.S -Japan trade deficit which allowed Japan producers' easy access to U.S markets in 1960s and at the same time putting the local firms which were not powerful enough to compete with Japan producers to incur loses. As a result, the U.S government introduced trade and market restraints which saw the reduction of competition from Japan firms. This triggered an internal trade policy which allowed local producers to merge and raise prices with an aim of making them competitive in the long run in global market. It also led to both governments reaching an agreement through Structural Impediments Initiative (SII) on how to co-operate in opening up their markets for each other (Fox and Pitofsky, 1997, p. 239). In addition, market power of a firm determines the directions in which the negotiations about how to collaborate with another firms will take. In most cases powerful firms dictates the terms and conditions. In some instances, government will intervene to save the small firms in a joint venture or collaboration deal. Also government may intervene to stop or reject any mergers that may be detrimental to consumer welfare or that is as a result of coercion- sale tie cases. Measuring of market power include among other things determining the available substitutes of the same products being produced by the firm with a power over the market. This means if a small firm increases price of its products and that a powerful firm have a perfect substitutes of the same then, the small business will loss market as people will switch to other products substitute. This is the same if a firm with a powerful market decide to raise the price of its products with a compliment produced by small firms. If the consumer switches to substitute products the small complement business will loss market too. In these two cases collaboration is needed but in most cases the big firm will dictate the terms of co-operation and point of joint venture. This will in turn affect global market competition (Fox and Pitofsky, 1997, p.243). Moreover, a few products have a global market such as jet engines and some financial services. Alternative sources of supply worldwide will help in checking anticompetitive behaviour and ensure that no market power exists. Imports can also be used to check market powers of dominant local firms. It have been observed that when there is influx of cheap imports in a local market, the prises of products fall thus making a powerful market less and less powerful with time. A case in question is when Asian products flooded the U.S markets, causing the prices of products from local firms to stab; the same applies globally (Sung-Joon, 1993, p.6). Forms of Collaboration Firms could come together and carry out a joint research initiative in what is called pre-competitive research. This research should be in character that can be effectively used and shared by a number of industry participants serving as a common base from which firms can later compete by developing their own specific products (Sung-Joon, 1993, p.25). Another aspect of collaboration can be a situation where two firms are in their initial stages of inventing a product. In this case, the competition is seen as many years to come after the completion of trials and approval by relevant authorities. In some of these cases mergers have been blocked or modified on the basis of 'capabilities' of the merging firms or 'overlap' in innovation market. This is done to promote independent research approaches and to make sure that multiple paths to invention are kept open. (Dussauge, Barrette and Mitchell, 2000, p.100). Examples of Collaborations Cartels. Another aspect of rival firms' collaboration is through cartels. The cartels of powerful firms may come together and agree to fix prices and quantity of products to be supplied in the market. This behaviour in most cases has led to artificial shortage of essential products globally. The cartels collaborate mostly in setting maximum and minimum prices, terms of sales (rebates, discount, transport charges and credit terms). They may agree to divide markets geographically and so on. Through these agreements, they have been able to control commodity flow and prices (Shapiro, 2002, p.11). However, cartel behaviour in almost entire world is illegal and is never entertained. Many of cases against cartels behaviour had been filed in U.S such as Pabner V. BRG of Georgia, Inc, 498 US. 46, 1990, Catalano and Inc. V. Target Sales, Inc, 446 US 643, 1980. The cartel behaviours by firms have never been justified enough to warrant their behaviour. The firms could not claim that they lack market power or have good business reason for their conduct. Identifying the nature of agreement between cartels whether it exist or not have time and again proved to be tasking. However, the behaviour of prices over time can be used as a circumstantial evidence of price fixing or market allocation (Fox and Pitofsky, 1997, p.246) The exception of legality of cartel behaviours is found on dominant firms and its definition. Initially the major threshold of antitrust laws was to fight the dominance of a firm in the market. However, there is no clear consensus to what extent a firm can be considered to be dominant. Some holds that 90% market share constitute a monopoly. The question is what if that firm with 90% market share can only enjoy normal profits Does that constitute a monopoly Others peg it at 70%-100%. All in all, a monopoly firm can have as little as 33% and dictate the prices and reap high prices. The U.S government recently have been lenient on the behaviour of cartels especially when the cartels form themselves to expand their market share or in order to become competitive globally (Fox and Pitofsky, 1997, p.247). Mergers. Mergers are declared illegal if they substantially lessen competition or tend to create a monopoly. Mergers can occur between consumers and suppliers and between competitors in the concentrated and unconcentrated markets. They normally take the form of horizontal, non-horizontal, potential horizontal and vertical mergers ( Dussauge et al, 2000, 120). Most firms may merge in order to achieve more efficiency, drive down prices and preserve innovation. However, those against the mergers argue that, mergers may as well diminish the incentives to achieve efficiency, innovativeness and increase prices to reap more profits. The mergers that tend toward this direction have been blocked by U.S antirust merger policy (Fox and Pitofsky, 1997, p.250). Joint venture. Joint ventures may include any cooperation arrangement among firms so as to share talents, or pool risks in order to undertake a project that neither partner could do alone. The joint venture may be loose contractual arrangements, or they may be corporate joint ventures. The joint venture partners may also resolve to form a new corporation in which they will hold shares, and they might jointly control the new corporation. The joint venture may in such a way that after the achievement of the goals set, the corporation ceases to function. These have happened mostly in areas of R&D and primary research in field of science and technology (Sung-Joon, 1993, p.5). This type of collaboration has been associated with many new innovations and inventions in the area of medicine thus making pharmaceutical firms involved more competitive in global market. A merger may be anticompetitive if it is introduced in a concentrated market. It may as well create market power but likely to result in efficiency or technological progress ( Dussauge, et al, 2000, p.112).This may be especially in strategic alliances where the collaboration gives the partner an advantage to penetrate market of the other or give the partners synergistic advantages in technology. These advantages may be double pronged, anticompetitive exclusionary advantage or pro-competitive. Nevertheless, mergers partners are left to decide on the term of operation and collaboration. (Fox and Pitofsky, 1997, p.253) Predation. Another area where global firms may collaborate is in a strategy to disable competitors by using low prices, strategic exclusions or other means designed to impose cost on the competitors and then raise prices later after achieving monopoly or oligopoly. It normally makes no sense if the market after the predation is expected to be competitive as it were before. Literary there is no legislations about this kind of behaviour since low prices are considered good for the consumer. Predation can be in form of a product change as in case of IBM and peripheral compatible manufacturer's equipment1(Fox and Pitofsky, 1997, p.255; Herget, 1987, p.1805) Price discrimination. Rival firms may collaborate in price discrimination in order to harm, injure destroy or prevent a competition with a competitor or a customer. Price discrimination when applied at the primary line harm or destroy a competitor thus lessening competition. When applied at secondary line it may harm competition on the line of disfavoured customer.(Fox and Pitofsky, 1997, p.256) Vertical agreement. In this type of collaboration firms influences the prices of distributors down from the production to the retail point. This may go further to reach an agreement to deny other firms access to raw materials as in case of Kenya Breweries Limited (KBL) and Castle Breweries Limited (CBL). KBL had a contract with local barley farmers to be the sole buyer of their barley. When CBL started its operation in Kenya, KBL refused them access to this local barley market. The CBL filed a suit and since there was no well established legal framework in Kenya to handle this kind of a case, the CBL lost their case. Effort by CBL to negotiate for tariff reduction on imported Barley with the Kenyan government proved futile. Eventually the CBL firm was forced to sell its capital and brand to KBL and opted out of Kenyan market (Mwaura, 2000, p.31). Conclusion From the above analysis, it is clear that global competition attracts some kind of partnership from the rival firms. Firms' collaboration promotes innovation as well as creativity and thus propelling global economic growth. The rationality behind collaboration of rival firms is to undertake such projects that require a huge capital and technical investments a single firm cannot be able to sustain. The cooperation is in such a way that each firms will at the end reap some benefits through a well regulated antitrust policy. We have also seen that not all cooperation is meant for the greater good of the society. Such as those formed to hike prices, discriminate and exploit or block market access to small firms. Therefore, all effort should be made to fight these kinds of cooperation. In nutshell, rival firms collaboration promotes global competition while at the same time it can be anti-competition. Therefore, the specific market effect of a collaboration need to be reviewed individually in order to ponder its effect to the global competition. References Buckley, P.J and Casson, M (1988). "A theory of cooperation in international business" in Contractor, F.J and P. Lorange, Cooperative strategies in international business. Lexington Books Lexington, MA, 31-67. Buckley, P.J and Casson, M (1998). 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