Dividing the market

Market Division: Dividing the Market

Market division is an illegal anti-competitive practice within the realm of Antitrust Law where competing businesses agree to allocate customers, geographic areas, or specific products among themselves. This practice eliminates Competition that would otherwise exist, leading to higher prices, reduced innovation, and fewer choices for consumers. Such arrangements are a form of Collusion and are considered a per se violation of antitrust statutes, meaning they are inherently illegal regardless of their actual impact on the market.

History and Origin

The concept of prohibiting market division and other anti-competitive practices gained significant legal traction in the late 19th and early 20th centuries. In the United States, the Sherman Antitrust Act of 1890 was the first federal statute designed to outlaw monopolistic business practices and agreements that restrain trade.¹³ Section 1 of the Sherman Act explicitly declares illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations."¹² This sweeping language laid the foundation for prosecuting agreements like market division. The act aimed to protect the public from market failures caused by anti-competitive conduct.

In Europe, competition law has evolved to address similar concerns. The European Union's (EU) competition law, primarily derived from Articles 101 to 109 of the Treaty on the Functioning of the European Union (TFEU), prohibits agreements between undertakings that restrict or distort competition within the common market. Market sharing is explicitly listed as a prohibited practice under these rules.¹¹

Key Takeaways

• Market division is an illegal agreement among competitors to carve up a market.
• It harms Consumer Welfare by eliminating competition, often leading to higher prices and less choice.
• Such agreements are typically per se illegal under antitrust laws, meaning no proof of actual harm is required for conviction.
• Enforcement is carried out by government agencies like the Department of Justice and the Federal Trade Commission in the U.S., and the European Commission in the EU.
• It is a form of Horizontal Agreement among competitors, distinguishing it from agreements between different levels of a supply chain.

Interpreting the Market Division

Market division is interpreted as a direct attack on the principles of a free market economy. When companies engage in market division, they are essentially replacing competitive forces with a coordinated scheme to control portions of the market. This practice directly undermines Economic Efficiency because resources may not be allocated to their most productive uses, and innovation can stagnate without the pressure of rivalry. The existence of such an agreement indicates an attempt by firms to gain or maintain Market Power through illicit means rather than through superior products or services. Regulatory bodies interpret these actions as serious threats to fair trade and typically pursue stringent penalties.

Hypothetical Example

Imagine two major manufacturers of specialized industrial components, Company A and Company B, operating nationwide. After years of intense competition, which led to thin profit margins, their senior executives meet secretly. They agree that Company A will exclusively serve all customers east of the Mississippi River, and Company B will exclusively serve all customers west of the Mississippi River. They also agree not to bid on each other's "territory."

In this scenario, Company A and Company B have engaged in geographic market division. Previously, customers on both sides of the river could solicit bids from both companies, ensuring competitive pricing and service. Now, a customer in, say, Ohio, can only get a bid from Company A, which faces no competition for that customer's business from Company B. This eliminates price competition and reduces customer choice. If this arrangement were discovered, antitrust authorities would likely pursue legal action against both companies for forming an illegal Cartel.

Practical Applications

Market division manifests in various forms across different industries. It can involve:

• Geographic Allocation: Dividing sales territories by state, region, or country (as in the example above).
• Customer Allocation: Assigning specific customers or classes of customers to particular competitors, often seen in bidding processes where companies agree not to solicit or bid for certain clients.
• Product Allocation: Agreeing to specialize in certain product lines and not compete in others, even if both companies have the capability to produce the full range.
• Functional Allocation: Dividing the market based on the type of sale, such as one company handling retail sales and another handling wholesale.

The U.S. Department of Justice (DOJ)¹⁰ and the Federal Trade Commission (FTC)⁹ are the primary federal agencies responsible for enforcing antitrust laws against market division agreements. Both agencies actively investigate and prosecute companies and individuals involved in such schemes. For example, the DOJ's Antitrust Division frequently files cases against companies engaging in market division, which can result in significant fines and imprisonment for individuals.⁸ Similarly, the FTC's Bureau of Competition⁷ investigates potential law violations and seeks legal remedies to prevent anti-competitive business practices.⁵, ⁶ European Union regulators also actively enforce against market sharing agreements, imposing substantial fines on infringing companies.³, ⁴

Limitations and Criticisms

While market division is widely condemned as anti-competitive, its detection and successful prosecution can present challenges. Proving the existence of a secret agreement, rather than mere parallel business conduct (where firms independently respond to market conditions in a similar way), often requires extensive investigation, including gathering emails, meeting minutes, and witness testimonies. Circumstantial evidence, such as unusually stable Market Share among competitors or identical pricing without a clear market explanation, can suggest market division but may not be conclusive on its own.

Furthermore, economic analysis in Industrial Organization attempts to understand the environments (market structures) in which firms interact, highlighting the complexities in differentiating between natural market dynamics and deliberate anti-competitive acts.¹, ² The legal process can be lengthy and resource-intensive, requiring significant effort from Regulatory Bodies to build a compelling case.

Market Division vs. Collusion

Market division is a specific type of Collusion. Collusion is a broad term referring to any secret or illegal cooperation between competing parties to deceive, defraud, or gain an unfair advantage. This can encompass a wide range of anti-competitive behaviors.

While all market division agreements are a form of collusion, not all collusion involves market division. For instance, an agreement solely to fix prices without dividing up customers or territories would be collusion, but not market division. Both practices are severely penalized under antitrust statutes because they undermine fair trade and consumer welfare.

FAQs

What happens if companies are caught engaging in market division?

Companies caught engaging in market division can face severe penalties, including substantial fines that can amount to a percentage of their annual revenue, and individuals involved can face criminal prosecution, leading to prison sentences. Additionally, victims of market division can sue for damages, often triple the actual damages incurred.

Is market division always illegal?

Yes, in most jurisdictions with established antitrust or competition laws, market division is considered a per se illegal offense. This means that the act itself is illegal, and prosecutors do not need to prove that the agreement actually harmed competition or consumers; the agreement's very nature is deemed anti-competitive.

How does market division affect consumers?

Market division harms consumers by eliminating the benefits of competition. Without rivals vying for their business, companies can charge higher prices, offer lower quality products or services, and reduce innovation, as they face no pressure to improve. Consumers have fewer Choices and ultimately pay more for less.

Can a small business be guilty of market division?

Yes, any business, regardless of its size or market share, can be found guilty of engaging in market division if it enters into an agreement with a competitor to divide markets or customers. The illegality stems from the agreement itself, not necessarily the market power of the participants.

How is market division typically detected?

Detection often comes from whistleblowers (current or former employees), customer complaints, or internal investigations by antitrust authorities. Data analysis showing unusual pricing patterns or stable market shares among competitors can also trigger investigations. Leniency programs, which offer reduced penalties to companies or individuals who report illegal cartel activities and cooperate with investigations, are also a significant source of detection.