Document(s) 8 of 9

The purpose of this short glossary is to help the casual reader focus on terms used in this book. Terms marked with * or ** have been drawn most significantly from the glossaries of the European Commission (2003) and OECD (Khemani and Shapiro, n.d.), respectively, although some have been abbreviated. Italicized terms are defined in the glossary of the European Commission (2003), and bold terms are defined elsewhere in this glossary.

Abuses of dominance* — Anticompetitive business practices (including improper exploitation of customers or exclusion of competitors) in which a firm in a dominant position may engage to maintain or increase its market power.

Anticompetitive agreements — A general classification of agreements between rival or potentially rival firms to limit competition. See cartels.

Anticompetitive conduct/practices — Any activity that is intended to limit competition or extract rent. The activity will involve an anticompetitive agreement, an abuse of dominance, or a merger.

Bid rigging* — A form of coordination between firms that interferes with a bidding process. For example, firms may agree on their bids in advance, deciding which will be the lowest bidder; some may agree not to bid or bid high so that a predetermined bid will win.

CARICOM — Caribbean Community (and Common Market)

Cartels* — Arrangement(s) between competing firms designed to limit or eliminate competition between them, with the objective of increasing prices and profits of the participating companies and without producing any objective countervailing benefits. In practice, this is generally done by fixing prices, limiting output, sharing markets, allocating customers or territories, bid rigging, or a combination of these. Cartels are harmful to consumers and society as a whole because the participating companies charge higher prices (and earn higher profits) than they would in a competitive market.

COMESA — Common Market for Eastern and Southern Africa

Comity* — Principle applied in the field of international cooperation on competition policy. In negative comity, every country that is party to a cooperative agreement guarantees to take account of the important interests of the other parties of the agreement when applying its own competition law. In positive comity, a country may ask the other parties of the agreement to take appropriate measures, under their competition law, against anticompetitive behaviour taking place on their territory and affecting important interests of the requesting country.

Cost of capital — The cost of financing a project or firm expressed as an opportunity cost for an equivalent investment alternative. This typically requires judgements of risk of the project or firm: assessing what components will make up the capital (debt, share equity, etc.), and assessing the opportunity costs for those components in the market.

Dawn raid — A dawn raid occurs when a competition authority has the power to enter a firm’s premises, copy and seize documents, copy or seize computer hard drives, and remove evidence to help it to uncover evidence of wrongdoing.

Deadweight loss — A deadweight loss is a loss of efficiency caused by an economy not producing at its most efficient level. Deadweight losses can be caused by the cost of anticompetitive behaviour or agreements, excessive taxation, or subsidy levels.

Economies of scale occur when the more a firm produces, the lower its long-run average unit cost of production becomes. Returns to scale exist where a firm lowers its short-run cost by simply increasing its output. See Minimum efficient scale.

GDP — gross domestic product: the total market value of all goods and services produced within a country in a given period of time (usually a calendar year).

Hard core restrictions* — Restrictions of competition by agreements or business practices, which are seen by most jurisdictions as being particularly serious and normally do not produce any beneficial effects. They almost always infringe competition law.

IDRC — International Development Research Centre

INDECOPI — Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual (Peruvian Competition Authority)

Market power* — Strength of a firm in a particular market. In basic economic terms, market power is the ability of firms to price above marginal cost and for this to be profitable. In competition analysis, market power is determined with the help of a structural analysis of the market, notably the calculation of market shares, which necessitates an examination of the availability of other producers of the same or of substitutable products (substitutability). An assessment of market power must also include an assessment of barriers to entry or growth (entry barriers) and of the rate of innovation. Furthermore, it may involve qualitative criteria, such as the financial resources, the vertical integration or the product range of the undertaking concerned.

MERCOSUR — Mercado Comun del Cono Sur (Southern Cone Common Market)

Merger** — An amalgamation or joining of two or more firms into an existing firm or to form a new firm. A merger is a method by which firms can increase their size and expand into existing or new economic activities and markets. A variety of motives exist for mergers: to increase economic efficiency, to acquire market power, to diversify, to expand into different geographic markets, to pursue financial and research and development synergies, etc. Mergers are classified into three types: horizontal, vertical, and conglomerate. Horizontal mergers are between firms that produce and sell the same products, i.e., between competing firms. If significant in size, these mergers can reduce competition in a market and are often reviewed by competition authorities. Vertical integration between firms operating at different stages of production usually increases economic efficiency, although they may sometimes have an anticompetitive effect. Conglomerate mergers are between firms in unrelated businesses.

Minimum efficient scale — The minimum size a firm can be for it to be productively efficient. In small economies, this can be very important if the market is too small to support more than one firm efficiently. If a market is smaller than the minimum efficient scale of a single firm, then that firm will be less efficient than rivals and will charge higher prices to consumers.

Monopoly/monopsony* — Market situation with a single supplier (monopolist) who, because of the absence of competition, holds an extreme form of market power. It is tantamount to the existence of a dominant position. Under monopoly, output is normally lower and prices higher than under competitive conditions. A monopolist may also be deemed to earn supranormal profits (i.e., profits that exceed the normal remuneration of the capital). A similar situation on the demand side of the market, i.e., with a single buyer, is called monopsony.

NGO — non-governmental organization

OECD — Organisation for Economic Co-operation and Development

Oligopoly* — A market structure with few sellers who realize their interdependence in making strategic decisions, for instance, on price, output, and quality. In an oligopoly, each firm is aware that its market behaviour will affect the other sellers and their market behaviour. As a result, each firm will take the possible reactions of the other players expressly into account. In competition cases, the term is often also used for situations where a few big sellers jointly dominate the competitive structure and a fringe of smaller sellers adapt to their behaviour. The big sellers are then referred to as the oligopolists. In certain circumstances, this situation may be considered to be collective (also joint or oligopolistic) dominance.

Per se prohibitions simply outlaw a certain type of agreement regardless of whether it has caused damage.

Productivity — The most common use of this term is the value of output per worker’s hour. This is an example of factor-specific productivity (i.e., labour). Simply put, one is more productive if one produces more output for a given hour of work, but a worker may be more productive with a new, more expensive machine; labour productivity may rise with more investment in capital (another factor of production). Hence, in economic studies of competition, where the focus is on improvements in welfare caused by competition through innovation, efficiency, etc., the total factor productivity is used: the value of output as it exceeds the value of the input factors of production (traditionally land, labour, and capital).

Regulatory capture is the circumstance when a government regulatory agency (such as a competition authority), which is supposed to be acting in the public interest, becomes dominated by the vested interests of the incumbents in the industry that it oversees.

Rent — A firm (or group of firms acting anticompetitively) can extract rent when it has market power by restricting output, forcing consumers to pay more than they would otherwise pay in a competitive market. Rent generates economic profit (revenue less economic opportunity costs). Economic opportunity costs usually differ from explicit accounting costs. Most of this adjustment typically reflects the opportunity cost of capital.

RTA — regional trade agreement. In this book, RTAs encompass bilateral and multilateral free trade agreements and customs unions, irrespective of geography.

Rule of reason**— An evaluation of the procompetitive features of a restrictive business practice against its anticompetitive effects to decide whether the practice should be prohibited. Some market restrictions that may at first glance give rise to competition issues, may on further examination be found to have valid efficiency enhancing benefits. The opposite of the rule of reason approach is to declare certain business practices illegal, per se, (i.e., always illegal). For instance, price-fixing agreements and resale price maintenance agreements in some jurisdictions are illegal.

Tied selling* — Making the sale of one product conditional on the purchase of another product.

UNCTAD — United Nations Conference on Trade and Development

Vertical integration/restraint** — Relationship, ownership, or control of different stages of the production process, e.g., petroleum refiners, pipeline companies, and oil explorers. A vertical restraint is an agreement-setting conditions under which the firms within a production process may purchase, sell, or resell certain goods or services.

WTO — World Trade Organization

Document(s) 8 of 9