Glossary Terms

Question 1

Allocative efficiency

Answer 1

This state occurs when resources are so allocated that it is not possible to make anyone better off without making someone else worse off.

Question 2

Anti-competitive agreements

Answer 2

Agreement refers to an explicit or implicit arrangement between firms normally in competition with each other to their mutual benefit. Agreements to restrict competition may cover such matters as prices, production, markets and customers.

Question 3

Antitrust

Answer 3

Antitrust refers to a field of economic policy and laws dealing with monopoly and monopolistic practices. Antitrust law or antitrust policy are terms primarily used in the United States, while in many other countries the terms competition law or policy are used. Some countries have utilized the phrases Fair Trading or Antimonopoly law. In Europe, including the UK, antitrust and competition law are often used interchangeably.

Question 4

Average total cost (ATC)

Answer 4

The total costs involved in the production of one unit of output, ie., total cost divided by the number of units produced.

Question 5

Average variable cost (AVC)

Answer 5

The variable costs (QV) involved in the production of one unit, i.e., variable costs added up and divided by the number of units produced.

Question 6

Avoidable costs

Answer 6

The costs that will not be incurred if an undertaking ceases a particular operation.

Question 7

Bi-lateral agreement

Answer 7

Agreement between two parties.

Question 8

Block exemption

Answer 8

A set of general rules laid down in a Regulation, which, if complied with, will allow an agreement to escape the prohibition in Article 101(1) TFEU.

Question 9

Cartel

Answer 9

A cartel is a formal agreement among firms in an oligopolistic industry. Cartel members may agree on such matters as prices, total industry output, market shares, allocation of customers, allocation of territories, bid-rigging, establishment of common sales agencies, and the division of profits or combination of these.

Question 10

Cellophane fallacy

Answer 10

Problem in applying SSNIP test (QV) when the existing price is above the competitive level, for example, where the market is to some extent monopolized. In some cases, prices will have already been raised to the level at which a further price rise would lead a significant number of purchasers to stop buying, or switch to alternatives that would not otherwise have been regarded as reasonable substitutes. The application of the SSNIP test might, therefore, erroneously suggest that other products should be included in the resulting product market even though they would not have been seen as substitutes had the competitive price level been used as the starting point for the test. Named after the US case in which the product concerned was cellophane and the problem was not noticed: US v E I du Pont de Nemours

Question 11

Chain of substitution

Answer 11

In the process of defining a market, two products that are not direct substitutes can at times be included in the same market. This happens when product B, for example, is a direct substitute to products A and C, but C is not a direct substitute to A and vice-versa. There is then a ‘chain of substitution’ running from A to B to C. Despite not being direct substitutes, A and C may, in some instances, be considered to be in the same market if they are constrained by their common relationship with B.

Question 12

Collective dominance

Answer 12

Sometimes referred to as joint dominance. Term of EC competition law referring to a situation where two or more undertakings, when taken together, are considered to have a dominant position (QV) between themselves.

Question 13

Collusive tendering

Answer 13

The practice among companies making tenders for a job of sharing inside information between themselves, with the objective of fixing the end result.

Question 14

Conglomerate mergers

Answer 14

A merger between firms in unrelated business, e.g., between an automobile manufacturer and a food processing firm.

Question 15

Co-ordinated effects

Answer 15

Refers to the position in oligopolistic markets (QV) where companies recognise that the actions of individual companies can have identifiable effects on their competitors. If this position is maintained, the recognition of this interdependence can have a significant effect on business decisions. In particular it can become rational to refrain from initiating price cuts which would be unavoidable in more competitive circumstances. Although there may be co-ordination in such situations, it does not mean that the companies have been in contact with each other.

Question 16

Demand side substitution

Answer 16

Where customers react to a price increase by switching some or all of their purchases from one product to another product.

Question 17

Distribution agreements

Answer 17

A vertical agreement (QV) whereby a manufacturer makes arrangements for the distribution of their goods, either directly to consumers or to distributors or wholesalers who then sell the goods to retailers.

Question 18

Divestiture

Answer 18

Refers to firms selling part of their current operations, divisions or subsidiaries.

Question 19

Dominant position

Answer 19

Legal term in EU competition law. Indicates an undertaking which has a level of market power which means its behaviour should be subject to competition law.

Question 20

Dynamic efficiency

Answer 20

Refers to balancing short and long run concerns and the ability to improve efficiency, typically productive, over time.

Question 21

Economies of scale

Answer 21

Refers to the phenomenon where the average costs per unit of output decrease with the increase in the scale or magnitude of the output being produced by a firm.

Question 22

Economies of scope

Answer 22

Exist when it is cheaper to produce two products together (joint production) than to produce them separately.

Question 23

Follow on action

Answer 23

An action for damages or compensation brought by a person(s) or undertaking(s) which have been damaged by anti-competitive conduct. The action is brought after a competition authority has decided that there has been a breach of competition law, that is, it follows on from the decision of a competition authority.

Question 24

Franchise

Answer 24

A form of business organization in which a firm which already has a successful product or service (the franchisor) enters into a continuing contractual relationship with other businesses (franchisees) operating under the franchisor’s trade name and usually with the franchisor’s guidance, in exchange for a fee.

Question 25

Fixed costs

Answer 25

Those which do not change with output over a given time period

Question 26

Hard core restraints

Answer 26

Term used in EU competition law to identify a variety of provisions in a contract that are considered particularly damaging to competition. Lists of such provisions can be found in the block exemption Regulations (QV). Inclusion of such provisions in an agreement means that it cannot receive the benefit of a block exemption. Whether or not all such provisions are damaging to competition is a matter of controversy.

Question 27

Herfindahl-Hirschman Index

Answer 27

A measure of industry concentration. The value of the index is the sum of the squares of the market shares of all firms in an industry. Higher values indicate greater concentration. One of several ways to measure concentration.

Question 28

Horizontal agreements

Answer 28

An agreement between two firms or companies at the same level of production. For example, an agreement between two car manufacturers.

Question 29

Horizontal merger

Answer 29

A merger between two firms operating at the same level or production.

Question 30

Hypothetical monopolist test

Answer 30

See SSNIP test. Alternative term for this test.

Question 31

Inter-state trade

Answer 31

Strictly, trade between two states or nations. In EU competition law, refers to agreements or conduct which have an effect on trade between Member States of the EU. The concept has been interpreted broadly to include agreements or conduct within one Member State (because they may affect the ability of other producers to enter this market) and to cover potential, as well as actual effects.

Question 32

Long run incremental cost (LRIC)

Answer 32

The total long run costs of supplying a specified additional unit of output, taking into account both capital and operating costs.

Question 33

Marginal cost

Answer 33

The increase in total costs of a firm caused by increasing its output by one extra unit.

Question 34

Marginal revenue

Answer 34

The increment in total revenue resulting from the sale of an additional unit.

Question 35

Market integration

Answer 35

Central policy objective of the EU. The idea is to break down barriers in markets which exist between Member States so that, ideally, there is one European wide market for products.

Question 36

Market power

Answer 36

Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition is referred to as market or monopoly power. The exercise of market power leads to reduced output and loss of economic welfare. (OECD) Since markets are never perfectly competitive, all firms have some level of market power.

Question 37

Market share threshold

Answer 37

Shorthand used in competition law to describe situation where once an undertaking goes above a certain market share it will be treated less favourably within competition law. For example, block exemptions (QV) specify a market share below which the undertakings can obtain the benefit of the block exemption. Above that level they cannot use the block exemption, although this does not necessarily imply that their action is anti-competitive.

Question 38

Merger

Answer 38

When two companies become one, “the merged firm”. Usually done by agreement between the two companies, although not always the case.

Question 39

Monopoly

Answer 39

A situation where there is a single seller in the market.

Question 40

Monopsony

Answer 40

A market with a single buyer

Question 41

Multi-lateral agreement

Answer 41

Agreement between three or more parties.

Question 42

Non-co-ordinated effects

Answer 42

Sometimes called unilateral effects, occurs when a merger (QV) enhances the ability of the merged firm to exercise market power independently, without the need to second-guess the strategies of other firms in the market.

Question 43

Oligopolistic industry/markets

Answer 43

An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.

Question 44

Oligopoly problem

Answer 44

The problem that oligopolistic industries/markets create for competition authorities. The problem is that oligopolies may or may not be highly competitive and it may be difficult to distinguish the two situations. In addition, independent behaviour which recognises interdependence is not an offence under EU and UK competition law.

Question 45

Price fixing agreements

Answer 45

An agreement between two companies or firms to fix prices.

Question 46

Productive efficiency

Answer 46

When the production of a product is achieved at the lowest cost possible.

Question 47

Resale price maintenance

Answer 47

The practice whereby a manufacturer and its distributors agree that the latter will sell the former’s product at certain prices. These prices may be either a minimum or a maximum.

Question 48

Selective distribution

Answer 48

Arrangement between a manufacturer and a distributor or retailer where the manufacturer selects the distributor on the basis of some criteria. Criteria often relate to the quality of service offered by the distributor or retailer to customers.

Question 49

Severance/severability

Answer 49

Contract law doctrine which refers to the ability of certain clauses in a contract to be deleted or ignored but will allow the substance of the contract to be carried out.

Question 50

Short-run marginal cost (SRMC)

Answer 50

The marginal cost based on a firm’s existing plant and output, not on that which would be the most efficient.

Question 51

Social market economy

Answer 51

Economic model usually associated with Germany and ordo-liberalism (QV). An attempt to find a middle way between unbridled capitalism and socialism/communism.

Question 52

SSNIP test (Small but Significant Non-Transitory Increase in Price)

Answer 52

In competition law, before deciding whether companies have significant market power which would justify government intervention, the test of Small but Significant and Non-transitory Increase in Price is often used to define the relevant market in a consistent way.

Question 53

Stand-alone actions

Answer 53

An action for damages, or other relief, brought by one private party against another alleging that there has been behaviour which is in breach of competition law. Unlike a follow-on action (QV), there will have been no prior decision by a public authority that the agreement or conduct is anti-competitive.

Question 54

Stand-alone costs

Answer 54

The costs which are involved in producing a product without taking into account that some of these costs are shared with the production of other products.

Question 55

Sunk costs

Answer 55

Costs which, once committed, cannot be recovered. Sunk costs arise because some activities require specialized assets that cannot readily be diverted to other uses. Second-hand markets for such assets are therefore limited.

Question 56

Supply side substitutability

Answer 56

Where producers react to an increase in the price of a product either by increasing their production or switching their production facilities to produce the product whose price has increased.

Question 57

Unilateral action

Answer 57

Action taken by one undertaking.

Question 58

Unilateral agreements

Answer 58

A contradiction. Refers to those cases in EU competition law where the question has been whether or not two undertakings have entered into an agreement or, instead, one of them has imposed its will on the other.

Question 59

Upstream/Downstream market

Answer 59

Some products are not sold directly to the final customer. They are first sold to an intermediary, who then either sells on directly to another customer (wholesaler) or transforms the products for sale to customers. Markets for products at an earlier stage of production are generally designated as upstream markets; and those at a later stage, typically to the final customer, downstream markets.

Question 60

Variable costs

Answer 60

Those costs which do change with output.

Question 61

Vertical agreements

Answer 61

An agreement between two firms or companies at different levels of production. For example, an agreement between a manufacturer and a retailer or distributor.

Question 62

Vertically integrated undertaking

Answer 62

The ownership or control by a firm of different stages of the production process, e.g., petroleum refining firms owning “downstream” the terminal storage and retail gasoline distribution facilities and “upstream” the crude oil field wells and transportation pipelines.

Question 63

Vertical merger

Answer 63

A merger between two firms operating at different levels of production. For example, the merger of a distributor and retailer.