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Gaining a competitive advantage in an oligopolistic market

Article by Danie Pienaar (Partner) Spoor & Fisher

In light of the recent financial uncertainties in the South African markets, companies are becoming even more pro-active within their competitive environment in order to gain, or at least maintain, market share and maximise profits. In this article, we take a specific look at oligopolistic markets (markets which are dominated by a small number of firms), the danger zones to avoid, and a number of sometimes lesser-known tools which can help companies strengthen their position in the market.

In oligopolistic markets, companies are constantly making strategic decisions in relation to pricing, output and target markets, amongst others, in order to determine the most profitable way to conduct business. However, due to the interdependence between the players in an oligopolistic market, the reactive behaviour of competitors plays a vital role in whether or not certain strategic decisions result in a substantial market or profit gain. Since the actions of competitors in this type of market structure have such a substantial impact on strategic decisions, there are certain well-known tools which are often used to help reduce this uncertainly to some degree. One of these tools is known as Game theory. Game theory is often used to help analyse and predict the outcome of certain strategic actions by predicting the competitors’ reactions to those actions, should they be taken. By predicting their reactions and the effect they would have, a decision can be made as to whether or not the actions should be implemented.

However, even though these tools help to reduce uncertainties in the market, competitors are sometimes enticed with the idea of colluding with one or more of their main competitors, in order to create an environment in which market uncertainty is reduced and profits are maximised. Although this practice might, from a pure profit-maximisation perspective, seem like a good business decision, companies may unknowingly/knowingly enter the dangerous realm of unlawful collusive practices, which can result in hefty administrative fines by the Competition Tribunal of up to 10% of the company’s annual turnover. Any undertaking between competitors, whether explicit or implicit, whereby prices or certain trading conditions are fixed, or where markets are divided (e.g. by territory or through customer allocation), should be seen as a red-alert that the company is in all likelihood participating in an unlawful practice which is prohibited by the Competition Act and liable to a fine. It should also be noted that in addition to an administrative fine, the negative publicity accompanied by a conviction of cartel-like conduct, could deal a serious blow to a company’s reputation.

In light of the above, it is critical that managers and strategic decision makers be well educated on the prohibited practices of anti-competitive behaviour. In order to mitigate this risk, a competition-law compliancy programme could be developed to educate all the decision makers within a company. This programme can also help improve corporate governance and due diligence, as part of an overall risk management strategy.

However, if any possible cartel-like activity is identified within a company, it is critical to take a proactive approach and seek adequate legal advice on whether or not the company has in fact contravened the Competition Act, and if so, what further steps to take. In this regard, it is important to note that the Corporate Leniency Policy of the Competition Commission allows the Commission at its discretion to grant a cartel member immunity/indemnity for participating in the cartel activity, provided that they are the first member to approach the Commission. In other words, immunity/indemnity can only be provided to the first whistle-blower. Taking an active approach when cartel-like actively is identified may therefore save a company a substantial amount in fines and help limit the damage to the company’s reputation.

As a result of these prohibited practices, companies are required to investigate other means of strengthening their position in the market. One way of doing so is to create strategic barriers to entry which fall outside the scope of prohibited anti-competitive practices.

In order to obtain a competitive advantage over competitors, companies often focus on improving customer services and product quality to help strengthen their brand reputation in the market. This is where trademarks can play a vital role. A trademark is in essence any mark (e.g. a name, logo or slogan) which is used by a company to distinguish their goods or services from those of their competitors. By having a strong trademark portfolio in place, companies are therefore able to prevent competitors from using the same or similar trademarks within the same industry.

In order to improve on their existing products, companies sometimes develop new products, which provide them with a competitive advantage over competitors’ existing products. However, to help prevent competitors from merely developing a similar product, patent protection can be put in place in certain cases. A granted patent effectively protects the technical uniqueness of an invention and helps to prevent any other party from commercialising a similar product within a particular territory (e.g. South Africa). In other words, a patent can help create an effective, legal barrier to prevent competitors from launching a similar product.

Patent protection is generally available for a variety of technical fields which include any new products, manufacturing processes or compositions. It is however important to bear in mind that patent protection is only available if an invention is new (worldwide), and should be applied for before any public disclosure. The decision on whether or not to patent a specific product should therefore be decided and implemented prior to launching it into the market.

To summarise, oligopolistic markets are often fiercely contested by a small number of dominant players and companies often try and find new ways to improve their position in the market. However, companies should always bear in mind that there are certain practices they should avoid at all cost, since failure to do so could be detrimental, not only from a financial perspective, but also from a reputational point of view. Intellectual property however provides legally-recognised tools which companies can use in order to obtain monopoly rights to the exclusion of their competitors.

Spoor & Fisher is a proud Partner of the NSBC.