the visible hand

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Ruinous competition…

Posted by ecoshift on August 29, 2009

Competition Policy in Distressed Industries

Excerpt from Remarks as Prepared For Delivery to ABA Antitrust Symposium: Competition as Public Policy
Deputy Assistant Attorney General for Economics
Antitrust Division
U.S. Department of Justice
May 13, 2009

“Ruinous Competition”

During an economic downtown, some industries will inevitably have substantial excess capacity. Under these circumstances, the prices resulting from competition may fail to provide many of the suppliers in the industry with a normal, risk-adjusted rate of return on capital. This may be true even for firms that are relatively efficient and have done a good job anticipating the needs of customers. The risk that a general economic downturn will reduce the rate of return on invested capital is, of course, but one of the many risks associated with business investments. Indeed, in many industries it is normal and expected that firms will experience some periods during which the risk-adjusted rate of return on capital is above normal, and other periods when it is below normal. Sound competition policy should not allow firms to restrict competition to avoid downside risks in their rate of return, any more than sound competition policy should intervene to deprive successful firms of their upside returns when times are good.(37)

These days, it is unlikely that well-counseled firms will explicitly argue that they need to be saved from “ruinous” or “cutthroat” competition. But, under one name or another, this idea is likely to resurface. For example, two merging firms may well argue that ongoing competition will leave them with insufficient profits to make valuable and necessary investments to serve consumers. This is effectively a version of the “ruinous competition” argument that should be treated skeptically.

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One Response to “Ruinous competition…”

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