2.3. Consequences of Recent Trends in Business Environment

Chapter III was divided into two parts, namely trends in business environment induced by policy changes and those induced by economic and technological factors. With regard to policy changes, it was observed that liberalisation in the form of deregulation and privatisation has taken place on the nation-state level almost everywhere and that regional and global agreements have often substantially increased possibilities to do business beyond borders, either by trade or by foreign direct investment. With regard to delineating relevant markets and assessing dominance, this means that the geographic dimension of the relevant market has often considerably increased in scope. This would often translate into lower market shares of firms willing to merge and thus to a lower number of mergers to be prohibited by the competition authorities.

The curious gap between textbook delineations of the relevant market and actual practice was already mentioned in chapter II: whereas textbooks often mention the necessity to consider time as a relevant dimension, this is hardly ever done in actual practice. If one looks at the underlying theory, this is in no way surprising: The Harvard approach is inherently static, changes as dynamic processes in historical time simply do not occur.

The world is, however, not a static place. Some of the recent developments in business environment mentioned in Chapter III have an important time dimension. Rapid technological change on the supply side and rapid changes of consumption patterns on the demand side mean that a position a firm has at time t0 will not secure it a similar position at point in time t1. If significant product or process innovations are under way, high present market shares might therefore not be a good indicator for future market shares, and therefore – according to the Harvard approach – for market power. Similar considerations follow as a consequence of the rapid changes in consumption patterns.

The three trends mentioned – shorter product cycles, rapid technological change, and rapid changes in consumption patterns – all mean that it has become more difficult to make reliable predictions concerning the structure of a market. Within the Harvard paradigm, the structure of a market is, however, a necessity for making competition policy. We are thus dealing with a dilemma, namely the necessity and the impossibility of reliable predictions concerning the structure of a market. In section 2.5 of this chapter, a possible way out of the dilemma will be sketched.

In Chapter III, the notion of international interaction costs was introduced. It was shown that they have substantially decreased in many of their components. Transport costs, e.g.,, have decreased due to liberalisation and technological progress. The same can be said with regard to transaction costs. What some representatives of competition theory perceive as the most important constraint to competition, namely state-mandated barriers to trade was also shown to have substantially decreased. In sum, international interaction costs have been on a secular decline.

This long-term trend ought to be reflected in the delineation of the geographic dimension of relevant markets. In the absence of relevant international interaction costs, the relevant geographic market should often be the global market. Business strategists (Porter 1990, 53ff.) have proposed to distinguish between (1) completely globalised markets, (2) partially globalised markets, and (3) regional markets. Completely globalised markets are characterised by only marginal international interaction costs with regard to both the trade and the investment dimension. Partially globalised markets, in turn, are those where there are (still) relevant costs of overcoming geographical space but where costs of carrying out foreign direct investment have become marginal. Regional markets would be those in which both costs of overcoming space and of doing foreign direct investment are still prohibitive. Examples for globalised industries are the car industry and its supplier industries, the chemical industry, the machine tool industry, the component industry for electronic products, the consumer electronics industry, the computer software as well as the hardware industry, and the aviation industry. The pharmaceutical industry is a good example for an industry that is currently moving from partially to completely globalised17.

The last aspect with regard to the delineation of the relevant market is its product dimension. At least two aspects encountered in the chapter on trends in business environment deserve to be mentioned here again. The observation that command of one basic technology enables companies to supply a variety of products and the liberalisation of capital markets. If the first observation is correct, then potential competition has considerably increased because barriers to entry for firms who command the one basic technology crucial for the market under consideration have decreased. Barriers to entry will be discussed extensively in the next section of this paper. They are mentioned here anyway because it is often argued that potential competition should already be recognised when the relevant market is delineated and not only afterwards, when counterbalancing factors for concentrated market structures are examined.

A very similar argument can be made with regard to the liberalisation of capital markets. Raising equity as well as outside capital has become easier for companies that are considering entry into another jurisdiction as well as for entrepreneurs contemplating to newly establish a firm. All these aspects should lead to a broader delineation of the relevant market in both its product and geographic dimension.