Appendix 1: Raising rivals’ costs

Extract from “Competition Policy, Theory and Practice” by Massimo Motta Published in 2004 by Cambridge University Press

Krattenmaker and Salop (1986) claim that among the monopolisation tools available to firms there are also so-called raising rivals’ costs practices.¹⁰³ These practices all aim at increasing the costs of one or more rivals, thus leaving room for the firm that engages in these practices to increase prices without losing market share. These practices would be particularly appealing for a firm that has anti-competitive aims because they do not require it to run losses in the short-run, as in predatory pricing. If the impact on rivals’ costs is immediate, there will also be an immediate positive impact on profits. A number of practices have been interpreted as belonging to the category of raising rivals’ costs strategies. Some of them are probably of little relevance, such as those that increase rivals’ costs directly, either through sabotage (if one destroys the rivals’ plants it also increases its costs, but there is no need for anti-trust laws to take care of such behaviour); or through lobbying and regulation (think for instance of domestic firms that convince the government to introduce tariffs or other taxes on imported products).¹⁰⁴ More interestingly, a number of practices that we have already analysed might be seen as raising rivals; costs. Exclusive dealing might make it more difficult or more costly for a rival to find distributors that can sell its products. A vertically integrated firm might refuse to supply a key input to a downstream rival (or to engage in a price squeeze, that is sell the input to the rival but at a prohibitively high price), increasing the production costs of the latter. Furthermore, denying inter-operability to a rival network might also be seen as a strategy which increases the rival’s cost of doing business.

Not all actions that increase rivals’ costs are necessarily anti-competitive. For instance, one might argue that a firm that carries out significant R&D activities to increase its product quality is also raising the cost of its rivals: if they want to be competitive and keep their appeal, they also have to sustain higher R&D expenses. Yet, this is not a practice that harms competition: R&D will benefit consumers.¹⁰⁵ Therefore, a crucial step in the theory is to distinguish between practices that only harm competitors from those that also reduce welfare.

To sum up, raising rivals’ costs theories provide a concept that encompasses many very different practices. Due to the specificities of such practices, I have preferred to deal with them separately.

¹⁰³See also Salop and Scheffman (1987).

¹⁰⁴An interesting US case in Pennington, where a large mine operator and the miners’ trade unions lobbied for a minimum wage. The resulting increase in production costs would have hurt smaller competitors more than the large firm.

¹⁰⁵The same consideration should for advertising outlays, as they increase the perceived quality of products.