Cardinal Sin No. 2 – Output Limitation
Last week we looked at the Cardinal Sin of price fixing. This week we discuss Cardinal Sin No. 2 – output limitation.
Output limitation refers to agreements between competitors to fix, maintain, control, prevent, limit or eliminate the production or supply of products.
Why limit output?
To create a scarcity of supply to increase prices and therefore maximise the profit margin.
What is output?
Output limitation can occur at any level of the production or supply chain. The following are some examples of “output”:
- Raw materials;
- Essential facilities;
- Spare parts;
- Products or services; and
- Future products or services.
What does “limitation” mean?
While businesses can independently determine their individual levels of output, they cannot agree with competitors to fix, maintain, control, prevent, limit or eliminate output. This is the case even in times of economic recession or crisis.
Consider this example of output limitation:
Due to the proliferation of competitive technology start-ups, incumbent manufacturers of smart phones have been losing market share and the price of smart phones have dropped significantly.
To counter this, the major manufacturers of smart phones enter into a “ one per year” agreement, where they commit to limit the number of smart phones they introduce into market to no more than one per year.
Even though the agreement concerns future smart phones which may not have been manufactured or even designed, the manufacturers have already limited their output to one per year, for the purpose of dampening increasingly intense competition.
Without the “one per year” agreement, smart phone producers would all have to “out-innovate” and “out-price” each other to stay ahead of the competition – the pace of introducing new smart phones into the market would be determined by the speed of innovation, research and development and market demand. The “one per year” agreement is a blatant example of output limitation which limits competition in the smart phone market and harms consumers.