- Published: September 3, 2022
- Updated: September 3, 2022
- Language: English
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Competition in economics is rivalry in supplying or acquiring an economic service or good. Sellers compete with other sellers, and buyers with other buyers. In its perfect form, there is competition among many small buyers and sellers, none of whom is too large to affect the market as a whole; in practice, competition is often reduced by a great variety of limitations, including monopolies. The monopoly, a limit on competition, is an example of market failure. Competition among merchants in foreign trade was common in ancient times, and it has been a characteristic of mercantile and industrial expansion since the Middle Ages. By the 19th century, classical economic theorists had come to regard competition, at least within the national state, as a natural outgrowth of the operation of supply and demand within a free market economy. The price of an item was seen as ultimately fixed by the confluence of these two forces. Early capitalist economists argued that supply-and-demand pricing worked better without any regulation or control. Their model of perfect competition was marked by absolute freedom of trade, widespread knowledge of market conditions, easy access of buyers to sellers, and the absence of all action restraining trade by agencies of the state. Under such conditions no single buyer or seller could materially affect the market price of an item. After about 1850, practical limitations to competition became evident as industrial and commercial combinations and trade unions arose to limit it. A major theme in the history of competition has been the monopoly, which represents a business interest so large that it has the ability to control prices in a given industry. Some governments attempted to impose competition through legislation, as the United States did in the Sherman Antitrust Act of 1890, which made many monopolistic practices illegal. Other governments depend on monopolistic organizations to boost their economy like the zaibatsu and keiretsu in Japan. The United States
Monopolies in the United States have a long history. They usually are associated with industry and the post-Civil War period, but their history originates in Elizabethan England. By the time the American colonies had become independent, the term “ monopoly” was already well established. Yet nothing was written about monopolies in the Constitution or in any writing of the founding fathers. However, several states felt strongly enough about them to prohibit them in their constitutions in the months following independence. For example, the Maryland State Constitution in 1776 stated that “ Monopolies are odious, contrary to the spirit of free government… and ought not to be suffered”.
With the support of President Benjamin Harrison, Congress passed the Sherman Antitrust Act in 1890. John Sherman, a lawyer and senator from Ohio, was the author of this legislation that attempted to curb the growth of monopolies. The act declared illegal any business combination that sought to restrain trade or commerce. Penalties for violation of the act included a $5, 000 fine or/and a year’s imprisonment. The act was unable to achieve its original objectives.
Despite its good intentions, the Act didn’t hit all its targets. The Act emerged as a somewhat tenuous plan to break up the “ big business” monopolies. The weaknesses of the Act are described by Chief Justice Stone:
“ The prohibitions of the Sherman Act were not stated in terms of precision or of crystal clarity and the Act itself does not define them. In consequence of the vagueness of its language, perhaps not uncalculated, the courts have been left to give content to the statute, and in the performance of that function it is inappropriate that courts should interpret its words in the light of its legislative history and of the particular evils at which the legislation was aimed”
Ultimately, “ there [was] no question that nearly everyone wanted to outlaw monopolies and create competition”; however, everyone also knew that the Act left many future considerations to be pondered. In this way, the Act served as the first piece of legislation but, it was to be the first step in a long series of steps to regulate competition.
The Clayton Antitrust Act was passed in 1914 by the U. S. Congress as an amendment to clarify and supplement the Sherman Antitrust Act of 1890. The act prohibited exclusive sales contracts, local price cutting to freeze out competitors, rebates, interlocking directorates in corporations capitalized at $1 million or more in the same field of business, and intercorporate stock holdings. Labor unions and agricultural cooperatives were excluded from the forbidden combinations in the restraint of trade. The act restricted the use of the injunction against labor, and it legalized peaceful strikes, picketing, and boycotts. It declared that “ the labor of a human being is not a commodity or article of commerce.” The Clayton Antitrust Act was the basis for a great many important and much-publicized suits against large corporations. Later amendments to the act strengthened its provisions against unfair price cutting (1936) and intercorporate stock holdings (1950).
The Federal Trade Commission, or FTC is an independent agency of the U. S. government established in 1915 and charged with keeping American business competition free and fair. The FTC has no jurisdiction over banks and common carriers, which are under the supervision of other governmental agencies. It has five members, not more than three of whom may be members of the same political party, appointed by the President, with the consent of the Senate, for seven-year terms. The act was part of the program of President Wilson to check the growth of monopoly and preserve competition as an effective regulator of business.
The duties of the FTC are, in general, to promote fair competition through the enforcement of certain antitrust laws; to prevent the dissemination of false and deceptive advertising of goods, drugs, curative devices, and cosmetics; and to investigate the workings of business and keep Congress and the public informed of the efficiency of such antitrust legislation as exists, as well as of practices and situations that may call for further legislation.
The commission’s law-enforcement activities have to do with the prevention of unfair methods of competition and false advertising (in accordance with the Federal Trade Commission Act of 1914 and the Wheeler-Lea Act of 1938); with administration of provisions restricting tying and exclusive dealing contracts, acquisition of capital stock, interlocking directorates, and price discriminations (in accordance with the Clayton Antitrust Act of 1914 and the Robinson-Patman Act of 1936); and with administration of the Webb-Pomerene Act of 1918, which permits associations to engage in export trade without incurring the penalties of the Sherman Antitrust Act. In 1946 the FTC was given the right to cancel faulty trademarks. The FTC also enforces the provisions of the Truth in Lending Act of 1968 over creditors (e. g., finance companies, retailers, and nonfederal credit unions) not specifically regulated by another government agencies. The act was designed to ensure that a potential borrower can obtain meaningful information about the actual cost of consumer credit.
To enforce antitrust legislation, the commission is empowered to issue cease-and-desist orders upon ascertaining to its satisfaction that the laws are being violated. These orders, to be effective, usually must have court sanction, and the commission must, therefore, in various instances prove its case in court. In deciding such cases the courts have interpreted and applied the phrase “ unfair methods of competition.” Many of the judicial decisions have frustrated the work of the commission in restricting the growth of monopoly and also, to some degree, the intent of the antitrust laws. Yet the commission has done much toward ridding the business world of vicious competitive practices.
To put present day keiretsu into context, it is essential to understand some Japanese history, particularly because of the strong respect for tradition in Japan.
In 1953, a US naval fleet anchored in Yokohama Bay and, using gunboat diplomacy, forced the Japanese Shogun to sign a trade agreement. Fifteen years later, after 250 years of self-imposed isolation, the last Shogun was toppled and the Emperor restored the Meji Restoration. Newly alert to the outside world, the mostly agrarian, feudal society of Japan dispatched missions to the industrialized West to discover how to industrialize and arm. Their reports showed that enormous wealth was concentrated in just a few hands. Families like Krupp, Tyssen, Rothschild, Rockefeller and Morgan controlled huge industrial empires based on industries such as steel, oil, mining and railways. The new government, therefore, rapidly established a number of such basic industries, including shipping, shipyards, coal mines, cement and glass, bringing in foreigners to run them.
During the 1880s, short of funds, the government offered them for sale. However, since private capital was also in short supply, there were only a limited number of bidders. Those who bid were almost all newly rich businessmen. Thus a new group of wealthy family-based concern, mostly centered around their own bank, had come into being, just as in the West. These families became the new Japanese elite, or the zaibatsu. Among the earliest to form, four zaibatsu grew faster than their rivals, becoming known as the “ Big Four”: Mitsui, Mitsubishi, Sumitomo and Yasuda.
The murder in 1932 of the head of the Mitsui zaibatsu by a right-wing assassin shook the family-held combines. As a result they made public ‘ conversions’ (tenko) and proclaimed their true ‘ patriotic spirit’, thus implying support for Japanese military expansionism. However, the Imperial Army wanted highly committed supporters, not late converts, to support their planned war in China, and so they granted contracts to new zaibatsu built on the remains of the second-tier zaibatsu which had collapsed after the First World War. When the Sino-Japanese War broke out in 1937 and Manchuria fell, it was these new zaibatsu, of which the largest was Nippon Sangyo (usually shortened to Nissan), which were allowed a free hand in the conquered territories. Based primarily on heavy industries, however, they lacked the financial resources of the old zaibatsu and rapidly ran out of money. So, despite their intense dislike of them, the Imperial Army turned to the old zaibatsu to gear up their heavy industrial activities and support the war effort. An effort that, with the attack on Pearl Harbor on December 7 1941, brought both Japan and the US into the Second World War.
The defeat of Japan in 1945, and the bombing that preceded it, left the country completely devastated. Socially and industrially it was on its knees, reduced to Third World status. The subsequent US occupation of Japan was intended to ensure that “ a former enemy would never again become a threat to world peace”. A program of fundamental reform was put in hand by the Supreme Commander for the Allied Powers (SCAP). Designed to demilitarise and democratise the country, an integral part of the program was the disbandment of Japan’s military and industrial platform. To this end, the 15 largest zaibatsu holding companies and 83 large zaibatsu companies were targeted for dissolution. Once the zaibatsu holding companies were dissolved, the shares they held were dispersed, mostly to employees and the general public. In addition, all the members of 56 named families connected with the ten largest zaibatsu were ordered to give up their executive positions and surrender their personal assets. A further 2200 senior executives from 250 large companies were scheduled to be deprived of their appointments and prohibited from executive positions. Finally, the use of the old zaibatsu names was outlawed. This meant that even the old zaibatsu banks were forced to change their names: Mitsubishi Bank became Chiyoda Bank, Yasuda became Fuji Bank, Sumitomo became Osaka Bank and so on.
Determined to embed these changes, SCAP prepared an Anti-Monopoly Act which was passed in 1947. This made holding companies illegal, restricted any bank from holding more than 5% in any company, and created a Fair Trade Commission to make sure that the zaibatsu did not re-emerge.
By 1948, however, as communism spread across Europe and Asia, the Pentagon was already starting to see Japan as a useful buffer. Mao Tse-tung’s overthrow of the nationalist government in China was followed within months by the outbreak of the Korean War. It was not just in the Pentagon that the need for a strong Japan with a democratic, non-communist government, started to make sense. As a result, American emphasis switched from dismantling the Japanese economy to rebuilding it. In 1952 a Security Pact between Japan and the US was signed and the last of the occupation forces left. Japan resumed its status as a sovereign state.
In the event, fewer than 25 of the original list of zaibatsu companies had been broken up. Although some zaibatsu managers had been removed, their places were taken by new, younger managers steeped in the same tradition, whose loyalties remained the same. Contrary to American assumptions that ex-zaibatsu members would go their own way, the long-standing relationships between companies and individuals meant that there was every reason to stick together.
Almost as soon as the occupation ended, the newly named Ministry of International Trade and Industry (MITI) began to re-establish Japanese priorities. In 1953 SCAP’s Trade Association Law was repealed and in 1955 the restriction on banks’ holding of company shares was increased from 5% to 10%. However, one of the earliest changes was the repeal of the law prohibiting the use of the old zaibatsu names. Within months the Big Four had restored their names, the symbols of their former power and prestige. Driven by the fear that their shares, originally held by the zaibatsu holding companies, might fall into the wrong – especially foreign – hands, the old group banks made arrangements to buy back these shares from their new owners and then lodged them with other group members for safe-keeping. Thus began the pattern of cross-held shares that remains such a feature of Japanese industry today.
As early as 1953, MITI was calling for the “ keiretsification” of Japanese industry. Aware that the focal points of the largest of the old zaibatsu groups had been the main bank and a large-scale general trading company, MITI worked hard to reassemble the broken up trading companies. The banks, once they had changed their names back (with the exception of Yasuda which chose to remain the Fuji Bank), picked up where they had left off, maintaining the special relationships that they had with the members of the old groups. These original Big Four banks became the centre of the keiretsu formally founded between 1951 and 1966. They were later joined by two further groupings, centred around Dai-Ichi Bank and Sanwa Bank. Together these six groups now form Japan’s “ Big Six” horizontal keiretsu. It is important to add that in present day Japan zaibatsu is a pejorative term, carrying a heavy stigma as a symbol of the evils committed in an earlier age.
Keiretsu are a tight networks of companies that share capital, research and development, customers, vendors, and distributors. They play a powerful role in the nation’s economy and are deeply rooted in Japan’s economic history. Competition between keiretsu is vigorous, as each one competes for the largest share of the market. The keiretsu have a “ one set principle”, which means that only one enterprise in each business sector is allowed, to avoid direct competition between member companies. The big six of the keiretsu are Mitsubishi, Mitsui, Sumitomo, Fuji, Daiichi Kangyo and Sanwa, which account for a quarter of total Japanese assets. Two types of keiretsu exist in the economy; vertical and horizontal.
The horizontal keiretsu consist of a bank at the core and a large number of companies from related and unrelated industries and services clustered around it. Member companies may be major manufacturers, large service providers like life insurance companies, and other important corporations, but they also may be quite modest in size.
To understand how a horizontal keiretsu works, envision a hypothetical small sub-contractor called Company A. Company A makes auto parts and sells to companies within its horizontal keiretsu, which we will call the K-group. The companies that are Company A’s customers hold shares of its stock and have placed some of their former employees on Company A’s board of directors. It’s no accident that Company A’s bank belongs to the K-group.
Company A has little to say about the prices that it charges because it cannot sell to anyone outside the K-group. If it did, it would soon get cut off from the keiretsu and lose all its business and financing. However, since Company A has K-group members on its board and even on its management team, and has a K-group bank and K-group shareholders, it is unlikely that Company A could even attempt to break away from the K-group.
The reward for this kind of control is security. Company A is virtually guaranteed business. Though its potential profits are limited, it will provide its principals with a comfortable living and will provide its workers with stable jobs.
A shortcoming of the horizontal keiretsu system is the lack of keen competition for goods, though there are exceptions, especially in the automotive and electronics industries. Overall, quality remains very high, but so do prices. As a result, Japanese consumers pay higher prices than Westerners for most goods.
The vertical keiretsu are centered around a major manufacturer that is not part of a horizontal keiretsu. Unlike the horizontal keiretsu with its member companies from diverse industries, the members of a vertical keiretsu are usually drawn from a single industry. They consist primarily of supplier and distributor relationships that service the large manufacturer at the core of the keiretsu.
Vertical keiretsu influence the economy in much the same way as the horizontal keiretsu. However, they tend to be concentrated in the competitive areas of automobiles and electronics. While the vertical keiretsu model is being adopted in other countries, the horizontal keiretsu system is starting to break down, partly because of the prolonged recession in Japan and partly because of the presence of more foreign competition.
The Role of the Bank
The bank at the heart of a keiretsu is more than just a bank. It is the “ central clearinghouse for information about group companies and the coordinator for group activities.” Because the early Tokyo Stock Exchange had the reputation of being a gambling casino, Japanese banks have until recently always been the source of funds. As a result, all large Japanese companies have a special relationship with at least one bank. As well as giving access to funds, advice and valuable market information, this relationship provides the company with protection and assistance in a crisis. In return, the bank gathers information and can guide or encourage the company in the choice of who it conducts business with – tending to prefer other keiretsu members. As part of the relationship, the bank is likely to be a significant shareholder in the company to provide “ stability” in its shares.
Because, traditionally, corporate accounting and disclosure have been underdeveloped in Japan, the bank also acts as a credit monitor, using its knowledge of group members’ performance to assess and contain risk. Since other group members have cross-shareholdings in each other and provide each other with loans, the bank oversees these flows and provides advice and guidance. Because it is so familiar with its members’ businesses, it can also act as a venture capitalist, supporting R and important technical developments. The authors quote Sumitomo Bank’s support of investments in semiconductor technology made by Nippon Electric Company (NEC). NEC “ outspent its rivals in semiconductor plants by roughly two to one over a six year period in the late 1970s” but had to rely on external finance for 85% of its total capital during the period. Not only did the bank provide assistance, its recommendations meant that other Sumitomo keiretsu companies provided about one third of all NEC’s loans.
Finally, the group bank acts as a highly skilled company doctor. If trouble is looming at one of its customers, it has its own well-informed team of executives ready to replace the existing management, provide high levels of management expertise, and steer the company round – one of the reasons why very few large companies in Japan fail.
After the Second World War, some 69% of shares in Japanese companies were in private hands. By 1989, however, banks held 42. 3% of Japanese shares and corporate holdings had risen to 24. 8%, a total of over 67% in non-private hands. While cross-shareholding had started soon after 1952, it was the Japanese Stock Market crash in 1964 that provided the impetus. As prices fell, the Japanese government froze the shares being off-loaded onto the market to avoid foreign investors buying into leading Japanese companies. These shares accounted for over 5% of all shares issued by companies in the First Section of the stock exchange listing. When they were gradually released back onto the market between 1967 and 1971, the keiretsu banks and other group companies bought them to avoid them falling into the wrong hands. This fear of foreign take-overs led to a movement to create stable shareholding. Beginning with car manufacturers, it spread relatively quickly among horizontal keiretsu and then began in vertical keiretsu as manufacturers sought to protect their suppliers from take-over, binding them ever more closely. Toyota, for instance, managed to stabilise 70% of its total shares by selling them first to the banks and insurance companies of the Mitsui keiretsu, then to other group members and finally to parts of its own vertical keiretsu. In doing so, Toyota inevitably declared its affiliation to the Mitsui keiretsu. However, few companies have stabilised such a large proportion of their shares – more commonly stabilised cross-shareholdings are in the 15-30% range. By the mid 1970s these cross-shareholding became institutionalised and that has remained the pattern ever since. Because of capital gains tax, there is a strong disincentive to sell assets that, in some case, have risen by 300-400%.
Apart from achieving their aim – foreign shareholding of Japanese shares peaked at 6. 3% in 1983 – there were other advantages stemming from this system. Firstly, it cemented relations, acting as part of the “ glue” that holds the keiretsu together. Secondly, by reducing the shares in circulation, it tended to push share prices up, thus improving everyone’s ability to borrow money against these secure, rising assets. Thirdly, and most importantly, Miya*censored*a and Russell estimate that around 25% of shares in Japanese companies are currently held as keiretsu cross-holdings, with a further 50% in the hands of banks, trust companies and insurance companies, most of whom have keiretsu connections. This has given management in leading Japanese companies a freedom to act with a longer-term perspective than most Western managements. Able to give precedence to employees rather than shareholders, they can concentrate on expanding market share rather than short-term profit.
Generally, the Justice Department, the Federal Trade Commission (FTC) and U. S. courts have been insulated from statutory requirements and political pressures to pursue industrial policy considerations in the formation of antitrust policy. Antitrust law has focused on maximizing consumer welfare and economic efficiency. Competition has been the industrial policy of the United States, at least as compared to conditions in Japan.
U. S. enforcement focuses on ensuring that markets remain competitive. For example, U. S. law is tough on the abusive business practices of large (dominant) firms that may thwart competition, and on cartels. However, U. S. law is not inclined to regulate large firms seeking to defend or gain market share through fair means (e. g., innovation and superior business acumen), or to regulate agreements between large firms and their suppliers or distributors as long as these do not block market participation by other firms. U. S. merger policy is preemptive, seeking to ensure that competition is sustained.
Federal enforcement agencies vigorously seek out antitrust violations, using regional offices around the country. The suits brought in federal courts by private firms, individuals, and the several states play an important role in enforcement too. Criminal penalties are meted out for egregious violations like price fixing.
Since the Meiji Restoration (1868), Japan has used industrial policies to catch up and, more recently, to compete with the United States For example, as early as the 1880s, zaibatsu were used to neutralize what the Japanese viewed as the destabilizing consequences of excessive competition. Through industry associations, Japanese governments have used zaibatsu to address the employment consequences of recession and the problems in maturing industries, to mobilize private resources in order to achieve public purposes, and to achieve specific development objectives.
After World War II, the U. S. occupation government imposed an antitrust law modeled after U. S. law. Following the American withdrawal, however, the Japanese law was weakened, and enforcement was subordinated to the needs of industrial policymakers. For example, in the mid-1960s, over one thousand government-sanctioned cartels were in place.
Since the late 1970s, Japanese antitrust enforcement has been somewhat resurgent, but the value of collaboration remains substantially ingrained in Japanese behavior. This is reflected in the continuing prominence of cartels and the purchasing practices of the keiretsu, which cause tensions with trading partners.
Cartels in industries with chronic excess capacity, such as steel, for example, require public or private restraints on imports to maintain prices above international levels. In turn, that creates opportunities for Japanese dumping in foreign markets, and the combination of private import restraints and dumping tends to shift unemployment onto foreign producers.
In industries where Japanese firms have achieved dominant positions, such as video cassette recorders, and more recently, fax paper, they have run afoul of U. S. antitrust laws prohibiting price fixing. Although keiretsu networks permit interbrand competition in Japan, their purchasing practices and control over distribution channels can impose significant barriers to foreign products and firms, as well as to new domestic competitors, in retail markets.
Following the Structural Impediments Initiative (SII) Report (1991), Japanese law and enforcement were strengthened, and Japan essentially has a U. S. style antitrust law. However, in most areas, enforcement by the Japanese Fair Trade Commission (JFTC) is much less aggressive than that of the U. S. antitrust agencies. The remedies available through private suits are very limited, and Japanese courts are reluctant to embarrass their government with findings that oppose its policies or the actions of one of its key ministries.
The continuing tension between collaboration and competition in Japanese policy makes negotiating an effective CPA much more difficult than merely establishing formal requirements for national law and enforcement. In Japan, what U. S. exporters and investors need is not better statutory guarantees. Rather, they need better access to remedies, through more aggressive JFTC enforcement, better access to private actions when the JFTC fails to act, and an alternative forum when the Japanese courts refuse to enforce the law. Lacking those, U. S firms can lobby their governments to take action on their behalf through the WTO, but its practical jurisdiction has proven quite limited.
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