Market attributes that distort competition

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MEASURING competitiveness of a procurement process using three quotation systems is subjective. It is agreed that every competition identifies a winner but that winner may not ultimately be the best. Sports competitions recognised this element and participants may be grouped by age or different leagues are used to consider different levels of competencies. This is all in recognition that the quality of competition is shaped by the quality of the participants.

If sports leagues were not classified, the oligopolistic behaviour of the big teams would be unbreakable. In all sports leagues, there is a four-participant concentration that is equivalent to the business four-firm concentration ratio that expresses the market share of the four largest firms as a percentage. If the four-firm concentration ratio is above 40%, the market is classified as oligopolistic. This affects the power of the particular suppliers to indirectly drive the market. The suppliers would have unchecked powers to determine market prices with a marginal risk to lose the market share.

Understanding the market structure would include estimating the combined market share of the top four market players. The availability of three quotations for comparison purposes for any purchase may mask the fact that the market is an oligopoly. An oligopoly market is when a few organisations dominate the market. Two of the three quotations sourced might have a combined 90% total market sales. In light of these observations, the number of suppliers in a competition is not always a good sign for the degree of competition between participants.

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In addition to the level of competition, as measured by the number of suppliers competing at any given time, there is need to evaluate the extent to which the suppliers are competing. Procurement competition attributes are around the “iron triangle” considering quality, cost and time. This is a more difficult assessment compared to the simple assessment of availability of three quotations or the number of suppliers in the market structure.

It is assumed that suppliers compete in a process determined by the buyer and the position is correct at face value. A thorough scrutiny may reveal that the framework of the competition though called for and designed by the buyer may be on the basis of a framework that the suppliers have agreed between themselves.
Such frameworks act in the interests of the suppliers. Professional associations have enacted laws that govern competition outside national procurement rules. The nature, manner and structure of the competition may achieve two of the three elements of the iron triangle of quality and time since their regulations govern the manner and the extent of charging or costing projects.

These practices distort the market and are very difficult to notice. The Competition and Tariff Commission has the mandate to expose such irregularities that portray normal business practice. The anti-competitive behaviour that is ordinarily illegal would have been legitimised in many jurisdictions by members in an effort to fleece the consumers in the disguise of professionalism. Such arrangements are legal cartels that cannot be prosecuted and would require a challenge on the constitutionality of such provisions in relation to their inhibition of competition.

The procurement function should be the first to identify such malpractices. The assessment of the market attributes that distort competition can never be identified by a procurement function that is operational, a function limited to converting requisitions to purchase orders. It would require a strategic procurement unit manned with procurement professionals to unmask irregular market practices that have a serious bearing on the costs to the ultimate consumer. It is about time that procurement is professionalised.

●Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: nya.chizu@gmail.com; Skype: nyasha.chizu