A technique of evaluating FDI, joint ventures, mergers and negotiations

Competition in market is very much vital to generate robust market structure. But competition doesn't always come automatically; sometimes it comes from automatic response of competing entities and sometimes it is the direct result of conscious market design. The kind of competition we will discuss here is exactly the latter kind.
Formal models of economics say that as the number of producers or competitors increases, market converges to atomistically or perfectly competitive structure. The number of competitors varies to designate a market nearly or approximately competitive. For example, in some market five producers are enough to make the market nearly perfectly competitive given the magnitude of market demand. In another market, it may require thousands of producers to make the market perfectly competitive - rice market or agro-products markets.
But the weakness of this formulation is very much striking because it ignores totally how special access to some resources will make someone in market act as if he was a monopoly seller, and through this special access he can secure monopoly rents even if there is sufficient number of sellers. For example, if there are five sellers in one competitive market and one of them has special access to some resources that make huge difference in market operations, then it can be expected, no matter how fierce the competition becomes, this entity or seller will be able to secure a monopoly rent or can price product in such way that as if he was monopoly seller
NO-ENTRY STRATEGY: To develop the no-entry strategy in the simplest form, we can imagine a scenario like this. Imagine you are travelling by bus through one highway. Imagine the highway you are travelling through is like the one given in the Figure One. (Note that this example should not be anyway interpreted as resembling the queue problem because the nature of the two cases is totally different and that's why we have taken the highway example rather than the usual queue problem).
The capital letters A, B and C, etc. shown in the Figure One indicate the buses stuck in the highway traffic jam. The hypothetical picture of the portion of the highway you are travelling shows that there is one archway curved across the highway. The way the buses are lined up is the indication of the sequential arrival to the place. Assume also that the bus you are travelling is G, right in front of the open face of the archway. So, the situation becomes like this: The bus which  has come first, the bus A, should go first when traffic jam ends; that means A must go first anyway, then B, C, D and so on.  But the bus you are travelling has two options right in front of the open face of archway: First, it can stay and wait until the traffic jam eases and move sequentially. Second, it can go through the archway to exploit the advantage of being in the open face of the archway. Let's say that the bus G has taken the second option and has moved to travel through the archway. But the archway, as it is drawn, is bound to join the same highway at J point. The prime attached at the head of G indicates the position of the bus throughout the archway. When the bus G is at the position G, right in front of the joining point of the archway and highway, the bus A can adopt two actions: First, A can let the bus G to enter the highway and go ahead of it. Second, A can simply deny the bus G giving any room to go ahead and keep it waiting until B comes at the Ath position. Suppose A has completely denied giving any room to G and A has passed the joining point J keeping the bus G waiting for the second chance from the bus B to enter the highway. Now, in similar fashion B face the same choice either giving G a chance to enter the highway or keeping it waiting until C comes. In this way, process is going to be repeated by until the bus F comes at J point. Now, if the bus H doesn't give the chance and if the same process is going to be repeated by the rest of the buses until the bus K comes at the joint point J. then certainly the bus G is absolutely worse-off adopting the strategy of driving through the crossway. But , if any one of the buses from A to F gives G a chance  to enter the highway, then G is better-off taking the strategy of driving through  the archway. On the other hand, if H gives G a chance to enter the highway, G is neither better of f nor worse off.  But if H doesn't give the chance, then G is worse off and so is true in case of every bus that comes after H. But if, fortunately, G gets the chance from any buses from A to F, it is not only better off in relative terms but also in absolute terms. This simple exposition refers that if the buses from A to F follow the No-entry strategy against the opportunistic attitude of G because G should have been in the line waiting until traffic jam ends instead of entering the archway, then not only are the buses from A to F  better off but also the buses from H to K. Only G would be worse-off by this No-entry barrier and the rest will be definitely better-off.
The no-entry stand by all buses from A to F against G is a collective strategy to maximise the collective gains and the extent of the gain is anyway much more than the loss G suffers. On the other hand, if G manages to get the chance to enter the highway from any buses from A to F then not only are A, B , C, D , E, F  worse-off but also H, I, K, and the rest.  Now, if one translates the above highway example in economic terms and give it a resemblance to market competition-based example and problem, one can say that the archway is like the special access to special resource that, if attained anyway by G, will make everybody worse off except G itself, and G will act as a monopoly rent seeker. Here monopoly has been employed to indicate not a single seller but an entity that can do monopoly pricing in spite of its operation among a lot of competitors.
Now, the question comes what is the application of this simple strategy? We think that this simple technique can be used widely to evaluate Joint Venture decision by companies, negotiations that take place between two firms or companies, foreign direct investment proposal acceptance and rejection, and in many other conflict of interest related problems.
A MARKET EXAMPLE: Let's say there are five firms called X, Y, Z, W, and V operating in an industry among the five firms firm X has a special access to special resource. Say that firms are operating in a telecom industry. The special access that the firm X enjoys is the special access to network. If the firm X somehow enjoys a special access to some networks that facilitate its operation, then whatever the market competition, it will remain a monopoly actor in market since strong network makes huge difference in service rendering of firms. It will be able to capture large market share only because of this advantage even if it charges comparatively higher price. To see how this works, see the explanation of the graphical illustration in Figure Two:
In the above figure, price (P) is measured on the vertical axis and quantity of demand (q) on the horizontal axis. P0 is the average price level in market that is charged by all telecom companies given the extent of market competition and PX is the price that is charged by X which is above the average price level. D, D1, and D2 are the average demand curves of telecom companies showing the relationship between average market demand and average price level. If the initial demand is q2 and price p0, and if companies want to sell more or q1 quantity average market price must decrease to p01, but for X price should be PX = R - a price that is above the competitively determined average market price.
At that price, it can capture the same market share as the others though others have to decrease the price level to P01 to capture the equivalent market shares. Now, if other companies want to sell more or q0 they have to reduce the price still more but for X, price is still above the average price, perhaps fixed at P1X =R1. That means for X the market demand curve is approximately horizontal - a curve characteristic of the perfect competition. That means X can sell as much as it wants without significantly reducing while others have to reduce the price to sell more. This monopolised attitude of X is only due to its special access to networking resources, otherwise it would have to reduce price to increase market shares.
FDI AND TATA'S PROPOSAL: In this volatile and globalised world, FDI (foreign direct investment) has bombarded the developing economies. One of the best examples how No-Entry strategy can be applied to accept or reject FDI proposal is the evaluation of Tata's proposal of investment in Bangladesh. Without going further into details, we simply argue that Bangladesh would always be in a winning position if it rejects such a proposal irrespective of from where such proposal comes and who brings it. In this globalised world FDI will bombard the developing economies even more in future and we don't have exact estimate how big such bombardment would be in future. For this reason, we don't need to grab whatever comes in our path and we can approximately evaluate the pros and cons of such investment using No-Entry strategy.
MERGER, JOINT VENTURES, AND NEGOTIATIONS: Corporate often carries out merging, joint ventures, and negotiations among themselves. But this type of corporate strategies often brings advantage and often brings a lot of problem.
 One problem that we will experience in the future, as the some are experiencing now, is the unhealthy market structure and incompatible development. By unhealthy market structure we mean that an economy has some ordered processes by which it makes transition. These corporate strategies are more suitable for developed and advanced countries because after certain stage of development, transition to large size corporate is bound to occur. An economy can't hardly avoid that even if we say that giants create problem.
For example, Walmart is often cited as gobbling up the small businesses in the USA. This is true but it is also true that increase of the size of Walmart corresponds to the degree of economic development. Therefore, the claim for small enterprises in the USA is meaningless and even very unrealistic.
But for Bangladesh, development must go in the opposite way. It should not break the natural order of transition - from small to medium to large size. For this reason, No-Entry strategy is very much helpful to evaluate such merging, joint ventures and negotiations of corporates. It will at least help us to move in the right direction preventing giant domination in the poor stage of development. So, we argue that such corporate strategies should be brought under observation and should be given sufficient notice to prevent inharmonious development and inconsistencies.
Md. Jamal Hossain writes from the                                                                  University of Denver, USA.                                                                                 [email protected]