This report examines competitor behaviour as explained by the economic fields of Industrial Organisation and Strategy, then compares these theoretical findings against observations of firm interactions in the Australian Building Products Industry. Aspects of government policy and regulation are also discussed, due to the considerable influence that these have to shape the nature of competitive behaviour.
The objective of this report is to gain an insight to competitive behaviour by exploring economic theory and relate these to actual firm interactions, with consideration also given to government policy and regulations. As relevant economic theory is extensive, the theoretical component of the report is limited to the Oligopoly and Strategy theories. Models from Oligopoly were considered as these deal with the interactions of firms where their interdependence is likely to see a response to competitor actions. Research from the strategy field is also considered as firms use strategies as a means to create an attractive, competitive position within an industry.
The report then reviews historical pattern of industry competition in Australia, and the means by which identified competitor interactions are regulated, via compliance laws based on economic theory. Finally, this observed conduct of firms within the Australian Building Products Industry are considered in light of theoretical approaches to behaviour so as to ascertain their relevance.
In conclusion, the models reviewed can only be considered as simple theories of market structure interactions. In practice every industry and more likely each firm is a special example whose behaviour and performance depends not only on readily observable and simple structural variables, but on diverse variables such as relationships within the firm, information structures, rivalry within an industry, learning, technology. These areas are outside the scope of this report.
At this stage, the competitive behaviour of firms cannot be considered as adequately explained by the theories and models within the general theory of oligopoly. Also, due to the dynamics of industry and exogenous factors, the field of strategy has been shown not deliver the final solution for competitive advantage. However, economic theory appears to be heading towards more dynamic approaches to be able to explain industry behaviour and build strategic or competitive advantage.
The review of government competition policy indicated that past protectionalist policies have led to highly concentrated industries in Australia, that subsequently exhibit the behavioural characteristics associated with Oligopoly Theory, ego collusion, non-price competition, etc. In this context the Australian Building products Industry was discussed, however, while observed behaviour fits with basic economic theory these must be considered as anecdotal as based largely on casual observation.