What Is Market Allocation

What Is Market Allocation

What Is Market Allocation also known as market division, is a horizontal trade agreement in which competing businesses agree to limit their operations to specific aspects such as territories, geographic locations, and consumer demographics. This agreement divides sales territories and assigns them to different competitors, allowing each company to exert better control over its designated market area.

Key Aspects of Market Allocation:

What Is Market Allocation
What Is Market Allocation
  • Market Division Schemes: Market allocation agreements are often referred to as market division schemes. In these agreements, competitors divide the market among themselves and establish specific terms and conditions aimed at restricting certain business activities.
  • Allocation Parameters: Activities are restricted based on various parameters, which can include geographic locations, demographic segmentation, territories, and more. Competing firms agree to allocate specific sets of customers, products, and services to themselves.
  • FTC Definition: According to the Federal Trade Commission (FTC), market allocation agreements that involve the division of sales territories or the assignment of customers are typically illegal. Such arrangements essentially prevent competition and can be likened to agreements not to compete in each other’s markets.

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Market Allocation Example:

What Is Market Allocation
What Is Market Allocation

Market allocation is an agreement that ensures competing companies coexist without interfering with each other’s operations, especially those of their rivals. It discourages anti-competitive practices, as all competitors within a given market agree to stay out of each other’s way in terms of marketing and business activities. While they may fiercely compete for market share, they refrain from undermining each other’s business.

Under this agreement, a single market with multiple competitors is segmented among them. Each competitor utilizes its own business and marketing strategies to boost sales and profit margins. They focus exclusively on the segment of consumers allocated to them, refraining from targeting customers belonging to their competitors.

How Market Allocation Works in Favor of the Market:

What Is Market Allocation
What Is Market Allocation

Market allocation is designed to foster a harmonious business environment where competitors coexist without direct competition within their allocated segments. The market is divided based on specific parameters, and each company concentrates on its designated segment, ensuring that it does not encroach on its competitors’ customer base.

Violating this agreement is considered illegal, and companies found in breach may face legal consequences. Market allocation reduces unwanted competition, promotes fair market practices, and allows companies to potentially charge higher prices without fear of being undercut.

Benefits of Market Allocation:

  1. Reduced Competition: Market allocation minimizes competition by directing companies to target specific customer segments. This reduces the burden on businesses and fosters a fair marketplace.
  2. Entrepreneurship: Encourages entrepreneurship by allowing new entrants to establish themselves in a market without intense competition.
  3. Elimination of Unwanted Competition: Ensures that companies do not target each other’s customer bases, reducing unnecessary competition and potential price wars.

Types of Market Allocation Schemes:

What Is Market Allocation
What Is Market Allocation

Market allocation schemes can be categorized based on various factors:

  • Customer-Based: Focuses on customer segments, with companies agreeing not to target each other’s customers.
  • Geographically Based: Division of markets based on geographic boundaries, with companies agreeing to operate within their allocated regions.

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Legal Implications of Market Allocation:

Market allocation practices are generally against federal antitrust laws, such as the Sherman Antitrust Act, and state antitrust laws like the California Cartwright Act. Violating these laws can lead to serious legal repercussions for companies involved.

In most cases, market allocation is considered illegal under antitrust law, as it restricts competition and consumer choice. Competitors should be cautious and ensure compliance with antitrust laws to avoid legal consequences and make informed business decisions.

By understanding the implications and risks associated with market division schemes, companies can navigate the competitive landscape more effectively while adhering to antitrust regulations.

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