The relationship between the supplier and buyer

7.8 The relationship between the supplier and buyer

It is only in a very few market structures that the government does not seek to control or regulate the behaviour of firms. If the market power of one firm becomes too great, then it is referred to some form of monopolies or mergers commission/board or, in the UK as of 1 April 1999, the Competition Commission. This states:

The word ‘monopoly’ has a special meaning under the Fair Trading Act (the FTA). For the precise legal definition please refer to sections 6 and

7 of the FTA. Broadly speaking, the Act provides for two different kinds of monopoly situations: scale – when an individual or a single company, or companies within the same group, accounts for at least 25 per cent of the supply or acquisition of particular goods or services; and complex – when individuals or companies, which together account for at least 25 per cent of the supply or acquisition of particular goods or services, follow a course of conduct, by agreement or not, that prevents, restricts or distorts competition. The FTA does not presume that it is wrong to be a monopolist, but recognises that a monopolist may be in a position to act against the public interest and that a monopoly situation may need investigation

(see www.competition-commission.gov.uk) Firms which have a very strong market position may abuse that position by

imposing high prices or by giving poor service. They may also use unfair tactics to keep other companies out of their market, or distort the market in their favour.

The ‘concentration ratio’ of buyers or sellers is one that the government uses to monitor and test whether a firm’s actions are against the public interest. Pappas et al. have examined the work of Sosnick, and have extracted certain key factors in the structure of a free market in what they

call ‘workable competition’ 13 . These are reproduced here, since they serve as a useful benchmark in the performance analysis of the audiovisual industry. More specifically, they indicate the relationship between the independent producer and the media conglomerates or broadcaster by which any government action in the twenty-first century should be measured.

Managing in the Media

1 Structure. There should be: (a) a sufficient number of independent sellers (b) no artificial barriers to entry or exit from market (c) moderate and price-sensitive quality differentials.

2 Conduct. Firms should: (a) act as rivals without collusion (b) not shield inefficient producers or customers (c) avoid persistent harmful price discrimination (d) avoid misleading sale promotion activities.

3 Performance. Could lead to: (a) efficient production and distribution in terms of resources use (b) a level of profit which is just sufficient to reward efficiency and induce

investment in innovation (c) output levels and quality features that are responsive to consumer preferences (d) exploitation of new technology, resulting in new processes and products (e) a reasonable level of sales promotion expenditure.

The model, when applied to the buyer–supplier relationship between the IPS and the broadcasters, highlights some of the anomalies of the current industrial structure. For example, 3(b) (level of profit) is often set by the broadcaster, who cash flows the project so, in effect, no true competition can exist.

The company that wins the contract has to:

1 Produce the programme to the budget agreement

2 Accept the ‘profit’ that the broadcaster allocates to them. James Hogan summarised the buyer supplier relationship thus 14 :

The bulk of the independent community is made up of tiny companies which are little more than conduits for freelance producers . . . They are, in truth, very dependent on the power and patronage of the broadcaster, who has the daunting task of sorting through thousands of programme proposals every year and choosing, at best, approximately four per cent.

How can we characterise the audiovisual industry? It is volatile, unpredict- able and unforgiving. The entrepreneur can, as John Ellis describes, find him or herself in a ‘precarious and marginal’ environment. The paradox for all in the industry is that the fragmentation of the market can only increase the uncertainty, but may also offer more opportunities to reach an audience.

The growth of business in the audiovisual industry