Abbrochment - Explained
What is Abbroachment?
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What is Abbrochment?
Abbrochment is an anti-competitive act whereby a market participant monopolizes a particular good by buying up all available supply. The purchaser will then use their market power to raise prices on customers or purchasers of the product. This activity is deemed to be "anti-competitive".
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How does Abbrochment Work?
The intent behind this action is to ultimately cut off consumer alternatives. By limiting supply, the market competitor has greater control over price charged for the product. Economic theory tells us that there is a given level demand for a product at a given price. The amount of demand for the product will vary as the price varies.
The extent to which the demand varies with price is directly related to the price elasticity of demand of or for the product. If a market competitor is the only supplier of a given product, and that product is highly inelastic (meaning raising the price will not greatly reduce customer need or want to purchase the product), the seller can charge a higher price for the product and capture greater value (rents or profits).
Abbrochment practices are generally regulated by antitrust law. The practice is, by its very nature, anti-competitive. The question of legality will turn upon whether the action creates a monopoly for the product or whether there are adequate competitor or substitute products to avoid the monopoly effects of harming consumers.
Example of Abbrochment
ABC, Inc., manufactures widget M. XYZ distributor enters into an agreement with ABC to purchase all output of widget M, to the exclusion of all other distributors. XYZ then introduces the product directly for sale to customers. As the only supplier of widget M, XYZ can control the price within the confines of demand for the product. If widget M is a necessity for consumers (with few or no substitutes), XYZ will be able to reap a greater profit in selling the product.
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