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Report n°2: An integrated approach to economic and social contestability in business

Economic contestability in a recycling branch of activity

The first form of contestability studied is economic contestability, which refers to the competitive interplay. It characterises the exposure of the established operator(s) - referred to as the "historic operator" - to the threat of a new operator entering at some point in the chain(5) of that branch. To assess this type of exposure, we look at the assets held by the historic operator and at the organisation of commercial transactions with the other operators in the branch(6). The combination of both of these economic characteristics is necessary to qualify the activities of the operator and of the branch. It determines the extent of his exposure to threats of entry by potential competitors.

Based on these two variables (types of assets and organisation of the transactions) the analysis considers three categories of parties with a stake in the branch: (a) the suppliers on the input market of the branch who deliver materials for recycling to (b) a recycling operator - referred to hereinafter as the "recycler" - who processes the materials for recycling to separate a re-usable fraction (the "secondary raw material") offered for sale on the branch's output market (c) a steel manufacturer, and a fraction referred to as ultimate waste, evacuated to a specialized landfill site.

Given the nature of the goods exchanged in this branch, the notion of contestation will be further refined to reflect two different economic expressions of the idea of contestation.

Economic contestation through competition from an internal or external source
The first - economic contestation in the strict meaning of the term - corresponds to the entry onto the market of a newcomer to compete with the historic/incumbent operator(s). Depending on whether one looks at matter from a branch standpoint or that of an operator occupying a link in that branch, that threat of potential competition consists respectively in the arrival of a newcomer at a specific point in the activity or in an vertical integration operation further up or down the chain launched by a upstream or downstream historic operator. When the identified threat of economic contestation is the result of action by an operator already in place in the branch of activity, we will refer to this as the extent (or "degree") of internal economic contestability (resulting from a threat of contestation from an economic agent inside the branch). The expression external economic contestability will be used when the threat of contestation upon the economic position is due to an economic agent previously absent on either side (input or output) of the branch under consideration; the threat of contestation in this case is attributed to the possibility of any newcomer - identified or not - entering the field.

Defection as economic contestation, in the procurement of goods or services
The second form of economic contestation is through defection, with respect to the terms of an agreement or a contract signed between two agents, with a sanctioning or strategic purpose. These kinds of practice (proven or potential) to contest the terms of transaction are designated here by the expression contestation through defection. They take place when (i) a possible change in the quality of an asset or service to be provided and/or (ii) systematic re-negotiation of a past agreement are used as leverage in a contract or situation that one party interprets as a source of possible abuse (abuse of dominant position by a monopolist or monopsonist or refusal to share information and skills). Contestation through defection reflects a desire to sanction a party to the transaction. More generally, it expresses mistrust for an agent involved in a transaction. It is distinguishable from opportunistic defection, in which a party merely takes advantage of the inobservability of his actions in a moral hazard situation. Identification of these kinds of contestatory practices is important not only to understand the nature of the economic relationships between agents, but also because they raise the level of the risks generated for public safety and the environment and, like a two-stage triggering mechanism, can foster the emergence of social protest on environmental or safety issues at a later date.

(5) According to this view, the new potential entrant may be an upstream collector who decides to develop a business of his own in processing material, or a downstream operator who decides to integrate upstream.

(6) Two types of transaction are considered here: those that take place (1) between suppliers and the recycler, and (2) between the recycler and the downstream customer.