Harvard Discussion Paper No. 575; NBER Working Paper No. 12867; Handbook of Law and Economics, A. Mitchell Polinsky & Steven Shavell, eds., Elsevier 2007
This paper provides an overview of competition economics and law today in the United States.
The general trend is that antitrust law is becoming more consistent with the views of current economists. But there are significant areas in which courts do not use all the economic tools at their disposal.
In antitrust law, only firms with “market power” are closely scrutinized, though just having market power is not illegal. Most firms have at least some market power.
Market power is linked to how much a firm can raise prices without losing business, which depends on the strength of consumer demand, market share, and rivals’ responses.
Collusion between firms means that market power will not always be obvious.
Market power can be inferred from the difference between price and cost, a firm’s behavior, or models that assess demand.
In theory, cartels can be unstable. But some, like OPEC, last a long time. Economics known as game theory predicts that there will be many cartels, but is not a good match for reality.
Mergers between competitors can result in increased prices or make collusion more likely. Some studies show that the firms can reduce costs, which has economic benefits. Some case studies show that mergers result in higher prices.
Enforcers should be skeptical that mergers benefit consumers.
Antitrust law can be used to assess behavior by just one firm that might harm consumers and competition. Predatory pricing or agreements to deal exclusively with others are suspect.