Market Power in Antitrust Cases

Competition Policy and Antitrust

Article Snapshot

Author(s)

William M. Landes, Eric Posner and Richard A. Posner

Source

94 Harvard Law Review 937, 1981

Summary

This paper asks how antitrust courts conclude that a firm is too large.

Policy Relevance

Even a very big firm cannot be said to have too much power if they lose business when prices go up. Court should look to whether consumers have choice.

Main Points

  • Economists recognize that a firm can’t harm consumers or competition when others can simply refuse to deal with the firm. Antitrust cases should start by asking whether a firm has too much “market power” for others to ignore.

 

  • Market power is the power to raise prices.

 

  • Market share—the proportion of customers a firm serves—doesn’t matter when consumers don’t need the product. If demand shrinks when prices rise, demand is “elastic” and the firm lacks power.
    • One can measure elasticity of demand by comparing a firm’s current output with its potential capacity over a relevant time period.
    • Ruling that firms with shares below a certain percent lack power would be unwise. Large and small markets differ.

 

  • Access to substitute goods is relevant, even if the substitute is not perfect.

 

  • Market size matters. Do buyers buy locally? Nationally?
    •  Foreign producers should count if they sell in domestic markets.

 

  • A pitfall: In regulated sectors, low prices leads to large market share, instead of a large market share allowing a low price.

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