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 compa ring a firm’s current output with its potential capacity over a relevant time period.
- Ruling that firms with shares below a certain perce nt 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.
