Competition laws and judicial practice use a wide range of different terms and definitions to identify firms that are subject to single firm conduct provisions, including “dominance”, “monopoly power” and “substantial degree of market power”. But whatever they call them, different competition regimes are converging toward the notion that single firm conduct provisions should be applied only to firms that have “substantial market power”. “Substantial market power” can be said to exist when competitive constraints imposed by other firms are relatively ineffective on the dominant firm. In this situation, the dominant firm’s decision about its own output and price can influence market outcomes. To distinguish between instances of “normal, everyday” nonsubstantial market power and the type of market power that should trigger heightened scrutiny under single-firm conduct provisions, it is important to determine whether market power is durable, i.e., whether it can be maintained for a considerable period of time. The emphasis on durability of market power explains why the question of entry barriers and barriers to expansion is an essential step in determining whether a firm has substantial market power.
Entry barriers are arguably the single most important factor in assessing whether a firm has substantial market power. If other firms can enter or rivals can expand, a firm will not be able to maintain market power in the long run, hence its market power will not be durable. Barriers to entry and expansion are thus a necessary, but not a sufficient condition, for the finding of substantial market power. Markets can be competitive and characterized by vigorous price competition even if entry barriers are high.
A situation in which a single company owns all or nearly all of the market for a given type of product or service. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (barriers to entry, or governmental regulation). In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare. A firm is a monopoly if it is the sole seller of its product and if its product does not have close substitutes. The fundamental cause of monopoly is barriers to entry: A monopoly remains the only seller in its market because other firms cannot enter the market and compete with it.
2.1Price and output under a pure monopoly
A pure monopolist can take market demand as its own demand curve. The firm is a price maker but a monopoly cannot charge a price that the consumers in the market will not bear. In this sense, the price elasticity of the demand curve acts as constraint on the pricing-power of the monopolist.
The Graph describes a short run price and output under a pure monopoly – the average revenue curve is assumed to be the market demand curve. A pure monopoly is a single seller of a product in a given market. The firm has a 100% market share. The profit-maximising level of output is at Q1 at a price P1. This will generate total revenue equal to OP1aQ1, but the total cost will be OAC1aQ. As total revenue exceeds total costs the firm makes abnormal (supernormal) profits equal to P1baAC1.
2.2 The effect of a rise in costs on monopoly price and profits
The diagram shows the effect of a rise in variable costs – which leads to an upward shift in short run average cost and short run marginal cost. The rise in price from P1 to P2 helps in part the monopolist to offset some of the rise in costs, but the net effect is still a reduction in total profits and a contraction in output. The extent to which a business with monopoly power can pass on a rise in costs depends in part on the price elasticity of demand – pricing power is greatest when demand is price inelastic. 3. Barriers to entry – protecting...
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