The market power requirement in antitrust enforcement and its usefulness

Abstract

In competition law the concept of “significant existing market power” is often considered as a prerequisite to examining whether a business conduct gives rise to liability and, traditionally, the value of the Lerner index (the proportional price–cost margin) is used to measure the size of market power. In this paper we discuss in detail the role of the size of existing market power as a predictor of the size of the reduction in welfare generated by anticompetitive actions/conducts. We concentrate on monopolization or abuse of dominance conducts in which an exclusionary action by the dominant firm eliminates one of the rival firms. The main point which emerges from our analysis is that the source of market power is very important in understanding how changes in the size of extant market power affect the size of the reduction in welfare. We consider vertical and horizontal product differentiation and market structure as alternative sources of market power. We show that in contrast to Kaplow (Goals of competition law, Edward Elgar, pp 3–26, 2012), a significant extant market power requirement can be justified if either a Total Welfare Standard (TWS) or a Consumer Surplus Standard (CSS) is used and that this will be the case if the market power is the result of horizontal product differentiation or the result of a smaller initial number of competing firms. Further, we show, again in contrast to Kaplow (Goals of competition law, Edward Elgar, pp 3–26, 2012), that such a requirement may not be justified under either a CSS or a TWS—as when the market power is the result of vertical product differentiation. We also examine how extant market power and market share vary with the degree of product differentiation and market structure. We show that market shares vary inversely with the Lerner index as horizontal differentiation increases and directly as vertical differentiation increases and as the number of firms decreases, thus proving the irrelevance in many cases of market share as a predictor of market power.