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Official websites use. Share sensitive information only on official, secure websites. Monopoly power can harm society by making output lower, prices higher, and innovation less than would be the case in a competitive market. This monopoly-power requirement serves as an important screen for evaluating single-firm liability.
It significantly reduces the possibility of discouraging "the competitive enthusiasm that the antitrust laws seek to promote," 5 assures the vast majority of competitors that their unilateral actions do not violate section 2, and reduces enforcement costs by keeping many meritless cases out of court and allowing others to be resolved without a trial. Accordingly, it is important to determine when monopoly power exists within the meaning of section 2. An understanding of monopoly power helps in crafting appropriate antitrust policy towards single-firm conduct.
Drawing on lessons from the hearings, along with existing jurisprudence and economic learning, this chapter discusses the Department's view on appropriate assessment of monopoly power in enforcing section 2. Market power is a seller's ability to exercise some control over the price it charges. In our economy, few firms are pure price takers facing perfectly elastic demand. Economists say the dry cleaner possesses market power, if only to a trivial degree.
Virtually all products that are differentiated from one another, if only because of consumer tastes, seller reputation, or producer location, convey upon their sellers at least some degree of market power. Thus, a small degree of market power is very common and understood not to warrant antitrust intervention. Market power and monopoly power are related but not the same. The Supreme Court has defined market power as "the ability to raise prices above those that would be charged in a competitive market," 8 and monopoly power as "the power to control prices or exclude competition.
Clearly, however, monopoly power requires, at a minimum, a substantial degree of market power. Although monopoly power will generally result in the setting of prices above competitive levels, the desire to obtain profits that derive from a monopoly position provides a critical incentive for firms to invest and create the valuable products and processes that drive economic growth.
Section 2's requirement that single-firm conduct create or maintain, or present a dangerous probability of creating, monopoly power serves as an important screen for evaluating single-firm liability. Permitting conduct that likely creates at most an ability to exercise a minor degree of market power significantly reduces the possibility of discouraging "the competitive enthusiasm that the antitrust laws seek to promote" 15 and assures the majority of competitors that their unilateral actions will not violate section 2.
It also reduces enforcement costs, including costs associated with devising and policing remedies. The costs that firms, courts, and competition authorities would incur in identifying and litigating liability, as well as devising and policing remedies for any and all conduct with the potential to have a minor negative impact on competition for short periods, would almost certainly far outweigh the benefits, particularly if the calculus includes, as it should, the loss of procompetitive activity that would inevitably be discouraged in such a system.
Monopoly power is conventionally demonstrated by showing that both 1 the firm has or in the case of attempted monopolization, has a dangerous probability of attaining a high share of a relevant market and 2 there are entry barriers--perhaps ones created by the firm's conduct itself--that permit the firm to exercise substantial market power for an appreciable period.
In determining whether a competitor possesses monopoly power in a relevant market, courts typically begin by looking at the firm's market share. Discussions of the requisite market share for monopoly power commonly begin with Judge Hand's statement in United States v. Aluminum Co. United States. Following Alcoa and American Tobacco , courts typically have required a dominant market share before inferring the existence of monopoly power.
It is also important to consider the share levels that have been held insufficient to allow courts to conclude that a defendant possesses monopoly power. Some courts have stated that it is possible for a defendant to possess monopoly power with a market share of less than fifty percent.
The Department is not aware, however, of any court that has found that a defendant possessed monopoly power when its market share was less than fifty percent. Significance of a Dominant Market Share. A dominant market share is a useful starting point in determining monopoly power. Modern decisions consistently hold, however, that proof of monopoly power requires more than a dominant market share.
For example, the Sixth Circuit instructed that "market share is only a starting point for determining whether monopoly power exists, and the inference of monopoly power does not automatically follow from the possession of a commanding market share.
A simple example illustrates the "pitfalls in mechanically using market share data" to measure monopoly power. In this situation, the large firm's market share is only one determinant of its power over price. Even a very high share does not guarantee substantial power over price for a significant period: if the fringe firms can readily and substantially increase production at their existing plants in response to a small increase in the large firm's price that is, if the fringe supply is highly elastic , a decision by the large firm to restrict output may have no effect on market prices.
Even if fringe firms cannot readily and substantially increase production, a firm with a very high market share is still not guaranteed substantial power over price if the quantity demanded decreases significantly in response to a small price increase--in other words, if market demand is highly elastic. Instances of high fringe-firm supply elasticity or high industry-demand elasticity are not the only situations where a high market share may be a misleading indicator of monopoly power.
In markets characterized by rapid technological change, for example, a high market share of current sales or production may be consistent with the presence of robust competition over time rather than a sign of monopoly power.
Indeed, in the extreme case, "market structure may be a series of temporary monopolies" in a dynamically competitive market. Notwithstanding that a high share of the relevant market does not always mean that monopoly power exists, a high market share is one of the most important factors in the Department's examination of whether a firm has, or has a dangerous probability of obtaining, monopoly power.
A high share indicates that it is appropriate to examine other relevant factors. In this regard, if a firm has maintained a market share in excess of two-thirds for a significant period and market conditions for example, barriers to entry are such that the firm's market share is unlikely to be eroded in the near future, the Department believes that such evidence ordinarily should establish a rebuttable presumption that the firm possesses monopoly power.
This approach is consistent with the case law. Market-Share Safe Harbor. To give businesses greater certainty in circumstances where significant competitive concerns are unlikely, many panelists supported a market-share safe harbor in section 2 cases, voicing skepticism about how frequently monopoly power would be present when a firm possesses a market share less than Alcoa's "sixty or sixty-four percent" market share.
However, other panelists voiced objections to a market-share safe harbor. Market definition can lack precision, 43 and it is possible that an incorrect market definition could allow anticompetitive conduct to avoid liability. They thus are concerned that a safe harbor may protect anticompetitive conduct.
The Department believes that a market-share safe harbor for monopoly--as opposed to market--power warrants serious consideration by the courts. In many decades of section 2 enforcement, we are aware of no court that has found monopoly power when defendant's share was less than fifty percent, suggesting instances of monopoly power below such a share, even if theoretically possible, are exceedingly rare in practice. It is therefore plausible that the costs of seeking out such instances exceed the benefits.
Durability of Market Power. The Second Circuit has defined monopoly power as "the ability ' 1 to price substantially above the competitive level and 2 to persist in doing so for a significant period without erosion by new entry or expansion. Panelists agreed that monopoly power is the ability to engage profitably in substantial, sustained supracompetitive pricing. As one panelist noted, the "picture [of monopoly power] that we carry around in our head" is "the sustained charging of a price above marginal cost, maintaining.
Even when no current rival exists, an attempt to increase price above the competitive level may lead to an influx of competitors sufficient to make that price increase unprofitable. The Supreme Court has noted the crucial role that defining the relevant market plays in section 2 monopolization and attempt cases.
The relevant product market in a section 2 case, as elsewhere in antitrust, "is composed of products that have reasonable interchangeability for the purposes for which they are produced--price, use and qualities considered. However, particular care is required when delineating relevant markets in monopolization cases.
In merger cases, the antitrust enforcement agencies define markets by applying the hypothetical monopolist paradigm. The Horizontal Merger Guidelines state:. The Guidelines go on to explain that in implementing this definition, the agencies "use prevailing prices. The problem with using prevailing prices to define the market in a monopoly-maintenance case is known as the "Cellophane Fallacy" because it arose in a case involving cellophane, where an issue before the Supreme Court was whether the relevant market was cellophane or all flexible-packaging materials.
Many have criticized the Court's reasoning because it assessed the alternatives for cellophane after du Pont already had raised its price to the monopoly level, failing to recognize that a firm with monopoly power finds it profitable to raise price--above the competitive level--until demand becomes elastic. Hence, it should not be at all surprising to find that at the monopoly price the firm faces close substitutes and would not be able profitably to raise price further.
One panelist suggested using the hypothetical-monopolist paradigm in certain monopoly-acquisition cases, defining the relevant market as of a time before the challenged conduct began and carrying forward the resulting market definition to the present to assess whether the firm possesses monopoly power.
Unfortunately, however, substantial practical problems may make it difficult to determine consumers' preferences and other relevant factors as of some prior date, thereby impeding the ability to conduct an accurate "but-for" exercise. An additional problem concerns allegations of monopoly maintenance where the conduct in question allegedly has maintained preexisting monopoly power rather than created that power. One possibility is to apply the hypothetical-monopolist paradigm of the Horizontal Merger Guidelines just as in merger cases, except at the competitive price rather than the prevailing price.
However, accurately determining the competitive price is apt to be quite difficult in such cases. Despite its limitations in the section 2 context, there exists no clear and widely accepted alternative to the hypothetical-monopolist methodology for defining relevant markets. Moreover, and importantly, concerns over the Cellophane Fallacy need not confound market definition in all section 2 cases.
Panelists observed that, although there may be no reliable paradigm for defining the relevant market in every case, courts often are able to draw sound conclusions about the relevant market based on the facts and circumstances of the industry. The Department believes that market definition remains an important aspect of section 2 enforcement and that continued consideration and study is warranted regarding how to appropriately determine relevant markets in this context.
Other Approaches to Identifying Monopoly Power. As noted above, courts typically determine whether a firm possesses monopoly power by first ascertaining the relevant market and then examining market shares, entry conditions, and other factors with respect to that market. One important issue is whether plaintiffs should instead be permitted to demonstrate monopoly power solely through direct evidence--for example, proof of high profits 70 --thus rendering market definition unnecessary.
While no court has relied solely on direct evidence to establish monopoly power, one court found direct evidence sufficient to survive summary judgment despite plaintiff's failure "to define the relevant market with precision.
Relying exclusively on direct evidence of profits to establish monopoly power presents a number of difficult issues. In particular, cost measures are normally available only from reports prepared in conformity with accounting conventions, but economics and accounting have significantly different notions of cost.
For example, determining if a firm is earning an economic profit requires accounting properly for depreciation and the economic replacement cost of the assets the firm is using to generate its income. Yet the information reported by accountants frequently is not designed to measure and accurately reflect those costs.
Accounting records rarely attempt to make such assessments. Moreover, available estimates of a firm's capital costs, an important input into calculating a firm's profitability, are generally based on accounting rules that do not account for the riskiness of the investment. If the investment, at the time it was made, was quite risky, a very high accounting rate of return may reflect a modest economic return.
More generally, when all relevant economic costs are properly accounted for, what may at first seem to be a supracompetitive return may be no more than a competitive one or vice versa. Using price-cost margins, rather than profits, as evidence of monopoly power is also unsatisfactory. Economists have long pointed to a firm's price-cost margin--its price minus its short-run marginal cost, all divided by its price known as the Lerner index 77 --as a measure of the extent to which the firm is exercising short-run market power.
Short-run price-cost margins are not, however, of much use in determining whether a firm has monopoly power. Monopoly power requires that the firm be able profitably to charge prices high enough to earn a supernormal return on its investment.
It is not clear how much price must exceed short-run marginal cost before there is monopoly power. Indeed, a firm should not be found to possess monopoly power simply because it prices in excess of short-run marginal cost and hence has a high price-cost margin.
In principle, a better measure of margin would be the ratio of price to the firm's long-run marginal cost. Nor does evidence concerning the elasticity of demand for the firm's products establish the existence of monopoly power. Demand elasticity can, to be sure, provide information about the firm's market power. In those cases, they will generally have high price-cost margins and market power. Only rarely, however, will those firms possess monopoly power.
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The Firm, the Market, and the Law: Economics Books @ hampdenlodgethame.org
The theory of the firm consists of a number of economic theories that explain and predict the nature of the firm, company , or corporation , including its existence, behaviour, structure, and relationship to the market. Firms exist as an alternative system to the market-price mechanism when it is more efficient to produce in a non-market environment. It might also be costly for employees to shift companies every day looking for better alternatives.
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Some material is in Chinese. Journal of Law and Economics, Vol. Epstein, Gary S. Becker, Merton H. Miller, Richard A. Goldin , Land Economics, Vo. Williams, Jr.
It offered an economic explanation of why individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market. The author was awarded the Nobel Memorial Prize in Economic Sciences in in part due to this paper. Despite the honor, the paper was written when Coase was an undergraduate and he described it later in life as "little more than an undergraduate essay. The article argues that firms emerge because they are better equipped to deal with the transaction costs inherent in production and exchange than individuals are. Coase's article distinguished between markets as a coordination mechanism and firms as a coordination mechanism.
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