Observations on the Multiple Dimensions of Market Power

30 May 2007
By Dr. Alan J. Daskin and Dr. Lawrence Wu

Market share and market concentration have long been among the yardsticks used by antitrust practitioners and the courts when assessing antitrust claims. Indeed, analysts spend considerable effort defining the relevant market and computing measures that describe the structure of that market. Those measures, however, are only proxies for the true issue of concern, the exercise of market power. A more direct approach might attempt to determine whether prices or profit margins are above competitive levels. But that approach leads to even more fundamental questions: What is the appropriate definition of market power? And if supracompetitive pricing and profitability are appropriate measures of market power, how do we determine the competitive level in the first place?

In this chapter from Economics of Antitrust: Complex Issues In a Dynamic Economy, NERA Senior Vice President Dr. Lawrence Wu and Vice President Dr. Alan J. Daskin discuss the multiple definitions of market power that are in use and the economic foundations for these definitions. Although most definitions refer to control that a firm either has or does not have over prices and competitors' entry, analyses of market power should be more nuanced. The authors argue that focus should be on the degree to which prices or profits exceed competitive levels and how long they can be sustained. This means, however, that the competitive benchmark must be clearly specified and that the analysis should consider evidence that can help fact finders distinguish market power that nearly all firms have from the market power that raises antitrust concerns. One conclusion is that with clear benchmarks, we can sharpen the inquiry into one that focuses on the degree of market power in the short and long term, rather than the absolute presence or absence of market power.