The Meaning and Determination of Market Power

Posted by Social Science Research Network

The Meaning and Determination of Market Power

By John B. Kirkwood (Seattle University School of Law)

Abstract:       Market power and monopoly power lie at the core of antitrust law. Yet there is no agreement on exactly what they mean. Courts and scholars agree that market power is the ability to raise price profitably above the competitive level and monopoly power requires a substantial amount of market power. But there is no consensus on how to determine the competitive level. Instead, there are four principal alternatives – two based on costs and two based on price levels. Further, courts virtually never measure market power or monopoly power by identifying the competitive level and comparing the defendant(s)’ prices to it. Rather, they attempt to infer power by defining a relevant market and calculating market share(s). While that process works well in some cases, in others it is complicated and inadequate to determine the degree of power.

This Article proposes a simpler and more direct method of determining market power and monopoly power. It recommends that the competitive level be measured by price levels, not cost levels. Courts ought to identify power by asking whether the challenged conduct would enable the defendant(s) to raise price above the prevailing level or maintain price above the “but for” level (the level to which price would fall absent the challenged conduct). The relevant market would follow from this analysis.

This method would not always be adequate to identify market power or monopoly power. But it would often do so, and when that is the case, it would make the determination of power simpler, more efficient, and more accurate. It would be simpler because it would focus the courts on a single fundamental issue: whether the challenged conduct would enable the defendant(s) to reduce competition. It would be more efficient because it would allow courts to resolve the power element and the anticompetitive effects element of an antitrust violation at the same time, while avoiding the complexities of cost analysis and traditional market definition. Finally, it would be more accurate because it would sometimes demonstrate market power that neither a market share test nor a cost test would identify.

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