Chapter 4: The Measurement and Interpretation of Market Dominance
I Introduction We established in Chapter l a number of results concerning the inefficiency of monopoly. It was also apparent, however, that under certain conditions improvements in some types of efficiency may come at the expense of other types. In such cases complex trade-offs are likely to be involved, posing difficult problems for the policy maker. The main concern of this opening chapter of the part of the book which deals with horizontal dominance is to discuss how it might be possible to convert the formal results of monopoly theory into the operational requirements of antitrust policy. It is one thing to draw a downwardsloping demand curve and announce that this represents the situation in a monopoly market. It is quite another to determine whether a firm which appears to have a large market share, but where there are, say, a number of much smaller competitors as well as producers making apparently similar products, actually ‘dominates’ the market, with harmful results. We approach this transition in two stages. First, in Section II below, we look at two indices of market dominance and assess their usefulness for highlighting the issues involved and for direct application to policy. The measures chosen are the Lerner index of market power and the Bain index of ‘excess’ profits.1 Both have been discussed extensively in the present context, and the latter has been the subject of a great deal of empirical analysis and supporting use in antitrust cases. Secondly, in Section III, we review a number...
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