Chapter 6: Market Conduct of Dominant Firms II
Utton2 02 chap 5 4/12/02 16:20 Page 126 6 Market conduct of dominant firms: II I Introduction A large part of Chapter 5 was concerned with the exercise of market power. In particular, the sections on price discrimination showed how an incumbent firm could increase its profitability by varying the price to cost margin for different amounts of output or to different groups of purchasers. The exception was where our discussion extended to the use of predatory pricing by a dominant firm in an attempt to maintain its position. We also mentioned there the possibility that the firm may deliberately expand its output capacity beyond the level dictated by current and foreseeable demand as a strategy to deter entry to the market. Such capacity expansion is only one of many strategies that incumbent firms may employ to maintain their dominance. An analysis of those strategies and their implications for antitrust policy is the main focus of this chapter. As we shall see, many of the strategies are aimed at potential rather than actual competitors. For those used to thinking of competition in terms of interactions between existing firms, the current focus on potential competitors may seem misplaced. After all, the familiar view of the competitive process is one where existing positions of market power are eroded over time by the growth of rivals attracted by the lure of abnormally high profits. One model describing this process was discussed in Chapter 4, where it became clear that the influence of...
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