Edited by John Duns, Arlen Duke and Brendan Sweeney
Chapter 6: Understanding market power
This chapter provides an outline of the reasons for which we regulate market power and then considers how market power can be established. It contrasts ‘classical’ or structural approaches to market power with more modern strategic considerations, before examining several cases in which market power was alleged to have been misused. A useful starting point for analysing market power is to approach it backwards. If we can understand what problem we are trying to fix when regulating or eliminating market power, we can better understand what market power is. This purposive approach to defining market power also helps to resolve the contest between classical approaches to defining market power, as against more strategic (or Bainian) approaches, as discussed in the second part of this chapter. Concerns with market power essentially relate to its adverse impact on ‘welfare’. In economic terms, the arguments against market power are represented by the diagrams in Figure 6.1 (the second being a more simplified version of the first). In accordance with this standard analysis, market power gives rise to a power over price that is exercised by a profit-maximising firm. The profit-maximising price is calculated by reference to the marginal revenue of the firm with market power. Unlike a firm acting in a competitive market, a firm with market power is able to restrict supply and charge a higher price.
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