Market Power or Monopoly Power? A Response to Josh Wright
In this comment to my earlier post, Josh Wright differentiates between market power and monopoly power. The former is a firm’s power over its own price as expressed by a downward sloping demand curve. The latter means power over the market price. Antitrust, Josh argues, should focus on monopoly power not market power, because the latter is ubiquitous and more often than not harmless from a consumer welfare point of view. Monopoly power, in contrast, is a necessary predicate for consumer overcharges.
It seems to me that our disagreement is more conceptual than substantive. (But then again, legal concepts are the substance of the law.)
The goal of the antitrust laws is to protect competition as a necessary condition of free markets, the currently best available means of continuously increasing consumer welfare. (To be sure, free markets don’t succeed on that score in all instances, but by and large they do a better job at it than any other arrangement has done so far.) We thus want a prohibition only for those kinds of price discrimination that are detrimental to consumer welfare. Against that backdrop, how can we tell good discrimination from bad discrimination? If we could measure the welfare effects directly, that wouldn’t be a problem. But more often than not we can’t, and so we have to rely on inferences and proxies, unless we want to forego regulation altogether.
In my view, there is no reason to abandon the inference from market power to anticompetitive effects. As long as we accept the model of perfect competition as a conceptually useful starting point, market power and anticompetitive effects are virtually inseparable.
(Note: Whether we should hold on to the model of perfect competition even as a conceptual starting point in light of an economy that is increasingly characterized by oligopolies and differentiated products is another matter. It may even be a different matter for economics than it is for the law. The law is free to selectively import those concepts that are useful for its purposes. More on that specific autonomy of the law here and here.)
That alone is a good reason for maintaining the inference as a rule and dealing with instances in which the inference doesn’t work in the form of exceptions, to be proven by rebuttal evidence. For example, price discrimination in markets with easy entry is in all likelihood not anticompetitive. Thus, any inference from market power (as evidenced by the fact of price discrimination) to anticompetitive effects would be rebutted by the fact of entry. Jonathan Baker makes this point, I think persuasively, in his article “Competitive Price Discrimniation: The Exercise of Market Power without Anticompetitive Effects (Comment on Klein and Wiley)” in 70 Antitrust LJ 643 (2003).
I don’t want to ignore Josh’s broader argument. In his view, market power, that is a firm’s ability to profitably raise its own prices for a sustained period of time, is not particularly troublesome. Monopoly power, control over the market price, is. That’s the deeper reason for why, in Josh’s view, inferring anticompetitive effects from market power is conceptually flawed. Rather, we should be inferring anticompetitive effects from monopoly power. I don’t think that the distinction between market power and monopoly power is particularly fruitful. Even in Josh’s use of the terms, monopoly power is not qualitatively different from market power but simply more of it. A very large firm, controlling most of the output of “the market” for a particular product will have market power and “monopoly power.” One of many small restaurants will have market power but no “monopoly power.” If that’s all, then introducing “monopoly power” as a concept distinct from market power is probably more confusing than illuminating.
In other words, I am all for garnering the best evidence of the net effect on consumer welfare from price discrimination. But I am not ready to “forego use of this poor proxy [i.e., market power] for inferences of competitive effects altogether,” as Josh proposes.
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March 2nd, 2006 at 1:54 pm
Nice post Hanno. I think that you are correct that the difference here is conceptual than substantive. We both are concerned about making appropriate inferences regarding competitive harm. A simple way to articulate my view that using the power to price discriminate (downward sloping demand) to make these inferences is that virtually every firm in the economy possesses such power. How is such a definition helpful to our inference problem? How could it possibly be? Only where we are talking about undifferentiated, homogenous commodities would price discrimination tell us something about the power to control market prices.
For this reason, I disagree with your conclusion that the distinction between market power and monopoly power is one of magnitude, i.e. monopoly is just “more” market power. Free entry does not resolve the confusion. Take Independent Ink where the presence of patenting makes such an assumption inappropriate. The patent gives the patentee the ability to price discriminate, but (as the case tells us) this is quite different from the ability to control market prices.