Collusive activities. The regulator should watch whether firms collude to limit competition, by fixing prices and dividing markets. The European Commission, for example, takes into account additional factors to measure the extent to which a firm acts independently of its competitors and customers.
Analysis of barriers to entry. Market dominance also depends on the assessment of ease of market entry. Barriers to entry are costs that new entrants incur but that an incumbent firm avoids. This cost asymmetry may reveal dominance, as it may prevent new entrants from competing with the incumbent.
Barriers to entry may arise due to high fixed or sunk costs costs that a new entrant must absorb, while the incumbent operator does not incur the same risks and costs , or restricted access to essential facilities a new entrant must incur the costs of purchasing access to a network, costs that the firm who owns the facility does not have.
Quantitative measures of market dominance. Several quantitative measures exist that can help assess whether a firm may have market power, such as the Herfindahl-Hirschman Index HHI 2 , which is an index of the number of firms in the market and their market shares, and the Lerner Index that measures the degree to which prices exceed marginal cost. Such concentration measures are rather imperfect measures of potential market power and an overreliance on them could lead to biased policy decisions, as this happened in the energy sector in the United States in the s.
Yet, the guidelines on mergers used by the US and now EU competition authorities contain explicit thresholds defined in terms of the HHI. View mytutor2u. Account Shopping cart Logout. Explore Economics Economics Search. Explore Blog Reference library Collections Shop. Share: Facebook Twitter Email Print page. The Lerner Index is a measure of market power in an industry. The Lerner index measures the price-cost margin - it is measured by the difference between the output price of a firm and the marginal cost divided by the output price Under conditions of perfect competition, output prices equal marginal costs leading to an electively efficient equilibrium output while prices move increasingly above marginal cost as market power increases and we head towards an oligopoly, duopoly or monopoly.
We can interpret the index by saying that the Lerner index lies between zero perfect competition and one strong market power The chart below tracks the estimated Lerner Index for the UK commercial banking industry and suggests that the industry was becoming more concentrated in the years leading up to the Global Financial Crisis. The more market power a company has the more close it gets to be in a dominant position. Market power—and dominant position—arises where a company does not face effective competitive pressure in the relevant market.
Market power is not absolute, but is a matter of degree; the degree of power changes depending on the circumstances of each case. Market power can exist in a variety of forms. In some markets, a single company may possess market power dominant position ; in others where, for example, a number of companies have agreed explicitly or tacitly not to compete with each other, a group of companies may collectively possess market power collective dominance.
A market power test generally takes account of a wide range of factors on i market definition, ii market structure, iii entry conditions, iv the behavior of companies and v their financial performance. When assessing whether and to what extent market power exists, the strength of any competitive constraints is considered i.
Competitive constrains include i existing competitors, ii potential competition and, iii buyer power with a strong negotiation position, weakening the potential market power of a seller. That being said, in general, market power is more likely to exist if a company or group of companies has a persistently high market share.
Likewise, market power is less likely to exist if a company has a persistently low market share. Relative market shares can also be important. For example, a high market share might be more indicative of market power when the rest of the market is very fragmented and all other competitors have very low market shares.
Data on market shares may be collected from a number of sources including i information provided by companies themselves ii trade associations, customers or suppliers and iii market research reports. The appropriate measure for calculating market shares depends on the dynamics of each specific case.
Usually sales data by value and by volume are both informative. Often value data will be more informative, for example, where goods are differentiated. All Rights Reserved. Password Passwords are Case Sensitive. Forgot your password? Free, unlimited access to more than half a million articles one-article limit removed from the diverse perspectives of 5, leading law, accountancy and advisory firms.
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