Definition of Market Power

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CHAPTER I

DEFINITION OF MARKET POWER

The definition of market power is often critical to antitrust analysis,

but the term has been used differently by economists and courts

depending on the circumstances presented. This Chapter sets a

framework for the rest of the Handbook by describing the definition

generally used by economists, as well as the varying formulations used in

antitrust law. The Chapter then considers how antitrust law differentiates

between two terms often used interchangeably—“market power” and

“monopoly power.”

A. Economic Concept of Market Power

“Market power” exists when an industry’s behavior “deviates from

perfect competition.” 1 Economists often define market power as the

ability of a firm or group of firms within a market2 to profitably charge

prices 3 above the competitive level for a sustained period of time.

1. See, e.g., Dennis W. Carlton, Market Definition: Use and Abuse, COMP.

POL’Y INT’L, Spring 2007, at 3, 5.

2. Economists and antitrust lawyers alike typically have analyzed market

power in the context of well-defined markets. In antitrust law, these are

referred to as “relevant markets.” Chapter IV provides a discussion of the

definition of relevant markets. The 2010 revisions to the Merger

Guidelines suggest that the agencies may be moving away from defining

relevant markets in all cases. See U.S. DEP’T OF JUSTICE & FED. TRADE

COMM’N, HORIZONTAL MERGER GUIDELINES § 4 (2010), available at

http://www.justice.gov/atr/public/guidelines/hmg-2010.html [hereinafter

MERGER GUIDELINES]. Courts, on the other hand, may not be amenable to

divorcing market power from market definition. See, e.g., City of New

York v. Group Health, No. 06 Civ. 13122, 2010 WL 2132246, at *2

(S.D.N.Y. 2010) (“To state claims under any of the statutes identified

above, Plaintiffs must identify the product market in which competition

will be impaired.”).

3. Although the economic definition of market power typically does not

mention reductions in product or service quality, economists generally

would expand the meaning of price to include the increases in real price