Effective Market Shares and Antitrust

• DOI: 10.1177/0003603X1105600108
• Author: Dennis L. Weisman
• Published date: 01 March 2011
• Date: 01 March 2011
• Subject Matter: Economics

ATB Spring 2011 08 Weisman

June 11, 2011

T

HE

A

NT IT RU ST

B

UL LE TI N

:

Vol. 5 6, No. 1/ Spring 20 11

:

139

E

ffective market shares

and antitrust

B

Y

D

ENNIS

L. W

EISMAN

*

This article extends the single-market measure of market power to a

multimarket setting in order to develop the concept of effective

market share—what the market share of the hypothetical, single-

market firm would have to be to exercise the same degree of market

power as the actual, multimarket-domin ant fi rm. This approach

yields four main findings. First, traditional market power measures

tend to oversta te (understate) market po wer in the case of net

comp lement s (sub stitute s). Se cond, cost compl ementa ritie s

compound the effects of demand complementarities in tempering the

dominant firm ’s market power. Third, the errors in measu ring

market power are asymmetric: policy makers are more likely to

conclude that market power is present when it is absent than to

conclude that market power is absent when it is present. Fourth,

effective mark et shares facilitate more rel iable inferences about

market power and hence fewer errors in adjudicating merger and

deregulation cases.

* Professor of Economics, Department of Economics, Kansas State Uni-

versity.

AUT HOR’ S NO TE:

I am g ratef ul to To m Hazle tt and G len Ro binson for he lpful

discussio ns and to Yuan Gao and Canh Le fo r expert research assistance. I a lso thank

the editor -in-chief , Will iam Cur ran, t he eco nomics edito r, Rog er Blai r, and an

anonymous ref eree for their constr uctive suggestions f or revision. The usual cav eat

applies.

© 2011 by Federal Legal Publications, Inc.

ATB Spring 2011 08 Weisman

June 11, 2011

140

: THE ANT ITR UST BU LLE TI N: V ol. 56, No. 1/S prin g 20 11

I. IN TR ODU CT ION

A firm possesses market power when it has “the ability profitably to

mainta in prices abo ve competitiv e levels for a significan t period of

time.” 1 Landes and Posn er2 popularized a mea sure of market power

that wa s pioneered by Saving.3 S pecifically, t he dominant firm’s mar ket

power is increas ing in it s market s hare and decreasing w ith the m arket

elasti city of demand and the comp etitive fringe supply e lasticity. This

relations hip is captured i n the following expression:

where

L

S

denotes the Ler ner index for the single -market measure of

marke t po wer,5

p

is price,

c

is the dominan t fi rm’s marginal cost , å is

the price e lasticity of demand facing the domi nant firm,

s

is the domi -

nant fir m’s market sha re, åD is the mar ket price elast icity of deman d

and å s is the competit ive frin ge suppl y elasti city.

The prima ry obj ective of thi s analy sis is t o exte nd the s ingle -

market measure of market power t o a multimarket setting in order to

develo p t he concept of the effe ctive market sha re—what the mar ket

share of the hypothetical, single-market provider would have to be to

exerci se the sa me degree of market power as the actu al, mult imarket

1 U. S. D EP’T OF JUST ICE & FTC, HORI ZON TAL MER GER GUID ELI NES § 0.1

(1992).

2 Wi lliam W. L andes & Ri chard A. P osner , Ma rket Power in A ntitr ust

Cases, 94 HARV. L. REV. 937 (1981).

3 Th omas R. S avin g, Co ncen trat ion R atio s an d the Deg ree o f Mo nopo ly

Power, 11 INT’L ECON. REV. 139 (197 0).

4 Notabl y, the rela tionship in equation (1) holds only when the market

operate s according to the dom inant firm/ competitive fringe mo del and the

assumpt ions of that model hold .

5 Ler ner obse rves tha t “t he p rima ry un it t o wh ich o ur m easu re o f

monopoly applies is the firm in the very shortest period.” Abb a P. Lerner, The

Conc ept of Mon opoly an d t he Meas uremen t of Monop oly Powe r, 1 REV. ECON.

STUD. 171 (193 4).

4

(1)