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Market power is the foundational concept in all antitrust analysis. Learn how legal experts and courts define the relevant market, measure a firm’s ability to charge supracompetitive prices, and distinguish legitimate success from illegal monopolization under the Sherman and Clayton Acts.
The existence of market power is the central element in the majority of antitrust cases, particularly those brought under Section 2 of the Sherman Act, which prohibits monopolization, and Section 7 of the Clayton Act, which addresses anticompetitive mergers. Without a finding of significant and durable market power, a claim that a firm engaged in anticompetitive conduct is unlikely to succeed.
In essence, market power is defined as the ability of a firm—or a group of firms acting in concert—to profitably charge prices above the competitive level for a sustained period of time. Legal experts and courts often use the term “monopoly power” as a shorthand for a substantial degree of market power.
The traditional and most common methodology for establishing market power is a two-step process, beginning with the definition of the relevant market. A firm cannot have market power unless it operates within a clearly defined market where competitive constraints are limited. This analysis typically involves two components:
This component identifies all products or services that are reasonably interchangeable by consumers for the same purpose. Economists use a hypothetical test, often called the “SSNIP” (Small but Significant and Nontransitory Increase in Price) test, to determine if a hypothetical monopolist over a proposed product set could profitably impose a small but durable price increase. Products that consumers would switch to in response to such an increase must be included in the market.
This identifies the area where customers can practically turn to for the product or service. It includes all producers that could easily and economically produce and sell the relevant product in a short period of time to customers in that area. The scope is expanded until a hypothetical monopolist in that area could profitably sustain a price increase without customers switching to providers outside the area.
Legal experts must be wary of the Cellophane Fallacy. This occurs when the relevant market is defined based on a price that is already supracompetitive (monopoly price). At an already high price, consumers may switch to imperfect substitutes, making the market appear broad and the firm’s share seem small, thereby masking the existence of true market power.
Once the relevant market is defined, the next step is to assess the firm’s share of that market.
A high market share is the primary, though not dispositive, indicator of market power. Generally, courts are unlikely to find monopoly power if a firm has less than 50% of the sales in the relevant product and geographic market. However, some courts have required much higher percentages.
| Key Indicator | Significance in Antitrust |
|---|---|
| Market Share > 50% | The usual threshold for a rebuttable presumption of monopoly power in US law. |
| High Barriers to Entry | Crucial for sustaining market power; prevents new firms from competing away excess profits. |
| Sustained Economic Profits | Direct evidence that returns systematically exceed the normal competitive rate of return. |
Even a 100% market share will not lead to durable market power if entry into the market is easy and quick. Therefore, the existence of high barriers to entry is a critical structural characteristic courts examine. These can include: control of scarce resources, increasing returns to scale, technological superiority, high start-up costs, or government-created barriers like patents or licenses.
While market definition and market share are the traditional route, direct evidence can sometimes bypass this complex process. Direct evidence includes things like proven, sustained supracompetitive pricing (the gap between price and marginal cost) or high, long-term economic profits that cannot be explained by superior performance alone. However, financial expert analysis is required, as accounting data can be misleading.
It is vital to understand that possessing market power, even monopoly power, is not illegal in itself. A firm that achieves a dominant position through “growth or development as a consequence of a superior product, business acumen, or historic accident” is acting lawfully.
To violate Section 2 of the Sherman Act, a firm must not only possess monopoly power but also engage in “the willful acquisition or maintenance of that power” through exclusionary or predatory acts that harm the competitive process. This is the core difference between legal success and illegal monopolization.
For businesses seeking to understand or litigate antitrust issues, a clear grasp of market power is non-negotiable. The modern analysis is a holistic one, where structural characteristics are considered alongside the defendant’s specific conduct.
Definition: The power to control price or exclude competition.
Proving It: Market Definition → Market Share → Barriers to Entry.
The Law: Required for most monopolization claims (Sherman Act, Section 2) and merger challenges (Clayton Act, Section 7).
Key Pitfall: The Cellophane Fallacy can distort market size, making power appear weaker than it is.
A: While economists and courts sometimes use them interchangeably, monopoly power is generally considered a substantial, durable degree of market power—the kind sufficient to trigger a violation of Section 2 of the Sherman Act. Market power is often a prerequisite for a wide range of antitrust violations, whereas monopoly power is specific to monopolization claims.
A: No. While a high market share is a key indicator, it is not conclusive. For market power to be durable, there must also be significant barriers to entry for new competitors. If competitors can easily enter the market, a dominant firm’s attempt to raise prices will be quickly undercut.
A: In some complex cases, courts may look for direct evidence of market power, such as sustained supracompetitive pricing or high economic profits that cannot be explained by superior efficiency. This direct evidence can sometimes be used to infer market power without relying solely on the structural analysis of market definition and share.
A: The law encourages competition on the merits. A firm can legally obtain market power through “superior product, business acumen, or historic accident”. Antitrust laws only prohibit the willful acquisition or maintenance of that power through exclusionary or anticompetitive acts.
A: The two primary statutes are Section 2 of the Sherman Act (monopolization and attempted monopolization) and Section 7 of the Clayton Act (mergers and acquisitions that may substantially lessen competition or tend to create a monopoly).
This blog post was generated by an artificial intelligence model based on public legal and economic information. It is intended for informational and educational purposes only and does not constitute legal advice. You should not act or rely on any information contained herein without seeking advice from a qualified Legal Expert. The use of certain terminology reflects common legal usage but is not intended to be a substitute for professional legal consultation.
market power, antitrust law, monopoly power, relevant market, market share, Sherman Act, Section 2, anticompetitive conduct, Cellophane Fallacy, Clayton Act, supracompetitive pricing, barriers to entry, rule of reason, market definition, economic power, consumer welfare
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