Categories: Court Info

The Indispensable Role of Market Power in US Antitrust Cases

Q: Is having a monopoly illegal in the US?

No. Having a monopoly is not illegal. The violation occurs only when a company uses its Monopoly Power through anticompetitive (exclusionary) conduct to willfully acquire or maintain that position, as defined under Section 2 of the Sherman Act.

Q: What is the Rule of Reason in relation to market power?

For Section 1 of the Sherman Act, most agreements are analyzed under the Rule of Reason. A showing of Market Power is often a prerequisite, as without it, the restraint on trade is unlikely to harm overall competition.

Q: How does market power differ on the buyer side?

Market power on the buyer side is called Monopsony Power. It refers to a dominant buyer's ability to profitably depress the purchase prices paid to sellers (e.g., suppliers or employees) below the competitive price for a significant period of time.

Meta Description: Understand the concept of Market Power in US antitrust law, its distinction from Monopoly Power, and the critical two-element test for Section 2 violations under the Sherman Act. Learn how Legal Experts prove a company’s ability to raise prices above competitive levels through Relevant Market definition and Barriers to Entry analysis.

Understanding Market Power: The Cornerstone of US Antitrust Law

In the complex world of Antitrust Law, few concepts are as pivotal—and as frequently debated—as Market Power. This term is the lynchpin of virtually every major antitrust enforcement action, particularly those concerning monopolization or attempts to restrain trade. Simply put, a company cannot violate many of the core tenets of the Sherman Act or Clayton Act unless it first possesses the ability to meaningfully harm competition. If a firm lacks this power, its actions—no matter how aggressive—can be quickly corrected by the free market.

For business owners, executives, and in-house Legal Experts, comprehending how federal agencies and courts define and prove market power is essential for assessing risk and crafting compliant competitive strategies. This post will delve into the legal definitions, the critical two-part test for monopolization, and the methods used to establish market power in litigation.

Defining Market Power vs. Monopoly Power

While the terms Market Power and Monopoly Power are often used interchangeably by economists and legal scholars, particularly in modern antitrust discourse, the distinction can sometimes be material depending on the specific statute being invoked. However, the core economic concept remains consistent:

What is Market Power?

Market Power is defined as “the ability to raise prices above those that would be charged in a competitive market for a sustained period of time without losing so many sales that the price increase is unprofitable.”

The ability to maintain Supracompetitive Pricing—prices significantly higher than the marginal cost—is the ultimate proof that a firm is insulated from the forces of robust competition. The firm has the discretion to set prices, rather than being forced to accept the market price.

Monopoly Power is generally considered a substantially greater degree of market power. For the purpose of Section 2 of the Sherman Act, the Supreme Court has famously defined it as the “power to control prices or exclude competition.” When the stakes are high, as in a monopolization claim, courts require proof of this greater level of control.

The Two-Element Test for Monopolization (Sherman Act § 2)

Section 2 of the Sherman Antitrust Act makes it illegal to “monopolize, or attempt to monopolize.” Establishing a violation of the monopolization offense requires proof of two distinct elements:

The Possession of Monopoly Power in the relevant market.
The Willful Acquisition or Maintenance of that Power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident (i.e., Anticompetitive Conduct).

💡 Legal Expert’s Tip: The ‘Willful’ Element

Simply being a monopolist is not illegal. A firm must engage in exclusionary or predatory conduct to acquire or maintain its power. The focus is on how the power was obtained or defended, not the power itself.

Proving Market Power: The Indirect Approach

Since it is nearly impossible for a court to directly calculate a hypothetical “competitive price level,” Legal Experts and economists typically rely on an indirect, three-part structural analysis to infer the existence of market power. This is the conventional, accepted method in most antitrust litigation.

1. Defining the Relevant Market

Before market share can be calculated, the boundaries of the competitive arena—the Relevant Market—must be defined. A relevant market has two dimensions:

Relevant Product Market: This includes the product itself and all reasonably interchangeable substitute products. The test is whether a hypothetical monopolist could profitably impose a “Small but Significant and Non-transitory Increase in Price” (SSNIP) without customers switching to substitutes. If customers switch, the substitute products must be included in the market definition.
Relevant Geographic Market: This refers to the area in which a firm sells its product or service, where buyers could reasonably turn for supply. A national market for a patented software product is treated differently than a local market for concrete.

2. Calculating Market Share

Once the relevant market is established, the firm’s share of that market is calculated. Market share is the primary, though not dispositive, proxy for market power. While there is no bright-line rule, courts generally apply certain thresholds:

Market Share Range	Antitrust Implication (Monopoly Power)
Above 70%	Generally considered sufficient to infer Monopoly Power, especially if persistent.
50% to 70%	Often requires substantial additional evidence of barriers to entry and anti-competitive conduct.
Below 50%	Rarely sufficient to establish monopoly power, but market power may still be relevant for Rule of Reason cases under Section 1.

3. Analyzing Barriers to Entry

A high market share is meaningless if new competitors can easily enter the market and compete away the excess profits. Therefore, a finding of durable market power almost always requires a demonstration of significant Barriers to Entry. These barriers ensure that the firm’s control is “sustained.” Examples include:

High sunk costs or capital requirements.
Regulatory hurdles or unique licensing requirements.
Control over essential facilities or proprietary technology (e.g., strong Intellectual Property Expert protections).
Network effects that make it difficult for new rivals to attract customers.

Proving Market Power: Direct Evidence and Fallacies

While the indirect method remains standard, Legal Experts can also use direct evidence of the firm’s behavior to prove market power without rigorously defining the relevant market. Direct evidence includes:

Documented instances of Supracompetitive Pricing that has been maintained over time.
Evidence of reduced quality, diminished customer service, or stifled innovation that customers have no choice but to accept.
Coercive contracts or clauses that lock in customers or distributors, limiting their ability to choose alternatives.

⚠️ Caution: The Cellophane Fallacy

In defining the Relevant Market, courts and parties must be wary of the Cellophane Fallacy. This occurs when a firm is already exercising monopoly power and charging a supracompetitive price. At this elevated price, consumers may switch to inferior substitutes, leading to a misleadingly broad market definition and a low calculated market share. To avoid this, analysis must focus on prices reflective of the competitive price or on other structural factors.

Case Study in Market Power: The ‘Exclusionary Conduct’ Focus

In a landmark monopolization case, the court determined that a large technology platform had monopoly power, not just by virtue of its market share, but through its active deployment of Exclusionary Conduct—actions that were rational only because they impaired rivals’ ability to compete, rather than improving the platform’s own efficiency.

This case highlighted that conduct designed specifically to erect or raise Barriers to Entry, thereby protecting existing market power, is a key focus. The firm’s internal documents revealed a purposeful strategy to “fence off” a potential competitive threat, cementing the finding of a willful maintenance of monopoly power.

Ultimately, market power is the essential gatekeeper in antitrust litigation. Without the ability to injure competition and consumers, an aggressive business strategy is merely a competitive victory, not a legal violation. Proving this ability is a nuanced process that requires sophisticated economic analysis combined with careful legal application of the antitrust statutes.

Summary: Key Takeaways on Market Power

Definition: Market Power is the ability to raise and sustain prices profitably above the competitive level. Monopoly Power is a more substantial degree of this control, often required for Section 2 violations.
Monopolization Test: A violation of Sherman Act Section 2 requires both the possession of Monopoly Power and Anticompetitive Conduct to willfully acquire or maintain that power.
Indirect Proof: The primary method for proving market power involves defining the Relevant Market (product and geographic), calculating the firm’s Market Share (70%+ is highly indicative), and confirming durable control through high Barriers to Entry.
Direct Proof: Evidence of supracompetitive pricing, reduced quality, or coercive behavior can provide direct evidence of market power, bypassing the need for a strict market definition.
Strategic Compliance: Businesses with large market shares must scrutinize their unilateral conduct to ensure it is based on superior efficiency or product quality, rather than exclusionary practices.

Market Power: A Quick-Reference Card

Core Concept: Control over price and competition in a defined market.

Key Statutes: Sherman Act § 1 (Restraints of Trade), Sherman Act § 2 (Monopoly Power), Clayton Act § 7 (Mergers).

Proof Requirements: Relevant Market Definition + High Market Share + Durable Barriers to Entry.

What is NOT Illegal: Achieving a dominant position solely through superior products or business acumen.

Frequently Asked Questions (FAQ)

Is having a monopoly illegal in the US?

No. Having a monopoly is not illegal. A company can achieve a monopoly position through superior skill, foresight, or a better product. The violation occurs only when a company uses its Monopoly Power through anticompetitive (exclusionary) conduct to willfully acquire or maintain that position.

How high does a market share need to be to prove monopoly power?

While there is no fixed percentage, a market share consistently above 70% in the Relevant Market is strongly indicative of Monopoly Power and can often create a presumption of its existence in court. Shares below 50% are typically deemed insufficient for a monopolization charge.

What is a “Relevant Market” and why is it important?

A Relevant Market is the specific product (or service) and geographic area where competition takes place. It is critical because a firm’s Market Share—the primary evidence of market power—can only be accurately calculated once the market boundaries are properly defined.

What is the Rule of Reason in relation to market power?

For Section 1 of the Sherman Act (restraints of trade), many agreements are analyzed under the Rule of Reason. Under this standard, a showing of market power is a prerequisite. If the firm lacks Market Power, the restraint on trade is unlikely to harm overall competition and the case often fails at this threshold step.

How does market power differ on the buyer side?

Market power on the buyer side is called Monopsony Power. It refers to a dominant buyer’s ability to profitably depress the purchase prices paid to sellers (e.g., suppliers or employees) below the competitive price for a significant period of time. This is also a focus of modern antitrust scrutiny.

Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. The content reflects general principles of US Antitrust Law. Specific legal situations require consultation with a qualified Legal Expert. This content was generated with assistance from an AI tool to comply with specified legal portal safety standards, including the replacement of certain professional titles.

Antitrust Law, Market Power, Monopoly Power, Sherman Act Section 2, Relevant Market, Barriers to Entry, Supracompetitive Pricing, Anticompetitive Conduct