Market Dominance: How Firms Gain, Hold, or Lose It and the Impact on Economic Performance

By David I. Rosenbaum | Go to book overview

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INTRODUCTION

David I. Rosenbaum

A competitive market system creates incentives for firms to vie for large market shares. Sometimes one firm is so successful in this fight, it acquires a dominant position in a market. From the firm's point of view, a large market share is good. After all, dominance implies power and control. It creates a real potential to increase profits. From society's point of view, however, dominance may not be quite so desirable. For the power that goes with dominance can be acquired and used in a number of ways. While some of these ways may promote economic welfare, others might reduce it. If the reductions are large and long-lived, we may want to reconsider whether dominance should be affirmed in all cases.

Among economists, there is no consensus on the allocative consequences of market dominance. Some argue that the process of gaining and holding a dominant position naturally improves economic welfare. Under this school of thought, firms become dominant because they are doing something better than their competitors. It may be managing better or producing a better product or even producing more efficiently. Whatever the specific source, the general foundation for dominance is being "more efficient" than competing firms. The argument continues that once dominance is attained, it is then maintained only through efficient pricing and continuing efforts to remain more efficient than competitors. Hence, dominant firms act to improve economic welfare.

Other economists argue that efficiency is neither the requisite source nor the mandated consequence of market dominance. Firms can become dominant through actions that will eventually decrease economic welfare. Predatory behavior is an

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