because of their power, normally neutral strategies consistently block meaningful competition from occurring in a market, a closer look should be taken. In particular situations, antitrust policy should step in and prevent a dominant firm from stifling meaningful long-run competition. Things like extensive integration, tying, pricing schemes to lock customers into specific technologies, discriminatory rates for long leases, selective price wars, acquisition of key components of a competitive threat, preannouncement, acquiring strategic inventories or excess capacity, and other strategies may have to be limited within a dominant firm's strategy space.
It also seems reasonable that the decision to challenge certain behaviors would be based, in part, on underlying market conditions. Microsoft is a good example. Network externalities and customer lock-in have given Microsoft a significant advantage over its rivals. Under these conditions, close scrutiny of its pricing seems reasonable. However, as technology evolves, other competitors may think of ways to reduce those advantages. If that occurs, there may be less need to monitor Microsoft's pricing schemes. Notice also the difference between the evolution of Standard Oil and the Tobacco Trust. Both began to acquire competitors, and gain the advantages of scale economies and integration. Their sheer size created many advantages that gave the companies considerable power over their rivals. Under those conditions their pricing, capacity expansion, and acquisitions should have been watched carefully. Over time, however, Standard's underlying market changed. New oil fields were discovered and new products were demanded where Standard had little capacity. New firms were able to get into the market and get established before Standard could bring its power to bear against them. Under these latter market conditions, Standard's previous actions may have been less onerous. The Tobacco Trust, on the other hand, was pervasive enough and tobacco-growing land restricted enough so that no firm could get into a niche that was protected from the Trust's power. No firm could evade the Trust long enough to overcome the Trust's advantage. As long as these conditions remained, the tobacco companies should have been monitored in their pricing, input purchasing, and other decisions.
The results also have implications for trade policy. In a number of these industries, the only competitors able to overcome the advantages attained by dominant firms were foreign firms. They had the experience, technological know- how, accumulated learning, and product mixes to successfully penetrate U.S. markets. Furthermore, they were able to enter even after de novo domestic entry failed. This suggests that a fairly open trade policy may be one tool to limit the power of dominant firms.
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Book title: Market Dominance:How Firms Gain, Hold, or Lose It and the Impact on Economic Performance. Contributors: David I. Rosenbaum - Editor. Publisher: Praeger. Place of publication: Westport, CT. Publication year: 1998. Page number: 254.
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