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

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

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

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

Synopsis

Economic theorizing suggests that firms can acquire and maintain market dominance in a number of ways. Some economists argue that firms attain dominance only by being relatively more efficient than their rivals and retain leadership only by staying more efficient than their rivals. Others argue that efficiency is not the only source of dominance and that leaders can retain ascendancy even if they are inefficient. This book attempts to sort out the relevant points by exploring market dominance as it has been experienced by firms in ten different industries. The results suggest that both schools make valid points. While firms generally used efficient strategies to reach preeminence, some chose predatory policies to gain market share. While all used assorted efficient strategies to maintain their dominance, many remained dominant long after their efficiencies had evaporated.

Excerpt

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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