After having delineated the relevant market and predicted post-merger market structure, an evaluation needs to be made: will the merged entities command a dominant position after having executed the proposed merger?
Competition theorists talk of single dominance if a firm is capable of enforcing prices that are above the competitive level. Every case in which prices are above marginal costs is taken as an indicator that it has at its disposal some power, or, is dominant. Such a situation presupposes that a firm has some discretionary leeway that it can use to increase prices without having to face substantial reductions in demand. The less tightly a firm is constrained by its competitors, the closer it will be able to set the price close to the profit-maximising monopoly price, where marginal costs are equal to marginal returns.14 Such leeway can be caused by the uniqueness of
the product offered, the preferences of the consumers for just this product, or absolute (cost) advantages on the input side.
The figure illustrates the economic effects of a dominant position drawing on an extreme case, namely the monopoly case. If the firm is able to set the monopoly price, the price will be pm instead of pc, which would result in the (perfectly) competitive case. Accordingly, the quantity sold is qm instead of qc. The triangle ABpc is called “consumer rent”. It represents the increase in utility of all consumers given the price pc. Many consumers are ready to spend more than they actually have to spend and a “rent” in the economic sense is the result. By reducing quantity and increasing price, the consumer rent gets smaller. Parts of it are transformed into producer rent, i.e., the utility increase of producers that they enjoy because they are able to sell above (marginal) costs. The main reason why monopoly situations are deemed welfare reducing is the triangle CDB: this is the loss in welfare that is the result of switching from a competitive to a monopoly situation. It is this triangle that forms the underlying rationale of fighting dominance in competition policy.
The description of the standard approach used in merger policy is, of course, very coarse. There are numerous quantitative methods to delineate the relevant markets used by various competition authorities and there are also various ways to assess market structure. This section was not aimed at giving a detailed account of them but an overview. The tools used by the European Commission will be dealt with in more detail in subsection 4. Before, however, we turn to some modifications that could be the consequence of recent theoretical developments as well as those that could be the consequence of changes in business environment.
Posts
