Dominance and monopolization

Marcel Canoy, Patrick Rey and Eric van Damme 1 Dominance and competition policy A firm is in a dominant position if it has the ability to behave independently of its competitors. Dominant firms attract public attention and often arouse mixed feelings. Consumers enjoy branding when it makes life predictable, but grumble when the price of their favorite brand is raised. Policymakers may be proud of their Heinekens, Microsofts or McDonalds, but become unhappy if they restrict choices. Rivals of dominant firms may be lucky if the dominant firm is a toothless giant, but a predatory tiger scares them off. The mixed feelings can easily be explained. From a theoretical point of view, it is not clear whether dominant firms reduce or enhance welfare. There are many reasons for that. First, a dominant firm can be a successful innovator which is typically good for welfare. But it can also be a firm that emerged from an anti-competitive merger which is typically bad for welfare. Second, some ex post behavior may have adverse welfare consequences even when dominance stems from innovation. An innovator may engage in such abuses as predatory pricing that might well prevent or delay subsequent innovations. Third, when dominant firms engage in behavior that might reduce welfare (such as predatory pricing), how can such behavior be distinguished from normal efficiency-enhancing business practices (such as discounts)? Fourth, welfare reductions today might be traded off against welfare gains tomorrow (or vice versa), and who is going to determine which generation….