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p. 17 of 62 BACK | NEXT Purpose and Structure of the Toolkit Overview of Practices Controlled by Competition Law Countries with Competition Law Systems Benefits of Competition Policy Practices Controlled by Competition Law Key Concepts and Tools Market Power Market Definition Key Indicators of Market Power Competition, Privatization, and Regulation Emerging Economies Enforcement Mechanisms ADB Resources and Projects Other Resources Glossary and List of Abbreviations

Competition Law Toolkit : Key Concepts and Tools

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A. Market Power

Competition law is concerned, above all, with the problems that occur where one or more firms possess, or will possess, market power [ PDF ].

As explained in Benefits of Competition Policy, competition leads to lower prices, better products, wider choice for consumers and greater efficiency than what would occur under conditions of monopoly. A monopolist, or a firm with significant market power approaching that of a monopolist, is able, by the exercise of its market power, to restrict output, raise prices, and deprive consumers of the benefits that flow from competition. The key concept is market power. The practices discussed in Overview of Practices Controlled by Competition Law and Practices Controlled By Competition Law were all concerned in with the actual or potential abuse of market power. In the case of horizontal hard-core cartels, firms are able to exercise collective market power that they lack individually by acting in a coordinated manner, rather than by competing. Monopolists and market-dominant firms may be able to harm consumer welfare because their market power enables them to restrict output and raise prices; or exclude firms from entering the market, or make it difficult for existing ones to stay in it. The concern about certain mergers is that, once the merger has taken place, the merged firm will be able to exercise greater market power. It is the issue of market power that unifies competition law and policy.

Many systems of competition law adopt a two-stage procedure when determining whether a firm or firms have, or would have, market power. First, the relevant market is identified in relation to which market power may exist: this requires a definition of both the relevant product and the relevant geographical market. The second step is to determine whether a firm or firms have market power in the relevant product and geographical markets. Although market definition is a common feature of competition law analysis, it is important to understand that it is only a means to an end: the crucial question is whether a firm or firms have market power. It should be emphasized that defining a market with mathematical precision is rarely possible. The relevant market is in practice no more than an appropriate framework of reference for analysis of particular practices or transactions. It is not the case that products should be viewed as being either at one extreme or the other, such that they are either in the market, and therefore a perfect 100% substitute for any other product in that market; or out of the market, and therefore offering zero substitutability or constraint on products in the market.

In practice, firms may face a series of competitive constraints both from within and outside the relevant market, and it is essential not to lose sight of this important fact.

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