The European Court has defined a dominant market position as:
‘...a position of economic strength enjoyed by an undertaking which enables it to […] behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers’
Does this definition make economic sense? How should it be interpreted in the light of the economic theory of monopoly and oligopoly? The European court definition of a dominant market, to some extent, makes economic sense as it takes into account the economic possibilities and effects of an ‘undertaking’ having substantial market power. It puts forward the case that dominant market have an ‘upperhand’ as a result of high barriers to entry hence little or no competition, and therefore deliberately setting prices and output to influence it profits(achieve its objective) which leads to contrived scarcity1 where the market becomes economically and socially inefficient. This definition makes more economic sense to some extent in the case of monopoly but not for an oligopoly market as consumers and PED would constraint their market power. Subject to the economic theory of Monopoly, when interpreting this definition certain factors such as the degree of market power (barriers restricting competition), close substitutes and a firm’s objective must be considered. Monopoly is a market structure where one firm supplies all output in the industry without facing competition because of high barriers to entry2. This market structure utilises significant market power where its dominant position is interpreted by its characteristics, conducts and outcomes. It gains/maintains its position through high barriers to entry (both natural and artificial) and in some cases its ownership of a key resources. This is very true for natural monopolies as a natural monopoly is a monopoly in which the relation between industry demand and cost structure makes it possible for only one firm to exist in the industry3. As a result of very high production cost as a barrier, there are no new entrants, thus competition is prevented and monopoly may take advantage of its price making power.
Monopolies are price makers and decide their prices irrespective of competitors or consumers. Their dominant market position gives them the economic strength to restrict output onto the market whilst charging higher prices (above its marginal cost) than in a competitive market. More so, a monopolist may use its position to price discriminate whereby they charge different prices to different groups of consumers for an identical good or service4. For example, with a perfect (first degree) price discrimination the firm charges each consumer the maximum price they are willing to pay as indicated by the demand curve. All consumer surplus is turned into additional revenue. Furthermore, if a monopoly is a sole supplier, they can adversely affect businesses as they could refuse to serve customers which could potentially shut down the business5.
Figure 1 illustrates a monopoly’s ability to behave independently of consumers and its long run equilibrium in maintaining abnormal profits where output(Qm) is restricted and higher prices(Pm) are charged compared to perfect competition. At the socially optimal level(Q2), consumers value additional units of output at a higher price than the opportunity cost of making them. Monopoly exploits consumers through ‘contrived scarcity’ as consumers are price takers who accept the market situation and hence, consumer choice is restricted6. Consequently, consumer surplus and economic welfare are reduced whereby fewer consumers can afford the good or service; this could be detrimental. Monopolies profit maximise at MC=MR where consumer surplus is appropriated as supernormal profit and a deadweight loss is created.
Nevertheless, it is important to note that although a monopoly may hold a dominant position, the above may not always be the case as they may be restricted in exercising their
