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    Douglas Melamed A. - Chapter 2 Market Power and Meaning of Competition

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    Alexa C

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    © All Rights Reserved
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    UNIVERSITY CASEBOOK SERIES® ANTITRUST LAW AND TRADE REGULATION CASES AND MATERIALS SEVENTH EDITION A. Dou@Las MELAMED Professor of the Practice of Law, Stanford Law School Ranpat C. PICKER ‘James Parkor Hall Distinguished Service Professor of Law, University of Chicago Lav School PHILIP J. WEISER Hattield Professor of Law and Telecommunications, Dean Bmeritus, and Bxective Director of the Silicon Flatiron Center for Law, Technology, tnd Entrepreneurship University of Colorado Law Schoo! DIANE P. Woop Chief Cireuit Judge, U.S. Court of Appeals, Seventh Circuit Senior Lecturer in Law, University of Chicago Law Schoo! FOUNDATION PRESS CHAPTER 2 MARKET POWER AND THE MEANING OF COMPETITION 1. Market Power 2, The Limits of Permissible Competition 8, The Challongos of Applying the Antitrust Law (and the Concept of Market Power) 1. MARKET POWER A. MARKET POWER: DEFINITION AND SIGNIFICANCE ‘Market power is one of the most basic notions in antitrust, but that does not mean that it is well understood or that itis easy to convey what is at stake, The most natural path, we think, and the one that we will follow, is to start with the absence of market power—a competitive situation—and with that as the baseline, build up @ notion of mariet power as a deviation from competitive conditions. 1. AN INPRODUCTION To THE ECONOMICS OF COMPETITION AND ‘MONOPOLY ‘The most basic tool in antitrust economics is the demand curve, Demand curves can be either for a particular individual or for a group of individuals or for even the economy as a whole. A demand curve represents the willingness of the covered individuals to pay for the good in question, And the most basic property of demand curves is that consumers want more of the good as it becomes less expensive, Consumers will buy more cases of Diet Coke at $3.99 than they will at $4.25, That is true both because some individual consumers will buy more Diet Coke at a lower price and because some consumers will not buy any Diet Coke at the higher price. Put differently, demand curves slope down, When economists say that—and they do say that with some frequency—they have in mind the idea of a graph with price on the Y- axis and quantity on the X-axis. High prices imply low quantities, and low prices imply high quantities. Demand curves slope down. This is illustrated by Figure 2.1. 1 o Manion Power AND THE MEANING OF ComPurrrioN Cuarren 2 $2___Manuer Powen aun Tu Mean or Cowrermon ____—Ciarren Demand Curve 10 In Figure 2.1, the vertical axis, labeled P, shows the unit price for the product at issue, in this ease Diet Coke. ‘The horizontal axis, labeled Q, shows the number of units of the product. The demand eurve, which is typically labeled D, shows the number of units that consumers are willing to buy at each price. Ifthe price is 10, eonsumers are not willing to buy any units, They are willing to buy some number of units (1 unit in Figure 2.1) ifthe price is 9, a larger number (2 in Figure 2.1) if the price is 8, and 60 on, Another way of putting the point is that the demand curve depicted in Figure 2.1 shows that consumers are willing to pay up to 9, but no more, for the first unit of Diet Coke, up to 8 for the second unit, tand so on. As we will see, however, the actual price that consumers will, have to pay might be less than those shown on the demand curve. a. Competitive Markets Demand curves are important because they help frame how to think about competitive markets. In a competitive market, goods are produced 80 long as consumers are willing to pay for those goods amounts that ‘excoed the cost af creating those goods. There is quite a bit embedded in ‘that statement. This is not an abstract statement about how much a given consumer might enjoy consuming a particular good. Instead, it focuses on the willingness of a consumer to pay for a good and, in doing 0, it focuses on the ability of that consumer to pay for the good. When wwe think ahout competitive markets, we take demand curves as a given and then assess how goods are produced relative to that demand eurve. ‘The stylized version of a competitive market assumes that producers are each relatively small and each believes that it is a price-taker. That means that each believes that the final price for the good is set by the “market” and that its production is too small to influence that price. That ‘makes decision-making for the firm quite simple, If the current market price excoeds its marginal cost—that is, the cost of making the next unit of the good—the firm should make move units of the good. Put numbers sscri0Nt Manes Powsn on that. If the current market price ig $6 and the firm can make additional units for $4, it will make a profit of $2 on the next uni: that it eroates. And it should do that as fast as it can and make as many as possible. Of course, each firm is in the same position, and the only way for all, of them in the aggregate to sell more of the good in question than the amount they could sell at a price of $6 is for priee to go down. Why? Demand eurves slope down. Consumers will take more of the good only if the price goes down. That should start to make clear the dynamics of ‘competition at work here and the natural result of that outcome. In a competitive market, if all of the firms that can make units for $4 keep making units as long as the price excaeds $4, the price will decline until it equals $4. Now, let's flip the facts and consider the opposing situation, If the current market price of the good is $2 and it costs $4 to produce each unit of the good, the firm should cut production because at the current price it would lose $2 per unit. As each firm cuts production, overall output will drop; and again, because demand curves slope down, the market price of the good will rise as production drops until the price equals marginal cost. Thus, in a competitive market, price equals marginal cost. This is illustrated by Figure 2.2. Stop to consider the beauty of what just took place. Producers produce goods as long as consumers are willing to pay for them, No consumer who is willing to pay more than it costs to create the next unit, of the good is left unsatisfied. And no producer makes a good that isn't ‘covered by what a consumer is willing to pay for it. It costs one producer more to make the good than it costs another producer, only the low cost. Producer will keep producing the good and selling it at the low price. A ‘competitive economy is said to be economically efficient in that () enough ‘output is produced to satisfy all the demand of eonsumera who value the product in excess of its cost of production (“allocative efficiency”) and Gi) output is produced at minimum cost (“productive efficiency’) Let's take a closer look at Figure 2.2. The point of an example like the one set out in Figure 2.1 is to remove much of the complexity of the real world to allow the core points to stand out. The idea that damand ‘curves slope down is captured in a simple equation P = 10-Q. Just put 4 few numbers in that to see what happens. At a price of 2—

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