Market power is only damaging if the firm concerned exercises its power. For example, if it raised prices above competitive levels, this would reduce demand, generate efficiency losses, and harm the public interest. In addition, firms with market power may engage in anti-competitive behavior.
The European Commission defined the concept of Significant Market Power (SMP) as the ability of a firm to act independently of competitors and customers. In some jurisdictions, the term dominance is used but has a similar meaning to SMP. The World Trade Organization defines dominance as the ability of an organisation to prevent effective competition being maintained in the relevant market by having the power to behave to an appreciable extent independently of its competitors, its providers, its customers and ultimately of the consumers. In the United States it has been largely left to courts to decide what constitutes dominance and, for the most part, they have applied criteria based solely on market shares.
Under the European model, firms that are found to have SMP are subject to additional ex ante regulatory obligations such as:
- Obligations to align interconnection prices with costs,
- Accounting separation requirements, and
- Mandatory publication of reference interconnection offers.
A high market share does not necessarily imply market power. A firm’s market share may increase, at least temporarily, due to a successful new invention or better customer service. Or, incumbent telecommunications firms may have high market shares but as competition emerges, its market share cannot guarantee it the ability to charge prices higher than its competitors.
Market share in itself is neither necessary nor sufficient for market power. Firms with high market shares may be constrained from raising prices by a range of factors, including:
- Competition from other suppliers already in the market,
- Barriers to entry; a well-established firm may have exclusivity agreements with distributors, making it difficult for competitors to enter the market.
- Barriers to exit; if an entrant must incur high sunk costs to enter the market, then the entrant must be prepared to absorb those sunk costs in the event that it fails,
- The role of any essential facility; if an entrant needs access to an essential facility that is controlled by one of its competitors, this creates a barrier to entry.
- The “countervailing power” of customers in the market, for example their willingness to do without the service if the price increases.
- Any technological advantages, or privileged access to financial resources,
- Economies of scale and scope; in the telecommunications sector, a new facilities-based entrant may have no choice but to start out at a relatively large scale of operations, in order to achieve unit costs close to the incumbent’s,
- Product differentiation, and
- The type and availability of sales channels.