Transitoriness of Market Power and Antitrust Activity

Abstract

The economic rationale for how much market power is tolerable has so far been based mainly on static considerations; ideally, however, it should discriminate between persistent and transitory market power. I propose a dynamic dominant-firm type of model where the firm's use of market power, when it is discovered by an antitrust agency, will be penalized. Equilibrium entails a threshold market share above which the market tends toward monopoly and below which the market tends to competition. One may propose the region below this threshold to be the safety zone. The size of this region depends on how fast market power depreciates. In industries in which this depreciation is fast and where, as a result, monopoly power is more transitory, the safety zone should be wider, and there should be less policy intervention.

Keywords: L10, L20, L40