Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

12

Entry Deterrence and Predation

Elementary textbook presentations of microeconomics, such as our presentation in Chapter 2, often represent monopoly power as a transient phenomenon. The argument is that whenever a firm acquires market power and earns super-normal profit, entry will occur and the new entrants will reestablish a competitive market. Those who follow actual markets, however, know that this scenario may be more the exception than the rule. Campbell's, for example, has held a dominant position with 60 percent or more of the US canned canned soup sales for over a hundred years. For twenty years, Microsoft's Windows has maintained a share of over 90 percent in the market for personal computer operating systems, although this share drops to closer to 80 percent if tablet computers are included.¹ Despite recent expansion by Chinese and other emerging economy firms, Sotheby's and Christie's have together controlled roughly 55 percent of the world's fine art auction market for two decades, and as much as 70 percent of that market during many of those years.² Such instances of sustained dominance are common. Moreover, such anecdotal evidence is buttressed by formal analysis such as that by Baldwin (1995) and Geroski and Toker (1996). These authors find that, on average, the number one firm in an industry retains that rank for somewhere between seventeen and twenty-eight years. In short, there is abundant evidence that, in contrast to the textbook analysis, market power is ...