According to the European competition case law, a dominant position is defined as “the power of a firm to behave to an appreciable extent independently of its competitors, customers and consumers”. It is obvious that a firm or several firms which hold a dominant position can determine price, the amount of production, supply and this is because these firms can act independently of their competitors and customers.
As a result, dominant position can lead to the market power and in this situation a firm or several firms have an ability to individually make a big influence on the price and total quantity produced which could result to the market failure. But does this definition make an economic sense and how it should be interpreted in monopoly and oligopoly? Firstly, we need to understand exactly the actual meaning of a dominant position.
It is a situation when a firm has an ability to behave independently of its competitors, customers and ultimately the final consumer. A well known example of monopolistic dominance is Microsoft’s market in PC operating systems. In monopoly some members in a market can gain market power allowing them to stop other important gains from trades and this can make the allocation of recourses inefficient due to imperfect competition. As going back to my example, Microsoft illegally used its market power by bundling its web browser with its operating system.
In economics, market power is the ability of a firm to independently determine the market price and the production of a good or a service, of course, in perfectly competitive markets – market power vanishes. From this example we actually see that Microsoft has an ability to make a big influence on the price or other outcomes in the market by using its dominant position because that kind of a firm can raise price, outcomes without worrying of losing its customers.
On the other hand, not only one firm can hold a dominant position, but also a dominant position can be held among several firms and this is called oligopolistic dominance. For example: in 2008 Verizon, AT&T, Sprint, Nextel and T-Mobile together controlled approximately 89 % of the United States cellular phone market. In this situation sometimes firms can decide to make some secret agreements in order, for example, to raise prices of cellular phones leading to the profit maximization, knowing that they still are not going to lose their costumers.
Of course, there is opinion that oligopoly is better than monopoly, because oligopolistic dominance (several firms who have a dominant position) could help to stabilize unstable markets, for example dominant firms could set some kind of prices which could help other producers to survive in the certain market and this is called a price leadership, however the welfare of economics in oligopoly is not easy to analyze and to determine if it is going to have a positive reaction.
Furthermore, now we know that the definition of dominant position makes an economic sense, because when a firm has a power to behave independently and can make a big influence on the welfare of the economics (prices, total quantity produced, efficiency in allocating the resources), market power and later market failure could occur. We also know that a market failure is a situation when the allocation of recourses is inefficient due to imperfect competition when not all sellers and buyers can be satisfied.
In order to prevent market failure, each government imposes some policies such as subsidies, taxes, minimum wage, some price controls, however sometimes happens that these policies also create inefficiency in allocating the recourses and it is called government failure. Going back to the original topic, dominant position is not an exception.
According to the European competition case law, dominant positions are not forbidden but in order for firms not to abuse that position they have a special responsibility: dominant firms must not allow their strategic decisions to make a negative influence on competition in the market, in other words, dominant firms cannot intentionally prevent or eliminate competition. Moreover, in order to determine the definition of dominant position in monopoly, at first we need to understand the basic aspects of it.
Monopoly is a situation when a certain agent is the only one who supplies a particular good, of course, it is obvious that this market has a lack of economic competition. In monopoly a company has a much bigger profit than it could expect in competitive market, because that only firm regulates all the prices and services for that certain good. As a result, it can raise the price and maximize its profit without worrying of losing its customers. So, the dominant position in monopoly is a market with a single agent which has a power to operate independently and has an ability to make a big influence on the prices and production.
Finally, to do the same in oligopoly we also need to understand the basic aspects of it. Oligopoly is the market share of several firms which together make a big influence to the price or other outcomes of a certain market, however the difference between monopoly and oligopoly is that in oligopoly firms do not operate independently, because then they could lose some of their customers to their competitors. That is why several dominant firms always try to cooperate together and sometimes they even make some secret agreements in order to maximize their profits.
So, the dominant position in oligopoly is the market share of several dominant firms who have an ability to make big influence on the prices and production. To sum up, we actually see that a dominant position can be defined variously in different areas but still all definitions will have the same meaning: a dominant position creates a market power which evidence to the inefficiency of allocating the resources in economic markets and sometimes leading to the market failure, but in some cases dominant position is the key of stabilizing unstable markets.