Monopoly Power and Competition

The past two decades are a special period, during which the global ranking of the largest companies has been dramatically reshuffled by the rise of information technology (IT). What explains the rise of market power that enabled the IT companies to grow so fast and their founders to become so wealthy? This chapter analyses the interplay of the surpluses needed to fund the fixed costs of innovation and R&D versus the benefits of competition generated by free entry. Price discrimination can reduce the deadweight loss in a market, to the benefit of funding the fixed cost, but it also transfers surplus from consumers to the monopolist. We discuss the implications of various forms of competition such as Cournot and Stackelberg competition and entry deterrence. A trade-off between competition and scale is identified: while entry reduces the deadweight loss by means of more competition, it duplicates fixed cost. We analyse two-sided markets and the role of IT platforms in leveraging information about consumers for advertising while at the same time solidifying the platforms’ grip on rents. Finally, we discuss the public institutions for competition policy and their difference between the US and the EU.