Small but significant and non-transitory increase in price
Would this cause customers to move elsewhere?
If we have demand at different prices we can estimate whether it is worth monopolising the market.
Because this lack of motivation may be because of competitor goods, we can include these to see if that market is worth monopolising.
For example: hiking up the price of one good may not be profitable. Therefore that is not a relevant market (though it could be!). Then we can see if hiking up the price of that good, and others, is profitable. If so, then it is a relevant market.
Note:
High elasticity may be because monopoly power is already being exerted
Identify smallest market where a monopolist could increas price profitably
How to do test? interview customers about whether increase in price would negatively affect them. want to know if they could switch.
If could switch at price rise of say 5
Can be used to estimate elasticity of demand
We can also look at the cost impact from cutting units. if high variable, then more appealing
We can expand to include substitutes. if substitutes make worth monopolisign, then merger can be concerning.
We want to see what market the monopolist can exert a profitable increase in price. This my not be all of their offerings.
The relevant market includes the good offered by the monopolist, along with relevant competitors in supply and demand
If we are considering a commodity it is easy to see that, say, steel supplied by one firm is comparable to that supplied by another. For other goods this is more complex.
For example, does Google provide search services, making it highly dominant? Or does it in fact provide advertising services for a small number of searches aimed at purchases? In the latter case it is a closer good to Amazon or Ebay.
If a price rise from a firm caused other firms to increase supply, this is relevant.
Would others be able to raise output?
Would others be able to enter the market?
If a price rise from a firm causes buyers to react, price increases will be less rewarding for the firm.
Assessment: Price elasticity of demand
May be many players but fewer locally. Threat of entry may still be a key motivation for price setting. Supply side substitution.
Benefits: no double mark up.
2 monopolists both exert monopoly power, more deadweight loss. Integration solves this.
Contract theory argument. Don’t want to be held if need change
Costs: can keep out downstream competitors
Facilitating collusion? Vertical integration allows upstream to monitor downstream price from their customer.
Restoring monopoly power?
Problem: to what extent can monopoly upstream abuse their power? One option is high price, but they could also do 2 part tariffs
But 2 part tariffs are unstable, as there is an incentive for the provider to offer the last downstream one a lower marginal cost.
Vertical integration then restores this power.