Market Power in Economics and in Antitrust: Reply to Baker

Jonathan Baker’s incisive comment on our article usefully focuses the primary issues surrounding antitrust analysis of competitive price discrimination. It also highlights what we consider to be the major drawbacks of using the standard economic definition of market power as a measure of antitrust market power. Using this definition, as Baker does, price discrimination always provides evidence of antitrust market power. However, Baker recognizes that firms we all would label as competitive, such as restaurants, commonly practice price discrimination. Baker attempts to resolve this inconsistency by arguing that if entry is easy, such examples can reasonably be termed “competitive price discrimination.”We respectfully disagree with both of Baker’s main points. Free entry is not critical for competitive price discrimination, and price discrimination does not imply antitrust market power. Our article argues that appropriate antitrust analysis of price discrimination requires a distinction between market power in economics (which can be inferred from price discrimination) and market power in antitrust (which cannot be inferred from price discrimination). Professor Baker says this distinction is “troublesome” and “confusing.” We say that it is the blurring of these two quite different senses of market power that confuses analysis of price discrimination, as well as of antitrust more generally.