Dominance Thresholds: A Cautionary Note

Abstract

As a threshold matter, high market shares are considered informative of potential underlying competitive dynamics, especially issues of market power and dominance. However, as is well known, high shares may not tell the entire story. Beyond issues related to market definition, entry, and efficiencies, this article notes an additional reason why caution may be warranted before drawing conclusions about dominance or market power from share evidence. Specifically, such conclusions can be statistically unsupportable in the presence of small sample issues. In markets with relatively few transactions (that is, “thinly” traded markets), the implications of observed high market shares are much less clear than in more thickly traded markets. It is entirely possible that situations that appear to implicate a dominant firm actually reflect pure random chance in a competitive process involving equally matched or nondominant firms. This article discusses theories and methods for distinguishing between outcomes that exhibit strong statistical evidence of dominance as opposed to those that merely reflect the random distribution of winnings among nondominant firms.