William M. Landes and Richard A. Posner’s 1981 Harvard Law Review article “Market Power in Antitrust Cases” is a true classic. Showing the value of interdisciplinary work within the law & economics tradition, it brought real clarity to what “market power” means and how courts should assess it—cutting through vague labels like “monopoly power” and “dominance” that too often obscure more than they explain.
On a personal note, no article has shaped my thinking about antitrust more. After reading it, I became deeply skeptical of the reflexive habit of blaming “monopoly power” for business practices people dislike or don’t understand. As a law student, I even had the privilege of translating the article into Spanish with my friend Valery Vicente—a project that forced me to read it closely, repeatedly, and with growing appreciation.
Why Market Share Isn’t Market Power
Landes and Posner open with a sharp, economic definition of market power: “the ability of a firm (or a group of firms, acting jointly) to raise price above the competitive level, without losing so many sales so rapidly that the price increase is unprofitable and must be rescinded.” The second clause does the real work. Antitrust should not be concerned with a firm that can raise prices briefly but cannot sustain the increase.
The size of the price increase matters, too. As they stress:
the fact of market power must be distinguished from the amount of market power. When the deviation of price from marginal cost is trivial, or simply reflects certain fixed costs, there is no occasion for antitrust concern, even though the firm has market power in our sense of the term.
Economists capture this idea—pricing above marginal cost—in the “Lerner Index”: L=(P-MC)/P, where “P” is the market price and “MC” is marginal cost. The intuition is clean, but the measurement isn’t. Prices are easy to observe; a firm’s marginal cost rarely is.
Because marginal cost is hard to observe, courts and agencies often tend to fall back on market shares to infer market power, which was the dominant approach when Landes and Posner wrote. The logic is simple: “(i)f the firm’s market share is large, the market price will rise proportionally more for a given reduction in its output.” Large shares make price hikes more efficient to engineer. As Landes and Posner illustrate, when “firm i‘s market share is 50% and the market elasticity of demand is 1,” it must cut output by 2% to raise price by 1%; with a 90% share, a cut of just over 1% does the job. Rivals’ shares matter, too. The smaller the share, the smaller their increase in output. For that reason, agencies and courts often infer market power from shares above 60 or 70% (sometimes lower, depending on the jurisdiction).
But Landes and Posner warn that market shares alone tend to mislead. Real market power turns on cross-elasticities of demand and supply—how buyers and sellers respond to price changes. A firm may look powerful only because we have defined the market too narrowly. If its product has close substitutes, consumers will switch when prices rise. Broaden the market to include those substitutes, and the firm’s market share—and apparent power—shrinks.
Imagine an orchard that produces 100% of a region’s apples. Does it have market power? Not necessarily. The answer turns on substitution: will consumers switch to pears, peaches, or oranges when apple prices rise? A 100% share means nothing without information about elasticities. Modern competition agencies now accept this in principle, even if narrow market definitions still too often drive the analysis.
Supply-side substitution also matters. As Landes and Posner put it:
Suppose i‘s market share of product x is 80%, and x and y are poor substitutes in consumption, but producers of y can, at low cost, switch production to x. For example, x might be residential buildings and y commercial buildings. Consumers cannot substitute between the two, but firms putting up commercial buildings have the equipment and skills necessary to construct residential buildings. Therefore, if firm i tried to raise the price of residential buildings above the competitive level, commercial builders would substitute toward residential construction. This would make i‘s price increase less profitable.
Agencies sometimes account for this dynamic, as well, but far less often than they should.
Rivals’ output is also relevant. Even with an 80% share, firm i may lack real market power if the remaining “fringe firms” can expand output quickly when prices rise. If those firms supply the last 20% of the market with a more elastic response—or at lower cost—a price hike by firm i invites rivals to ramp up production, eroding its share and blunting the increase.
One overlooked takeaway from Landes and Posner is their skepticism of document-driven antitrust. Modern enforcement often leans on internal emails and slide decks that feature executives talking up their “market power,” “dominance,” or “crushing” rivals. But while a firm’s executives might believe they can raise prices profitably—and they certainly have incentives to communicate that to some of their stakeholders—what matters is whether demand and supply elasticities actually let a firm raise prices profitably. The test must be economic, grounded in real evidence of substitution, not rhetoric. As Justice Oliver Wendell Holmes warned, “(w)e must think things not words.” That lesson feels especially timely as agencies treat “hot docs” as near-dispositive proof of market power in cases like the Amazon litigation.
Finally, Landes and Posner emphasize entry:
Suppose firm i has 8o% of the market, there are no good substitutes, and existing firms are currently operating at full capacity, but entry is relatively easy. It might be a mistake to conclude that firm i had market power. Suppose that in the previous decade there had been both a rapid expansion in demand and a lot of entry into the industry.
This evidence wouldn’t change the hypothetical monopolist’s market share, but it should negate any inference of market power based on share alone. And the point cuts both ways: market shares can also understate market power:
Suppose firm i has only 40% of the widget market, but the demand for widgets is highly inelastic (suppose it is .5), the other firms in the market are price takers, and the elasticity of supply of the competitive fringe is very low (say .5) because of, say, government regulations requiring the licensing of new additions to capacity. In these circumstances, although firm i‘s market share is well below the 60-70% range conventionally used in antitrust cases as the threshold for inferring monopoly power from market share evidence, firm i has in fact great market power as measured by the Lerner index.
Market Power, Applied
After laying out their theory of market power, Landes and Posner turn in Section II to applications: when to measure elasticities, how to avoid the “Cellophane fallacy,” how to define geographic markets, and how market power should factor into merger cases.
They start with a basic question: how much market power should antitrust care about? Lawyers—and, one might add, “structuralists”—often equate market power with specific market shares. A “monopoly,” on that view, means 100% of the market. Landes and Posner reject that formalism. A given share is neither necessary nor sufficient to raise prices above the competitive level. Whether market power raises competitive concerns depends instead on two things: the size of the market and the antitrust violation at issue.
Market size matters because harm depends not just on how far price exceeds marginal cost, but on how much commerce that gap touches. Landes and Posner drive the point home with a simple but overlooked insight: “To make a monopoly profit, the firm must raise the market price, because the same product will sell for the same price regardless of who produces it.”
This insight undercuts the growing habit of inferring market power from “direct evidence” that firms can “impose” contract terms—see, for example, the Federal Trade Commission’s (FTC) lawsuit against Amazon. As Landes and Posner stress, the question is not whether Firm A charges a given price, but whether it can raise the market price itself.
The nature of the alleged violation matters. Some anticompetitive conduct requires proof of market power; some doesn’t. Cartelization needs none. Monopolization, by contrast, is impossible without substantial market power.
The relevant time horizon to estimate the elasticity of demand and supply of the “relevant product” depends on the conduct at issue. Landes and Posner generally favor considering long-run elasticities, especially in merger cases that focus on the market’s long-term structure—“except in the very rare case where a large market share, implying a problem of supracompetitive pricing in the short as well as long-run, is created by a (horizontal) merger.” Practical considerations reinforce the point: In monopolization cases, they note “the large costs and long delays involved in structural relief (…) argue for using long-run rather than short-run elasticities.”
The article also takes on the “Cellophane fallacy” in market definition. In the 1956 Cellophane case, the Supreme Court defined the market broadly based on evidence that consumers substituted among “flexible wrapping materials.” But the flaw lies in the baseline price. The question is not whether consumers substitute at the current price, but whether they would switch after a “small but significant and non-transitory” increase from the competitive price. As Landes and Posner explain, “Because every monopolist faces an elastic demand (…) at its profit-maximizing output and price, there is bound to be some substitution of other products for its own when it is maximizing profits, even if it has great market power.” The correct baseline is the competitive price, not the monopolist’s already-inflated one.
They make a similarly sharp point about geographic markets:
if a distant seller has some sales in a local market, all its sales, wherever made, should be considered a part of that local market for purposes of computing the market share of a local seller. This is because the distant seller has proved its ability to sell in the market and could increase its sales there, should the local price rise, simply by diverting sales from other markets (emphasis added).
When distant sellers make any sales in a local market, they’ve already cleared the distance barrier. Their total output—and capacity—shows how easily they could shift more supply into that market if prices rise. Modern agency guidelines account for this reality when defining markets, even if they don’t count all such sales. See, for example, the 2010 Horizontal Merger Guidelines (now “rescinded,” but clearer on this point than the 2023 version).
Landes and Posner’s framework also sharpens merger analysis, even though the market-power threshold is lower there. A horizontal merger can enhance market power by increasing the merged firm’s ability to raise the market price. But that outcome is not automatic. Rivals (including “fringe firms”) may expand output and blunt the price increase, leaving the merged firm with less power than its combined pre-merger share suggests—at least, over time. And mergers can cut costs. By accelerating economies of scale or other efficiencies, a merger may produce a firm with a larger market share and lower prices. This is another reminder that scale, on its own, is not a harm to cure.
Economics Is Not at War with the Law
Section III tests whether this economic framework fits existing law. Landes and Posner concede that their approach may seem “remote from existing judicial approaches,” but they argue it aligns with the “broad doctrines laid down by the courts to deal with these questions.” In other words, economics clarifies the law, rather than rewriting it.
They return to Cellophane to make the point. The first part of the Court’s definition of market power—“the power to control prices”—tracks their own. The second—“the power to exclude competition”—strikes them as “puzzling,” unless it means that any firm able to sustain supracompetitive prices must also be able to deter entry. Without that exclusionary power, higher prices would not last.
They also point to 2nd U.S. Circuit Court of Appeals Judge Learned Hand’s opinion in 1945’s United States v. Alcoa, which recognized that foreign aluminum production constrained U.S. prices, even when that production never entered the U.S. market. The case anticipates their view of geographic markets: what matters is the ability to redirect supply when prices rise, not where output currently sells.
Finally, Landes and Posner address the then-“recent trend” of inferring market power from market shares in merger cases. They highlight 1974’s United States v. General Dynamics as a course correction toward economically meaningful measures of power. There, the Supreme Court looked past historical shares and focused instead on “a company’s uncommitted reserves of recoverable coal.” The lesson is clear: a firm’s capacity to expand output often predicts competitive effects better than yesterday’s market shares.
Conclusion: From Structure to Substance
Among the things that make “Market Power in Antitrust Cases” a paradigmatic law & economics article is how it takes vague legal concepts—“monopoly power” or “market power”—and gives them sharp economic meaning through the Lerner Index. Moreover, it shows how economics cuts through formalism, such as equating monopoly with a 100% market share. And most importantly, it improves legal decisionmaking by focusing on what actually matters in antitrust—elasticities and entry—rather than what is merely easy to observe, like market shares. It is this combination that explains the article’s outsized influence and its place in the antitrust law & economics canon.
The article landed at a turning point. For decades, antitrust had followed the structure-conduct-performance (SCP) paradigm tied to Joe Bain and the Harvard School. Concentration supposedly dictated conduct, which dictated performance. High concentration was assumed to mean market power. That logic drove cases like Brown Shoe (1962) and Von’s Grocery (1966), where the Supreme Court condemned mergers for marginal increases in concentration without regard to consumer effects.
By the time Landes and Posner wrote, the SCP paradigm was already beginning to crumble. Harold Demsetz had shown that the link between concentration and profitability likely reflected efficiency, not collusion. As he put it, “superior efficiency,” not anticompetitive conduct, was “the likely explanation for the observed relationship between concentration and profitability.”
Landes and Posner built on that foundation by defining what market power actually is and how to measure it. They shifted antitrust from structural proxies like market shares to economic substance—the ability to raise prices profitably. In the process, they turned decades of Chicago price theory, dating back to Aaron Director’s 1950s seminars, into an operational framework.
The article also bridges directly to Frank Easterbrook’s “Limits of Antitrust“ (1984), which turned market power into a central screening tool for antitrust. As Easterbrook put it, “[u]nless there is market power, the practice cannot be anticompetitive.” As the 10th U.S. Circuit Court of Appeals put it in 1994’s SCFC v. Visa, (citing Easterbook):
[T]he market power requirement “help[s] to screen out cases in which the risk of loss to consumers and the economy is sufficiently small that there is no need of extended inquiry and significant risk that inquiry would lead to wrongful condemnation or to the deterrence of competitive activity as firms try to steer clear of the danger zone.”
This lineage—from Director’s insights, through Demsetz’s challenge to SCP, to Landes and Posner’s formalization of market-power analysis, and on to Easterbrook’s operational filters—defines the Chicago School’s core contribution to antitrust. “Market Power in Antitrust Cases” sits at the center of that “Chicago canon” of antitrust law & economics.
Nearly everything Landes and Posner laid out now regularly appears in treatises, regulations, and agency guidelines. Yet the article remains essential, as antitrust debates slide back into “structuralism,” with an overfixation on market shares and concentration that treats “bigness” as a harm and fuels calls for aggressive enforcement or regulation (or worse, both) in markets that are often competitive.
Landes and Posner offer a timely antidote.
Further Reading:
- Harold Demsetz, “Industry Structure, Market Rivalry, and Public Policy,” The Journal of Law & Economics, Vol. 16, No. 1 (April 1973)
- Harold Demsetz, “The Market Concentration Doctrine,” AEI-Hoover Policy Studies (1973).
- Frank H. Easterbrook, “The Limits of Antitrust,” Texas Law Review, Vol. 63, No. 1 (August 1984)
- Louis Kaplow, “Why (Ever) Define Markets?,” Harvard Law Review, Vol. 124, No. 2 (December 2010)
- Benjamin Klein, “Market Power in Antitrust: Economic Analysis After Kodak,” Supreme Court Economic Review, Vol. 3 (1993).
- Gregory J. Werden, “Why (Ever) Define Markets? An Answer to Professor Kaplow,” Antitrust Law Journal, Vol. 78, No. 3 (2013).
- Gregory J. Werden, “Market Delineation and the Justice Department’s Merger Guidelines,” Duke Law Journal (1983).
