Who Gains From Greater Market Power
(A2019-8240)

AUTHORS

Steven Shugan, University of Florida; Haibing Gao, Renmin University

KEYWORDS

Market-power; Pricing; Discriminatory-Practices

ABSTRACT

Marketing practice seeks to create and exploit market power. However, few studies examine who gains more from market power partially because the direction of causality is often unclear. We mitigate that problem by studying exogenous variation in market power in markets with many competitors. Theoretically, greater market power increases the gains from discriminatory marketing practices. We confirm that claim measuring discrimination as the price difference between identical products except for a costless feature. We find the gains from market power are greater for smaller firms with more rivals, better-perceived value, larger fixed costs and less similarity with rivals. Surprisingly, greater market power does not necessarily benefit firms with higher quality. Also surprisingly, greater market power does not necessarily benefit firms with more heterogeneous customers. Our empirical analysis explicitly controls for the possibility that larger markets attract more rivals.

REFERENCES

McKethan-Matherly Foundation funded this project