THE CREATION, MAINTENANCE, AND EROSION OF MARKET POWER: AN ANALYSIS OF THE DOMINANT FIRM

This dissertation is a study of the phenomenon known as the "dominant firm." Described also as quasi- or partial monopoly, the dominant firm market structure is characterized by a single firm with a significant degree of market power. Like other large firms its actions shape the market outcome, but it is sizeable enough to be at least partially free from the constraints of oligopolistic interdependence.;The method of analysis includes a comparative case study of nine dominant firms and a statistical comparison of a sample of large nondominant firms with a sample of dominant firms. The firms included in the case study were United Shoe, Pullman, Coca-Cola, Eastman Kodak, Gillette, Campbell Soup, IBM, Boeing, and Procter & Gamble. They were chosen to provide a mixture of firms which had maintained and firms which had lost their market power as well as a mixture of product types.;The examination of the sample's origins of market power revealed that in no case was the dominant firm structure predetermined: every firm in this sample owed its market power to at least two factors or sources of dominance, and in no case were all of the factors passive, that is, technologically or legally determined and thus outside the control of the firm. In contrast to passive factors, active sources of dominance require that the firm make some competitive move; they include invention or innovation, merger, product loyalty, and predation. Two firm's positions were entirely the result of active factors. The remaining seven firms relied on a mixture of active and passive factors.;The importance of each source of market power varied with the type of product the firm made. Firms producing high technology products owed their position to invention or innovation, the realization of scale economies, and product loyalty. For firms producing branded consumer goods, product loyalty played a larger role, and patents and trade secrets replaced scale economies in importance. Innovation was of equal importance for firms of both product types.;Two broad issues are addressed throughout. First, what are the sources of a dominant firm's market power? Second, what forms of conduct characterize a dominant firm structure?;The examination of the conduct characteristic of dominant firms revealed that traditional dominant firm models such as price leadership or limit pricing models do not predict their behavior well. The only evidence of a form of price leadership behavior was that some fringe firms take the dominant firm's price as a guide and mark down from it. Likewise, there was no evidence of limit pricing.;The essence of dominant firm's market power is their ability to use non-price strategies. Dominant firm's products define the market, and they alter them as part of their competitive strategy. Non-price behavior examined in this dissertation included product policies, marketing devices, innovation, vertical integration, and diversification.;Product type determines which non-price strategies are available to a given dominant firm. Branded goods producers most often engaged in product proliferation strategies while producers of high technology items relied on marketing techniques such as leasing and systems introductions or on changes in the rate and manner of introduction of new or improved products.;The conduct of dominant firms is reflected in several observable firm characteristics. They have significantly higher profit rates than other large firms and more internal funds to use for investment. They also have higher rates of investment in research and development and advertising.;Just as firms played an active role in the creation of market power, they also played a role in its maintenance. The main reason for a decline in a firm's market power was its inability to determine the level and direction of demand growth through either its price or non-price strategies.