Market structure and multiproduct industries

Abstract

TRADITIONAL ECONOMIC ANALYSIS of the theory of the firm has concentrated on single-product firms. But, in reality, most businesses produce many products, and many regulatory and antitrust issues involve only these enterprises. In recent years, economists and policymakers dealing with antitrust and regulatory issues have increasingly recognized the need for a theory that can be used to evaluate the efficiency of market structures in industries dominated by a few firms operating in a diverse range of markets. For such firms, conventional concepts of structure and performance such as economies of scale, measures of concentration, and barriers to entry do not adequately capture the complexity of market relationships. A few examples illustrate the complexities introduced by the multi-product firm and highlight the need for a theory that can be used to evaluate performance and conduct in its markets. In many trucking and air city-pair markets, the efficient number of carriers appears to be relatively small (perhaps even one). Does this imply, however, that trucking firms and air carriers that compete in a wide range of city-pair markets should be regulated as natural monopolists or that mergers involving overlapping markets should be disallowed? In the petroleum industry, there is a current trend to diversify into other sources of fuel, and in cable TV markets there are numerous attempts to integrate vertically. What should economists look for in evaluating whether these changes in market structure are motivated by efficiency or by anticompetitive behavior? For a dominant firm, such as AT&T, there is a frequent complaint that the incumbent firm is preventing entry by cross-subsidizing one of its products, which faces competition by entrants, at the expense of other of its products. What kinds of regulatory intervention in pricing or in market structure must be considered