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A dominant firm is one which accounts for a significant share of a given market and has a significantly larger market share than its next largest rival. Dominant firms are typically considered to have market shares of 40 per cent or more.

Dominant firms can raise competition concerns when they have the power to set prices independently. An industry with a dominant firm is therefore often an oligopoly in that there are a small number of firms. However, it is an asymmetric oligopoly because the firms are not of equal size.

Normally, the dominant firm faces a number of small competitors, referred to as a competitive fringe. The competitive fringe sometimes includes potential entrants. Thus the dominant firm may be a monopolist facing potential entrants.

Like a monopolist, the dominant firm faces a downward sloping demand curve. However, unlike the monopolist, the dominant firm must take into account the competitive fringe firms in making its price/output decisions. It is normally assumed that the dominant firm has some competitive advantage (such as lower costs) as compared to the fringe.

The term competitive fringe arises from the basic theory of dominant firm pricing. It is generally assumed that the dominant firm sets its price after ascribing a part of the market to the competitive fringe which then accepts this price as given. Dominant firms may be the target of competition policy when they achieve or maintain their dominant position as a result of anti-competitive practices.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Abuse of dominant position


Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Friday, March 15, 2002