How does it happen?

Predatory Pricing

Pricing below costs in order to drive out competition with the intent of raising prices above costs once the market is less concentrated - Example: American Airlines in the Dallas-Fort Worth hub - American Airlines cut their prices until they drove out three smaller airlines - Raised prices once all other airlines were gone

High startup costs

If it’s expensive to enter and compete in an industry then there are likely very few firms in that industry

  • Example the US railroad industry
    • Creating a new railroad is very expensive
    • As a result, there are only a few major railroads in the US
    • All of these railroads have some ability to set their own prices
  • Example the US ski industry
    • Building chairlifts and forming slopes is very expensive
    • A small number of firms with a lack of competition results in market power