Assessing the market power of mineral commodity producers

Abstract

The major producers of most mineral commodities possess large market shares and so can raise the market price by restricting their output. For this reason, many assume that they possess market power. However, this article argues that there are two necessary conditions for market power: a market share sufficient to raise the market price is the first; the second is the incentive to do so. Firms that fulfill the first condition do not necessarily satisfy the second. This is because maximizing profits this year by restricting output and raising the market price usually has negative consequences for future profits. In particular, a price higher than the competitive price over time reduces market demand below what it otherwise would be by encouraging consumers to switch to substitute materials and to introduce material-saving new technologies. The higher price also encourages rival firms to increase their capacity and output. The result is a smaller market share and lower, even possibly negative, profits in the future. Failure to recognize the second necessary condition for market power provides a plausible explanation for the widespread perception that the major mineral producers—both firms and countries—possess substantial market power, even where hard evidence of such power is lacking.