Merger is an obvious method used to obtain a dominant market position. The formation of dominant firms by merger was an important motive for the passage of the Sherman act, which is after all an antitrust act. As we will see in chapter 10, the antitrust laws now place restrictions on such mergers. But there are strategies that a firm can employ to reach a dominant position through internal growth. Such strategies fall into three broad categories: strategies that act directly to raise rivals’ cost, and strategies that act indirectly to raise rivals costs through some aspect of the technology or marketing.

Direct Cost – Based Strategies

As a strategy for dominance, increasing rivals costs is superior to lowering the market price. Expanding output and lowering the price requires the dominator to bear the birden of lost profit. Raising rivals costs places the burden on the entrant and allows the dominator to act as a monopolist under blockaded entry.

A dominant firm gains by accepting higher costs for itself if that strategy protects it from entry and allows it to exercise greater control over the market price and recoup the higher costs. Thus a dominant firm might accede to union demands for a higher wage rates as a way of raising the wage costs of later entrants. More generally, a dominant firm may bid up the price of necessary inputs or acquire control of low – cost supplies as a way of raising rivals costs. Other strategy act indirectly to raise rivals’ costs by increasing the investment needed for successful entry.