Abuse of dominant position

Abuse of a dominant position is a situation in which an economic agent takes advantage of its market power. Then, it influences the determination of the price of the good or service it produces.

In other words, abuse of a dominant position occurs when a company takes advantage of the fact that it has the largest participation in the sector, or that it is the only producer (monopoly). Thus, it sets a very low price for its merchandise, for example, so that no other company can compete.

There are regulations on the part of governments that try to control and prevent these types of actions and persecute those who undertake them. In this way, they seek to promote free competition that is more consumer-friendly.

Consequences of the abuse of a dominant position

The abuse of a dominant position has various consequences. One of the most important is that it discourages new companies from entering the sector.

In the absence of competition, the dominant producer lacks incentives to offer a quality good or service. This is particularly relevant in strategic markets that affect the well-being of citizens, such as public services.

In this sense, it should be noted that in sectors such as electricity, communications or health, there are economies of scale and the largest companies are capable of producing in greater volume. Therefore, they can lower the price so that the profit margins of the rest of the competing companies remain below minimum and they have to exit the market.

Another common practice occurs when several companies that exercise the dominant position agree to set prices and production, driving the supply and demand curve at will. Consequently, they can maintain, for example, a high price for their merchandise.

Given these abusive situations, regulators establish various penalties. Thus, significant fines and administrative sanctions are imposed that even prevent the exercise of economic activity.