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Monopoly power with a short selling constraint

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  • Baumann, Robert
  • Engelhardt, Bryan
  • Fuller, David L.

Abstract

We show if a speculator can benefit from reducing a monopoly's rents through short selling, then a speculator may take a short position in a monopoly, overcome the barriers to entry, and compete with the monopoly. The competition drives down the monopoly's rents, and as a result, the short position becomes profitable and covers the cost of entry. If entry is impossible, then the speculator may coordinate and pay the firm's counter-parties to stop trading with the monopoly rather than entering. In either case, increasing a speculator's ability to short a firm's rents results in a constraint on the monopoly and forces it to act more like a price taker. Although we are unaware of such a mechanism being attempted in practice, it does provide a potential market based approach to antitrust regulation.

Suggested Citation

  • Baumann, Robert & Engelhardt, Bryan & Fuller, David L., 2018. "Monopoly power with a short selling constraint," The Quarterly Review of Economics and Finance, Elsevier, vol. 67(C), pages 8-13.
    • Handle: RePEc:eee:quaeco:v:67:y:2018:i:c:p:8-13
    DOI: 10.1016/j.qref.2017.04.002
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    1. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
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    More about this item

    Keywords

    Antitrust; Monopoly; Short selling;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K21 - Law and Economics - - Regulation and Business Law - - - Antitrust Law
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies

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