The abuse of 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.
That is, the abuse of dominant position occurs when a company takes advantage of having the largest share in the sector, or that it is the only producer ( monopoly ). Thus, it sets a very low price on its merchandise, for example, so that no other company can compete.
There are regulations by governments that try to control and prevent such actions and persecute those who undertake them. In this way, they seek to promote free competition that is more favorable to the consumer.
Consequences of abuse of dominant position
The abuse of dominance position has several 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 good or quality service. This is particularly relevant in strategic markets that affect the welfare of citizens, such as public services.
In that sense, it should be noted that in sectors such as electricity communications or health there are economies of scale and larger companies are able to produce in greater volume. Therefore, they can lower the price so that the profit margins of the rest of competing companies remain low and have to leave the market.
Another common practice occurs when several companies that exercise the dominant position agree to set prices and production, managing the supply and demand curve at will. Consequently, they can maintain, for example, a high price for their merchandise.
Given these situations of abuse, regulators establish various penalties. Thus, important fines and administrative sanctions are imposed that even impede the exercise of economic activity.