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Achieving Economic Efficiency in Spite of Market Failures: The Case of the Luxury Goods Industry

According to standard economic theory, unfettered free markets lead to an efficient allocation of resources. Importantly, this result is generally taken to hold only insofar as market failures are absent. One of these failures, market power, is defined as the ability to elevate prices above competitive levels for a significant period of time. Generally speaking, the exercise of market power harms consumer welfare.

This logic appears quite general and is commonly accepted by policy makers. Indeed, precisely for this reason most competition authorities aim to limit firms’ ability to gain or exercise market power. However, can it be the case that markets are efficient, even in the presence of [...]

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