Market Power - Explained
What is Market Power?
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Table of ContentsWhat is Market Power?What gives rise to Market Power?How Market Power Works (Example) Factors that Influence Market PowerNumber of Companies in the Market Demand Elasticity Product Differentiation Pricing Power Barriers Related to Entry or Exit The ability of companies to make above normal profit Mobility Factor Academic Research on Market Power
What is Market Power?
Market power is an economic term that refers to the ability of a company to successfully raise the prices of goods or services in the general market. In other words, when a commercial enterprise is able to influence products or services price by taking control over its demand, supply or both, then this becomes a market power. Market power may refer to either a seller or buyer in the market. Another term for market power is pricing power.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
What gives rise to Market Power?
Note that a market with perfect competition has no market power. This is because when the competition is perfect, the players will have zero power. Instead, each commercial enterprise will have to work with the current price in the market since it cannot be manipulated or changed. However, the perfect competitions concept is of the assumption that there is no even one producer who can determine a price for the overall market. For companies that produce the same products and services, they all vary in their market power levels. Generally, market power is only present where there is:
- Oligopoly: This is where there is complete domination of a market by either two or more than two suppliers.
- Monopoly: This is where a market is controlled by only one supplier.
- Monopsony: This is where a market is dominated by one buyer. A good example is the United States defense industry which represents over 85% of the purchases.
How Market Power Works (Example)
For instance, when Apple introduced the iPhone, the Apple company had significant power as it is the one that defined the App market and the smartphone when it launched the product. However, the monopoly lasted for a short time. A good example of market power is a monopoly. This is because without or with little competition, a monopoly has the power to control the market price and it can raise the prices simply by decreasing its output levels.
Factors that Influence Market Power
There are several factors that influence market power. They include the following:
Number of Companies in the Market
To be able to hold market power that is extensive, the industry need not be concentrated in the area in which it operates. One important thing to note is that fewer companies provide an opportunity for each of the player to hold greater market power.
To hold market power, there must be persistent demand for its products (inelastic demand), regardless of the products price. For a company to achieve persistent demand for its products, it must ensure that it provides products or services that add value to customers. In other words, quality products or services are key in achieving the inelastic demand curve.
Product differentiation is where a company is able to provide products and services that can fill a vacuum in a given market. When a company is able to fill a hole in a given market, it enables it to gain power in that particular market. However, it is important to note that in an industry where products substitute is always available, companies in such industry do not hold any market power as none of them can control the price.
In a market where a company holds market share that is extensive, it has the power to determine (decide) its products price and be able to realize persistent demand from consumers. In other words, for a company to hold market power, it is required that if offers products or services that are unique so that it can reach the inelastic demand curve. When a company is able to dictate a high pricing power, then it means it can has market power because it can manipulate market prices in the overall market.
Barriers Related to Entry or Exit
Players in a market cannot hold market power if there is high entry or exit barriers. When the entry has high barriers, it means that in particular industry, the profits are above normal and, therefore, protected. This makes many players not to qualify entering the industry in the already enabling situation.
The ability of companies to make above normal profit
Where the market is competitive, it means that both the buyers and sellers price takes. In such a situation, no player can achieve market power. However, in a market where a company can make profits above normal profit, then such a market will have many companies joining in order for the same reason of making profits. The position will in the process be diluted hence bringing the profits back to normal. Generally, a market which has greater power has the ability to make profits beyond the normal profit.
Where an industry makes access to its products or services inputs easier, then individuals market power will not be realized.
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