Market power

From Wikipedia, the free encyclopedia

In economics, market power is the ability of a firm to alter the market price of a good or service. A firm with market power can raise price without losing all customers to competitors.

When a firm has market power it faces a downward-sloping demand curve.

In perfectly competitive markets, market participants have no market power. A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. If the demand curve is downward sloping (that is, the most common situation where price increases lead to a lower quantity demanded), then the decrease in supply as a result of the exercise of market power creates an economic deadweight loss in comparison with a situation of perfect competition. This is often viewed as socially undesirable, and as a result, many countries have anti-trust or other legislation with the aim of limiting the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.

A firm usually has market power by virtue of it controlling a large portion of the market. In extreme cases - monopoly and monopsony - the firm controls the entire market. However, market size alone is not a good indicator of market power. Highly concentrated markets may be contestable if there are no barriers to entry or exit, limiting the incumbent firm's ability to raise its price above competitive levels.

Market power gives firms the ability to engage in unilateral anti-competitive behavior. Some of the behaviours that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry. If no individual participant in the market has significant market power, then anti-competitive behavior can take place only through collusion, or the exercise of a group of participants' collective market power.

1 Oligopoly
2 Monopoly power
3 See also
4 External links
5 References

[edit] Oligopoly

When several firms control a significant share of market sales, the resulting market structure is called an oligopoly or oligopsony. An oligopoly may engage in collusion, either tacit or overt, and thereby exercise market power. An explicit agreement in an oligopoly to affect market price or output is called a cartel. The behavior of firms in perfect competition or monopoly can be treated as a simple optimization, but an oligopoly requires game theoretic analysis.

[edit] Monopoly power

Monopoly power is an example of market failure which occurs when one or more of the participants has the ability to influence the price or other outcomes in some general or specialized market. The most commonly discussed form of market power is that of a monopoly, but other forms such as monopsony, and more moderate versions of these two extremes, exist. Market participants that have market power are sometimes referred to as "price makers", while those without are sometimes called "price takers".

A well known example of monopolistic market power is Microsoft's market share in PC operating systems. The United States v. Microsoft case concerned the allegation that Microsoft illegally exercised its market power by bundling its web browser with its operating system. Some have suggested that Wal Mart exercises monopsonistic market power; its size allows it to extract extremely low prices from its suppliers.