Market Power

Definition

Market power refers to the ability of a firm or group of firms to influence the market price, output, and other market conditions. It is the degree to which a firm can exert control over the market by setting prices, restricting supply, or hindering competition.

5 Must Know Facts For Your Next Test

1. Firms with market power can set prices above the competitive level, leading to a deadweight loss in social welfare.
2. Barriers to entry, such as economies of scale, patents, or government regulations, can help firms maintain their market power.
3. In monopolistic competition, firms have some degree of market power due to product differentiation, but face competition from other firms offering similar products.
4. Oligopolies are characterized by a few dominant firms that can exercise market power through strategic pricing and output decisions.
5. Regulators may intervene to limit the exercise of market power and promote competition, such as through antitrust laws and regulations.

Review Questions

• Explain how barriers to entry can contribute to a firm's market power.
  • Barriers to entry, such as economies of scale, high start-up costs, or government regulations, can prevent new firms from easily entering a market. This allows incumbent firms to maintain their market power by limiting competition and enabling them to charge higher prices or restrict output without the threat of new competitors entering the market. Barriers to entry can be an important factor in the formation and persistence of monopolies or oligopolies, where a few firms dominate the market.
• Describe how market power is exercised in a monopolistically competitive market.
  • In a monopolistically competitive market, firms have some degree of market power due to product differentiation. This allows them to charge prices slightly above the competitive level and influence market conditions to a certain extent. However, they still face competition from other firms offering similar but not identical products. Firms in monopolistic competition may use strategies such as branding, advertising, or minor product variations to differentiate their offerings and maintain a degree of market power, but they cannot completely control the market like a pure monopoly.
• Analyze how regulators may intervene to address the exercise of market power in an oligopolistic industry.
  • In an oligopolistic market, where a few dominant firms hold a significant portion of the market share, regulators may intervene to limit the exercise of market power and promote competition. This can be done through antitrust laws and regulations, such as prohibiting collusive behavior, preventing mergers that would increase market concentration, or requiring firms to share essential facilities or infrastructure. Regulators may also encourage new entry by reducing barriers or providing incentives for smaller firms to compete with the dominant players. The goal of these interventions is to foster a more competitive market environment and protect consumer welfare from the negative effects of excessive market power.

Related terms

Barriers to Entry: Factors that prevent or discourage new firms from entering a market, allowing incumbent firms to maintain their market power.

Monopolistic Competition: A market structure where firms have a degree of market power due to product differentiation, but face competition from other firms offering similar but not identical products.

Oligopoly: A market structure where a few dominant firms hold a significant portion of the market share, allowing them to exercise market power and influence prices and output.