Market Power

Market power
Market power means the company manipulate the price of the good & services influenced
by the supply or demand or both of the goods or services. Company which has market
power are said to be the price makers as they set the prices while maintaining their
market share while firms which accepts or have no influence on price of commodity is
refferd as price takers Market power generally indicates the amount of influence that a
firm has on the industry in which it operates.
Market participants have no market power, in perfectly competitive market. They are the
price takers & make their decisions based on the market price, which they cannot influence.
A firm with total market power can raise prices without losing any customers to
competitors. In markets that are not perfectly competitive (which describes most markets),
most firms have some degree of market power.
Market power came into account when prices exceed marginal cost and long run average
cost, so the firm makes economic profits. In the absence of market power firms cannot
influence price and, because products are not unique, they cannot influence demand by
advertising or product differentiation. In this environment, managers maximize profit by
minimizing cost, through the efficient use of resources, and by determining the quantity to
produce.
A firm with market power has the ability to individually affect either the total quantity or
the prevailing price in the market. Price makers face a downward-sloping demand curve,
such that price increases lead to a lower quantity demanded. The decrease in supply as a
result of the exercise of market power creates an economic deadweight loss which is often
viewed as socially undesirable. As a result, many countries have anti-trust or other
legislation intended to limit 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 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 the only 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
behaviour. 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 behaviour can take place only through collusion, or the exercise of a group of
participants' collective market power.

MARKET STRUCTURE

1. Perfect competition: When there are many firms that are small relative to the entire
market and produce similar products
Firms are price takers.
Products are standardized (identical).
There are no barriers to entry.
There is no price competition.

2. Imperfect competition:
Firms have some degree of market power and can determine prices strategically.
Products may not be standardized.
Firms employ no price competition.
Product differentiation
Advertising
Branding
Public relations

3. Monopolistic competition: When there are many firms and consumers, just as in
perfect competition; however, each firm produces a product that is slightly different
from the products produced by the other firms. There are no barriers to entry.
4. Monopoly:
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.
Markets with a single seller.
Barriers to entry prevent competitors from entering the market.
5. Oligopoly:
Markets with a few sellers.
There are significant barriers to entry.
When several firms control a significant share of market sales, the resulting
market structure is called an oligopoly .
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.

Market Power

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