What is Market Power in Business

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Market power is the ability of an individual market player or a small group of competitors, to influence others through services, prices or conditions. Market power is therefore always linked to time and is relative to a market partner over another.

Market power is often placed in the context of restricting competition. The relationship between market power and restricting competition is ambivalent, as the behavioral constellations transform frequently.

A company that holds market power enjoys the privilege of being in a position to singularly impact on the total quantity or the prevailing price factors in the market. However, a decline in supply which may occur as a result of the implementation of market power produces an economic dead weight loss effect.

Hence, the presence of relevant legislative instruments designed to deal with undesirable manifestations of market power in an economy. Such regulation frequently covers issues around mergers and in some cases obligates divestiture.

Generally, a business entity can brandish market power on the grounds of being in control of a huge share of the market. And could extend to a state of monopoly or monopsony, even though market size does not necessarily translate to market power at all times.

Some of the developments that lead to market power scenarios include the creation of artificial monopolies, which may be exercised by the state, in the form of natural monopolies. Companies can execute the same through internal business growth, for example performance projections and/or development of market entry barriers.

And via external corporate growth, that is, through mergers, formation of cartels (collusive behavior) which pertains to the reciprocal exchange of information by companies.

Market power is ideally a qualitative phenomenon, the lower the price elasticity, the greater the market power. Therefore, price elasticity is relevant in determining the amount of market power or the degree of monopoly.

Vertical market power is the power that can form between sellers and buyers. Horizontal market power is the power for both the supplier and buyers. In the presence of a so-called buyers’ market, vendors can use a large market share compared to how its competitors use this power.

In the strictest sense, monopoly power is an illustration of market failure which takes place in the event that a single market participant or more brandish skewed influence on price or other factors in the market.

And due to existing market power, the price often exceeds the marginal cost, it reflects on increases in producer surplus, but also to a reduction in consumer surplus, which is relatively stronger. Consequently, there is an allocative inefficiency in the market.

 

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