In the field of economics, market power
is an ability of a firm to adjust or control the market price or volume of production of a product/s in the market. A firm
with a market power absolutely raises its price without losing all customers to
challengers. In the aggressive markets, there is no market power for market participants. A firm which has a market power
has a capability to affect either the total quantity or current price in the market independently. If the increase in the
prices of the commodity leads to a fall in demand, then the fall in supply of the market
power creates an economic loss in comparison with circumstances of perfect competition. Generally, in operational terms,
market power is involved in a firm’s monopoly
or oligopoly which is also referred as competitive power. Usually, the market power can be measured by Tobin’s Q or simply Q ratio (wikepedia 2007[online]).
When the whole market structure of several firms controls the major share of
market sales, then the resulting structure is referred as Oligopoly. The Oligopoly is also called as oligopsony. The main function of oligopoly
is to engage in collusion, either by tacit or overt, and also thereby work out market
power. An open agreement belonging to oligopoly is called as cartel which
takes care of the market price or its resolution. Here, Oligopoly is a market
conquered by some large dealers. The amount of market concentration is very high and leading firms will take a large percentage.
Firms which are within an oligopoly produce more identified products. In that
case, advertising and marketing is the major feature of competition in case of such markets and so, there is also no obstruction
to other entries (Case Fair 2006).
Another important feature of an oligopoly
is the dependence between two firms. This is nothing but, that each firm should always take into account the possible reactions
of other firms in the market when they are making pricing and investment decisions. This may generate improbability in such
markets. The behavior of firms in perfect case, in monopoly concept can be treated
as a simple optimization (Tutor2u2007 [online]).
THE MAIN FEATURES OF OLIGOPOLY:
• Some of the firms are selling product with similarity.
• The production of each firms branded products.
• To make the barriers to enter into the market in the long run that allows
firms to make supernormal profits.
• Inter-dependence between competing firms.
FEATURES OF MONOPOLY:
If a particular firm has one fourth of the market percentage, monopoly occurs. Monopoly is a state in which the market is dominated
by any one of the seller or manufacturer. Monopoly power is an example of market
breakdown that occurs when the member has the ability to control the price or other outcomes in a particular market.
MONOPOLY AND ITS BENEFITS:
• The firm makes top profits
• The firm usually invests its profits on new products or improves the
DEMERITS OF MONOPOLY:
- The firm can hike the prices
of the commodity according to its will
- Since the competition is eliminated,
the consumer services are hampered
Capital Structure and Market Place. Volume 36, 2004
Principles of Microeconomics by Karl E. Case, Ray C. Fair
Wikipedia (2007). Market Power. Available: http://en.wikipedia.org/wiki/Market_power. Last
accessed 26 October 2007.
Tutor2u.net. The Pricing Power of Businesses. Available: http://www.tutor2u.net/economics/
Last accessed 25 October 2007.