What is Market Power
Market power refers to a company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both. A company with substantial market power has the ability to manipulate market price and thereby control its profit margin, and possibly the ability to increase obstacles to potential new entrants into the market. Firms that have market power are often described as "price makers" because they can establish or adjust the marketplace price of an item without relinquishing market share.
BREAKING DOWN Market Power
Market power can be understood as the level of influence that a company has on determining market price, either for a specific product or generally within its industry. An example of market power is Apple Inc. in the smartphone market. Although Apple cannot completely control the market, its iPhone product has a substantial amount of market share and customer loyalty, so it has the ability to affect overall pricing in the smartphone market.
The ideal marketplace condition is what is referred to as a state of perfect competition, in which there are numerous companies producing competing products, and no company has any significant level of market power. Of course, that is merely a theoretical ideal that rarely exists in actual practice. Many countries have antitrust laws or similar legislation designed to limit the market power of any one company. Market power is often a consideration in government approval of mergers. A merger is unlikely to be approved if it is believed that the resulting company would constitute a monopoly or would become a company with inordinate market power.
Power Structures of Markets
There are three basic marketplace conditions that exist in terms of market power, as applied to either an overall economy or a marketplace for a specific item.
The first is the previously noted ideal condition of perfect competition. With perfect competition, in addition to a number of companies producing the same or a similar product, there are also minimal or no barriers to new companies entering the marketplace. Agricultural markets are often pointed to as examples of relatively perfect competition markets, since it is nearly impossible for any one producer of an agricultural commodity to gain a substantial amount of market power.
The opposite of perfect competition conditions is a monopoly in which one company completely controls the market for a product or service, or at least a portion of the total market, and is able to adjust pricing at will. Limited monopolies are often allowed for utility companies, but their ability to raise prices is usually limited by government authority.
An oligopoly refers to a marketplace dominated by a small number of companies, and in which there are substantial barriers to new entrants in the market. The companies in an oligopoly generally have combined, but not individual, market power. An example of oligopoly is the market for cellphone service, controlled by a relatively small number of firms, in which large barriers to new entrants exist.