Market power
A firm has market power when it is able to affect the supply or demand of a market to force a change in the price. The firm that has the market power has the most influence over the market.[1] Free markets seek to prevent this occurrence by promoting competition in markets. Competition limits the influence a firm has on a market because it cannot acct freely without other firms reacting.
Market Structures With Market Power
Monopolies, oligopolies, monopsonies and oligopolies have market power because they care able to affect he the supply or demand of a market. A monopoly or oligopoly can restrict the supply in a market to force an increase in the price of a good. Alternatively, a monopsony or oligopsony can reduce the demand to force a decrease in the price of a good. Because these market structures are able to influence the price in a way that is favorable to them they are called price makers.[2]
Beneficial Market Power
A firm or firms having market power is not always negative. While a firm having market power creates an inefficient market due to the deadweight loss, it can be a positive outcome for some markets. In the case of natural monopolies, a utility company can over-supply the market which keeps prices low. This also ensures the stability of supply to protect against shocks that would normally produce a shortage. this ensures that people serviced by the utility (usually a city) have reliable, low-cost utilities.
See Also
References
- ↑ OECD. "Market Power" [Online], Available: https://stats.oecd.org/glossary/detail.asp?ID=3256, March 16, 2002 [June 28, 206]
- ↑ "A Dictionary of Economics" published Oxford University Press, 2013. Edited by John Black, Nigar Hashimzade, and Gareth Myles Online version accessed [August 17th, 2017].