What is Market Power?

Market power is a measurement of the influence a company has over the marketplace. Companies that are able to raise a price without affecting demand have a high market power and are called price makers. If a company has little market power, they are called price takers. A single firm amassing market power is often an early sign that an industry is moving towards an unhealthy state. In healthy markets, it is usually a sign of a powerful marketing influence and strong brand recognition.

Even though the term goes low as well as high, market power is mostly used as a way to describe firms that exert a strong influence on the marketplace. These firms are able to make decisions regarding the strength and viability of different products and determine the direction in which the market moves. These decisions are so overwhelming to their competitors that they need to follow along with them or their business will stagnate or fail.

High market power typically culminates in a monopoly or a monopsony. In these cases, one firm has all the power or one consumer has all the power. This means that a single group controls the total market power. From an economic standpoint, this is a very unhealthy situation, as it effectively stagnates the marketplace. Even so, this is not always bad on a consumer level.

In some cases, a monopoly simplifies situations by reducing the number of redundant options in a market. In most circumstances, having several firms to pick up household trash or provide electricity does little to help the consumer. A monopsony may actually be beneficial to consumers, as it often comes into practice when a single organization controls the distribution and price of a needed good or service. This will often give people access to something they didn’t have before.

Some instances of high market power have less to do with an unhealthy economic condition and more to do with a strong customer base. If a single firm has a large enough customer base, it is able to make price and supply changes that only affect the users of its products. If the customer base is large enough, these changes can move the whole industry.

In this situation, a company is vulnerable to falling into a monopoly. Since it has such a strong product or service, it has a very loyal customer base. If its competitors find they have no market power, regardless of their actions, they may leave the industry. This will create the monopoly, regardless of the desires of the larger company.