Market Power in Economics: Definition, Sources & Examples

Market Power in Economics: Definition, Sources & Examples
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  • 0:00 What is Market Power?
  • 0:25 Market Power and…
  • 2:17 Who Has Market Power?
  • 3:43 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Francis

Jennifer has a Masters Degree in Business Administration and pursuing a Doctoral degree. She has 14 years of experience as a classroom teacher, and several years in both retail and manufacturing.

This lesson aims to present market power in the economic sense. It will provide a definition, sources, and examples of how organizations can use economic power to their advantage, to maximize their profit potential.

What Is Market Power?

Market power is an organization's ability to control the price of a product by manipulating its supply, its demand, or both. Market power is also referred to as economic strength. Companies that possess market power are referred to as price makers because they are able to determine the price for a product or service, even as they maintain market share.

Market Power and Market Structures

There are various types of economic systems in which organizations have varying ability to control price. Market power varies depending on whether the economy is operating under perfect competition, monopoly, oligopoly, or monopolistic competition. Let's take a look at how each of these differs.

In perfect competition there are many organizations, and any organization is free to enter the market. These organizations sell a homogeneous product or service, to make a normal profit. When operating in this system, no single organization is capable of setting price for a whole market. Because of the homogeneity of their offerings, all the companies have varying levels of market power. Examples of perfect competition are foreign exchange markets, agricultural markets, and internet-related industries.

A monopoly is defined as situations in which there is only one supplier of a particular good or service. A monopoly is the best example of an organization with considerable market power. In this case, such a company can increase prices by reducing its level of output or its supply. This results in increased demand for the product, at which time the supplier can raise the price. Examples of current monopolies include Monsanto (genetically modified organisms), local telephone, water, electricity, and cable television services.

An oligopoly exists when an industry is dominated by a few firms, with barriers to entry. These few firms, by some type of agreement, have shared market power. Examples of oligopolies include the steel industry, aluminum, film, gas and cellular telephones.

In monopolistic competition there are many firms selling differentiated products within the same industry. These firms share market power and are able to raise prices without losing customers. Examples of monopolistic, competitive industries are restaurants, hotels, bars, and consumer services such as hairdressing.

Who Has Market Power?

The more monopolistic the industry, the more likely it will be for market power wielded by the company or companies involved. Let's take a look at some specific examples of companies and their market power.

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