Market power measures a company’s influence on the market. High market power allows firms to raise prices without affecting demand, making them price makers. It can lead to unhealthy monopolies, but can also simplify markets and benefit consumers. Strong customer bases can also lead to market power and potential monopolies.
Market power is a measure of the influence a company has on the market. Firms that are able to raise a price without affecting demand have high market power and are called price makers. If a firm has little market power, it is called a price taker. A single firm amassing market power is often an early sign that an industry is heading towards an unhealthy state. In healthy markets, it’s usually a sign of strong commercial influence and strong brand recognition.
Whether the term is low or high, market power is mostly used as a way to describe firms that exert strong market influence. These companies are able to make decisions about the strength and profitability of different products and determine the direction in which the market moves. These decisions are so overwhelming to their competitors that they must follow them or their business will stagnate or fail.
High market power typically culminates in a monopoly or monopsony. In these cases, a business has all the power or a consumer has all the power. This means that a single group controls total market power. From an economic point of view, this is a very unhealthy situation, as it effectively stagnates the market. Even so, this isn’t always bad at the consumer level.
In some cases, monopoly simplifies situations by reducing the number of redundant options in a market. In most cases, having several companies to collect household waste or supply electricity does little to help the consumer. A monopsony can actually be beneficial to consumers, as it often occurs 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 cases of high market power have less to do with an unhealthy economic condition and more to do with a strong customer base. If an individual company has a large enough customer base, it is able to make price and supply changes that only affect users of its products. If the customer base is large enough, these changes can move the entire 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 that they have no market power, regardless of their actions, they could leave the industry. This will create a monopoly, regardless of the wishes of the larger company.
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