|
|
| Line 1: |
Line 1: |
| {{Competition law}}
| | Her name is Felicidad Ahmad. The factor she adores most is to perform handball but she can't make it her profession. I am a cashier and I'll be promoted soon. My home is now in Kansas.<br><br>Visit my blog: [http://Www.Arcaderiver.com/profile/elbreaux extended car warranty] |
| '''Market power''' is the ability of a [[theory of the firm|firm]] to profitably raise the [[market price]] of a good or service over marginal cost. In [[Perfect competition|perfectly competitive]] markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers," while those without are sometimes called "price takers." Significant market power is when prices exceed marginal cost and long run average cost, so the firm makes economic profits.
| |
| | |
| A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. Price makers face a downward-sloping [[demand curve]], such that price increases lead to a lower quantity demanded. The decrease in supply as a result of the exercise of market power creates an economic [[deadweight loss]] which is often viewed as socially undesirable. As a result, many countries have [[anti-trust]] or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates [[merger]]s and sometimes introduces a judicial power to compel [[divestiture]].
| |
| | |
| A firm usually has market power by virtue of controlling a large portion of the market. In extreme cases - [[monopoly]] and [[monopsony]] - the firm controls the entire market. However, market size alone is not the only indicator of market power. Highly [[Market concentration|concentrated markets]] may be [[contestable market|contestable]] if there are no [[barriers to entry]] or exit, limiting the incumbent firm's ability to raise its price above competitive levels.
| |
| | |
| Market power gives firms the ability to engage in unilateral [[anti-competitive practices|anti-competitive behavior]].<ref>Vatiero Massimiliano (2010), "The Ordoliberal notion of market power: an institutionalist reassessment", European Competition Journal, 6(3): 689-707.</ref> Some of the behaviours that firms with market power are accused of engaging in include [[predatory pricing]], product [[Tying (commerce)|tying]], and creation of [[Capacity utilization|overcapacity]] or other barriers to entry. If no individual participant in the market has significant market power, then anti-competitive behavior can take place only through [[collusion]], or the exercise of a group of participants' collective market power.
| |
| | |
| The [[Lerner index]] and [[Herfindahl index]] may be used to measure market power.
| |
| | |
| ==Oligopoly==
| |
| When several firms control a significant share of market sales, the resulting market structure is called an [[oligopoly]] or [[oligopsony]]. An oligopoly may engage in [[collusion]], either tacit or overt, and thereby exercise market power. An explicit agreement in an oligopoly to affect market price or output is called a [[cartel]]. The behavior of firms in perfect competition or monopoly can be treated as a simple [[Optimization (mathematics)|optimization]], but an oligopoly requires [[game theory|game theoretic]] analysis.
| |
| | |
| ==Monopoly power==
| |
| '''Monopoly power''' is an example of [[market failure]] which occurs when one or more of the participants has the ability to influence the [[price]] or other outcomes in some general or specialized [[market]]. The most commonly discussed form of market power is that of a [[monopoly]], but other forms such as [[monopsony]], and more moderate versions of these two extremes, exist.
| |
| | |
| A well-known example of monopolistic market power is [[Microsoft|Microsoft's]] market share in [[IBM PC compatible|PC]] [[operating system]]s. The ''[[United States v. Microsoft]]'' case dealt with an allegation that Microsoft illegally exercised its market power by bundling its [[web browser]] with its operating system. <!-- A well-known example of monopoly market power is [[Standard Oil]], an oil refining company that held about 90% of the refining capacity in the U.S before it was split up by the [[Supreme Court of the United States]] in 1911, but I don't know enough about how Rockefeller abused its market power to use the example. -->
| |
| In this respect, the notion of dominance and dominant position in EU Antitrust Law is a strictly related aspect.<ref>Vatiero M. (2009), "An Institutionalist Explanation of Market Dominances". World Competition. Law and Economics Review, 32(2):221-6.</ref>
| |
| | |
| ==Source of market power==
| |
| A monopoly can raise prices and retain customers because the monopoly has no competitors. If a customer has no other place to go to obtain the goods or services, they either pay the increased price or do without.<ref>If the power company raised rates the customer either pays the increase or does without power.</ref> Thus the key to market power is to preclude competition through high barriers of entry. Barriers to entry those are significant sources of market power are control of scarce resources, increasing returns to scale, technological superiority and government created barriers to entry.<ref>Krugman & Wells, Microeconomics 2d ed. (Worth 2009)</ref> [[OPEC]] is an example of an organization that has market power due to control over scarce resources - oil. Increasing returns to scale are another important source of market power. Firms experiencing increasing returns to scale are also experiencing decreasing average total costs.<ref>Krugman & Wells, Microeconomics 2d ed. ( Worth 2009)</ref> Firms in such industries become more profitable with size.<ref>Krugman & Wells, Microeconomics 2d ed. ( Worth 2009)</ref> Therefore over time the industry is dominated by a few large firms. This dominance makes it difficult for start up firms to succeed.<ref>Krugman & Wells, Microeconomics 2d ed. ( Worth 2009)</ref> Firms like power companies, cable television companies and wireless communication companies with large start up costs fall within this category. A company wishing to enter such industries must have the financial ability to spend millions of dollars before starting operations and generating any revenue.<ref>Often such natural monopolies will also have the benefit of government granted monopolies.</ref> Similarly established firms also have a competitive advantage over new firms. An established firm threatened by a new competitor can lower prices to drive out the competition. Microsoft is a firm that has substantial pricing or market power due to technological superiority in its design and production processes.<ref>Krugman & Wells, Microeconomics 2d ed. ( Worth 2009)</ref> Finally government created barriers to entry can be a source of market power. A prime example are patents granted to pharmaceutical companies. These patents give the drug companies a virtual monopoly in the protected product for the term of the patent.
| |
| | |
| ==Measuring market power==
| |
| Concentration ratios are the most common measures of market power.<ref>Samuelson & Nordhaus, Microeconomics, 17th ed. (McGraw-Hill 2001) at 183-84.</ref> The four-firm concentration ratio measures the percentage of total industry output attributable to the top four companies. For monopolies the four firm ratio is 100 per cent while the ratio is zero for perfect competition.<ref>Samuelson & Nordhaus, Microeconomics, 17th ed. (McGraw-Hill 2001) at 183.</ref> Another measure of concentration is the [[Herfindahl index|Herfindahl-Hirschman Index]] (HHI) which is calculated by "summing the squares of the percentage market shares of all participants in the market." <ref>Samuelson & Nordhaus, Microeconomics, 17th ed. (McGraw-Hill 2001) at 184.</ref> The HHI index for perfect competition is zero; for monopoly, 10,000. The four firm concentration domestic (U.S) ratios for cigarettes is 93%; for automobiles, 84% and for beer, 85%.<ref>Samuelson & Nordhaus, Microeconomics, 17th ed. (McGraw-Hill 2001) at 184.</ref>
| |
| | |
| ==Market power and elasticity of demand==
| |
| Market power is the ability to raise price above marginal cost and earn a positive profit.<ref>Perloff, J: Microeconomics Theory & Applications with Calculus page 369. Pearson 2008.</ref> The degree to which a firm can raise price above marginal cost depends on the shape of the demand curve at the profit maximizing output.<ref>Perloff, J: Microeconomics Theory & Applications with Calculus page 369. Pearson 2008.</ref> That is, elasticity is the critical factor in determining market power. The relationship between market power and the [[price elasticity of demand]] (PED) can be summarized by the equation:
| |
| :<math>\frac{P}{MC}=\frac{PED}{1+PED}.</math> | |
| | |
| Note that PED will be negative, so the ratio is always greater than one. The higher the P/MC ratio, the more market power the firm possesses. As PED increases in magnitude, the P/MC ratio approaches one, and market power approaches zero.<ref>Perloff, J: Microeconomics Theory & Applications with Calculus Pearson 2008.</ref>
| |
| The equation is derived from the monopolist pricing rule:
| |
| :<math>\frac{(P-MC)}{P}=-\frac{1}{PED}.</math>
| |
| | |
| ==See also==
| |
| *[[Bargaining power]]
| |
| *[[Imperfect competition]]
| |
| *[[Market concentration]]
| |
| *[[Monopsony]]
| |
| *[[Natural monopoly]]
| |
| *[[Predatory pricing]]
| |
| *[[Price discrimination]]
| |
| *[[Dominance (economics)]]
| |
| | |
| ==References==
| |
| {{Reflist}}
| |
| | |
| ==Further references==
| |
| * ''Managerial Economics and Organizational Architecture'' 3rd Edition, Brickley, Smith and Zimmerman, McGraw-Hill, Chapter 7.
| |
| | |
| [[Category:Imperfect competition]]
| |
Her name is Felicidad Ahmad. The factor she adores most is to perform handball but she can't make it her profession. I am a cashier and I'll be promoted soon. My home is now in Kansas.
Visit my blog: extended car warranty