What is market power?

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Market power is a measure of the influence a company has on the market. Companies that can raise a price without affecting demand have high market power and are called price makers. If a company has little market power, it is called a price taker. A single company amassing market power is often an early sign that an industry is heading towards a sick state. In healthy markets, it is usually a sign of a powerful marketing influence and strong brand recognition.

Even though the term goes both low and high, market power is mostly used as a way of describing companies that exert a strong influence on the market. These companies are able to make decisions about the strength and viability of different products and determine the direction in which the market moves. These decisions are so overwhelming for your competitors that they have to keep up with them or your business will stagnate or fail.

High market power often culminates in a monopoly or monopsony. In these cases, a company holds all the power or a consumer holds all the power. This means that a single group controls the total power of the market. From an economic point of view, this is a very harmful situation for health, as it effectively stagnates the market. Even so, this is not always bad for the consumer.

In some cases, a monopoly simplifies situations by reducing the number of redundant options in a market. In most circumstances, having multiple companies to collect household waste or supply electricity is of little help to the consumer. A monopsony can actually be beneficial to consumers as it often comes into play when a single organization controls the distribution and pricing of a needed good or service. This will usually give people access to something they didn’t have before.

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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 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 could move the entire industry.

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

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