Markets can be dominated by either the customers or the companies. Companies which have market power have the ability to change the prices of the goods or services that they are providing. These kinds of situations are found in imperfect markets. Imperfect markets are markets that allow the participants to have market power . Perfect markets on the other hand are controlled by the forces of demand and supply. The participants in the perfect markets do not have any control over the prices they can charge for the goods or services and are therefore price takers .
In imperfect markets the participants who have power to control prices are referred to as the price makers. The companies that have the ability to control the prices are also able to control the supply of the goods and the services that they provide. This eventually leads them to control the demand of the goods and services. The companies have a large share of the market for the goods and services they provide hence they are therefore able to control the entire market. In some extreme cases the companies are able to control the entire market.
This paper discusses the market power theory and explains how a company can achieve market power. Market power enables a firm to control the prices or the amount of goods and services that it provides to the market that it is involved in. The firm is also able to increase the prices of goods and services without the fear of loosing its customers. It can also affect the total quantity of the goods and the services in the market together with the prices independently. This kind of power exists in markets that do not have an outside controlling force like the government and the demand or supply of the customers does not influence the power.
There are two examples of market powers scenarios that companies can have. These are the monopoly and oligopoly market powers. When several firms in a particular market are able to control the major share of the market the resulting power structure is known as the oligopoly market structure. The firms form a cartel that takes control of the market prices and the supply. The companies in most cases are big and they are in direct competition with each other. This causes them to frequently collide as they compete. There are various features that characterize this kind of market power.
The companies that are in this oligopoly type of market tend to produce similar goods and services that are easily interchangeable. The customers can easily change from buying the goods or services of one company and buy those of the other companies without any hindrances or difficulties. The other feature that identifies these companies is that they heavily invest in marketing especially advertising to promote their goods in the market. The firms are also interdependent on each other. The decision of one firm affects the other firms in the market.
They closely monitor each other’s activities and strategies in order to maintain the competition. Hence when one company carries out one strategy that seems to improve its sales, the other companies follow suit. In this kind of market structure, small and upcoming companies are obstructed from joining the market. There are barriers that the companies have established to avoid other firms from joining the market. Some of the barriers include the use of expensive technology in its processes. This enables the firms to be very efficient and enjoy economies of scale. They also use strategic locations as one of the barriers to entry of other firms.
They also use patents to protect their techniques and technology. Good examples of companies that use this kind of measures are companies in the soft drinks industry like Coca cola . The small firms are not able to keep up with the competition hence end up making losses and exit the market at their own will. The barriers to entry enable the firms make supernormal profits in the long run. In cases where a firm has a quarter of the market share, the resulting market power is known as a monopoly . This is a state where there is a firm that dominates the market on its own.
The firm is able to dictate the prices of the goods and services that it is providing and this leads the other firms in the market that share the rest of the market to follow these prices. The monopolistic market is characterized by the existence of many buyers. The firm is able to set very high prices that lead it to make supernormal profits. The firm also decides on the output that it can produce and hence this can make the market inefficient. This kind of market structure is sometimes encouraged by various governments to avoid duplication of efforts. A good example is in the service of delivering mails.
It is not efficient for several mail carriers to deliver letters to the same house. Hence the governments encourage only one firm to provide the service . The features that characterize this kind of market structure include the ability of the firms to make very huge profits that are not comparable to the other firms in the market. The firms set the prices very high above the marginal cost which the other firms are not able to maintain. The firm is also able to reduce its prices below the marginal cost in order to eliminate the other firms from the market and discourage other firms from joining.
This acts as a barrier to entry in the market and ensures that other firms are not able to join the industry. By setting the prices very low, the new companies are not able to make profits since they are not able to set higher prices. The monopoly firm is able to operate even though the prices are below the marginal cost of production. The small firms are therefore pushed out of the market. One feature that makes the firms in this market power unattractive is that since there is no direct competition, the firms are not able to carry out their activities efficiently hence their services are hampered.
Good examples of firms that are monopolistic in nature are the electricity companies in various countries. Microsoft Company was once a monopoly in the 1990’s. It was in control of a large share of the computer operating system market and it was able to absorb upcoming competitors that posed a threat to its power . There are various similarities and differences that exist between the two kinds of market powers which are mainly identified through the functions of the two market powers. A monopoly has one single seller while the oligopoly has several sellers. Both markets have a high number of customers that exist.
The two market structure disadvantage the customer by dictating the price and the levels of supply that they will produce. The customers are not able to have a wide variety to select from in both cases. The customers have little or no choice when buying the goods and services that are provided by the firms in both market power structures. There are various ways that a company can use to achieve market power. A company can start with patenting and copyrighting the goods or services that it wants to provide. This can be effective if the company is providing a new product in the market.
The patent can prohibit other companies that may decide to enter the market from selling a similar product for a number of years. Copyrighting gives the company the exclusive right to produce the goods and protect the company from direct competition. The company can also seek government intervention to bar entry of other firms in the same market that the company is dealing in. The government can give the company the exclusive right to operate in that market and avoid competition from other firms. The company can also engage in economies of scale to be in a position to set the prices in the market.
This is effective if the company has been in existence in a particular market for a while and is able to charge low prices below its marginal costs. The company can invest in specialized technology that will enable it to cut down its costs and run efficiently. This will discourage the small firms that are unable to purchase the same kind of technology to use in their processes. This gives the company an edge over other firms and it is able to gain a larger market share and hence gain some power to dictate the prices. The company can take control of the raw materials that are needed to produce the particular product that it is producing.
This will prevent other firms from entering the market since they will not have access to the crucial raw material that is needed for the product to be developed . The company can also develop distribution channels that will prohibit other firms from joining the industry. Exclusive distribution channels that will lead to the customers receiving the goods and services efficiently can also limit the entry of other firms into the industry since they will have to develop their own distribution channels that may be very expensive to establish.
The company can also merge and acquire the small companies that are in existence in the market and are posing a threat through competition. By buying the small companies, the company can be able to eliminate the products of small companies and continue the production of its goods and services from the acquired assets of the small companies. The company can also position itself strategically in a location that will ensure that it gains an advantage over the other companies in the industry. This could be near a railway line for easier transportation, or near the buyers of the products to ensure quick delivery.
Though these monopolies and oligopolies control the prices and the supply of goods and services, they are cautioned against exploiting customers. Governments are trying to come up with measures that will control the powers of the firms. Regulating these firms will prevent them from exploiting their market powers and cause problems to the customers and the market. Some governments have come up with ways of regulating the firms through nationalization.
This allows them to own and operate the firms in a bid to regulate their powers and protect the consumers. This is mostly found in the monopolistic firms that deal with electricity. This however has a disadvantage of turning the profit making companies to making losses and loosing tax payers’ money.
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