Not only that, but the granting of patents, copyrights, licenses, protection of other intellectual property rights also contributes to market power. Usually, it is for strategic industries such as utilities and the weapons industry. The government may only permit one company to operate in the market. Monopoly power also arises because of regulatory support. The firm does not have the power to influence market prices and charge the selling price at a marginal cost level-the closer to 0, the closer to perfect competition. They can charge more than their marginal cost-the greater the index value, the greater the monopoly power.įurthermore, in perfect competition, Lerner’s Index is equal to zero (L = 0). When Lerner’s index is positive (L≥0), the firm has monopoly power. Where P is price, MC is marginal cost and E is the elasticity of demand. In fact, the market might require only one company to produce cheap output. To achieve economies of scale and lower costs, it requires a few players. Take, for example, a market (industry) which has the characteristics of a significant proportion of fixed costs. Market power comes from a variety of sources, including:Įconomies of scale affect a firm’s cost structure. Long story short, differentiation increases consumer switching costs. Once the company charges a higher price than other players, consumers will switch to cheaper products. Conversely, when producing a homogeneous product (mass product), the power over the selling price decreases.
Product differentiation. Differentiation increases a firm’s ability to set a selling price.Moreover, if the market consists of a few players, it was easy for them to collude in setting prices. It will increase when the market leads to monopoly. As I explained earlier, market power in perfect competition is zero. The fewer players, the greater the monopoly power. In that case, the new entrant may offer at the equilibrium price, encouraging more purchases. Suppose the current firm charges a higher price than the equilibrium price. New entrants bring new capacities to the market and add choices for consumers. The higher the entry barriers, the higher the company’s chance to gain and maintain monopoly power.
The significance of monopoly power depends on: Furthermore, the customer doesn’t have the option to switch to another product because there is no substitute product. Barriers to entry are also very high, allowing the company to maintain its power. The monopolist has neither direct competitors nor threats from substitute products. The monopolist determines supply, product quality, and selling price because it is the sole supplier. Or, they may collude or form cartels.įinally, the power over market prices is absolute in a monopoly market.
I mean, in designing strategy, companies are likely to observe strategic decisions made by their opponents. Under an oligopoly market, competition has a more intriguing dimension. The fewer players, the higher the power over the selling price. Because the market comprises a few firms, firms have more market power than monopolistic competitive markets. Differentiation allows the company to set a selling price that is higher than the market price.įurthermore, monopoly power is getting more significant in the oligopoly market. One way is to differentiate product features or branding through advertising. They do this by differentiating the offer. In a monopolistic competitive market, firms have some power to set prices. Price takers work in a perfectly competitive market. It only takes the market price as the selling price of its products. When a company is a price taker, it has no control over their products’ selling price, let alone influence the market price. Monopoly power is often contrasted with a price taker. The relationship between monopoly power and market structure Monopoly power is synonymous with market power and is often used interchangeably in some literature.
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