What is Market Power?
Market power refers to the relative ability of a business to control the market price of an item by influencing the level of supply, demand, or both. Market power is also known as pricing power.
A company with significant market power has the power to manipulate the market rate and thus control its profit margin, and potentially the ability to increase barriers to potential new market entrants.
Companies with market power are often defined as "price makers," since they can set or adjust an item's market price without giving up market share.
Understanding the Market Power
Market power can be described as the level of control a business has on deciding market price, either for a particular product or for its industry in general. An example of market power in the smartphone market is Apple Inc. Although Apple can't fully control the market, it is the iPhone product that has substantial market share and customer loyalty, so it has the ability to influence overall smartphone market pricing.
The ideal condition of the economy is what is referred to as a state of perfect competition, in which there are numerous companies manufacturing competing products and no company has substantial market control. Producers have little pricing power in markets with the perfect or near-perfect competition, and thus must be price-takers.
The shortage of a resource or raw material, even more so than the presence of competing suppliers of a commodity, may play a significant role in pricing power. For example, multiple risks, such as disasters that jeopardize oil supply, will result in higher petroleum companies' costs, despite the fact that competing suppliers exist and compete on the market.
Combined with the widespread dependence on the resource across multiple industries, the limited supply of oil means oil companies maintain considerable pricing power over that product.
An Example of Market Power
For example, when Apple initially introduced the iPhone, the company had tremendous market power because it effectively established the mobile and app industry with the product launch—it was the monopoly for a short period of time.
The cost of obtaining an iPhone was high at the time and could remain so due to a shortage of competing products. Thus, Apple initially set iPhone prices and not the marketplace.
Even with the introduction of the first rival smartphones, the iPhone continued to display the market's high end in terms of price and anticipated efficiency. As the rest of the industry started to catch up with apps in service, quality, and availability, Apple's market power decreased.
The iPhone hasn't vanished from the market with more entrants. Apple began offering new iPhone models in multiple variations, including less expensive models aimed at more budget-conscious buyers.
