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In economics, market power (sometimes called monopoly power) is a 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. Market participants that have market power are sometimes referred to as "price makers", while those without are sometimes called "price takers".In perfectly competitive markets, market participants have no market power. A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. If the demand curve is downward sloping (that is, the most common situation where price increases lead to a lower quantity demanded), then the decrease in supply as a result of the exercise of market power creates an economic deadweight loss in comparison with a situation of perfect competition. This is often viewed as socially undesirable, and as a result, many countries have anti-trust or other legislation with the aim of limiting the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture .
A firm usually has market power by virtue of it 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 a good indicator of market power. Highly concentrated markets may be 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 behaviour. Such behaviour may include predatory pricingPredatory pricing is the practice of a dominant firm selling a product at a loss in order to drive some or all competitors out of the market. The other firms must lower their prices in order to compete with the predatory pricer, which causes them to lose, product tyingTying is the anti-competitive practice of requiring de facto or de jure the customer to purchase a certain package of goods together. It is implied in this that one or more components of the package are sold individually by other businesses as their prima, and creation of 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 collusionIn the study of economics, collusion takes place within an industry when rival companies cooperate for their mutual benefit. Collusion most often takes place within the market form of oligopoly, where the decision of a few firms to collude can significant, or the exercise of a group of participants' collective market power.
When several firms each have significant market power, the resulting market structure is called an oligopolyAn oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few sellers''. Because there are few participants in this type of market, each oligopolist is aware of the act or oligopsonyAn oligopsony is a market characterised by a small number of consumers for a product or a service. See also Monopsony.. The behavior of firms in perfect competition or monopoly can be treated as a simple optimizationOptimization is a general term for extremum searching (maximizing or minimizing) of particular properties. In mathematics, it is usually the value of a particular function. Optimization is a part of the broader discipline of Operations research when appli, but an oligopoly requires game theoreticThis article discusses the mathematical modelling of incentive structures. For other games (and their theories) see Game (disambiguation). Game theory is a branch of mathematics that uses models to study interactions with formalized incentive structures ( analysis.
A well known example of monopoly market power is Microsoft'sMicrosoft Corporation , headquartered in Redmond, Washington, USA, is the world's largest software company (with over 50,000 employees in various countries, as of May 2004). Microsoft develops, manufactures, licenses and supports a wide range of software market share in PC operating systems. The Microsoft antitrust case concerned the allegation that Microsoft illegally exercised its market power by bundling its web browser with its operating system. Some have suggested that Wal Mart exercises monopsonistic market power; its size allows it to extract extremely low prices from its suppliers.
