What is meant by market power?

Market power refers to a firm's ability to influence the price, output, or other market conditions in its favour, without being constrained by competitive forces. Firms with significant market power can:

• Set prices above marginal cost (price-making ability).
• Restrict output to maximize profits.
• Influence consumer choice through product differentiation, branding, or other strategies.

Sources of Market Power

1. Barriers to Entry:
   • High startup costs, economies of scale, legal barriers (e.g., patents), or access to essential resources.
2. Product Differentiation:
   • Unique products or services that consumers perceive as superior or irreplaceable.
3. Network Effects:
   • Increased value as more people use a product or service (e.g., social media platforms).
4. Control Over Supply:
   • Firms dominating supply chains can dictate terms and conditions in the market.

Examples of Market Power with Recent Data

1. Technology Sector (Google, Amazon, Apple, Meta, Microsoft)

• Market Share:
  • Google controls over 90% of global search engine traffic (Statista, 2023).
  • Amazon accounts for 40% of U.S. e-commerce sales (eMarketer, 2023).
• Market Power:
  • Google leverages its dominance in search to charge higher ad rates.
  • Amazon exerts influence over suppliers and marketplace participants by controlling distribution channels.
• Regulatory Concerns:
  • In 2023, the U.S. Federal Trade Commission (FTC) filed a lawsuit against Amazon for anticompetitive practices, including suppressing competition from smaller sellers.
  • Apple faces scrutiny in the EU for requiring app developers to use its payment system, charging fees of up to 30%.

2. Energy Sector (OPEC and Big Oil Companies)

• Market Share:
  • OPEC controls about 80% of the world's proven oil reserves and accounts for 40% of global oil production.
• Market Power:
  • OPEC uses production quotas to influence global oil prices, such as the decision in April 2023 to cut production by 1.6 million barrels per day, leading to a surge in oil prices.
• Implications:
  • Higher energy prices impact consumers and industries reliant on oil.

3. Pharmaceuticals (Pfizer, Moderna, Roche)

• Market Share:
  • Pfizer and Moderna dominate the global COVID-19 vaccine market, with combined revenues exceeding $100 billion in 2021–2022.
• Market Power:
  • Patent protection and R&D costs create barriers for competitors.
  • Firms can set high prices due to the essential nature of their products.
• Example:
  • The U.S. government criticized Pfizer for pricing its COVID-19 antiviral drug, Paxlovid, at $530 per course after public funding supported its development.

4. Airlines

• Market Share:
  • In the U.S., the four largest carriers (American Airlines, Delta, Southwest, United) account for 80% of domestic air travel.
• Market Power:
  • Airlines use their dominance to charge high fares during peak travel seasons, as seen in 2023, when summer airfares increased by over 30% compared to 2022.
• Behavior:
  • Limited competition on specific routes allows airlines to increase ticket prices significantly.

5. Retail (Supermarkets in the UK)

• Market Share:
  • Tesco holds 27.5% of the UK grocery market (Kantar, 2023).
  • Sainsbury’s, Asda, and Morrisons collectively control another 40%.
• Market Power:
  • Dominant players negotiate favorable terms with suppliers, sometimes squeezing smaller producers.
• Regulatory Action:
  • In 2023, the UK Competition and Markets Authority (CMA) investigated Tesco for using its purchasing power to engage in anti-competitive practices.

Implications of Market Power

1. For Consumers:
   • Negative: Higher prices, limited choices, reduced innovation in markets with monopolistic tendencies.
   • Positive: Stable product supply and potentially higher quality due to firm investments in R&D.
2. For Competitors:
   • Small competitors may be driven out of the market due to predatory pricing or exclusionary tactics.
3. For the Economy:
   • Market inefficiencies may arise due to allocative and productive inefficiencies when prices deviate from marginal costs.

Conclusion

Market power allows firms to shape market dynamics to their advantage, often leading to higher profits but also raising concerns about fairness, efficiency, and consumer welfare. Recent examples from the tech, energy, and pharmaceutical sectors highlight how market power operates and the regulatory challenges in ensuring competitive markets. Balancing innovation and competition is essential to managing the effects of market power effectively.