Editing Market power (section)

== Market structure ==
[[File:Market Structures .jpg|thumb|Different types of market structures]]
In economics, market structure can profoundly affect the behavior and financial performance of firms.<ref name=":0">{{Cite book |last=Besanko |first=David |title=Economics of Strategy|publisher=  |location= United States |year=2013 |isbn=9781118273630 |edition=6th |pages=171–172}}</ref> [[Market structure]] depicts how different industries are characterized and differentiated based upon the types of goods the firms sell (homogenous/heterogenous) and the nature of competition within the industry.<ref name="Lábaj 1694–1715">{{Cite journal|last1=Lábaj|first1=Martin|last2=Morvay|first2=Karol|last3=Silanič|first3=Peter|last4=Weiss|first4=Christoph|last5=Yontcheva|first5=Biliana|date=2018-03-28|title=Market structure and competition in transition: results from a spatial analysis|journal=Applied Economics|language=en|volume=50|issue=15|pages=1694–1715|doi=10.1080/00036846.2017.1374535|issn=0003-6846|doi-access=free}}</ref> The degree of market power firms assert in different markets are relative to the market structure that the firms operate in. There are four main forms of market structures that are observed: [[perfect competition]], [[monopolistic competition]], [[oligopoly]], and [[monopoly]].<ref name="Lábaj 1694–1715"/> Perfect competition and monopoly represent the two extremes of market structure, respectively. Monopolistic competition and oligopoly exist in between these two extremes.<ref name=":0" />

=== Perfect competition power ===
"Perfect Competition" refers to a market structure that is devoid of any barriers or interference and describes those marketplaces where neither corporations nor consumers are powerful enough to affect pricing. In terms of economics, it is one of the many conventional market forms and the optimal condition of market competition.<ref>{{Cite journal |last=Robinson |first=Joan |date=1934 |title=What is Perfect Competition? |journal=The Quarterly Journal of Economics |volume=49 |issue=1 |pages=104–120 |doi=10.2307/1883878 |jstor=1883878 |doi-access=free }}</ref> The concept of [[perfect competition]] represents a theoretical market structure where the market reaches an equilibrium that is [[Pareto optimal]]. This occurs when the quantity supplied by sellers in the market equals the quantity demanded by buyers in the market at the current price.<ref>{{Cite book|last=Debreu|first=Gerard|title=Theory of value; an axiomatic analysis of economic equilibrium|date=1959|publisher=Yale University Press|isbn=0-300-01558-5|location=New Haven|oclc=420976}}</ref> Firms competing in a perfectly competitive market faces a [[Price|market price]] that is equal to their [[marginal cost]], therefore, no economic profits are present. The following criteria need to be satisfied in a perfectly competitive market:

# Producers sell homogenous goods
# All firms are price takers
# Perfect information 
# No barriers to enter and exit 
# All firms have relatively small market share and cannot influence price

As all firms in the market are price takers, they essentially hold zero market power and must accept the price given by the market. A perfectly competitive market is logically impossible to achieve in a real world scenario as it embodies contradiction in itself and therefore is considered an idealised framework by economists.<ref>{{Cite journal |last=McDermott |first=John F. M. |date=2015-05-19 |title=Perfect competition, methodologically contemplated |journal=Journal of Post Keynesian Economics |volume=37 |issue=4 |pages=687–703 |doi=10.1080/01603477.2015.1050335 |s2cid=154042857 |issn=0160-3477}}</ref>

=== Monopolistic competition power ===
[[Monopolistic competition]] can be described as the "middle ground" between [[perfect competition]] and a [[monopoly]] as it shares elements present in both market structures that are on different ends of the market structure spectrum.<ref>{{Cite book|last=Barkley|first=Andrew |title=The Economics of Food and Agricultural Markets|date=2016|isbn=978-1-944548-22-3|edition=|location=Minneapolis|oclc=1151088067}}</ref> Monopolistic competition is a type of market structure defined by many producers that are competing against each other by selling similar goods which are differentiated, thus are not perfect substitutes.<ref>{{Cite book |last=Krugman |first=Paul R. |title=International economics: theory and policy |date=2009 |publisher=Pearson Addison-Wesley |author2=Maurice Obstfeld |isbn=978-0-321-49304-0 |edition=8th |location=Boston |oclc=174112719}}</ref> In the short term, firms are able to obtain [[Profit (economics)|economic profits]] as a result of differentiated goods providing sellers with some degree of market power; however, profits approaches zero as more competitive toughness increases in the industry.<ref>{{Cite journal|last1=d’Aspremont|first1=Claude|last2=Dos Santos Ferreira|first2=Rodolphe|date=June 2016|title=Oligopolistic vs. monopolistic competition: Do intersectoral effects matter?|url=http://link.springer.com/10.1007/s00199-015-0905-8|journal=Economic Theory|language=en|volume=62|issue=1–2|pages=299–324|doi=10.1007/s00199-015-0905-8|s2cid=155013659|issn=0938-2259}}</ref> The main characteristics of monopolistic competition include:

#Differentiated products
# Many sellers and buyers
# Free entry and exit 
Firms within this market structure are not price takers and compete based on product price, quality and through marketing efforts, setting individual prices for the unique differentiated products.<ref>{{Cite web|title=Monopolistic Competition – Overview, How It Works, Limitations|url=https://corporatefinanceinstitute.com/resources/knowledge/economics/monopolistic-competition-2/|access-date=2021-04-27|website=Corporate Finance Institute|language=en-US}}</ref> Examples of industries with monopolistic competition include restaurants, hairdressers and clothing.

===Monopoly power ===
The word monopoly is used in various instances referring to a single seller of a product, a producer with an overwhelming level of market share, or refer to a large firm.<ref>{{Citation|last1=McKenzie|first1=Richard B.|title=Deadweight-Loss Monopoly|date=2008|url=https://www.jstor.org/stable/j.ctvnjbdsg.5|work=In Defense of Monopoly|pages=25–53|series=How Market Power Fosters Creative Production|publisher=University of Michigan Press|isbn=978-0-472-11615-7|access-date=2021-04-25|last2=Lee|first2=Dwight R.|jstor=j.ctvnjbdsg.5}}</ref> All of these treatments have one unifying factor which is the ability to influence the market price by altering the supply of the good or service through its own production decisions. The most discussed form of market power is that of a [[monopoly]], but other forms such as [[monopsony]] and more moderate versions of these extremes exist. A monopoly is considered a '[[market failure]]' and consists of one firm that produces a unique product or service without close substitutes. Whilst pure monopolies are rare, monopoly power is far more common and can be seen in many industries even with more than one supplier in the market.<ref name="economicsonline.co.uk">{{Cite web|date=2020-01-29|title=Monopoly power as a market failure {{!}} Economics Online {{!}} Economics Online|url=https://www.economicsonline.co.uk/Market_failures/Monopoly_power.html|access-date=2021-04-20|language=en-US}}</ref> Firms with monopoly power can charge a higher price for products (higher markup) as demand is relatively inelastic.<ref name="Monopoly Power">{{Cite web|title=Monopoly Power|url=https://xplaind.com/327596/monopoly-power|access-date=2021-04-20|website=xplaind.com|date=23 February 2019 |language=en}}</ref> They also see a falling rate of labour share as firms divest from expensive inputs such as labour.<ref name="De Loecker 561–644">{{Cite journal|last1=De Loecker|first1=Jan|last2=Eeckhout|first2=Jan|last3=Unger|first3=Gabriel|date=2020-05-01|title=The Rise of Market Power and the Macroeconomic Implications*|journal=The Quarterly Journal of Economics|volume=135|issue=2|pages=561–644|doi=10.1093/qje/qjz041|issn=0033-5533|doi-access=free}}</ref> Often, firms with monopoly power exist in industries with high barriers to entry, which include, but are not limited to:

# [[Economies of scale]]
# [[Predatory pricing]]<ref name="economicsonline.co.uk"/>
# Control of key resources (required in production of the good)
# Legal regulations<ref name="Monopoly Power"/>

A well-known example of monopolistic market power is [[Microsoft|Microsoft's]] market share in [[IBM PC compatible|PC]] [[operating system]]s. The ''[[United States v. Microsoft]]'' case dealt with an allegation that Microsoft illegally exercised its market power by bundling its [[web browser]] with its operating system. In this respect, the notion of dominance and dominant position in EU Antitrust Law is a strictly related aspect.<ref>Vatiero, M. (2009). "An Institutionalist Explanation of Market Dominances. World Competition". ''Law and Economics Review'', 32(2):221–226.</ref>

===Oligopoly power===
Another form of market power is that of an [[oligopoly]] or [[oligopsony]]. Within this market structure, the market is highly concentrated and several firms control a significant share of market sales.<ref>{{Cite web|date=2020-01-20|title=Oligopoly – characteristics {{!}} Economics Online |url=https://www.economicsonline.co.uk/Business_economics/Oligopoly.html|access-date=2021-04-18|language=en-US}}</ref> The emergence of oligopoly market forms is mainly attributed to the monopoly of market competition, i.e., the market monopoly acquired by enterprises through their competitive advantages, and the administrative monopoly due to government regulations, such as when the government grants monopoly power to an enterprise in the industry through laws and regulations and at the same time imposes certain controls on it to improve efficiency.<ref>{{Cite book |last=Carr |first=Christopher |title=Global Oligopoly : a Key Idea for Business and Society |publisher=Routledge |year=2020 |isbn=9780429316050 |edition=1st}}</ref> The main characteristics of an oligopoly are:

# A few sellers and many buyers.
# Homogenous or differentiated products. 
# High barriers to entry. This includes, but is not limited to, 'technology challenges, government regulations, patents, start-up costs, or education and licensing requirements'.<ref>{{Cite web|title=Barriers to Entry – Types of Barriers to Markets & How They Work|url=https://corporatefinanceinstitute.com/resources/knowledge/economics/barriers-to-entry/|access-date=2021-04-18|website=Corporate Finance Institute|language=en-US}}</ref>
# Interaction/strategic behaviour.

It is salient to note that only a few firms make up the market share. Hence, their market power is large as a collective and each firm has little or no market power independently.<ref name=":1">{{Cite web|title=Section 3: Characteristics of an Oligopoly Industry {{!}} Inflate Your Mind|url=https://inflateyourmind.com/microeconomics/unit-8-microeconomics/section-3-characteristics-of-an-oligopoly-industry/|access-date=2021-04-18|language=en-US}}</ref> For firms trying to enter these industries, unless they can start with a large production scale and capture a significant market share, the high average costs will make it impossible for them to compete with the existing firms.<ref>{{Cite journal |last=Stigler |first=George J |date=May 1950 |title=Monopoly and Oligopoly by Merger |url=https://www.jstor.org/stable/1818020 |journal=The American Economic Review |volume=40 |issue=2 |pages=23–34 |jstor=1818020 }}</ref> Generally, when a firm operating in an oligopolistic market adjusts prices, other firms in the industry will be directly impacted.

The graph below depicts the kinked demand curve hypothesis which was proposed by [[Paul Sweezy]] who was an American economist.<ref>{{Cite web|title=Kinked Demand Curve|url=https://www.toppr.com/guides/business-economics/determination-of-prices/kinked-demand-curve/|access-date=18 April 2021|website=Toppr|date=17 October 2018 }}</ref> It is important to note that this graph is a simplistic example of a kinked demand curve.

[[File:KinkedDemandCurve.gif|thumb|center|Kinked Demand Curve]]

Oligopolistic firms are believed to operate within the confines of the kinked demand function. This means that when firms set prices above the prevailing price level (P*), prices are relatively elastic because individuals are likely to switch to a competitor's product as a substitute. Prices below P* are believed to be relatively inelastic as competitive firms are likely to mimic the change in prices, meaning less gains are experienced by the firm.<ref>{{Cite web|title=Interdependence in Oligopolies |url=https://revisionworld.com/a2-level-level-revision/economics-level-revision/business-economics-distribution-income/concentrated-markets/interdependence-oligopolies|access-date=2021-04-18|website=revisionworld.com}}</ref>

An oligopoly may engage in [[collusion]], either tacit or overt to exercise market power and manipulate prices to control demand and revenue for a collection of firms. A group of firms that explicitly agree to affect market price or output is called a [[cartel]], with the organization of petroleum-exporting countries ([[OPEC]]) being one of the most well known example of an international cartel.