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Sources and causes of market power
The market structure has many facets, which is reflected in its various indicators. To determine the market structure (the level of monopoly power, the freedom of entry of the company into the industry, its ability to influence the price) it is important to determine the value of the concentration of sellers in the market. With high barriers to entry into the industry, the concentration of sellers can be realized in monopoly power - the ability to set a price that provides a sufficiently high economic profit.
The market is
• place of sale of services and goods, conclusion of trade transactions;
• economic relations associated with the exchange of goods and services, as a result of which demand, supply and price are formed.
Consideration of the two extreme types of market structures - perfect competition and pure monopoly - allows us to approach the definition of market power.
Market power means an opportunity for a firm to influence price and increase economic profits by limiting production and sales. Price, profit and volume are the objects of market power.
The degree of market monopolization quite fully determines the level of market power of individual firms. In perfect competition markets, no company in the industry has market power, since it cannot influence the price level.
Market power manifests itself most strongly in pure monopoly, and the nature of the emergence of pure monopoly is the source and cause of market power.
The main sources and causes of market power include:
1) The effect of scale production. Efficient and low-cost production using modern technology in some industries can be achieved through large volumes of production and sales. The effect of scale growth will be manifested in a reduction in average costs or unit costs. Therefore, with a certain market demand, the achievement of low costs per unit of production and, consequently, low prices per unit of production depends on the existence of several large firms or only one firm. Such situation
possible in industries such as steel, aluminum, gas, oil, energy. Enter in such industries can only be a large producer with large cash capital. It is quite difficult to obtain such capital for a new producer, and without it it is impossible to acquire technologies and equipment comparable to an existing large company. Therefore, financial barriers arise here, equivalent to prohibitive.
2) Natural monopoly. In these sectors, the economies of scale in production are particularly pronounced, and competition is either difficult or simply impossible. The state is granted exclusive privileges to these sectors; these include, for example, public utilities - power supply, water supply, gas supply, transport, etc. In exchange for the provided
exclusive rights to be a monopoly, the state reserves the right to regulate monopoly power in the field of quality of services, price control.
3) Administrative barriers: licenses and patents. Entry into the industry can be limited by the state by issuing licenses, for example, television companies, companies producing strong alcoholic drinks and the state monopoly on their sale.
The grant of patents for an invention gives the right to the inventor the exclusive right to control a product or technology from illegal seizure by competing firms that did not incur labor and capital costs for its development. Patents also provide the inventor with a monopoly position for the duration of the patent. So patent control played a serious role in the formation of such major corporations as Xerox, Polaroid, General Motors. The monopoly power obtained through patents can be strengthened, since the profits obtained from the use of the patent can be used by the monopolist to finance subsequent scientific and technical developments, which will result in patenting of new inventions.
4) Ownership of the most important raw materials. In this case, the institution of ownership is used by the monopoly as a means of preventing potential competitors from entering the industry. Thus, thanks to control over the main sources of bauxite, Aluminum Company of America maintained a monopoly position in the aluminum industry, Russian Sugar Syndicate controlled sugar beet farms, and De Beers Company of Africa, which owns most of the world's diamond mines, maintains a monopoly position in this industry.
Along with the considered main barriers that prevent a potential competitor from entering the industry and serving as sources and causes of market power, others are possible: customs restrictions and direct import bans, difficulties in obtaining loans and, finally, unfair competition.
However, pure monopoly is quite rare. As a rule, either monopoly power is divided between several large firms (oligopoly), or many small firms operate on the market, each of which produces products different from the others (monopolistic competition).
In these cases, market power depends on the following factors:
1. The elasticity of market demand.
Demand for the products of an individual company cannot be less elastic than market demand. The more firms are presented on the market, the more elastic will be the demand for the products of each of them. The presence of competitors does not allow an individual company to significantly raise the price without fear of losing part of its sales market.
2. The number of firms in the market.
However, only this indicator does not give an idea of how monopolized the market is. The competitiveness of the market as a whole is assessed by means of special coefficients and indices characterizing the degree of monopolization of the market.
3. The behavior of firms in the market.
If firms adhere to a strategy of fierce competition, lower prices to capture a larger market share and crowd out competitors, as a result, prices may drop to almost a competitive level and price and marginal costs will be equal. Monopoly power and, accordingly, firms' revenues are declining. However, obtaining high profits is very attractive for any company, therefore, instead of aggressive competition, firms would prefer explicit or secret conspiracy, a division of the market, i.e. unfair competition.
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