Oligopoly Vs Market Power

Market power refers to the amount of influence that a firm has on the industry in which it operates. A firm with market power would be able to affect price to its benefit. Firms with market power are said to be “price makers” as they are able to set the price for an item while maintaining market share.

In a perfectly competitive market firms have zero market power. Individual firms have no control over prices when other firms sell identical or nearly identical products. All firms in a perfectly competitive market are “price takers”. Individual firms simply take the price determined by the market and produce the quantity of output, also determined by the market, which maximizes the firm’s profits. If a perfectly competitive firm attempted to

Each firm produces identical or different varieties of the same product. An oligopolist is not the sole dominator of its market, so it does not have the freedom to “behave to an appreciable extent independently of its competitors”, as the definition states. Interdependence is an important characteristic of an oligopoly. In an oligopoly each firm’s actions affect market conditions. Therefore, when a firm is contemplating a market action, they must consider the possible reactions of competing firms and the firm’s possible

Having great market power is what puts a firm in a dominant market position. The definition of market power is the amount of influence that a firm has on the industry in which it operates. If a firm is able to influence the market substantially then it means that they are in a position where the can alter the market to an extent whereby it only considers the firms best interest and that’s what the European Court’s definition states.

In light of the monopoly theory this definition can be interpreted as the definition of a monopoly. A monopoly is the sole seller of its product so it is in “a position of economic strength” because there is no competition, the monopoly can “behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers” without losing market share.

The definition represents an oligopoly to an extent because oligopolies do have competition in their market with other firms producing similar or identical products. Therefore they cannot act independently of its competitors. However, oligopolies are price makers and are in a position of economic strength. The definition is more fitting to oligopolies that collude and form cartels because they become more like a monopoly. When they act in unison it gives them greater control over the market and collectively can act independently of its