• MARKET POWER refers to THE DEGREE TO WHICH A FIRM IS ABLE TO RAISE ITS PRICE WITHOUT LOSING A SIGNIFICANT NUMBER OF ITS CUSTOMERS (PRICE-SETTING ABILITY)

• The extent to which this is possible DEPENDS PRIMARILY ON THE NUMBER AND CLOSENESS OF SUBSTITUTES AVAILABLE (LEVEL OF COMPETITION) 

• Which in turn is determined by how well it can DIFFERENTIATE ITSELF from its rivals.

• As mentioned above, the main determinant of MARKET POWER is the LEVEL OF COMPETITION, which is heavily influenced bxxxy the level of DIFFERENTIATION, for each type of firm below, decide whether they have a significant amount of MARKET POWER and explain your answer in terms of the LEVEL OF COMPETITION and DIFFERENTIATION they face.

• For each of these firms consider the following questions

  • • Is the same price charged by all firms in the industry?

    • Is it able to raise its price and still keep some of its customers?

    • Do they produce completely identical products?

    • Is it just one of thousands of small-scale firms?

    • If it left the market, would the market price rise? 

    • If its profitable, can new firms easily enter the industry to compete?

    • Do all consumers know about the existence of substitutes?

--1) NOODLE STALL IN HAWKER'S MARKET--

-2) ORGANISATION of PETROLEUM EXPORTING COUNTRIES-

--3) FRUIT STALL IN A WET MARKET--

--4) SINGAPORE MTR--

--5) ADIDAS TRAINERS--

--6) OVERSEAS FAMILY SCHOOL--

--7) MONEY EXCHANGERS--

• The ability to set prices implies firms do not have to accept the free market competitive price and this in turn implies they do not need to produce at their allocatively efficient levels, rather they will produce at a level that MAXIMISES PROFITS, which you will soon see means that they will ALWAYS PRODUCE at a level BELOW THEIR EFFICIENT LEVEL, and hence UNDERPRODUCE.

• But is it realistic to believe that a firm will always price at the equilibrium price? For this to occur we are making some very UNREALISTIC ASSUMPTIONS that rarely apply in the real world.

• To illustrate these inaccurate assumptions imagine that we had a supply and demand diagram showing the market for IBDP schools in Singapore. For this to be an accurate we are assuming the following about OFS:-

  • • There is a SINGLE PRICE CHARGED for all IBDP courses by all Singapore-based international schools. NOT TRUE!

    • If OFS was to RAISE ITS PRICE above this level, 100% of CUSTOMERS WOULD LEAVE to go to a rival school, that offers a PERFECT SUBSTITUTE. NOT TRUE!

    • OFS is UNABLE TO DISTINGUISH ITSELF in any way whatsoever from its rivals in the eyes of customers (e.g through location, design, facilities, marketing etc...) and thus they PRODUCE COMPLETELY IDENTICAL PRODUCTS. NOT TRUE!

    • OFS is just ONE OF THOUSANDS OF SMALL-SCALE SUPPLIERS of the IBDP in Singapore with no ability to grow in size and therefore HAS NO IMPACT ON THE OVERALL MARKET SUPPLY. NOT TRUE!

    • New schools freely ENTER the market whenever demand increases and EXIT the market when demand decreases. NOT TRUE!

• With reference to the example above, our models so far are all assuming that there is PERFECT COMPETITION between all firms and that they are just one of MANY SMALL COMPETING FIRMS, that are all PRODUCING IDENTICAL (HOMOGENOUS) PRODUCTS and therefore have to TAKE THE COMPETITIVE MARKET PRICE, (Hence they HAVE NO PRICE SETTING ABILITY or in other words MARKET POWER) 

• Diagrammatically this implies each firm faces a PERFECTLY ELASTIC DEMAND CURVE, placed at the market price.

                           --MARKET--         --FIRM--