# What Is Market Power (Pricing Power)? Definition and Examples

## What Is Market Power?

Market power, or pricing power, is a company's ability to influence product prices by manipulating supply, demand, or both, enabling control over profit margins and creating barriers for new competitors. For example, Apple has long had significant market power in the smartphone market. In industries with competition, antitrust laws seek to limit excessive market power.

> **Important**
>
> In a market where many producers exist that compete with each other to sell a similar product, such as wheat or oil, producers have very limited market power.

### Key Takeaways

*   Market power allows a company to influence prices by controlling supply, demand, or both.
*   Companies with market power are often "price makers" and can set prices without losing market share.
*   In perfect competition, companies have little market power and are considered price-takers.
*   Monopolistic and oligopolistic markets give producers more power to influence prices.
*   Antitrust laws aim to limit excessive market power to prevent monopolies.

## Decoding Market Power: How Companies Influence Prices

Market power can be understood as the level of influence that a company has on determining market price, either for a specific product or generally within its industry. Take, for instance, Apple Inc. in the smartphone market. Although Apple cannot completely control the market, its iPhone product has a substantial amount of market share and customer loyalty, so it has the ability to affect overall pricing.

Perfect competition is a market state where many companies produce similar products and none has significant power. In markets with perfect or near-perfect competition, producers have little pricing power and so must be [price-takers](https://www.investopedia.com/terms/p/pricetaker.asp). However, perfect competition is a theoretical ideal that's rare in reality.

Many countries have antitrust laws or similar legislation designed to limit the market power of any one company. Market power is often a consideration in the government approval of [mergers](https://www.investopedia.com/terms/m/mergersandacquisitions.asp). Mergers are often blocked if they would create a monopoly or give a company too much power.

The scarcity of a resource or raw material can play a significant role in pricing power, even more so than the presence of rival providers of a product. For example, [various threats](https://www.investopedia.com/articles/markets/080814/how-fracking-affects-natural-gas-prices.asp), such as disasters that put the oil supply at risk, lead to higher prices from petroleum companies, despite the fact that rival providers exist and compete in the market. The narrow availability of oil, combined with the widespread reliance on the resource across multiple industries means that oil companies retain significant pricing power over this commodity.

## Real-World Example: Apple’s Influence in the Smartphone Market

When the iPhone was initially introduced by Apple, the company had substantial market power as it essentially defined the smartphone and app market with the launch of the product. For a short period of time, it had a monopoly.

At the time, iPhones were expensive due to few competing devices. Thus, iPhone prices were set initially by Apple and not by the marketplace. Even as the first competitor smartphones emerged, the iPhone continued to represent the high end of the market in terms of pricing and expected quality. As the rest of the industry began to catch up in service, quality, and availability of apps, Apple’s market power diminished.

The iPhone did not vanish from the market as more entrants arrived. Apple began to offer new models of iPhones in multiple variations, including less-expensive models targeted at more budget-minded consumers.

> **Fast Fact**
>
> Monopsonies are markets where one buyer has all the market power. This concept was developed by economist Joan Robinson in the 1933 book "The Economics of Imperfect Competition."

## Exploring Market Structures: From Perfect Competition to Monopolies

There are three basic marketplace conditions that exist in terms of market power, as applied to either an overall economy or a marketplace for a specific item.

The first is the previously noted ideal condition of perfect competition. With perfect competition, in addition to a number of companies producing the same or a similar product, there are also minimal or no barriers to new companies entering the marketplace. Agricultural markets are often pointed to as examples of relatively perfect competition markets since it is nearly impossible for anyone producer of an agricultural commodity to gain a substantial amount of market power.

The opposite of perfect competition conditions is a monopoly in which one company completely controls the market for a product or service, or at least a portion of the total market, and is able to adjust pricing at will. Limited [monopolies](https://www.investopedia.com/terms/m/monopoly.asp) are often allowed for utility companies, but their ability to raise prices is usually limited by government authority.

An [oligopoly](https://www.investopedia.com/terms/o/oligopoly.asp) refers to a marketplace dominated by a small number of companies, and in which there are substantial barriers to new entrants in the market. Companies in an oligopoly share market power collectively, not individually. The [cellphone service](https://www.investopedia.com/ask/answers/010915/what-are-most-famous-cases-oligopolies.asp) market is an oligopoly, controlled by few firms with high entry barriers.

## What Is an Example of a Price Competition?

Consider the way that a consumer might shop for fruits and vegetables. They may browse produce sectinos at grocery stores, farmer's markets, superstores, and discount retailers across their city. Because there are many firms that sell produce, there will be some that set lower prices than others to entice shoppers. This is a form of price competition.

## Who Has Market Power in a Competitive Market?

In a non-competitive market, such as in a monopoly, a single producer or multiple producers may hold disproportional power, allowing them to set prices as they wish. In a competitive market, the opposite is true: Buyers have power, and can respond to pricing changes by taking their business where they please.

## Is Price-Fixing Legal?

Price-fixing refers to a practice in which multiple firm collaborate to set prices that would otherwise be determined by supply and demand within a competitive market. In general, it is illegal in the U.S. and suspected instances of price-fixing are subject to legal scrutiny and potential criminal prosecution.

## The Bottom Line

Market power, also known as pricing power, refer to a company's relative ability to influence the price of products by manipulating supply, demand, or both. It enables companies to increase their profit margins and and impose barriers to entry for other firms. Many countries including the U.S. have antitrust laws that aim to limit the market power of any one firm.

> **Article Sources**
>
> 1.  Federal Trade Commission. "[Price Fixing.](https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/dealings-competitors/price-fixing)"