Q.1 Explain what is meant by the term “market power”. Briefly describe how firms might act to increase their market power In economic terms and particularly in industries, market power can be referred to as an ability of the firm to increase the market price of a product or service provided profitably over and above the marginal cost. In case of perfect competition in the market, the market participants are not able to exercise the market power. A firm which has market power will be able to raise the price of a good without the fear of losing any customer to its competitors. Those who have the market power are also referred to as price makers. Market power occurs significantly when the price exceeds marginal cost and average cost in the long run which gives the firms a chance to make economic profits (‘Market Power’, 2015).
Firms may indulge in predatory pricing or product tying in order to increase their market power. If the scale of business increases, it leads to greater output which lowers the cost of production. Marketers use this strategy to enhance their market power. Monopoly market tends to have the highest market power due to the lack of competition.
Q.2 In what ways is oligopoly different to the market structures of monopolistic competition and monopoly?
Oligopoly represents a market structure which contains a small number of relatively large business entities which make a crucial barrier to entry of other firms. It is different from monopolistic competition which is a market structure consisting of large number of relatively small firms. A particular industry under monopolistic competition shall be located in a large city while oligopoly can be seen in a small town. On the other hand, Monopoly is a market structure where there is only one provider of service or a product. Higher prices can be charged in Monopoly as there is lack of competition whereas moderate or fair pricing is done for competition in the oligopoly market (Diffen.com, 2015).