A firm may have power over its market. This means that to some degree the seller is able to determine the price charged. Market power develops when:
• a seller is able to distinguish what is offered for sale from that which is on offer from other producers ( product differentiation )
• there is little competition from other sellers
• There is a monopsony buyer which has more influence in the market than the seller does.
A person with scarce skills which are in strong demand will have some power in the labour market because buyers of those skills are competing to hire the few people who have them.
Marketing strategies can be used to increase market power and reduce the threat from competing products. Market power opens up the possibility of being able to determine the price at which the product sells and is a feature of oligopoly, where a small number of firms each have a significant market share. The Competition Commission exists to reduce market power wherever it threatens to work against the interests of the consumer.
Several sources of market power can be seen in the position of the large supermarket chains. Typically, they have market power in relation to suppliers because they can negotiate very favourable prices. Most of their suppliers will be operating in much more competitive markets, being relatively small-scale producers. They also have some market power in relation to consumers because many of the latter have only limited choices about where they can shop. Market power can develop wherever competing substitutes are hard to find. It will always mean that price elasticity of demand is relatively low.