Introduction to Part II: Market power

Firms are assumed to maximize profits but the market environment limits their abilities to exploit consumers. Indeed, if we can believe the perfectly competitive paradigm, firms will end up selling at a price equal to marginal costs. In particular, if firms are price takers and small compared to the industry, they will not exert any market power.

But what happens if firms are not small compared to the industry they are operating in? This is certainly the case for heavy weights such as Coca Cola, Microsoft, Nokia, Mittal-Arcelor, Gazprom, Anheuser-Bush InBev and the like. These large firms have seized a significant share of their respective markets. They can thus hardly be described as price takers. Yet, as they face competition from a number of other firms, they cannot either be described as pure price makers, like the monopolies we studied in the previous chapter. While these large firms undeniably exert market power, so do their smaller competitors. Market power – i.e., the ability to ‘make the price’ or to sell at prices above marginal costs – is thus collectively shared in those industries in which a few firms compete with one another. Such industries are called oligopolies (from the Greek ‘oligo’, which means ‘small number’). The vast majority of industries are oligopolies.