Legal Definitions - market power

Market power refers to a company's ability to influence the price of its goods or services in the market without losing all its customers to competitors. Essentially, it means the company can raise its prices above what they would be in a perfectly competitive market and maintain those higher prices for a significant period, still making a profit.

When a company has significant market power, it faces less pressure from rivals to lower prices or improve quality, because consumers have limited alternatives. In the context of antitrust law, a very high degree of market power can be considered monopoly power, which can lead to legal scrutiny if abused.

• Example 1: Patented Life-Saving Drug

  A pharmaceutical company develops and patents a groundbreaking drug that is the only effective treatment for a rare, life-threatening disease. Because there are no substitute medications available, the company can set a very high price for the drug. Patients and their insurance providers will pay this price because the alternative is much worse. The company can sustain this high price for the duration of its patent, demonstrating its significant market power by controlling supply and pricing without fear of competition.

• Example 2: Specialized Industrial Software

  Consider a company that develops highly specialized software essential for operating a specific type of complex industrial machinery used globally. This software is deeply integrated into manufacturing processes, and switching to another (non-existent) system would be prohibitively expensive and disruptive for manufacturers. The software company has substantial market power because its customers are effectively "locked in." Even if the company significantly raises its annual licensing fees, the manufacturers are unlikely to switch or develop their own alternatives due to the immense cost and operational risk involved. The company can dictate prices without fear of losing its customer base.

• Example 3: Sole Internet Provider in a Rural Area

  In a sparsely populated rural region, only one telecommunications company has invested in the infrastructure necessary to provide high-speed internet service. Other providers find it uneconomical to build competing networks in such a low-density area. This sole provider possesses market power. Residents and businesses in that area have no other viable options for high-speed internet. The company can charge higher monthly fees and offer less flexible plans than those found in competitive urban markets, knowing its customers must accept these terms if they want internet access.