Regulation of market power

Market power refers to a company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both. In markets with perfect or near-perfect competition, producers have little pricing power and so must be price-takers. How monopolies and monopsonies would try to force changes in the price and quantity to move the market to their advantage, but at an even greater cost to the other side of the market. Again, this is not simply an equity concern that one party is getting most of the surplus created by the market (although that may be a legitimate concern) but rather the exertion of market power results in a net loss in total social surplus. 

Seller competition is not only helpful in lowering prices and increasing volume and consumer surplus, but firms also compete in terms of product differentiation. When a monopoly or oligopoly emerges and the seller(s) have a sustainable arrangement that generates economic profits, the firms do not have the incentive to spend money in developing better products. 

The stagnation of the product sold represents another loss in potential value to the consumer. Unfortunately, monopolies or tight oligopolies can readily develop in markets, especially when there are strong economies of scale and market power effects. For this reason, there are general antitrust laws that empower governments to prevent the emergence of monopolies and tight oligopolies. Some of these laws and regulations actually cite measures of market concentration that can be used as a basis for opposing any buyouts or mergers that will increase market concentration. Where market concentration has already advanced to high levels, firms can be instructed to break up into separate companies. 

About a century ago, monopolies had developed in important U.S. industries like petroleum, railroads, and electric power. Eventually, the U.S. federal government mandated these monopolies split apart. As mentioned in earlier chapters, the fact that there are a few large sellers does not automatically constitute abusive use of market power if there is free entry and active competition between sellers. However, if those large sellers collude to hold back production volumes and raise prices, there is a loss in market surplus. The United States has laws that outlaw such collusion. While firms may be able to collude with indirect signals that are difficult for government antitrust units to identify at the time, courts will consider testimony that demonstrates that collusion has taken place.