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Helpful prior knowledge and learning objectives
Helpful prior knowledge and learning objectives
Helpful prior learning:
Section 1.1.1 The economy and you, which explains what an economy is and how it is relevant to students’ lives
Section 1.1.2 The embedded economy, which explains the relationship between the economy and society and Earth’s systems
Section 1.1.3 Degenerative economies, which explain the problems for people and planet with the way our current economies operate.
Section 3.1.1 The market as a system, which describes market parts and their relationships, and the connection between the household and the rest of the economy.
Section 3.1.2 Demand and supply, which explains the factors affecting supply and demand and the dynamic relationships and feedback between supply, demand and prices.
Section 3.1.3 Elasticity, which explains the concept of elasticity generally, and focuses on the factors affecting price elasticity of demand and its link to market power.
Section 3.2.1 Capitalism: definition and development, which explains what capitalism is and how it developed.
Section 3.2.2 Capitalism: an evaluation, which explains the positive and negative consequences of capitalism and how economic narratives support capitalism.
Section 3.2.3 Law and markets, which explains how law supports market and capitalist activities through creating trust, protecting private property, and establishing legal personhood for businesses.
Section S.1 What are systems?, which explains what a system is, the importance of systems boundaries, the difference between open and closed systems and the importance of systems thinking
Section S.2 Systems thinking patterns, which outlines the core components of systems thinking: distinctions (thing/other), systems (part/whole), relationships (action/reaction), and perspectives (point/view)
Section S.5 Causal loops, feedback and tipping points, which explains the feedback loops that can stabilise or destabilise systems.
Learning objectives:
define market power and describe various forms including monopoly, monopsony, oligopoly and oligopsony
explain the strategies that businesses use to increase market power
discuss the economic, social and ecological consequences of increased market power
In July 2024, a global IT outage grounded flights and disrupted hospitals and governments. The cause? A faulty CrowdStrike update impacted Microsoft software (Figure 1).
This showed a key flaw in our digital world: relying too much on a few big companies. Microsoft’s control of cloud computing meant that when CrowdStrike's update failed, industries everywhere suffered. Lina Khan, the US Federal Trade Commision chair, tweeted:
All too often these days, a single glitch results in a system-wide outage, affecting industries from healthcare and airlines to banks and auto-dealers. Millions of people and businesses pay the price. These incidents reveal how [market power] can create fragile systems.
This section covers market power, its growth, and its impact on economies, showing why laws are needed to limit it.
Figure 1. Blue computer screens at LaGuardia Airport in New York in July 2024 from the global CrowdStrike IT disruption.
(Credit: Smishra1, CC BY-SA 4.0)
What is market power?
What is market power?
Market power is when one or a few businesses can control prices or market conditions. It depends on the number and size of firms. Markets with fewer and larger firms have more market power (Figure 2).
A monopoly exists when one company dominates a market. For example, Google has monopoly power in internet searches. While there are competitors like Ecosia, Bing, Safari, and DuckDuckGo, Google controls about 90% of the market, making it the clear leader.
Figure 2. Continuum of market power, related to number and size of firms
(Credit: Olena Panasovsk, Noun Project)
Sometimes, natural monopolies form due to high setup costs (Figure 3). These costs make it hard for other companies to compete.
For instance, in areas with piped water, a single company usually controls the supply because building duplicate infrastructure doesn't make sense.
Figure 3. Water and railway transport, two examples of natural monopolies due to high fixed cost of infrastructure
(Credit: Jonathan Kingston, CC BY-SA 2.0)
A monopsony occurs when there's only one dominant buyer in a market. For example, in some agricultural markets, farmers may only have one supermarket chain to sell to. This gives the supermarket power to pay lower prices to suppliers for their products and control other contract terms. The farmers have no other options. Some markets can be both monopolies and monopsonies.
An oligopoly is when a few companies dominate a market. Oligopolies can have the same power as monopolies because they can easily work together to control the market.
The global smartphone industry, with firms like Apple, Samsung, and Xiaomi, is an oligopoly (Figure 4). These companies have used anti-competitive practices, like exclusive supplier deals, to block competition.
Figure 4. Market share of major smartphone producers as of Q2, 2024
(Credit: IDC, made with Flourish)
An oligopsony happens when a few buyers control a market. For example, in the cocoa market, a few large companies buy from many small farmers. These buyers can pressure farmers to lower their prices, impacting the farmers’ incomes. With so few buyers, it's easy for them to work together to increase their power over sellers.
Figure 5 illustrates four types of concentrated market power.
Figure 5. Types of concentrated market power
How do firms increase market power?
How do firms increase market power?
Firms can boost their market power through economies of scale, influencing laws and regulations, marketing, and anti-competitive practices.
Economies of scale
Economies of scale mean lower production costs as firms grow larger. Bigger companies can buy materials in bulk at discounted prices, borrow money at lower interest rates, and afford more efficient machines. They can also spread their advertising and design costs over a larger output, reducing the cost per unit, increasing profits.
As firms grow, they can invest profits to expand even more or lobby for favourable laws, creating a reinforcing feedback loop (Figure 6). Smaller competitors, with lower profit margins, struggle to enter the market, further strengthening the dominant firm's power.
Figure 6. Reinforcing feedback loops showing how increases in business size and market power lead to economies of scale and higher profits which lead to further increased market power (right) and political power (left).
Laws and regulations
Laws can help firms grow market power by granting them advantages like patents, which give companies exclusive rights to produce a product for a set time (Section 3.2.3). The firms with the patent can earn high profits to recover their investment costs before competitors enter the market. For example, patents for new drugs enable pharmaceutical companies to earn large profits from their innovations. While this incentivises the company to innovate, consumers, especially in poorer countries needing affordable medicines, are harmed as was the case during the Covid-19 pandemic.
Businesses also lobby for laws that benefit them or block new competitors, and they oppose laws that reduce their power, even when more competition would help the public.
Marketing tactics
Marketing includes activities businesses use to develop and sell products, covering product, price, promotion, and place. Businesses want you to buy their products repeatedly. When a firm’s sales grow faster than their competitors, a firm gains market share and power. Businesses often use sophisticated methods to boost market share and power, such as:
product positioning: Large businesses use their power to position products in ways that hurt competitors. For example, big food companies pay supermarkets to place their items at eye level, making them more likely to sell. Companies also pay Google to display their “sponsored” content at the top of search results making them more likely to be clicked.
manipulative promotion: businesses use advertising to build brand loyalty, sometimes by linking their products to personal identity or social status. Luxury brands, for instance, link their products to higher social standing. Influencers persuade people that buying certain goods will make them more attractive or popular (Figure 7).
Figure 7. Influencers persuade people that buying certain goods and services will make them beautiful, interesting, and popular
(Credit: RDNE Stock project, Pexels licence)
addiction: some products are addictive, leading to repeat purchases. Classic examples include cigarettes and gambling, but social media also addicts users, keeping them on screens longer to show more ads. Addiction harms human wellbeing and, in social media, increases social tensions.
network effects: platform firms like TikTok and Amazon benefit from network effects, where a product becomes more valuable as more people use it. The more people on a platform, the more attractive it becomes, creating a reinforcing feedback loop (Section S.x). As these firms grow, leaving becomes harder due to high switching costs.
access to data: platform firms also gain power through data collection. While using free services, firms gather data on users to sell to advertisers—a practice known as surveillance capitalism. This data allows companies to influence buying behaviour and charge higher prices, leaving competitors without data at a disadvantage (Figure 8).
Figure 8. Surveillance capitalism involves platform firms monitoring your digital activity and using data to influence your spending
(Credit: Made, Yuni Sarah, Noun Project)
Anti-competitive behaviour
Some firms use anti-competitive tactics to boost market power, making it harder for others to compete. These include:
mergers and acquisitions: companies combine with competitors (merger) or buy them (acquisition) to reduce competition. For example, Facebook/Meta has bought many smaller firms to prevent them from developing competing services, stopping some innovation.
exclusive contracts and agreements: firms make exclusive deals with suppliers or distributors, blocking competitors from key resources or markets. Tech companies, for instance, may sign agreements with app developers, preventing them from offering apps on rival platforms.
bundling: companies group, or bundle, products together, making it harder for consumers to buy from competitors. For example, a software company might sell a package of programs, forcing customers to buy the whole bundle instead of a single competitor's product.
price-fixing: firms agree to set prices instead of competing. Price-fixing ensures higher profits, but is illegal in many places, as it harms consumers through high prices.
predatory pricing: large firms may temporarily lower prices to a level small competitors can’t match, driving them out of business. Once competition is gone, prices are raised again.
Figure 9. Anti-competitive behaviours can take a number of forms, but often involve firms working together to reduce competition
(Credit: olia danilevich, Pexels licence)
These strategies show how firms protect and grow market power, making it tough for new businesses to compete. Profit-maximising goals often fuel these actions, which negatively impact societies.
What are the consequences of firms’ increased market power?
What are the consequences of firms’ increased market power?
When firms gain significant market power, they often harm society and Earth systems. Like ecosystems, economies need diversity to be resilient. Concentrated market power weakens economies by raising prices, reducing innovation, lowering product quality, and increasing economic inequality, political capture, and environmental damage. There is an activity at the end of this section that will help you think about each of these impacts more carefully.
Capitalism and market power are closely linked. Capitalism seeks to maximise profits, and market power helps firms raise prices, cut costs, and influence laws in favour of business. To profit, firms aim to dominate markets.
Market concentration has grown globally, with a few firms controlling essential markets like food and energy, reducing choice and raising prices. Despite claims that capitalism promotes competition, profit-driven firms often seek monopoly power, as famous tech investor Peter Thiel highlights in the first 50 seconds of the video below titled "Competition is for losers."
Activity 3.2.4
Activity 3.2.4
Concept: Power
Skills: Thinking skills (transfer and critical thinking)
Time: varies depending on option
Type: Individual, pairs, or group
Option 1: Linking market power to economic, social and ecological problems
Time: 30 minutes
This section outlined some negative impacts of market power for society and Earth systems: political capture, environmental harm, less economic resilience, higher prices, reduced innovation, lower quality products, and economic inequality.
Alone or with a partner, think through the links between market power and each of these impacts. What’s the connection?
Write or verbally discuss your ideas. You can check your ideas against information by clicking on the arrow.
political capture: firms with significant market power can successfully lobby for favourable laws and regulations, often at the expense of public interest. This undermines democracy and leads to policies that prioritise business profits over social well-being. We see this with large fossil fuel companies that have influenced governments’ energy policies, hindering the development of renewable energy.
environmental harm: large profit-maximising firms often harm the environment, through deforestation, pollution, and overfishing. For example, a few large companies dominate the market for seeds and pesticides. They promote monoculture farming which undermines soil health and reduces biodiversity.
less economic resilience: If one or a few firms dominate a market it makes our economies more vulnerable to disruptions, as you read about the CrowdStrike outage that affected Microsoft’s cloud computing systems.
higher prices: when firms control the market, they can set high prices, making goods and services more expensive for people to buy, harming their ability to meet other needs.
reduced innovation: when a few firms dominate, they may lack the incentive to innovate, leading to stagnation.
lower quality products: with little or no competition, dominant firms might reduce their focus on quality, knowing consumers have limited alternatives.
economic inequality: Firms with significant market power can influence wages and working conditions, often to the detriment of employees. For instance, Walmart has been criticised for paying low wages and offering poor working conditions, despite the company's vast profits. This can create a cycle of poverty and insecurity for workers, limiting their economic mobility and overall wellbeing.
Option 2: Considering market power in your community
Time: 30-40 minutes
People face oligopolies or monopolies now for many of their daily needs, such as food, water, mobility, communication and energy.
Make a list of some goods and services that your household buys regularly.
Think about the businesses in your local community that provide these goods and services. For each good or service, list as many businesses as you can that sell it.
It may be easier to do this as a small group or whole class to combine everyone’s local knowledge. If you have access to one, you can also use the search function in a mapping app to see what comes up.
Consider the list you made, identifying the businesses that may have monopoly or oligopoly power in your community. Which of these, if any, are branches of large businesses that may exist on a national or international scale? Which of these are locally owned?
What implications might there be of the patterns of market power that you have found in your local community?
Option 3: Considering market power in social media
Time: 20 minutes
One concern with companies achieving too much market power is that they will harm consumers, often through raising prices. With the major social media businesses, for example Meta (owner of Instagram) and TikTok, this doesn’t appear to be the case. Many of the services these companies offer do not cost consumers money. Some questions to consider or discuss with a partner, small group or as a class:
Are these social media services really for free? Why or why not?
How much choice do you have about whether to participate in social media networks? Consider the impact of network effects in your own life.
Competition authorities in some countries are challenging Meta in court, claiming that the company is an illegal monopoly with the aim of getting it to change its practices. Given what you have read in this section, and considering any of your own experiences, do you think that states should more strictly limit the power of social media or other tech firms? Why or why not?
Ideas for longer activities and projects are listed in Subtopic 3.5 Taking action
Checking for understanding
Checking for understanding
Further exploration
Further exploration
Can we trust Google? - an episode of the BBC podcast The Inquiry that explores how Google came to dominate internet search and the legal cases that accuse the company of illegal behaviour. Difficulty level: medium
Intellectual property is broken - a short video from the Institute for New Economic Thinking, where economist Dean Baker explains how patents are enabling firms to receive unreasonable profits, often at the expense of human wellbeing. He argues for more state funding of research so we don’t have to give firms monopolies. Difficulty level: medium
The Problem with Superchickens - A National Geographic podcast about research on superchickens which supports evolutionary biologist D.S. Wilson’s claim that “Selfishness beats altruism within groups. Altruistic groups beat selfish groups.” The link to this section is that the kind of behaviour that enables firms to gain market power might help them be successful against other firms in their industry, but it undermines the economic, social and ecological conditions the firm and the rest of us need to survive and thrive. Difficulty level: medium
Inequality Inc. Chapter 2 - a 2024 report from Oxfam about increased economic inequality. Chapter 2 focuses on the role of market power in driving global inequality trends. Difficulty level: medium
High tech is watching you - an interview with economist Shoshana Zuboff in the Harvard Gazette where she explains surveillance capitalism, where technology firms are mining users’ data to predict and influence their behaviour. Difficulty level: hard
Surveillance Tech and Price Gouging - the first 5 minutes of this from Macrodose explains recent concerns about surveillance pricing in grocery stores, and its ability to increase market power to raise prices and extract value from consumers related to necessity goods. Difficulty level: medium
Profile of Lina Kahn (US) and profile of Margrethe Vestager (EU) - in recent years two women have held the top posts in charge of monitoring and regulating competition in the US and EU. They have taken particularly strong actions to challenge and prevent increases in market power, particularly in the tech industry. Difficulty level: medium
The Biden Policy That Trump Hasn’t Touched - an interview with Lina Kahn about her work in the US Federal Trade Commission (FTC) pursuing antitrust cases against firms taking too much market power. The interview covers how US antitrust law had been weakened by economic ideology in recent decades, and the approaches the FTC took under her leadership to consider a wider range of systemic factors to judge the threat of mergers in industries. Difficulty level: easy
Sources
Sources
Blink, J., & Dornton, I. (2020). Economics: Course Companion. Oxford: Oxford University Press.
Laidler, J. (2019, March 4). “High Tech is Watching You.” The Harvard Gazette. https://news.harvard.edu/gazette/story/2019/03/harvard-professor-says-surveillance-capitalism-is-undermining-democracy/.
OECD. (2022, May 30). “The Evolving Concept of Market Power in the Digital Economy – Note by Germany”. Directorate for Financial and Enterprise Affairs Competition Committee. https://www.bundeskartellamt.de/SharedDocs/Publikation/EN/Diskussions_Hintergrundpapiere/OECD_2022_Competition_Committee_Concept_Market_Power_Digital_Economy.pdf?__blob=publicationFile&v=2.
Ongweso, E. (2024, July 20). “The Microsoft/CrowdStrike outage shows the danger of monopolization.” The Guardian. https://www.theguardian.com/technology/article/2024/jul/20/the-microsoftcrowdstrike-outage-shows-the-danger-of-monopolization.
Riddel, R. et al. (2024). Inequality Inc.: How corporate power divides our world and the need for a new era of public action (Chap. 2). Oxfam International. https://www.oxfam.org/en/research/inequality-inc
Stevens, M. Bowles, S, and Carlin. (2024). “7.8 Price setting, competition, and the market”. The Economy 2.0. https://www.core-econ.org/the-economy/microeconomics/07-firm-and-customers-08-price-setting-competition-market.html.
Terminology
Terminology
Link to Quizlet interactive flashcards and terminology games for Section 3.2.4 Market power - in order of appearance
market power: the ability of a firm to influence the price of their product in a market, as well as other market conditions
monopoly: a market structure where a single seller or producer is dominant and has price-setting power
natural monopoly: a market where only one firm offers the product or service because of massive barriers for new firms to enter the market, like high setup costs
supply: the quantity of a product that producers are willing and able to supply at various prices
infrastructure: large scale physical systems that a society needs to function (roads, railways, electricity networks, etc)
monopsony: a market with only one dominant buyer of a product
oligopoly: a market with a few dominant sellers of a product
oligopsony: a market with a few dominant buyers of a product
income: money received from work or investments
power: the ability to influence events or the behaviour of other people
economies of scale: when a business can lower its average costs of production due to the large scale of its output
interest rate: the price a borrower pays to borrow a sum of money
efficient: when there is a low ratio of resource inputs compared to outputs
investment: a system where people self-organise to co-produce and manage shared resources.
lobby: seeking to influence a politician on an issue
reinforcing feedback: a situation where change in a system causes further changes that amplify the original change which can lead to tipping points in a system
profit margin: the percentage of profit earned by a company in relation to its revenue
patent: the sole right for an inventor to sell and profit from an innovation for a limited time
consumer: someone who buys and uses resources and products ot meet needs
marketing: the strategies a business uses to sell its products
promotion: activities to persuade people to buy a product, such as advertising
market share: the portion of a market controlled by a particular business or product
product positioning: defining where your product fits in the market relative to competitors; can be descriptive or physical positioning in a marketplace
brand loyalty: when customers continue to purchase a product from the same brand over and over again
influencer: someone who persuades others to do something, such as buy a product
platform firm: a firm that hosts market exchanges between other people and businesses
network effect: where a product becomes more valuable as more people use it
switching cost: the cost (in money, time, or other benefit) of a consumer to switch to a different product
surveillance capitalism: a business practice where firms gather data on users to sell to advertisers
merger: when a business combines with a competitor
acquisition: when one business purchases another business
distributor: a business that buys products from a producer and sells them for a profit to other businesses or customers
bundling: when businesses group, or bundle, products together, making it harder for consumers to buy from competitors
price-fix: an agreement between competitors to set prices (usually higher than they would be otherwise)
predatory pricing: when large firms temporarily lower prices to a level that small competitors can’t match, driving them out of business; once competition is gone, prices are raised again
ecosystem: the interaction of groups of organisms with each other and their physical environment
resilient: able to recover after a disturbance
political capture: when the government prioritises the interests of economically powerful groups over the general interests of the public
market concentration: the portion of a given market that is controlled by a small number of businesses
fossil fuel: a non renewable energy source including coal, oil, and natural gas, formed over millions of years in the Earth's crust from decomposed plants and animals
renewable energy: energy from sources that are continuously available or regenerate quickly
monoculture: growing one crop species in a field at a time
wage: payment for work
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