Market Power
The term “market power” can be defined as company that has the ability to control the market price of a good or service. The company that has such power is able to raise prices without losing customers to competing firms. (businessdictionary.com, 2010)
One way for a company to gain market power is through a merger or the acquisition of a competing firm, which might be scrutinized by a state or federal agency for any anti-trust violations.
A firm that has market power typically has control of a large portion of the market, and in some cases has a monopoly over the market. Illegal monopolies and companies that violate a country’s anti-trust laws often engage in predatory pricing, overcapacity, and product tying. In some cases when a clear market leader cannot be found a group can enter into collusion or another anti-competitive behavior which grants this new coalition market power.
An example of market power can be found in the oil and gas industry. A coalition of oil producers like OPEC can easily manipulate the oil market by setting production quotas, and cutting production to limit supply, thus driving prices higher.
Manipulation in the oil market is not limited to just the producers, but also can involve energy traders. In 2003 the US Congress launched an investigation into energy trading. The congress discovered that the Intercontinental Exchange (ICE) was being used to manipulate oil prices through trading. The tactic that was used is referred to as “round-trip” trading. This technique allows two firms to trade energy from one firm to another, and then resells the same amount of energy back to the original seller at the original price. No energy actually moves or changes possession, but as the shares are traded on the open market, the transactions wind up triggering signals which will artificially inflate prices, and raise revenue for the companies. (Davis, 2009)
These price manipulation tactics work in the