Market power is the ability to profitably sustain prices above competitive levels or restrict output or quality below competitive levels. A company with market power may also have the ability and incentive to harm the process of competition in other ways; for example, by weakening existing competition, raising entry barriers or slowing innovation. The more market power a company has the more close it gets to be in a dominant position. Market power—and dominant position—arises where a company does not face effective competitive pressure in the relevant market. Market power is not absolute, but is a matter of degree; the degree of power changes depending on the circumstances of each case.
Market power can exist in a variety of forms. In some markets, a single company may possess market power (dominant position); in others where, for example, a number of companies have agreed explicitly or tacitly not to compete with each other, a group of companies may collectively possess market power (collective dominance).
A market power test generally takes account of a wide range of factors on (i) market definition, (ii) market structure, (iii) entry conditions, (iv) the behavior of companies and (v) their financial performance.
When assessing whether and to what extent market power exists, the strength of any competitive constraints is considered (i.e. market factors that prevent a company from profitably sustaining prices above competitive levels). Competitive constrains include (i) existing competitors, (ii) potential competition and, (iii) buyer power with a strong negotiation position, weakening the potential market power of a seller.
That being said, in general, market power is more likely to exist if a company (or group of companies) has a persistently high market share. Likewise, market power is less likely to exist if a company has a persistently low market share. Relative market shares can also be important. For example, a high market share might be more indicative of market power when the rest of the market is very fragmented and all other competitors have very low market shares. Although there is not a determined market share threshold for a company to be in dominant position, Guidelines on Abusive Behaviors states that companies with market share below 40% are unlikely to be in dominant position.
Data on market shares may be collected from a number of sources including (i) information provided by companies themselves (ii) trade associations, customers or suppliers and (iii) market research reports. The appropriate measure for calculating market shares depends on the dynamics of each specific case. Usually sales data by value and by volume are both informative. Often value data will be more informative, for example, where goods are differentiated.