Chapter 21: Problem 762

What is countervailing power?

Short Answer

Expert verified

Countervailing power is a concept in economics, introduced by John Kenneth Galbraith, that describes the balance of power between multiple parties in a market, preventing any single party from dominating. This leads to increased competition, limits monopoly power, and promotes a fair distribution of wealth and income. For example, in a market with a large manufacturer, a large retailer, and a powerful labor union, the power is balanced, and no party can control the market, resulting in a more competitive environment.

Step by step solution

Introduction to Countervailing Power

Countervailing power is a situation where market power is balanced between two or more parties, meaning that one party cannot dominate the market on its own. This concept was introduced by American economist John Kenneth Galbraith in 1952 to explain how the balance of power between suppliers, manufacturers, and retailers can lead to a more competitive market.

Example of Countervailing Power

Let's take an example of a market where there are three major parties: a large manufacturer, a large retailer, and a powerful labor union. The manufacturer produces goods at a low cost, and the retailer has a wide network of stores to sell the goods. The labor union represents the workers who produce the goods. In this situation, each party holds some power over the others. The manufacturer can raise the price of goods, the retailer can refuse to stock the goods, and the labor union can go on strike. No single party can dominate the market because their power is being counterbalanced by another party.

Implications of Countervailing Power

The countervailing power can lead to: 1. Increased competition: As no single party can dominate the market, they must compete with each other to attract customers and maintain their position. 2. Limiting monopoly power: Countervailing power can prevent one party from achieving a monopoly over the market, leading to more choice for consumers and lower prices. 3. Fair distribution of wealth and income: Since the power is distributed in the market, each party can negotiate better deals and the income generated from the market can be distributed more fairly.

Conclusion

Countervailing power is an important concept in the field of economics that helps explain how market power can be balanced between multiple parties and create a more competitive environment. It limits the concentration of power and monopoly while promoting fair distribution of wealth and income in the market.

Unlock Step-by-Step Solutions & Ace Your Exams!

Full Textbook Solutions
Get detailed explanations and key concepts
Unlimited Al creation
Al flashcards, explanations, exams and more...
Ads-free access
To over 500 millions flashcards
Money-back guarantee
We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!