Market power is the ability of a seller (or sometimes a buyer) to have some control over the price. At one extreme, a seller in a perfectly competitive market has no market power at all, because there are so many other sellers all selling the same good or service, that the firm couldn't raise its price without losing all of its customers. At the other extreme, a monopoly has a high degree of market power, because the consumers have no other options buy to buy from the monopoly firm, if they really want the good or service. The monopoly firm can raise its price up to the point where it is maximising profits - a much higher price than the perfectly competitive firm would receive.
Sellers can get market power in various ways. One is to sell a differentiated good or service - something that the consumers perceive as different from other goods or services. That leads to a market that we refer to as monopolistically competitive, and the sellers in that market will have a small amount of market power.
To get a lot of market power, the seller would want to be a monopoly - the sole seller of its good or service, which has no close substitutes. To become (and remain) a monopoly, there needs to be some barriers to entry into the market, that prevent other firms from entering the market and competing. If there are no barriers to entry into the market, then a highly profitable monopoly seller would find that other firms enter their market and sell in competition with them, driving the price (and the seller's profits) down.
Barriers to entry can arise in various ways, one of which is where the government grants a firm an exclusive right to sell the good or service. Patents are a good example of this type of barrier to entry. The existence of a patent means that only the patent holding firm can sell the patented good, and other firms can't compete by selling the same product (although, they might sell similar products).
Another way that the government can create a barrier to entry is through occupational licensing. There are some occupations (dentists, doctors, nurses, teachers, etc.) where you have to be licensed in order to operate (literally, in the case of surgeons). While this doesn't create a monopoly, it does grant some degree of market power to those who have licences, because it prevents unlicensed people from entering the market. Unlicensed doctors or dentists would face stiff penalties for offering their services without a licence.
So, part of this article (probably gated) from the National Business Review yesterday struck me as surprising:
A KiwiSaver provider is concerned the new licensing regime for financial advice will reduce the number of advisers and therefore make it harder for people to access those services, as has been seen in other countries.
But the Financial Markets Authority said there is no indication the changes have, or will, result in a reduction in advisers, with the sector “fully embracing” the changes.
On Monday, a new licensing regime went live requiring anyone who gives regulated financial advice to retail clients to either hold, or operate under, a Financial Advice Provider licence.
Just because there has been no immediate effect on the number of financial advisors, it doesn't mean that there won't be fewer of them long term. The new rules have created a barrier to entry into the financial advisor market, because advisors must now be licensed. Whatever the merits of the licensing regime, it is highly likely that the result is fewer financial advisors, charging higher fees for their advice.
Financial advisors is one occupation where licensing might provide a net benefit for society. Clients don't engage with their advisors very often and financial literacy in the general population is not great (e.g. see here), so many clients won't know whether they are getting good advice, or bad advice. And the consequences of getting bad advice, in terms of reduced savings or retirement income, are likely to be quite high (and there are no do-overs). However, not all occupations are like that. For instance, it beggars belief why some countries require licenses for beekeepers, fortune tellers, dog groomers, or librarians. But, in all cases, occupational licenses reduce the number of people working in those occupations, and increase their market power.
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