Market Power

In economics, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors. Market participants that have market power are therefore sometimes referred to as "price makers," while those without are sometimes called "price takers." Significant market power is when prices exceed marginal cost and long run average cost, so the firm makes economic profits.

A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. Price makers face a downward-sloping demand curve, such that price increases lead to a lower quantity demanded. The decrease in supply as a result of the exercise of market power creates an economic deadweight loss which is often viewed as socially undesirable. As a result, many countries have anti-trust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.

A firm usually has market power by virtue of controlling a large portion of the market. In extreme cases - monopoly and monopsony - the firm controls the entire market. However, market size alone is not the only indicator of market power. Highly concentrated markets may be contestable if there are no barriers to entry or exit, limiting the incumbent firm's ability to raise its price above competitive levels.

Market power gives firms the ability to engage in unilateral anti-competitive behavior. Some of the behaviours that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry. If no individual participant in the market has significant market power, then anti-competitive behavior can take place only through collusion, or the exercise of a group of participants' collective market power.

The Lerner index and Herfindahl index may be used to measure market power.

Read more about Market Power:  Oligopoly, Monopoly Power, Source of Market Power, Measuring Market Power, Market Power and Elasticity of Demand

Other articles related to "market power, market, power":

Market Power and Elasticity of Demand
... Market power is the ability to raise price above marginal cost and earn a positive profit ... That is, elasticity is the critical factor in determining market power ... The relationship between market power and the price elasticity of demand (PED) can be summarized by the equation P/MC = PED/(1 + PED) Note that PED will be negative ...
Monopoly (economics)
... with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry) ... In law, a monopoly is a business entity that has significant market power, that is, the power, to charge high prices ... A small business may still have the power to raise prices in a small industry (or market) ...
Monopoly (economics) - The Inverse Elasticity Rule - Market Power
... Market power is the ability to increase the product's price above marginal cost without losing all customers ... Perfectly competitive (PC) companies have zero market power when it comes to setting prices ... All companies of a PC market are price takers ...
George W. Stocking, Sr. - Career
... Stocking and Mueller pointed out the error of mistaking a monopolist's inability to exercise market power by raising price above the current price for an inability ... Courts that use a monopolized product's elevated market price will typically misconstrue a completed anticompetitive act as a lack of market power ...
Concerns About Cabcharge Activities - Fine For Misuse of Market Power and Predatory Pricing - Background
... The company holds a dominant market position in these services across Australia as it supplies almost 97 per cent of Australian taxis with its electronic payment system ... that Cabcharge had breached the Trade Practices Act (TPA) by misusing its market power and entering into an agreement to substantially lessen competition ... a corporation must have misused its substantial market power to eliminate or substantially damage a competitor prevent the entry of a person into that market or any other market or deter or prevent ...

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