16 Facts About Market power

In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit.

In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price above marginal cost without losing revenue.

Market power provides firms with the ability to engage in unilateral anti-competitive behavior.

In particular, firms with market power are accused of limit pricing, predatory pricing, holding excess capacity and strategic bundling.

The degree of market power firms assert in different markets are relative to the market structure that the firms operate in.

The most discussed form of market power is that of a monopoly, but other forms such as monopsony and more moderate versions of these extremes exist.

Whilst pure monopolies are rare, monopoly power is far more common and can be seen in many industries even with more than one supplier in the market.

Hence, their market power is large as a collective and each firm has little or no market power independently.

Measuring market power is inherently complex because the most widely used measures are sensitive to the definition of a market and the range of analysis.

Magnitude of a firm's market power is shown by a firm's ability to deviate from an elastic demand curve and charge a higher price above its marginal cost, commonly referred to as a firm's mark-up or margin.

Market power concentration, referred to as industry concentration, refers to the extent of which market shares of the largest firms in the market account for a significant portion of the economic activities quantifiable by various metrics such as sales, employment, active users.

Recent macroeconomic market power literature indicates that concentration rations are the most frequently used measure of market power.

An advantage of using concentration as an empirical tool to quantify market power is the requirement of only needing revenue data of firms which results in the corresponding disadvantage of the inconsideration of costs or profits.

An advantage of concentration ratios as an empirical tool for studying market power is that it requires only data on revenues and is thus easy to compute.

Lerner believes that market power is the monopoly manufacturers' ability to raise prices above their marginal cost.

The measurement of market power is key in determining a breach of the act and can be determined from multiple measurements as discussed in measurements of market power above.