Market Power

Published Jan 6, 2023

Definition of Market Power

Market power is the ability of a firm or an individual to influence the market price of a good or service. That means it describes the ability of a company or organization to set prices higher than the competitive level (i.e., higher than they could in a perfectly competitive market) and still remain in business. Or in other words, it is the ability to influence the market by controlling a large enough share of the supply and/or demand of a good or service.

Example

To illustrate this, let’s look at the market for gasoline. In most countries, the gasoline market is dominated by a few large companies. That means they have a lot of market power. As a result, they can set prices higher than the competitive level and still make profits. For example, if the competitive price for gasoline is $2 per gallon, the large companies can set the price at $2.50 and still sell their product, simply because there is not enough competition to cover all the demand. Therefore, they are said to have the market power to influence the price of their product.

Why Market Power Matters

Market power is an important concept in economics because it can lead to market distortions and inefficiencies. If a firm has too much market power, it can lead to higher prices and lower output than what would be the case in a perfectly competitive market (which results in deadweight losses). This can lead to a decrease in consumer welfare. Thus, it is important for policymakers to be aware of the potential side effects of market power and take appropriate measures to regulate it.