Market Power

Posted in Marketing and Strategy Terms, Total Reads: 484

Definition: Market Power

Market power refers to the ability of a firm to profitably manipulate price of a good or service by influencing its demand, supply, or both demand and supply. It is the ability of an agent to influence the price and to alter the allocation of resources. Market power is often used to define the monopoly and monopsony concepts.

The model of perfect competition rests on three basic assumptions: (1) price taking, (2) product homogeneity, and (3) free entry and exit. In pure competition sellers are “price takers.” No seller [or buyer] has the ability to influence the market price. The market determines the price.

In most markets, at least one or more of the conditions required for pure competition are violated. This gives sellers or buyers the ability to influence the market price and allocation of resources.

Some of the sources of market power include:

• Monopoly, oligopoly, monopolistic competition: Market power is often considered synonymous with the power that comes with being a monopoly.

• Monopsony, oligopsony

• Institutional structure- taxes, customs etc

When a firm faces a negatively sloped demand function for their product, they can raise the price above MC and reduce output. Buyers are willing to purchase a good so long as marginal benefits are equal to or greater than the price, they buy until MB =P.

The oil and petroleum cartels are able to influence the oil & gas prices. ‘Indian railways’ has the power to alter the prices of its tickets.



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