Market power
Topic: Market Structures, Market Failure and Competition · NCERT: Beyond NCERT
Meaning
Market power is a firm's ability to raise its price above marginal cost and still make a profit, without losing all its buyers. Marginal cost (MC) is the cost of producing one more unit. The gap between price and marginal cost (P > MC) is a rough sign of how much market power a firm has.
A firm under perfect competition has none. If it charges more than the market price, it sells nothing. Market power comes from barriers to entry, product differentiation or having few rivals, and it is a main cause of market failure.
Example
A farmer selling wheat in a mandi cannot charge above the going price, so the farmer has no market power. A popular soap brand can raise its price a little and lose only some customers, so it has some market power.
Don't confuse with
- Dominant position: a legal term under the Competition Act 2002 for a very high degree of market power. Being dominant is lawful. Only abusing that position is illegal.
Related concepts
- Market structure
- Barriers to entry
- Product differentiation
- Market concentration
- Herfindahl-Hirschman Index
- Concentration ratio
- Price maker