Question

How do firms gain market power?

Answer 1

Answer) Market power refers to a company's relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both.

Market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. Significant market power occurs when prices exceed marginal cost and long run average cost, so the firm makes economic profit.

To increase the marketpower, the firm needs to inculcate a strong brand loyalty into its customers, byproviding a variety of differentiated goods and services. With new innovations and variety, a firm can easily increase its market power.

The ideal marketplace condition is perfect competition, in which there are numerous companies producing competing products, and no company has any significant level of market power. In markets with perfect or near-perfect competition, producers have little pricing power and so must be price-takers.