What is Market Power?
Market power refers to a single company's ability to control the market price of a good or service.
How Does Market Power Work?
The macroeconomic concept of perfect competition assumes that no one producer can set a price for the whole market. Among companies that produce similar goods and services, all have varying levels of market power, but none are sufficient to effect a sustainable price change. In other words, all producers must compete based on a collective market price.
In reality, however, certain companies are able to affect the market price for goods and services, and they do this by either increasing or constraining the supply and/or demand for a good or service.
A monopoly is the best example of a company with substantial market power. With little or no competition, a monopoly can, for example, raise market prices by reducing its level of output.
Why Does Market Power Matter?
Market power lends itself to possible abuse and consumer exploitation (price gouging). Antitrust legislation limits a company's ability to wield significant market power and levies substantial penalties on those in violation.