Market power
In economics, market power to direct or instituting refers to the ability of the firm to influence the price at which it sells a product or improvement by manipulating either the give or demand of the product or good to include economic profit. In other words, market energy to direct or established occurs whether a firm does not face a perfectly elastic demand curve as well as can line its price P above marginal cost MC without losing revenue. This indicates that the magnitude of market power is associated with the hole between P in addition to MC at a firm's profit maximising level of output. such(a) propensities contradict perfectly competitive markets, where market participants take no market power, P = MC and firms hold zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are target to as 'price makers' or 'price setters'.
The market power of any individual firm is controlled by office factors, including but non limited to, their size, the profile of the market they are involved in, and the barriers to everyone for the specific market. A firm with market power has the ability to individually impact either the a object that is said quantity or price in the market. This said, market power has been seen to exert more upward pressure on prices due to effects relating to Nash equilibria and ecocnomic deviations that can be featured by raising prices. Price makers face a downward-sloping demand curve and as a result, price increases lead to a lower quantity demanded. The decrease in manage creates an economic deadweight loss DWL and a decline in consumer surplus. This is viewed as socially undesirable and has implications for welfare and resource allocation as larger firms with high markups negatively issue labour markets by providing lower wages. Perfectly competitive markets do not exhibit such(a) issues as firms category prices that reflect costs, which is to the benefit of the customer. As a result, numerous countries have antitrust or other legislation intended to limit the ability of firms to accrue market power. such(a) legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.
Market power enables firms with the ability to engage in unilateral anti-competitive behavior. As a result, legislation recognises that firms with market power can, in some circumstances, harm the competitive process. In particular, firms with market power are accused of limit pricing, predatory pricing, holding excess capacity and strategic bundling. A firm ordinarily has market power by having a high market share although this alone is not sufficient to establish the possession of significant market power. This is because highly concentrated markets may be contestable whether there are no barriers to entry or exit. Invariably, this limits the incumbent firm's ability to raise its price above competitive levels.
If no individual participant in the market has significant market power, anti-competitive remain can only take place through collusion, or the lesson of a multiple of participants' collective market power. An example of which was seen in 2007, when British Airways was found to have colluded with Virgin Atlantic between 2004 and 2006, increasing their surcharges per ticket from £5 to £60.
Regulators are able to assess the level of market power and predominance a firm has and measure competition through the usage of several tools and indicators. Although market power is extremely difficult to measure, through the use of widely used analytical techniques such as concentration ratios, the Herfindahl-Hirschman index and the Lerner index, regulators are expert to supervise and effort to restore market competitiveness.