Market Power

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Definition of 'Market Power'

Market power is the ability of a company to raise prices or lower output without losing too many customers. It is often measured by the Lerner index, which is the ratio of the price-cost margin to the elasticity of demand.

A company with market power can earn above-normal profits because it can charge a price that is higher than the marginal cost of production. This is because customers are less likely to switch to a competitor if the price is only slightly higher.

Market power can be created by a number of factors, including:

* **Economies of scale:** When a company's costs per unit decrease as output increases, it can afford to charge a lower price and still earn a profit.
* **Brand loyalty:** Customers may be willing to pay a higher price for a product from a company they trust.
* **Network effects:** When a product's value increases as more people use it, a company can charge a higher price without losing too many customers.
* **Government regulations:** Government regulations can create barriers to entry for new competitors, which can give existing companies more market power.

Market power can have a number of negative consequences, including:

* **Higher prices:** Companies with market power can charge higher prices than they would if there was more competition. This can lead to lower economic efficiency and lower consumer welfare.
* **Less innovation:** Companies with market power have less incentive to innovate because they do not need to compete on price. This can lead to slower economic growth.
* **Monopoly power:** When a company has a monopoly, it has complete control over the market and can charge whatever price it wants. This can be very harmful to consumers.

Governments can take a number of steps to reduce market power, including:

* **Antitrust laws:** Antitrust laws are designed to prevent companies from engaging in anti-competitive practices, such as price-fixing and collusion.
* **Regulation:** Government regulations can be used to limit the market power of companies, such as by setting price controls or requiring companies to share their technology with competitors.
* **Competition policy:** Competition policy is designed to promote competition in markets, such as by encouraging new entry and breaking up monopolies.

Market power is a complex issue with no easy solutions. However, by understanding the causes of market power and the negative consequences it can have, governments can take steps to reduce its harmful effects.

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