market power

Market power is the ability of a seller (or sometimes a buyer) to nudge the price in its favour without losing all its customers. A wheat farmer has none — raise the price a cent and every buyer leaves. Your local electricity company has a lot — it could raise prices and you'd grumble but stay, because where else would you go? Market power is, in plain terms, how much a firm can get away with.

Economists measure it by how steep, rather than flat, a firm's own demand curve is — that is, how few customers it loses when it raises the price (low price elasticity of demand). A firm with no market power is a price taker stuck at marginal cost; a firm with lots of it charges a price well above marginal cost, and the size of that markup is the standard yardstick of power (the Lerner index just puts a number on the gap between price and marginal cost). Power is a matter of degree, not a yes-or-no: a corner café has a little (loyal regulars won't bolt over ten cents), an airline on a route it flies alone has a lot, a sole water utility has nearly total power. The sources are the same things that protect a monopoly: few rivals, hard-to-copy products, brand loyalty, switching costs, and barriers to entry.

Market power is the quiet thread running through every market structure beyond perfect competition — it is what monopoly, oligopoly and monopolistic competition all share, just in different amounts. A dab of it is normal and even healthy: it can reward a genuinely better product or fund research. Too much of it lets a firm charge more, supply less, and coast on quality, transferring money from customers to owners and wasting value along the way — which is precisely what competition authorities try to measure and, when it is abused, to rein in.