Market Power
The ability of a firm to profitably set prices above competitive levels without losing all of its customers.
What is Market Power?
Market power is the degree to which a firm can raise its prices above marginal cost and sustain those higher prices without competitors immediately eroding its sales. A firm with no market power (perfect competition) must accept the market price as given; a monopolist has maximum market power. Market power arises from sources such as economies of scale, network effects, proprietary technology, brand loyalty, control of scarce resources, and regulatory barriers to entry. Antitrust authorities use measures such as the Herfindahl-Hirschman Index (HHI) to assess concentration and market power in merger reviews. Excessive market power can harm consumers through higher prices, reduced output, and less innovation.
Example
Google's dominance in general search advertising — holding over 90% of the global search market — gives it substantial market power. Advertisers have few viable alternatives, allowing Google to set ad prices significantly above what a competitive market would produce. The DOJ filed an antitrust lawsuit against Google in 2020 citing this market power.