Market Power
Plain definition
The ability of a firm to profitably raise its price above marginal cost — the opposite of being a price taker.
In economics
Market power comes from facing a downward-sloping demand curve, which arises through differentiation, barriers to entry, or limited rivals. It is measured by the price–cost margin (Lerner index: (P − MC) ÷ P). More market power means higher prices, lower output, and deadweight loss relative to the competitive benchmark.
Example
A brand-name drug maker can charge far above production cost because patents give it market power; a wheat farmer cannot, because any price above market loses all buyers.
Market power is confused with monopoly. A monopoly is the extreme case, but firms in oligopoly and monopolistic competition also hold some market power. Size alone is not market power either — a large firm in a fiercely competitive market still prices at marginal cost.