Market power refers to the ability of a company to influence the market price of a good or service and the terms of trade. It is an important factor determining the long-term profitability of an industry and can affect the welfare of both the seller and the buyer of a product or service.

Market power is derived primarily from the possession or control of resources or factors of production. In the classical microeconomics models, market power is a derived concept, existing within a structure of marketable products, pricing and entry conditions. In the modern world, market power can arise from a variety of sources, including considerable financial resources, monopoly status, patent protection, geographic scope, large scale production, controlling a superior and essential technology, superior information, and physical assets.

Market power is often used as a synonym for “monopoly power” i.e. the ability of a single firm to influence the market price and the terms of trade. Monopoly power, however, is only one of many sources of market power. For instance, a firm with a unique product or an oligopolist (a small number of firms operating in an industry) may also possess significant market power.

An important measure of market power is the ability of firms to control price either through the setting of prices or by limiting output. Oligopoly firms have the power to affect the price of their product, since their output is jointly determined. The ability of firms to influence price in oligopolistic industries is called price leadership. Furthermore, firms that possess market power often create a form of competition through product differentiation and advertising.

Market power also extends beyond a company’s ability to influence price and other aspects of the market. Market power encompasses a range of economic and strategic elements, including control over the total supply of a product or resource, the number of suppliers in the market and even the knowledge of the market. Therefore, in addition to understanding the competitive position of a firm, it is also important to examine its strategic thinking and long-term goals.

It is important to note that while market power can lead to competitive advantage, it can also create social costs and reduce welfare. Therefore, it is important to keep a balance between the competitive characteristics of the economy and the need to protect consumers and provide social welfare. This balance is achieved through the efficient use of antitrust laws, regulation, and competition policy. Ultimately, the ability of a firm to achieve its strategic goals without sacrificing social welfare depends on a judicious mix of regional, national, and international regulations and policies.