Question

Explain the concept of market power. Why does a monopolist have market power while a perfectly competitive firm does not?

Answer 1

Market power is the ability of a firm to control the market price, the quantity produced and the product quality, etc. A monopolist is the only firm in the entire market. Therefore, it can control the market price by reducing or increasing production. Also, it can change product quality without bothering to lose market as there is no competteion. Therefore, a monopolist has a significant market power. However, a perfectly competitive firm does not have any market power. There are a large number of firms in a perfectly competitive market. If the competitive firm increases the price, it will lose all buyers. In addition, if it reduces quality, again it will lose all customers as there are a large number of competitors and the firm has a very insignificant market share.