The Power of Pricing Power

The POWER OF PRICING POWER AND 2 FREE STOCK PICKS.......Show more

What Is Pricing Power?
Pricing power is an economic term that describes the effect of a change in a firm's product price on the quantity demanded of that product. Pricing power is linked to the price elasticity of demand. Price elasticity is a measure of the degree to which individuals, consumers, or producers change their demand or the amount supplied in response to price changes. For example, if the price of a good goes up, the tendency is that the demand for that goodwill go down as people will look for cheaper alternatives.

In economics, market power refers to the ability of a firm to influence the price at which it sells a product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing sales. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit-maximizing level of output. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC, and firms earn zero economic profit.[3] Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'.

A firm with market power has the ability to individually affect either the total quantity or price in the market. This said market power has been seen to exert more upward pressure on prices due to effects relating to Nash equilibria and profitable deviations that can be made by raising prices.[4] Price makers face a downward-sloping demand curve and as a result, price increases lead to a lower quantity demanded. The decrease in supply creates an economic deadweight loss (DWL) and a decline in consumer surplus. This is viewed as socially undesirable and has implications for welfare and resource allocation as larger firms with high markups negatively affect labor markets by providing lower wages. Perfectly competitive markets do not exhibit such issues as firms set prices that reflect costs, which is to the benefit of the customer. As a result, many countries have antitrust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture.

Market power provides firms with the ability to engage in unilateral anti-competitive behavior. As a result, the legislation recognizes that firms with market power can, in some circumstances, damage the competitive process. In particular, firms with market power are accused of limit pricing, predatory pricing, holding excess capacity, and strategic bundling. A firm usually has market power by having a high market share although this alone is not sufficient to establish the possession of significant market power. This is because highly concentrated markets may be contestable if there are no barriers to entry or exit. Invariably, this limits the incumbent firm's ability to raise its price above competitive levels.

If no individual participant in the market has significant market power, anti-competitive conduct can only take place through collusion, or the exercise of a group of participants' collective market power. An example of this was seen in 2007, when British Airways was found to have colluded with Virgin Atlantic between 2004 and 2006, increasing their surcharges per ticket from £5 to £60.[8]

Regulators are able to assess the level of market power and dominance a firm has and measure competition through the use of several tools and indicators. Although market power is extremely difficult to measure, through the use of widely used analytical techniques such as concentration ratios, the Herfindahl-Hirschman index, and the Lerner index, regulators are able to oversee and attempt to restore market competitiveness

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