Significant 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, SMP refers to a company’s relative ability to manipulate the price of an item in the marketplace by manipulating the level of supply, demand or both.

These Companies have possibly the ability to increase obstacles to potential new entrants into the market.

A company with substantial market power has the ability to manipulate the market price and thereby control its profit margin, and possibly the ability to increase obstacles to potential new entrants into the market. Firms that have market power are often described as “price makers” because they can establish or adjust the marketplace price of an item without relinquishing market share. 

The concept of market power applies to an individual enterprise or to a group of enterprises acting collectively. For individual firm, it expresses the extent to which the firm has discretion over the price that it charges. The base line of zero market power is set by the individual firm that produces and sells a homogenous product. Since all of the firms sell the identical product, the individual sellers are not distinctive. Buyers care solely about finding the seller with lowest price.

Factors influencing Market Power 

1. Number of competitors in a market

For a company to hold extensive market power in the industry in which it operates, the industry must not be heavily related to the number of companies means greater market power is available to each other.

2. Elasticity of demand

For a company to exert market power, there must be inelastic demand for its products. This means that regardless of the price of the product, there is a persistent need for the product. Companies can achieve an inelastic demand curve by providing unique products and services that create value for the customer.

3. Product differentiation

If a company offers differentiated products and services or holds an extensive market share, it can to some extent, dictate the pricing of its products and meet the inelastic demand from customers. A high degree of pricing power helps a company achieve market power.

4. Ability of companies to make above “normal profit”

In a perfectly competitive market, where buyers and sellers are both price takers it is not possible to make above-normal profit in the long run. If there is a scenario where companies can make profits, more companies will join the industry seeking the same. The company with great market power will be able to make profits above normal profit.