Market Power

Market power is the ability to sustain prices or other terms above a competitive benchmark because competitive constraints are limited. Entry barriers, differentiation, scarce inputs, and switching costs may contribute. A single price increase or high accounting margin does not establish it.

Market power depends on alternatives buyers can actually use within a relevant place and period. Customers may be unable to switch immediately yet leave at renewal. Start with substitutes, migration costs, and entry possibilities before treating high margins or a familiar brand as proof of durable pricing discretion.

A price increase can reveal several things. Retention might reflect an unusually low old price, improved service, or a temporary contractual constraint. Profit depends on costs and volume as well. Ask whether weak competitive constraints allow sustained terms above a competitive benchmark, and what could strengthen those constraints.

When to use it

When margin erosion suggests insufficient competitive protection; when pricing strategy needs to account for competitive dynamics; when business model evaluation requires assessing the firm's ability to capture value; when understanding why some profitable businesses stay profitable and others don't.

How it can help

Investigate realistic customer alternatives and the durability of the constraints they face. Improve value while considering pricing's customer and legal consequences; obstructing customers is not a necessary strategy.