Some of the behaviors that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry. For example, market power gives firms the ability to engage in unilateral anti-competitive behavior. Relationship between Market Power and Firm BehaviorĪ firm’s market power influences its behavior. Greater availability of substitute goods will weaken a firm’s market power. Even highly concentrated markets may be contestable markets if there are no barriers to entry or exit, which limits a firm’s ability to raise its price above competitive levels.Ĭommon barriers to entry include control of a scarce resource, increasing returns to scale, technological superiority, and government-imposed barriers. For example, while conglomerates may be very large, they may play only small roles in many different markets and have no ability to influence prices in any of them.īarriers to entry determine how contestable the market is. However, being a large firm does not necessarily equal market power. The numbers and size of firms determine the extent that firms can withstand pressures and threats to change prices or product flows. Other factors that affect a firm’s market power include: However, market size alone is not the only indicator of market power. \)Ī firm usually has market power by virtue of controlling a large portion of the market.
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