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Relationship between market power and price

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The simple case of pricing with market power assumes (a) all consumers are charged the same price, (b) the firm sells one product, (c) demand exists in one time period, and (d) competitors do not pursue pricing games. Economists insist on reviewing what happens as each assumption is relaxed one at a time, However, it is clear that in real world all four relaxed simultaneously. Why does economic analysis insist on such unrealistic analysis?

The market environment heavily influences corporate decision-making ability. Discuss the differences in executive decisions concerning pricing, product design, and advertising between a company that exists in a perfectly competitive market and a company that lives a monopolistically competitive market.

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Solution Summary

This solution addressess the relationship between market power and price. It examines how market factors can impact price elasticity.

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Dear Student,

In order to understand the relationship between market power and price, we must discuss what market power really is and the relationship between market power and price. Market power references an organization's ability to raise a price above the marginal cost in order to make a profit. The magnitude in which a firm can raise this price is dependent on what is known as the demand curve, the point at which the profit is maximized. The factors that determines this demand curve is known as elasticity. To summarize, there is a ...

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