ABSTRACT
In Chapter 8 we studied a perfectly competitive firm and a perfectly competitive market, a central feature of which is that no single firm has any market power. All other forms of market structure in which some firms or economic agents have some market power go under the rubric of an imperfectly competitive market or briefly an imperfect market. Market power manifests in the ability to charge a price higher than the marginal cost. There are two sources of market power.
One is the presence of limited number of sellers (or buyers to be more general). Lack of competition bestows market power.
The second source is a bit subtle, that is, product differentiation, meaning that, irrespective of whether there a few or a large number of competitors, a firm will have some market power if it produces a brand or a product which is “different” from what others produce, even though it may be basically the same product. For instance, in the soap market, there are many varieties in India like Lifebouy, Lux, Dove, Pears, etc. They are basically the same product, yet slightly different from each other in terms of look and feel. Each one is unique in some sense and this uniqueness confers some market power.
