What does market power refer to?

Market power refers to the ability of a firm to influence the price of a product or service in the marketplace. When a firm has market power, it can raise prices above the level that would prevail in a competitive market, where many firms are unable to set prices on their own. This ability typically comes from a lack of competition, allowing the firm to control pricing to some extent.

In contrast, the stability of prices relates more to external factors, such as market conditions or competition, rather than the inherent power of a firm. Reducing production costs is an important aspect of operational efficiency but does not directly pertain to the firm's capacity to influence market prices. While market share can give some indication of a firm's position within its industry, it does not inherently capture the firm's ability to set or raise prices independently of the competitive dynamics of the market. Thus, the defining characteristic of market power is its direct relationship to price manipulation, which is accurately reflected in the ability to raise prices.