Provide a rationale on whether or not a firm has to possess market power in order to raise prices.

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A firm does have to possess market power in order to raise prices. To understand this better, let's define market power and look at it more closely.

Market power refers to the ability of a company to determine the price of goods by adjusting levels of supply and/or demand. Firms...

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A firm does have to possess market power in order to raise prices. To understand this better, let's define market power and look at it more closely.

Market power refers to the ability of a company to determine the price of goods by adjusting levels of supply and/or demand. Firms that have such market power (or pricing power as it is also called) are referred to as "price makers." They control a good share of the market with their own products and often have a loyal following among customers. Because they lack much in the way of competition (or their competitors fall far behind them in popularity), they can set their prices quite freely.

On the other hand, when the market for a particular product is not dominated by one firm but rather filled with competition from several firms, none of these companies has much in the way of market power and they cannot do much to raise prices. If one firm tries to do so, it could very easily price itself right out of the market, because consumers will turn to its competitors for lower prices. The firm simply does not have enough control. It must balance with other companies and keep its prices in line if it wants its share of the market.

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