Market Power

Market power describes the capability of either a buyer or a seller to negotiate, bargain, and make exchanges that are more aligned to their own preferences than to the preferences of the other. A market, where goods and services are bought and sold, is a social institution where benefits and costs are distributed. Market power [Page 1344]is the means for market participants to appropriate more benefits for themselves while providing less benefit and transferring more cost to others.

Buyers and sellers negotiate, bargain, and make their exchanges in the market. In a free market, where each exchange is a voluntary transaction between a self-interested buyer and a self-interested seller, buyers or sellers can demonstrate their market power by making credible threats to abandon, or “walk away ...