Advantages of Market Power
Market Failure: Market Power
AO3·HL
Syllabus requirement
Large firms may experience economies of scale or invest abnormal profits into R&D, contributing to innovation.
Assessment objectives
AO3 Synthesis and Evaluation
Higher LevelThis topic is assessed at HL.
Summary
This topic explains how market power — a firm’s ability to influence price or output — can produce potential economic benefits despite its risks. Key advantages discussed are economies of scale, which can lower long-run average costs for large firms, and the ability to earn abnormal profits that may finance research and development (R&D). The net welfare effect depends on whether these gains are used to lower costs, expand productive capacity or innovate rather than simply raising returns to the firm.
