| John Spacey, November 11, 2016 updated on January 14, 2023
Pricing power is the ability of a firm to set higher prices without losing customers. Raising prices typically results in fewer unit sales. Firms with strong pricing power can raise prices without a major drop in demand in the short term. In the long term, high prices may attract new competition. As such, pricing power is often used with caution. The following are types of pricing power.
MonopolyIn many cases, a monopoly has a great deal of pricing power as they have no direct competition. For this reason, it is common for monopolies to be regulated. For example, a telecom company that owns all the networks in a city could raise prices for internet access extremely high and people would need to pay as it is an essential service.
Luxury GoodsBrands with high social status enjoy significant pricing power. If a luxury brand lowers prices they typically enjoy a spike in sales but their brand may quickly lose brand value. As such, luxury brands have incentive to maintain high prices.
Differentiated ProductsProducts and services that are viewed as superior by customers. For example, a popular mobile device offered by a strong brand may easily command both a higher price and greater market share than the closest competition.
Niche ProductsProducts and services that offer something unique that is valued by a small subset of customers. Niche products may enjoy significant pricing power depending on the niche and their position in the market.
CommoditiesA commodity is something that customers view as undifferentiated. Firms selling commodity products have no pricing power whatsoever and must accept market prices.
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