Explain how market power alters the relationship between a firm's costs and the price at which it sells its product

Market power varies across the various market structures. The costs vary accordingly. We will consider four market forms.

Perfect competition: the perfect competition does not give any market power to the firm. Hence the firm has to keep costs lower. The price is accepted by the market determination, which is equal to marginal cost. The firm has no control over price, hence has to lower the average cost to make production profitable.

Monopolistic competition: the firm has some market power in terms of product design. The product is differentiated, advertised well, hence the marginal costs are high. The prices are higher than marginal cost, to make it profitable, due to some market power.

Monopoly: the firm has the highest or complete market power in its own hand. Thus, the firm has marginal costs towards the higher end, while the average costs towards the lower end and prices are way higher than marginal cost, so that consumers have to bear it. Price meets equilibrium where the Marginal revenue = marginal cost.

Oligopoly: It is similar to a monopoly, but the price is a bit lower than the monopoly price. But, the costs are not too lower than the profit. As there is still some rivalry element, the price cannot be kept too high, just some margin above the marginal cost.