Competition's Impact on Pricing Power and Demand Elasticity
The level of competition a firm faces, largely determined by the availability of similar products, directly restricts its pricing power by influencing the price elasticity of its demand curve. In a market with intense competition, a firm's choice of price is highly constrained. This is because the presence of many substitutes makes its demand curve very flat (elastic), meaning a small price increase would cause a large number of consumers to switch to competing brands.
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