What is Pricing Power?

“Pricing Power” is an economic term describing the ability of a company to influence or alter the market price of a good or service.

In a perfect market (where there are numerous small buyers and sellers who have access to information regarding availability, prices, and quality of goods being traded and all goods of a particular nature are homogeneous), all buyers and sellers have the zero market power. Each party has to accept the current market price without being able to exercise any control over it.

However in reality, some companies have varying degree of control over pricing based on their brand image, product differentiation and market ownership.

Warren Buffett told the Financial Crisis Inquiry Commission in an interview in February 2011:

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”

Pricing Power is also referred to as “Market Power”.