Pricing power is a company's ability to raise its prices, or to keep them steady while its costs or its rivals' prices fall, without losing enough customers or sales volume to make the move unprofitable. A firm in a perfectly competitive market has none: a cent above the going rate and buyers go elsewhere. A firm with pricing power faces customers who stay, because switching is costly, unattractive or impossible. It matters to investors because it protects margins, to competition authorities because it can signal monopoly, and to advertisers because they sit on both sides of it: they pay prices set by platforms, and spend partly to win pricing power for their own products.

Elasticity, mark-ups and the Lerner index

The economic engine behind pricing power is the price elasticity of demand: the percentage change in quantity sold divided by the percentage change in price. If a 10% price rise cuts sales by 25%, elasticity is minus 2.5 and demand is called elastic. If the same rise cuts sales by 3%, elasticity is minus 0.3 and demand is inelastic. The less elastic the demand a firm faces, the more pricing power it holds.

Abba Lerner formalised the link in 1934 in "The Concept of Monopoly and the Measurement of Monopoly Power", published in the Review of Economic Studies. The Lerner index is price minus marginal cost, divided by price. It runs from zero, the competitive outcome, towards one. A product selling at 10 with a marginal cost of 6 has a Lerner index of 0.4. For a profit-maximising firm, the index equals the inverse of the absolute elasticity it faces, so 0.4 implies an elasticity of 2.5 at the chosen price.

Market power is the broader capacity to set terms above competitive levels, including quality, output and contract conditions; pricing power is the part that shows up in the price.

Where it comes from

Five sources recur in the literature. Differentiation and brand make a product imperfectly substitutable, the idea at the centre of Edward Chamberlin's 1933 theory of monopolistic competition. Switching costs and lock-in raise the price of leaving, from retraining staff to rebuilding campaign histories and conversion data. Network effects make a product more valuable as more people use it, which in advertising means more users attract more advertisers. Scarcity, whether of spectrum, prime-time slots or live sports rights, limits supply. Legal protection through patents or licences keeps rivals out. Advertising platforms often combine several: a search engine with most of a country's queries offers an audience no rival can replicate.

How it is measured

No single metric captures pricing power. Elasticity estimates come from price experiments, natural experiments or econometric models. Gross margin trends show whether a firm keeps a stable share of each sale as input costs move. Pass-through measures how much of a cost increase, from inflation or a tax, a firm can pass to customers; full pass-through with stable volumes indicates strong pricing power. Mark-up estimates attempt to measure the gap between price and marginal cost across whole economies.

The last approach produced one of the most cited and contested findings of recent years. Jan De Loecker, Jan Eeckhout and Gabriel Unger, in the Quarterly Journal of Economics in 2020, estimated that average mark-ups of US public companies rose from 21% above marginal cost in 1980 to 61% in 2016.

Investors use cruder tests. Warren Buffett told the Financial Crisis Inquiry Commission on May 26, 2010, that the power to raise prices without losing business to a competitor marks "a very good business," according to the transcript.

Platforms' pricing power over advertisers

Advertising prices are mostly set in auctions, which hides pricing power. A platform can raise what advertisers pay without announcing anything, by changing reserve prices, ranking formulas or how bids become charges.

Search is the clearest case. On August 5, 2024, Judge Amit Mehta of the US District Court for the District of Columbia found Google held nearly 90% of the search text ad market and that its monopoly power "permitted it to charge supracompetitive prices for search text ads," according to a Covington & Burling summary of the opinion. Advertisers stayed "even when Google increased the price for ads." His remedies opinion of September 2, 2025, found Google used pricing knobs to raise text ad prices "without fear of losing advertisers", raising them incrementally so increases looked like normal auction fluctuations. Jerry Dischler, then a Google advertising executive, had testified in September 2023 that the company adjusted auctions to meet revenue goals, raising prices by as much as 10%, according to eMarketer.

Benchmarks show the effect, not its cause. WordStream's 2026 data, covering 13,474 US campaigns, put the median search cost per click (CPC) at $5.42, against $2.32 in 2016. The campaigns ran through LocaliQ, mostly for smaller businesses.

Meta reports pricing directly. In the first quarter of 2026, its average price per ad rose 12% while ad impressions grew 19%. In the second quarter, price per ad again rose 12%, with impressions up 14% and ad revenue up 27% to $59.36 billion. Rising prices alongside rising volume suggest demand that is not leaving.

Intermediaries exercise it through fees. Judge Leonie Brinkema found on April 17, 2025, that Google's 20% ad exchange take rate had been supracompetitive for more than a decade, treating the stable fee as evidence of monopoly power, as PPC Land's explainer on take rate sets out. The European Commission, fining Google EUR 2.95 billion on September 5, 2025, said self-preferencing let Google charge higher fees. Every point of take rate reduces working media.

It can also erode. Netflix cut its connected TV (CTV) rates from about $39 to $45 per thousand impressions (CPM) to roughly $29 to $35 after Amazon launched Prime Video ads, according to the Wall Street Journal, as EMARKETER measured a 26.3% decline in Netflix CPMs. DataBeat put average US programmatic CTV CPMs at $4.68 in April 2026, down 25.8% year on year. Premium positioning did not hold prices once supply outgrew demand.

Advertisers' own pricing power

For brands, advertising is one route to pricing power. Anil Kaul and Dick Wittink reviewed the evidence in Marketing Science in 1995 and drew three generalisations: price advertising increases consumers' price sensitivity, price advertising is associated with lower prices, and non-price advertising reduces price sensitivity. Brand-building advertising can lower the elasticity a product faces. The argument runs through industry work on share of voice, which links brands spending above their market share with later growth.

An Adtaxi survey of more than 1,100 US adults, fielded from May 2026, found 40% had switched to lower-cost brands. The agency did not disclose a margin of error.

Limitations and disputes

Power or efficiency. High margins can reflect a better product, scale economies or large fixed costs that marginal-cost measures ignore, so a high Lerner index does not by itself prove harm. The Google courts combined prices with market definition and conduct.

Measurement. Marginal cost is rarely observable, and mark-up estimates depend on how costs are classified. Critics of the De Loecker study, including James Traina in a 2018 working paper, found a much smaller rise once selling and administrative costs were counted as variable.

Inflation attribution. An IMF working paper by Niels-Jakob Hansen, Frederik Toscani and Jing Zhou, published on June 23, 2023, found domestic profits explained about 45% of euro area consumer price inflation between early 2022 and early 2023. The same paper noted that the largest profit increases came in sectors that benefited from commodity prices or supply mismatches, which supports a reading of windfall gains rather than a general rise in pricing power.

Auction ambiguity. Rising CPCs can reflect more advertisers bidding, not platform decisions. Amazon, answering an FTC complaint, said its inflation-adjusted average CPC was flat from 2019 to 2024. Separating the two requires internal data that mostly surfaces in litigation.

Not the same as

Market share is a firm's percentage of category sales. A firm can hold a large share in a commodity market with no pricing power, or a small share of a luxury market with a great deal.

Price discrimination charges different buyers different prices for the same product. It usually requires pricing power, but it describes a pricing method, not the capacity to sustain a price.

Dynamic pricing changes prices over time in response to demand, as in airline fares or real-time auctions. Prices can move constantly where no one has pricing power.

Vertical integration is a structure, ownership of successive supply chain stages, that can create or extend pricing power but is not the power itself.

Recent developments

Keller Postman launched a mass arbitration on behalf of Google advertisers in May 2026, arguing that a 10% overcharge, trebled, could return up to 30% of spend. On August 31, 2026, the FTC and 22 states sued Amazon, alleging an undisclosed reserve that lifted the share of Sponsored Products clicks billed at the advertiser's full bid from about 4% in late 2020 to 79.1% in 2024. Amazon disputes the claims.

Remedies so far favour disclosure over price control. Mehta's December 5, 2025 judgment requires notice of auction changes. Brinkema's behavioural remedies of September 2, 2026 left the AdX take rate unchanged. Ian Whittaker argued in August 2026 that platform regulation is drifting towards the price-cap regime once applied to Yellow Pages. Meanwhile, Google's August 2026 change pulling budget-limited campaigns towards their bid targets drew advertiser reports of higher CPCs. Buy-side fees are also contested: Needham estimated Amazon's DSP fee at about 1% against 12% to 15% at The Trade Desk. PPC Land's explainer on price shows how those layers combine.

Timeline

  • 1933: Edward Chamberlin publishes The Theory of Monopolistic Competition, framing differentiation as a source of pricing power.
  • 1934: Abba Lerner publishes the Lerner index in the Review of Economic Studies.
  • 1995: Kaul and Wittink publish empirical generalisations on advertising and price sensitivity in Marketing Science.
  • May 26, 2010: Warren Buffett tells the Financial Crisis Inquiry Commission that pricing power marks a very good business.
  • 2014: Google introduces Dynamic Revenue Share on AdX.
  • 2020: De Loecker, Eeckhout and Unger estimate US mark-ups rose from 21% in 1980 to 61% in 2016.
  • June 23, 2023: IMF working paper attributes about 45% of recent euro area inflation to profits.
  • September 2023: Jerry Dischler testifies about auction pricing adjustments.
  • August 5, 2024: Judge Mehta finds Google monopolised search and search text ads.
  • December 2024: EMARKETER reports streaming CPM declines after Prime Video ads launch.
  • April 17, 2025: Judge Brinkema finds the AdX take rate supracompetitive.
  • September 2, 2025: Mehta's remedies opinion requires disclosure of material auction changes.
  • September 5, 2025: European Commission fines Google EUR 2.95 billion over ad tech.
  • December 5, 2025: Final judgment entered in the search case.
  • May 11, 2026: Keller Postman launches mass arbitration against Google.
  • July 29, 2026: Meta reports a 12% rise in average price per ad for Q2 2026.
  • August 17, 2026: Google begins pulling budget-limited campaigns towards bid targets.
  • August 31, 2026: FTC and 22 states sue Amazon over ad pricing.
  • September 2, 2026: Brinkema rejects AdX divestiture in favour of behavioural remedies.

Summary

Who: Any seller facing buyers who will not readily switch. In advertising, platforms such as Google, Meta and Amazon set prices for advertisers through auctions and fees; ad tech intermediaries such as AdX charge take rates; brands seek pricing power with consumers. Regulators including the DOJ, the FTC and the European Commission, and courts in Washington and Virginia, have examined platform pricing.

What: The ability to raise prices, or hold them, without losing enough volume to make the change unprofitable, rooted in low price elasticity of demand and measured through elasticity, margins, pass-through and mark-ups such as the Lerner index.

When: Theorised by Chamberlin in 1933 and Lerner in 1934; central to Google's search ruling of August 5, 2024, and ad tech ruling of April 17, 2025; contested through 2026 in the Amazon complaint, mass arbitration and remedies.

Where: In any market, and in advertising at the search auction, social feeds, retail media, CTV inventory and the ad exchange fee layer between advertisers and publishers.

Why: Pricing power determines who keeps the margin in a transaction. For advertisers it decides how much of a budget buys media; for brands it determines whether advertising can protect prices when consumers trade down; for regulators it is evidence of monopoly.